Will Somebody Please Explain...

**safari** · 09-24-2006, 01:49 PM

Re: Will Somebody Please Explain...

401(k) and traditional IRA plans are tax-deferred, meaning that you don't pay taxes on the money that you contribute to those accounts until you start making withdrawals when you retire. Many employers match 401(k) contrubutions, which makes it by far the best option for a retirement account. Usually they match contributions up to a certain percentage of your salary, for example 50% up to 5% of your salary, so if your salary is $40K and you contribute 5%, which is $2K, your employer will add another $1K. This gives you guaranteed 50% return on your investment. Once you contribute the maximum that your employer matches, you can either contribute more to your 401(k) up to the maximum allowed (I believe this year it's $15,000), or you can open a Roth IRA (maximum $4,000 a year), or you can do both! The money that you put into a Roth IRA are after-tax dollars (meaning you can't deduct them on your tax return); however, the interest that you will earn is going to be tax free. In addition, you can make withdrawals (principal only) from a Roth IRA account at any time without paying any penalties, unlike in 401(k) and traditional IRA accounts.

**Broken Arrow** · 09-24-2006, 06:03 PM

Re: Will Somebody Please Explain...

Yeees, in other words....

Taxes?

401k: Not taxed until you take it out.
Traditional IRA: Not taxed until you take it out.
Roth IRA: Taxed first, but no more after that.

Contribution limits?

401k: $15,000. Employer match contribution varies.
Traditional IRA: $4000
Roth IRA: $4000

FDIC Insurance?

401k: Not insured.
Traditional IRA: $250,000
Roth IRA: $250,000

Mandatory withdraw age

401k: 70.5 years old.
Traditional IRA: 70.5 years old.
Roth IRA: None.

I think those are the major differences. There's more to it, such as borrowing against those accounts, withdrawing principals, and what not, but they're generally not a good idea so I'm not going to mention them.

I also over-simplified the answer for the sake of clarity.

**timetosave** · 09-25-2006, 04:25 AM

Re: Will Somebody Please Explain...

Thank you, over-simplifing this is exactly what I needed.

Now I have pre-taxed money going into my Fidelity acct, however, my employer does not match the funds in my current job (did in my last) is this considered a 401k?

How do I go about opening an IRA? Is that through my job or do I go to the bank? Is there an age limitation to this? Can I open one for my dd?

thanks
G

**sweeps** · 09-25-2006, 05:17 AM

Re: Will Somebody Please Explain...

You probably have a 403b, not a 401k. Close enough though. I assume you work for an educational institution or some other non-profit company. Often they do not match contributions.

You're probably better off in a Roth IRA. Since you already have an account with Fidelity, it's fairly straightforward to open a Roth IRA account with them. (However, you can open a Roth IRA in just about any investment firm or bank if you don't like Fidelity.) You put after-tax money in a Roth IRA, and it grows tax-free from that point on.

Regarding your DD, does she have earned income (i.e. from a job)? You can only open and contribute to a Roth IRA if you have earned income.

**MonkeyMama** · 09-25-2006, 09:09 AM

Re: Will Somebody Please Explain...

I didn't realize 401ks were not FDIC insured. Reason #2001 why I should roll my old 401k over. Thanks!

**sweeps** · 09-25-2006, 09:16 AM

Re: Will Somebody Please Explain...

Don't be misled. FDIC insurance only applies to FDIC-eligible accounts in your IRA. These are rare in a retirement account. In fact usually you don't even want them in your IRA because they don't earn a very good rate of return.

**disneysteve** · 09-25-2006, 03:49 PM

Re: Will Somebody Please Explain...

Nobody has mentioned a BIG difference between a 401k and an IRA/Roth. The 401k is an employer-sponsored plan. You can only get one through your job. IRA/Roth is an independent account that you set up and manage on your own. 401ks are not portable. You can't take them with you or keep contributing to them if you leave that job (though you can roll the funds into an IRA). 401ks also have limited investment choices.

IRA/Roth is yours. It doesn't matter where you work or if you work. That account is yours forever. You make all the investment decisions and can invest in virtually anything within that account. You can even open and fund an IRA for a non-working spouse.

You can have both a 401k and an IRA/Roth.

I also didn't see mention of income limits for IRAs and Roths. There are cutoffs for who can contribute and deduct contributions.

**creditcardfree** · 09-26-2006, 10:00 AM

Re: Will Somebody Please Explain...

You can open an IRA or ROTH IRA through a bank or a mutual fund company. Go online and type in mutual fund company. Many of us here have Vanguard and Fidelity accounts. You can open one online!!

I would really ask you to pause a bit before opening one of these. Based on your past information, you are still behind with debt. These really need to be current and have a partially saved Emergency Fund, before you starting investing. These retirement accounts are for the long term. There are penalties if you withdraw the money earlier than 59.5 years of age. Please learn before you jump in. Great question though!!

**Mathew Green** · 09-27-2006, 02:02 AM

Re: Will Somebody Please Explain...

Originally posted by creditcardfree

You can open an IRA or ROTH IRA through a bank or a mutual fund company.

Or at most stock brokerages, including online brokers like TDAmeritrade or Swabb. I prefer having my IRA with an online broker because it give me total control to put my money in individual stocks, or bonds, or mutual funds instead of being limited to whatever products some bank or mutual-fund company is offering.

**disneysteve** · 09-27-2006, 04:15 AM

Re: Will Somebody Please Explain...

Originally posted by Mathew Green

Or at most stock brokerages, including online brokers like TDAmeritrade or Swabb. I prefer having my IRA with an online broker because it give me total control to put my money in individual stocks, or bonds, or mutual funds instead of being limited to whatever products some bank or mutual-fund company is offering.

Vanguard has a brokerage arm so within a Vanguard account, you can invest in pretty much anything including stocks, bonds, ETFs, CDs, options and non-Vanguard mutual funds. I don't know anything about the fee structure, but it is definitely available.

https://flagship.vanguard.com/VGApp/hnw/content/AccountServ/Brokerage/ATSInvChoiceContent.jsp

**TinyFish** · 09-27-2006, 07:41 AM

Re: Will Somebody Please Explain...

I would just add a slight clarification to Disneysteve's comments. Your 401K (or equivalent plan if you are working for a non-profit) is still 'yours' after you leave the company, or even if the company goes bust. You just cannot add anything more to it. I just mention this in case someone would think that you lose the money or something.

Often, the investment choices are limited, but how limited depends on what your company decided to do. Beware of plans that require excessive amounts of stock in the company you work for. That is how the Enron folks 'lost' their retirement. Not because they had a 401K with Enron, but because they had a lot of their investment in their own stock. Also, so far as the limited investment options go, sometimes there are limits with IRAs as to what you can invest in, if your IRA is still a very small amount.

So far as 'taking it with you' goes, when you leave your company you will generally want to either roll it into your next company's 401K, or roll it into an IRA. I tend to do the latter, as it gives me more flexibility. It is very easy, however, and most investment companies are happy to help you. I happen to like Fidelity for their service. I think generally employers have a rule that you must somehow remove the funds from the 401K within 6 months of leaving the company. So you must roll it into another 401K, into an IRA, or withdraw the money (bad, bad idea!).

All that being said, there is no that you cannot have both a 401K and an IRA. 401K limits are much higher, which lets you make a more significant savings towards your retirement. Oh, and yes, getting out of consumer debt and getting an emergency fund comes first.

-TinyFish

**LuxLiving** · 09-27-2006, 07:45 AM

Re: Will Somebody Please Explain...

You CAN add more to a rollover 401-K... it's kinda silly to add to it, but it is definitely do-able as my Hubster did it before I talked to him about why he was putting money in that had already been taxed into an account that was going to be taxed upon withdrawal - creating a double taxation situation. Fortunately I stopped him when he'd only put in about 300 dollars. I think it was right about then I took over the bookeeping.

**creditcardfree** · 09-27-2006, 10:24 AM

Re: Will Somebody Please Explain...

It's true you can add to a rollover IRA account. However, once you do that you have comingled funds and the rollover IRA is no longer able to be rolled back to another employers 401k.

I hope we aren't confusing you with the particulars of these accounts. If you have questions let us know.

Will Somebody Please Explain...