Fidelity Investor’s Weekly is a weekly personal finance online newsletter, much like what is available on CNN Money or MSN MoneyCentral. It’s supposed to be for Fidelity members (I am one) but it looks publicly accessible to me! Although many of the articles have a Fidelity slant – you won’t find them recommending a Vanguard fund for sure – there are some good articles from time to time, such as this one: Ten Myths of IRA Investing.
As April 15th approaches, many of the people are still on the fence regarding starting or contributing to an IRA. A lot of times this is simply due to confusion of the rules regarding it, as I hear wrong things being passed around the water cooler all the time. I’ve already contributed to my wife and I’s IRAs for 2004 and 2005, but this one still struck a cord:
Myth #6: Skipping a year of IRA contributions won’t make much of a dent in my future savings
Nearly one-third of American retirement savers share this false belief. Assuming the same hypothetical assumptions mentioned above, delaying a $3,000 contribution just one year — from age 25 to age 26 for example — could mean nearly $100,000 less at retirement.
I would say 80-90% of my friends have not started an IRA. Many of them are still in school, and many of the others figure the little they put in a 401k is enough. I can’t stress enough that time is on your side! Compound interest is a powerful thing, I encourage everyone to at least better understand what IRAs have to offer. And be quick! April 15th is the deadline for 2004 contributions, even if you file for a tax return extension.
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Is there a difference between starting a new IRA account vs. just contributing more to my existing 401(k)? In the end, the 401(k) contribution is pre-tax dollars anyways right? Or does the difference come into play when you retire and withdraw the funds?
For a Traditional IRA vs. 401k, they have many similar characteristics such as tax-deductibility and tax-deferral until you withdraw. Some people don’t have access to a 401k so IRAs are the only choice. But, if you have a 401k at work, your ability to contribute to an IRA may be reduced. In addition, many 401k have a limited number of investments to choose from, whereas in an IRA you can basically buy anyting from stocks to bonds to real estate.
Roth IRAs are a different animal, as your contribution are taxed on the way in, and not on the way out. I did a quick Roth vs. Traditional calculation in this previous entry. Your situation may be different, but I would definitely consider a Roth IRA if you have more money after contributing up to your company’s match (if any). Many times Roths are the way to go vs. putting more into 401k.
Good post. Even on my meager salary I’ve made sure to max out my Roth the last two years.