taxes and investing

[argh]

just thinking about something. if you're an intern this year and won't be owe taxes because of the lifetime learning credit, is there a point in contributing to 401(k) or 403(b) beyond the possibility of matching? shouldn't I throw everything into Roth first?

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[GeneGoddess]

For many people, the rule goes: contribute to your employer sponsered plan UP TO THE MATCH, then contribute the max to a Roth, and then contribute the rest to the employer sponsered plan. So, if you have $10K/yr to contribute, and your employer matches the first $5000, contribute $6000 to the 401k/403b and $4000 (the max) to your Roth. If you have $7500 to contribute, do $5000 to the 401k/403b and $2500 to the Roth. If you have $5000 to contribute, contribute all to the 401k/403b.

But, keep in mind that some employer plans have poor stock/mutual fund selections versus an IRA, which is controlled by YOU. My residency program doesn't match, so I plan to max my Roth and put the rest into the 403b.

 

[MS05']

For many people, the rule goes: contribute to your employer sponsered plan UP TO THE MATCH, then contribute the max to a Roth, and then contribute the rest to the employer sponsered plan. So, if you have $10K/yr to contribute, and your employer matches the first $5000, contribute $6000 to the 401k/403b and $4000 (the max) to your Roth. If you have $7500 to contribute, do $5000 to the 401k/403b and $2500 to the Roth. If you have $5000 to contribute, contribute all to the 401k/403b.

But, keep in mind that some employer plans have poor stock/mutual fund selections versus an IRA, which is controlled by YOU. My residency program doesn't match, so I plan to max my Roth and put the rest into the 403b.

I'm new to the 401k and 403b stuff so here it goes...does the return from the employee offered program actually equal that or beat what you could expect to get from a Roth, especially seeing how with the Roth you won't have your money taxed when you take it out? Is the employer plan better for the sole reason that you can put more money into it than you can a Roth?

Thanks!

 

[argh]

I'm new to the 401k and 403b stuff so here it goes...does the return from the employee offered program actually equal that or beat what you could expect to get from a Roth, especially seeing how with the Roth you won't have your money taxed when you take it out? Is the employer plan better for the sole reason that you can put more money into it than you can a Roth?

Thanks!

with the 401k and 403b, you get the benefit of greater investing power per dollar of what would be after tax money. Let's say you lose 30% of gross income to taxes. It's like having one dollar of investing power for what would be 70 cents in other investing options. when you add the fact that many employers will match contributions to a degree, the incentive to invest is even greater. yes, you get taxed on the back end when you retire based on your tax bracket. Roth is still probably better because we'll probably as a group have higher expenditures in retirement, and would be taxed more for the larger distributions.

 

[GeneGoddess]

I'm new to the 401k and 403b stuff so here it goes...does the return from the employee offered program actually equal that or beat what you could expect to get from a Roth, especially seeing how with the Roth you won't have your money taxed when you take it out? Is the employer plan better for the sole reason that you can put more money into it than you can a Roth?

Thanks!

It COMPLETELY depends on the program. For example, Enron employees lost a TON because some of their retirement was required to be company stock. With a Roth, YOU get to choose everything. But other companies offer lots of different options. It's not that a Roth vs/ 401K has a better return, but what options you have to choose from. I would invest little in a place where I only had two mutual funds to choose from.

ANd with the Roth, some people say that maybe we WILL be taxed when it is taken out. So that, in and of itself, is a gamble. But if we aren't, I know I'll probably never be in the lowest tax bracket again, so a Roth makes sense. Educate yourself! Start reading books (now, before internship starts). Learn about investing! It will help, trust me!

 

[kas23]

I just received a small dissertation from my program this morning. By briefly sifting through this sea of papers, I found my program doesn't match 401k/403b, but will contribute 1.5% of our base salary. So based on that, it doesn't seem like I would benefit at all by contributing to this during my 3 years of residency. Instead, should I just max out my Roth yearly till I can't do it anymore (which is in the foreseeable future after residency)? Then after I make over 95K, then shift my focus towards my 401k/403b? I understand if I have any extra money after funding my Roth, I should put it in a 401k/403b. However, we can't make lump sum contributions, so it has to be done via montly deductions from my paycheck. I guess I can see it for a low mothly deduction and always increase it later. I just don't want to squander the next few years where I can actually fund my Roth.

This 401k/403b stuff just seems so scary. It is like the money is being sucked into a black hole and we will never see it again, especially at a time when we need the extra money the most.

And where ae we going to get the money for our children's educations? When does that come into play? Maybe we should be conservatively investing our money for that?

 

[GeneGoddess]

That sounds like a decent plan, Kas. Take the plunge! And the monthly stuff is tricky, but you CAN change the contributions. I highly recommend getting a good program for keeping track of your finances (Quicken, MS Money, even Excel). That will help you make a budget and see how much you can contribute.

With regards to education, first, know that if you contribute to something like a 529 plan, you often MUST use the money ONLY for education. So, if you have kids and they decide not to go to college, the money just sits there unless you want to use it to fund a niece or nephew (or stranger). Not all plans are like that, but keep it in mind.

Go read a financial planning book. I like Smart Women Finish Rich (the updated version is probabaly the best of the series...very warm/fuzzy/supportive, but educational and not condescending). Learn how to make your money work for YOU!

 

[kas23]

That sounds like a decent plan, Kas. Take the plunge! And the monthly stuff is tricky, but you CAN change the contributions. I highly recommend getting a good program for keeping track of your finances (Quicken, MS Money, even Excel). That will help you make a budget and see how much you can contribute.

With regards to education, first, know that if you contribute to something like a 529 plan, you often MUST use the money ONLY for education. So, if you have kids and they decide not to go to college, the money just sits there unless you want to use it to fund a niece or nephew (or stranger). Not all plans are like that, but keep it in mind.

Go read a financial planning book. I like Smart Women Finish Rich (the updated version is probabaly the best of the series...very warm/fuzzy/supportive, but educational and not condescending). Learn how to make your money work for YOU!

Thanks. I think I am going to go out and buy something like "Personal Finance for Dummies." I don't know if all your "women book" suggestions will work for me, but "Dummy" books will.

And I found a cool site that lets you make a monthly budget. This site has other cool calculators too:

http://www.northstar.org/Med/Calculators.aspx

 

[GeneGoddess]

It's not really women specific. But it IS a rah-rah-you-can-do-it! style. If you want a REALLY good "has it all" book, try "The NEW MONEY Book of Personal Finance" or Suze Orman's "Road to Wealth". I detest Suze Orman (she really bugs the hell out of me, and I had "Young, Fabulous, and Broke"), but Road to Wealth is a very complete Q&A style book. Go visit the library and page through a few. Smart Women is good, but much shorter and more to the point. The other two are MUCH longer (400pgs?), but more complete.

www.bankrate.com is also good for some calculators.