Guys, lend me your wisdom. My current job doesn't offer 401k but are in the process of adding it. I'm at the age that I need to start looking toward future investments. I know nothing about IRA's or CD's. Can you tell me which is better and why.
An IRA is a type of account (individual retirement account) while a CD is a specific investment (certificate of deposit). $ you put into the 401k will be tax deductible and most employers match up to an amount, so its usually a great deal. Once the $ are in that account, you can invest in various things - stocks, bonds, cds, or just leave it in a money market. If you're young, put it an a few mutual funds and keep adding $ each paycheck.
What are the advantage of going with a traditional IRA and 401K versus Roth 401K? Everything I've read and studied make it seem like Roths are no brainers if they are offered by an employer.
Wikipedia has a good matrix breaking it down: http://en.wikipedia.org/wiki/401%28k%29_IRA_matrix Essentially, if you're under the age of 40, Roth is a no-brainer for the long term tax benefits. You don't get the tax break up front on the contribution like you would with a 401(k), but you don't pay taxes on all the compound interest that contribution earns. You do pay taxes on those earnings if you go the traditional 401(k) route. If you're closer to retirement age, it might not make sense to go the Roth route.
You need to match the investment with time horizon of your financial goal. Retirement - 30 years out - use Roth IRA or 401K Down payment for car/house - 2 years out - CD
Actually, if you can afford the tax hit, transferring a traditional IRA into a Roth is always beneficial, regardless of age. As my F.A. used to say, "you can pay the taxes on the seed or the weed."
So guys, if I'm trying to play basketball, should I use a gym or a Spalding? What would be the best way and why? A roth is better if you are young and in a very low tax bracket. You pay your ordinary income tax up front. Then it grows tax free. It's pretty sweet. When you start to climb your tax brackets, it wouldn't be a bad idea start doing a roth and a traditional, to alleviate those taxes a little. Generally, roth when you're young. It's neat but kind of depressing because you aren't touching that money til 59.5.
