Roth IRA's vs. 401K

[lisajl]

Hi everyone.

I know many of you have investments, etc. Thought I would ask y'all something.

I was watching Suze Orman on PBS this a.m. I have a 401K through work and my employer only matches a small and I mean small amount of it.

I love being able to save this way but Suze says it is not the best thing to do.

When I have to take the money out,there will most likely be a higher tax on it(than right now).

She suggested Roth IRA's would be a better investment because what you put in is what you take out.

Can anyone help me with this one? If you have changed from a 401K to Roth could you tell me about it?

I just want to make sure my DH and I have the money we need when we are older.

THanks so much!
Lisa

 

[dcfromva]

lisajl,
I thought Suze recomend that you invest up to the amount your company matches, if a match is offered. And then, up to the limit of a Roth.

If no match is offered, then invest up to the limit of the Roth first.

( I don't remember if she addressed what to do if you had more to invest than that... )

You can not switch your 401k funds to a Roth directly. Under certain qualifying conditions (which you may not qualify for if you are still employed with the same employer), you can do a direct transfer of your 401k over to a regular IRA and then you convert your regular ira to a roth (you must meet certain income tests to do this and it is a taxable event!).

The easiest thing to do (if you elect to do this) is to just start a new Roth account (provided you meet the income test) and stop making contributions to your 401K. You could set up automatic payments to your Roth account to make it transparent.



-DC

 

[lisajl]

Yes, I'm sorry, she did say that. But my take on it was that she recommended the Roth IRA due to taxes. Is that correct?
I mean any savings that we have, investments are good, but I want the most we can get and be penalized if we have to take it out.

Thanks
Lisa

 

[dvcgirl]

Hi everyone.

I know many of you have investments, etc. Thought I would ask y'all something.

I was watching Suze Orman on PBS this a.m. I have a 401K through work and my employer only matches a small and I mean small amount of it.

I love being able to save this way but Suze says it is not the best thing to do.

When I have to take the money out,there will most likely be a higher tax on it(than right now).

She suggested Roth IRA's would be a better investment because what you put in is what you take out.

Can anyone help me with this one? If you have changed from a 401K to Roth could you tell me about it?

I just want to make sure my DH and I have the money we need when we are older.

THanks so much!
Lisa

The general rule of thumb for retirement savings is to fund your 401K up to the point where your employer matches, then fund your Roth IRA to max. If no match fund your Roth IRA first, then your 401k and then after that you'd invest taxable income. Hope this helps.

 

[lisajl]

Yes, it does. Now it means I will be busy on my day off!!

Thanks for clarifying. I really need to watch where my money goes and how much it grows.

Lisa

 

[dcfromva]

Yes, I'm sorry, she did say that. But my take on it was that she recommended the Roth IRA due to taxes. Is that correct?
I mean any savings that we have, investments are good, but I want the most we can get and be penalized if we have to take it out.

Thanks
Lisa

lisajl,
The points she makes regarding a Roth are good ones. You are taxed on a Roth, but you take it upfront. Your earnings are not taxed /don't receive penalties provided you take the money out for a qualifying reason (reaching the proper age, et'c) I just can't see any downsides to that. Except, in the case of a company match on a 401K. That makes a guaranteed rate of return on your investment--you can't leave that on the table!

I took retirement seminar recently and from the briefing, they mentioned some pretty interesting estate planning benefits associated with a Roth IRA. I believe you can will your Roth to your children-- provided it is transferred properly as a decedant IRA, it retains the tax benefit on the earnings.
I do not know if the rules for 401K s differ from company to company, but I was told in my case, my 401K can only be transferred over to my spouse's IRA--to anyone else, it has to be cashed out with the taxes due immediately.

Of course, a lot depends on your specific situation--if you make too much money (that sounds funny, doesn't it? ), you can't invest in a Roth. Also, one of the nice things about 401K's is that they often have lower expenses (this isn't always true) and they do lower your taxable income. ( It seems like more and more people are getting caught by the AMT )

-DC

 

[lisajl]

I just looked at my banks info on Roth and I am going to talk to them on Wed.
I hope I can make sense out of it all. It's so confusing, but hopefully they can walk me through it.

I am definately going to look at my 401K again and make sure I am doing the right thing. Check over how much my employer matches, etc.
This is going to be a loooonnnggg week!

I hate this kind of stuff, but Suze made me realize it's my job to do it!

Lisa

 

[janette]

I saw an article with information that said starting in 2006 companies can start offering a Roth also. Sounds like if your company participates you'll be able to have them withhold funds for a Roth. Here's a google search on the subject and it should also have information on which is better for you. It really depends on your current income / tax rates and expected income / tax rates. Roth IRA 2006 Rules

 

[lisajl]

Janette,
Thanks for the link. I will check into that! I doubt if my employer will do that.
It's a pretty small company and I think he regrets doing the 401K thing.
Will check with his SIL (our office manager) and ask her about it.
Lisa

 

[leight]

ahhh- I work in Financial sales so this is an area I can answer some questions. Watch for the New Roth 401ks that will be launched in 2006. This is a way for you to invest aftertax $ into the Roth styled 401k plan- if your employer matches it will be pretax and held in a separate acct so that there will be no confusion w/ comingling.

If your employer doesn't offer it- suggest it to HR. This is a great way to fund your retirement early w/ tax free growth!
And you'll get used to having the money redirected from your pay so you forget that you're saving.

reg Roths should be used after you max your 401k w/ the employer's match. The new Roth 401k- gives you a way to do both.

 

[lisajl]

ahhh- I work in Financial sales so this is an area I can answer some questions. Watch for the New Roth 401ks that will be launched in 2006. This is a way for you to invest aftertax $ into the Roth styled 401k plan- if your employer matches it will be pretax and held in a separate acct so that there will be no confusion w/ comingling.

If your employer doesn't offer it- suggest it to HR. This is a great way to fund your retirement early w/ tax free growth!
And you'll get used to having the money redirected from your pay so you forget that you're saving.

reg Roths should be used after you max your 401k w/ the employer's match. The new Roth 401k- gives you a way to do both.

The problem with my 401K is that I misunderstood how much my employer would match. We(co workers and I) thought he would match 50%. That is what the financial guy told us. No, my boss only matches about 0.5%...I have to look at my paperwork again to figure it out.
I am not too happy about the non growth of it all!

Lisa

 

[crisi]

It is going to completely depend on your current tax bracket and the tax bracket you anticipate you will be in at retirement. For most people Suze is right, for some people, however, you'll end up paying more taxes with a Roth than your 401k. Also, not everyone qualifies for a Roth, make too much money and it isn't an option.