401k vs. Roth IRA? need suggestions?

Question

Hello,

I am 21 years old, and have been at my job (small game development company) for over a year now. My company recently switched from Schwab to John Hancock, which i think was a bad choice. The JH funds are ridiculous with extra fees and high expense ratios. My company is not contributing to my 401k, and I have a little over 2k in my Schwab account. My question is should I roll over my money to a Roth IRA and not participate in my companies 401k plan? Thanks for your help.

-Michael

Answer 1

Most retirement planners suggest first to max out the 401k and get the match -- in your case, this doesn't exist.

Roth IRAs are great.  Roth max is $5000/yr I believe for 2008 so if you can put more than this in there, go ahead and keep a little something going in the 401k.  You'll save a little extra there of course.

Long-term tax free withdrawls on the Roth are powerful, and I'm guessing at 21, you're not desparate for the tax savings advantage quite yet that the 401k offers (but Roth doesn't).

I wouldn't likely pull the money out of the Schwab -- but you could ask them if you could keep the money in Schwab or possibly move it to your own (rollover) traditional IRA.  Perhaps this won't be allowed.

But I would encourage you to try to open up a Roth.

Answer 2

The other consideration to make is that you can contribute much more income to your 401k than a Roth IRA assuming that you can afford to fully maximize your contributions.

Since your employer is not matching any of your contributions, I am assuming that you can put as much as $15,500 towards your 401k which is the maximum contribution allowed.  If your employer is making contributions, then the limit is usually 15% of your gross income.

The most that you can put away in a Roth IRA is $5,000.

If you can contribute $15,500 to a 401k every year, it will grow much larger than contributing $5,000 to a Roth IRA assuming the rate of return is equal.

Answer 3

Fully fund the Roth.  Roll the 401K into the Roth and pay the taxes ($500??) if you can.  

Look at all your investment options when it comes to retirement.  One thing to remember, purchase money mortgage interest on 1st and 2nd homes is every bit as deductible as contributions to 401K's and IRA's with limits to 1.1million in purchase price.  The appreciation and lifestyle enhancements far outweigh traditional investment accounts, in my opinion.  Max funded Indexed Universal Life policies can provide principal protection, aggressive tax deferred growth, tax free access to your money and protection for your family.  Way less commonly known and understood, but an advanced strategy worth learning about.

You're starting at such a fabulous time, you will probably have an estate to protect.

Answer 4

You can't roll a conventional 401(k) directly into a Roth IRA without tax consequences.  For the future, first fully fund a Roth IRA annually, then contribution as much as you can beyond that into the new 401(k) - all you can do there is pick the best funds available.  Also let your company know what you think of their choice.

Answer 5

Only consider dropping the 401k if there is not a match.  If there is a match, put enough in to max out the match and then fund a Roth.

Answer 6

You may not be able to roll your 401K over into an IRA unless you leave the company.  In any event, your 401K is pre-tax dollars and Roth IRA are after tax dollars.  There would be tax consequences.

You may have to leave the $2K in the 401K, but stop additional contributions.  Put those in a Roth IRA.  Since your employer isn't contributing to the 401K, you will be much better off with the Roth IRA.