Start the savings or pay down my student loans?

[Exile]

Concentrate on paying off your student loan with 75% of the funds in question and set aside the remaining 25% in a Roth IRA. I would forget about a 401(k) for now unless there's a fund in the portfolio that is FDIC insured. If that's the case then place the 25% there instead.

[jIM_Ohio]

I would agree about the safety of the money market in the short term. But I wouldn’t consider it for the long term. Though it might grow in the number of dollars, it may not keep up with inflation. So in effect it will also lose money. At your age the market will most likely recover not just once, but it will recover then lose then recover ect ect.. If you are in it for the long hall the growth is in stocks. You should look to own 70% on stock funds with the rest in bonds. .
I agree with the other poster about the emergency fund. I had forgot about that when I posted earlier. I also agree that opening a Roth would be better than an unmatched 401k.assuming you qualify.

Doing the Roth over the 401k might be OK investing advice, it is TERRIBLE tax advice.

Based on income of 122k, the 401k should be your top choice for efficient investing and efficient taxation. You are paying 25% or 28% in taxes now (are you married or single?). Investing pre-tax allows you to save more and pay less in taxes.

This advice assumes you spend less than you earn, and that no HUGE raise is coming your way anytime soon (40k in raises and this advice changes probably).

[simpletron]

I just want to double check this, you net ~7-8K/month and your expense + min debt payments is ~ 1700, so you have ~5-6K extra per month, right? if this is true I would max out the 401K and get in the habit of doing that every year. it is not like it will really slow down paying off the student loans much. and after you payoff the student loans, what's next? you can't contribute more than the max to 401K or contribute more for earlier years. if you say a taxable account, the additional taxes over a lifetime(compare to the 401K) will be more than the additional savings in interest from not doing the 401K.

[disneysteve]

Doing the Roth over the 401k might be OK investing advice, it is TERRIBLE tax advice.

Investing pre-tax allows you to save more and pay less in taxes.

Jim, you may or may not be correct, but there is no way to know. I've read numerous articles, as recently as this morning, that stress how we are currently paying historically low tax rates that can't possibly last given the financial picture, the trillion dollar deficits, bailouts, stimulus plans, etc. As a result, many advisors recommend Roth IRAs and Roth 401ks as the preferred investment choice for most workers.

I know we can only plan based on currently available information. I just wanted to toss out an alternate point of view.

[jIM_Ohio]

Jim, you may or may not be correct, but there is no way to know. I've read numerous articles, as recently as this morning, that stress how we are currently paying historically low tax rates that can't possibly last given the financial picture, the trillion dollar deficits, bailouts, stimulus plans, etc. As a result, many advisors recommend Roth IRAs and Roth 401ks as the preferred investment choice for most workers.

I know we can only plan based on currently available information. I just wanted to toss out an alternate point of view.

Steve- we have gone thru this before- at 122k gross income this person is either in 25% bracket married or 28% bracket single/married filing seperate.

Even if taxes "go up", let's remember the basics-

75% of americans pay taxes in 15% bracket or lower.
This person is in other 25% of taxpayers NOW.

Taxes do get raised, and they would be raised on the upper 25% before the lower 75%.

In retirement, it is very easy to get into the lower 75%. Many states give more exemptions to retired people, some of income will be tax free, and expenses are usually lower. USUALLY.

I am banking on the "usually" when suggesting 401k now over Roth as tax advice. OP should take a 25% deduction or 28% deduction now and reduce taxes NOW because I don't know what the future holds, but if the tax code give you a deduction now TAKE IT at 25% or 28%. If OP is in 28% bracket, the 401k is one of few deductions they are eligible for anyway.

Then in a year where income is low, convert the 401k to a Roth. Meaning do not pay taxes when tax rates are 28%, pay them when they are 15%.

There will always be a tiered income tax system in the USA. Each day 10 new lines get added to the tax code- for anyone to unravel the tax code (to modify the tiered level we have now), it would take something close to an act of god (is that the mess we are in now- LOL?).

Example- OP accumulates $2-3 M in 401k over working career and calls it quits at age 54. Taxes at 25% now and they went up to 28% by time done working.

They can lower expenses by 20% when retired. No more mortgage, no work travel, down to one car for household. That lower level of expenses reduces tax rate from 28% to 20% (the 20% is the old 15%).

So even though tax rates went up on lowest income tax payers, it is still lower than the marginal bracket when working.

I would not choose an investment bucket based on what the government MIGHT do in the future. The government bailout might work. Are banking on the stimulous working? I am not- I am actually banking on the opposite.

[isthisused]

Doing the Roth over the 401k might be OK investing advice, it is TERRIBLE tax advice.

Based on income of 122k, the 401k should be your top choice for efficient investing and efficient taxation. You are paying 25% or 28% in taxes now (are you married or single?). Investing pre-tax allows you to save more and pay less in taxes.

This advice assumes you spend less than you earn, and that no HUGE raise is coming your way anytime soon (40k in raises and this advice changes probably).

I think most advisers would say it depends on the expectation of a change in tax bracket or an increase in taxes by the time a person retires. If the % the person pays in taxes at time of retirement is the same as it was at the time the $ is saved. Then it’s a mathematical wash. Example #1 (pretax401k) $100 grows x10 = $1000 then –25%tax = $750 Example #2 (aftertax roth) $100 –25%tax =$75 grows x10 = $750 both leave the same outcome. So you need to consider will you be in the same tax bracket? If he saves at this high rate there is a good chance that he will be in a higher tax bracket making the roth the better choice. Another thing to consider is the deficit spending that our gov is so fond of. Is that likely to force higher taxes in the future? I think so . that would again make the Roth the better choice. One more thing. At retirement taxable income is added to social security income and everything over a certain amount( cant remember what that amount is but its not nearly as high as you would think, like $35,000) is taxed at around 40% . Roth income can be drawn without this effect.
One possibility that would put the Roth at the disadvantage is if they some day drop all taxes in favor of a consumption tax. That would screw the Roth savers.
I recommend doing what most advisers seem to suggest, max them both out!

[FlamingRug]

Hmmm. Thanks for all the great info everyone. Just to complete the picture, I am not married, but will be before the end of the year.

It seems that there is a lot of debate over Roth (this is a Roth IRA right?) vs. 401k. Aside from the differences in taxation are there any other notable differences between the two that would make one better than the other before my company match starts?

[isthisused]

Yes , if you have an emergency and need the cash, you can take your initial investment out of the roth without any penalties. You cant do that with the 401k. On the 401k you can borrow from it and pay it back with interest (like paying yourself interest.) Some people like the 401k better because you never see the money and therefore don’t have the option to be tempted not to put it in. however, you can set up your roth to automatically be deducted from your checking on your payday so that it does the same basic thing.
It sounds as if you could easily max out both so which one to do first is probably a mute point. If I were in your position I would max them out even without the employer match.

Of coarse the best free advice you will get is to pay a financial adviser an hourly rate to work out the best plan for you.

[FlamingRug]

Just so I can get a better picture of whats to come since I will be married soon would that change the saving strategy drastically assuming we file taxes together?

In our first year of marriage our combined gross income will be ~165,000. After that it will be ~220-240,000/year.

Combined expenses are probably ~2,200-2,500/month.

It seems to me that since we can probably both easily max out 401k and Roth IRAs, that may be the best route. Now obviously monthly budget will increase a good amount eventually with kids, a house, etc, but what would be the next place to start socking away money after maxing out the Roth and 401ks?

[disneysteve]

Aside from the differences in taxation are there any other notable differences between the two that would make one better than the other before my company match starts?

Yes , if you have an emergency and need the cash, you can take your initial investment out of the roth without any penalties.

Also, the Roth gives you virtually unlimited investment options unlike the 401k where you are limited to what the plan offers. Some 401k plans aren't all that great with not so good investment choices and high fees.

Roths are also yours no matter where you work. With a 401k, when you leave the job, you may have to transfer that money either to your next job's plan or an IRA.

There are also differences in retirement. 401k plans and traditional IRAs have required distribution rules. Roths do not.

There are advantages and disadvantages to each type of account.

[jIM_Ohio]

Just so I can get a better picture of whats to come since I will be married soon would that change the saving strategy drastically assuming we file taxes together?

In our first year of marriage our combined gross income will be ~165,000. After that it will be ~220-240,000/year.

Combined expenses are probably ~2,200-2,500/month.

It seems to me that since we can probably both easily max out 401k and Roth IRAs, that may be the best route. Now obviously monthly budget will increase a good amount eventually with kids, a house, etc, but what would be the next place to start socking away money after maxing out the Roth and 401ks?

at all of above incomes Roth is a non issue- you will not be eligible. Check for exact limits, but I think 160k single is well above limit and 160 k married is just above limit.

At those incomes- close to 33 percent fed taxes, + state taxes, you will want to get a deduction from 401k anyway.

[jIM_Ohio]

I think most advisers would say it depends on the expectation of a change in tax bracket or an increase in taxes by the time a person retires. If the % the person pays in taxes at time of retirement is the same as it was at the time the $ is saved. Then it’s a mathematical wash. Example #1 (pretax401k) $100 grows x10 = $1000 then –25%tax = $750 Example #2 (aftertax roth) $100 –25%tax =$75 grows x10 = $750 both leave the same outcome. So you need to consider will you be in the same tax bracket? If he saves at this high rate there is a good chance that he will be in a higher tax bracket making the roth the better choice. Another thing to consider is the deficit spending that our gov is so fond of. Is that likely to force higher taxes in the future? I think so . that would again make the Roth the better choice. One more thing. At retirement taxable income is added to social security income and everything over a certain amount( cant remember what that amount is but its not nearly as high as you would think, like $35,000) is taxed at around 40% . Roth income can be drawn without this effect.
One possibility that would put the Roth at the disadvantage is if they some day drop all taxes in favor of a consumption tax. That would screw the Roth savers.
I recommend doing what most advisers seem to suggest, max them both out!

will future taxes be higher or will future deductions be lower? There is more than one way for gov't to get their tax revenue.

If a person is in 15 percent bracket the Roth is a great move.
If a person's marginal bracket is 25 percent or higher, I will usually recomend take your deduction NOW and worry about taxes later. That deduction may not always be there.

Those pundits you listen to are still working... they may not be the best people to take retirement advice from...

[disneysteve]

at all of above incomes Roth is a non issue- you will not be eligible. Check for exact limits, but I think 160k single is well above limit and 160 k married is just above limit.

For 2008, the eligibility phase out is for AGI between $159,000 and $169,000 for married filing joint.

For OP, if your gross is $165,000, your AGI will likely be under the $159,000 limit (especially if you also fund a 401k) so you would still be eligibile for a full Roth contribution.

[noppenbd]

will future taxes be higher or will future deductions be lower? There is more than one way for gov't to get their tax revenue.

If a person is in 15 percent bracket the Roth is a great move.
If a person's marginal bracket is 25 percent or higher, I will usually recomend take your deduction NOW and worry about taxes later. That deduction may not always be there.

Those pundits you listen to are still working... they may not be the best people to take retirement advice from...

Another point to consider is that 401k contributions come off "the top" at contribution time (meaning the full amount is taxed at marginal rate), but fill in from the "bottom" at withdrawal time.

Say married couple makes $165K, putting them in 28% tax bracket. Entire $15K 401k contribution would have been taxed at 28%, so contributing saves them $4200 now.

At withdrawal, taking out the same $15K will not be taxed at 28%. In fact, first ~18K or so is taxed at 0% (due to exemptions and deductions). Even assuming they take out $165K from 401k in retirement, most of the withdrawal will not be taxed at 28%. Most likely, they will be taking out less due to mortgage paydown, no kids, etc.

[jIM_Ohio]

Another point to consider is that 401k contributions come off "the top" at contribution time (meaning the full amount is taxed at marginal rate), but fill in from the "bottom" at withdrawal time.

Say married couple makes $165K, putting them in 28% tax bracket. Entire $15K 401k contribution would have been taxed at 28%, so contributing saves them $4200 now.

At withdrawal, taking out the same $15K will not be taxed at 28%. In fact, first ~18K or so is taxed at 0% (due to exemptions and deductions). Even assuming they take out $165K from 401k in retirement, most of the withdrawal will not be taxed at 28%. Most likely, they will be taking out less due to mortgage paydown, no kids, etc.

YES YES YES
what she (he?) said.

Take the deductions now if you are in a high bracket. Meaning put 16500 into 401k and save $4600.
Then put the remaining monies you can afford to invest in a Roth (up to 5k per year). Because I don't think you are eligible for a deductable IRA.