401K and Roh question

[shibabigk]

I've been trying to figure out what the best split between these two is. My employer matches up to 3%, but I've been putting in 8% into my 401K. I opened a roth a few months ago and have been putting small amounts in there. We are still paying off CC debt, but that should be done in a few months, so I need to have a plan.
So I suppose my questin is if I should decrease 401 contributions and put more in a roth? I've read that some poeple a) fund 401 up to the match, b)max out Roth, and then c) add more to max out te 401K.
I work part time and never know how much I'll make, but its not a whole lot, so either account is no being showered with money and the annual max is not anywhere near possible right now.. :-)
Any advice would be great.

[disneysteve]

Originally Posted by shibabigk

I've read that some poeple a) fund 401 up to the match, b)max out Roth, and then c) add more to max out te 401K.

Yes. That's what I'd do. The Roth has a lot of advantages over the 401K. You have far more investment options, complete control of your money, no taxes in retirement, no minimum withdrawal requirement, ability to leave the account to your heirs, ability (which I don't recommend) to withdraw your contributions at any time without penalty, etc.

Take the free money from the company match and then move on to the Roth.

[jIM_Ohio]

Originally Posted by disneysteve

Yes. That's what I'd do. The Roth has a lot of advantages over the 401K. You have far more investment options, complete control of your money, no taxes in retirement, no minimum withdrawal requirement, ability to leave the account to your heirs, ability (which I don't recommend) to withdraw your contributions at any time without penalty, etc.

Take the free money from the company match and then move on to the Roth.

For 75% of people, steve's advice is accurate, and I believe you fall into the "75%".

401k up to match
Max out Roth
then 401k up to max


the other train of thought is this
401k to next lower tax bracket
Roth to max
max out 401k

If you are close to using 401k to lower your tax bracket, it is probably a good move. If you tell me your filing status and AGI from 2010 tax return, I could steer you as to whether the second scenario is more applicable.

[shibabigk]

Thanks!
I don't think there is a lower tax bracket :-). I am a full time student and in a good month take home is maybe $600, so there is no way I'll be maxing out my roth. I am still waiting for a document from my school before I can file, but in 09 I was working full time, so this year will be vastly different.
I am a little concerned about the whole Roth. I am just learning the whole investing thing and well, it seems that my sucess will be based on my decisions, while with my 401K my choices are limited but I won't need to beat myself up for choosig the wrong investments. I know I will just need to gain confidence by learning more about the different options.

[disneysteve]

shibabigk, your investment choices are just as important in your 401K as they are in your Roth, while you are correct that your options are more limited. Either way, you have to have some idea what you are doing and choose investments appropriate to your situation and goals.

[jIM_Ohio]

Originally Posted by shibabigk

Thanks!
I don't think there is a lower tax bracket :-). I am a full time student and in a good month take home is maybe $600, so there is no way I'll be maxing out my roth. I am still waiting for a document from my school before I can file, but in 09 I was working full time, so this year will be vastly different.
I am a little concerned about the whole Roth. I am just learning the whole investing thing and well, it seems that my sucess will be based on my decisions, while with my 401K my choices are limited but I won't need to beat myself up for choosig the wrong investments. I know I will just need to gain confidence by learning more about the different options.

Reality is you have the same options in a 401k as you do in a Roth...
difference is who made the decisions to give you the options...

a 401k is an employer benefit, so either your employer pays a provider to give you this benefit, or adds the fees to the employees to pay the provider for them. Because of this issue, the choices from the provider get limited.

If that was too much to follow, here are 3 choices you could make, all of which are equal, just depends how well your brain deciphers problems and solutions

1) In each plan (Roth and 401k) find a target date fund, choose that one fund in each plan and forget about making investment decisions (on which fund to pick) forever. Only real decision here is choose a retirement date, and as long as you are within 10 years of being correct, you will do less wrong than anything else. If you turn 72 in 2070, finding a 2065 or 2070 target date fund is probably what makes the most sense (for now).

2) Examine 401k offerings, and find the 1-6 best choices. Organize these by large cap-mid cap-small cap-bond funds-foreign funds. Add to these funds in 401k based on some asset allocation you establish for yourself. In Roth IRA pick funds based on asset allocation (same allocation) as 401k. Each account has between 3 and 6 funds (probably) and is invested about the same
**this is what I do**


3) Examine 401k offerings, find the one or two not so bad choices based on allocation for yourself. Then in Roth, fill in the allocation with what was missed (for example if 401k has no good international or mid cap funds, you open the international and mid cap funds in the Roth).


Most people do one of the 3 techniques listed above. All accomplish the same thing, it just depends how much effort and thought you want to put into your investments.

Read this thread for more information
Questionaire for people starting retirement planning

[swanson719]

The other option to Jim's plan, though a little higher maintenance in the future, is to find a BRIC fund. Stands for Brazil, Russia, India, China. These are so called "developing" nations - the ones going through what you could an economic growth spurt. The China fund in our Roth has gone up about 8% more than any of our other funds. A lot of people advise "Buy American", but I don't know how applicable that is to investments. Even so, 75% of our investments are American.

[jIM_Ohio]

Originally Posted by swanson719

The other option to Jim's plan, though a little higher maintenance in the future, is to find a BRIC fund. Stands for Brazil, Russia, India, China. These are so called "developing" nations - the ones going through what you could an economic growth spurt. The China fund in our Roth has gone up about 8% more than any of our other funds. A lot of people advise "Buy American", but I don't know how applicable that is to investments. Even so, 75% of our investments are American.

The main reason for concentrating in US based equities is volatility.

The markets already have their own volatility, as I am sure you are aware. Once you invest in foreign stocks, you add another layer (or cause) of volatility- currency fluctuations.

And because one has nothing to do with other, its possible two portfolios with same allocation, but one weighted heavier in foreign currencies (foreign investments) will have the foreign portfolio more volatile, without much added return (if you take on more risk, you want higher returns).

Just because the foreign currency does not move with (or against) the market as a whole is not a reason to make it a 100% diversifier.

I think 25% foreign exposure is a good move. I am 25% foreign myself.

[dvd7e]

So how about this strategy....?


Since it's so important to invest while young, you go with 401k while < 30 years old to get the additional money NOW, then reinvest this money (IRA, real estate, whatever) to start taking advantage of compounding. Then as you get a little bit older, switch to the other methods talked about in this thread.

Thoughts?

[jIM_Ohio]

Originally Posted by dvd7e

So how about this strategy....?


Since it's so important to invest while young, you go with 401k while < 30 years old to get the additional money NOW, then reinvest this money (IRA, real estate, whatever) to start taking advantage of compounding. Then as you get a little bit older, switch to the other methods talked about in this thread.

Thoughts?

You lose too much tax benefit of the Roth if you choose not to use it for first 30 years of investing