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Waht to do, what to do....
Old 04-29-2005, 10:26 AM   #1
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Waht to do, what to do....

Hello all! Here's' my question....

I can only contribute so much money to investments each year (the rest I have to live off of). I will use the $14,000 401K contribution as my example $$ amount....Soooo, if 14K is what I can contribute, should I put it all in my 401K ($250. employer match per year) or should I spread it out with say Roth IRA and some index funds

The usual advise seems to be to max your 401K, then do Roth, then some other investing...but what if only have enough money to max your 401K....should the other things fall by the wayside? :

Thanks!
Adventuregirl
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Re: Waht to do, what to do....
Old 04-29-2005, 10:53 AM   #2
 
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Re: Waht to do, what to do....

Your 401K is with pre-tax dollars, so I'd go there with all of it. It is very possible that you can invest your 401K dollars into an index fund. If your company matches your 401K with some dollars, that can also be an advantage.

A few specifics would provide a better answer. What kind of investments does your 401K offer. Does yor company match? - What is the match percentage?
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Re: Waht to do, what to do....
Old 04-29-2005, 10:57 AM   #3
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Re: Waht to do, what to do....

Adventuregirl (by the way, thats my nick name for my wife!), you will probably get a more detailed response from the folks who actually use their Excel programs, but as I undestand it the priorities are 401k to the matching level, then a Roth Ira, then its kind of even between adding more to the 401k and after tax accounts. I would favor them a bit for a diversity of sources.
I really like the Roth but I do not get any matching funds on my 401k type (TSP) account.
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Re: Waht to do, what to do....
Old 04-29-2005, 11:11 AM   #4
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Re: Waht to do, what to do....

My employer matches 6% of contributions up to $250./yr...pretty easy to get the full match....The 401K is through Lincoln and is mostly index funds, from what I can tell...mostly Russell and S&P ....I wish I knew more about it it but the plan is self administered by my employer so I just have to sift through whatever info I can find on their website....Hope this helps!

Adventuregirl

PS - Yakers your wife and I must be long lost twins....my DBF is the one that calls my Adventuregirl too!
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Re: Waht to do, what to do....
Old 04-29-2005, 11:12 AM   #5
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Re: Waht to do, what to do....

I think it depends on your income, I was reading some SmartMoney article on this, and they were recommending if you make 50k or under, to sock away enough in the 401k to get the full company match, then max your Roth IRA. I'd do this, too, just cause I like the flexibility of the Roth, in terms of being able to have more options to invest my money in.

I'd max out my 401k up to the amount the company matches, then max my Roth IRA, and if I have some money left over, then continue to build up my 401k.
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Re: Waht to do, what to do....
Old 04-29-2005, 11:14 AM   #6
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Re: Waht to do, what to do....

Quote:
My employer matches 6% of contributions up to $250./yr...pretty easy to *get the full match....The 401K is through Lincoln and is mostly index funds, from what I can tell...mostly Russell and S&P ....I wish I knew more about it it but the plan is self administered by my employer so I just have to sift through whatever info I can find on their website....Hope this helps!

Adventuregirl

PS - Yakers your wife and I must be long lost twins....my DBF is the one that calls my Adventuregirl too! *
Yea, i'd do the 401k up to the match, which isn't much, then do Roth IRA, then maybe put some more money in the 401k in Index funds.
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Re: Waht to do, what to do....
Old 04-29-2005, 11:49 AM   #7
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Re: Waht to do, what to do....

Correct me if I'm wrong, but the cool thing about having money in both Roth IRA and 401(k) is that when you go to retire in the future, you can look at the tax rates and decide whether to withdraw 401 (taxed) money or Roth IRA (non-taxed) money. Of course, would it be better to draw down the 401k first and let the Roth continue growing and use it last, since the interest compounding will be tax free?
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Re: Waht to do, what to do....
Old 04-29-2005, 01:57 PM   #8
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Re: Waht to do, what to do....

Martha will probably chime in here with the legal angle... but just in case she misses this thread, I'll give it a shot:

the other nice feature of having your money split between 401K/ Roth IRA is that if for some unlucky reason you are sued (car accident, etc.) your 401K is protected from creditors, but Roth IRA is only protected in some states.

From a tax standpoint, diversifying is also to your advantage for the reason laurencewill mentioned.
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Re: What to do, what to do....
Old 04-29-2005, 07:08 PM   #9
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Re: What to do, what to do....

Don't overlook the lower tax rates on capital
gains and dividends. You can't beat a taxable
account for flexibility. Every dollar withdrawn
from a 401k will be at the ordinary income tax
rate, which is likely to be higher in the future, IMHO.
Also, money drawn from a 401k will expose up
to 85% of your SS income to taxation. This creates
a high marginal rate for most retirees. Of course
this is just peanuts for some .....

Cheers,

Charlie
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Re: Waht to do, what to do....
Old 04-29-2005, 08:13 PM   #10
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Re: Waht to do, what to do....

Charlie, do you have that chart handy? I am one of the few optimistic youngin' s that think SS will be around when I reach 62-67 (or whenever they'll make me wait to get it). So to make sure I understand, if your income is low enough, your SS isn't taxed, but as you go up, you start to get taxed on SS as well as your income? Do Roth IRA withdrawals get counted against that income limit? Thanks!
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Re: Waht to do, what to do....
Old 05-01-2005, 05:09 PM   #11
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Re: Waht to do, what to do....

Hi Laurence,

Calculation of the tax on SS income is pretty hairy so I recommend
you check out Turbo Tax or J.K. Lasser's tax book to study
the SS income work sheet for the fine details. Basically you start
paying tax on SS income if your taxable income plus 1/2 of SS
income exceeds $32,000 for a couple filing jointly. Up to 85% of
your SS income can become taxable. A rough estimate for the
15% tax bracket is that for every $1000 over the threshold you
pay tax on $500 of SS income. Thus instead of paying just $150
tax on IRA withdrawal, you are paying $225 or a marginal rate
of 22.5%. For those in the 25% bracket the marginal rate becomes
46.25% on your IRA withdrawal. If this analysis is in error, you can
blame Burns and Kotlikoff's "The Coming Generational Storm" from
whom I plagiarized liberally.

No, ROTH withdrawals are not considered taxable income so they
don't cause the same problem.

This is why I have been harping on the "wisdom" of only funding
your 401k up to the company match. IMHO, we are at a low ebb
on tax rates right now and it is highly likely that the above analysis
will only get worse in the future.

Keep in mind, however, that this mostly affects those retirees with modest incomes above the $32,000 threshold. The marginal tax
rate drops down again after 85% of your SS income has been
exposed ..... nice problem to have, I guess.

Cheers,

Charlie
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Re: Waht to do, what to do....
Old 05-01-2005, 05:48 PM   #12
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Re: Waht to do, what to do....

Charlie

Single, 85% Trad IRA, age 62 in august, Pension plus div stocks puts me at 20k(vs ?26k or so for 15% bracket). Started mini Roth conversion last year - RMD is lower now than it used to be.

Juggling anyone??

Heh, heh, heh - I pu pu spreadsheets - but some games must be played. Including taking IRA via Roth conversion, spending early and looking at later SS, after I whack the pile down.
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Re: Waht to do, what to do....
Old 05-01-2005, 06:22 PM   #13
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Re: Waht to do, what to do....

unclemick,

I am already in RMD and drawing SS so no help with ROTH
conversions for me. Lyn is 64 and drawing SS already.
I need to see if it makes sense to start converting her
IRA. At first blush, that would just expose more SS to
tax. Last year $7082 out of $20,575 was hit. I don't
see any way out of the sneaky stealth tax for us .....
hope the rest of the great unwashed pays attention.

Cheers,

Charlie



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Re: Waht to do, what to do....
Old 05-01-2005, 10:59 PM   #14
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Re: Waht to do, what to do....

Thanks Charlie! I'll continue to monitor as I go, but untill then, Roth IRA maxed, 401(k) maxed. If I'm screwed, well, everybody else is too. I'll have company!
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Re: Waht to do, what to do....
Old 05-02-2005, 07:55 PM   #15
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Re: Waht to do, what to do....

Quote:
Originally Posted by laurencewill
Thanks Charlie! I'll continue to monitor as I go, but untill then, Roth IRA maxed, 401(k) maxed. If I'm screwed, well, everybody else is too. I'll have company!
That's the same strategy as mine.
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Re: Waht to do, what to do....
Old 05-02-2005, 08:34 PM   #16
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Re: Waht to do, what to do....

Adventuregirl:

If you are still in the earlier stages of accumultaion, then I'd say that the 401k is probably a no-brainer as long as the fees are within reason. There is a lot to be said for tax deductions and automatic saving. Once you are farther down the road, it may make some sense to do some Roth or after tax stuff at the expense of the 401k, but only if you are starting to have very serious coin in the 401k. I am starting to approach that point, and after this year, I may start seriously evaluating throttling back the 401k if I cannot afford to do both that and the after-tax/Roth.
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