Retirement Investing Question

[skives]

Currently I have a 401k through my employer. They do not match anything. My 401k has $19,000 in it.

My question is I been reading on this forum and a lot of posters say that if your employer doesn't match your contribution some in the your 401k then you should get a Roth IRA. What are the advantages of a Roth IRA over a employer 401k?

[disneysteve]

Here's the answer I gave to this question recently:

There are a few reasons this advice pops up.

1. Most financial folks agree that we are currently enjoying record low income tax rates that can't possibly last. Particularly for someone just starting out in the workforce, it is very likely that their tax rate in retirement will be higher than it is now. Therefore, a Roth makes more sense than a 401k since money goes into a 401k pre-tax and gets taxed when withdrawn in retirement but money goes into a Roth after-tax (at current rates) and is withdrawn tax-free in retirement. Better to pay a lower tax rate today than a higher tax rate 20 or 30 years from now.

2. With a Roth, you are in total control of your money. You have an unlimited number of choices as to where and how to invest. With a 401k, you are limited to the options offered by your plan. Many 401k plans don't offer great options, may not have index funds, may not have a brokerage arm that lets you buy individual stocks if desired, and often are packed with funds with high expense ratios.

3. Roths have no minimum requirement rules in retirement. You don't have to start withdrawals by any particular age if you don't need the money. You can let it continue to grow tax-free as long as you'd like and even bequeath it to your heirs when you die.

4. With a Roth, there is no worry or hassle about what to do with the money if you change jobs. It doesn't matter since the account is not tied to your employer in any way.

5. Although I strongly advise against doing so under any circumstances, in a true catastrophe, you can withdraw your contributions (but not earnings) to your Roth at any time and for any reason without penalty.

I'm sure there are a couple of reasons I'm forgetting, but those are the main points. So the advice you will see repeatedly here and elsewhere is to invest in this order:
1. 401k WITH company match up to the amount needed to get the full match.
2. Roth up to the limit.
3. 401k WITHOUT company match.

[maat55]

Depending on your income level, A roth allows you to invest after tax dollars and grow your investment tax free. If you are in a lower tax bracket, you will likely benefit from paying the tax now and having none later.

Company 401k's are limited to the investments offered by the company, you are better off investing outside them for more options.

Roth IRA - Wikipedia, the free encyclopedia

[skives]

My only thing is that if Some one goes with a Roth IRA don't you need to put a lot of time into knowing and researching your investments? I am not sure I have the time for this ( not saying I don't just not sure). All my 401k money are in small, mid-cap, large-cap funds, and growth funds. Actually I am in 5 different funds.


Eaton Vance Large-Cap Value I
American Funds Growth Fund of Amer R5
Hartford MidCap HLS IA
Goldman Sachs Small Cap Value Inst
American Funds EuroPacific Gr R5

[jIM_Ohio]

My only thing is that if Some one goes with a Roth IRA don't you need to put a lot of time into knowing and researching your investments? I am not sure I have the time for this ( not saying I don't just not sure). All my 401k money are in small, mid-cap, large-cap funds, and growth funds. Actually I am in 5 different funds.


Eaton Vance Large-Cap Value I
American Funds Growth Fund of Amer R5
Hartford MidCap HLS IA
Goldman Sachs Small Cap Value Inst
American Funds EuroPacific Gr R5

Technically you need to do research whether you use 401k or Roth.

401k has a limited number of options based on the plan
Roth has many more options because more options are available (companies will compete for your business).

The research of the investment options and choosing pre tax vs post tax are two very different issues.

investment options is about education- either do it yourself or hire someone.

Roth vs 401k is a tax issue. Partly a withdraw issue, a very small part an inhertance issue, but mostly a tax issue (pay tax now, or pay tax later).

If you are in 15% bracket now, Roth is almost surely the best option. If you are in 25% bracket, you have some choices, and if you are in 28% bracket, a Roth IRA is probably not an option because you exceed the income limits set forth by the IRS.

[Runaway Finances]

A 401K plan can have a Roth option as well as a before-tax option. Saving through payroll deduction is sometimes easier for some people. Also, IF your 401K plan allows for a Roth option AND it matches, then you would want to save throught he 401K to get the match. I agree that investments in a 401K plan many times are not that great.

Not all 401K plans offer the Roth option so ask your employer or plan administrator if that option is available.

[GREENBACK]

To throw a monkey into this wrench, I will say that, although, a 401k isn't being taxed currently, and we don't know what tax rates will be, it is growing off of tax deffered money. Will a roth with some unknown tax rate at withdrawl time equal this? Who knows. I invest in both(457 & roth). Not to the max on either but to try to cover both bases.

I do like the versatility of a roth but can't understand the stupid 5k investment limit. In fact, I've never heard this explained in a cognizant way. I begin to smell the stench of politics when that happens.

[disneysteve]

I do like the versatility of a roth but can't understand the stupid 5k investment limit. In fact, I've never heard this explained in a cognizant way. I begin to smell the stench of politics when that happens.

The problem, as with several other government issues (like the AMT) is that they started the program and "forgot" to index it for inflation. The IRA limit sat at $2,000 for about 20 years if I'm not mistaken. They finally started increasing it and it is now indexed for inflation with the condition that it will only go up in $500 increments, so it is $5,000 for 2009 but might increase to $5,500 for 2010.