many people will role a 401k into an IRA at some point as well

Another possibility might be a Roth 401(k). Also, another
consideration is that many 401(k) plans (not the law), require
distributions to be made within a period of time (i.e., they don't
allow the stretch that IRAs do). I don't see many commentators mention
that fact (probably becuase you have to read the fine print on the plan
trust docs to notice it).


Gary Brolis
http://www.MechanicsofMoney.com
http://www.MechanicsofMoney.com/blog.php

"The tax benefits of a Roth IRA are at the time of distribution, when
all
income is tax free. All contributions to a Roth are currently taxable."

In addition to favorable withdraw rules, one should also consider:

money in taxable accounts can be sold, and capital gains tax is paid
money in 401k type vehicles invested in mutual funds will be taxed at
ordinary income tax rates on withdraw (tax rate is established at time
of withdraw)
company stock held in 401k plans can be taxed at capital gains rates (I
THINK). I read this back in 1997 when I started my first job out of
college. I do not know details.

My point is that I would suggest a person have money in all 3 types of
accounts if possible (401k, Roth IRA and normal account) to take
advantage of tax laws in retirement.

<screenaccount[at]gmail.com> wrote in message
news:1139978649.608322.284500[at]f14g2000cwb.googlegroups.com...
- quote -

The tax benefits of a Roth IRA are at the time of distribution, when all
income is tax free. All contributions to a Roth are currently taxable.

Elizabeth Richardson

On 2006-02-15 05:01:54 -0500, screenaccount[at]gmail.com said:

- quote -

There's no real universal "guideline". The consensus hereabouts,
however, generally matches what Elle's posted.

To be quite honest, unless the 401k choices stink, I'd probably
generally recommend maxing out the 401k first. The main advantages
of the Roth over the 401k are flexiblity and accessibility - one
may withdraw one's contributions without penalty. If the choices
in the 401k are good, the flexibility isn't that imporant. And
as for pulling one's contributions back out, well, I'd try awfully
hard to make that a last resort. Build up adequate emergency funds
outside of all this to make if very unlikely that you'll pull that
money out. You want your retirement money fully invested as long
as possible, and once you pull the money out, you can only put it
back slowly given the current max Roth contribution cap.

But maxing out the 401k has a couple of human advantages - it's
gone from your paycheck before you ever see it - you're very unlikely
to forget to send in the money or mess with it. People very often
do better with things on auto-pilot - even those of us who spend
a lot of our time dealing with finance issues are helped by this
sort of thing. And the lack of accessibility may similarly be
considered an advantage.

As for the "tax advantages" of the 401k versus the Roth, they are
*identical* assuming identical rates of return and marginal tax rates.
If someone has a crystal ball about future tax rates, I'd like to
borrow it. That said, having some pre-tax and some post-tax
investments would work as a hedge. If rates go up, the Roth is
better and if rates go down, the 401k is better. Invest in both
to diversify tax-rate risk.

If you make too much to contribute to a Roth and have the cash
available, definitely max out the 401k. If you still have more
cash available for investing after that, the discussion of what
to do with it is a little more complex. Options include a
non-deductible contribution to a traditional IRA, education accounts
for one's kids (or self!) (ie. 529), as well as plain old taxable
accounts and possibly certain types of low-fee variable annuities.

But maxing out the 401k is generally a no-brainer, especially if
you can't do a Roth.



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

<screenaccount[at]gmail.com> wrote
- quote -

According to the /guideline/, yes. Generally speaking, doing this will
maximize your retirement savings. As has been pointed out, though, there are
specific situations where it may not. E.g. if one expects one's retirement
tax rate to be higher than one's pre-retirement tax rate. Or if the fees
associated with the 401(k) are somehow so high that the tax advantage does
not outweigh investing in the 401(k). Etc.

Elle wrote:
- quote -

How about if one's salary exceeds the limit for claiming any tax
benefits on the Roth IRA? Should you then forget about the IRA and put
all the money toward maxing out the 401k as much as possible (beyond
the employer match, too)?

Bucky,

Hi, I've been thinking about what I've said about first maxing our your
401K, but now I'm thinking that I must have misunderstood about the
term 'maxing out'. I thought it was the total amount you can contribute
to the 401K. Now I'm believing it must refer to the max you can
contribute to receive the employer's match. I'm in the Thrift Savings
Plan with the government and their max contribution was 15% of your pay
(now they've changed it to 100%) and the government will match the
first 5% you contribute. Bucky you are absolutely correct and thanks
for setting me straight.

Thanks everyone!

joe

jjlindula[at]hotmail.com wrote:
- quote -

The reasons that both of you have given are both wrong. Ignoring
employer match and assuming the same tax rate for all cases, Roth and
401K give the exact same performance. This seems amazing at first, but
not so much after realizing that a*b = b*a. I'm not going to go through
the calculations here because this has been debated so often. Search in
the Google Groups archives or on the web.

- quote -

That's not what I've read. Everything I've read says max out your 401k
*up to the employer match* first. Show me an article where you saw to
max out 401K (all the way to $14,000) before funding the Roth.

Here are some factors in your co-worker's favor: These may not apply
to all people, these may not even apply to your co-worker

he plans to be in a higher tax bracket in retirement than he is now.
he plans to withdraw money from the Roth before retirement age
he does not like investment choices in the 401k

other issues to consider:

A person is eligible for a 401k if they work at an employer which
offers one. There are "upper income limits" on 401k contributions, if
a person a significantly paid individual within the company. Outside
of this issue, it is easy for a person of any age, any income level to
contribute to a 401k. A Roth IRA has an AGI limit for single and
married people. It is possible a person is eligible to contribute to
Roth when they are young (and making less money) and could not
contribute as they get older (and make more money). At this inflection
point, it would make sense to start the 401k contributions (or increase
them) to reduce AGI to maintain Roth eligibility, and at some point the
Roth contributions might need to stop (because of the income limits)
and the 401k is the only vehicle of convenience available.

Roth IRA's, IMO, have much more flexible withdraw rules and investment
choices relative to my 401k. I even rolled an old 401k into an IRA,
then converted to a Roth because of it's perceived advantages.

I would not pass up my company 401k match for a Roth, but I max out my
Roth and I am not maxing out my 401k.

The guideline is to fund one's
1. 401(k) up to the employer match, to get the immediate 100% return on
one's money
2. Roth IRA, to get the tax advantage and flexibility it offers
3. 401(k) further, to get the tax break

This might vary somewhat depending on what one anticipates one's tax bracket
will be at retirement. Or perhaps the 401(k) choices are poor (though it's
still hard to beat the 100% return in 1.)

jjlindula[at]hotmail.com wrote:

- quote -


It depends whether or not his employer matches his contributions to the
401k. If the employer doesn't match anything, he's probably better off
putting the first $4000 in a Roth IRA where he has more control and
better access to the money.

I believe in:
(1) contribute enough to the 401k to capture the maximum employer match
(2) max out the Roth, then
(3) retiring debts, adding more to the 401(k), and contributing to
non-qualified (taxable) accounts, etc, in no particular order.


I asked the same question last week about whether *maybe* funding the
Roth first made sense if someone had no emergency fund, and the response
I got was a resounding, "the 401(k) employer match is too valuable to
leave it on the table"

Best regards,
Bob

Hello, I have a co-worker who believes its better to fund his Roth IRA
first then his 401K and I believe he should do the opposite. His
reasoning is that when you take money out of the Roth you won't have to
pay any taxes on it, but when you take money out of the 401K you do
have to pay taxes. Everyone thing I've read says to max out your 401K
and then if you have money left over to fund your Roth. I've mentioned
that funding your 401K can minimize the taxes you pay because you can
deduct the amount you contributed, but he still believe funding the
Roth comes first, then funding the 401K. Is he making the right
choices? What could I say to change his mind? I would appreciate any
comments or suggestions, or web site than can help.

thanks,
joe