There are two kinds of employer sponsored defined contribution retirement accounts: the Roth and traditional 401(k). These two options are analogous to the Roth and Traditional IRA accounts:
- With a Roth 401(k), taxes are paid on the contribution, and withdrawals in retirement are tax free.
- With a traditional 401(k), contributions are not taxed, but withdrawals in retirement are.
In Money Magazine, Walter Updegrave compares the two types of accounts:
Investing $11,625 in after-tax dollars in the Roth 401(k) is the equivalent of making the maximum $15,500 contribution of pre-tax dollars into a regular IRA. But you’re not limited to contributing $11,625 in after-tax dollars to the Roth.
…
Which means that as long as the dollar amount you can contribute to a regular 401(k) and a Roth 401(k) are the same, the Roth 401(k) effectively gives you the chance to sock away more money on a tax-advantaged basis for retirement, assuming you’re willing to part with the extra bucks. [emphasis added]
At my new job, I have the option of opening a retirement account of either type. Last summer I worked out my budget assuming that I would open a traditional IRA (because I did not know the Roth was an option). The immediate benefit of the traditional 401(k) is the tax savings, leaving more money in my pocket each month.
But since a Roth 401(k) is available and it allows me to ultimately save more money for retirement, I am going with a Roth. That makes my take home pay a bit smaller, but in the long run I will appreciate having more money in retirement.
I recently had a conversation with a friend about reading financial news. She said it was not worth reading the news; she has an investment plan and sticks to her target asset allocation.
Generally, I agree that it is a waste of most people’s time to follow financial news on a daily basis. There are several things going on right now, though, that I follow in the news.
This is what I am paying attention to now.
- Home heating costs
Last year I spent twice as much money on oil for my home (around $1,000) as gasoline for my car (around $500). At my old apartment in New Jersey, a giant oil tank in the basement was used to generate hot water and heat in the winter. Each time the tank was re-filled, I got a bill for at least $600. With higher oil prices, these re-fills will cost even more. For example, in New Hampshire, “retail heating oil costs about $4.50 a gallon, up from $3.30 last winter.” - Nearing retirement in a downturn
I care about this topic because my parents are in/near retirement (my father is retired, my mother is still working). There is compelling advice to near-retirees that it makes sense to work longer, giving retirement accounts time to bounce back before withdrawals begin. (NYT) - Changes in the tax law
Specifically, changes in capital gains tax, the Alternative Minimum Tax, and limits on retirement account contributions. - The housing market
I may (or may not) buy a condo in the next few years. If prices decrease significantly in the DC area, I probably will buy. (Washington Post) - Which Wall Street firms are closing
Since I have friends on Wall Street, I am curious about how the major companies are faring and who is planning lay-offs. (TheStreet.com)
There are some things I am intentionally not paying attention to.
- 529s/ ESA
I will most likely not have children within the next few years, and when/if I do have kids, I may live in a different state. Also, these accounts have only existed for a short amount of time. If the laws change, it may not make sense to use these anymore (or it may make more sense) - News about “hot” funds/sectors/stocks …
Here I completely agree with my friend — follow your asset allocation and ignore the market fluctuations.
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