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Quick Investment question (cant find an official thread) vol.401k vs Roth IRA

post #1 of 7
Thread Starter 
Just got a new job, this new company doesnt match 401k for a few months or a yr, and then after the first yr they do 25%, 2nd yr 50%, and after 3rd 100% all of this is on a max of 6% contribution.

I was thinking it would be a waste of time for the first yr so I was thinking about putting my money into a Roth IRA for the first yr or maybe up until 100% match and then start using my company 401k.

Is this a good strategy?
post #2 of 7
Do not open a Roth IRA if you only plan on using it for a few years (unless you happen to be 56 1/2 years old.) It'd be great to start, but if you do not plan on making any contributions to the IRA after your employer begins to match, you would essentially be putting that money under lock and key until your 60s for no good reason. If you think you can manage contributing to both the IRA and the 401K towards the future, then it'd be a great way to start diversifying your investments.

If you only want to use the Roth IRA until your employer matches though, you'd probably be better off putting your money in a CD with a guaranteed interest rate for the next few years and then withdrawing your money without penalty once it comes time to contribute to the 401K. The terms of a CD really depend on your bank. Some are limited and are only available for 6 month periods, others are long term. There are many types of CDs; traditional, liquid, brokered, etc. Work with your financial advisor/bank to find the right type of CD, a term that works for your time table, the best interest rates available to you.

Hope this helps.
Edited by Yeah - 10/8/15 at 8:30am

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post #3 of 7
Thread Starter 
Quote:
Originally Posted by Yeah View Post

Do not open a Roth IRA if you only plan on using it for a few years (unless you happen to be 56 1/2 years old.) It'd be great to start, but if you do not plan on making any contributions to the IRA after your employer begins to match, you would essentially be putting that money under lock and key until your 60s for no good reason. If you think you can manage contributing to both the IRA and the 401K towards the future, then it'd be a great way to start diversifying your investments.

If you only want to use the Roth IRA until your employer matches though, you'd probably be better off putting your money in a CD with a guaranteed interest rate for the next few years and then withdrawing your money without penalty once it comes time to contribute to the 401K. The terms of a CD really depend on your bank. Some are limited and are only available for 6 month periods, others are long term. There are many types of CDs; traditional, liquid, brokered, etc. Work with your financial advisor/bank to find the right type of CD, a term that works for your time table, the best interest rates available to you.

Hope this helps.

I planned on rolling the roth over to the 401k account, or is that not possible? Even then I believe the Roth Ira lets you make withdrawls after 5 yrs so essentially i was also considering to just use it as an emergency fund since savings accounts have such tiny interest rates.

Are CD pre tax or post for contributions?
post #4 of 7
Quote:
Originally Posted by LuckyLuchiano View Post

I planned on rolling the roth over to the 401k account, or is that not possible? Even then I believe the Roth Ira lets you make withdrawls after 5 yrs so essentially i was also considering to just use it as an emergency fund since savings accounts have such tiny interest rates.

Are CD pre tax or post for contributions?

It depends on your employer, some 401K plans allow for it, some do not. Either way, they will probably want the money from your IRA to have come from pretax dollars, so make sure you don't make any outside contributions to your IRA if that is your plan. Keep in mind that while you will be able to withdraw from your Roth IRA after a few years, every withdraw will come with a penalty before age 59.5, so you would be spending money to access your funds if you make any withdrawls before that milestone.

I'm not 100% sure about being able to make pretax contibutions to a CD.. I would imagine it depends on the type of CD you establish, your term, etc. Best way is to check with your financial advisor/bank. Based on your responses, my opinion is that it'd be better to make temporary investments like CDs before you start contributing to the 401K - a Roth IRA doesn't seem right for your goals.

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post #5 of 7
Thread Starter 
Quote:
Originally Posted by Yeah View Post

It depends on your employer, some 401K plans allow for it, some do not. Either way, they will probably want the money from your IRA to have come from pretax dollars, so make sure you don't make any outside contributions to your IRA if that is your plan. Keep in mind that while you will be able to withdraw from your Roth IRA after a few years, every withdraw will come with a penalty before age 59.5, so you would be spending money to access your funds if you make any withdrawls before that milestone.

I'm not 100% sure about being able to make pretax contibutions to a CD.. I would imagine it depends on the type of CD you establish, your term, etc. Best way is to check with your financial advisor/bank. Based on your responses, my opinion is that it'd be better to make temporary investments like CDs before you start contributing to the 401K - a Roth IRA doesn't seem right for your goals.

Got it, so I guess Id be better off doing CD and rolling into 401k and then using a high yeild savings account for emergency fund?
post #6 of 7
Quote:
Originally Posted by LuckyLuchiano View Post

Got it, so I guess Id be better off doing CD and rolling into 401k and then using a high yeild savings account for emergency fund?

It really depends on your goals. A CD will allow you more flexibility, but for many of the better options you'll have to have a sizeable amount of money to initially invest in order for it to pay off. I'm not sure about the rollovers to 401K either, so I think it's really best at this stage for you to seek professional guidance. They will be able to better quantify your investment goals and have the resources to answer all of your questions.

There are lots of non-commission based financial advisors, so try to see if you can find one that will help out with some of those questions. Getting an advisor was one of the best decisions I've made, and I recommend it to everyone regardless of budget.

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post #7 of 7

Heres the official thread for future reference Official Personal Finance Thread .

 

Like Yeah said, unless you plan to continue to use or Roll the Roth into your 401K I wouldn't open it.

I wouldn't do a CD either they aren't performing well, average 1 year CD rate is .38% .

 

You can open up an online savings account with Barclays and get 1.05% APY or 6.05% APY with a dream account (no withdrawals for 6 months and 1 deposit every month (max of 1K deposit per month) ). Seems like the dream account will be enough for you for 2 years, since this is very short term.

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