Where do you place your IRAs?

smbenevides1989 · December 2013

Since this board has been buzzing about 401K's and IRA's, it's got me thinking more about my retirement and I have a few questions.

Both H and I are 24. I have had a 401K through my employer since I was 21. My H just started his 401K through his employer in September. My current employer matches up to 4% with a 1% Agency Automatic. I have been putting in 3% since I started, but will be matching the 5% in March. My H has been placing his full employer matching contribution since he started - 6%.

I would like to save 15% of each of our incomes into accounts, but I'm not sure where to put them in. So here are my questions:

1. Does the employer match become included in the 15% (ie. I pay 5%, employer pays 5% = 10%) and I only have to save an additional 5%?

2. Once you match, do you continue to add % wise to your employer 401K, or do you place that % into a IRA?

3. What's the difference between a traditional IRA vs. a Roth IRA?

4. Where do you personally place that IRA? Bank, credit union, online investments such as Fidelity?

I want to make sure I am putting my money to work for me. I'm still trying to learn as much as I can without getting too overwhelmed. If you have any other insights, please share.

TIA!

maple2 · December 2013

1. Does the employer match become included in the 15% (ie. I pay 5%, employer pays 5% = 10%) and I only have to save an additional 5%?

I've seen several different answers to this question that seem to vary based on peoples' comfort with relying on employer contributions in a time when things like pensions are being cut or that reflect whether they feel they need to "catch up" with retirement savings. I'm curious to see what other people have to say. We currently save more than 15% of our income and have the employer match as a bonus because DH's career path required a lot of time in school during which he wasn't able to contribute to retirement.

2. Once you match, do you continue to add % wise to your employer 401K, or do you place that % into a IRA?

The usual advice is to contribute to your 401k up to the match then max out your IRA then contribute more to your 401k if you still have money you want to invest. This is particularly relevant when your IRA contributions can go to a Roth rather than traditional IRA (see below).

3. What's the difference between a traditional IRA vs. a Roth IRA?

When you contribute to a traditional IRA, you get to deduct the amount of your contribution on your taxes for that year, which lowers your tax liability in that year. When you withdraw money in retirement, you pay regular income tax on everything you withdraw, including the principle. When you contribute to a Roth IRA, your contributions are made after taxes (no deduction and no lower taxes in that year), but when you withdraw money during retirement it is not subject to taxes. In the long run a Roth is usually the best option to maximize your return, but there are limits based on your income. There are also some limits to contributions to traditional IRAs based on income and access to an employer retirement plan. You can learn more here http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

4. Where do you personally place that IRA? Bank, credit union, online investments such as Fidelity?

We use an investment company like Fidelity.

hoffse · December 2013

To answer your questions in order:

1) You can count it, but I prefer not to. For me, this depends on two things: first, the kind of life you want in retirement, and second, the vesting schedule (if any) of your employer match.

To address the first point - if you want to be able to cruise around the world when you retire, you need more money to do that. Most people spend less in retirement than while they are working, at least until they get very old and medical issues start to crop up. That's because things like student loans, mortgages, etc. are more likely to be paid off - and a lot of folks downsize in retirement so that they are living debt-free. BUT if you want to jet around the world, you need more than if you stay at home. know I want to travel, so I prefer to save 15% outright.

The second point - a lot of employer matches have a vesting schedule. Most law firms, for instance, only have the employer match vest after 6 years. Why? Because most folks don't stay at a single firm that long. My H will have to work at the same place for 6 years until that money becomes "his" - otherwise the employer can snatch it back if he moves jobs. So if your 401(k) is on a vesting schedule, I absolutely wouldn't count it until it "vests" or legally becomes yours.

2) I prefer to do retirement in the following order:

1) 401(k) up to the employer match

2) Then a Roth IRA up to the federal limit (in 2013 that's $5500 per person, per year)

3) Then whatever is left back in the 401(k)

4) If you max out your 401(k)s, then you invest the rest in regular accounts

I prefer to do a Roth 401(k) over a regular 401(k) because the Roth account means you don't pay taxes on the back end when you pull that money out. That means you also don't pay taxes on any gain. In your 20's and 30's that's HUGE. That said, I do hedge and put some in a regular 401(k) just in case the tax rules change. It will piss me off to pay taxes on the regular 401(k) when I'm old, but with any luck we'll have enough money by then that it just won't matter.

A regular 401(k) is very good for folks who are cash poor in their 20's and 30's but still want to save for retirement - it puts more cash in your pocket immediately, and it comes right out of your paycheck. But once you have some extra cash I would look toward funding a Roth 401(k) instead of a regular 401(k), or at least try to hedge and send money to both types of accounts. If the tax rules don't change, you will be stoked when you pull that money out during retirement.

3) The difference has to do with when you pay taxes. In a regular IRA your tax payments are deferred until retirement. That means you typically pay income tax on both your original contributions AND any gain that has occurred since then when you pull money out. You do usually get a deduction in your contribution year, but rest assured you will pay income taxes on that money eventually.

In a Roth IRA you pay income taxes when you make your contribution - so while you are 24 - and then it grows tax free until you take it out in your retirement. Typically money doubles every 7-10 years depending on your investments. So yeah. Not having to pay taxes on all that money you have earned in the market is huge.

4) H and I both keep our Roth IRAs at Fidelity, mostly because Fidelity has a credit card that we can link to our Roth accounts. That card automatically deposits 2% of everything we spend into our Roths. That helps us max out both Roths each year without actually dropping the full $5,500 per person from our savings. It's a great system if you pay off your credit cards in full each month.

But most investment banks are great - Vanguard, Schwab, Scottrade, Etrade, etc. are all great. I would probably go with an investment bank over a traditional bank like Wells Fargo, simply because the investment banks spend their entire corporate existence doing this. Their websites are also oriented entirely toward investors, and they all have a lot of educational tools to help you learn about it. I think investment banks are more transparent and user-friendly than the multi-service banks that try to do everything.

vlagrl29 · December 2013

I have my IRA's with Fidelity and DH has his with TD ameritrade. we've been happy with both.

hoffse · December 2013

Oh yeah maple pointed out that there are income limits on Roth IRAs but there are no income limits on traditional IRAs.

Good news - there's a "back door" method that still allows people who make more than the income cap to contribute to Roth IRAs. It involves an extra strep, but any investment banker should know how to do this, and if they don't, then you should fire him/her as your investment banker.

So the income caps are technically true, but those rules are so easy to get around that it's more of an inconvenience than anything.

In other words, Congress was dumb when they wrote those rules. But that should come as a surprise to nobody.

One other reason I like investment banks: customer service is usually much better than a regular bank. And it makes sense. Virtually everybody these days has a checking account. But the people who seek out investment banks tend to be savvier and/or wealthier than those that don't. Investment banks know that even if you aren't earning much in your 20's, good customer service can result in 50+ years of commissions, and your income is very likely to go up as you get older. I also like that I can call Fidelity on a Sunday evening, and the person who answers the phone immediately understands my question, even if I'm asking it badly. I think there's a lot to be said for that.

smbenevides1989 · December 2013

Thank you for your inputs. At my employer, I only have to be vested in for 3 years before I can legally call it mine. I know I won't be leaving here anytime soon. I'll have to check what H's terms are. I go through a government 401(k) plan and H goes through Fidelity. I'll have to check out Fidelity for our IRAs, and I like the idea of the credit card with the 2% cash back. I think the Roth is going to be the best for the both of us. @hoffse I like your way of savings. I think that's how I will set up our accounts.

WedinVolterra · December 2013

we use Vanguard for our Roth IRA

brij2006 · December 2013

Mine is through New York Life with our financial rep.

We also don't count the employer contribution toward our 15%, but we're like hofsse and want to travel and do a lot after we retire. We also are hoping to get ourselves set up to retire at 60 if we can.

smerka · December 2013

One thing to consider is the fees you will pay on your account. You will have them in both a 401k and IRA. They are a small percentage that the manager takes out for managing the fund. The smaller the fee the higher your return. When you get your statements, you won't see the fees coming out, so it is important to find out what the fee is upfront. This is why I have my money with a low cost place like Vanguard. They don't have to pay for brick and mortar buildings so their fees are lower.

irishfemme · December 2013

We have both of Roth IRAs with Edward Jones.

smbenevides1989 · December 2013

Thanks for all your replies! I'm still continuing my research on where I would like to set up our accounts, but H is on board on saving what we can.

Where do you place your IRAs?

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