Tiago Splitter wrote:Roth makes more sense than pre-tax when your income is low. The deduction you get for contributing to the 401k isn't as valuable when you make 40k as it is when you make 160k.
Also all else equal the IRA is better than a 401k because of the flexibility it offers, particularly with regard to investment options. So even if you are going pre-tax I would use the traditional IRA (assuming you are eligible to take a deduction) before the 401k.
To add: the reason that an IRA is more flexible is because you get to choose who the custodian of your account is (e.g., Vanguard, Fidelity, etc) and the good IRA custodians have plenty of low cost index funds to invest in. In contrast, your employer chooses the custodian for your 401k and often they have a shitty selection of funds, many with high fees. Because of this, it almost always makes sense to max out your IRA prior to contributing to your 401k (excluding the amount that your employer matches). On limited occasions, the funds in a 401k can be somewhat better than in an IRA (e.g., some 401k's have access to Vanguard Admiral funds which have low fees but typically require a 10k+ investment when done through an IRA but have no such requirement when in a 401k, thus making the 401k slightly beneficial because you can get the low fee Admiral fund even if you don't meet the minimum investment requirements if you were going through an IRA).
Anonymous User wrote:So in that case, does it make sense to contribute during stub year. seems like the smart play would be contributing to a roth ira instead during the stub year.
And another add to what Tiago said: there are multiple considerations for contributing to an IRA during your stub year. For example, once you are making an associate's salary for the year, you will no longer be able to contribute to pre-tax money to a traditional IRA and will only be able to do a backdoor Roth IRA. As a stub year, your income may be low enough to allow you to contribute to a traditional IRA and claim a deduction. Additionally, some firms may not allow you to contribute to a 401k until you've been with them for a long enough period of time. You should also note that you can make contributions to an IRA for the 2015 tax year through April ~15 of 2016 (when you make contributions in January through April you can select that they apply for the previous tax year).
Personally, I tend to think the roth vs traditional calculation is mostly a wash because it is difficult to know what the tax rates will be when you retire.