401 k and IRA

Ask any of your friends how much they’ve invested and they’ll say things like, “Huh?” or “I don’t earn enough to invest.” Most of them will say, “I don’t know how to pick stocks,” which is crazy because INVESTING ISN’T ABOUT PICKING STOCKS. Although it’s true that some of them might participate in a 401(k)—a type of retirement account—that’s probably the extent of their investments.

401(k): 

A 401(k) is just a type of investment/retirement account—one that offers huge benefits which include:
1) Money isn't taxed for many years (tax-deferred until the age of 59 1/2)

2) Free money with employee match

3)Automatic Investing

Out of employees age 25 and under:

1) Less than 1/3 participate in a 401(k);
2) Less than 4 % max out their contributions;
3) Only 16 % contribute enough to get the full company match. The company match is literally free money, so 84 % of young employees are losing thousands of dollars per year because they haven’t spent a few hours to learn how this stuff works.

The Ladder of Personal Finance


Track 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100 percent of the match. A “401(k) match” means that for every dollar you contribute to your 401(k), your company will “match” your contribution up to a certain amount. For example, for easy math, let’s assume you make $100,000. A “100 percent match up to 5 percent of your contribution” means that you’ll contribute $5,000 and your company will match it with $5,000. This is free money and there is, quite simply, no better deal.

Track 2: Pay off your credit card and any other debt. The average credit card APR is 14 percent, and many APRs are higher.

Track 3: Open up a Roth IRA and contribute as much money as possible to it. (As long as your income is $101,000 or less, you’re allowed to contribute up to $5,000 a year.)

Track 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it (this time above and beyond your employer match).
The current limit is $15,500.

Track 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there.


401 k facts: 
1) If you need the money you can be penalized around 10% for early withdrawal but there are certain exceptions: medical expenses, buying a home, education.
2) Tax deferred not tax free
3) If company offers 401 k but no match, open anyway. Pay off debt with extra money and max out Roth IRA.

If you switch jobs:
1) Roll over 401 k into an IRA (preferred).
2) Roll old 401 k into new 401 k

Roth IRA: 


A Roth IRA is another type of retirement account with significant tax advantages. It’s not employer sponsored—you contribute money on your own. Every person in their twenties should have a Roth IRA, even if you’re also contributing to a 401(k). It’s simply the best deal I’ve found for long-term investing.

One of the benefits is that it lets you invest in whatever you want. Whereas a 401(k) has an array of funds that you must choose among, a Roth IRA lets you invest in anything you want: index funds, individual stocks, anything. A second difference has to do with taxes: Remember how your 401(k) uses pretax dollars and you pay taxes only when you withdraw money at retirement? Well, a Roth IRA uses after-tax dollars to give you an even better deal. With a Roth, you invest already-taxed income and you don’t pay any tax when you withdraw it.

Roth IRA facts:
1)You contribute your own money, no match.
2)Invest in what you want.
3) No taxes after you withdraw
4)You do not pay taxes on  the earnings.
5)Penalty if you withdraw early..some exceptions
6) You can withdraw the principal (amount you contribute) after 5 years.
7) If you make more than 100,000/yr there are restricitions on how much you can contribute..see traditional IRA
8)Over a certain income you aren't eligible for a roth IRA....see traditional IRA.
9)Start with at least $50-$100/month. I know Fidelity requires at least $100/month.

To start a Roth IRA, you’re first going to open an investment brokerage account with a trusted investment company. I use Fidelity, but companies include Scott-trade, t.rowe price, Vanguard, Schwab, etc.



Tiger Tracks Week 3:

1) Open your 401(k). Get the paperwork from your HR manager and fill it out.

2) Come up with a plan to pay off your debt. I can't stress this enough.

3) Open a Roth IRA and set up automatic payment. Send as much as you can, but even $50/month is fine