Should I start a Roth?

jessica490 · March 2014

I'm 31. So currently I have a 401K plan with my company that matches 100% at the first 3% contributed, and matches 50% for the next 2 percent contributed. I am currently contributing 7% . I am no where near maxing out to $17,500. This is what my statement looks like from 2013

Your Account Summary	Statement Period: 01/01/2013 to 12/31/2013

Beginning Balance

$19,368.80

Your Contributions

$2,645.03

Employer Contributions

$1,734.03

Dividends

$24.89

Fees

-$0.59

Change in Market Value

$6,100.34

Ending Balance

$29,872.50

Additional Information

Vested Balance

$29,872.50

As of today, my balance is up to $31,600.

I increase my contribution everytime I get a raise, which is in the month of June. I know Roth IRA's are a good thing to open up but I'm wondering if I should just keep focusing on increasing my contrubition on this 401K since my employer matches. I have only 1 fund in my 401K and it's the Vanguard Target Date 2045 because I don't know much about investing.

Any advice would be helpful.

Thanks!

brij2006 · March 2014

Am I correct in understanding that your employer matches up to your 5% contribution?

If so, I would continue your 7% in this 401k, then contribute 8% to a Roth. This way it gets you to the 15% retirement contribution, and is invested in more than 1 avenue.

jessica490 · March 2014

Yes, they contributed 5% total.

If i open up a Roth with the same company, should I/can I invest in the same fund?

jtmh2012 · March 2014

My advisor suggested that one invests up to the match percentage into a 401k, then max out a Roth IRA and then back to a 401k if you still have extra money.

brij2006 · March 2014

We use a representative from New York Life to do all of our investments outside of the 401k through H's employer (mine doesn't offer it). We've been very pleased with how they help us manage our investments, and they also helped us set up H's 401k in investments that will benefit us (even though the 401k isn't through them).

I agree with jtmh2012. Invest up to the match, then max out a Roth IRA. Anything above that, go back to your 401k to invest. Just make sure your contribution is 15% of your income (not including employers match).

jessica490 · March 2014

Ok, thanks! I have been slowly bumping up my contribution over the last 2-3 years...

Xstatic3333 · March 2014

jessica490 said:
Yes, they contributed 5% total.

If i open up a Roth with the same company, should I/can I invest in the same fund?

I agree with the others about opening a Roth! If you open one with Vanguard ($3,000 minimum to start, I believe) you should be able to invest in the same fund. I believe target date funds diversify for you, so that's probably not the worst way to go.

*Disclaimer: do your research or ask an advisor to be sure, because I'm new to all this!

JoanE2012 · March 2014

A 401k is pretax....so you defer taxes and pay later when you withdraw. I like this option because I can invest more money now because of the tax savings and I should be in a much lower tax bracket when I retire. Roth is after tax, so you pay taxes on your current tax bracket. I've always maxed out my 401k first (pretax) and contributed to Roth secondary. Unfortunately I'm not eligible to contribute anymore to the Roth.

jessica490 · March 2014

Hm, ok thanks. Maybe I will call up Fidelity and see what they have to say....I agree with all of you, just not sure which way to go. I could probably through a percentage or two into a Roth when I get my raise in June...

daisy662 · March 2014

Not sure what your income is, but I believe there are income limits with a Roth and they aren't very high... Something to look into... If you qualify for a Roth then I agree with pp's, get your employers full contribution, then open a Roth.

jtmh2012 · March 2014

If you're "married filing jointly" your AGI (adjusted gross income) starts affecting contributions at $181,001 with complete ineligibility at $191,000.

Married filing separately almost isn't even worth talking about. Not sure why the IRS looks at it that way.

Xstatic3333 · March 2014

I'd definitely ask Fidelity what they recommend. At our income, we will (hopefully!) be in a higher tax bracket at retirement, so maxing out the Roth makes sense for us. Also, tax rates could go up but unless the laws change, that won't affect our Roth withdrawals.

Another point-since you mentioned a Vanguard fund earlier-is that if you want to invest with Vanguard I'd set up your account with them. Fidelity charges very high transaction fees on Vanguard funds. I'm happy with Fidelity otherwise, however.

jessica490 · March 2014

From my above post, is my fee high? Not sure how that works....

Xstatic3333 · March 2014

Hmmm, I'm not sure if "fees" means something different in 401Ks since I only have a Roth. But to give you an example, there tends to be no transaction fee when I invest in Fidelity funds-no cost when I buy or sell. There are expenses taken off the top, but that's different.

A few months ago I read about Index funds and looked into investing in the Vanguard 500 fund. I learned that Fidelity would charge me $75 for each transaction. I tend to have a lot of transactions since I fund my Roth a little every paycheck, so that was a deal breaker for me. Fidelity got what they wanted, I'll just stick with their funds from now on.

LS45 · March 2014

I'm in almost your exact situation, retirement-wise. I contribute 7% to my employer-sponsored 401K that is managed by Vanguard. All of those contributions go in the 2050 Target date fund. I then opened a separate Roth IRA through Vanguard (there should be a link from your account with your 401k to invest outside your plan). I chose a dividend-paying fund for my Roth to diversify tax- and investments-wise. Right now, I'm only investing a combined 12%, but I hope to increase it as my income goes up.

moonprincessd · March 2014

We're kind of newbies in this too, but what my husband has with his company is some stock based system, so he gets a certain percent of the "stock" depending on how long he works with the company before retiring. He previously had a 401K which is now just sitting around earning interest (his company was merged with another company, so the 401K was replaced with the stock system, so he can't put anything into the 401K anymore, but it'll continue to gain interest).

Then we have a Roth IRA under my name through USAA. One of the Target ones, which we contribute 10% of our paycheck too.

Not sure if that's the best way to go about it, but that's what family recommended as since they're all older and wiser than us, we're taking their advice for the time being.

smerka · March 2014

jessica490 said:

From my above post, is my fee high? Not sure how that works....

You find the fees on the info they gave you when you set up the account. In my experience, the people that run 401ks take a bigger chunk than if you were to invest directly with the company. They frequently make it hard for you to see the actual fees they are taking out. There was a Frontline episode about this. My IRAs are with Vanguard and I've been really happy with them.

smerka · March 2014

We're kind of newbies in this too, but what my husband has with his company is some stock based system, so he gets a certain percent of the "stock" depending on how long he works with the company before retiring. He previously had a 401K which is now just sitting around earning interest (his company was merged with another company, so the 401K was replaced with the stock system, so he can't put anything into the 401K anymore, but it'll continue to gain interest).

Then we have a Roth IRA under my name through USAA. One of the Target ones, which we contribute 10% of our paycheck too.

Not sure if that's the best way to go about it, but that's what family recommended as since they're all older and wiser than us, we're taking their advice for the time being.

You can move his 401k into a rollover IRA to gain more control over it and the fees you are paying. And if you can afford the tax hit, you can then convert that to a Roth IRA or even do it in chunks to make the taxes affordable.

jessica490 · March 2014

smerka said:

jessica490 said:

From my above post, is my fee high? Not sure how that works....

You find the fees on the info they gave you when you set up the account. In my experience, the people that run 401ks take a bigger chunk than if you were to invest directly with the company. They frequently make it hard for you to see the actual fees they are taking out. There was a Frontline episode about this. My IRAs are with Vanguard and I've been really happy with them.

So even though my company goes through Fidelity, I can switch over to Vanguard and use their fund directly?

smerka · March 2014

Not for your 401k. Your company has hired Fidelity to manage it so everything goes through them. You can do an IRA through Vanguard though

jessica490 · March 2014

smerka said:

Not for your 401k. Your company has hired Fidelity to manage it so everything goes through them. You can do an IRA through Vanguard though

Oh ok, thanks!

jtmh2012 · March 2014

What you could do if you wanted to go through the trouble is setup a rollover IRA with Vanguard and then periodically roll over your 401k contributions to the rollover IRA. Maybe like once a year or something.

hoffse · March 2014

Don't assume that because you're retired you will be in a lower tax-bracket than where you are now. For one thing, taxes are likely to go up. That's pretty much been the trend for a couple decades now, with a couple of notable exceptions when you have a really conservative Congress/President. Frankly, after all the Obama stuff I don't see taxes getting cut in significant ways for a long time.

Second, your withdrawals from a 401(k) are included in taxable income when it's being calculated. You will probably be withdrawing less than your highest year of earnings (right before you retire), but if you are in your 20's or 30's right now, you are likely to find yourself withdrawing as much or more as you earned when you're young... not just because standards of living tend to increase as you get old (which is more expensive), but also because you will have to keep up with inflation. $1 today is worth a lot more than $1 30 years from now.

Finally, when you contribute to a Roth, your earnings grow tax-free.... vs. having to pay taxes on all the earnings from a 401(k).

For younger folks, Roths are incredibly valuable. They become less valuable as you approach retirement because you can better estimate actual tax brackets, and you really might be earning more than you will be withdrawing in retirement.

I do agree that you should contribute to the 401(k) up to the point that you get "free money." But after that, max out a Roth before going back to your 401(k).

One final thing to consider is that when you contribute to both pre-tax (401k) and post-tax (Roth) retirement accounts, you are hedging against taxes going both directions. With the 401k you are betting your taxes go down. With the Roth you are betting your taxes go up. Given you have absolutely no way of knowing which one will be true when you are actually in retirement, it's not a bad idea to plan for both scenarios.

Should I start a Roth?

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