Mutual Fund Newbie :(

Hey guys, I've followed with enthusiasm all the great advice you've given in the forums, I was wondering perhaps if someone could help me with my particular situation?

I'm 24 years of age, and currently interning at a Private Equity firm located in Midtown. As you can imagine, I don't get paid terribly much, however I have been granted benefits, included 401k options under Wells Fargo.

In a nutshell, I make about $10/hr. I have the option to allocate a percentage of my funds (up to 100% if I wish) each pay period into the 401k. I have both the pre-tax and Roth IRA options available to me, but I don't know which would be best to choose. Also, there is currently no employer matching.

Now, I plan to stick around if they hire me full-time, at which point I imagine they'll pay be ~$50k a year, which would be a nice jump from the roughly $13.5k I make now. However, I couldn't say how much more I'd be putting into the fund down the road... who knows what will transpire, you know?

Can anyone offer any advice as to which option, pre-tax or Roth IRA, I should consider?

Any help is greatly appreciated. Thanks for your time guys, and take care.

Very Best Regards,
360 :cool:

If this is the sum total of your annual income, then the Roth is probably a no-brainer. You'd be getting essentially no up front tax advantage in the pre-tax and you'd owe taxes when you take it out down the line. With the Roth, you'd probably pay no little to no taxes up front and have it all tax free a withdrawal.

Yea.. thats what my 'gut' tells me.. I just don't know why everyone is hammering me to put it all in the pre-tax, even the 'rents! :( Roth just seems to make more sense.

If you don't need a take break today the roth would be a better deal.

The Roth is better deal for you now. As your income increases you may need to use the regular 401k to maintain eligibility for other tax credits. For example right now you are probably eligible for the earned income tax credit, as your income increases (you have around 2k of income left before you cap out), you would want to use the deductable 401k to maintain eligibility for the credit.

I would put 15% of income into 401k plan for retirement. I realize at 13k gross this appears to be A LOT of money, but you need to create the savings habit. Then when you make more the 15% habit is already there and you won't even realize it.

My general advice is save 20% of gross.
Put 15% of this into a retirement account.
Put 5% of this into a savings account for emergencies. Then live off 80% of gross for taxes and expenses.

^ wonderful advice jim, thank you so much! yea i have the fund set for 15% to be allocated to the roth currently, and then saving an additional 5%. thanks guys!

The biggest disadvantage of a Traditional IRA is that if you are a great saver, and your IRA distributions end up becoming higher than the income in your working years, then you could end up spending more in taxes during retirement than the money you saved in taxes from your contributions.