So the company I just started working for offers a Roth 401(k), but no matching. I've been googling around and can't figure out if it's better/worse than a normal Roth IRA. Is the main benefit that the company pays all the fees and whatnot?

A 401k is almost always way more expensive than what you could get in an IRA. With no match, the standard advice is to cap out the IRA and if you can save more then do some into the 401k to maximize tax advantaged space.

Ah ok thanks Totally newb here which is why I'm asking as I don't want to make a mistake! If we really don't need access to 50% of our cash for 1-3 years, should I be looking at bonds then? Or anything else?

derada,

dale is spot on.

however i'd be surprised if your company offers only a roth 401k and not a traditional 401k. assuming that's true, make sure you run the numbers to see if traditional 401k contributions would be better.

gull,

i'd look at CDs first (i don't remember what euro banks call these) but yes, a short-term bond fund should gain you a bit more yield for a bit more risk than liquid savings. you have to figure out if risk is acceptable for this block of cash.

Yeah they do offer a traditional and a Roth IRA.

When you say a 401k is more expensive than an IRA.... what do you mean exactly?

You're going to be pay far higher expense ratios on funds in a 401k than you could get on your own in an IRA. 401k's have far fewer options. You can take your IRA anywhere.

dale is correct about choices: 401ks almost always have a limited set while in an IRA you can buy just about anything.

however, if your 401k *does* have good funds (e.g. low-cost Vanguard or Fidelity (Spartan) index funds), they will usually have *lower* expense ratios than what you can get on your own because the buying power of a large plan will get you access to the most competitive rates (e.g. "Signal" or "Institutional" shares).

Just be aware that you are always at the mercy of your institution/company. If they change fund companies, you can be really ****ed and have all your money in the 401k with no access. I'm not sure saving a few basis points in the short term is necessarily worth it, tbh.

dale,

you kind of make it sound like a 401k, even with mediocre options, is not a desirable vehicle. i don't think you believe that.

i do agree that you shouldn't put money in a 401k for anything other than retirement. (however i also believe that -- for the kinds of high wage-earners we see here -- you can't afford to save for other goals until you're maxing out your tax advantaged space.)

there's a bogleheads thread i can't find right now that does some math on this question and concludes that unless the 401k's options are *really* bad or if you plan to stay with that employer (and hence that plan) for a *really* long time, a 401k with mediocre options still wins in the long run. a summary is here:

http://www.bogleheads.org/wiki/401(k...diocre_choices

This is definitely a total newb question... But what would you be using a 401k for other than retirement?

Didn't mean to imply that at all. I completely agree. My point was simply (with no match), I still max on the IRA first and then go to the 401k even if the 401k somehow manages to save you 5 basis points or something on ER. But if you plan to save more than $5,500 for retirement per year definitely use 401k even if it's expensive.

i agree with all this. just wanted to make sure we had our story straight in front of the "students" .

derada,

imo there are no *good* things to use a 401k for other than retirement, but that doesn't stop people from having financial emergencies or "emergencies" and pilfering their retirement savings. this is an expensive class of mistake since you pay penalties to withdraw "your" money while simultaneously undoing the hard work of salting cash away for when you are no longer able to work for a competitive wage.

to keep it simple, you (generally) contribute your extra cash to accounts in this order:

- emergency savings
- 401k up to company match
- ira (probably roth)
- 401k up to max
- taxable investing

that "taxable investing" level is where you can start to have non-retirement goals, e.g. saving for a down payment on a house.

First off, thanks a ton for the help.

In the above, by "extra cash" this is assumed as cash left over once all consumer debts are eliminated, right?

For example, I have a $14k car loan @ 3.9% and about $45k in student loans (half @ ~4% and the other half @ 7.125%)

In my situation, would it be like:

?

(Of course 401k up to company match is obsolete considering my company does not match.)

I'm 24, and making $50k/year.

short version: your plan looks ok to me

longer version:

decisions about paying off debt vs investing more have a lot of moving parts. there are lots of numbers you can run: maybe contributing more to your 401k gets you into a lower tax bracket, giving you more post-tax money to play with. maybe the student loan deduction is enough to deprioritize paying off that debt (unlikely but this gives you a sense of all the variables you can consider).

there's also the psychological questions. for some, debt is slavery so paying it off is priority #1. if this is you, then go for it -- esp on that 7% vig.

however i would recommend maxing out your roth first for a few reasons:

- you can only create so much tax-advantaged space per year, and roths are pretty awesome.

- you are young so kicking off the magic of compound interest on a (probably) equity-heavy portfolio is a big win

- i happen to know what industry you are in, so i know that you will likely be making a lot more money in the next few years. this makes the roth extra attractive and means that you'll soon have disposable income to wipe out those debts

He is 24 and making 50k/yr so a Roth is just plain silly right now. A 401k is even more silly. The drag he is going to get on terminal wealth at retirement with an additional 1% (just guessing on the percent) 401k expenses is not even going to come close to making up for the initial tax savings of having a 401k over his time frame when he can buy ETFs with .04 to .10 expenses in a taxed account, right?

=fv(rate,periods.....) ftw.

He can adjust when he gets in a higher tax bracket or when the upfront tax savings or his age until retirement make it a no brainer.

I strongly disagree. Start maxing a ROTH asap.

Because having the most amount of money is bad?!?

he can buy the same ETFs in a roth as he can in a taxable account except he never pays taxes on the earnings in the former, so i don't know where you're going with that one.

at 50k/yr looks like our friend is in the 25% federal tax bracket. those extra two thousand five hundred basis points go to work immediately in the 401k. it's true he'll have to pay taxes later, but perhaps at a lower rate.

(fwiw and ime, 1% ER would be the top end of 401k expenses. i pay 0.07% and 0.12% but even if you're stuck with something like pimco's total bond fund that's like 0.6%)

Drunk midnight posting itt by Brian.

Once he deducts his student loan interest he has about $1250 of income in the 25% tax bracket. He should be paying down the higher interest student loans. His student loan payments are around $450/month (after taking into account student loan interest deduction, it will rise to $500 or so as time goes on and he pays down the principle) on a salary of 50k/yr.

Add in that there are absolutely no penalties for having a hiccup and not being able to fund the IRA and the likelihood of significantly outperforming the interest rate he is paying, while there are significant penalties for missing a student loan payment, and I think he is better off just doing things in order.

Worrying about him running out of years to contribute to tax protected accounts doesn't apply at his income level. $17k+$5.5k is a pretty hefty percentage of his income. If his income doubles, it will be a pretty hefty percentage of his income.

If he does a Roth IRA he gets the advantage of being able to withdraw his contributions for a house or whatever without any penalties. That is a fine reason to have one. Since he is only $1250 is in the 25% tax bracket and $4250 is in the 15% tax bracket, he has a blended tax rate of a bit over 17%.

***
For the 401k:

Making the assumption that he somehow has almost no expenses and puts the $1250 to work and no more in the 401k and that there are no administrative fees making things worse:

The break even (assuming a 7.5% market return, 25% tax bracket now and at 65 years of age) for money put in at the age of 25 and taken out at 65 years of age is an ER difference of 0.72%.

All the same other than assuming a 4% market return (bonds go in tax protected accounts, right - I'm being generous with the 4% bond total CAGR over the next 40 years), .57% expense ratio difference is the break-even point.

***

The entire thing is probably moot (on the 401k side of things). If he is able to max out an IRA at his current income AND put together an emergency fund AND pay down his higher interest student loan debt (and save for a down payment on a house, whatever) over the next few years, then he is doing great!

A couple questions (I'm still relatively new to this)...

1. The 2014 25% tax bracket is $36,900 - $89,350. So if I am making $50k, wouldn't I have $13,100 that is taxed at 25%, and then deduct $2,500 for student loan interest and I am left with $10,600 @ 25%? I guess I'm totally missing something here because that is way different than $1,250. (???)

2. How did you calculate my student loan payments should be $450/month, and can you expand on what you put in parenthesis about this # rising after taking into account student loan interest deduction? When I log into my student loan accounts (one set is private, the other gov - I'm sure you can guess by the rates), I am getting that my payments are going to be in the $600+/month area ($385/month for the 7% ones, and $200+ for the 4% ones)

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Also, while we're on the subject...I expect to get ~$3k+ back in taxes this season since I file as an independent and was in school full-time for 2012-2013 school year (it's through some education credit...American Opportunity I think?). What would you guys suggest I do with this, knowing my situation? I was going to throw 2/3rds at the highest interest student loan, and 1/3 in my high-yield savings/emergency savings acct which currently has $1k in it. I put about $225/month into this and plan to stop once it covers 6 months living expenses.

You get to subtract out off your personal exemption and standard deduction, which comes to $10k this year. I used 2013 tax brackets which explains the rest of the difference.

I got the payment from a loan amortization schedule (It was $511) over 10 years at your blended interest rate. As you pay down your loans, your interest drops (and the amount going towards principle goes up) so your SLID drops. If your actual loan amounts and interest rates aren't exact, my numbers are going to be a little off from yours.

Use the numbers you got. They use the actual interest rates and amounts you will owe on each account when you have to start making payments.

I put it all in the emergency fund, but that is just me. You'll be able to check off the box next to "get 6 months emergency fund" faster and it won't cost you that much in interest. Just a small added thing - needing new tires for your car is not an emergency. Needing to buy Christmas presents isn't an emergency. Needing to replace a computer isn't an emergency. You need to save up for occasional expected but irregular purchases too. The emergency fund is there to get you by if you become unemployed or one of your arms comes off.

I know you are just starting out, and I certainly don't want to stress you out, but you are going to have to increase that $225 that you are capable of putting away up a bit just to make the minimum student loan payments.

Honestly, that you are even thinking about these things right now is excellent. I think that you will do very well for yourself.

Thanks for all the help, advice, and encouragement.

I should probably have clarified that I'm not making $50k/year yet, I'm in my last semester of school and they are letting me work part time for 50k/52/40 per hour. Jan 1st I go full time and income will of course rise, so that explains the currently low amt of $ I have to save. Although if I budgeted better I could definitely be putting away more.

What is the general consensus on HSA's? I just found out about them in my personal finance self education (lol). Pretty sure I will qualify for one as the health care deductible is $2.5k :O