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View Full Version : 401(k) vs IRA vs Roth



Lebowski
12-20-06, 03:54 PM
Still young in my career. Employer has 30% match for 401k. In general, on a high level, what is the best type of plan for me? What are the general differences between the options? What advantages do they have or not have over traditional investing?

MisterFresh
12-20-06, 04:05 PM
401(k) is always deductible. Any match is free money. You should always contribute as much as your employer will match.

A traditional IRA is only deductible at certain income levels. If you are single, your modified adjusted gross income must generally be < 50,000 to make a full deductible contribution. If married, your MAGI must be less than 70,000. You can make a partial contribution if your MAGI is < 60k and you are single. Likewise, you can make a partial if your MAGI is <80k and you are married.

If you are able to make deductible contributions, the advantage is that you do not pay tax on that money now. The disadvantage is that you pay taxes on the contribution and any growth later.

If you make an after tax contribution, you only pay taxes on the gains later.

As far as a Roth IRA, you can make a full Roth contribution if your MAGI is less than 95K (single) or 150k (married). You may make partial contributions if your MAGI is less than 110k (single) or 160k (married). Your contributions are after tax and they grow tax free.

Unless you can deduct your traditional IRA contribution, you should always contribute to a Roth. If you make too much money to contribute to a Roth, I wouldn't do either.

One little caveat: If you make after tax traditional IRA contributions, you must track the contributions yourself by filing a tax form. If you do not keep tabs on this, you will end up getting taxed on the full amount of your distribution... meaning you will be double taxed.

Ghostrider
12-20-06, 04:09 PM
Was a 30% match a typo? If not, where do you work? I am going to try and work there as well....

Gaspergou
12-20-06, 04:18 PM
401(k) is always deductible.

Surely a Roth 401(k) is not deductible.

Lebowski
12-20-06, 04:19 PM
No typo. No limit either. 30% up to the 15k max. Offsets low pay a little, I guess.

So bottom line would be to take advantage of the match up to the employer limit (in my case the full 401(k) maximum) before looking at other options?

Thanks for the help MF.

wantsBU2win
12-20-06, 04:35 PM
I believe Roth 401(K) is after tax money

Ghostrider
12-20-06, 04:38 PM
Surely a Roth 401(k) is not deductible.
Roth IRA..and no, its tax deferred

caseman
12-20-06, 04:47 PM
max out the Roth as long as you qualify for it.

401(k) is a good return...sheesh 30%....but be careful and don't get cancer like me....it tends to make the millionaire at age 65 thing look a little less feasible and the drive a corvette and ducati and live in a loft downtown thing sound awesome.

BaylorGuy314
12-20-06, 04:51 PM
I get a 50% match, but only up to 7% of my annual income.

Gaspergou
12-20-06, 04:55 PM
Roth IRA..and no, its tax deferred

There is also a Roth 401(k) starting next year.

BaylorOkie
12-20-06, 04:55 PM
No typo. No limit either. 30% up to the 15k max. Offsets low pay a little, I guess.

So bottom line would be to take advantage of the match up to the employer limit (in my case the full 401(k) maximum) before looking at other options?

Thanks for the help MF.

RE your 401k--Look at it as an instant return on your investment of 30%. That's pretty nice.

Roth IRA's are nice b/c when you take the money out at retirement, you pay no taxes on all the gains you have accumulated over many years. So if you invest $5,000 this year and it grows to $150,000 at retirement (which at your age is very likely), you won't pay any taxes at all on the $145,000 gain. But like MF said, it's only allowed under certain income levels, so I've always thought people should do it while they can.

With a 401k or traditional IRA, you would pay taxes on the $145,000 gain.

MF, you said this:



Unless you can deduct your traditional IRA contribution, you should always contribute to a Roth.


I've always thought the long-term tax benefits of a Roth far outweigh the immediate tax deduction of a traditional. Do you disagree, and why? I'm interested to hear your opinion on this.

GoBearsGo
12-20-06, 05:10 PM
There is also a Roth 401(k) starting next year.

Funny I put 10k into one this year and will do 100% or 15k into one next year.

Not all plans have adopted a Roth401k

caseman
12-20-06, 05:25 PM
I am only allowed to deposit 2K a year into the Roth. Has it changed? If so, I am maxing that sucker out. Much better deal, if you qualify, than 401(k) or my 457

Lebowski
12-20-06, 05:26 PM
I am only allowed to deposit 2K a year into the Roth. Has it changed? If so, I am maxing that sucker out. Much better deal, if you qualify, than 401(k)

How so?

BaylorOkie
12-20-06, 05:28 PM
How so?


See my post (#11) above.

Lebowski
12-20-06, 05:41 PM
See my post (#11) above.

So caseman and you are saying all other things being equal - do the Roth BUT if there is a match by the employer to up that amount first in the 401(k). Correct?

Ghostrider
12-20-06, 07:02 PM
yes.

case, why are you only doing 2k and not 4k in the roth?

BaylorOkie
12-20-06, 07:50 PM
So caseman and you are saying all other things being equal - do the Roth BUT if there is a match by the employer to up that amount first in the 401(k). Correct?

Yes, I think the initial 30% return on your investment is the deal clincher here. Even though you will pay taxes on the 401k in the end, that extra 30% investment will kick some butt over the next 35-40 years. That will far outweigh the tax savings of the Roth.

If there was no employer match I would say max out the Roth first. In college I took student loan money to open a roth for me and one for my wife. I think that was smart b/c I can never go back and invest that money for that year, so I've got $4k that will grow for 40 yrs that we wouldn't otherwise have had. And I only had to pay about 4% on that money for a couple of years until I paid it off. Obviously, I'm a big fan of the roth but your 30% match is a nice deal.

NewsBruin
12-20-06, 09:08 PM
The theory I heard and believed was that if you're young and starting out, then take the max and put the rest in the Roth, because the odds are your tax rate will be higher when you retire.

Have I done it yet? No. I'm still sitting in my 401(k), and I haven't even checked which fund it's in. Any good tips for a fund in the 30-40 year range?

caseman
12-20-06, 09:38 PM
yes.

case, why are you only doing 2k and not 4k in the roth?

I stand corrected. 4 grand. I guess I was thinking about my 457, which I used to put 20% of pre tax income into, worked out just right to send me into a lower bracket.

I put a little money monthly into a Money Market account, in addition to the money I directly deposit into a simple savings every two weeks for the Roth (something like $155).

I think I put in 3% or so into the 457 now because I kind of got a little turned off by these future payoff when I was 65 because I had to confront my mortality before the age of 30. Sometimes I think hoarding my money and investing instead of spending a little more and having some fun now is unwise and is something some anal tightwad would do. As long as I can pay for everything with cash instead of credit (which I have for the past 5 years) and quickly pay off medical debt, I think indulging in some travelling is probably not going to hurt my future all that much (plan to visit the highpoints of all 50 states within the next 5 years).

I like Big Lebowski's 30% a lot, I think I am just kind of verbalizing my prejudices since I work for local government in a civilian position, thus no matching whatsoever :upset:

Disclaimer: I really know NOTHING about economics and even less about finance. I am a math and chemistry guy and couldn't tell you the first thing about Adam Smith or supply and demand....just repeating things that have been once told to me by buddies who are into that kind of stuff.

BaylorOkie
12-20-06, 10:00 PM
Case, what's a 457?

caseman
12-20-06, 10:07 PM
Case, what's a 457?

like 401(k) but for government workers, maybe only municipal government workers. I work for City of Dallas Environmental Health. There are some interesting provisions that separate it from 401(k). If you stay with the City your entire career, you are not allowed to touch the money without a penalty. If you change jobs, however, you can roll it over to another IRA with no penalty, or take it out at age 30, perhaps, taxed of course (but no early withdrawal penalty). This is only, however, if you leave the job. I think in the 401(k) you have to wait until age 60 before the ability to remove the money.

Is anyone on here more familiar than I am with the 457? I'm sure it probably sounds like I am full of crap....

MisterFresh
12-20-06, 11:12 PM
like 401(k) but for government workers, maybe only municipal government workers. I work for City of Dallas Environmental Health. There are some interesting provisions that separate it from 401(k). If you stay with the City your entire career, you are not allowed to touch the money without a penalty. If you change jobs, however, you can roll it over to another IRA with no penalty, or take it out at age 30, perhaps, taxed of course (but no early withdrawal penalty). This is only, however, if you leave the job. I think in the 401(k) you have to wait until age 60 before the ability to remove the money.

Is anyone on here more familiar than I am with the 457? I'm sure it probably sounds like I am full of crap....

I'm not familiar with the 457, but you can take money out of a 401(k) at any time provided you've left the job. I used a good portion of mine to pay for school related expenses when I got my masters.

I believe you're correct that a 457 is for municipal workers exclusively. Other gov't workers may be eligible for a 403(b) and other types of retirement plans.

psi style
12-20-06, 11:29 PM
I'm not familiar with the 457, but you can take money out of a 401(k) at any time provided you've left the job. I used a good portion of mine to pay for school related expenses when I got my masters.

I believe you're correct that a 457 is for municipal workers exclusively. Other gov't workers may be eligible for a 403(b) and other types of retirement plans.

most people if they take money out of their 401k (or in my case 403b) before age 59 1/2 will have to pay a 10% penalty to the IRS. sounds like you dodged that since it was for school expenses.

pretty good points all around on here. i definitely agree to get the full matching that you can, 30% is insane, i thought my 10% employer contribution was nice. just be careful of any vesting schedules. some places require that you work there for upwards of 7 years before all of that 30% is yours. if you leave your job in 3-4 years, you may only get to keep half of what they put in for you.

i would do a roth, but the cash isn't there for me right now after getting my full company match. but i'm only 26 and have plenty of time, and already have more saved up than most of our clients that i talk to in their 40's.

psi style
12-20-06, 11:36 PM
The theory I heard and believed was that if you're young and starting out, then take the max and put the rest in the Roth, because the odds are your tax rate will be higher when you retire.

Have I done it yet? No. I'm still sitting in my 401(k), and I haven't even checked which fund it's in. Any good tips for a fund in the 30-40 year range?

if you are age 30-40 i personally would still be very high risk, lots if not all in equities. unless you have plans to use some of that any time soon, you have at least 20 years to go. take full advantage of any earning potential while you can.

whatever you do try and avoid putting all of your account in company stock. if they go under, you're screwed (see: Enron) stick with mutual funds.

bottom line is find something you are comfortable with. if the thought of losing a few thousand in a year in account value freaks you out, there are lots of blended funds that are good for balancing it out for you so you won't have to worry about it. if you are the type that sets it and doesn't look at it for years at a time, going a little higher risk wouldn't be a bad idea.

Ghostrider
12-21-06, 02:17 AM
Sometimes I think hoarding my money and investing instead of spending a little more and having some fun now is unwise and is something some anal tightwad would do.
agree 100%...I wouldnt save every cent....you do need to have some fun and enjoy life

cletus
12-21-06, 07:23 AM
I have enjoyed this thread and the responses on it. I have a SEP IRA funded through my small business. Does that affect the amount I can contribute to my Roth IRA, or can I continue to max it out?

psi style
12-21-06, 07:48 AM
I have enjoyed this thread and the responses on it. I have a SEP IRA funded through my small business. Does that affect the amount I can contribute to my Roth IRA, or can I continue to max it out?

you should still be able to max out your Roth

eastdallasloco
12-21-06, 08:23 AM
There is also a Roth 401(k) starting next year.

ameritrade offered roth 401k to its employees and covered call writing in 401k. mista fresh, you lost me at the trad ira only deductible up to whatever. it was my understanding that every contrib to trad ira was fully deductible no matter how much you made. i think 07 ira contrib level goes up to 5k.

GoBearsGo
12-21-06, 08:41 AM
Cletus if you want to save more there are some ways as a SBO, especially if you do not have employees, you can save up to 45k next year.

FTY, be careful what you read on a board like this. Most of the things you hear are about 90% right. That 10% can hurt you. A lot of people like to give advice that may not be up on current changes ie, Roth 401k and how it works, because the heard it on CNBC or took a class 3 years ago. Either talk with a professional or do your own research with a QUALITY provider. Take what you get here with a grain of salt. Not everyone here does this for a living.

psi style
12-21-06, 09:09 AM
ameritrade offered roth 401k to its employees and covered call writing in 401k. mista fresh, you lost me at the trad ira only deductible up to whatever. it was my understanding that every contrib to trad ira was fully deductible no matter how much you made. i think 07 ira contrib level goes up to 5k.

limit goes up to $5k in 2008 as part of EGTRRA. if you are over 50 you get an extra $1k that you can put in each year.

you don't automatically get full deductibility on a Traditional IRA, it is based on your income. if you make over a certain amount, you can only get a partial deduction. i don't have the exact figures, but if your salary is pretty high i would be careful with doing a Traditional IRA.

eastdallasloco
12-21-06, 09:12 AM
limit goes up to $5k in 2008 as part of EGTRRA. if you are over 50 you get an extra $1k that you can put in each year.

you don't automatically get full deductibility on a Traditional IRA, it is based on your income. if you make over a certain amount, you can only get a partial deduction. i don't have the exact figures, but if your salary is pretty high i would be careful with doing a Traditional IRA.


i would love to have the problem of having my salary too high. thanks for keeping me up to speed on the new contrib limits.

psi style
12-21-06, 09:16 AM
i would love to have the problem of having my salary too high.

now wouldn't that be a problem we would all like to have?

BaylorOkie
12-21-06, 09:20 AM
just be careful of any vesting schedules. some places require that you work there for upwards of 7 years before all of that 30% is yours. if you leave your job in 3-4 years, you may only get to keep half of what they put in for you.

Great point, psi. Forgot about the vesting, since it doesn't affect me.

Cletus, I'm a small business owner, too. Any advice on now to set up an SEP? psi do you have any experience with these? I used to work in the family business and as of March I'm on my own. I'd like to get started with this in '07.

MisterFresh
12-21-06, 09:23 AM
Your salary doesn't have to be all that high to lose the deductibility of a traditional IRA. 50k for a single filer, 70k for a joint filer.

The Roth limits are considerably higher.

BUbacker
12-21-06, 09:47 AM
No typo. No limit either. 30% up to the 15k max. Offsets low pay a little, I guess.

So bottom line would be to take advantage of the match up to the employer limit (in my case the full 401(k) maximum) before looking at other options?

Thanks for the help MF.

Yes. You can't get a 30% guaranteed return anywhere else. Even after taxes that is the best deal.

booray17
12-21-06, 09:59 AM
I am considering starting an IRA for my daughter this year, matching the income she earned. Is there a lower limit on either the traditional or Roth IRA for AGI?

Dean/Sharpton04
12-21-06, 10:16 AM
I am considering starting an IRA for my daughter this year, matching the income she earned. Is there a lower limit on either the traditional or Roth IRA for AGI?

GENIUS! TEACH THEM EARLY!

psi style
12-21-06, 10:25 AM
I am considering starting an IRA for my daughter this year, matching the income she earned. Is there a lower limit on either the traditional or Roth IRA for AGI?

not from the IRS. each individual company may have a minimum requirement to open an account. the company i work for has a minimum balance of $1k for an IRA, but that differs from place to place.

BaylorGuy314
12-21-06, 10:26 AM
Ok, I'm curious.

Right now, I'm investing 10% of my paycheck into my 401K.

I get a 50% match on up to 6% of my annual income. (I thought it was 7%, but it's 6%.) I'm 20% vested on the match after Year 1, 40% after Year 2, 60% after Year 3, 80% after Year 4, 100% after Year 5. (I'm in Year 2 now.) I'm 100% vested on my contributions at Day 1.

Of that 10% of my paycheck, here's how I've broken my investment down:

66% is going to company stock
9% is going to American Funds Europacific A
8% is going to Income Fund of America
8% is going to Small Cap World
9% is going to Washington Mutual Investors

Am I diversified enough?



------------

Here are the trailing returns for the different investments:

American Funds Europacific A
YTD: 20.66%
3YR: 21.71%
5YR: 15.49%

Income Fund of America
YTD: 20.01%
3YR: 12.55%
5YR: 11.08%

Small Cap World
YTD: 21.77%
3YR: 19.65%
5YR: 15.00%

American Funds Washington Mutual A
YTD: 18.21%
3YR: 11.23%
5YR: 7.78%

Company Stock
Percentage Increase in stock price in 12 month period

2002: 17.07%
2003: 28.78%
2004: 38.26%
2005: 18.85%
2006 (YTD): 16.67%
1 YR Growth Rate: 18.85%
3 YR Compounded Growth Rate: 21.81%
5 YR Compounded Growth Rate: 16.75%

quash
12-21-06, 11:40 AM
Ok, I'm curious.
Of that 10% of my paycheck, here's how I've broken my investment down:
66% is going to company stock
Am I diversified enough?

Scott Burns, business writer for the Dallas Morning News, would probably suggest a little less going to the company stock. His reasoning is that your assets are not just what you do with the 10%, but your salary, your income stream, as well. Having 2/3 of your investments AND your salary all in one basket is kinda risky. But risk at your age is a relative thing.

Sigh.

MisterFresh
12-21-06, 11:54 AM
I am considering starting an IRA for my daughter this year, matching the income she earned. Is there a lower limit on either the traditional or Roth IRA for AGI?

One thing you need to know before you contribute to an IRA for your daughter is that she MUST have earned income in order to make a contribution. She cannot contribute more than her earned income (or the IRA limit).

See page 1 of this thread for the MAGI #'s.

BaylorGuy314
12-21-06, 11:58 AM
Scott Burns, business writer for the Dallas Morning News, would probably suggest a little less going to the company stock. His reasoning is that your assets are not just what you do with the 10%, but your salary, your income stream, as well. Having 2/3 of your investments AND your salary all in one basket is kinda risky. But risk at your age is a relative thing.

Sigh.

I see what you are saying- if the company were to tank, not only would I lose the value of 66% of my portfolio but also the other 90% of my income.

Interesting philosophy. I do feel I can afford to take some risk at my age though and the company is getting one hell of a return.

HenryTheOctopus
12-21-06, 12:12 PM
I do feel I can afford to take some risk at my age though and the company is getting one hell of a return.

That's what many Enron employees thought, too.

BaylorGuy314
12-21-06, 12:25 PM
That's what many Enron employees thought, too.

That is exactly why I'm not investing 100% into them. A lot of people I work with are- which is just plain dumb to me, but hey, it's their money.

What's funny (not funny in a "haha" way, but funny in a "that's interesting" kind of way), is that no one at Enron could tell you how they were making money. They just knew they made it...err...or thought they knew they made it.

It's a little different in my industry since most things we do are examined by the government. That's not saying it couldn't happen- it could- but it's far more unlikely than in a company like Enron.

The reason my company is growing so fast is that we have significant ties to WalMart, although we operate independently. If WalMart grows, we grow. WalMart is growing.

Ironically, I'm not worried about our internal controls. I've made enough friends with people in high places here to feel comfortable in our business plan, how they carrying it out, etc. My big concern is that we are kind of piggybacking on WalMart as far as current and future growth out of state is concerned. If WalMart begins to suck it up (unlikely, but certainly possible), the future outlook of our company could diminish as well.

GarlandBear84
12-21-06, 01:04 PM
BG314, W-M stock hasn't done well the last few years. I think it is very risky to put more than 20% of your savings in your own company stock. In my 401k the company matches 60% of the first 6% that I put in, so it's a no-brainer to take advantage of that.

BaylorGuy314
12-21-06, 01:24 PM
BG314, W-M stock hasn't done well the last few years. I think it is very risky to put more than 20% of your savings in your own company stock. In my 401k the company matches 60% of the first 6% that I put in, so it's a no-brainer to take advantage of that.

Thanks for the advice. I may have to reconsider some of my investment.

turk4037
12-21-06, 04:19 PM
There is another big benefit to a Roth that no one has mentioned. Anyone?

GoBearsGo
12-21-06, 04:36 PM
Turk-No RMD.

If you are tied to Wal-Mart watch out. That also means when Wal-Mart can figure out a way to cut you they will. No more than 20% is good. Those American Funds will do well in the long run.

turk4037
12-21-06, 04:46 PM
Nope, RMD isn't it.

GoBearsGo
12-21-06, 04:51 PM
Maybe not the answer you are looking for but it is a huge deal when you are 70 1/2. When you have a mil or two in the IRA and the govt says you HAVE to take out some, in a roth that will not happen in it's current form(the gov't can always change)

MisterFresh
12-21-06, 04:58 PM
Turk, you can contribute beyond age 59.5?

GoBearsGo
12-21-06, 05:02 PM
you can with a reg IRA also. Up until 70 1/2

turk4037
12-21-06, 05:15 PM
No neither of those either.

turk4037
12-21-06, 05:16 PM
RMD = Required Minimum Distribution

BaylorOkie
12-21-06, 05:20 PM
The inventor, Mr. Roth is dead so they are worth more money?

cletus
12-21-06, 07:57 PM
Cletus, I'm a small business owner, too. Any advice on now to set up an SEP? psi do you have any experience with these? I used to work in the family business and as of March I'm on my own. I'd like to get started with this in '07.

For my situation it was very easy. I went to fidelity.com and filled out an online application. Within a week the entire account was setup. My situation was pretty easy, however, as I do not have any employees. Go the fidelity website, and click the small business link located on the left. They have good advice and compare all the retirement options you have as a small business owner.

cletus
12-21-06, 07:59 PM
Cletus if you want to save more there are some ways as a SBO, especially if you do not have employees, you can save up to 45k next year.

I, in fact, do not have any employees. Although my business is fairly young, i would like to hear about the options you are talking about.

turk4037
12-21-06, 08:00 PM
No, this is another very nice feature of Roth IRA's and no one has mentioned it yet. I thought for sure Rush would.


The inventor, Mr. Roth is dead so they are worth more money?

turk4037
12-21-06, 08:01 PM
To be fair, it is a feature I never hear discussed much in the press. I am sure that's why no one really knows about it.

BaylorGuy314
12-21-06, 08:02 PM
If you are tied to Wal-Mart watch out. That also means when Wal-Mart can figure out a way to cut you they will.

Not tied to them in a retail way, but I got ya.

GoBearsGo
12-21-06, 08:49 PM
If you are making big bucks you can do a Owner 401K with a profit sharing, that's 15 for ther 401k and then a PS to make it to 45k. you need to be making some nice coin though.

SoTexBear
12-21-06, 09:00 PM
Was a 30% match a typo? If not, where do you work? I am going to try and work there as well....

We get a 150% match (max of 2%: I put in 2%, they put in 5%). Previous employer was 100% match (max of 6%: I put in 6%, they put in 6%).

I say put in all you can up to the match amount, then max out a Roth, then go back to your employers 401K.

SoTexBear
12-21-06, 09:02 PM
A big benefit of a Roth is that you can take out your contribution amount at anytime without any penalty and without taxes (the taxes were already paid).

Is that what you were thinking, Turk?

SoTexBear
12-21-06, 09:06 PM
Ok, I'm curious.

Right now, I'm investing 10% of my paycheck into my 401K.

I get a 50% match on up to 6% of my annual income. (I thought it was 7%, but it's 6%.) I'm 20% vested on the match after Year 1, 40% after Year 2, 60% after Year 3, 80% after Year 4, 100% after Year 5. (I'm in Year 2 now.) I'm 100% vested on my contributions at Day 1.

Of that 10% of my paycheck, here's how I've broken my investment down:

66% is going to company stock
9% is going to American Funds Europacific A
8% is going to Income Fund of America
8% is going to Small Cap World
9% is going to Washington Mutual Investors

Am I diversified enough?



Nope. I'd do it like this:

All stocks...
10% Company stock
22.5% Large Cap
22.5% Small Cap
22.5% International
22.5% Growth/Aggressive Growth/Growth & Income

turk4037
12-21-06, 09:14 PM
Bingo!!! We have a winner!!! Good job SoTex.


A big benefit of a Roth is that you can take out your contribution amount at anytime without any penalty and without taxes (the taxes were already paid).

Is that what you were thinking, Turk?

turk4037
12-21-06, 09:16 PM
You need to have a small portion in high yield. Not a lot right now but high yield funds have done surprisingly well for a long time. Of course, as I have stated on here before, when high yield is seriously oversold, you need to increase your holdings of it.

Right now High Yield funds are yielding approximately 350-380 bps over the 10 year. In 2002 the spread was 900 bps. That was cheap!!!! If you see that again start to load up fellas.

turk4037
12-21-06, 09:23 PM
Below is another little discussed feature of a Roth IRA.

Tax on Social Security
Another advantage over the traditional IRA
By Kaye A. Thomas
Updated March 12, 2006

How using a Roth IRA affects the amount of tax you pay on social security benefits.

If your income is above certain levels you have to pay tax on a portion of your social security benefit. Certain forms of exempt income are included when you determine how much of your social security benefit is taxable. Nontaxable distributions from a Roth IRA won't affect the tax on your social security benefits, however.
Nontaxable Distributions

When Congress decided how much tax people should pay on social security benefits, the general idea was that people with higher incomes should pay tax on a bigger portion of the benefit. It seemed fair (to the lawmakers, at least) to include certain types of nontaxable income for this purpose. So when you determine how much of your social security benefit is taxable you have to include the following items:

* Tax-exempt interest
* Series EE bond income that's excluded under the education savings bond program
* Certain otherwise excluded income earned abroad

Some people use a shorthand description of this rule, saying you have to include "tax-exempt income" when you figure how much of your social security benefit is taxable. You might wonder, then, if tax-exempt distributions from Roth IRAs would affect the calculation.
The answer is no. The only forms of tax-exempt income that affect the tax on your social security benefit are those that are specifically listed in a particular section of the Internal Revenue Code. Distributions from Roth IRAs are not on that list. In fact, many other types of tax-exempt income are not on that list, so there's no reason to think this is an oversight that will be corrected later. In theory it's possible Congress will change this rule, but I don't think that's likely.

This provides another potential advantage for the Roth IRA over the traditional IRA. Withdrawals from a traditional IRA can cause you to pay more tax on your social security benefits, but that's not true for withdrawals from a Roth IRA.

BaylorGuy314
12-21-06, 10:08 PM
Turk,

Could you clean out some PMs? I'd like to send you some stuff but your box is full...

Thanks!

SoTexBear
12-21-06, 10:11 PM
Turk,

Interesting enough, I was just discussing this with a financial counselor this week. We're re-doing our financial plan and the Roth will play a much larger role. We plan to max out the roth and take advantage of the company match 401K. While we were saving as much as 15% of our income in the past, I think we've laid a good groundwork to lower that to about 10% (although, technically I guess we'd be at about 15% since our employer will be putting in 5%). We'd like to enjoy more of our income.

I've been very happy with a 25%/25%/25%/25% diversification in different stock funds. I've stayed away from anything but stocks and have been pleased over the past 15 years.

BaylorOkie
12-22-06, 07:16 AM
For my situation it was very easy. I went to fidelity.com and filled out an online application. Within a week the entire account was setup. My situation was pretty easy, however, as I do not have any employees. Go the fidelity website, and click the small business link located on the left. They have good advice and compare all the retirement options you have as a small business owner.

Thanks. I'm in the same boat. I don't have any employees. I noticed how helpful Fidelity's website is, and I checked out Vanguard, too, since that's where I have our Roth's.

BaylorOkie
12-22-06, 07:21 AM
I say put in all you can up to the match amount, then max out a Roth, then go back to your employers 401K.

Good advice.

GarlandBear84
12-22-06, 08:08 AM
We get a 150% match (max of 2%: I put in 2%, they put in 5%). Previous employer was 100% match (max of 6%: I put in 6%, they put in 6%).

I say put in all you can up to the match amount, then max out a Roth, then go back to your employers 401K.

If you get a 150% match, then the company puts in 3% in addition to the 2% you put in for a total of 5%. If they add 5% then that is a 250% match.

SoTexBear
12-22-06, 08:55 AM
GarlandBear84,

Thanks for the clarification. I must have been tired when I typed that. 250% is correct. It's sure better than a poke in the eye.

Ghostrider
12-22-06, 09:21 AM
sotex, you still at USAA?

SoTexBear
12-22-06, 09:26 AM
Rush,

Left 2 years ago.

SoTexBear
12-22-06, 09:28 AM
Rush,

USAA matches 100% up to 6% of your income. The company I'm with now matches 250%, but it's limited to a set 2%/5%. Anything over 2% is not matched. So, maximizing the match, I was getting an effective 12% savings at USAA and only 7% now.

BaylorOkie
12-22-06, 09:32 AM
Rush,

USAA matches 100% up to 6% of your income. The company I'm with now matches 250%, but it's limited to a set 2%/5%. Anything over 2% is not matched. So, maximizing the match, I was getting an effective 12% savings at USAA and only 7% now.


The nice thing is you have to invest much less for that 5%. Instead of having to put 5% in your 401k (in the case of 100% match), you only have to put in 2%. Then you can take that next 3% and put it in your Roth's to grow tax free.

Ghostrider
12-22-06, 09:34 AM
sotex, how was UBS or SB? Cant remember where you said you went...

SoTexBear
12-22-06, 10:09 AM
Actually, I went to an independent (CFP) and a financial coach (not a CFP). I will meet w/UBS in the upcoming weeks.

turk4037
12-22-06, 11:03 AM
You owe it to yourself to look at 5% or so in high yield for now. If the spreads widen to 900 bps again then I'd take it up to 20%. Don't quote me on this (I have to go back and check my research) but I believe over the last 20 years the high yield market (Junk Bond Funds) have been one of the highest performing sectors in the market.


Turk,

Interesting enough, I was just discussing this with a financial counselor this week. We're re-doing our financial plan and the Roth will play a much larger role. We plan to max out the roth and take advantage of the company match 401K. While we were saving as much as 15% of our income in the past, I think we've laid a good groundwork to lower that to about 10% (although, technically I guess we'd be at about 15% since our employer will be putting in 5%). We'd like to enjoy more of our income.

I've been very happy with a 25%/25%/25%/25% diversification in different stock funds. I've stayed away from anything but stocks and have been pleased over the past 15 years.