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My new employer doesn't match 401K would it be better to invest in a Roth IRA in this case? |
My new employer doesn't match 401K would it be better to invest in a Roth IRA in this case? This question is very dependent on the individual. Generally, funding the Roth IRA first would be wise. In a Roth IRA, money is invested after tax and then grows tax free. When money is withdrawn from the Roth IRA it is not taxed. This is a huge advantage over an IRA where money is taxed after with-drawl. Also, with a Roth IRA money invested, less any appreciation, can be withdrawn without penalty. Another factor to consider, is the 401K investment options. Some 401K programs have limited investment options or options that have very high costs. Generally, I would be cautious of any investments with expense ratios of over 1.5%. Investing in index funds that have low expense ratios (about .2%) is very wise. The ability to choose what you invest in is another advantage of funding the Roth IRA first. It's best to do both, if you can afford it, so that you'll have more money stashed away for retirement. When/if you leave your current job, you can roll over the amount in your 401K into your Roth IRA. The money that you put into your 401K is tax deferred meaning that you won't pay tax on it now. You will pay the tax on the money when you withdraw it from your 401K when you retire. With a Roth, your contribution is not tax deferred, but your withdrawls will not be taxed when you retire. The 401K will allow you contribute more each year than the Roth and you might not be eligible for a Roth (depending on your income level). There are pros and cons to each plan type. However, you need to look at how your company's plan is performing and what it is invested in so that you can make a truly informed decision. You can put more money into a 401K, but many financial experts think it is better to put money into a Roth. So I would say max out the Roth and then put some more into the 401K. First you CAN'T rollover from a 401K to a Roth IRA...you can only rollover to a Traditional IRA. Personally I like the Roth since the money you withdraw from that account is generally tax free after 5 yrs and 59 1/2 yrs of age. If I were in your situation I would max out the Roth then contribute what I could to the 401K. In my opinion the best benefit a 401K offers is that it lowers your taxable income since contributions are made prior to assessing tax. |
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