Investment options when you don't have a 401k?

January 24, 2007 11:37 AM

My new job is a start-up, and they don't offer 401k. What are my investment options? I already have a Roth IRA to which I am contributing the max per year.
posted by xmutex to work & money (8 comments total)

Your Roth IRA contributions are not tax deductible, whereas contributions to a 401K or to a normal IRA are both tax deductible.

Talk to your financial institution managing your Roth IRA, and they can give you more info on adding an additional, traditional IRA to your portfolio. Then shop around to see where you get the best deal (i.e. amount of fees each year) and which place has the type of funds available that you would like to invest in.

Don't forget to diversify!
posted by gemmy at 11:43 AM on January 24, 2007

Your Roth IRA contributions are not tax deductible, whereas contributions to a 401K or to a normal IRA are both tax deductible.

Correct, but the interest you accrue never gets taxed while it's in the account, which is what makes it so awesome for younger investors.
posted by LionIndex at 12:00 PM on January 24, 2007

Of course if you buy a stock and just don't sell it you never pay taxes except on dividends @15% and if you sell it after a year you only pay long term capital gains (15%). Whereas if you put the same thing into a ira or 401 and then withdrawl you pay a hefty tax penalty (@ ordinary income). So what I wonder is does it really make sense to do the 401(K) or are you better off just doing a regular purchase of a basket of mutual funds or stocks. I'm thinking of dropping my 401(K) has anyone else done this?
posted by humanfont at 12:10 PM on January 24, 2007

You can't add a traditional IRA without reducing the amount you put in the Roth, of course.

If you're concerned with reducing your taxes for bookkeeping purposes, tax-deferred annuities (usually sold through insurance companies) and municipal bonds generally offer significant tax benefits. They also generally offer fixed yields lower than what you could get elsewhere, by about as much as the tax would be.

Another way to get a tax benefit is to purchase a primary home that you live in. The interest on the mortgage payments for that home is tax deductible.

Pester your employer to start a 401(k) plan with a match. It's not that much of an administrative hassle and because of the payroll tax benefits it allows them to pay their employees effectively more with the same amount of cost to them.
posted by ikkyu2 at 12:11 PM on January 24, 2007

A Tax defered annuity provides a sheltered vehicle for the accumulation of capital. The contribution limits are very, very high, earnings are tax free while in the annuity. These are best used when you've exhausted all other options such as those noted above, but still have discretionary income for investment purposes. Its best to speak with a professional before moving any money into such a vehicle
posted by Mutant at 12:12 PM on January 24, 2007

So what I wonder is does it really make sense to do the 401(K) or are you better off just doing a regular purchase of a basket of mutual funds or stocks.

Well, that way you pay TWO taxes: once on the income you used to buy the security, and then the capital gains on top of that. So, um, no, don't drop the 401(k).
posted by kindall at 12:58 PM on January 24, 2007

humanfront, you're missing the real benefit to tax-deferred investing: the amount you would pay otherwise in dividend and capital-gains taxes stays invested, and you get to keep the gains (minus taxes, eventually) from what otherwise would have been tax payments. So, for example, a $1 re-invested dividend would end up as $.85 in equity after taxes outside a 401(k), but the full $1 would be reinvested inside a 401(k).

It's true that you can choose investments that will have no/minimal dividends until you're ready to cash in...but you're betting that you can and will stay in that specific investment until you're ready to sell and that long-term capital gains rates will be the same/lower that ordinary income rates at that time.
posted by backupjesus at 2:02 PM on January 24, 2007

Re: tax deferred annuity, be careful. Many of these have very high fees attached, especially ones run by insurance companies. I think Vanguard might sell one of these; check with them first, as they almost always have low fees.
posted by Mid at 7:20 PM on January 24, 2007