Stub year retirement savings -- Roth 401(k) v. debt v. cash Forum

[Anonymous User]

Since your effective tax rate during your stub year is suuuuper low (maybe 15% total) because your taxable income is like 1/4 what it will be next year, I was curious if there's any general wisdom on prioritizing building an emergency fund, paying down loans, and saving for retirement with a Roth IRA/Roth 401(k) (to take advantage of the temporarily low tax rates). Thoughts?

[Desert Fox]

You'll probably be struggling to pay back your credit cards, new expenses, etc. etc.

[patogordo]

You'll probably be struggling to pay back your credit cards, new expenses, etc. etc.

lol yup

[Anonymous User]

I am interested in this as well. I will be an incoming associate in Sept 2015 and I will be able to pay off all of my law school loans/credit cards by October 2015. Currently have $4k of debt total as a 3L.

[Desert Fox]

I am interested in this as well. I will be an incoming associate in Sept 2015 and I will be able to pay off all of my law school loans/credit cards by October 2015. Currently have $4k of debt total as a 3L.

Max out 401k and emergency fund.

[Tiago Splitter]

Use Roth IRA as emergency fund. First $5500 goes there, rest into taxable savings. I don't know how common it is for firms to let new employees into the 401(k) right off the bat, but once eligible I'd put money in there after contributing to Roth and building a separate small taxable emergency fund.

[Anonymous User]

My firm lets me invest in a Roth 401(k) right off the bat. My thinking is that after building up my rainy day fund, I should plow what I can into my Roth 401(k) to take advantage of my low tax rates this year, but I was curious if others were doing the same.

[Tiago Splitter]

My firm lets me invest in a Roth 401(k) right off the bat. My thinking is that after building up my rainy day fund, I should plow what I can into my Roth 401(k) to take advantage of my low tax rates this year, but I was curious if others were doing the same.

I'd go with the Roth IRA first just because you'll have way more investment options and much easier access to the money.

[Anonymous User]

My firm lets me invest in a Roth 401(k) right off the bat. My thinking is that after building up my rainy day fund, I should plow what I can into my Roth 401(k) to take advantage of my low tax rates this year, but I was curious if others were doing the same.

I'd go with the Roth IRA first just because you'll have way more investment options and much easier access to the money.

Do you know the significant differences between the two? I get that the tax situation is the same (contributions are taxes, distributions are not), but it sounds like withdrawals from Roth IRA are generally always non-taxable, whereas non-qualified withdrawals from a Roth 401(k) are taxable to the extent of the earnings (and they pro-rate the earnings and basis). Is that right-ish?

[Tiago Splitter]

My firm lets me invest in a Roth 401(k) right off the bat. My thinking is that after building up my rainy day fund, I should plow what I can into my Roth 401(k) to take advantage of my low tax rates this year, but I was curious if others were doing the same.

I'd go with the Roth IRA first just because you'll have way more investment options and much easier access to the money.

Do you know the significant differences between the two? I get that the tax situation is the same (contributions are taxes, distributions are not), but it sounds like withdrawals from Roth IRA are generally always non-taxable, whereas non-qualified withdrawals from a Roth 401(k) are taxable to the extent of the earnings (and they pro-rate the earnings and basis). Is that right-ish?

Distributions are pro-rated from a 401k where from an IRA the contributions come first and then the earnings. Roth IRA earnings are subject to tax and penalty if you withdraw early but taking out the contributions first does give you a bit more wiggle room. But if you're planning for retirement that shouldn't make much difference; after 59.5 everything comes out tax-free.

There are also some minor differences in penalty exceptions (no penalty for early distribution for education from an IRA, but penalty if from a 401k) but these aren't worth making big decisions over. Again, the big advantage of the IRA is that you aren't limited by your employers investment selections and can access the money at any time should the need arise.