Should You Open an IRA Before You Max Out Your 401(k)?
Hi all,
Would you mind sharing your experiences/strategies on how you went about contributing to a Roth IRA and 401K?
My situation: I am starting my job soon and trying to decide how to go about funding my Roth IRA with around $6,000 in it as well as my 401k which my employer matches $2,000 (which I will definitely contribute $2,000 at the least). I have around $17,000 in student loans to pay back. In 3/5 years, I believe I will be making more than $124,000 meaning I will not be able to contribute any more to the Roth IRA.
So do I keep funding my Roth IRA now while I can, or would it be better to contribute more to the 401k because of the tax deductions?
Thanks!
Good question. There's not really a right answer. Long term you'll be wealthy either way most likely. Wipe out the debt. Max out your accounts. Run the numbers on Roth vs Traditional. Increase the income.
I generally think you should max out 401k first because of the automatic nature of investments and the discipline it instills in you, but if you've determined you'll be unable to max out both, the only downside with doing IRA & 401k is you own the investment decision making in the IRA. don't treat it as a trading account, maybe buy some individual names, but I'd still with broader ETFs and mutual funds.
also, just because you make too much for a Roth ain't no thang, look up backdoor roth IRAs, you can still do it legally.
if I were in your shoes, I'd do at least what your firm matches to the 401k, max out IRA, and then if you still have extra to save, put that into your firm's 401k. ideally, you want to be saving 20%+ of your income, but if you can't do that because of loans, 10% is a great start and better than most.
Well that debt should get paid down BEFORE anything else gets priority (besides free money). Why? Let's say your interest is 6% - paying off that debt is GUARANTEED 6% return as you work your way through it.
Agree with brofessor, 401k discipline is a big pro. Keep an eye out on your income to ensure you get at least 3-4 years of Roth contributions in before having to start doing more complex backdoor contributions.
I always max out my roth, I think it will make more sense to get the tax break on money that has 40 years to grow and the income limit means I only have a couple more years to do it. I also contribute to my 401k.
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