I am a senior in college and I have $3,000 dollars from my summer internship that I want to invest. I was thinking of investing it in a Roth IRA in an index mutual fund. However I am questioning my decision since I will be graduating in less than a year and will possibly start a 401(k) with a company.

Does it make sense to have a Roth IRA and a 401(k) as well? Or should I be steering my $3,000 dollars in a different investment account?

I will have $10,000 dollars left over in my college savings fund that my parents will give me when I graduate so that will be my "safety net". I know it's almost September and I heard investing too close to dividend payouts is not a wise time to start investing. Should I just wait until the next year to start investing?


5 Answers 5


Whether you contribute to an IRA (Traditional or Roth) and whether you contribute to a 401k (Traditional or Roth) are independent. IRAs have one contribution limit, and 401ks have another contribution limits, and these limits are independent. I see no reason why you wouldn't maximize the amount of money in tax-advantaged accounts, if you can afford to.

In your first year of work, especially if you only work for part of the year, you're likely in a lower tax bracket than in the future, so Roth is better than Traditional.

Another thing to note is that the money in the Roth IRA can be part of your "safety net" -- contributions to a Roth IRA (but not earnings) can be withdrawn at any time without tax or penalty. So if there is an emergency you can withdraw it, and it wouldn't be any worse than in a taxable account. And if you don't need it, then it will enjoy the tax benefits of being in the IRA.

  • If I'd had Roth IRA's available when I started making financial plans, i'd probably have a lot of my savings in one. Instead I'm gonna be paying tax on a lot of that. Oh well, at least it will be at long-term capital gains rates... I presume there's no way to "oops" that retroactively.
    – keshlam
    May 21, 2015 at 21:40

First a couple of quick points. Many people have an IRA (of any type) and a 401K. Over your professional career, the retirement packages for every employer will be different.

For this year you don't need to decide on the Roth or not until April 15th. You will be able to put 2014 money into the account as late as April 15th 2015. You will have a better understanding of your job situation at that time. It is possible that your post-graduation employer doesn't offer 401K matching, or has high expense funds only, or has no 401k.

Don't worry about retirement funds and dividend season. Yes if you invest right before the mutual fund issues the end of year dividend the price per share will go down. But in the retirement account you should just allow it to repurchase shares. In a non-retirement account the dividend would be a taxable event, which means you will end up sending money to the IRS. The retirement account avoids this issue.


The details of the 401(k) are critical to the decision.

A high cost (the expenses charged within the) 401(k) - I would deposit only to the match, and I'd be sure to get the entire match offered. In which case, that $3000 might be good to have available if you start out with a tight budget.

Low cost 401(k) w/match - a no-brainer, deposit what you can afford.

Roth 401(k) w/match - same rules for expenses apply, with the added note to use Roth when getting started and in a lower bracket.

Yes, it makes sense to have both.

You should note, depositing to the Roth now is riskless. The account, not the investment. If you decide next year you didn't want it, you can withdraw the deposit with no penalty or tax.

Edit to respond to updated question - there are two pieces to the Roth deposit issue. The deposit itself, which puts the $3000 earned income into tax sheltered account, and the choice to invest. These two are sequential and you can take your time in between. I'm not sure what you mean by the dividend timing. In an IRA or 401(k) the dividend isn't taxed, so it's a non-issue. In a cash account, you might quickly have a small tax issue, but this doesn't come into the picture in the tax deferred accounts.

  • revised my original post Aug 22, 2014 at 18:52

Why not just hold that cash until you graduate from college? Why? Because it's a safety net - make sure you don't have any sudden expenses (medical, school bills, car bills, etc). Then after school you're going to need some cash for job moving, relocation, clothes, downpayment on apartment, utilities, etc.

If all that cash is tied up into a 401 or IRA then you can't touch it and if something happens you'll be tempted to take a loan out. Ack!

You'll have plenty of time since you're just starting to save for retirement. Keep this cash as a beginning emergency fund and hang on cause as soon as you get out of school things really move fast. :)


There is little advantage to waiting or combining accounts. If it makes sense to put money into a Roth now (which I can easily believe because your current tax rate is crazy low) go ahead and do so. Your later opportunities for investment in a 401(k) do not affect your optimal decision today.

There's nothing wrong with having multiple types of retirement accounts and many people do. Over time the best place to put money can change. After retirement you can roll all your Roth style investments into a single Roth IRA and your traditional investments (IRA and 401k) into a single traditional IRA.

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