February 2018 Update: Roth & Traditional IRA + 401(k) (Vanguard + Principal) – Update #9
As we step into February 2018, it’s an opportune moment to review the landscape of retirement savings options, specifically focusing on Roth and Traditional IRAs, as well as 401(k) plans managed by Vanguard and Principal. This update will provide insights into the performance, benefits, and considerations for each account type as well as some important changes affecting retirement savings.
Overview of Retirement Accounts
Roth vs. Traditional IRA
Roth IRA:
- Contributions: Made with after-tax dollars.
- Withdrawals: Tax-free in retirement if certain conditions are met.
- Income Limits: Eligibility to contribute phases out at higher income levels.
- Flexibility: Contributions can be withdrawn at any time without penalties.
Traditional IRA:
- Contributions: Made with pre-tax dollars, potentially lowering taxable income for the year.
- Withdrawals: Taxed as ordinary income during retirement.
- Age Limit: There was no longer an age limit for making contributions as of 2018.
- Required Minimum Distributions (RMDs): Must begin at age 70½.
401(k) Plans
Vanguard 401(k):
- Known for low fees and a range of investment options.
- Offers various funds including index funds, which have a history of outperforming actively managed funds over the long term.
- Employee matching contributions can significantly boost retirement savings.
- Automatic rebalancing options aid in fund management.
Principal 401(k):
- Provides a range of investment choices, paired with personalized retirement planning options.
- Includes educational resources to help participants make informed decisions about their investments.
- Offers tools like retirement income planners to project future income needs.
Market Performance in February 2018
February 2018 saw significant market fluctuations, with increased volatility primarily due to concerns over inflation and potential interest rate hikes by the Federal Reserve. As a result, many investors contemplated reassessing their asset allocations in both their IRAs and 401(k) plans.
Key Takeaways:
- Equity Market: The S&P 500 experienced a tumultuous month, which prompted some to reconsider their risk tolerance.
- Fixed Income Investments: Treasury yields rose, which can impact bond investments in both IRAs and 401(k) plans.
- Overall Strategy: Maintaining a well-diversified portfolio remained crucial.
Saving Strategies
Maximize Contributions
It’s imperative to maximize contributions to take full advantage of tax benefits and compounding growth. As of 2018, the contribution limits are as follows:
- Roth and Traditional IRA: $5,500 (or $6,500 for those aged 50 and older).
- 401(k): $18,500 (or $24,500 for those aged 50 and older).
Review Investment Choices
With market volatility, reviewing investment choices within your retirement accounts is necessary. Ensure that your portfolio aligns with your retirement goals and risk tolerance. Both Vanguard and Principal offer tools to assess and make adjustments as needed.
Utilize Employer Match
Always aim to contribute enough to your 401(k) to receive the full employer match, as this is essentially free money that can significantly boost retirement savings.
Conclusion
As we navigate through 2018, both Roth and Traditional IRAs along with 401(k) plans from providers like Vanguard and Principal present valuable opportunities for retirement savings. By understanding the benefits and risks associated with these accounts, investors can make informed decisions that align with their long-term financial goals. Regularly reviewing and adjusting contributions, investment choices, and strategies will be critical to achieving a secure and comfortable retirement.
LEARN MORE ABOUT: IRA Accounts
INVESTING IN A GOLD IRA: Gold IRA Account
INVESTING IN A SILVER IRA: Silver IRA Account
REVEALED: Best Gold Backed IRA
Do you still have your principal account? How is your experience with this company principal? Do you think they are good?
Which Ira is best ? I don’t wanna pay tax when I decide to use money for car or a house?
Is principal a trustworthy company? Seeing a lot of bad reviews
why have money spread out when it will compound and grow faster together in 1 account ?
Wondering why you decided to go with the Target Date Fund rather than your own personal selection of ETFs. I’ve had a Vanguard Roth IRA for the last two years and have 5 different ETFs and 1 bond etf. Would you consider selling these off and simply throwing it all into a target date fund? Thanks (ps: currently researching Series I Bonds as well lol)
Chiming in in something you said: you cannot pull earnings out of a Roth IRA tax free prior to retirement but you can pull your contribution tax free after 5 years. If you take the earnings early (even after 5 years) you will have to pay a penalty. There are exceptions, but the general rule. Here's a reference https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/withdrawal_rules
Looking forward to seeing updates throughout the months/years to see how much your portfolio grows, great work!
are you involved with the real estate platform Fundrise? Ive been looking into it recently
You have a great attitude – "The market is a bit down right now, I guess I'll put in some extra hours this week" 😉
Tax diversification like you mentioned is a good thing. Build both your taxable and non-taxable accounts and assume at the rate you are going now, you will be in a higher tax bracket in the future (because you are pulling out more money of course!). If you have both types of accounts to pull from, you can control your taxable income to minimize tax burden after retirement.
From what I have read it ends up being about the same if you do traditional or Roth 401k. If you do pretax that’s more money compounding in the market for you. After tax less money to compound but no taxes. Ends up being about the same.