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Thread: New 401K

  1. #1
    L0 N00b rbonafede's Avatar
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    New 401K

    I just opened up a 401K with my employer because they are willing to match me up to 5%. I decided to split my pre-tax and post-tax contribution up and due 2% pre-tax and 3% post tax. I currently have a Traditional IRA and was wondering if I was to ever leave my job and roll over my 401K to my IRA will I get to pick which investments were made with pre-tax money and which ones were made with post tax money? I am trying to be aggressive because I am only 21 and figured if this was the case, all my growth investments would be covered by my post-tax money and the percentage I put into bonds, or safe investments is used with the pre-tax money.

    Sorry for all the questions but I am new to investing and want to make sure I am not doing anything stupid. Thanks!

  2. #2
    Super Moderator Kage_'s Avatar
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    Unless your employer is doing something strange I though that all 401k's were pretax contributions. Also, at your age you would get a larger tax savings with a ROTH IRA vs a traditional. With a ROTH you'll pay tax on the front end, but all of your earnings are tax exempt when you pull the money out when you retire.
    It's not the a = F/m that kills you it's the F=MA.

  3. #3
    L11 Sergeant striider's Avatar
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    Kage is correct. You are almost certainly in the lowest income tax bracket you will be for another 20 years or so at least. In other words, you are making less at 21, therefore your tax bracket (percentage you pay) is lower now. Roth would make the most sense for you. Here is the important thing - make SURE you contribute every $$ that your employer matches, because you will never got a 100% instant return on investment in the real world like an employer match. All 401 k contributions are pre-tax so you need to be contributing the full 5% into 401k and everything else you can save into a ROTH.

    Also consider paying off your debts as quickly as possible instead of contributing to a ROTH with excess "savings". They aren't really savings unless you don't need the money for debt, which works against you every day. Save all you can, because as a 40 year old guy - I sure wish I had fully understood the power of compound interest earlier in life so I would be retired today. Sounds like you are off to a good start!

    In summary - contribute full 5% to 401K, pay off debts, THEN invest in a ROTH.

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