New Job, New 401K

[LuckyRobin]

My husband started a new job in November and come April he will be eligible to start contributing to the 401K there, but the company offers absolutely no matching at all. Does it still make sense to contribute to a 401K in this circumstance? The only benefit I can see is it would lower our taxes because it would be pretax money. Since there was quite an income jump with the new job we might be in the next tax bracket this year. Or should we just open an IRA instead? And um...how does one do that? He's always had a 401K before and just rolled it over the one time he switched companies. We have the option to leave our current one where it is and it is doing well so we are going to just leave it alone.

[scfr]

Congratulations on your husband's new job with pay increase!

Whether you will want to contribute to the new company's 401K vs. doing an IRA on your own will depend, I think, on what your investment options are with the new 401K and where you would like to invest your money.

With a lot of mutual fund choices, there are minimum initial investment requirements. But with the 401K, you won't have to meet those minimum requirements.

For example, the Vanguard S&P 500 Index fund has a minimum initial investment of $3,000. If that is one of the 401K options, you like the fund and want to invest in it, but can't come up with the $3,000 to make a lump-sum IRA investment on your own, then the 401K would be the way to go.

I think it will boil down to whether or not you like your investment options in the 401K.

In addition to tax savings and not having to meet minimum initial investment requirements, another advantage of contributing to the 401K is that it is a way to automate your savings.

You can open an IRA lots of places: banks or credit unions, brokerage firms, or mutual fund companies. Many people open them at one of the large mutual fund companies like Vanguard, TRowe Price, or Fidelity because of the lower fees. If you call them and tell them you want to open an IRA, believe me, they will be happy to walk you through the process.

[disneysteve]

With no match, I'd fund the Roth first. If meeting a minimum investment requirement is a problem, start by opening a Roth with a discount broker or even your bank. Buy a CD or put the money in a money market account within the Roth until you have enough to meet the minimum where you'd really like to invest. Then roll the account over there.

[kork13]

I'm in essentially the same situation, I don't receive any matching for my retirement contributions. So as Steve said, I would recommend opening a Roth IRA. If you have (or will have) more than the $5000/year that you can put away toward retirement, that's when you start adding to the 401k--after your Roth has been maxed out (or once you know that it will be, like if you're doing regular monthly contributions so that you hit $5000 by the end of the year).

ETA: After typing the above, I realized this... wouldn't they actually be able to do $10k/yr into a Roth (between the two of them), assuming they file taxes jointly? And this is regardless of whether or not one spouse does not work, as long as together they have a combined income that qualifies to contribute the full $10k? Not married myself, so I'm not certain on this detail...

[disneysteve]

ETA: After typing the above, I realized this... wouldn't they actually be able to do $10k/yr into a Roth (between the two of them), assuming they file taxes jointly? And this is regardless of whether or not one spouse does not work, as long as together they have a combined income that qualifies to contribute the full $10k? Not married myself, so I'm not certain on this detail...

Yes, a married couple can fund a Roth for each spouse up to $5,000 each if under 50 years old as long as household earned income is sufficient to qualify and low enough not to be excluded. I've funded a spousal IRA for my wife for years including many years when she was a SAHM.

[jpg7n16]

Or should we just open an IRA instead? And um...how does one do that?

You can call the companies like suggested above, or if you like online registration:

Vanguard - choose 'Open a new account'

https://personal.vanguard.com/us/openaccount

Fidelity - click 'Open IRA' middle of page on the left

https://www.fidelity.com/ira/

Schwab - choose the type of IRA you want, and click 'Start' on the right
IRA: Charles Schwab: Individual Retirement Accounts (IRA)

[LuckyRobin]

Okay, thanks everyone. DisneySteve, can you explain why you think funding a Roth first is a better idea than doing the 401K first? Is it just because it won't be taxed at retirement or are there more reasons than that as to why? And no, we wouldn't have a problem coming up with the $5000 by the end of the year. DH will get at least that much as a bonus at Christmas.

[disneysteve]

Okay, thanks everyone. DisneySteve, can you explain why you think funding a Roth first is a better idea than doing the 401K first?

Roths are more versatile. In a 401k, you are limited to the investment choices offered by your employer. Unfortunately, those choices are sometimes not very good - high expense funds with so-so performance histories. In a Roth, your investment choices are nearly limitless. You can buy virtually any stock, bond or mutual fund you wish. You can even invest in real estate within a Roth. And you maintain full control over the investments. You can make changes, additions or deletions anytime at all.

With a Roth, you never have to worry about rolling your account over if you leave your job. You don't have any probationary period when you start a new job (some jobs don't let you contribute to the 401k for up to a year after starting there).

With a Roth, there is no required minimum distribution (RMD) each year in retirement. You can withdraw as much or as little as you need. You can withdraw nothing at all if you have sufficient income from other sources and let the Roth money continue to grow tax-free.

Roth withdrawals are tax-free in retirement. I'm of the belief that the historically low tax rates we are currently enjoying can't possibly last and by the time I retire in 20 years, rates will be significantly higher. I'm happy to pay tax on that money today and never have to worry about taxes again.

While it would take a truly catastrophic event for me to exercise this option, there is a provision that allows you to withdraw money you have contributed to your Roth at any time for any reason without penalty. I hope to never even have to consider doing that but the option does exist if some horrible calamity befell my family.

Really, the only "pro" for doing an unmatched 401k first is the upfront tax deduction.

[LuckyRobin]

Oh, okay, that makes a lot of sense. Thanks, DisneySteve. I think I have a lot of reading and research to do to get myself a bit more informed on Roths. Sometimes so much choice can be overwhelming, but at least I know where to start.

[MonkeyMama]

LuckyRobin - You may be limited in what you can contribute to a regular IRA, for tax reasons. If he doesn't contribute to the 401k at all, no biggie, but if he does, he couldn't contribute to an IRA with an income more than $100k (& the contribution phases out $90k - $100k).

The downside to the 401k is the limited choices, as mentioned already.

Personally, I would recommend putting as much as possible into the 401k, and then using the tax savings to fund the ROTH. (I don't think the upfront tax deduction is anything to sneeze at - is a huge benefit to the 401k). Between the two, you can possibly tax shelter $25k per year. ($16,500 401k max + $10k to ROTHS).

[LuckyRobin]

I think he said it was going to be grossing between $117K and $129K depending on bonuses. So that sounds like it would disqualify us for doing a Roth then.

[MonkeyMama]

I think he said it was going to be grossing between $117K and $129K depending on bonuses. So that sounds like it would disqualify us for doing a Roth then.

No - it would disqualify him from contributing to a regular IRA, if he put a penny in his 401k (or if his employer gave him a penny in match - because income limits are lower if you are in a retirement plan at your work). That said, you could probably contribute to a regular IRA, if you wanted.

The income cutoff for ROTH contributions is along the lines of $180k. So you can put up to $5k/each into your ROTHs.

I was just trying to clarify that you would probably have less choice with a regular IRA than a ROTH, due to income limitations. Your only real choice is 401k or ROTH.

[LuckyRobin]

So we could contribute to a Roth IRA and a 401K? Just not a regular IRA and a 401K?

[jpg7n16]

If you are in the 25% tax bracket (most likely case) - I personally recommend doing a 50/50 split.

So if you'd like to save 10%, save 5% in the 401k and 5% in the Roths.

This will give you guys sort of the best of both worlds.

Most common tax brackets are on combined income:
15% - between $16,750 and $68,000
25% - between $68,000 and $137,300
28% - between $137,300 and $209,250

So if you're below the 25% bracket with your combined income, do as much as you can in the Roths.
If you're in the 25% bracket, do a 50/50 split.
If you're above the 25% bracket, do the majority in the 401k.


And if your income is over $167-177k combined, you can't do Roth at all - so do as much as you can in the 401k.

[Tree0164]

Kind of going from gut instinction and the whole concept of paying yourself first I find that putting some money into 401K is easy. Maybe put 3-5% into the 401k and then fund the Roth. If you can do more than fund the 401K again.