kriskos4 said:I did a search and there are a lot of answers but it seemed to create more questions. Apparently you can contribute/start a Roth IRA up until tax day 2007 to be effective for 2006. Is there a benefit to this since Roth contributions aren't income tax free?

Here is my situation, perhaps I can get some advice on the best IRA or retirement program for me. I'm a 38yo married male with two kids 6 and 7. I make about $140,000 per year gross. I'm fairly debt free except for a mortgage and a $20,000 loan against my 401k (5% apr). I'm paying $160 per month on the loan.

I have about $20,000 from a home I just sold. I was planning to pay off the 401k loan but perhaps some kind of IRA is a better move. I was thinking a Roth for my wife and one for me with max contributions in 2006 and then again in 2007. As I understand it, this would be $16,000. I could also open an education IRA for my kids but their college is being covered by my father. I guess I could call my daughter's IRA educational but really use it for her wedding (or couldn't I?).

Is this the way to go? I would be fairly aggressive with the IRAs (mainly ETFs) since this money is icing on the cake. My retirement and 401k will be more than enough to maintain my spartan lifestyle. Thanks for any advice.

You answered your own question as to the advantage of making a 2006 contribution. You can then make a 2007 contribution, ....twice as much.

As for the rest, pay off the 401k loan before something goes wrong. If for ANY reason you're separated from that job the loan is likely due in full and if you can't pay it, it will be treated as a withdrawal, subject to substantial tax and penalty. It's too risky.

Treffen said:You answered your own question as to the advantage of making a 2006 contribution. You can then make a 2007 contribution, ....twice as much.

As for the rest, pay off the 401k loan before something goes wrong. If for ANY reason you're separated from that job the loan is likely due in full and if you can't pay it, it will be treated as a withdrawal, subject to substantial tax and penalty. It's too risky.

Okay, so there are no tax advantages to contributing money to a 2006 Roth in 2007?

Thanks for the advice regarding the 401k loan but I won't be changing jobs for any reason...I can retire in 9 years. If something did happen I would have to sell a car or likely even my house. I look at it as nearly free money that I'm paying to myself anyway. I'd like to be agressive in some ETF's...see if I can get a return far greater than 5%.

Treffen said:As for the rest, pay off the 401k loan before something goes wrong. If for ANY reason you're separated from that job the loan is likely due in full and if you can't pay it, it will be treated as a withdrawal, subject to substantial tax and penalty. It's too risky.

Just out of base emotional fear? You know nothing of OP's resources or reasons for taking that loan. 401k loans can be very handy tools used in the correct circumstances. While the great unwashed usually don't that's no reason to run and hide at the mere mention of the tool. 'Acckk, the sky may fall' is financial reasoning equal to 'I'll take a 401k loan because I deserve a trip to Barbados'.

kriskos4 said: . . . I look at it as nearly free money that I'm paying to myself anyway.

Kriskos 4: Remember interest paid on 401(k)loans is double taxed. You pay the interest with after tax dollars and then you pay tax again on those same dollars when you take them back as a distribution from your 401(k).

Example. Suppose you have 1000 in your 401(k). You borrow 100 for a year. After a year you pay back the 100 plus 5 dollars of interest. You do not get a deduction for the interest paid! You now retire and pay tax on 1005. (Notice that I haven't assumed anything about what the 401(k) might EARN. Whatever it earns you will pay tax on when you retire. That's not the issue -- earnings are taxed once. I'm talking only about the 5 dollars you paid in interest. This will be taxed twice)

So this is not free money. The tax on the interest (albeit deferred until retirement) is what you pay for the freedom to consume or, as you propose, the freedom to invest outside of your 401(k).

kriskos4 said: As one drops below the 'best 4' mark, I'll sell it and buy the new top ETF. I know it's not foolproof but a couple of friends have had good luck with this strategy.

This is a very bad idea (note all the red.) To outperform the market you must buy something before its price goes up, not after...stick to some broad index ETFs and just hold them. Don't try any schemes to try to beat the market, especially when you're close to retirement.

SuperMxyz said:kriskos4 said: As one drops below the 'best 4' mark, I'll sell it and buy the new top ETF. I know it's not foolproof but a couple of friends have had good luck with this strategy.

This is a very bad idea (note all the red.) To outperform the market you must buy something before its price goes up, not after...stick to some broad index ETFs and just hold them. Don't try any schemes to try to beat the market, especially when you're close to retirement.

Perhaps it goes against the 'book' but friends have had very good luck with the strategy. One guy added a fund because it did well in October...lo and behold the fund was up 25% in November and December and he got to enjoy all those gains. I think the fund was up around 15% for the year...the strategy allowed my buddy to enjoy the gains without the dips. I think the problem is the gains have to be impressive enough to offset the trading expenses.

I would do the following in this order:

1) Pay off the loan you have against your 401K (avoid the double taxation mentioned above)
2) Max out your 401K before tax contributions
3) Put remainder in a Roth IRA

Without the loan constraints, I like to make my Roth contributions early in the year. So for example, I would like to make my 2007 contribution right now! This adds another year for which I money is generating tax free earnings. My only thing to watch out is the income limits - i.e. if you know that your income will exceed the Roth cutoff limits, then it wouldn't sense to contribute so early and deal with all the hassles of fixing it later.

I am with othes - pay off the loan due to the double taxation. However, if paying off the loan would prevent you from making 2006 Roth contributions, then I personally would pay off part of the loan and make the 2006 Roth contribution [as long as I had a good plan to pay off the loan in some reasonable time frame].

Great advice...I think I'm considering a combination of two Roths and paying down the 401k loan. Hell, I might even sell a Z3 that I never drive and pay off the loan altogether...you guys have got me thinking.

I have a question that may sound dumb to most. A buddy seems to think that Roth contributions can be withdrawn at any time with no penalty but that doesn't sound logical to me since it's an IRA. He thinks earnings can't be withdrawn but principal can. Thanks again.