Please teach me about IRA's

See, I didn't say 'learn me."

I've had a 401K for many years, but an IRA can't be a bad addition to my portfolio right?

Do you have to select investments like a 401K or are they "all the same"? Will one place give a different rate than another? (again are they "all the same"?)

Taxes and Roth?

Did some reading from a few sources, but had a hard time comprehending what was being said. Can someone give me the readers digest version? Just turned 40 and I know I'll never be able to save enough to truly 'retire' but getting down to a low stress part time job someday would be nice.

IRA’s work very much like 401K’s…get a brokerage account with Schwab, Scott Trade, E-Trade, etc. and pick from a universe of stocks, mutual funds, index funds, bonds, REIT’s, metals, etc.

The real difference is with individual taxes, estate planning, age requirements for withdrawals without penalties, and legal stuff like what can be counted as an asset in a divorce.

This part is pretty complicated so I suggest you read up on it before jumping in. Readers Digest version: The limit for 401K contributions for those under fifty in 2014 is $17,500…if you’re not maxed out and looking to contribute more, you can probably ignore Roth’s for now.

However, I’m not a expert so perhaps someone else will chime in with some details that would make a Roth attractive for you now.

There is a limit for both Roth and Traditional. The limits are based on income and access to an employer savings plan (401k).

You select investments just like your 401k. I'd suggest just going to Vanguard or Fidelity and reading through and opening an account.

That said, if the expense ratios on your 401k funds are not high, I'd probably max that first before worrying about the IRAs.

I don't have a Roth, but I think what makes them attractive to many is that you can save in them, but withdraw from the principal without penalty. Or, if you are in a much lower tax bracket now than you anticipate being in when you retire.

ProDarwin wrote: That said, if the expense ratios on your 401k funds are not high, I'd probably max that first before worrying about the IRAs.

if you can do both … you're missing out if you don't, I could never afford to max out my 401k … but the return offered by it didn't come close to what I was getting from my IRA's

I have mine split between traditional and Roth …

never had the need to withdraw/borrow from the Roth, so now that's what I'm living on …

and for it's worth, it's growing faster than I'm taking out (American Funds… (ICA & growth fund of America) … which leaves me with SS as my only taxable income (happy with that)

so if you can afford to put money in the Roth (after taxes) I think it's worth it, even at your age

I think part of the "stuff more into the 401k or get an IRA" decision also needs to be based on the available investments in the 401k. Not all employers have that good a mix in there if you want to diversify your investments, so not everything is only dictated by the fees. They are, however, a negative indicator - the higher the fees, the more you only want to put in enough to grab a potential employer match.

If you have a 401k available to you that offers a good mix of low-cost investments (which usually means that it's with one of the low cost providers like Fidelity, Vanguard or similar) then it makes sense to max out the contributions first. If the fund choice is crummy and/or it's with a high cost provider, then you get better returns over time if you only contribute enough to put the money in to get the employer match, if any, and invest the rest of the money yourself into low-cost choices. IMHO, you want to see fees on the investments that are in the 0.1% range or considerably lower, although I do invest in a couple of funds that have fees in the 0.4-0.5 range because of the lack of alternatives.

One of the big advantages of 401ks is that they are considered protected assets so if some financial disaster strikes, your creditors usually can't grab assets in a 401k. Not all other retirement saving choices are protected like that, for Roth IRAs at least it varies from state to state. For me, the protection however doesn't outweigh the financial damage you can do to yourself by investing into a 401k with high fees and crummy choices. That's a choice everybody has to make for themselves.

Next, taxes and Roths. Regular 401ks are tax deferred - put the money in before tax, pay ordinary income tax when you pull it out - which can be helpful if you can use that as part of an income tax management strategy. Contributing to a regular 401k just for the tax saving does make about as much sense to me as keeping a mortgage around for the mortgage interest deduction, you'll have to get more out of it than just the tax advantage. Some employers now also offer a Roth 401k which is fed post-tax money, but you don't have to pay taxes on withdrawals made in retirement. If your employer offers that, it may make sense to put some money into a regular 401k and some into a Roth 401k.

Roth IRAs then allow you to contribute an additional post tax $5500 ($6500 if you're over 50) to retirement savings and because they're a Roth, you don't have to pay taxes on the earnings when you take them out in retirement. As ProDarwin already mentioned, you can also withdraw your contributions without taxes or penalties if you have to, as long as you leave the earnings in. Some people - like myself - make use of that feature and use Roth IRAs as a combination of retirement savings and backup emergency fund. I try to keep enough money around for "regular" emergencies like failed hot water heaters, furnaces, Porsche engines eating their IMS bearings and stuff like that.

Money that goes into the "you're fired" fund ends up mostly in Roth IRAs for both my wife and myself. That's on the assumption that this money will (hopefully) stay invested a lot longer because those dire emergencies are much rarer than the usual item breakage, having to take pets to the vet etc. That money at least needs to be able to keep up with inflation, which you currently can't with a regular savings account.

Both of the above posts are correct regarding 401k... make sure you have good investment options and low expenses. If you don't...

1) Get employer match
2) Max IRA
3) Max 401k
4) Taxable investments

In that order.

I contribute way more than $5500 a year, so I'm going to sink a bunch into my 401k regardless. Luckily my investment options in my 401k are pretty good and my expense ratios aren't bad.

Good info everyone, thanks.

My employer does not match, and I'm not maxed out. I'm putting in about 15% of my pay. (hitting 17K a year won't happen unless I give up eating and owning a home) Fedelity runs the 401K program, but wasn't much help when I called them for guidance. Basiclly they said to invest in the fund that matches my retirement date.

How do you find a good broker?

I'm reading to glean some of the good info, but this stuck out:

wbjones said: which leaves me with SS as my only taxable income

I still get a headache when I think about how the federal gov't finds so many ways to screw over its people, e.g. Social Security benefits are "taxable income." The government takes your money in taxes, puts it somewhere that performs below market, then gives it back to you gradually, and then taxes the part they give back, which comes from money they already took as taxes. They are taxing your tax money.

Gearheadotaku wrote: Good info everyone, thanks. My employer does not match, and I'm not maxed out. I'm putting in about 15% of my pay. (hitting 17K a year won't happen unless I give up eating and owning a home) Fedelity runs the 401K program, but wasn't much help when I called them for guidance. Basiclly they said to invest in the fund that matches my retirement date. How do you find a good broker?

Fidelity has local offices, too.

jsquared wrote: I'm reading to glean some of the good info, but this stuck out:

wbjones said: which leaves me with SS as my only taxable income

I still get a headache when I think about how the federal gov't finds so many ways to screw over its people, e.g. Social Security benefits are "taxable income." The government takes your money in taxes, puts it somewhere that performs below market, then gives it back to you gradually, *and then taxes the part they give back, which comes from money they already took as taxes*. They are taxing your tax money.

except that in my case, the taxable income will be so low as to seem to be tax free … at just barely over $12k/yr of SS income, and that being my only taxable income … the tax burden shouldn't be much, if any

and it won't take many yrs of receiving SS $$ before I will have received more than I ever put in … granted if that money had been invested at higher interest levels, that "break even point" would take longer to reach

David S. Wallens wrote:

Gearheadotaku wrote: Good info everyone, thanks. My employer does not match, and I'm not maxed out. I'm putting in about 15% of my pay. (hitting 17K a year won't happen unless I give up eating and owning a home) Fedelity runs the 401K program, but wasn't much help when I called them for guidance. Basiclly they said to invest in the fund that matches my retirement date. How do you find a good broker?

Fidelity has local offices, too.

research …. Fidelity and Vanguard have both been mentioned … in my case I use Wells Fargo Investments … but I was with the company LONG before WF purchased them …

Generally, I suggest taking the free money from a job, if they give it to you, then contributing to a Roth, then deciding if you are going to contribute to an IRA or a 401K. If you don't get any free money, there is usually no advantage to the 401K.

Johnboyjjb wrote: If you don't get any free money, there is usually no advantage to the 401K.

There is a huge advantage. 401k contribution limit is much higher.

If you are going to contribute a small amount, there may be no advantage.

Bottom line...when the government who collects taxes makes the game too complicated for the average citizen to comply with and/or understand...everyone is berkeleyed.

We are pretty much there.

Johnboyjjb wrote: Generally, I suggest taking the free money from a job, if they give it to you, then contributing to a Roth, then deciding if you are going to contribute to an IRA or a 401K. If you don't get any free money, there is usually no advantage to the 401K.

the advantage lies in the ability to contribute to both … assuming you can afford to max out both … and assuming the 401k offers investments that you want

NOHOME wrote: Bottom line...when the government who collects taxes makes the game too complicated for the average citizen to comply with and/or understand...everyone is berkeleyed. We are pretty much there.

Agreed. I want to run for office one day under the premise that I will create a new tax code that:

• Fits on a single sheet of 8 1/2 x 11 piece of paper, 12pt font.
• Can be easily comprehended by a 5th grade math student.

You would get my vote.

Good points about investing your 401k/IRA in funds with low fees. This is something I had never thought of until recently, but many funds in traditional 401k programs have very high expense ratios. 1-2% might look small but it isn't.

Put in simple terms, if all your retirement money is invested in funds that all have a 1% fee, that means you're paying 1% of the entire value of your combined funds every year, regardless of whether your return is positive or negative. As you get further towards retirement and have more money, let's say 500k, in your 401k, $5000 a year will be disappearing from your account in fees each year, every year. Over the lifetime of your retirement account, this can add up to an astronomical (6 figure) number.

That's why it's important to examine your fund options carefully before investing. Also, if you've ever been a federal employee and have access to a TSP, keep it active and roll your 401k investments and any vested employer match into the TSP. Their funds typically have a MUCH lower (e.g. .03% versus 1 or 2%) fee structure.

Vanguard. Lowest fees by far. Go read some of John Bogle's writings, such as The Little Book of Common Sense Investing.

The only reason I don't have an IRA is that it would be in the exact same funds as my 401k already is. Since I have a Roth option for the 401k as well, I wouldn't have any advantage to go to an IRA, with one exception--It is easier to withdraw money from an IRA to use as a down payment for a house.

Ok, now Roth vs. Traditional. Look at your income now. Look at what you expect your income to be in retirement. Is it more in retirement? Then do a Roth. Not more? Traditional. More to it than that, but seeing as I don't expect to be in a lower tax bracket than I am now, it is Roth for me.

Actually, while Vanguard does have low fees, some of the recent Schwab ETFs have similarly low fees compared to the Vanguard ones. In both cases, you can trade them commission free as well, which is another $8+ you don't have to make back. Given that I trickle the money into the funds over the year, that's $64 saved on my and my wife's Roth IRAs.

mtn wrote: Vanguard. Lowest fees by far.

Eh, I have a Vanguard account and a Fidelity account. Both have the same fees on the main funds I invest in (Total Market Index, Bond Index, and REIT)

ProDarwin wrote: Both of the above posts are correct regarding 401k... make sure you have good investment options *and* low expenses. If you don't... 1) Get employer match 2) Max IRA 3) Max 401k 4) Taxable investments In that order. I contribute way more than $5500 a year, so I'm going to sink a bunch into my 401k regardless. Luckily my investment options in my 401k are pretty good and my expense ratios aren't bad.

(Note that I'm a software engineer, not a CPA, so everything I say about taxes below is worth what you paid for it :-) )

It depends a bit on your income level. The really big win with a 401(k) is that it isn't a deduction -- it actually reduces your adjusted gross income (AGI). It's one of very few ways of legally doing that, and because of that it's way more valuable than it appears on the surface.

Why? Your AGI is how the government decides if you're "rich" (and thus worthy of being soaked out of additional tax revenue) or not. Lots of tax credit only apply below a certain AGI, and if it is above a certain amount, then they may only let you take 80% (or 60%, or 40%, or in some cases 0%) of any deduction you would otherwise be able to get for your mortgage interest, state tax, etc. 401(k) contributions are not only immune to being phased out, but because they reduce your AGI they can reduce the amount that other deductions are phased out as well. I think they're even proof against Alternative Minimum Tax (AMT) in this way as well. AFAIK the only other provision in the tax code that lets you do this is a HSA contribution, and that has a bunch of other restrictions associated with it (requiring a high-deductible health plan, for example), plus not all states recognize it.

I'm also under the vague impression that if you have a 401(k) available, then some of the tax benefits of IRAs may not apply. I'm not entirely sure how that works, though.

The downside to a 401(k) is, as observed above, that it typically has a significantly more limited set of investment options than an IRA. OTOH, you can roll a 401(k) into an IRA when you switch employers, so if you switch jobs every few years then you're not missing out on all that much in that regard.

ProDarwin wrote:

NOHOME wrote: Bottom line...when the government who collects taxes makes the game too complicated for the average citizen to comply with and/or understand...everyone is berkeleyed. We are pretty much there.

Agreed. I want to run for office one day under the premise that I will create a new tax code that: * Fits on a single sheet of 8 1/2 x 11 piece of paper, 12pt font. * Can be easily comprehended by a 5th grade math student.

The new 1040-SUPER-EZ:

• 1) How much money did you make? ____
• 2) Send it in.

codrus wrote: The downside to a 401(k) is, as observed above, that it typically has a significantly more limited set of investment options than an IRA. OTOH, you can roll a 401(k) into an IRA when you switch employers, so if you switch jobs every few years then you're not missing out on all that much in that regard.

I'm a bit on thin ice here, but I'm pretty sure that Clark Howard mentioned on one of his shows that you're allowed to roll over money from a 401k into an IRA once a year even if you don't change employers.

IIRC that was in response to someone who had an employer with a 401k that didn't have great investment choices but an employer match. Doing the rollover would help the employee both pick up the match and (eventually) end up with better investment choices.

It's all hearsay though, you may want to talk to an actual professional for correct info .

mtn wrote: Vanguard. Lowest fees by far. Go read some of John Bogle's writings, such as The Little Book of Common Sense Investing. The only reason I don't have an IRA is that it would be in the exact same funds as my 401k already is. Since I have a Roth option for the 401k as well, I wouldn't have any advantage to go to an IRA, with one exception--It is easier to withdraw money from an IRA to use as a down payment for a house. Ok, now Roth vs. Traditional. Look at your income now. Look at what you expect your income to be in retirement. Is it more in retirement? Then do a Roth. Not more? Traditional. More to it than that, but seeing as I don't expect to be in a lower tax bracket than I am now, it is Roth for me.

there is one possible advantage for you to have an IRA even if it would be the same funds … that being, if you can afford it, that much more money saved for when you retire, either tax deferred, or tax free … if you really can't afford to sock away anymore in "untouchable" savings, then you're right … no need