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Six Roth IRA and 401K Questions Everyone Asks

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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.

{ 12 comments, please add your thoughts now! }

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12 Responses to “Six Roth IRA and 401K Questions Everyone Asks”

  1. Martha says:

    I have a Roth IRA with Fidelity (I rolled over my 401K), do you have any recommended picks for me?

    Thanks Jim!

  2. Art Dinkin says:

    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.

  3. Dennis says:

    nice quick and useful! I’m bookmarking this for future reference. Learning all of this stuff is kinda fun.

  4. thomas says:

    it’s always nice to have these refresher posts. validating my current savings is good too :)

  5. Tim says:

    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.

  6. Haren says:

    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??

  7. jim says:

    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.

  8. Donnie says:

    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

  9. jim says:

    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.

  10. Donnie says:

    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

  11. Kim says:

    Hello,

    I came across your website and I have to say, it is really helpful and I enjoy it!

    I am college student going onto my 3rd year (hoping to finish by summer 2009) and I would to like to open a Roth IRA. But the thing is, I work on-campus and get paid through what is called “work study” which is through financial aid. However, I do not get taxed on the money I earn. Would I still be able to open one and contribute to it?

    Thank you very much!

    -Kim

  12. Estell says:

    I’m 57, medically retired, and have a 401 IRA. Unfortunately my spouse is out of work and we can’t pay our mortgage. Should I turn my 401 into a Roth IRA so I can take the money out without penalty to pay our mortgage and buy food?


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