starting my first ira? 401k? help!! which site?

[dgcoupe]

I just finished college and i am 24 making ab 35k yr i want to start about 10 percent of my paycheck to go to a retirement, should i go to my bank in wachovia, regions, or sunstate fedrel credit union and start an IRA? or go to a web site like vanguard and Charles schwab??

please help thank you!!!

[buildmybudget]

Does your employer offer any type of retirement or ESPP plan that offers matching? Also, do you have any credit card debt or other high-interest debts that need to be paid off?
Additionally, what knowledge do you have of investing? How comfortable you are with making investment decisions I think will also impact which broker would be best to assist you with getting your retirement plan started.

[kork13]

Your better options will be working with an online discount broker, such as Vanguard or Charles Schwab as you mention. Other good options are T. Rowe Price and Fidelity, just to name a few. Nothing that Wachovia, Regions, or SunState offers will match the low-cost, wide-variety, and solid investment options available from any of those online discount brokerages. Choose the one you like, and their websites can either help you set up a Roth IRA, or you can call them and their customer service reps can help walk you through the process.

As to the WHAT of your question, right now you want to open a Roth IRA. You pay taxes now on the money you put in, then during retirement you can withdraw it with taxes due on neither the principle deposits nor gains/interest/dividends. This is a HUGE advantage, considering that you'll have 40 years for this money to grow. Most likely, you're in a relatively low tax bracket, which will make the advantages all the better right now. Just keep in mind, however, that you can only deposit $5000/yr ($416.66/mo) into an IRA.

A 401k is offered through your employer, so you should check with your job's human resources office. If they offer a 401k, they can help you set it up. It's a little different from a Roth IRA, in that you put money in today and don't pay any taxes on it now, then when you withdraw from it during retirement, you pay taxes on everything: deposits, gains, dividends, etc. It's still a great option for saving money for retirement beyond the $5k limit of an IRA. So if you have $8000/year that you can save for retirement, max out the Roth IRA to $5000, and put $3000 ($250/mo) into a 401k. Also of note, the 401k maximum is $16,500/year, significantly higher than IRA's.

[dgcoupe]

wooowww you guys are amazing.. im so glad i joined this site

To answer some Questions
i don't have any debt no loans at age 24

I only have about 6k on a saving acct as of right now and like 800 on checking for spending

Also i am working with a new company so i will find out if i can do the 401k after my 90 days i just started.
i know there is a lot of website liek charles and vanguard etc.. but which one do u recommend? tell me and ill use that site since i am a new noob


also when u said this "in that you put money in today and don't pay any taxes on it now, then when you withdraw from it during retirement, you pay taxes on everything: deposits, gains, dividends, etc." i thought when u take it out when u retire it isn't taxed and thats the whoel point of the 401k isn't?? im confused

[kork13]

i know there is a lot of website liek charles and vanguard etc.. but which one do u recommend? tell me and ill use that site since i am a new noob

haha all of the places listed above are good. Personally, I use Charles Schwab and USAA. Vanguard is probably one of the most popular ones around here, and they have some great options with very low expenses. One thing to note, however, is that most of their funds require a $3000 minimum to start, though there are a couple exceptions. Someone that uses them would have to weigh in on that.

But as I said, you can't go wrong if you use Schwab, Vanguard, Fidelity, or T. Rowe Price. There are some small differences between each of them, and those are usually what decide it for people. I would really recommend you just check out their websites, look at the features, investments, and other options that each of them offers, then make your decision based on that. It's your finances, not mine or anyone else's. I've added links to each of their websites below, you should check them out.

Vanguard ; Charles Schwab ; Fidelity ; T. Rowe Price

[disneysteve]

Your better options will be working with an online discount broker, such as Vanguard or Charles Schwab

I want to clarify something here. Vanguard is not an online discount broker. (Technically, neither is Schwab since they have plenty of offices located around the country but also have an online presence). But Vanguard is primarily a mutual fund company. They do have a brokerage department but it is not a discount one. I wouldn't recommend using them as a broker as there are many others that are far cheaper. They are great for mutual funds but not so good for buying individual stocks and bonds.

So if you have $8000/year that you can save for retirement, max out the Roth IRA to $5000, and put $3000 ($250/mo) into a 401k.

If your company has a 401k, find out if they match your contributions to any extent. If they do, fund the 401k first to the amount needed to get the maximum company match. A common plan is for the company to match 50 cents on the dollar up to your contribution of 6% of income. So if you earn 35K, 6% would be $2,100. If you put in that amount, they would add another $1,050 out of their own money so at the end of the year, you would have $3,150 plus any earnings on that money. It is like getting an instant and guaranteed 50% return. No Roth investment will beat that.

[scfr]

dgcoupe - Welcome. It's great that you have no debt, a decent amount of savings, and want to start saving for retirement at the age of 24 - kudos!

I say invest in your "internal personal finance reference library" first, before you invest a single dollar.

My suggestion is that you set up a separate savings account somewhere that you label your "retirement savings account" which you will pledge to yourself you will not touch for any reason. Because the money won't be there for long, make sure it's an account where you won't get penalized if you close it in just a few months. Immediately, with your next paycheck, start socking away 10% of each paycheck in to that account.

Then go out and get a couple basic personal finance books (such as one of The Wall Street Journal's Guides). Pretend they are required reading for a school course. Read them cover to cover; take notes. Also start reading one of the basic PF magazines (such as Money). Learn the difference between traditional IRAs, Roth IRAs, 401Ks, etc. Learn about the different types of investments (stocks, bond, Treasuries, mutual funds, etc). Keep visiting this forum. Explore the web sites kork13 referenced (all good companies), not to invest right away, but just to familiarize yourself with what they have to offer. After a few months, you will not only have at least $1K saved for your retirement, more importantly you will have a better understanding of how you want to invest your retirement savings and will have a knowledge base that will help you make a more informed decision.

Good luck!

[dgcoupe]

thanks guys for all your advice.. this is all overwhelming :S

[dgcoupe]

Disneysteve: do you recommend visiting my local banks like wachovia and regions and all those and do an IRA soon? or down the road instead of like vanguard.... charles etc?

[skydivingchic]

I'll answer you question about 401k taxes. There are two basic types of plans. The one most employers offer is a pre-tax 401k. What that means is that you put money in today without paying taxes on it. That money will grow tax free until retirement. Since you have never paid any taxes on it, you will pay taxes on your withdrawals in retirement. Also since taxes have never been paid on it, you are required to take what are termed required minimum distributions at a certain age - the government wants some tax revenue from this money and this is how they get it. As has been stated, the current limit on these accounts is $16,500. Some employers will put additional limits on how much you can put in. For example, my company only allows contributions up to 40% of pay, so at a wage of $35k, the most you would be able to contribute is $14k. Traditional IRAs have similar tax treatment and their annual limit is $5k.

The second type of account is a Roth IRA. Some employers offer Roth 401ks. For these types of accounts, you are taxed on the money today before you put it into the account. The money grows tax free and you don't pay taxes on it when you make withdrawals in retirement. There are no required minimum distributions for Roth vehicles.

The major advantage to both 401ks and Roth vehicles is the tax free growth. If you go down to your local bank and get an interest bearing savings account or you invest in mutual funds, etc outside of these accounts, you owe taxes on the gains each and every year. With tax advantaged retirement vehicles, you don't get taxed on the annual growth.

The general rule of thumb is to put money into your 401k up to the employer match first. As Steve outlined, no investment will beat the 50% employer match. After that, or if your employer does not offer a match, max out a Roth IRA ($5k). If you still have investment dollars, go back to funding the 401k.

As others have said, find some personal finance and investing books and start reading. Certainly come here and ask questions - you will generally get solid advice. But ultimately you have to make the decisions and live with the consequences (good or bad), so start getting as much information as you can to help make the best decisions possible. Every situation is unique and we all have different goals, so the "best" course of action for one person may be different than the "best" course of action for another.

[skydivingchic]

One other note, someone mentioned saving 10% for retirement. This is a common rule of thumb and should be viewed as the minimum. Many places will recommend 15% minimum toward retirement. This is a percent of your gross pay and should not count any employer match. So for your $35k salary, you personally should aim to save $3,500 - $5,250 per year. Anything your employer matches above and beyond that is a bonus.

[dgcoupe]

Skydiving.. thank you and I donated!! This clears up a lot! One question though you mentioned to max out the 5k on IRA but also said to invest in 401k after that? Are you referring to invest in IRA FIRST then 401k or vise versa? Because people advice me 401k > IRA

[disneysteve]

Disneysteve: do you recommend visiting my local banks like wachovia and regions and all those and do an IRA soon? or down the road instead of like vanguard.... charles etc?

No. That wasn't the point I was making above. I think Vanguard is an excellent place to invest your retirement money. It is where the bulk of mine is invested. My point was to distinguish them from a discount broker. Vanguard is first and foremost a mutual fund company. That is what they are known for. If, which I don't recommend, you want to buy individual stocks and individual bonds, I would not do so with Vanguard. There are many cheaper ways to do that like with Scottrade, Ameritrade, E-Trade, etc. If you want to invest in good quality, low cost mutual funds, which I would recommend, Vanguard is a great choice, as is Fidelity or T. Rowe Price.

One limiting factor when you are first starting out is that Vanguard has a $3,000 minimum to open an account. I believe T. Rowe offers a lower minimum if you sign up for automatic monthly investments. I'm not sure about Fidelity. What you could do is just wait until you've accumulated $3,000 in your money market account and then open your Vanguard account at that point. From then on, you can make smaller contributions on a regular basis.

One question though you mentioned to max out the 5k on IRA but also said to invest in 401k after that? Are you referring to invest in IRA FIRST then 401k or vise versa? Because people advice me 401k > IRA

I addressed this earlier. If your 401k has a company match, do that first. Otherwise, you are essentially passing up free money. If there is no match, the Roth may be the better deal so do that first.

[dgcoupe]

thanks again disneysteve.. I can put in 3k in vanguard for their IRA right? but thats my plan with vanguard is to sign up for an IRA! sounds good??

also Should i do tradition or Roth? thanks

[disneysteve]

Should i do tradition or Roth? thanks

This is a point of much debate. Jim must be away this weekend since he hasn't posted to any of your threads yet. I'm sure he'll be along.

Traditional: Invest pre-tax money. Get a tax deduction for your contributions if you qualify. Money is taxed upon withdrawal. You can start taking money out when you are 59.5 and must start taking money out by age 70. Once you start taking money, there is a minimum required amount you must take out each year.

Roth: Invest after-tax money. No tax deduction since you've already paid the taxes. Money is not taxed upon withdrawal. You can start taking money out when you are 59.5 but there is no requirement to ever take the money out and no minimum amount you must take out. It can stay there forever and pass to your heirs upon your death.

Avoiding taxes now is better if you think your tax bracket will decrease in retirement.
Paying taxes now is better if you think your tax bracket will be higher in retirement.

Of course, nobody knows the answer to that question. Most folks agree that the historically low tax rates we have been enjoying can't last. The government spending spree will result in higher taxes in the future which makes paying taxes now and avoiding them down the line more appealing. I'm sure there are some online calculators, possibly at Vanguard's site, to help you make that decision.