I have looked all over the internet and this sight and still haven't found a clear answer to my question so I thought I would put it here.

I am finally out of school and while I am trying to pay off my massive student loans I am also focusing on my retirement goals. I am currently maxing out my 401k where my company matches up to 8% of my salary. I was wondering since I have this going should I look into starting an IRA. I have read all the criteria for the Roth and I don't think I can open a Roth due to income. So my question is should I start a traditional IRA or simply maintain those possible contributions in liquid assets?

Good Golly, you just got out of school and you're making more than $125,000??? You're one lucky duck

I need more details.

1) How old are you?
2) What are your loan balances/interest rates?
3) What's your current tax rate?

I can give you more appropriate advice if I know these things.

If you want to open an IRA, choose a low-cost broker. Don't be fooled. Expense ratios matter a great deal.

I'd lean towards paying your loans off heavily, especially if the interest rate is above 4%. If you're young, focus on this and tone down the retirement contributions. Contribute to the 401k up to your employer's match, and put the rest toward your loans. You'll have a much clearer path when you shed the debt.

I am pretty lucky, but I put in the years to get it.

1. I am freshly 27 years old
2. My loan balance is ~130,000, with a 6.55% interest
3. Tax rate I am in the 28% tax bracket??

As of right now I am scheduled to pay off my loans in approximately six years. I am going to max a one time payment of 20k next month. While making a $1800 per month and an additional $2000 payment each year (from tax return or Christmas Bonus funds).

Should I only contribute to the match in the 401k and not try to contribute the max? I have it mainly going into a retirement year plan with a small contingent in guaranteed interest (just to ease my mind).

You are in an enviable position my friend.

Let me ask you something; if you max out your 401k, can you defer enough income to get your AGI below $125k? If so, I'd suggest maxing out your 401k and opening a Roth IRA while you still can. This would theoretically reduce your available cash for the year by only around $20k, so really, unless you have a very rich lifestyle, you can plug away on those loans, say $60k/year, with relative ease. That's what I would do.

One last thing: guaranteed interest?? What, 1% interest? Something tells me you're being a little bit too conservative with your investment allocation. At 27 years old, you should be a little more hungry for risk. I'd recommend a total stock market index or a target date retirement fund unless you really know what you're doing. Go with a nicely diversified portfolio with the lowest possible expense ratio - you'll thank yourself later! Retirement investment balances go up and down in the short term, and the hardest thing about investing is riding out those rough seas. But it's worth it in the long run.

I think I can get my AGI below 125k. If I can then I could open a Roth IRA? If my AGI eventually goes above 125k will I be able to keep the Roth or does it have to change to a traditional IRA.

Yes! If you defer taxable income until you are below $125k, you can start a Roth. If your AGI ever gets above $125, you still keep your Roth, tax free growth forever. I'd jump on it while you still can.

Thanks for all the help. Where would you suggest opening a Roth? Also, what allocations should I make when I open it.

Absolutely open a Roth with Vanguard. They have some of the lowest expense ratios in the business.

As for allocation, you are still quite young so go ahead and put most of your money in stocks. There are very good mutual funds available through vanguard. I'd suggest the Total Stock Market Index, which has a little piece of basically every stock available in the US market, or a Target Date Retirement Fund.

Simplicity is essential! Don't overcomplicate your allocations. Keep it simple, keep it cheap, and focus on long-term growth, rather than what appears to be "hot" in the market right now.

If you want a bit more flavor to your investments, there are also foreign stock index funds, as well as bond funds (though I'd recommend staying away from the latter considering the current historic lows in interest rates).

If you have MORE extra money, and you'd like to invest in additional accounts but avoid taxes, I highly recommend you look into Municipal Bond funds. If you invest in Municipal Bond Funds that consist of bonds from the state in which you reside, you do not pay taxes on ANY of your returns, state or federal. This is a great deal, offers a relatively safe cushion, and is very popular among high-income people like yourself.

Thank you so much flinch. I will look into Vanguard today. I may look at the Municipal Bonds a litte later on. I really can't thank you enough for all the help.

Always a pleasure to help! Let me know how it goes.

Okay, time for a little clarity here.

First, be aware that you can't willy-nilly pop $5K into a Roth IRA just because you earn less than $125K. Roth IRA contribution limits phase out between $110,001 and $125,000. So if you're earning more than $110K, you have to contribute less than $5K.

Second income caps are irrelevant this year. You can get into a Roth IRA even if you don't get in under the $125K income cap. You just throw the money into a traditional IRA and immediately covert to it to a Roth IRA. Unless the law changes, this is the last year you can do this. Vanguard can help you with this and give you more detailed instructions.

As for what you should invest in, flinch13 has it right but rather than taking his word for it (or mine, for that matter) go to Transparent Investing and get yourself an education so that you understand why you're putting your money into stocks at this point in your life and why/when that should change as you get older.

VinTek is right! By all means don't take what I say as the truth automatically. Do some research and get educated before making big financial decisions.

One great book is A Random Walk Down Wall St. I highly recommend this for someone who is just starting out with investing.

Thanks VinTek. I will talk with Vanguard. Also, thanks for the tip on the Transparent Investing. I was planning to do some research before investing, just getting your opinions. Now the traditional vs roth maybe a little muddy to me, but I am sure Vanguard will help me out with that.

Hi Korben,

I'll give you the thumbnail version of the main difference between the Traditional IRA and Roth IRA.

In the TIRA, you get a tax deduction for what you contribute, your investments grow tax free, and when you pull the money out, you pay taxes on it.

In the RIRA, you put money that's already been taxed into the account, but when you pull it out, it's tax free.

Lots of other nuances, but that's the difference that most people focus on. The thing is, if you make enough money, you're phased out some of the benefits of each. For a RIRA, the phaseout of what you can contribute (if you're under 50 and single) is from $110,001 and $125.000. For a TIRA, there's no income cap limiting what you can contribute but as you earn more, the amount of that contribution that you can deduct limited if you are covered by a retirement plan at work.

For years, I was pretty much ineligible for contributing to a RIRA and phased out of getting a deduction for a TIRA. So I made contributions to a non-deductable TIRA instead (tax-free growth is better than nothing, even if you do have to pay taxes on the growth on your way out).

Then in 2010 (and this situation is allowable through this year), we were allowed to convert TIRAs in to RIRAs. The catch was that you had to pay back taxes what you'd deducted in previous years and also pay taxes on the growth in those years. So what you can do pay into a non-deductable TIRA and convert immediately to a RIRA. When I did that this year, I only had to pay taxes of a few dollars because it took 2 working days to do the conversion and my $5K had grown in value during those 2 days, so I had to pay taxes on that small amount of growth.

Hope that helps. Vanguard can definitely explain to you in greater detail.

True. But you could likely run into low balance fees or severe constraints on investments. Let's say you manage to contribute to the Roth to the maximum for 5 years. You'll have $15000. Now, even Vanguard will charge you extra fees for each fund under about $10k so you'll either be forced to stick with one fund or you'll effectively pay higher fees. It's not a lot of money but it could effect the decision.

My wife and I both have pretty good salaries and have never been able to make much in the way of deductible contributions to IRAs. We made nondeductible contributions years ago. Now what we have is a collection of relatively small accounts that we have to keep track of but constitute about 5% or less of our worth. But they create something like 50% of the headache at tax time.

Roth IRAs are a great thing. But if you expect your salary to keep going up so that you can only contribute for a year or two then you might want to research things more. Also realize that since Roths are funded with money you have already paid tax on, they are less attractive if you are in a high tax bracket now.