What's considered to be a good debt-to-income (DTI) ratio?

By Jean Folger

A debt-to-income ratio (DTI) is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, including mortgage lenders, use the debt-to-income ratio as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed.

To calculate your debt-to-income ratio, add up your total recurring monthly debt (such as mortgage, student loans, auto loans, child support and credit card payments) and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out). For example, assume you pay $1,200 for your mortgage, $400 for your car and $400 for the rest of your debts each month. Your monthly debt payments would be $2,000 ($1,200 + $400 + $400 = $2,000). If your gross income for the month is $6,000, your debt-to-income ratio would be 33% ($2,000 / $6,000 = 0.33). If your gross income for the month was lower, say $5,000, your debt-to-income ratio would be 40% ($2,000 / $5,000 = 0.4).

A low debt-to-income ratio demonstrates a good balance between debt and income. Lenders like the number to be low because, according to studies of mortgage loans, borrowers with a lower debt-to-income ratio are more likely to successfully manage monthly debt payments. On the contrary, a high debt-to-income ratio signals that you may have too much debt for the amount of income you have, and lenders view this as a signal that you would be unable to take on any additional debt. In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage. A debt-to-income ratio smaller than 36%, however, is preferable, with no more than 28% of that debt going towards servicing your mortgage. In general, the lower the number, the better the chance you will be able to get the loan or line of credit you want.

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IRA vs. 401(k): Where Should You Invest Your Money?

DAYANA YOCHIM August 12, 2016

What’ll it be: a 401(k) or IRA? Given the choice between putting money in an employer-sponsored retirement account such as a 401(k) or a self-directed savings vehicle like a Roth or traditional IRA, the ideal answer is “all of the above.”

Not everyone can afford to divert that much paycheck into retirement savings accounts. Maxing out a 401(k) and an individual retirement account up to the 2017 IRS contribution limits for each would mean earmarking $23,500 — or up to $30,500 for those 50 and older — for your future self. (If you can swing it, your future self will be really grateful. So grateful they’ll probably come back and tell your present-day self in person as soon as someone invents time travel.)

Until — or even if — contributing to “all of the above” is an option, maximize your retirement savings dollars according to this general 401(k) versus IRA pecking order:

1. If your employer offers any company match, first fund your 401(k) up to the point where you get the maximum matching dollars.
2. Direct your next investing dollars to an IRA — a traditional IRA for the upfront tax deduction or a Roth IRA to collect a tax break in retirement when you start making withdrawals.
3. After maxing out an IRA, return to your 401(k) plan because it offers a higher current-year income tax break.
4. If your company does not offer a 401(k) match, skip it at first and max out an IRA, then …
5. After contributing to an IRA up to the limit the IRS allows, based on your income, filing status and other factors, fund your 401(k) for the pre-tax benefit it offers.

And now, here’s all of that in more detail.

Short on time? Jump to our comparison tables to see how the accounts differ.
How to max out your retirement accounts in 2017

The IRS’ maximum allowable contributions for 2017 are:

If you can save enough to max out both your 401(k) and an IRA in 2016, your name deserves to be engraved on a Retirement Saver of the Year plaque. (If you qualify for both a Roth and a traditional IRA, you can split the difference. The IRS allows you to contribute to both a Roth and traditional IRA in a single tax year as long as your total contribution does not exceed the $5,500 ceiling for those under age 50 and $6,500 for savers 50 and up.)

As you rev up your retirement savings engine, let’s look at a detailed IRA versus 401(k) investing road map to guide the decision about which type of retirement account to choose, in what order and to what extent you should contribute.

1. If your employer offers any company match, start by funding your 401(k)

Check your employee benefits handbook. If you see that your employer matches any portion of the money you contribute to the company 401(k) plan, do not pass go without stopping here first to collect your free money. (If your company does not offer any matching funds, proceed directly to step four. In most cases where a company does not kick in any free money, it’s better to fund an IRA before contributing to a 401(k).)

A company matching program is one of the biggest benefits of a 401(k). It means that your employer contributes money to your account based on the amount of money you save, up to a limit. A common arrangement is for an employer to match the amount you save dollar for dollar up to the first 6% of your gross earnings. (Use our 401(k) calculator to help plan for retirement.)

If you earn $50,000 and contribute $3,000 (6% of your gross salary) to your 401(k), your employer will also add $3,000 to your account. Another way some companies determine matching contributions is on a percentage basis, with an employer matching 50 cents on each dollar contributed up to a limit, for example.

Even if a 401(k) has limited investment choices or higher-than-average fees, carve out enough money from your paycheck to get the full company match, aka a guaranteed return on those investment dollars.

Note that employer contributions don’t count toward the 401(k) annual contribution limit, which in 2017 is $18,000 if you’re under 50 and $24,000 if you’re 50 or older.

» Also consider: The Roth 401(k)

2. Next, contribute as much as you’re allowed to an IRA

You’ve collected the company match on your 401(k). Now it’s time direct your retirement dollars to an IRA.

Like a 401(k) plan, investments in an IRA grow tax-free. Depending on which type of IRA you choose — a Roth or traditional — you can get your tax break now or down the road when you start withdrawing funds for retirement.

• A traditional IRA is often the preferred choice for those close to retirement age and in a higher tax bracket now than they expect to be when they start making withdrawals. The benefit of a traditional IRA is that it gives you the same tax-deferral benefit as a 401(k), meaning contributions may be deductible from your current-year income taxes — though to what extent is based on income, tax filing status and other eligibility factors. See our top picks for best traditional IRA account providers.
• A Roth IRA is a good choice if you’re in a lower tax bracket now than you think you’ll be in the future. A Roth operates in the reverse of a traditional IRA or 401(k) in that you pay taxes upfront because you make contributions with after-tax income. The benefit of a Roth IRA is that withdrawals from the account in retirement are tax-free. See our top-rated Roth IRA accounts.

For more details on choosing the right IRA, see our Roth IRA vs. traditional IRA guide.

Still have money to stash away after getting the employer match and contributing to an IRA? Good for you! The next stop on your retirement savings journey should look familiar.

» See how the Roth adds up: Roth IRA calculator

3. After maxing out an IRA, revisit your 401(k) plan

Even after you’ve gotten the employer match — and even if your investment choices are limited, which is one of the main drawbacks of workplace retirement plans — a 401(k) is still beneficial.

401(k)s have higher contribution limits than IRAs: $18,000 versus $5,500 for those under 50; $24,000 versus $6,500 for those 50 and older. Plus, the money you contribute to the plan will lower your taxable income for the year dollar for dollar. And don’t forget about the added benefit of tax-free growth on investment gains, which, if you squint your eyes really hard, can sorta make you believe that you’re getting one over on the IRS. (It’s perfectly legal, so you’re not actually outmaneuvering Uncle Sam, but you can still pretend like you are.)

4. If your company doesn’t offer a 401(k) match, pick an IRA first

Not all companies match even a portion of employee retirement account contributions (boo, hiss). When that’s the case, choosing an IRA — and contributing up to whatever amount IRS rules allow for your situation — is generally a better first option.

And it’s certainly no consolation prize. One of the biggest benefits of an IRA is that it offers access to a virtually unlimited number and type of investments, giving you much more control over your retirement savings destiny: You can bargain-shop for low-cost index mutual funds and ETFs instead of being restricted to the offerings in a workplace retirement account, and you can avoid paying the administrative fees that many 401(k) plans charge. It’s like the difference between shopping for household necessities at Costco versus an airport kiosk.

5. After maxing out IRA benefits, then start contributing to your 401(k)

Here again, the tax deferral benefit of a company-sponsored plan and the fact that investments within the account grow tax-free are two good reasons to direct dollars into a 401(k) after you’ve funded an IRA. Only in the worst cases — a retirement account with truly crummy, high-fee investment choices and high administrative costs — would it be advisable to completely avoid your company plan. If that’s the case, or close to it, consider funding a nondeductible IRA. Although you won’t get the deductibility benefit, you’ll have free rein to choose investments, and the money will grow tax-free in the account until you start making retirement withdrawals.

401(k) vs. traditional IRA vs. Roth IRA: Key differences

The main thing 401(k)s and IRAs — both Roth and traditional — have in common is that they offer an incentive for people to save money for retirements: a tax break.

The key differences between a 401(k) and an IRA are:

• Contribution limits: They’re higher in a 401(k) plan.
• Investment options: They’re unlimited in a self-managed IRA.
• Tax treatment: 401(k)s and traditional IRAs offer an upfront tax break with qualified distributions in retirement taxed as regular income; Roth IRA contributions are not deductible, but qualified distributions are not taxed.

Here’s a side-by-side comparison of retirement plans:

401(k) vs. Traditional IRA vs. Roth IRA comparison

	401(k)	Traditional IRA	Roth IRA

Setup and funding	Via automated payroll deduction.	Set up and funded by you through a financial institution (Here’s our list of best IRA account providers.)	Set up and funded by you through a financial institution (Here’s our list of best Roth IRA account providers.)
2017 maximum allowable contribution	$18,000 for those under age 50; $24,000 for those age 50 and above. (See more on 401(k) contribution limits.)	$5,500; $6,500 for those age 50 and above. (See more on traditional IRA contribution limits.)	$5,500; $6,500 for those age 50 and above. (See more on Roth IRA contribution limits.)
Tax treatment of contributions	Contributions made with pre-tax dollars, which reduces your taxable income on a dollar-for-dollar basis.	Deductibility based on income, tax filing status and availability of a workplace retirement account (for you or your spouse, if married filing jointly).	Nondeductible
Investment options	A pre-selected list of investments, mainly mutual funds. Some plans have a brokerage option with access to investments outside of the plan.	Any investment available through your account provider (stocks, bonds, mutual funds, etc.).	Any investment available through your account provider (stocks, bonds, mutual funds, etc.).
How taxes work before you retire	Contributions reduce taxable income. Investments in the account grow tax-free.	Contributions may be tax deductible, depending on income and tax filing status. Investments in the account grow tax-free.	Contributions are taxable. Investments in the account grow tax-free.
How qualified withdrawals in retirement (after age 59 ½) are taxed	Income taxes due on distributions at your ordinary income tax rate.	Income taxes due on distributions at your ordinary income tax rate.	Distributions are tax-free on money that has been in the account for at least five years.
How early withdrawals (before age 59 ½) work	Withdrawals of contributions and earnings are subject to a 10% early withdrawal penalty and taxed as regular income. The IRS allows penalty-free early withdrawals in certain circumstances. (See more on 401(k) early withdrawal rules.)	Withdrawals of contributions and earnings are subject to a 10% early withdrawal penalty and taxed as regular income. The 10% early withdrawal penalty is waived if certain conditions are met. (See more on penalty-free IRA withdrawal rules.)	Penalty-free withdrawals of contributions that have been in the account for a minimum of five years. Earnings withdrawn before the five-year mark subject to a 10% early withdrawal penalty and income taxes. Penalty-free withdrawals allowed on certain qualified distributions. (See IRS.gov rules on qualified Roth IRA withdrawals.)

Sources: NerdWallet.com, IRS.gov

Pros and cons of IRAs and 401(k)s
Not that this is a beauty competition, but if it were, the retirement savings judges would probably favor IRAs — the Roth, in particular — over 401(k) plans. An employer match and higher contribution and deductibility limits are certainly standout features of employer-sponsored retirement accounts. Beyond that, IRAs offer more choice and flexibility. Here’s the breakdown of pros and cons:

	401(k) plans	Traditional IRAs	Roth IRAs

Main advantages compared with other retirement savings options	Employer may match a portion of your contributions (aka free money). Contributions lower your taxable income for the year to a greater extent than traditional IRA contributions ($18,000 or $24,000 versus $5,500 or $6,500 maximum allowable IRA contributions). Eligibility to contribute the maximum is not hindered by income or tax filing status. Offers more protection from creditors and lawsuits than IRAs.	The choice of investments is extensive compared with a typical 401(k) plan. Contributions lower your taxable income. A high household income does not disallow contributions, although it does affect deductibility eligibility. Money in an IRA can be moved to another brokerage firm at any time.	The choice of investments is extensive compared with a typical 401(k) plan. Withdrawals in retirement are tax-free. Offers more flexibility than a 401(k) and traditional IRA in terms of penalty-free early withdrawals. Money in an IRA can be moved to another brokerage firm at any time.
Main disadvantages compared with other retirement savings options	Limited investment choices. Plan fees and investment expenses are out of your control and can erode your investment returns. If you borrow money from your plan, even for qualified early distributions, you must reimburse the plan in full if you leave the company or pay a 10% early withdrawal penalty and income taxes on the full amount. Assets in a 401(k) must remain in the plan account for as long as you work at the company.	Qualifying for a full, partial or any upfront deduction benefit may be limited by your income, tax filing status and if you or your spouse have access to a workplace retirement account. Contribution limits are lower than in a 401(k). Early withdrawals are subject to stricter tax rules than with a Roth IRA.	Offers no immediate tax break, since contributions are made with post-tax dollars. Roth eligibility is based on income, which limits how much, if anything, the IRS allows you to contribute. Contribution limits are lower than in a 401(k).

Sources: NerdWallet.com, IRS.gov

Like we said in the beginning, investing in a 401(k) or an IRA — or, ideally, both— is a great way to build your retirement nest egg and save money on taxes. And the ideal investing strategy? We got it down to 137 tweetable characters:

Start with a 401(k) up to the company match, next fund an IRA — Roth or regular — then back to the 401(k) to get an additional tax break.
Next steps

• Got money in an old 401(k) plan? See our complete guide to 401(k) rollovers.
• Find out how and where to open a Roth IRA or a traditional IRA.
• Get more information about in our Roth IRA explainer.

Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: dyochim@nerdwallet.com. Twitter: @DayanaYochim.

Updated Jan. 7, 2017.

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IRA vs. 401(k) – What’s the Difference?

By Nancy Mann Jackson| January 23, 2015

So you’re planning for retirement — and feeling unsure about which product is the best vehicle to get you there. These days, few people have access to “defined benefit” plans like the pensions that may have guaranteed your grandparents a certain payout from retirement through the rest of their lives. Instead, most retirement plans are of the “defined contribution” variety, meaning you (and maybe your employer) contribute a certain amount each month, quarter, or year, but the payout you’ll receive during retirement will be based on the market value of the account.

IRAs and 401(k)s are among the most common defined contribution plans, and both offer tax-advantaged retirement savings. However, there are a few key differences between these types of plans. The good news is that you don’t have to choose one over the other. If you’re planning well for retirement, it’s quite likely that your plan may include both a well-funded IRA and a 401(k). But it’s a good idea to be informed about the differences so you can make smart choices for your future.

What’s a 401(k)?

A 401(k), as well as a 403(b) and 457, is a qualified employer-sponsored retirement plan. If your employer does not offer a 401(k) or other sponsored plan, you should probably just begin saving in a Roth IRA or traditional IRA. But if you have access to an employer plan — especially if the employer offers matching contributions — that’s the best place to start.

Many employers offer a matching contribution up to a certain percentage of your salary. For instance, if your employer will match your 401(k) contributions up to 6 percent of your salary, you should always contribute at least 6 percent. If not, you’re turning down free money.

All the money you contribute to your 401(k) account is pre-tax money, meaning you will not be taxed on that money during the year you earned it. You will pay taxes on it when you withdraw it during retirement. During 2015, employees are allowed to contribute up to $18,000 of pre-tax income to a 401(k), and those over 50 can contribute an additional catch-up contribution of $6,000.

What’s an IRA?

While the opportunity to contribute to a 401(k) is limited to people employed by companies that offer such plans, anyone can contribute to a traditional IRA (individual retirement account), as long as they are under the age of 70½. Like a 401(k), an IRA offers tax-deferred growth on your investments, meaning the assets in the IRA will not be taxed until they are withdrawn. A traditional IRA may also offer tax-deductible contributions for people who don’t participate in an employer-sponsored plan.

A Roth IRA offers opposite tax advantages from a traditional IRA: You pay tax on income before you make contributions to the Roth IRA, but you’ll pay no tax on the earnings when you make withdrawals in retirement. However, not everyone qualifies for a Roth IRA. To qualify, you must have an adjusted gross income that is less than $116,000, or $183,000 for married couples filing jointly.

The limit for annual contributions to an IRA is $5,500 for 2015, and $6,500 for people over 50. That limit is the same for both traditional and Roth IRAs.

You Might Also Like:

IRA vs. 401(k): Where Should You Invest Your Money?

Roth IRA vs 401k? You May Not Have to Choose

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