Should an amatuer investor who's just starting out begin with an IRA or a 401(k) plan? Any ideas or sites I should read? Thanks!
If you can afford it you should probably contribute to both (which you are allowed to do). However, if the funds you can invest are limited the 401(k) is usually the better deal as most 401(k) plans include an employer matching contribution. The amount of the match usually varies from a percent of your contribution to a full dollar for dollar match (I don't believe they can match your contribution by more than 100%). This gives you a big boost in savings as your contributions result in additional contributions from the employer at no cost to you. Of course both your contribution and the employer's contribution generate investment income for your account. So it is best to take the 401(k) if a choice has to be made.
With an IRA plan you can open the account at any time, and can invest in bank certificates of deposit, mutual funds, bonds or stocks. Many banks and investment companies will allow you to open an account for $50 or less provided you agree to set up periodic additions (usually monthly or quarterly) taken automatically from your checking account. The minimum amount of the periodic payments is usually $50 but many companies will allow less. The maximum that you can have periodically transferred would be one that is such that your total additions do not exceed $4,000 in 2007 or $5,000 per year starting in 2008. For tax purposes you can choose from two types of IRA. The first is a traditional IRA in which you are allowed to deduct the amount of your contributions from your gross income for Federal Income Tax purposes thereby lowering your current Federal Income tax liability. However, when you reach age fifty-nine and a half and can begin withdrawing money from the account you will have to pay income taxes on the amounts withdrawn each year. The other is the Roth IRA in which you don't get a deduction for your contributions but when you retire and begin withdrawing the funds you will not have to pay income taxes on any of the money withdrawn.
