Noob to 401k vs Roth 401k vs IRA vs Roth IRA
Hi, Just started FTE and trying to put money in 401k. I thought it would be simple enough. As I googled, there was so much information that it’s overwhelming. How should I start contributing ? Do I opt for 401k or Roth 401k. I am not sure I even understand half the things. What is IRA. How much should one ideally put in these ? Any pointers/advices etc is much appreciated. Thanks.
Hopefully that helps
401ks are employer sponsored retirement accounts and IRA are individual. 401k and tradition Ira is where you put pretax money into your account, and are deductible from your salary in terms of taxes. This means is you earn 100k you only pay taxes on 81k if you max out your yearly 19k. Then once you withdraw from your account in the future you pay taxes on your money. The term "Roth" basically means post tax money, which using the same example as above, you would pay taxes on your whole 100k. However, all growth is tax free and when you withdraw from Roth accounts you don't have to pay taxes on them. Just note that there is a limit on how much you can put into each of these accounts. And if your total pay in a a year exceeds a certain amount you may not be elligbale to contribute to an Roth ira or you may even not be able to deduct traditional Ira from your taxes.
Does Roth 401k and IRA have the penalty for early withdrawing before 59.5 yrs?
Before 5 years: Yes After 5 years: Yes on gains, No on contributions
There's a decent research overhead for any of this to make much sense. Luckily, Google is your friend ;) Else we'd sit here for ages answering all your edge case Questions
If my tc is too high for roth, can i still contribute? Ive heard of mega backdoor but honestly still confused
Google it After 130k you can't contribute to a Roth directly
Wrong - there are no income limits for a Roth 401k. Only a Roth IRA is income-limited, and even then, you can still backdoor into it.
Here are the general rules of thumb, 1. Put enough in your 401k to recieve the full employer's match. 2. maximize your Roth IRA or Roth 401k. 3. go back and maximize your 401k contributions. 4. If you have any left over money to invest, consider opening your own personal account and invest in index funds which track the equity market. You must design a portfolio mix that is balanced in terms of risk, so for example stocks are usually 3x more risky than bonds. So if you have 50% stocks and 50% bonds, that's not a balanced portofilio with respect to risk. Also consider buying uncorrelated assists, so that when one assist goes down the other uncorrelated assist pulls your balance up. 5. If you still have money left over, save for a house down-payment or any other purchase of your liking, you can swap point 5 and 4 if you like.
Thanks a lot everyone !! Lot of good info.
401k - employer sponsored Roth- contributes after taxes are taken out IRA- is an individual account/not set up through employer. Stands for Individual retirement account