So another question for you guys about personal finances:
401k or RothIRA or both?
Currently, I only have a 401k account because MIT matches up to 5% of my pretax income in contributions to my 401k account as part of my retirement benefits. What that means is that if my income is $100, and i put away 5% ($5) of that into my 401k then MIT will also give me another $5 (sort of like free money! yay!)-- I'm pretty sure most private companies match much more. Currently, I'm only contributing the minimum amount (5%) to earn the matching benefit from MIT.
I read somewhere that younger employees should be putting money away into their RothIRAs due to something about being taxed now (rather than later when we're in higher tax brackets). Take note that when you withdraw from your 401k, you will pay taxes on it according to the tax bracket you're currently in-- while with the RothIRA, you've already payed the taxes before you put it into your account. The other thing about the RothIRA is that you can only contribute a certain amount each year (I believe currently it's $6000)-- so the earlier you start contributing, the better.
Another question about the 401k-- how do you even begin to choose which investments you want to put your 401k contributions into? Thusfar I've just pretty arbitrarily chosen 2 "FID Diversified INTL" and "AIM MIDCAP CORE EQ A" whatever those are. I'm not even sure how to begin learning how to research them.
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As requested by Bcheng-- I'm adding my comment to the main post:
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To say that the RothIRA is tax free is not exactly true.
The money that you contribute to your RothIRA is already taxed (income taxes) before you put it into the account. It's true that the earnings you make on the RothIRA are not taxed-- so when you withdraw it you get all of it.
Contributions towards your 401K are not taxed before they enter the account. In fact, your 401k contribution is completely deducted from your taxable income.
In essence-- if you were to put the same percentage money into both your 401k and RothIRA-- your principal for the 401K would be higher. However, you will be taxed on the withdrawings of your 401k.
In the end, since we will be moving into higher tax brackets before retirement-- paying the taxes on the RothIRA now would be the best idea. For older folks who don't anticipate moving up in tax brackets-- it'd be better for them to contribute to their 401k since their principal would be higher.
Tuesday, December 2, 2008
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8 comments:
Hey Hey! I haven't read your entire post, but in terms of 401k or Roth, I have both as well. 401K through the company and then I opened a Roth IRA through Scottrade and use that money to invest in stock. And you don't need to pay tax on the money you make either.
I haven't read your entire post yet either but 2 weeks ago I heard Kenji and Rachel opened a ROTH IRA. I think Alfred opened one too, he told me. Oh on the left it says he did HAHA. Anyways I think you can't pull money out until a certain age but then it's tax free. Correct me if I'm wrong.
To say that the RothIRA is tax free is not exactly true.
The money that you contribute to your RothIRA is already taxed (income taxes) before you put it into the account. It's true that the earnings you make on the RothIRA are not taxed-- so when you withdraw it you get all of it.
Contributions towards your 401K are not taxed before they enter the account. In fact, your 401k contribution is completely deducted from your taxable income.
In essence-- if you were to put the same percentage money into both your 401k and RothIRA-- your principal for the 401K would be higher. However, you will be taxed on the withdrawings of your 401k.
So in the end-- do you want to be paying taxes now or later?
I havn't read this article in detail yet but it looks helpful.
401(k) vs. IRA
Dan, I think your comment is really useful. Can you publish it within your original blog?
That's odd. Because I use Scottrade and I don't get taxed at any point of my trading. Unless u count the fee for actually making trades.
Hey Alfred-- the money that you put into your RothIRA account is from your paycheck right? Well your paycheck is what's left over after the government takes a chunk out of your original salary (aka income tax).
That means the actual paycheck you see (and the portion of the paycheck that goes into RothIRA) has been taxed already.
As for the 401k-- the amount that you contribute from your paycheck (usually a percentage) is directly deducted from your salary and isn't subject to income taxes at the time of contribution.
Hope that clears things up.
Dan is correct, I got that verified from Gabe yesterday. If you need more clarification let us know Alfie.
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