Financial question

[SWPA Pilot]

This may not be the right board to ask this, but I figured that since pensions may or may not be there for retirement and social security may or may not be there, someone may have thought this through and has some info on this.

What would be a better option -

1. Max out 401K.

2. Max out Roth IRA, then put the rest in 401k.

I recently heard someone say the Roth IRA is the way to go since you have already paid taxes on that money, and who know what the taxes will be in the future. They may be more which would take a bigger cut out of your 401K fund. But I have also heard the arguement that the 401K is the way to go since it lowers your taxable income. The best way to go would be to max out both, but if I can't, which would be the best way out of the two listed above?

 

[Swaayze]

401k to the company match, then

max the Roth IRA (assuming you'll be in a higher tax bracket after retirement), then

401k to the max

 

[SWPA Pilot]

marrying into money would have been a good idea, but it is too late for that.

 

[Mooseflyer]

401k to the company match, then

max the Roth IRA (assuming you'll be in a higher tax bracket after retirement), then

401k to the max

Swaayze's idea is right on, but the reasoning is a little different, IMO. By maxing the company match, it's essentially a 100% return on your investment right away. The advantage of the Roth is generally considered that your return (reinvested) grows and is withdrawn tax free, not that you'll be in a higher tax bracket after retirement (although it would be nice).

BTW, there's a current 4 page thread on this subject in the General section.

 

[miles otoole]

marrying into money would have been a good idea, but it is too late for that.

Says who? Apparently you aren't a 50 year old captain yet.

 

[radarlove]

401(k) max first. You want company match (if you have one) and you want, want, want to use pre-tax dollars to invest. The secret is to push off taxes as long as you can.

Whoever told you to invest with post-tax money is not the sharpest tool in the shed.

 

[Whataburger]

Everything I have read says:
1. Pay off credit cards due to high interest rates.
2. Have 6mos living expenses liquid in savings/brokerage acct.
3. Max 401k to reduce taxible income plus get company match
4. Max Roth Contribution so money can grow tax free
5. Contribute to IRA or personal brokerage account
6. If you wanna keep the late J.C. happy, give 10% to your church.
7. Buy lottery tickets, loud motorcycles, old airplanes, muscle cars, and every Motley Crue and David Allen Coe CD on the market.

 

[Jim Smyth]

Max the 401K out when you get the chance. Its the only form of retirement that we have thats guaranteed. Profit sharing isn't a for sure but has historically paid pretty well. ESOP is also another tool that has done well for many Pilots if you want to put more of your retirement into the companies hands. Top Hat will become available when you get into the left seat. If you have a long career ahead and you plan and save as much as you can in the plans offered you will reitre very happy and secure.

 

[Capt.LongThrust]

Everything I have read says:
1. Pay off credit cards due to high interest rates.
2. Have 6mos living expenses liquid in savings/brokerage acct.
3. Max 401k to reduce taxible income plus get company match
4. Max Roth Contribution so money can grow tax free
5. Contribute to IRA or personal brokerage account
6. If you wanna keep the late J.C. happy, give 10% to your church.
7. Buy lottery tickets, loud motorcycles, old airplanes, muscle cars, and every Motley Crue and David Allen Coe CD on the market.

Hey Burger I thought beer and cigs were #1? Are you losing track of your priorities in the cold weather?

 

[TexaSWA]

I spend most of my money on fast cars and loose women. The rest I just blow.

Hey Jim, thanks for the beers in SAT.

 

[capt. megadeth]

Everything I have read says:
1. Pay off credit cards due to high interest rates.
2. Have 6mos living expenses liquid in savings/brokerage acct.
3. Max 401k to reduce taxible income plus get company match
4. Max Roth Contribution so money can grow tax free
5. Contribute to IRA or personal brokerage account
6. If you wanna keep the late J.C. happy, give 10% to your church.
7. Buy lottery tickets, loud motorcycles, old airplanes, muscle cars, and every Motley Crue and David Allen Coe CD on the market.

Sounds good but you got the 6 and 7 mixed up.

 

[CitationLover]

The secret is to push off taxes as long as you can.

best piece of advice.

your tax rate will be lower when you retire (unless you had some really good investments).

 

[semperfido]

subscribe to and read the WSJ

 

[D-Bo]

Also remember, in regards to the Roth, that you'll reach a point in the future where you'll make to much money to legally contribute to it so if you want to take some sort of advantage of it, do it before it's too late.

D-Bo

 

[radarlove]

Also remember, in regards to the Roth, that you'll reach a point in the future where you'll make to much money to legally contribute to it so if you want to take some sort of advantage of it, do it before it's too late.
D-Bo

This is a good point and it doens't just apply to the Roth. I was very surprised when I was going to purchase a rental property and my accountant told me that it better be cash-flow positive, since my household adjusted gross income was too high to take depreciation as a tax deduction. There are all sorts of other "gotchas", like the Roth (again, by the time you could comfortably afford to fund it, you probably make too much to qualify).

I've never been hit by the Alternative Minimum Tax, but that pretty much wipes out ALL deductions, from mortgage on down. The AMT is an effective tax increase for those who get nudged into it.

The advice you're hearing is good, BTW. Well, not the advice to max our your Roth first, but the other guys here.

 

[Jim Smyth]

I spend most of my money on fast cars and loose women. The rest I just blow.

Hey Jim, thanks for the beers in SAT.

No problemo! You should of had a dinner too!

 

[capt. megadeth]

If your employer does not match on the 401k at all, what would you all suggest? Max out the Roth and then put some into the 401k? What do you think?

 

[radarlove]

Max out the 401(k) then max out the Roth if you can afford it and qualify. Problem is, you probably won't max out your 401(k) until you earn close to $100k and if you are married, by the time you want start contributing to a Roth, you're probably over the income limit for the Roth.

Company contributions to 401(k)s are nice, but don't just put in the minimum to recieve the match, put in all $14k if you can. $14k/year is not really all that much to save toward retirement so put it all away, tax-deferred. The Roth is nice, too, if you can afford the change to drop into it, but if you have an employer 401(k), use all of it you can.

And put the 401(k) in index funds. Since it's such a long-term investment, you have a better than 85% (gets closer to 100% the longer the time) chance to beat all of the mutual funds if you just act passively.

 

[bluejuice787]

Fellas and Chicas-

I'll try to back up my opinion with a little math...not sure if it is correct though.

401k up to match first to take advantage of 100% return.

Sencond, consider maxing out your 401K. Pre tax dollars grow at rate great enough to offset the taxes when you retire. To demonstrate this go to savings calculator web site (there are many) and calculate a thirty year savings goal. Input values that reflect pretax (401k) and post tax (Roth) ammounts. For example if you want to contribute $100.00 of your gross salary every month. 401k would be all $100.00 and the Roth would be around $72 for the average tax payer. I'll assume an 8% rate of return for both.

Here goes: Roth= $864 per year, APR 8% for 30 years = $97877 tax free on the end. 401K= $1200 per year, APR 8% for 30 years = $135,000 with 25% tax of $33985 (probably not going to be anywhere near this high because of retirement) = $101955

The advantage goes to 401k every time, however, Roth offers the ability to invest in any thing you want. In other words you are not limited to the few funds your company may have.

 

[Jim Smyth]

Even if your employer doesn't match your 401K. The money you put in there you don't pay tax on. It is held seperate from the company and they can't get there fingers on it if times get bad! It grows tax deferred and compounds for your whole career. The idea is that when you retire your tax base will be lower and then when you tap it, you wont pay as much tax due to your lower income. I would recommend getting turbo tax. Its a great tool to use. Once you get used to using it you can run through it pretty quick. Do a whole year and plug the numbers in without putting any money into the 401K. Then do the same year and change the numbers to where you max out what you can put away in the 401K. You will notice that in the end there isn't much of a difference in take home pay. Because the scenario where you max it out, it doesn't get taxed on what you legally put away. Then you times that by your career and when you hit the golden age your will hopefully have enough to retire on comfortably. Plus lets say in 20 years your company has trouble and goes out of business. Your money is safe and secure and is held somewhere else. Plus once you get funds accumulated in there, you can take a loan from yourself if you wish for say a house downpayment, kids college etc. Ours we can take 50K out if you have that much and have 5 years to pay it back to yourself, usually payroll deducted. You usually pay yourself back the interest at prime plus 1 percent. Sure beats using someone elses money at a much higher percentage rate. Some potential downfalls though. You cant take the money out (other than a loan) until you reach 59 1/2. If you do and it isnt a loan your a subject to a 10 percent penalty and the amount you took out gets added to your income for that year and you pay tax on all of it. But all in all its a great retirement saving vehicle.

 

[AMRCostUnit]

Also remember, in regards to the Roth, that you'll reach a point in the future where you'll make to much money to legally contribute...
D-Bo

I used to have that problem...not anymore.

Unit
Back to Roth-land in 2003

P.S. I think the phase-out and upper limit increase in future years.

 

[Hpilot]

Everything I have read says:
1. Pay off credit cards due to high interest rates.
2. Have 6mos living expenses liquid in savings/brokerage acct.
3. Max 401k to reduce taxible income plus get company match
4. Max Roth Contribution so money can grow tax free
5. Contribute to IRA or personal brokerage account
6. If you wanna keep the late J.C. happy, give 10% to your church.
7. Buy lottery tickets, loud motorcycles, old airplanes, muscle cars, and every Motley Crue and David Allen Coe CD on the market.

Good Advice. Another option if you're looking for a conservative one is to make an extra house payment every year. I do this, plus 1-5 above with an occasional 6&7. Oh yeah, if you can't marry rich don't marry a trophy wife. My friend did. Nothing like making several hundred thousand a year and not having enough left over for taxes. Plus she doesn't even put out.

 

[Pilottodd2]

Since we are on the subject...

What does 401(k) actually mean?
I know there is a 401(a) (post-tax), but is there a 401(b), 401(c), etc...

Also, correct me if I am wrong, but the actual money that comes from your 401(k) or your Roth IRA go essentially to the same place. i.e. I could invest x% of my 401(k) in good-ole-boy mutual funds and also invest y% in the same good-ole-boy funds. The only difference is that the company 401(k)'s offerings are somewhat limited to the Roth IRA's.

 

[Secret Squirrel]

Since we are on the subject...

What does 401(k) actually mean?
I know there is a 401(a) (post-tax), but is there a 401(b), 401(c), etc...

Also, correct me if I am wrong, but the actual money that comes from your 401(k) or your Roth IRA go essentially to the same place. i.e. I could invest x% of my 401(k) in good-ole-boy mutual funds and also invest y% in the same good-ole-boy funds. The only difference is that the company 401(k)'s offerings are somewhat limited to the Roth IRA's.

401 (K) is the section of the IRS tax code that sets up the ability to invest in this way. THere are other such accounts like 403's (gov workers) and 457's.

What you can invest in is dependant on what your company sets up as options. You could have an IRA with TROWPRICE and a 401K with TROWPRICE. But they are seperate under the TAX CODE. A Roth IRA is another type of retirement set up by the tax code. You usually have more options whith a ROTH or IRA you set up yourself than one provided by a company (saves the company money probably).

SS

 

[SWPA Pilot]

Fellas and Chicas-

I'll try to back up my opinion with a little math...not sure if it is correct though.

401k up to match first to take advantage of 100% return.

Sencond, consider maxing out your 401K. Pre tax dollars grow at rate great enough to offset the taxes when you retire. To demonstrate this go to savings calculator web site (there are many) and calculate a thirty year savings goal. Input values that reflect pretax (401k) and post tax (Roth) ammounts. For example if you want to contribute $100.00 of your gross salary every month. 401k would be all $100.00 and the Roth would be around $72 for the average tax payer. I'll assume an 8% rate of return for both.

Here goes: Roth= $864 per year, APR 8% for 30 years = $97877 tax free on the end. 401K= $1200 per year, APR 8% for 30 years = $135,000 with 25% tax of $33985 (probably not going to be anywhere near this high because of retirement) = $101955

The advantage goes to 401k every time, however, Roth offers the ability to invest in any thing you want. In other words you are not limited to the few funds your company may have.

I ran the numbers as well and came up with a similar outcome. So, it seems like it may be better to keep the 401K maxed, and then do the Roth if there is money left over. If this is the case, why is there such a hype to max out the Roth first if it probably won't get you more money in the end?

 

[Secret Squirrel]

Roths are not completely useless. They hype is probably by the investment companies trying to get more money out of people.

I use the Roth IRA as a savings tool for my kids education. We are just under the $150,000 household income cap for the ROth. We have been saving 2000 a year for our kids college education. The benefits being that the money can be withdrawn tax free for college education and the money you put in can be withdrawn at any time for any reason. Plus the money is controlled by ME and my 18 year old son can't decide to buy a corvette instead of go to college (or try to become a pilot). A lot of the college savings plans are in the childs name and thus can be controlled by the child when he grows up. Plus you have more options than lots of the college plans. Both in investment options and where the child can go to school. Plus anything left over goes right into my own retirement fund, or to buy myself a corvette!!

SS

 

[Dorkpilot]

Fellas and Chicas-

I'll try to back up my opinion with a little math...not sure if it is correct though.

401k up to match first to take advantage of 100% return.

Sencond, consider maxing out your 401K. Pre tax dollars grow at rate great enough to offset the taxes when you retire. To demonstrate this go to savings calculator web site (there are many) and calculate a thirty year savings goal. Input values that reflect pretax (401k) and post tax (Roth) ammounts. For example if you want to contribute $100.00 of your gross salary every month. 401k would be all $100.00 and the Roth would be around $72 for the average tax payer. I'll assume an 8% rate of return for both.

Here goes: Roth= $864 per year, APR 8% for 30 years = $97877 tax free on the end. 401K= $1200 per year, APR 8% for 30 years = $135,000 with 25% tax of $33985 (probably not going to be anywhere near this high because of retirement) = $101955

The advantage goes to 401k every time, however, Roth offers the ability to invest in any thing you want. In other words you are not limited to the few funds your company may have.

Not always. You are considering you are in a 28% tax bracket now (1200x.72=864), and are retiring to a 25% tax bracket. If your tax bracket is the same before retirement and after retirement then your retirement checks will be equal for both the Roth and 401k.

The advantage goes to the Roth when you make less now (ie. commuter pilot) and hoping to get a better job down the road. (Then you will change your retirement planning to pre tax dollars ie. 401k after you get the higher paying job)...or if you will be in the same tax bracket that you are in now in retirement.

For example if you are currently in the 15% tax bracket and retiring to a 25% tax bracket because you did well in your saving and later moved to a higher paying job.

1200x.85=1020

1020 at 8% for 30 years =115,550 tax free Vs. 101955 401k money at the higher 25% tax bracket


**You can withdraw contributions from a roth penalty and tax free at any time.

**You can invest in anything you want (Roth) Vs. limited mutual funds in a 401k.

**And as squirrel mentioned, you can by the corvet before age 60 and 1/2 or use the Roth to help pay for your kids education Vs penalties for using the 401k for that purpose.

**You can also use the Roth as a tax advantaged savings account...because you can always take the contributions out without penalty or taxes. And after the 5 year savings date, you can take out the earnings too!


There are many more options with a Roth Vs a 401k. There are just different tax considerations for different people. If you will be in the same or higher tax bracket after retirement then the Roth is the best bet for you. (The Roth is perfect for commuter FO's and a lot of commuter CA's which pay nothing in taxes. Just make sure you get your company match in the 401k first.)

When retiring, you can always withdraw just enough of the 401k money (in retirement) to put you up to the edge of the next higher tax bracket and then withdraw the rest from the Roth which is tax free upon withdrawl and take and pay the least amount of taxes.


Check out this website. It clearly lists the advantages of the Roth IRA and what you can do with it.

www.fool.com

click on IRA and explore the different options...

If you are currently in the 15% tax bracket or less, then you should most likely:

1. Put in the min amount to get the full 401k match by your company
2. Max out the Roth IRA
3. Then max out your 401k.

DP

 

[Dorkpilot]

PS. The best mutual fund in my 401k has returned 8% as of yesterday Vs. 15% for my Roth IRA for the year.



I'm in the 15% tax bracket so I'm contributing to the Roth as I suggested in my last post.

Not trying to start a flame war. Just stating different strokes for different folks.

DP

 

[fire0241]

Best financial advice.........

Marry someone you will not divorce or don't get married.

Divorce can destroy a retirement.

 

[Swaayze]

Careful, you can't take out earnings penalty free after 5 years unless you're "of age". You can take out contributions after you've had the account 5 years. The penalty-free withdrawls are much friendlier w/ a Roth in general: contributions, medical, 1st home (w/ limits). And if you don't use it all before you die your heirs are much better off if you pass down a Roth.

There are some variables wrt your current and future tax brackets. Don't forget that both contributions and earnings in a 401k (and traditional IRA) will be taxed at your future rate (nothing tax free). Roth contributions are taxed at your current rate, but earnings are tax free.