# What do I do with a 401k? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [February 7, 2005, 12:55am UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726 "2005-02-07T00:55:42Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Icarus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/icarus/32/72_2.png) [@Icarus](https://boards.straightdope.com/u/Icarus)\ **Post date:** [February 8, 2005, 2:46am UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/21 "2005-02-08T02:46:17Z")
> [@Zebra](#): > > Your company will be matching some of your contributions. . Not all companies provide matching funds. According to one source I read, about 15% of companies provide no matching funds. Like the company I work for :mad: ! ---
**Author:** ![jweb](https://avatars.discourse-cdn.com/v4/letter/j/71c47a/32.png) [@jweb](https://boards.straightdope.com/u/jweb)\ **Post date:** [February 8, 2005, 4:00am UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/22 "2005-02-08T04:00:07Z")
> [@Medea's Child](#): > > I’ve got budgeted about 20% of my paycheck, before taxes, so I think that’ll do. I was planning on mixing it up, and probably running a tad lower risk than I need to, simply because I’m a wuss. (What other type of 23 year old worries about precisely how they should allocate their 401k? I mean really.) I like the idea of international stuff, as I have more confidence in some other country’s economies right this second. I started my real job in June 2001, and immediately put 8% into the 401(k), with a company match of 6%. Upped it to 10% after 6 months, and it remains at that level now. I’m going to up it to 12% in a week or so when I get my raise. When I first started, I didn’t know WTF to put stuff in. “High Yield? That sounds like it makes money…” I allocated my money across 4 different funds, and they all dropped like a rock. Immediately. I think I lost like 12% in the first 4 months. But that was actually a bit of a good thing for me. Read up on a concept called “Dollar Cost Averaging”: think about it this way… if you’re buying something, do you want to buy it when it’s cheap, or when it’s expensive? When the shares value dropped, I was able to buy more shares with each paycheck then I could have purchased at a higher price. And now that the value of those shares has come back up (made about 12% gains this year, 22% in 2003), I’m better off now then I would have been if the price had remained basically steady for those years. Remember, if you see a statement that shows you lost a bit of money, grit your teeth and repeat these words: “It’s ok. I’ve got 40 years to invest, and now I get to buy on sale” ---
**Author:** ![lel](https://avatars.discourse-cdn.com/v4/letter/l/8797f3/32.png) [@lel](https://boards.straightdope.com/u/lel)\ **Post date:** [February 8, 2005, 4:13am UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/23 "2005-02-08T04:13:21Z")
I don’t know if this is a good way to look at things at all. However, I just decided that I was going to pick some random mostly aggressive standard portfolio at first and spend the first year or two just researching investments. After all, the most I could lose in the first year or so was very small, and getting money into investments was more important than worrying about how to invest funds when you’re investing amounts under $1000 or so. So in other words, follow the advice above and not mine! ---
**Author:** ![Neurotik](https://avatars.discourse-cdn.com/v4/letter/n/91b2a8/32.png) [@Neurotik](https://boards.straightdope.com/u/Neurotik)\ **Post date:** [February 8, 2005, 4:27am UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/24 "2005-02-08T04:27:23Z")
> [@featherlou](#): > > Do people in the U.S. refer to their IRAs as 401Ks? Cause I’m kinda confused - I looked up 401K, IRA and RRSP (Registered Retirement Savings Plans), and it sounds like the RRSP is more like the 401K than the IRA. Like I said in the third paragraph of my earlier post, RRSPs are deferred income, not really an investment (although that is how they are commonly referred to). No, they’re two seperate things. I have no real idea what an RRSP is or how it works, so I can’t really make any good comparisons. 401Ks and IRAs are pretty similar, with minor differences. In both of them, money is invested (usually in a mutual fund, bonds, etc.) using pre-tax dollars, with none of the earnings/interest being taxed until money is withdrawn for retirement. Generally, an IRA is something you set up on your own so you can make your own choices on what to invest in and a 401K is something set up by the employer with the employer deciding which investment options are available for the employees. You can have both an IRA and a 401k at the same time, but they’re both essentially the same things - tax deferred investment vehicles to allow people to save for retirement. ---
**Author:** ![Trunk](https://avatars.discourse-cdn.com/v4/letter/t/87869e/32.png) [@Trunk](https://boards.straightdope.com/u/Trunk)\ **Post date:** [February 8, 2005, 2:00pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/25 "2005-02-08T14:00:21Z")
> [@Neurotik](#): > > No, they’re two seperate things. I have no real idea what an RRSP is or how it works, so I can’t really make any good comparisons. 401Ks and IRAs are pretty similar, with minor differences. In both of them, money is invested (usually in a mutual fund, bonds, etc.) using pre-tax dollars, with none of the earnings/interest being taxed until money is withdrawn for retirement. Is the point of doing this the following. . . Let’s say I make $100,000 right now and I will until I retire. Let’s say I’m in a high tax bracket so I get taxed 40%. So, the strategy with an IRA would be that I can take, say, $20,000 and put it in an IRA. In effect, I’m now taking home $80,000. Now, if making $80,000 puts me in a lower tax-bracket, do I get taxed at that rate. . .that is, would I now pay 30% of the $80,000. Or would I pay the **higher** rate on the $80,000. And, now, let’s say I retire, and I decide to take out about $50,000 per year to live on. Would I then get taxed on the $50,000 at whatever bracket that puts me in? That is, am I able to avoid being in the $100,000 tax bracket my whole life even though that’s what I make between now and retirement. Thanks, I hope that’s clear. ---
**Author:** ![Zebra](https://avatars.discourse-cdn.com/v4/letter/z/c0e974/32.png) [@Zebra](https://boards.straightdope.com/u/Zebra)\ **Post date:** [February 8, 2005, 2:42pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/26 "2005-02-08T14:42:45Z")
> [@Icarus](#): > > Not all companies provide matching funds. According to one source I read, about 15% of companies provide no matching funds. Like the company I work for :mad: ! Wow I guess I’m lucky. My company (Viacom) matchs, but with Class B (non-voting) stock. Right now I think they are matching 4%. So IF your company does this, AND they do it with stock, DON’T let too much of that one stock build up. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [February 8, 2005, 6:03pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/27 "2005-02-08T18:03:05Z")
> [@Neurotik](#): > > No, they’re two seperate things. I have no real idea what an RRSP is or how it works, so I can’t really make any good comparisons. 401Ks and IRAs are pretty similar, with minor differences. In both of them, money is invested (usually in a mutual fund, bonds, etc.) using pre-tax dollars, with none of the earnings/interest being taxed until money is withdrawn for retirement. > > Generally, an IRA is something you set up on your own so you can make your own choices on what to invest in and a 401K is something set up by the employer with the employer deciding which investment options are available for the employees. You can have both an IRA and a 401k at the same time, but they’re both essentially the same things - tax deferred investment vehicles to allow people to save for retirement. A Roth IRA is different. A Roth is funded with post-tax dollars and withdrawals are tax-free. Hence you should consider, if possible, your likely post-retirement tax bracket and consider whcih approach works best for you. Plus a Roth is more flexible than a 401k should you want to withdraw some before retirement age. A strategy that works for many people (but you have to do your own assessement according to your own circumstances and needs) is: - first priority = fund your 401(k) up to the level your company matches - then fund a Roth up to the annual limit (currently $4k for a single person) - then go back to your 401k (or a regular IRA). ---
**Author:** ![missbunny](https://avatars.discourse-cdn.com/v4/letter/m/76d3ee/32.png) [@missbunny](https://boards.straightdope.com/u/missbunny)\ **Post date:** [February 8, 2005, 6:19pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/28 "2005-02-08T18:19:14Z")
> [@](#): > > Let’s say I make $100,000 right now and I will until I retire. Let’s say I’m in a high tax bracket so I get taxed 40%. > > So, the strategy with an IRA would be that I can take, say, $20,000 and put it in an IRA. In effect, I’m now taking home $80,000. > > Now, if making $80,000 puts me in a lower tax-bracket, do I get taxed at that rate. . .that is, would I now pay 30% of the $80,000. Or would I pay the higher rate on the $80,000. > > And, now, let’s say I retire, and I decide to take out about $50,000 per year to live on. Would I then get taxed on the $50,000 at whatever bracket that puts me in? > > That is, am I able to avoid being in the $100,000 tax bracket my whole life even though that’s what I make between now and retirement. Yes, you can avoid being taxed at the rate a salary of $100,000 would normally be taxed for your whole life. You will be taxed at any time at the rate appropriate to your taxable income. If you make $100K in 2005 and put $20K into a tax-deferred retirement plan, you are taxed for 2005 as though you had only made $80K. However, the limit for IRA contributions is much lower than $20,000. What is it now, about $3,000 or so, for persons under age 50? So maxing out your IRA isn’t going to drop you into a hugely lower tax bracket. You can usually put a much higher amount in a 401K, although there are limits set by the IRS and the employer; and if you are a Highly Compensated Employee, you may end up not being able to contribute at all (if such contributions would cause the plan to become out of compliance). Or rather, you can contribute, but you might end up having to take back all your contributions as taxable income for the year in which you made the contributions. ---
**Author:** ![Neurotik](https://avatars.discourse-cdn.com/v4/letter/n/91b2a8/32.png) [@Neurotik](https://boards.straightdope.com/u/Neurotik)\ **Post date:** [February 8, 2005, 6:27pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/29 "2005-02-08T18:27:08Z")
> [@Trunk](#): > > That is, am I able to avoid being in the $100,000 tax bracket my whole life even though that’s what I make between now and retirement. Sort of, except you’re way overestimating how much you can put into an IRA. This year, IRA limits are $4,000 this year if you’re younger than 49, and $5,000 (or something like that) if you’re 50 or older. Unless you’re borderline, that’s not generally enough to knock you to a lower tax bracket. But, say you make $100K this year and you’re 30 years old. You can take $4,000 of that and put it into an IRA, then you only get taxed on $96,000. As your initial $4,000 investment increases in value, it isn’t subjected to taxes like a normal investment would be. Then, once you retire, say you want to take $50,000 out to live on that year, it’s taxed at the $50,000 rate. Unless you invested in a Roth IRA, in which case you’d pay taxes on the whole $100K, but wouldn’t pay any taxes on the $50,000 retirement withdrawal. > [@amarone](#): > > A Roth IRA is different. True, but we were confusing our Canadian friend enough just with 401ks and IRAs, I didn’t want to toss Roth in there. > [@](#): > > then go back to your 401k (or a regular IRA). Can you fund a Roth and a traditional IRA in the same year? [quote] ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [February 8, 2005, 6:35pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/30 "2005-02-08T18:35:33Z")
> [@Neurotik](#): > > True, but we were confusing our Canadian friend enough just with 401ks and IRAs, I didn’t want to toss Roth in there. Hey, I’m English and I learned! > [@](#): > > Can you fund a Roth and a traditional IRA in the same year? Ah, good point. You can, but the limit is shared so in my proposal you would have used it up on the Roth so would have none left for a traditional IRA. ---
**Author:** ![Medea\_s\_Child](https://avatars.discourse-cdn.com/v4/letter/m/8baadc/32.png) [@Medea\_s\_Child](https://boards.straightdope.com/u/Medea_s_Child)\ **Post date:** [February 8, 2005, 7:22pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/31 "2005-02-08T19:22:00Z")
So, how do I do an IRA? ---
**Author:** ![Neurotik](https://avatars.discourse-cdn.com/v4/letter/n/91b2a8/32.png) [@Neurotik](https://boards.straightdope.com/u/Neurotik)\ **Post date:** [February 8, 2005, 7:46pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/32 "2005-02-08T19:46:23Z")
> [@Medea's Child](#): > > So, how do I do an IRA? First, make sure you have some spare money to start the whole thing. Then decide if you want Roth or traditional. Then go to a site like [Vanguard.com](http://Vanguard.com) or [Fidelity.com](http://Fidelity.com) (or any other known, respectable financial institution like your bank) and follow the instructions. Do your research first on what type of investments you’d like to make and what companies you’d like to go with. ---
**Author:** ![Cheesesteak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cheesesteak/32/3694_2.png) [@Cheesesteak](https://boards.straightdope.com/u/Cheesesteak)\ **Post date:** [February 8, 2005, 7:51pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/33 "2005-02-08T19:51:43Z")
If you’re not interested in trying to be some wheeler dealer, go with index funds. Actively managed funds rarely beat the index, and have higher maintenance fees. You’re young, pick a couple of different stock funds, large company funds (S&P 500), small company funds, international funds, etc. As long as they just try to match an index, they’ll give good returns and not cost a bunch to manage. Maybe throw a few percent into a bond fund to make yourself feel safer. ---
**Author:** ![DrLoveGun](https://avatars.discourse-cdn.com/v4/letter/d/ecb155/32.png) [@DrLoveGun](https://boards.straightdope.com/u/DrLoveGun)\ **Post date:** [February 9, 2005, 4:20am UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/34 "2005-02-09T04:20:54Z")
Ok, There’s an old saying about investments. “It’s not timing the markets, it’s time in the markets”. That being said. You’re 23, the average age for retirement is 70. You can’t touch the money in a 401(k) without tax repercussions until you’re 65. Ok…you have lots of time. The things to think about are this. Does your company match? If so, make sure you contribute the maximum that your company matches. Thats free money. Never turn down free money. Next, the secret is balance. I would put 10% into the high risk funds, 10% into very conservative funds and the remaining 80% can be spread over the middle of the road funds. Remember diversification, you don’t want every fund you put your money into to have large holdings in the same stock. Go for international funds, emerging markets, small, medium and large cap funds. Index funds are good too. The Russell 2000 is the best index fund to use right now. But the important part, invest now, invest as much as you can, and if you leave your job, roll the 401(k) into an IRA so that you can maintain control over the assets. ---
**Author:** ![Cat\_Whisperer](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cat_whisperer/32/4839_2.png) [@Cat\_Whisperer](https://boards.straightdope.com/u/Cat_Whisperer)\ **Post date:** [February 9, 2005, 4:49am UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/35 "2005-02-09T04:49:25Z")
> [@amarone](#): > > Hey, I’m English and I learned! > \ According to the IQ test in MPSIMS, I have an IQ of 69. I’m lucky I can breathe and type at the same time. ---
**Author:** ![Black\_Train\_Song](https://avatars.discourse-cdn.com/v4/letter/b/4da419/32.png) [@Black\_Train\_Song](https://boards.straightdope.com/u/Black_Train_Song)\ **Post date:** [February 9, 2005, 1:15pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/36 "2005-02-09T13:15:20Z")
> [@Medea's Child](#): > > So, how do I do an IRA? Other things to look for: there are “load” funds, which charge you a percentage of what you put in (around 5%) There are funds that charge a “load” when you take OUT your money. And there are noload funds which don’t charge a percentage at all except for management fees (which is another thing you should be looking at). The more a fund turns over its stocks, the higher the mngmt fees are likely to be. ---
**Author:** ![missbunny](https://avatars.discourse-cdn.com/v4/letter/m/76d3ee/32.png) [@missbunny](https://boards.straightdope.com/u/missbunny)\ **Post date:** [February 9, 2005, 2:41pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/37 "2005-02-09T14:41:39Z")
> [@](#): > > You can’t touch the money in a 401(k) without tax repercussions until you’re 65 You can start withdrawing money without penalties at age 59-1/2, not 65. ---
**Author:** ![amarinth](https://avatars.discourse-cdn.com/v4/letter/a/3be4f8/32.png) [@amarinth](https://boards.straightdope.com/u/amarinth)\ **Post date:** [February 9, 2005, 6:57pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/38 "2005-02-09T18:57:40Z")
> [@Neurotik](#): > > First, make sure you have some spare money to start the whole thing. Then decide if you want Roth or traditional. Then go to a site like [Vanguard.com](http://Vanguard.com) or [Fidelity.com](http://Fidelity.com) (or any other known, respectable financial institution like your bank) and follow the instructions. Any of these sites that you’d recommend over others? ---
**Author:** ![Black\_Train\_Song](https://avatars.discourse-cdn.com/v4/letter/b/4da419/32.png) [@Black\_Train\_Song](https://boards.straightdope.com/u/Black_Train_Song)\ **Post date:** [February 9, 2005, 7:50pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/39 "2005-02-09T19:50:41Z")
How about [the Motley fool](http://www.fool.com/retirement.htm?ref=G02A04) ---
**Author:** ![Neurotik](https://avatars.discourse-cdn.com/v4/letter/n/91b2a8/32.png) [@Neurotik](https://boards.straightdope.com/u/Neurotik)\ **Post date:** [February 9, 2005, 8:20pm UTC](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726/40 "2005-02-09T20:20:17Z")
> [@amarinth](#): > > Any of these sites that you’d recommend over others? I’d just like to note that I’m not a financial professional. I’m just a guy who set up his IRA about a year ago, after taking a lot of advice off of these boards. Anyway, I found both [Vanguard.com](http://Vanguard.com) and [Fidelity.com](http://Fidelity.com) to be very helpful. I notice that **Rooves** linked to the Motley Fool, which is another excellent site that helped me a lot. [Previous page](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726.md?page=1) [Next page](https://boards.straightdope.com/t/what-do-i-do-with-a-401k/288726.md?page=3)