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Old 10-17-2007, 08:08 AM   #1
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401k or IRA

I work Part-Time. Salary about $26,000 year.

I am currently putting 6% of salary towards my 401K with 50% company match. The fees seem to be very high. And also contributing $4000 in a Roth at the advice of my dad.

I can contribute about $12,000 or maybe $13,000 a year total towards something. Do I put it all in my 401K or do 6% 401K and the rest in an IRA? roth or regular?

I have no debts and 2 houses paid for, and some money sitting in a MMA from a recent inheritance if that makes any difference to your advice. I need to do something with that I know but one thing at a time....
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Old 10-17-2007, 09:17 AM   #2
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First order of business is getting the company match on the 401k, which you're already doing. After that I'd go for the Roth given that you're current tax rate is pretty low.

Once the Roth is maxed out you need to decide whether to continue contributing to the 401k post-match, or whether you'd rather put the funds in a taxable account. This depends largely on your personal situation - you're not paying a ton in taxes, so the benefit of the 401k is somewhat reduced. It still offers tax free compounding though, but reduced flexibility on withdrawls and you'll have to pay the income taxes down the road...
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Old 10-17-2007, 09:31 AM   #3
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Depending on if you want to retire earlier than 59 1/2. I'd also build an account to take you from when you retire early to 59 1/2. Alot of the people I work with have substancial amounts built up, but can't touch it without penalties till 59 1/2. Cletis
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Old 10-17-2007, 09:44 AM   #4
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Depending on if you want to retire earlier than 59 1/2. I'd also build an account to take you from when you retire early to 59 1/2. Alot of the people I work with have substancial amounts built up, but can't touch it without penalties till 59 1/2. Cletis

Good point on building a taxable account - greater flexibility. I'd still max the Roth for now though - maximize the tax-free compounding.

Those under 59.5 with most of their savings in 401ks can tap them without penalty by using 72t withdrawls (equal periodic payments based on your life expectancy at the time you start taking withdrawls). I believe you have to take these withdrawls until age 59.5 or for 5 years, whichever occurs later.
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Old 10-17-2007, 02:24 PM   #5
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Good point on building a taxable account - greater flexibility. I'd still max the Roth for now though - maximize the tax-free compounding.

Those under 59.5 with most of their savings in 401ks can tap them without penalty by using 72t withdrawls (equal periodic payments based on your life expectancy at the time you start taking withdrawls). I believe you have to take these withdrawls until age 59.5 or for 5 years, whichever occurs later.

I think you are on the right track. Contribute to 401k so as to achieve maximum company matching funds, contribute max to Roth IRA, build up/maintain a taxable account for emergency living expenses.

Also, doesn't Roth IRA also have early withdrawal provisions---making early retirement possible either way?
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Old 10-17-2007, 02:54 PM   #6
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Also, doesn't Roth IRA also have early withdrawal provisions---making early retirement possible either way?

There are some specific circumstances, including (I believe)... first home, medical expenses >7.5% of agi, etc

And you can always withdraw your contributions without penalty if it comes to that.
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Old 10-17-2007, 04:49 PM   #7
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There are some specific circumstances, including (I believe)... first home, medical expenses >7.5% of agi, etc

And you can always withdraw your contributions without penalty if it comes to that.
What about the "substanially equal periodic dtistributions for at least five years"---doesn't that apply to IRA's too?
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Old 10-17-2007, 10:10 PM   #8
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I've just advised our son to get the company match for the same reasons then use his Roth for any spare cash for retirement.
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Old 10-17-2007, 11:04 PM   #9
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What about the "substanially equal periodic dtistributions for at least five years"---doesn't that apply to IRA's too?

Yes, I believe that is correct, although conventional wisdom is to save the non-taxable withdrawals until last (to maximize tax free compounding).
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Old 10-18-2007, 10:28 AM   #10
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I am like a few that have already posted... Here is what I recommend to my friends...

Make sure you put in enough to get the 401(k) match... then stop..

Make sure you put in the MAX in a ROTH...

Now, check how much income you have and ONLY put more money into the 401(k) if you are in the 25% rate or higher. I do a calc for one of my friends to say how much she should invest for the year.... the reason? Why save 15% tax today when you will hopefully be paying 28% or more tax when you take it out. It is much better to put it in a taxable account that does not throw off much income or capital gains. Still 'tax free' compounding without the hassles (with the restriciton that you can not move the money without paying taxes... can't have you cake and eat it too...)
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Old 10-18-2007, 11:32 AM   #11
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Thanks for the advice folks.

I am in the 15% tax bracket. My 401K is all in Janus Twenty which has done really well for me the past 6 years. Up 38% the last 12 months so I am not gonna complain TOO much about the 3% fees.... but I know of course that it won't sustaining that.

OK, so 6% in 401K & $4000 in Roth. Any advice about the other $6000 or so? Vanguard Total Market Index Fund? That is where I am leaning but love to hear brighter minds advising me.

THANKS!
Tammy
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Old 10-18-2007, 11:49 PM   #12
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Thanks for the advice folks.

I am in the 15% tax bracket. My 401K is all in Janus Twenty which has done really well for me the past 6 years. Up 38% the last 12 months so I am not gonna complain TOO much about the 3% fees.... but I know of course that it won't sustaining that.

OK, so 6% in 401K & $4000 in Roth. Any advice about the other $6000 or so? Vanguard Total Market Index Fund? That is where I am leaning but love to hear brighter minds advising me.

THANKS!
Tammy
Vanguard Total Market Index as good as any. Low expenses and broad diversification with equity particiaption-- the only thing I would want yuou to add to that mix is a longterm commitment to HOLD onto it for years (with only occasional rebalancing of %'s of all parts of your portfolio).
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Old 10-19-2007, 07:13 AM   #13
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Any advice about the other $6000 or so? Vanguard Total Market Index Fund?
Since you may be looking at Vanguard funds for your taxable account(remainder), be sure to look at the "Tax Advantaged" funds section titled "How to be a tax-savvy investor" at http://tinyurl.com/2yq7pk
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Old 10-19-2007, 08:00 PM   #14
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I would take a look at some Bond funds and or TIPS in your 401K or Roth accounts. Having 100% stocks is very risky IMHO. The 3% fees in the Janus fund would make consider different/additional options regardless on past performance. Visit the diehards.org site and they can help you construct a cost efficient diversified portfolio....
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