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Old 07-18-2007, 11:21 AM   #1  
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Default 401K versus Roth IRA

Right now I'm military (no 401K) and am fully funding my Roth IRA.

Some of the companies I'm looking at have a 401K with matching funds.

Long term, which will benefit more? The tax free withdrawal from the IRA or the matched funds from the tax deferred 401k?

What I'm thinking is if the company has a 401k, but doesn't match funds the first year, it would be to my advantage to keep putting money into the IRA. Once I qualify for matching funds, say 2%, I'll put 2% into the 401k and then put the rest of my investment into the IRA. If I subsequently qualify for 4% matching funds, then I'd put 4% into the 401k and the rest into IRA (right now I invest about 15%).

Is that the best way to optimize the matching funds and benefit of the Roth? Or should I fully fund the 401k up to the $15,500 allowed first then put money in the Roth IRA, or fully fund the Roth IRA first then put money into the 401k?

Also keep in mind that I anticipate not investing as large of a percentage as I am now the first couple years with the airlines, especially if I need to start with a regional.
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Old 07-18-2007, 11:46 AM   #2  
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http://money.cnn.com/galleries/2007/...mag/index.html

-LAFF
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Old 07-18-2007, 11:47 AM   #3  
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Money you pull from a 401(k) and traditional IRA will be taxed as ordinary income, so if you anticipate you will be in a lower tax bracket than you are today, this is to your advantage.

Money you pull from a Roth IRA will be tax-free, which is to your advantage if you anticipate being in a higher tax bracket than you are today or if you anticipate lawmakers will raise income tax rates by the time you retire.

If you have a 401(k) at work and you qualify for a Roth IRA, one of the best ways to maximize your savings tax-wise is first to put enough in your 401(k) to get the full match and then contribute up to the limit in your Roth IRA.

If you can save even more after doing both of those things, you can put the rest of the money you've earmarked for retirement savings into your 401(k) up to the maximum allowed.
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Old 07-18-2007, 12:13 PM   #4  
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Cool, thanks, great info. That's right along the lines of what I was thinking.
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Old 07-18-2007, 01:34 PM   #5  
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Also look to see if your future company offers a Roth 401(k). Yes they have those out there as well. So now you are not limited to your annual income just by what the feds put a limit on your yearly contributions.
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Old 07-18-2007, 08:05 PM   #6  
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Quote:
Originally Posted by sigtauenus View Post
Cool, thanks, great info. That's right along the lines of what I was thinking.
I think there is a Cap on the Roth as well something like gross income of 95,000 or so. That means by the time you spend a couple years at the majors you wouldn't be eligibe for that Roth any more. Like I said I am not sure about this but I was told that. So if this is the case I think I would do the 401K for what ever the match is and then dump as much as you can into the Roth...I think the limit per year is only like $5000 right now isn't it?
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Old 07-19-2007, 04:17 AM   #7  
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Yeah, but I'm also paying into my wife's Roth so I get a higher cap. Either way at some point I will hit an income limit on the IRA side. Also, if putting money into the 401k is tax deferred, I think there'd still be a range of income where the money going into the 401k reduces the taxable income enough that I could still use the IRA.
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Old 07-19-2007, 08:19 AM   #8  
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The income limits for the roth IRA in 2007 are based on the modified AGI between 156K and 166K. There is a phase out period that starts at 156K.

FYI contributions to a 401(k) does lower your taxable income.
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Old 07-19-2007, 09:04 AM   #9  
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Yeah, and those numbers are more than twice what I'm making now. If I'm making that much money that I can't contribute to the IRA anymore, I don't think I'll care that much. Of course, I say that now...
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Old 07-19-2007, 09:22 AM   #10  
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In addition to what has been said above, if you have a company match (regardless of the amount or percentage), it's pretty stupid not to get the free money. Always contribute what will max out the match (at the very minimum). Anything above and beyond that you can shift to Roth or other investment options.
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