Hi Blind šš¼ One of my goals in 2020 is to start investing and saving up money. Iām gonna be 24 this year and I make $60k/yr with 1 YOE. Question is: should I open a 401k or an IRA? I know Roth would be best option for either, but not sure what the difference is. If anyone has some good advice or wanna share what they did I would appreciate it! Thanks. Edit: My current compancy does not do 401k match, but I really hope to be leaving this job soon. Doesnāt make sense to open one with them since they dont match and I dont want to stay there longer.
Does your company have a 401k match?
They donāt :/
Max out both Roth IRA and Roth 401K
OP said they make 60, so they probably cannot save 60.
401k to the match, then roth ira, then rest of 401k if you can.
Yes
Not all companies offer Roth 401ks. Investigate this first, and if they match, do that.
If your company has a 401k match, then definitely do that and make sure you're getting the full match. I'm going to oversimplify a bit, but consider a 401k and an IRA to be the same type of thing. In fact, many people roll 401ks into IRAs when they leave their existing employer. Typically you contribute pre-tax money to these, which lowers your tax burden in the years you contribute - you will pay taxes on the income made when you withdraw later in life. Roth 401ks and Roth IRAs can also be considered the same type of thing. Typically you invest after tax money in these, then the earnings grow and you do not pay tax on withdrawal later in life. So it doesn't change your current-year tax burden but reduces the burden on withdrawal. One catch here is there is an income limit that restricts contributions to such accounts - currently this shouldn't be an issue for you, but you should look into it for future reference. Some exceptions exist, and you can look into backdoor roth conversions and mega backdoor roth conversions down the road. What I'd suggest is to contribute to an employer 401k to get your full employer match. Then, rather than contributing more to the 401k, contribute whatever else you're willing to save to a Roth IRA (up to annual contribution limits of course), just to take advantage of being under the income cap. This also diversifies the tax burden - probably a good thing this early in your career. Brief, simple IRA vs. 401k difference. Typically a 401k will provide a set of funds to choose from, while an IRA allows you to basically pick from everything (not totally true, but for simplicity). This often means people have more flexibility with IRAs, which often leads to lower fees on the funds. One exception here is that some employer 401ks (esp. those for major companies like FAANG) have negotiated much lower fund fees for their 401k funds.
Agree with above. If company offers match for 401k, max that first. Be sure to understand how they match. All Iāve dealt with require contributions throughout year to maximize the match (e.g. evenly space your contributions throughout year). If they offer a 401k Roth I would do that rather than a traditional 401k. If you donāt get a match, Iād probably go with maxing your Roth IRA over contributing to your 401k. There are fewer restrictions on Roth IRAs vs Roth 401ks. If you can save beyond the max Roth, go for the Roth 401k. This said, be sure you first have an emergency fund that you donāt ever touch unless...an emergency. Of course you could use your Roth IRA in a similar manner (can withdrawal contributions), but that just sets a bad relationship with your Roth, and then you may end up having to sell investments in Roth to cover an emergency. However, it is nice to have that ability in a true emergency.
Your Tc is low so do roth ira
There is more tc than google out there. Might be considered low to you but you shouldnāt downplay it.
I'm don't say this in a mean way. I made the same when I was their age. I'm saying that they should pay their income tax at their current income rate rather than later since they'll probably retire with more income
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Why not both?
Not sure if I would be able to set aside enough to max out both and get the best savings.
Just max the employer match for the 401K. Then put money in a Roth IRA :)