I am 20 years old, a full-time student, and I work part-time. I was wondering which option is best for me: a 401(k) or a Roth IRA. My employer does not offer matching, so I would not receive any free contributions.
I am considering contributing to a 401(k) to get tax advantages, but I would have to wait until age 59½ to withdraw the money. That feels like a long time, and I may need money sooner for things like buying a house or car, or paying off student loans.
With a Roth IRA, I understand that I may be able to withdraw money tax-free for certain expenses like a house, car, or loans. I want to confirm if this understanding is correct.
Given my situation, would it be better for me to:
Contribute about 8% of my paycheck to a 401(k)
OR
Contribute 0% to a 401(k) and instead open and fund a Roth IRA with after-tax money?
Also, if I choose not to contribute to a 401(k), would I be missing out on any important benefits, such as tax savings? Thank you.
Is 20 y/o better off funding 401k or Roth IRA
byu/You_are_yummy_uwu inpersonalfinance
Posted by You_are_yummy_uwu
11 Comments
Sounds like you are asking about a framework for what to do with money.
Start with reviewing the Prime Directive in the PF Wiki. It will answer your question and many other questions you didn’t realize you should be asking.
* https://www.reddit.com//r/personalfinance/wiki/commontopics
Roth IRA is the recommendation with no employer match, but depending on your current tax bracket (which I assume is low since you’re part time), the next recommendation would probably be Roth 401k
just to clarify your understanding, you can early withdraw only the money you put into a Roth IRA without penalty, not the gains. You can only withdraw $10,000 (including gains) penalty free for a first time home purchase. However generally its not advisable to withdraw any of your money early
Nothing beats the time value of money. If you put in 10K in your first year and never put in any more it could be worth 250-300K by time you are 65
With part-time work you probably have a low tax bracket. It may be 12%. If it’s 12-22%, you are almost certainly better off contributing to Roth IRA. Lock in the low tax rate now.
The choice between traditional and Roth should be driven by tax rate now and expected tax rate when you’re retired and taking money out. 401k vs. IRA has a few extra considerations, but nothing that would tip the balance.
401(k) contributions are NOT stuck until 59.5 that’s a common misconception in fact accessing retirement funds early is a crucial part of early retirement see here: https://www.madfientist.com/how-to-access-retirement-funds-early/
Roth vs traditional depends more on income than age. You just compare your current TOP marginal rate on your last dollar of income (what you pay with Roth/avoid with traditional) vs estimated average effective rate on withdrawals in the future (what you pay with traditional/avoid with Roth.)
That being said if you are only working part time it’s likely your income is low so Roth is probably preferred.
When you get a full time job and career you will likely want to prioritize traditional contributions.
You’re supposed to have separate savings for house and car. 401k and Roth are retirement accounts and only for retirement. Do not put money into them with the plans of taking it out early.
The primary determinant of which is better in the long run is whether your tax bracket now is higher or lower than it will be in retirement. For almost all 20 year olds, it’s lower, so that means [b]Roth[/b].
You also noted that you can take money out of the Roth earlier. I wouldn’t recommend that if you can avoid it, but it is a fact.
Looks like Roth is just better in your case.
I don’t think it is really possible to say. So much can change between now and retirement age that. As long as your are saving you are way ahead of most.
Does your employer offer a Roth 401(k)?
I made the decision to go all Roth so I have a personal Roth IRA and my works Roth 401(k)
Roth for sure if there’s no match