This is incorrect.

The skinny on the Roth:

As long as your Adjusted Gross Income is below $95K single or $150K joint, you can contribute the max annual to a Roth IRA, even if you are covered under a company's pension plan.

Yes, Roth contributions are not tax deductible. But the interest/appreciation of the funds is never taxed. In other words, when you eventually withdraw your moolah, it's not taxed. If you aren't going to retire for another 20 years or so, this is very very powerfull.

Here's the math:

Assuming you invest in an index fund (such as the S&P 500), you can bank on an average 12% - 14% in the longterm.

So, $1,000 invested now will appreciate to $9,650 - $13,750 over 20 years.

In a 401K, you will pay income tax on the $8,650 - $12,750 when you withdraw upon retirement. Under a Roth, the money comes out tax-free. At an average tax rate of 28%, you keep an additional $2,400 - $3,500.

The only time a 401K makes more sense is if you exceed the income limits, or more usually, if your employer matches your contributions.

"Yes, Roth contributions are not tax deductible. But the interest/appreciation of the funds is never taxed. In other words, when you eventually withdraw your moolah, it's not taxed. If you aren't going to retire for another 20 years or so, this is very very powerfull."


however - with a regular 401k - you are putting in pre-tax money and if you keep it in til you retire when your income drops off and you are in a low tax bracket - you save a lot of money. It is almost always better to delay your tax bill (present value of money analysis)...

I think this is a little agressive in terms of an assumption. I'm too lazy to look it up but I recall historical long term market returns being more in the 7-10% annual range.

Shit, some private equity raise funds with target returns in the 15% range and they carry substantially higher risks.

Granted, all rates are low right now (Jeez, look at mortgage rates). Which reminds me, anyone who rents should really consider buying property. The taxes and interest are deductible--a $150K mortgage and $4k property taxes will cost you a little more than $1K per month out of pocket, which is probably less than your rent.

In the late 90's, there was heated debate on whether "Market Risk" should be valued at 14% verus 12%. Granted, the market has been depressed in the last few years, but in '98 or so, the average S&P return was 12% (and no, this didn't measure off the historic low). It's the rule I've always used. Corporate debt isn't too far below 10%, and junk which is notoriously underpriced relative to the risk will get you low teens.

Even if the index return is only 10% over the long haul, the tax-free appreciation is ridiculously valuable for anyone with 20+ years to retirement.

I just requested a cash-out of my 401K this afternoon.

Being unemployed & broke RULES.

i want to know what kind of penalty taxes you pay on that cash out.

huuuuge.

i just sold a couple thousand dollars of stock and stock options - the tax sucks but I need cash for my impending trip to Italy.

Right off the top they take 20% for the gubment. I'm probably gonna be nailed for 10% more for cashing out early, but I haven't heard about that yet.

This was my "nuclear option" & I just pushed the big red button.

Do something you like so you never have to retire.

That's what I WAS doing until I was laid off 2 months ago.

You got laid off from your radio job?

Radio monitoring job...but yeah. In mid-Feb.

Sucks, amigo. Least we have our Royals. Best of luck finding something quick, if you haven't already.

Thanks. I've got some lines in the pond, but no bitin' fish yet. Cashin' out the 401K is all part of my "Delaying Taking A Shit Job So I Can Pay The Rent" plan. Hopefully something decent will pop up before then.

This may qualify for some of the worst advice ever.

I have worked in the financial services industry for almost eight years and have a couple of NASD licenses (Series 6 and 63). I am not an expert nor am I a financial advisor, but I know enough to give generally good advice to non-specific situations.

Here is a quick guide I provide to friends who seek financial advice. They should be followed in order (no skipping steps):

1. Create a budget analysis for one typical month. Figure how much $$$ comes in (net, not gross). Find out where your money goes. This is an eye-opening task for many people.

2. If you have credit card debt, do all that you can to eliminate this. Start with the highest APR if you have multiple cards. Once you have paid off your credit cards, never carry a balance month to month.

3. Invest in your company's 401k at this point IF AND ONLY IF they match your contribution. Only contribute the amount necessary to maximize the full contribution (e.g. if they match you $0.50 to the dollar for the first 6% of your contribution, only invest 6% and no more).

4. Save enough money to cover 3 months of expenses without any other income. Some people would suggest this as a first step and not third, but I disagree for several boring reasons.

5. Invest in a Roth if you qualify--I would guess almost everybody on this board does (if you don't qualify, you are making a significant amount of money already). If you can't contribute lump sum, start off with a small amount and invest in an index fund (Mr. Fancypants--an index fund IS a mutual fund....and by its definition is an extreme form of diversification).

6. If you are able to swing your finances this far, consider upping your 401k contributions beyond the company match threshold.

7. Once you have maximized your 401k contribution, this would be a good time to consider seeing a financial advisor. You may need to see one earlier than this (they can help with rolling over your 401k into an IRA if you lose your job for example) but financial advisors are really only going to be able to help people who have money to invest or other insurance/estate planning needs.

That is all.

Spoken like a fellow poor person.