4

My new employer does not offer a 401k for the first year of employment.

Should I bother with creating an IRA account given the max limit is 5k? Or should I just put the 5k in a savings account?

What's the best way to estimate the benefits of an IRA for just a year?

  • 1
    Make sure to research whether ROTH IRA is right for you. Instead, you might want consider a "regular" IRA. there are several very important differences with regards to taxation and withdrawals that you have to be aware of. – littleadv Apr 17 '12 at 19:44
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Yes, you should absolutely bother. Get a Roth IRA opened up soon and contribute the max you can per paycheck.

$96 weekly, $192 bi-weekly or $416 per month.

You probably shouldn't fret about the benefits of your IRA for a year. Instead, consider the benefits of feeding it for your entire working life.

Other issues to consider

  • Do you have any debt? Pay them off.
  • Do you have an emergency fund? Try to make one.
  • Fund that IRA
4

Even with a 401(k), the IRA should be part of your savings right after the 401(k) match. In other words;

  • Deposit to 401(k) up to the match
  • Pay off high interest debt
  • Deposit to IRA to max
  • Back to 401(k) till maxed.

With 401(k), you'd need to decide Roth or pretax (Traditional), if the company offers both flavors. With IRA, the choice may be taken away if you have income over the limit.

Given Dilip's comment below - I'll clarify that the above should be planned in advance. Before the year, will you plan to save more than the matching percent? will it be more than $416.67 more per month? (The amount to fund the IRA). Etc. Not that you'll actually change percents as the year goes by, although I do suggest that for people who knock off their debt and wish to bump their savings after that.

  • JoeTaxpayer's advice sets the priorities correctly but be aware that some companies allow only one change in the level of 401k contributions per year (including starting or stopping in the middle of a year). If so, stopping 401k contributions and restarting them later may not be possible. – Dilip Sarwate Apr 17 '12 at 22:20
  • Wow, Dilip. I didn't know that. My company 401(k) admin permits changes with 2 week notice, no limit. Good to check this with one's plan. – JoeTaxpayer Apr 17 '12 at 22:40
  • I thought the last "company" to limit the number of changes was the US Government Thrift Savings Plan – mhoran_psprep Apr 18 '12 at 12:28
  • Maybe others can comment on this. It's a black swan item - one current employer that limits changes makes the warning worth mentioning. – JoeTaxpayer Apr 18 '12 at 12:51
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If you have a high income for that first year, you should consider contributing to a Traditional IRA instead of a Roth IRA. Since you are not covered by a 401(k), there is no income limit for deducting a Traditional IRA. Traditional IRA can be deducted, so it saves taxes now, which is good if your income is high and you are in a high tax bracket now.

  • yeah I saw the deduction limits (irs.gov/retirement/article/0,,id=202510,00.html). In other words next year when I have 401k it doesn't make sense to do Traditional IRA because I won't be able to deduct anything so might as well put it in Roth IRA. – Tigran Apr 17 '12 at 21:29
  • @Tigran The option to put money into a Roth IRA also disappears at higher income levels. But it is always possible to make nondeductible contributions to a Traditional IRA. These contributions will not be taxed upon withdrawal but the earnings on them will. However, the earnings growth is tax-deferred until the money is withdrawn. – Dilip Sarwate Apr 17 '12 at 21:58
  • @Tigran: yes, next year you can only do Roth IRA – user102008 Apr 17 '12 at 22:20
  • @DilipSarwate: once you make nondeductible contributions to a Traditional IRA, you can then convert it to a Roth IRA – user102008 Apr 17 '12 at 22:21
  • "you can then convert it to a Roth IRA" Check the arithmetic on this. I believe that the money converted into a Roth IRA must come proportionally from the tax-deferred amounts and the basis (post-tax contributions), and, of course, income tax has to be paid on the amounts converted. For young people starting out, this is not a big deal. For older people with far more in tax-deferred part and smaller amounts in post-tax contributions, the tax can be pretty substantial. – Dilip Sarwate Apr 17 '12 at 23:21

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