401k vs IRA

I'm no financial advisor. But I ALWAYS hear them state to max out your 401K. That's always rule #1.

Also though, I'd try to invest in both while you're young. A person who starts investing at 25, instead of 30, will have double the cash when they retire. In other words, every dollar you invest at your age is a great, great investment. So put in what you can afford right now, to guarantee that one day you'll do whatever you please.

Since you get free money with the match, go with the 401(k).

You can later do a direct rollover to an IRA without any tax consequence to somewhere like Vanguard where there are low fees if you leave the company.

But if you are only going to be at the company for a short period, make sure they have low fees to administer your 401(k). You shouldn't really invest it for such a short period. Talk to someone at your HR department. A rollover shouldn't cost more than $75-$100.

Take the match every time. Look out though, there may be vesting conditions attached to the matching funds.

You can roll over the 401k into IRA no penalty when you quit.

The right answer would be to do both. Contribute just enough to your 401(k) so you get a full match. Most employers require you to contribute a certain percentage amount and they will match it up to a limit. For instance, if your employer matches $.50 to your dollar (50%) up to a cap of 3%, you have to contribute 3% to get an employer match of 1.5%.

If you have anything left, put it into an IRA. For you, as a younger individual earning less now than in 20-30 years (theoretically), a Roth IRA would make more sense than a traditional IRA due to the tax treatment (For the sake of brevity I won’t explain the difference between the two). One caveat…just like the traditional IRA there is a limit to the amount you can put into a Roth and there are income limits (for a single individual I believe the IRS starts to dissolve the beneficial tax treatment at $90k and it is eliminated at $110k). Also, a lot of employers are starting Roth 401(k)s so check with your employer to see if you have that option.

You can roll over your old 401(k) to a new 401(k)/traditional IRA without IRS penalty and the account specific fees are usually relatively small as mentioned in an earlier post. Personally, if rolling over an old 401(k) I would prefer to put it into a traditional IRA compared to a new 401(k) because you have more control (again for the sake of brevity I won’t explain why but if you look at what happened to the former employees of Enron you’ll see what I mean).

One thing to consider, because you are moving on in a few months it might be better to keep your money in cash (thus liquid) since you’re not yet sure what you’re moving on to and might experience some extra expenses (moving costs, temporary unemployment etc.). One other benefit of a Roth compared to a 401(k)/traditional IRA is that you can access the dollars you contribute to the account without penalty (but NOT the investment growth).

All that said, what matters most is that you’re young and you’re saving money (living in SoCal no less). Congrats to you and keep it up!

Bro-

I too live in SoCal. My first job i started working I was making $40k, and contributing to my 401k 10% of my salary. That was 3 years ago I've gotten 3 promotions since then and increased my 401k contribution to 12%.

I'd go with the 401k because of the match and the free money. It is a myth that SoCal is "that expensive"

I live on my own, own my own townhome in San Juan Capistrano. Have a sweet sportscar that i have 1 year of payments left on and a motorcycle that i bought in cash. and have zero debt now.

You're doing alright, just plan accordingly and keep a mental sense on your budget.

Right now, I would actually pay off the car first. At your age, there is NO reason to have a car payment. Actually, at any age, there really isn't any reason to have a car payment.

Next, because they aren't matching your investment, don't worry about the 401k. 401ks are really great because of the company match. The general rule of thumb is to invest in the 401k until they match, then do the Roth IRA, then finish out the 401k. Since they aren't matching yet, do the Roth IRA first to the annual limit, and then put anything else you can into the 401k.

Take a look at their 401k plan as well. You might have to repay the amount they match if you leave before a certain time. I believe my wife's is this way.

Thanks for the responses guys. Thank you for not explaining the taxing differences with the IRA's - I do have a pretty good understanding between the two. I do understand my options pretty well, I was just curious of options in my particular case.

First off, my company does not have the ROTH 401K's available, so thats a no-go. I have also heard the ALWAYS contribute up to match (they match up to 6% - so they will give 3%). And, as for the vesting, each year the take away increases 20% - so after one year of service it is 20%, after two years 40%, etc until after 5 years I get to keep all of it.

As for SJC, I live in Dana Point. I know it is affordable if you have the patience to look around and know where to look.

And as for the car payment, it was an inheritance from the parents. They wanted a new car, so I got the old one after graduation and just had to inherit the loan. It is actually a very good loan from our credit union, so it isn't strapping me. I will get rid of it in a couple years, but overall it was a great deal I got because they had put so much down on the car the refinanced loan has a very good interest rate and the amount of the car was a steal.

So from what I gather - other than paying off the car - I should go 401K match (even if I leave after a couple months after a year - better to get some of that free money) as well as open up the ROTH IRA? Kind of where I was heading - but good advice guys. Thanks!

You ever run the Salt Creek Trail? I really like that trail once you get past the fire station. I'd start at the beach at Salt Creek and go up past the baseball fields. Keep going up and you go under a street and then past the fire station and then it gets to be a nice dirt and woodchip trail up there. The way back is nice and easy.

Another run I used to like was going from the beach at Doheny State Beacg up the San Juan Bike trail up through the equestrian area under the 405/5 and up into the Rock Quary and then up to La Paz. There is a Taco Bell and a little store there to get a drink and then run back. It made for a nice long run.

Yea, but I will do the Monarch Golf Course trail out to Del Avion quite a bit too. I also run the Creek to and from Doheny and the harbor a bit sometimes turning down to Capo Beach. If the run needs it, I'll take a drive over to Aliso and run the Niguel Regional park or Woods Canyon trails. Don't head out there very often though. I also have adventured up into the hills on the San Clemente side of the 5, there in San Juan. All trails and a GREAT hill run. Deadly steep hills and miles and miles of them to enjoy.

And yes, the trail that goes past Chapparosa park and the fire station, eventually ending up in the hills there behind the houses is great.

SOME good responses here. Let's get it all out on the table in a clear and concise manner.

1) Contribute to your 401k up to the match (you need to do 6%).

2) THEN contribute to your Roth IRA up to the max of $5,000 a year (if you can; you likely can't do that yet in addition to your 401k giving).

3) THEN go back and put more into the 401k.

Being debt free needs to be a plan in here though too. I agree with the earlier post that you don't need a car payment. I can't give away free money, so I would do #1 above for sure and then pay down that car and student loans before contributing more to a Roth and more past the match to the 401k.

Do know this -- if you leave this company and go to another one, you do not have to roll that money in the 401k to the new company's 401k. You could simply roll it into your Roth IRA (if you have one) or just then open a Roth IRA and roll it into there. 401k money does NOT have to be rolled into another 401k.

If you're thinking long term, here's what I would suggest:

1) Continue giving to the 401k up to the match.

2) Become debt free as quickly as you can -- no car payment or student loan. The absolute minimum goal for this should be by age 30 (unless you have outrageous student loans over $100,000 to pay back; in that case, make it 35).

3) No later than age 30 (or after being debt free), you need to be putting 15% of your income into retirement accounts (401k and Roth IRA).

Math time:

If you start at age 24 putting 9% away into 401k (6% you; 3% company) and you do that until you are 30 and then at age 30 you start doing 15% with another 3% from your company, at 9% annual return at age 65 you will have $2,295,550.28. 4% of that first year is $91,822.01 or more than double what I ever had you making. Make more ever than $40,000 and you'll have more. At 62 you'll be able to get Social Security too.

and I believe we were talking about the same trail that goes past Monarch golf course...

Thanks for the math, Flagpole. I knew it was coming. But I do appreciate it, makes it easier for me not to have to. And I agree with those points, and laying it out so simply does make it seem easy.

401kizzle wrote:

So from what I gather - other than paying off the car - I should go 401K match (even if I leave after a couple months after a year - better to get some of that free money) as well as open up the ROTH IRA? Kind of where I was heading - but good advice guys. Thanks!

Speaking of getting rid of the car payment, how much do you still owe? You said you\'ve got $7k banked, why not just get it over with. Then you can put the car payment towards your student loans and be out of debt even faster. Remember, when you pay off debt, you\'re earning a guaranteed return on your money of what ever the interest rate is.

But, if I plan on investing that money with a return rate higher than my car loan (6%) then wouldn't I be getting more with that (granted if the return is higher than 6%)?

My car payment the interest is 1.9%. I don't know who you are or what you think you know but it's not getting any better than that. I actually make money by not paying my loan off. Considering the fact I also invest in individual stocks outside of my 401k and various other mutual funds that have some sweet 5-7% dividends.

Roth stuff is only good for someone if you make under a certian income limit. so i wouldn't just strongly recommend that to everyone because there are some people that don't qualify for it.

Also set aside some cash each month just $50 or so (that's easy to afford for pretty much anyone) and invest in some low-cost index funds until you get around $5k and then do your research and invest in INDIVIDUAL stocks. The returns are great if you do your homework.

Example, Visa IPO was $44 per share. Closing price today $82.17 that's almost 100% and it's been less than 2 months. There are plenty of good undervalued stocks that one can buy. Another stock that I like right now is (AA), and (FWLT). DSX also has some value left in it.

I'm not claiming to know anything, just simply asking. And I apologize for making it seem like my car payment is 6% - I was just using that as a number for the example.

I was curious if there is a point where most people (or if "experts" have named a point) where steadily paying off the borrowed money (in this case my car payment) while having the funds to pay it off, but instead using that money to invest. If you need the investment return to be X% more than the interest rate on the borrowed money? Or is it simply, if the investment return is higher than the interest rate, go for it?

You have to consider the tax ramifications of gains. For example, the average return in the S&P 500 is 10% a year. However, if you have to pay taxes on it, and are in the 28% bracket, that effectively reduces the rate to 7.2%.

Personally, if the interest rate on the car is within 1.5% or so of your expected after tax rate, I would just pay it off. I don't have any real numbers as to why it is worth it, but it is more of a gut instinct and piece of mind thing.

My student loans are around 4.7%, and that isn't worth it for me, especially because those can be tax deductible. If I had a car payment above 5.5% right now though, I would pay it down ASAP. Part of that, too, is that I hate the idea of financing a car (a depreciating asset).

Good point. The piece of mind aspect, although i know it doesn't return any money, is a factor because I like the feeling of having the monkey off the back. And I know that the 1.5% above the interest rate is an arbitrary number, but i sounds reasonable enough to counteract the "piece of mind" cost as well as the cost of having to hold on to the debt - because as long as you hang on to the debt, you can always get into trouble.

Does making the car payments help my credit score though? Since I am fresh out of school, never really had any credit cards (never really liked the idea of creating debt when I didn't need to - although thats kind of what I did with the car, I know). Does paying a car loan help the credit score? And is this worth it while I am still young to build the score with a safe bet payoff?

You say that you inherited the loan. Does that mean it was transferred to your name, or are you just making payments on it?

You have student loans, so that'll help your credit score. Do you have any credit cards? I would hope you have one or two that you pay off in full each month. If you have two plus the student loan, you should have enough to have a high credit score after a few years (if you don't yet).