Roth IRA v/s 401k

[darkstar]

anyone here have a roth ira instead of a 401k? it says here http://www.roth-ira-rules.com/roth-ira.html "A Roth IRA is a special type of an Individual Retirement Account where your investment choices are unlimited. You can allocate your savings over a diversified set of investments such as common stock, mutual funds, bonds, Certificates of Deposit, Real Estate or even derivatives. "

if that's the case, howcome Roth IRA is not very famous while the 401k is popular?

[LdyFaile]

From what I understand, ROTH IRA's are something that you initiate and fund, while 401k's are something that you're employer hooks you up with and in many cases does matching. I would imagine that the employer matching would make 401k's very popular. Just my thoughts...

[disneysteve]

Originally Posted by darkstar

howcome Roth IRA is not very famous while the 401k is popular?

I'm not sure what gave you that impression. I think Roth IRAs are very well known and very popular.

Personally, my job doesn't offer a 401k, but both my wife and I have had Roth accounts for years. Browse around here and you'll find plenty of threads discussing and recommending Roths in addition to 401ks.

[Broken Arrow]

Originally Posted by darkstar

You can allocate your savings over a diversified set of investments such as common stock, mutual funds, bonds, Certificates of Deposit, Real Estate or even derivatives.

Please remember that they're just tax shelters. Within that tax shelter, you can use just about any kind of asset classes that's available out there. Your choices are limited only by what's available with your investment firm.

And yes, the Roth is very well-known. It's so well-known and so often recommended, in fact, that some of us have had to throw up the occasional caution that the Roth isn't the only way to save for retirement, nor is it always ideal.

[MonkeyMama]

If you have a 401k you can contribute $15k/year, pretty much no limits based on income. Plus you would most likely receive an employer match.

A ROTH - only $4k/year max contribution and far more income limitations.

Probably why when a 401k is offered, people will take advantage.

[creditcardfree]

Originally Posted by MonkeyMama

In many instances you can not contribute to a ROTH if you have a 401k.

Are we spreading false information? What intances are you referring to?

My husband contributed to a 401k and a ROTH in the same year...many years in fact.

[disneysteve]

Originally Posted by MonkeyMama

In many instances you can not contribute to a ROTH if you have a 401k.

Edited:

Sorry. My original post was wrong. My wife had a traditional IRA and we had to recharacterize her 2006 contribution into a Roth when she started contributing to her 403b plan.

[creditcardfree]

Originally Posted by disneysteve

True. We got snagged by that this year. My wife became eligible for her 403b (very similar to 401k offered by non-profit institutions). But we had already made her Roth contribution. We had to contact Vanguard and recharacterize the contribution to a traditional IRA.

Can you explain why you had to do that? Was it because of your income?

[disneysteve]

Originally Posted by creditcardfree

Can you explain why you had to do that? Was it because of your income?

OOPS! My apologies. I had that backwards. We had to recharacterize her TRADITIONAL IRA contribution into a ROTH (not the other way around).

[LivingAlmostLarge]

If you have a 401k you cannot contibute to a Deductible IRA. You can contribute to a Roth IRA under certain income limits. And you can contribute to a Non-Deductible IRA. In 2010, the income restrictions life on converting a Non-deductible or Deductible IRA into a Roth IRA. The income limit is currently $100k. However if you make a lot, it may not be worth converting.

[creditcardfree]

Originally Posted by LivingAlmostLarge

If you have a 401k you cannot contibute to a Deductible IRA. You can contribute to a Roth IRA under certain income limits. And you can contribute to a Non-Deductible IRA. In 2010, the income restrictions life on converting a Non-deductible or Deductible IRA into a Roth IRA. The income limit is currently $100k. However if you make a lot, it may not be worth converting.

Ahh...I knew that. I was confused be the statement made by others that they could not contribute because of the 401k...which is a false statement by itself. One can contribute to a Roth IRA or Traditional IRA while contributing to a 401k...but how the contribution is treated for tax purposes is the difference.

Thanks for you contribution to this discussion LivingAlmostLarge!!!

[MonkeyMama]

I apologize too, I was thinking of Tradiitonal IRAs. I Edited my post.

Oh gosh, well if you must bring up non-deductible IRAs, if you REALLY want to I guess you can with a 401k - hehe. But I Am assuming most people would choose a ROTH in that case.

[creditcardfree]

Originally Posted by darkstar

anyone here have a roth ira instead of a 401k? it says here http://www.roth-ira-rules.com/roth-ira.html "A Roth IRA is a special type of an Individual Retirement Account where your investment choices are unlimited. You can allocate your savings over a diversified set of investments such as common stock, mutual funds, bonds, Certificates of Deposit, Real Estate or even derivatives. "

if that's the case, howcome Roth IRA is not very famous while the 401k is popular?

They are both popular and well known. You can have both at the same time based on maximum contributions and ones own inome limitations. If your income disallows you to contribute to a Roth, a traditional ira is available and may or may not be deductible. IRS publications spell out the guidelines quite clearly.

[Lonewolf]

Reading these forums, I've often struggled with Roth vs 401K. Currently my wife is doing about 15% without company match in her 401K and I am doing 16% (with 3% additional percent company match) in mine. Next year, my traditional pension is being frozen and being replaced with a company match of 1% for first 6% and an automatic 3%). I've only had 7 years with the company, so my pension won't amount to much, but I guess every little bit helps. So beginning in 2008 at my current contribution I will be putting in 25% which I'm feeling really comfortable about.

Right now I have nothing in a Roth IRA and am considering doing that in the near future. Part of me feels its better to leave what I'm doing in my 401K alone, and then at my next raise start to add money into a Roth. We are both 35, so figure we still have some time to make the change, but I've seen many times people recommend cutting back the 401K to fund the Roth.

In addition, we have 529 plans for our 2 little ones, and putting a small amount for each of them a month, as I felt we were doing a decent job with saving for retirement and that it would be ok to at least give them a head start in the cost of college which I don't even want to imagine in 18 years.

I'd welcome any advice people had about Roth vs 401K, and if I should reduce funds from 401K to fund Roth, or leave it alone . . .

Wolf

[Broken Arrow]

Without company match, I'd take the Roth in a heartbeat. Well, I guess the real answer lies in the details, but I have yet to find anyone who can beat out the overall performance and value of Vanguard's IRA.

[disneysteve]

I agree with Broken Arrow. If their is no 401k match, I would fully fund a Roth first ($4,000 currently). Then put money after that into the 401k. The Roth offers many advantages - mainly that you can invest in virtually anything and aren't limited by the choices offered by the employer. Also, and I don't recommend this but just FYI, you can withdraw your Roth contributions at any time for any reason without penalty. I believe retirement accounts are strictly for retirement, but some people like knowing they have that option if some major emergency were to arise.

[TMoney]

Does anyone know the key differences between Fidelity and Vanguard when looking to open a Roth IRA? Which did you choose, and why?

Thanks.

[creditcardfree]

Lonewolf, originally, we decided for our family was a goal of 15% of our gross income. We used that first to take full advantage of the company match in my husbands 401k, which was 6% of his salary. The remaining 9% funded our roth iras. So we took advantage of what each investment vehicle has to offer to the extent that our budget and income allow. Maybe this is something you could try, since your company does have a match with the new plan.

My husband no longer has a 401k, and our plan is still 15% of gross. We now max our our roth iras first and use his government plan, TSP, for the remainder of our investment...now about 3% of his base pay.

[Lonewolf]

Thanks for everyone's input.

Creditcardfree, its one of those things I might need to just change my thinking. I've spent the past year building up from 10% to 16% and feel like I would be "losing ground" if I take it out of the 401K and into the Roth. As long as I use discipline, and if I cut back a little more I was hoping that I could maintain the 16% in addition to potentially putting my next raise directly into a Roth from the get go. But maybe I need to strike a balance, and give a little from the 401K and add in the raise at a later point to ensure I max out Roth in 2007.

Thanks again to all.

Wolf

[LivingAlmostLarge]

The math doesn't appear to matter either way. more important is qualifying for the Roth IRA.