Investing in a 401k for Beginners | BeatTheBush
Can You Fund a 401k and an IRA?
Here’s a classic retirement question from a reader:
I’m in my 30’s, and saving about 10% of my salary. Soon I can contribute to my 401k—and they’ll match 100%, up to 5% of my salary. Should I put the whole 10% into my 401k and stop contributing to my IRA, or do both?
OK, there are a few things to think about here, but let’s concentrate on taxes.
When you contribute to a 401k—or a traditional IRA—you get a similar tax benefit: i.e. the amount you save in each isn’t counted as taxable income. In other words, it’s income, but it’s not taxed.* At first.
The money you save is tax-deferred—so when you withdraw the money (in years to come) you pay taxes on it then.
But what if you put 5% in your 401k to get the full match (a.k.a. free money) and then into a Roth IRA?
The advantage of a Roth IRA is that you’re putting in cash that you’ve already paid tax on. So Uncle Sam cuts you a break—and when you retire you don’t pay tax on any Roth withdrawals.
Crazy-time. But true. By the way, the limit you can save in an IRA or Roth is ,500 for 2013 (,500 if you’re 50 or older). You can contribute for 2012 up until tax day, April 15, 2013.
It’s probably wise to keep some part of your retirement money tax-free, since no one knows what tax rates will look like down the line. Assuming you don’t exceed , it’s likely a good idea to take advantage of a Roth, whether you have a 401k or not.
*Except that in some cases, when you put money into both an IRA and 401k, you your full IRA contribution.
Video: How to Invest in a 401k | BeatTheBush
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