401K vs. Roth

[TrustMe]

I am unfortunately not financially savvy and have a question regarding investing during residency. Is it better to contribute to a 401K up to the max that the hospital will match or forego the 401K and have my wife and I both max out a Roth IRA? I would like to contribute to both but since I am fresh out of school and she is only a year out we have little to no savings and I would like to get a little cushion in regards to a savings account and don't know if we can make much gain in all three. Thanks.

TM

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[Ulquiorra]

I graduated just a few months ago and found myself in your shoes, with regards to lack of knowledge about finance and investment; I also started my journey here, so I'll gladly answer your question as best I can.

1) Make sure to set aside some cash in an emergency fund. Being unprepared for a car accident, death in the family, broken water heater, etc can be potentially disastrous and costly.

2) If your hospital does match contributions to a 401k type plan, contribute up to the maximum amount that they will match. Pre-tax dollars go into a 401k, which is nice, but when you start taking money out of it, that money will be taxed. However, it's good to take advantage of maxed contributions from your hospital, since that's just free money right there.

3) Max out your Roth. Post-tax dollars go into a Roth IRA, but when you start taking money out of your Roth, it is all tax-free baby. It's perfect for folks like us, who are pretty certain to be in a higher tax bracket when we begin taking money out of it.

4) ???

5) Profit!

 

[Sol Rosenberg]

Definitely contribute the max. that is matched to your 401k first. Once you've done that, then the Roth IRA is probably a better choice (but crunch the numbers.)

What percentage does your job match? At my last job it was 50% (up to a certain dollar amount.) Some jobs even match dollar-for-dollar (100%.) Do you think you can earn 50% on your Roth IRA this year?

 

[IceMan0824]

I graduated just a few months ago and found myself in your shoes, with regards to lack of knowledge about finance and investment; I also started my journey here, so I'll gladly answer your question as best I can.

1) Make sure to set aside some cash in an emergency fund. Being unprepared for a car accident, death in the family, broken water heater, etc can be potentially disastrous and costly.

2) If your hospital does match contributions to a 401k type plan, contribute up to the maximum amount that they will match. Pre-tax dollars go into a 401k, which is nice, but when you start taking money out of it, that money will be taxed. However, it's good to take advantage of maxed contributions from your hospital, since that's just free money right there.

3) Max out your Roth. Post-tax dollars go into a Roth IRA, but when you start taking money out of your Roth, it is all tax-free baby. It's perfect for folks like us, who are pretty certain to be in a higher tax bracket when we begin taking money out of it.

4) ???

5) Profit!

To add my $.02.
Unless you can do it comfortably, you do not need to max out your Roth IRA while also contrributing to the 401k. I'm for opening both account, but with the way the OP phrased this question, maxing both account is not an option.

Contribute to the 401k to the limit that your employer matches. If you have any extra, then contribute to the Roth even if you're not maxing it out.

Also, your wife cannot contribute to a Roth while in school, unless she's also generating income on the side.

 

[TrustMe]

Definitely contribute the max. that is matched to your 401k first. Once you've done that, then the Roth IRA is probably a better choice (but crunch the numbers.)

What percentage does your job match? At my last job it was 50% (up to a certain dollar amount.) Some jobs even match dollar-for-dollar (100%.) Do you think you can earn 50% on your Roth IRA this year?

First off, thanks for the tips. All suggestions needed and welcomed.

My hospital will match 50% up to 6% of your salary (which for me will be a typical PGY-1 salary).

As far as earnings on a Roth for this year I have no clue. I don't have one set up yet but am planning on talking to a financial planner in the next few weeks when I am closer to actually getting a paycheck.

My original post was a little confusing. My wife has been out of school and working in order to support my educational habits, therefore we don't have much in the way of emergency funds as someone mentioned earlier. That is my biggest immediate concern. I also realize that I need to start some retirement savings so that it can be incubating for next 40 years and just didn't know the best route to take at this point.

 

[zao275]

Also, your wife cannot contribute to a Roth while in school, unless she's also generating income on the side.

Actually, you can contribute to a Roth for yourself and for your wife, even if she is in school, provided that your combined income is equal to the amount contributed. In other words, if you make 35k and she makes $0, you can put $4000 in a Roth for yourself, and $4000 in a Roth for your wife. As long as you are married and filing jointly, it doesn't matter who makes the money.

In regards to the other questions, I agree with the previous advice:

1. Always have a liquid emergency fund (I keep mine in an online money market account earning 4.5%. check bankrate.com to compare rates.)

2. I contribute to my 401k the max my hospital will match.

3. then I contribute the max to my Roth and my wife's Roth

Good luck. You are very wise to think about this stuff. So many people do not.

 

[IceMan0824]

Actually, you can contribute to a Roth for yourself and for your wife, even if she is in school, provided that your combined income is equal to the amount contributed. In other words, if you make 35k and she makes $0, you can put $4000 in a Roth for yourself, and $4000 in a Roth for your wife. As long as you are married and filing jointly, it doesn't matter who makes the money.

Good Point. I'm not married, and it easy to keep forgetting this.

 

[TrustMe]

I got some information from my program this weekend and found out that they use 403b instead of 401k. What is the difference between the two?

 

[etf]

I got some information from my program this weekend and found out that they use 403b instead of 401k. What is the difference between the two?

the number 3, and the letter b. they're pretty much the exact same account. 401k = private sector; 403b = public.

 

[Dr JPH]

Contribute to the 401k to the limit that your employer matches. If you have any extra, then contribute to the Roth even if you're not maxing it out.

 

[cali-ob]

I just want to add to the op, instead of paying a financial advisor who is going to be looking out for your best interests, spend a lot less money and buy a great book, The Money Book for the Young, Fabulous and Broke, by Suze Orman. It's a great book, covers these topics and more, and the purchase of the book gives you access to a message board on her website where there are nothing but people who are young, starting out in their careers all discussing these very same types of financial issues. Also, as I have learned from Suze, if you are going to get a roth, you should do so through a no load, or discount brokerage firm like Vangaurd, or T. Rowe Price. Much MUCH cheaper than a financial advisor.
One last thing, you might have to be employed 1 year with your residency program, before they will start to contribute their match, and if so, you might consider just funding the Roth to the max this year, and wait until 1 year has passed before you start with the 403b. That's what I think I will be doing.

 

[blanche]

I just want to add to the op, instead of paying a financial advisor who is going to be looking out for your best interests, spend a lot less money and buy a great book, The Money Book for the Young, Fabulous and Broke, by Suze Orman. It's a great book, covers these topics and more, and the purchase of the book gives you access to a message board on her website where there are nothing but people who are young, starting out in their careers all discussing these very same types of financial issues. Also, as I have learned from Suze, if you are going to get a roth, you should do so through a no load, or discount brokerage firm like Vangaurd, or T. Rowe Price. Much MUCH cheaper than a financial advisor.
One last thing, you might have to be employed 1 year with your residency program, before they will start to contribute their match, and if so, you might consider just funding the Roth to the max this year, and wait until 1 year has passed before you start with the 403b. That's what I think I will be doing.

good advice. along those lines--one of my questions is that my program contributes to a 401K after the first year. do i have to be enrolled in it to start (ie as an R1) to get the matched contributions as an R2? if not, i don't see why i would contribute to the 401K as an intern, i think i'd rather put $$$ towards the Roth instead. Cali-ob, have you looked into this?

 

[Doctor Bagel]

good advice. along those lines--one of my questions is that my program contributes to a 401K after the first year. do i have to be enrolled in it to start (ie as an R1) to get the matched contributions as an R2? if not, i don't see why i would contribute to the 401K as an intern, i think i'd rather put $$$ towards the Roth instead. Cali-ob, have you looked into this?

I think that's going to be employer specific -- there's no legal mandate as to when or how they have to match. You'll have to call the dreaded HR office to figure that out and hope you speak to a competent person. Going purely off a hunch, I doubt you'd have to be enrolled prior to that, but again, it's a total hunch and means pretty much nothing.

Another thing that's going to hit soon or has already hit -- the 401k laws changed, and employees are going to be automatically enrolled in the program unless they opt out. So you guys might want to look out for that before you get money withheld from your paycheck that you'd rather go to a Roth. Employers are supposedly going to be offering Roth plans, though, so that's good news.

 

[IceMan0824]

Employers are supposedly going to be offering Roth plans, though, so that's good news.

Roth 401(k). The very idea makes me salivate.

 

[cali-ob]

good advice. along those lines--one of my questions is that my program contributes to a 401K after the first year. do i have to be enrolled in it to start (ie as an R1) to get the matched contributions as an R2? if not, i don't see why i would contribute to the 401K as an intern, i think i'd rather put $$$ towards the Roth instead. Cali-ob, have you looked into this?

From what I understand you do not have to contribute for a year to get their match the second year. I would check with your own HR to confirm though. Also what was mentioned about the change in 401K laws, I don't know about that but I would also just check on that so see if enrollment in the 401k (or 403b) is automatic. I think an HR rep would be there during orientation as you are filling out these papers, but if not, then I would definitely call. Also, you should try to become informed before that day comes about the investments that you want your money to go to.....ie large cap, small cap, mid cap, growth, etc. I knew nothing about these terms until a few weeks ago, and would have been a big idiot signing up for something I totally didn't understand.

 

[blanche]

From what I understand you do not have to contribute for a year to get their match the second year. I would check with your own HR to confirm though. Also what was mentioned about the change in 401K laws, I don't know about that but I would also just check on that so see if enrollment in the 401k (or 403b) is automatic. I think an HR rep would be there during orientation as you are filling out these papers, but if not, then I would definitely call. Also, you should try to become informed before that day comes about the investments that you want your money to go to.....ie large cap, small cap, mid cap, growth, etc. I knew nothing about these terms until a few weeks ago, and would have been a big idiot signing up for something I totally didn't understand.

ok, thanks. my program hasn't gotten us much info yet but i'll be all over that during orientation. i think often w/401ks or 403bs you get a limited choice of accts to choose from. with a roth ira, it's $$$$ you take home so you can park it wherever you like. i don't know about roth 401k.

for an ira i've looked at the fidelity freedom funds (change the stock/bond allocation to more conservative as you get older) but i think for a roth, it might be a good idea (for me) to just park it in a good, low fee/load index fund like Vanguard's total stock market. just let it ride the market waves...ride..

 

[Ulquiorra]

ok, thanks. my program hasn't gotten us much info yet but i'll be all over that during orientation. i think often w/401ks or 403bs you get a limited choice of accts to choose from. with a roth ira, it's $$$$ you take home so you can park it wherever you like. i don't know about roth 401k.

for an ira i've looked at the fidelity freedom funds (change the stock/bond allocation to more conservative as you get older) but i think for a roth, it might be a good idea (for me) to just park it in a good, low fee/load index fund like Vanguard's total stock market. just let it ride the market waves...ride..

I was debating whether to park my money with Fidelity or Vanguard for a while, and I finally decided to go with Fidelity.

At the current time, many of Fidelity's index fund expense ratios are equal or lower than that of Vanguard's. Also, there is a Fidelity Visa card that gives you 1.5% on *all* purchases when you redeem your rewards into a Fidelity account. Granted, 1.5% isn't a lot, but considering how much I use my credit cards, it's enough of an incentive for me.

http://personal.fidelity.com/products/checking/content/mcplatplus.shtml.cvsr

 

[blanche]

I was debating whether to park my money with Fidelity or Vanguard for a while, and I finally decided to go with Fidelity.

At the current time, many of Fidelity's index fund expense ratios are equal or lower than that of Vanguard's. Also, there is a Fidelity Visa card that gives you 1.5% on *all* purchases when you redeem your rewards into a Fidelity account. Granted, 1.5% isn't a lot, but considering how much I use my credit cards, it's enough of an incentive for me.

http://personal.fidelity.com/products/checking/content/mcplatplus.shtml.cvsr

that's funny, i acutally just got that card this year. i'm on track to collect q6 mos if i keep spending at my current level. $150/yr in rewards isn't a ton, but i'm guessing if having the fidelity card makes me invest it than in 50 years it'll amount to something. i like that you get points for everything.