Posted: 12/9/2007 4:36:01 PM EDT
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My company matches 100% of the 1st 2% of your salary invested and 50% of the next 4% invested. Should I put in 6%? Is it always worth investing in a 401K, what is the tax advantage? Taxes will only go up why not pay the tax now? If there are limited or "poor" investement options in the 401K package should I still invest? What would be poor investent options in a 401K? |
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Short version. It is free money so take full advantage of it. Longer version, depending on your situation, take care of any debit that is at a higher interest rate than your 401k can return then hit the investments harder. In other words, a 401k returning 8% a year may not be covering debt that is taking 18% away. |
Agreed, except that he automatically doubles his principal when he invests up to his company match. That means the rate of return is automatically doubled as well. But of course I agree with you that it's important to get rid of any personal unsecured debt such as credit cards first and foremost. That would take the discipline of immediately paying down the credit cards, not just continuing to spend the money on other things. |
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You must do 2% and get the 100% match. But should at least do the 6 % and get all you can for free. Who is the 401k manager? Greatwest, Troweprice, fidelty etc? Are there better investments? Roth IRA maybe depending on the investment. No investment is good if you don't follow through with it. Bottom line is it automatic and you will never miss the money. |
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Ditto on the 6%. Always take the free money. If you can afford it, contribute the max ($15,500 for 2007). About the taxes. In theory, your tax bracket will be much lower when you retire and begin withdrawing from your 401k, so the tax savings now are a huge advantage. There really aren't any "poor investment choices". It all depends on future performance, which is unpredictable, and your risk tolerance. I'm going to assume you're young and have many more work years before retirement, so in general you wouldn't be wrong contributing to higher risk small-cap and international funds because you have time to recover if they perform poorly. Personally I like a mix, heavy on index funds. |
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For many, maxing out a 401K substantially reduces one's taxable income. The tax savings here can be a benefit that is many times greater than even a 6% match. I'd rather put that extra money in my 401K than let the government have any more. I would suggest contributing to retirement in the following order: 1) contribute to 401K up to match 2) max out Roth IRA 3) max out 401K |
| There's absolutely no way to know that you'll be in a lower tax bracket later. As a matter of fact, more-than-likely, tax rates will be higher later than now. Having said that, you MUST take all the free money. Don't put another dime more than that being matched into a qualified plan, unless it's a "Roth-type" plan. |
How do you figure? Whatever amount he's making now, when he retires, he'll have no income, which is the lowest tax bracket there is. I'd rather pay taxes on a zero income tax bracket rather than whatever he's making now (and will continue to make for the next 40 years or so). Besides, what is the connection between taxes and the employer match? I think you're confused. |
Nah, having associated with the financial institution that handles more 401k plans than any other financial institution, and having done a lot of work in qualified and non-qualified retirement plans, I doubt that I'm the one who's confused.  The naive assumption that tax rates won't be higher in the future than now, considering the national debt, etc., underwhelms me. The question regarding employer match and tax rate is nonsensical. There are so many disadvantages to dumping money into a qualified plan that many intelligent financial advisers steer clients away from qualified plans. The exception is that it just makes sense to take the free money from one's employer. As I've posted previously, when you accept the tax advantage of any qualified plan, "your" money is no longer your money. You put yourself in partnership with the U.S. Congress and its infinite wisdom. They can and do change the rules (such as no-penalty retirement age) with no grandfathering, etc., etc. When one is older, besides dealing with potentially higher tax rates, one also generally has fewer tax deductions. If you don't like paying taxes when you're 25, how the hell do you think you'll feel when your 65 and are trapped, with no options? How about the warm, fuzzy feeling of, perhaps, knowing that every penny you draw out of your retirement plan is taxed @, say, 50%, and you can't do a damn thing about it? How about considering that, if you're lucky, you've accumulated a coupla million bucks @ whatever the Congress decides your retirement age is, and you won't to spend a few hundred thousand of "your" bucks on, say, a vacation home? Better check "excessive distributions" and see what penalties you'll pay for spending "your" money. Supposed you're REALLY lucky with your investment returns. Check out "excessive accumulations". Smart people with investing and business prowess don't depend on the U.S. government's magnanimous nature for achieving wealth. |
Very interesting. Are there specific situations where this plan would be inadvisable? I'm trying to learn more about retirement investments, and learn what's best for me/family. I'm currently putting in 12% of my paycheck into my company's 401K. They match 6%. Should I now drop that back to 6% and put the difference into a ROTH? How can I estimate what kind of tax increase I will face by doing this? Thanks for any help. CMOS |
Does a bear shit in the woods??? You're getting an automatic 66% return on your money even before the gains you'll realize from whatever it's invested in. Name one other investment that can do that and that isn't touted over late-night television... 
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I would. And the immediate tax difference is, obviously, the amount of tax owed on that 6% Do you get refunds after April 15? Redo your withholdings so you get a small refund, or none, or write a small check. That'll easily make up the difference. |
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A related ROTH question for you guys: What do you think the chances are that the gooberment will leave the ROTH dispersals untaxed over the next few decades? Seriously - what are the chances that when I retire they will say, "Nah, we need a little bit of that money - how about small tax, to help the poor?" Thoughts? CMOS |
It's simply not possible to accurately prognosticate about what the U.S. Congress will do at any particular time, particularly several decades into the future. Any money sunk into a qualified retirement plan is a crapshoot. |
Already knew that's the answer I would get.  CMOS |
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hello tamron.
it could very well be. i used to work for Boeing. but that doesn't mean i'm qualified to fly a jumbo jet nor give non-pilots advice on how to fly a jumbo jet.
links please? ar-jedi |
I had hoped that somehow superior intellect and obviously cogent posts would eventually get through! This ain't rocket science...really basic logical reasoning skills involved. Even though there is an element of "crapshoot", do invest the max that your employer will match...that kind of makes the "crapshoot" odds a little better in your favor. Basic logic: The younger you are when you start dumping $$ (I hesitate to use the common misnomer, "invest") into a qualified plan, the greater the effects of compound interest. However, that compounding should be weighed against the many disadvantages previously discussed. If I "invest" in a piece of property, I actually own the property. The U.S. Congress can't tell me when I can sell the property, to whom I must leave the property, etc. Only to the extent of capital gains taxes are the feds involved. The rules governing your qualified retirement plan won't even be recognizable to you, relative to their current form, in 30 years. Good luck! Hope you all "invest" well. 
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Thanks for all the replies. I already have a ROTH that I converted from IRA years ago back when the IRS gave that "last chance" to convert it with a 3 year period to pay the tax hit. I went for it, of course. I spoke to my investment broker today and he said I can add more to my current ROTH. For some reason I had been thinking that I was unable to do so. [shrugs] I'll work up a plan to drop my 401K investment to meet the employer match then take the difference and plop that in the ROTH. Since I have been getting a refund the last year (after buying a house) I'm hoping the higher income tax bracket won't hurt me too much. Better to get taxed now than when I'm 65 hm!? CMOS |
See I thought that too. I was considering pulling off a percentage of my money and investing it myself. I am afraid that when the boomers have raped and pillaged, and living ultra long lives with modern medicene taxes will be nuts. Taxes never go down substantially. But the 6% is nice. |