You are correct. With a Roth, you are only paying taxes on contributions, not on growth. Over a 20-30 year timeframe, that's a HUGE difference. With a Traditional, you may pay a lower tax rate when you withdraw at retirement than you have now, but you're paying taxes on everything - contributions and growth. For a young person, a Roth (either IRA or 401(k)) is absolutely the way to go (after getting the maximum match of course).
Roth IRA in Ankeny area
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You are correct. With a Roth, you are only paying taxes on contributions, not on growth. Over a 20-30 year timeframe, that's a HUGE difference. With a Traditional, you may pay a lower tax rate when you withdraw at retirement than you have now, but you're paying taxes on everything - contributions and growth. For a young person, a Roth (either IRA or 401(k)) is absolutely the way to go (after getting the maximum match of course).
To cut through all of the bloatware in here that you get when you ask a question like this:
Go online, search for who has the lowest fees and who has the lowest investment expenses, choose that one.
Go online, search for who has the lowest fees and who has the lowest investment expenses, choose that one.
Lots of helpful discussion here- I appreciate it. At the time being my non US based employer doesn't have a 401k program. I am compensated well enough that I should be able to get very close to maxing out a Roth IRA- with that said though, I am working as diligently as possible to pay down student debt and get rid of it, so anything more than maxing out a Roth IRA at this time is unlikely. I just want to make sure that I'm doing the most that I can to stay on top of retirement with this different career.
Will be in a pretty similar situation as the OP pretty soon and this is the advice I got. Take the tax hit now with the Roth if you can afford it because it's worth it in the long run.
I don't even know if this is a possible question to answer without more details, but if you're moving 50k into a Roth IRA how big will the tax hit be?
I second this. I was all ready to get signed up with an adviser when a friend of mine recommended the Bogleheads website and Jack Bogle's Book (https://goo.gl/9OvrgV). It was eye opening.
Just for comparison...the adviser was going to charge me between 2 and 3.5% on contributions. So, for every $1 of my own money I would put in, he would take up to $0.035. That doesn't seem like a lot, but when you compound that over 30 years of investing, it's huge. Instead, I put my money in a Vanguard fund that has a 0.05% expense ratio (so $0.0005 out of every $1).
In simple terms, his fund would have to outperform the market by 3.5% to just be equal to the Vanguard fund. If it didn't, I'd be losing money on fees alone.
A lot of people are scared by the idea of taking charge of their own retirement investing. However, with a little study and just paying attention, anyone with a basic understanding of finance/markets will do just fine. The Bogleheads approach is simple and made me feel much more comfortable to take control without paying someone.
I believe you pay your income tax rate. So, on the order of 15-30% depending on your tax rate.
To simplify things, your goal should be to put the equivalent of 15% of your income into retirement savings each year. Obviously as a young person with many balls in the air - like potentially getting married, owning a home, having kids, college savings, etc. - that can be a challenge, but that's a good benchmark to work toward.
Remember: any employer match reduces your contribution to that 15% too, so if they put in 5% you only have to do 10%. And make sure if/when you get married that the Mrs. does 15% too. Then as you get older, try to bump that up to 20%.
If you can pull that off, you will be in great shape.
Yes. When you go from a tax-deferred retirement (401k, traditional IRA) to a non-tax-deferred, that rollover amount is taxed as income. You will want to estimate what your tax burden would be with the extra $50k income and then set aside that amount for your tax bill for the next filing.
Just to set the record straight. Generally with an IRA, you have MORE investment options. "Better" is subjective and doesn't ensure a person will select the "right" investments anyway.
Nothing is "free". Either and IRA or 401(k). These aren't provided by charities after all. Some 401(k)'s can actually be less expensive if you're with a large enough employer and thus they are able to offer lower large institutional fees on the investment. This isn't he norm, but it is out there so don't assume an IRA will always be cheaper.
Don't let a broker touch it, they will rob you blind. www.vanguard.com.
But if you have a 401K at your new company, you may want to transfer it there.
But if you have a 401K at your new company, you may want to transfer it there.
Honest question...is there really a situation where you'd want to transfer it to the new company? The only one I can think of is ease of management, or not wanting the hassle of multiple accounts. Because once you move that money in, am I correct that you can't move it back out again until you leave the employer?
It depends on the fees of the new account, plus yes, keeping it all in 1 place is nice. But you could convert it to a traditional IRA with no taxes.
That's one of the reasons why I rolled it over to Vanguard. That way I will always have control over it no matter where I work.
I believe within a plan, rollovers-in are recordkept separate from 401k contributions so they would generally be subject to less restrictive distribution rules than contributions (which generally can't be take out).
Also, bankruptcy protection is stronger for assets you keep in a 401k vs and IRA (a lot people don't realize this).
All that said, I've been out of the 401k space for awhile, so knowledge might be a little rusty.
On the bankruptcy side, in Iowa IRAs are exempt just as pensions and employer plans are. I've looked that up, but that's about as far as my knowledge extends on that so if there are exceptions or other rules, I'm not aware of them. Other states may vary.
If talking about a traditional IRA or plain 401k, yes for purposes of a back door Roth IRA contribution. If you have an existing IRA, you would want to move it to a 401k first to eliminate tax on the nontaxed conversion and wouldn't want to move a 401 to an IRA.
Not necessarily, depends on the in-service withdrawal options. Most normal k plans are going to have a provision that would allow to take out funds you roll in to the plan (and you can do whatever you want with them ie rollover, cash).
For me, at work I have access to Vanguard Institutional funds which have lower expenses than the Vanguard Investor funds they offer to individuals. It really all depends on what type of arrangement your employer has with the given mutual fund provider. Also, I think some allow transfers when still employed and some don't.
