IRA Rollover

Archive for August, 2009

Question: 401k Vs. IRA?

My company doesnt match 401k until 1 year of service and that will be end of July next year. I am currently contributing 75% of my semi-monthly paycheck into 401k. Is this smart? I heard its smart because I avoid federal taxes. My take home pay sucks but I dont really need the money right now. The investment options I have are stock, mutual funds (large/medium/small cap etc) and also a stable fund (not much interest).

In my Rollover IRA account from my previous employer, only a small amount is invested, but it’s a life-cycle fund (where it will go until the year I retire) and the ROI is high and I can do that since I am young.

Should I stop investing in 401k and contribute my money to my life-cycle fund/IRA account ($4k max per year) which has a higher interest rate? or should I keep 401k, keep avoiding taxes, and contribute 60% to company stock based on my deductions and 40$ to the Bond investment (stable fund)? Thanks I’m trying to make my money work hard for me.

Answer: Make sure you are not over contributing to your 401k. There is a dollar limit of $15,000 but there is also a percentage limit. You could not put 75% of your pay into a 401k.

You can do both the 401k and the Roth IRA as long as your AGI is under $110,000.

Until your employer starts to match your 401k contributions, if you are only going to do one investment, do the Roth IRA because you are young. The tax-deferral of earnings and tax-free withdrawals when you retire far outweigh the tax benefits you would get by putting $4,000 into a 401k.

After your employer starts to match your 401k contribution, contribute as much as you need to get the maximum match, then contribute to your Roth IRA, then put more into your 401k if you can afford to.

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