I guess the money that goes into these account (Roth, 401) generates a very high interest rate, I mean, how else does 10G/year become a couple millions years and years later.

Say, if I am saving for a large lump sum payment (like a house downpay, for example), 401K would be the way to go because Roth has a lower cap, and bank savings account does not generate that kind of interest rate.

Roth = Stock
401K= Mutual fund

Is this right?

 

There is no standard interest rate on these products. Your investment options are many and varied, and your return will depend on that. The argument for pretax investments such as a 401K or regular IRA is that taxes will be due after you retire when your tax bracket will probably be lower. The Roth uses after tax dollars to invest with withdrawals and gains being tax free in the future. You just have to decide what you want to do: Shelter your income now or avoid all taxes at some point in the future.

 

The benefit of putting your money into the 401k now is that you can afford to be a little more aggresive in the allocation of the mutual funds. I don't know how old you are so that would make a difference.

Since I have more then 40 years until I retire, I can afford to have more aggressive choices in the mutual funds because the likelyhood of them going bad for that long a time is low while the potential payout is higher.

If you are closer to retirement then you want to choose a less aggressive fund as you don't want to risk your money as you will need it sooner.

As for saving for a large lump sum item such as as a house, I can't see that either of these are the way to go. By putting your money into a 401k program you are effectively saying that you won't need it until you retire. In the event that you do take it out before retirement you will pay a hefty tax penelty. Now you can take out a loan against your vested amount, however I don't think that interest rates are high on that. In fact, you may need to pay off that loan before you can contribute again. ( I don't know about that, but I think that is what I remember being told). The idea for being able to use the money that you are saving for retirement is that you may have some type of hardship that you need cash to overcome.

 

I am at the first year of legally-drinking-in-public ..... which is great by the way, I love to show my ID.

I've heard of this before, borrowing out of the 401K as a loan and pay yourself the interests; the interest, in the meantime, becomes contributions. I'll need to look into this, as it would seriously affect the snow ball effect in the long run. I should get a wife and maybe a kid before I take it out for the house to put myself in a cheaper tax bracket; it hurts when I look at my check as a single man.

Do you guys know if this (above scenario) applies to the invested dollars in the Roth account? Since it won't be taxed upon withdrawal (certain age?), I am sure there must be some kind of penalty charge, whatever it is, shouldn't it be less than what "tax percentage" sucks out.

So, Roth = stocks, 401K = mutual.

 

[QUOTE]Originally posted by mstw
[B]I am at the first year of legally-drinking-in-public ..... which is great by the way, I love to show my ID.

I've heard of this before, borrowing out of the 401K as a loan and pay yourself the interests; the interest, in the meantime, becomes contributions.

 

[QUOTE]Originally posted by boka
[B]

I believe you are allowed to withdrawl from your 401k without penalty for 2 reason:

 

[QUOTE]Originally posted by mstw
[B]
Sometimes I wonder if my car cost me a million when I retired.
Oh well, I only live once

 

[QUOTE]Originally posted by boka
[B]

Well....

 

If you're 21 and you're going to retire at 65...

Total saved: $3,664,585

Starting with $0 and depositing $10,500 annually over 34 years (at a rate of return 11% compounded monthly), you will save $3,664,585.
Initial balance: $0
Total deposits: $357,000
Total interest earned: $3,307,585
Total taxes paid: $0
Total Saved: $3,664,585