Six Roth IRA and 401K Questions Everyone Asks
By everyone I mean random people who reach the site via Google, but they’re common questions that I read or hear all the time so they make for a quick Q&A article. If you think any of my responses are off target, certainly give your opinion as well because I may very well be wrong!
Should I put more into my 401k or open Roth IRA?
The general consensus is that you should contribute enough into your 401k in order to earn the company match, if one is offered, otherwise maximize your Roth IRA contributions first. The logic behind this is that the Roth IRA is a powerful tool but not as powerful as free money (the match). This also has the added bonus of diversifying the tax burden of your retirement assets. So, get the match, max the Roth, then go back to the 401K.
Should I use my IRA account to pay off debt?
Noooooooooooooooooooo! Actually, you can do whatever you want but considering that you can’t put the money back into your IRA, I think it’s a bad idea. Don’t pilfer your retirement assets to pay off the debt, it may be better for you to pay off the debt in lieu of additional contributions or perhaps ratchet back your spending.
How much money should I put in my 401k?
If you can afford to, the maximum. Save for the future! Actually, what you should do is put as much as you can afford to while maintaining a reasonable lifestyle. You don’t want to max out your 401k at the cost of enjoying life now but you shouldn’t be making weekend trips to Paris and ignoring your 401k. If you want to make an error in either direction, then err on the side of caution and pump up the 401k now because time will be on your side. Waiting even five years to start contributing can result in a difference of tens of thousands when retirement comes around the corner.
What do companies match on 401k?
They will generally match your contributions up to a percentage. At my former job, if you contributed 6% of your salary then the company would contribute 3%. If you contributed 10%, then they still would kick in only 3%. If you contributed 1%, they gave you 0.5%.
Can a college student open a Roth IRA?
Anyone with income can open a Roth IRA and there are no rules for where the money has to come from. For example, if you had a summer job and earned $2,000 but blew it all on movies, diners, and dates then your parents can give you $2,000 to contribute to your Roth IRA. The only thing that matters is how much you earned. Also remember the contributions are after taxes so it’s not your gross income, it’s your take-home income that limits you.
If my investment became less can I put more than $4,000 in IRA?
Unfortunately no you cannot. The value of the Roth IRA contribution isn’t your limiting factor. So if you contributed $4,000 and because the market tanked the Roth IRA is only worth $1,000, then you cannot contribute another $1,000.
16 responses to “Six Roth IRA and 401K Questions Everyone Asks”
Martha responds:
Posted: July 30th, 2007 at 1:18 pm
I have a Roth IRA with Fidelity (I rolled over my 401K), do you have any recommended picks for me?
Thanks Jim!
Quality Links - July 30 2007 - Stock Trading To Go responds:
Posted: July 30th, 2007 at 4:58 pm
[...] for Financial Prosperity answers some Common Questions on Roth IRAs and 401ks. Most are common sense, the best I thought was the first on where should you place more money, [...]
Art Dinkin responds:
Posted: July 30th, 2007 at 5:08 pm
Good post! I like how concise your Q&A is.
Just want to clarify, you do eventually say it but IRA contirbutions (Roth or traditional) are limited to earned income so it does matter where the money comes from.
Also, as for employer contributions to a 401(k), they are almost always a percentage of either income or contributions. Some employers contribute regardless if the employee does or not. This makes the plan test better to allow more contributions by the highly compensated employees.
Dennis responds:
Posted: July 30th, 2007 at 11:25 pm
nice quick and useful! I’m bookmarking this for future reference. Learning all of this stuff is kinda fun.
thomas responds:
Posted: July 31st, 2007 at 12:06 am
it’s always nice to have these refresher posts. validating my current savings is good too
401(k) and Roth IRA Frequently Asked Questions at FinancialDominance.com responds:
Posted: July 31st, 2007 at 9:44 am
[...] is a continuation of a post at Blueprint for Financial Prosperity called Six Roth IRA and 401(k) Questions Everyone Asks. The following are a few questions I hear often that are very basic but often require some [...]
Tim responds:
Posted: July 31st, 2007 at 2:26 pm
if you are investing in 401K, make sure you keep abreast of the rules and any changes. it also is nice to know how long you have to contribute before becoming fully vested in the program.
Art Dinkin is correct on earned income. However, if one spouse is not working and the other spouse earns enough to cover the IRA, you can invest in IRAs for each person.
Lessons From My Blogroll: Why You Should Be A Fan Of Personal Finance Blogs responds:
Posted: August 1st, 2007 at 1:32 pm
[...] has written an awesome post about 401(k)s. All of the information applies to those of us who have [...]
Haren responds:
Posted: August 12th, 2007 at 11:14 am
For a working married couple -Can someone please spell out what are the max allowed to invest in Reg IRA and Roth IRA after maxing out 401K for the husband and partial ( of the fully allowed) 401K contributed for the Wife’s account??
jim says in reply:
Posted: August 12th, 2007 at 8:18 pm
The maximum is $4k per person total, take whatever you put into the Reg and whatever you put into the Roth, that sum can’t exceed $4k for 2007. It’s totally independent of the 401k.
» Mortgage Loan Questions » Blueprint for Financial Prosperity responds:
Posted: August 14th, 2007 at 9:45 am
[...] the popularity of the last searcher questions on 401K and Roth IRA, I figured I’d poke through the logs and pull out some mortgage loan related questions. Some [...]
Moolanomy weekly roundup #4: “Retirement” edition | Moolanomy responds:
Posted: August 19th, 2007 at 11:02 am
[...] how about IRA? Good thing Blueprint for Financial Prosperity anticipated this question and wrote Six Roth IRA and 401K Questions Everyone Asks. I always wondered if I should put more into my 401k or contribute to my Roth IRA? I think that is [...]
Donnie responds:
Posted: December 19th, 2007 at 7:32 pm
Hello
The company I currently work for is closing out the 401K program at the start of the new year.
What is the best thing for me to do with the money I have in my 401 K now. Should I roll it into a IRA or is there something better out there that I can do?
Cashing out is not an option. I am already 59 years old and I don’t have that many more years until I can retire.
I want to get the best bang for my buck so to say while I can.
Thank you for your help,
Donnie
jim says in reply:
Posted: December 19th, 2007 at 8:08 pm
Donnie: By closing out you mean closing the program entirely or to new money? If it’s closing entirely, rolling it over into an IRA is your best option. Cashing out would be bad because you’re so close to retirement and because the penalties are STEEP.
Donnie responds:
Posted: December 20th, 2007 at 1:25 am
To my understanding they are closing out the program entirely. We are supose to have a rep from their company come to my work place to talk to everyone. I just wanted to be ready, before hand, to know the best thing to do. I do not want to cash out and I knew if nothing else I would roll it over to an IRA. Just didn’t know if something better was out there or not. Thanks again for your help.
Donnie
Ask an author: David Loeper here to answer your 401k questions! - Page 4 - Wise Bread Forums responds:
Posted: February 21st, 2008 at 4:05 am
[...] you mentioned saving too much as one of the mistakes. Do you then disagree with this view: [...]