Roth 401(k) versus traditional 401(k)

Everyone says to take advantage of the 401(k), because most employers will offer a match to your contributions. But some don’t, including mine, so I looked into which plan would be best for me — a recent grad with an optimistic fiscal future.

This brief overview by Ramit Sethi on iwillteachyoutoberich is great for getting the basic vocabulary down. After that, the most helpful article I found was on CNN Money, by Walter Updegrave. The Wikipedia entry on Roth 401(k)s also isn’t a bad resource.

I realized after reading all this that one should participate in both plans to “hedge your bets” — finance-speak for covering all your bases.  The real decisions are whether you’ll be putting more into one or the other and what your 401(k) allocations look like.  There’s usually too much un-funny funny in the Motley Fool for my taste, but their page on picking what goes into your 401(k) is very helpful.

Anyway, back to this Roth/traditional 401(k) business.

What Tax Brackets Have To Do With It

Updegrave shows that the tax savings are equal in the end if you stay in the same tax bracket, say, 25 percent. But if you expect to be in a higher tax bracket, say 33 percent, then why not get it taxed at 25 percent and withdraw tax-free when you’re old?  Furthermore, it’s not for certain that tax rates will increase in the future, but they probably will. We’ve all heard Obama say he’s increasing taxes for people who make more than 200,000, right? I’m not saying I will ever make more than that, but *just* in case…

You could you expect to be in a higher tax bracket if you are just starting your career and plan to be making a lot more money in the next forty years. You could expect to be in a lower tax bracket if you are already at the peak of your career and will be taking it down a notch in the next two decades or so.

How Much Can You Put In?

Then there’s the question if which one lets you put more money in from the get-go. max is 15,500 for both.

If Roth after-tax in 25 percent bracket, then you invest 15,500 pre-tax (which becomes 11,625) and even more (3,375 x 1.25 = 4,218.75) up to 15,500 to max it out. so you put more in from the start. If traditional 401k, then you max it out at 15,500 pre-tax and should invest the tax savings (4,218.75) in stocks. if your stocks do well then you end up with more!

For mid-career folks with a higher income, the Roth 401(k) is also pretty much the only way to take advantage of the after-tax feature of a Roth IRA. Before the Roth 401(k), you could only get a Roth IRA, which maxes out at $5,000 per year and is only available to people who make under $110,000 annually.

Final Notes

• If your company does offer a match, the match goes into a 401(k), not the Roth 401(k).
• You can roll the Roth 401(k) into a Roth IRA at any time, i.e., if you change employers, or to avoid making required withdrawals after age 70 or so.
• There’s a Social Security benefit to the Roth 401(k), which is that the money here isn’t going to be taxed as income in the future.

What I’m Going To Do

I’m going to start out by giving the Roth 401(k) a (much) weightier percentage of my contributions. Given that I will probably end up in a higher tax bracket in the future, it’s definitely the better investment for a young person.  Furthermore, the absence of a company match (aka free money) gives me less incentive to put money into the company’s 401(k) plan, especially in this market.

I found an article saying that the Roth 401(k) is set to expire in 2010, unless Congress still looks favorably upon it. Not sure where this is headed, but don’t feel like looking into it.  Bottom line: take advantage of it while it’s there.

After the first couple months of savings-ness, I might also open a Roth IRA. I haven’t found a single article that hasn’t advocated for it as an investing essential for young people. Money from a Roth IRA is more liquid than these 401(k)s, and can be taken out tax-free for new family things like college, a house or even your kids’ education.

Forget ING, I’m switching to HSBC

A few months ago, I wrote that I’d look into opening a high interest savings account at ING.  I mean, I thought it was pretty cool that a bank could exist purely online.  But in spite of its rave online reviews, my user experience with ING has been disappointing.

First, the blaring, ad-like home page just won’t stop asking me to buy more products to “Save Your Money!”  From product descriptions all the way down to the license agreement, ING talks to its customers like they’re simpletons looking for an easy way out.  I may be a lowly beginner, but stupid I am not.

Secondly, their layout is a mess.  At least 70% of the home page contains links I don’t need.  The go-to left menu is wasted on product advertisements.  Key links for accessing my account are strewn across an awkwardly horizontal menu.  And their Microsoft Publisher graphics need serious reconsideration.

To be fair, the Orange Savings Account is only a gateway to more expensive (and profitable) financial products.  They offer great deals for online CDs, mortgage and investment services, and an award-winning high interest checking account.  Should I open one of these, I might find that ING is the best bank around.  But honestly, my investment account is already set up, I’m really rather poor, and all I want is to get 3 to 4% interest on my meager savings.

So what am I looking for?  I want a bank that will respect its beginners, present relevant options for growing my money, and provide me with the tools I need to become a more sophisticated saver.  Of course, all these requirements are rather immaterial feel good effects of a well-designed user interface.  But what can I say, I like design.  If I’m getting the same service, I might as well choose the prettier one.

I’ve decided to go with ING’s competitor, HSBC Direct.  They have a clean, well-organized interface that’s appropriately monotone and rectangular.  All the links I need are neatly stacked in a left menu.  Like ING, I can transfer funds to and from my regular checking account for free and watch my interest grow.  But unlike ING, I’m not bombarded by silly advertisements and product offers.  What’s made me really happy is their neat customer service.  Instead of muddling through 10 minutes of robot phone menus, they call you!  A customer service representative can dial you at a chosen number, at any time of day.

Finally, a couple quirky details about HSBC that are not great, but not deal breakers:

• This post has been so long in coming because of the two week lag time between registration and the snail-mail arrival of a temporary password, blech!
• HSBC presents the additional formality of signing up for online transfers apart from your account, which is strange, but it’s no trouble at all.
• HSBC accounts have two complete number/letter passwords, whereas ING requires a regular number/letter password and a number code.

iwillteachyoutoberich

Well, this is interesting.  Ramit Sethi, blogger of iwillteachyoutoberich.com, proposes a November challenge: Save $1000 in 30 days.  Here is his promise:

I promise: No stupid frugality tips

I’m not trying to save $1 or even $10 per week, because it’s not worth changing your behavior for that kind of money. Guys, we’re aiming to save $1,000 in 30 days. That’s why this series will not include retarded suggestions like “Start a garden” or “Buy day-old food from bakeries.” I certainly won’t tell you to cut your rent or move to a cheaper place, because NOBODY WILL DO IT! Does anyone ever follow those stupid tips? No, but it sure makes other personal-finance authors feel good about themselves for coming up with a suggestion that theoretically, maybe, somehow could save money for the moron who would do it. Not here.

Here is his plan.  And yes, in the knowingly precocious flavor of its namesake, it is called the “C.E.O. plan:”

Save $1000 in 30 days challenge

C = Cut one habit cold-turkey
for example: Reduce eating out. Stop drinking 4 nights/wk.

E = Earn more
for example: Sell at least one thing on ebay. Babysitting. Freelancing.

O = Optimize spending
for example: Negotiate insurance rates. Optimize cell phone and cable bill.

While I can’t say I’ll commit, I will definitely check in on the tips, because this guy talks like he knows it all.  He probably doesn’t, but he knows enough to make what little I know, zero.

personal finance 3: sht hits the — mint II

First: the peppermint plant might not make it, due to directed indifference on both our parts. [D.Olivan]

Nudge: mint.com came up in conversation last night [J.Ge].  This makes me happy for a number of reasons (positive feedback!), but, aside from my self-justification as a savvy young pre-professional, I am glad to come back to this neglected little preaching post.  No promises on posting frequency, but know that I haven’t forgotten about this. [J.Shum]

Post: The past two months have been a free-for-all, buy this, get tickets for that, lunches out and elaborate dinners in.  As my balance drops and I await my numbered paychecks, I’ve hit that wall (or zero?) that I’m sure many young people do.  And my answer?  Budget, duh.  As with most major life changes, it’s a process.  Now to be fair, all my limits are only a shot in the dark until I am really, really employed.  Luckily, my favorite money tool mint has taken great strides in the past six months.

New and updated features:

• Improved automatic categorization of your spending, along with the option to customize
• The ability to split transactions, especially useful for cash withdrawals
• New visualization tool to map your investment history against the Dow, S&P, NASDAQ
• Blogblogblogblogblog: blog.mint.com

If you’re still not convinced, look into it yourself.  Here’s a re-posting of the three top free online personal finance services:

(mint.com)
“Free Personal Finance Software, Online Money Manager, Budget Planner and Financial Planning”
Clean “web 2.0″ user interface. mostly a visualization tool to let you consolidate your finances, create a budget, and see where you’re spending your money.

(wesabe.com)
“Get to Know Your Money”
With social networking component, so you can see what others spend, recommended products, their saving tips (…superfluous.)

(yodlee.com)
“Innovative Bill Pay, Personal Finance, and Online Account Opening Tools”
The Original Gangster, but far too complex for single young people without businesses, mortgages and families, IMO.