401K, how does it work? Should I enroll??

[Ender510]

I am debating whether I should sign up for it now.. I still have school debt and credit card debt to pay off.. my original plan was to take care of all this, then sign up for it.. now I am thinking maybe I should because now it is my 2nd year of employment and the employer will match 25% of the contributions.

Questions - how often do they buy? They take a monthly % out of the check.. but how often are the actual purchases done? Should I enroll??

 

[vi edit]

More or less, it's "free" money. You put in $100, your employer puts in $25. The $25 is "free". How can you pass up free money?

All 401k's are taken out before taxes. That's nice in itself. Your contributions are higher because they come off of gross instead of net, and it also lowers your taxible income.

That said, the only real reason not to go in on it is if you know for certain that you won't be sticking around very long at that company. If you plan to hop ship after a year or two, your company may pull their contributions to your fund. You have to remain with them for a little while to become "vested".

If you are young, a nice 401k putting in the full percentage (anywhere from 10%-15%), combined with an IRA fund, you'll be retiring pretty dang well.

 

[vi edit]

As far as how often they "buy", it really depends on the broker or agency they are using the funds through.

It may be done monthly or quarterly. You'd have to check w/ your HR person for that.

 

[StageLeft]

Yes retirement funds kick mucho ass. If you do the math with compound interest and you're young you'll find that even very modest payments bring you an ungodly landfall of cash by the time you retire. Lets say you're 25 now and want to retire at 60. Thats 35 years. Based on a 11% interest rate (very reasonable in a well managed mutual fund - don't bother playing around with stocks yourself) and depositing only $300/month by the time you retire at 60 you'll have about $1,200,000.

I was watching oprah last week and a full 2/3 of the American population has NO savings - the regular adult has no retirement fund, no investments or anything. Isn't that lame? If you're making only $35k year and you put away 10% of that over 35 years you're worth a million bucks.

 

[Adul]

I am putting 10% a year myself. My employer matches 50% up to 8% of my income. It is great indeed. I already have double digit numbers saved up.

 

401s are nice if you want to work for someone for a looooooooooooooooong time.
Make sure ya don't pull money early, or uncle sam will tax you to next sunday and back.

 

[HKSturboKID]

Definitely sign up for it. If you do the math. You hardly see the difference. If you don't enroll, you just gonna give it to taxes anyway.

 

[Total Refected Power]

401k's are a must!! You get tax-deferred savings, plus you lower your current income tax. In addition your company is giving you "free" money. It is a no brainer. Save as much as you can NOW! The earlier you start the better because of the power of compound interest. Don't delay, you'll regret it.

Also, 401k are portable. If you leave your company you should be able to roll that money over into your new companies 401k plan or into an IRA. Check with you benefits people.

My wife and I contribute the max. 10,500 per year each. That's 21,000 a year PLUS the match given to us by employers. WE WILL RETIRE RICH!!!!!!!!!

 

[Ender510]

skoorb: even tho it may be over 1m later, the inflation factor won't make it worth as much. I guess I will enroll and do it.. but I am just looking at bottom line wise, I have 10% in ESPP now, and then an additional 15% in 401K will be 25% of my check leaving.. that's a huge chunk, especially when I am considering the debts I am paying off too.. that's why I am having thoughts on this..

 

[Adul]

SammySon, you can now roll your 401k into a roth IRA when you leave a company. It will then remain tax free.

 

[BigSmooth]

vi_edit (or whoever else knows the answer): isn't there some rule that limits how much you can put into an IRA in a given year depending on how much you contribute to other retirement accounts such as a 401(k)? I know the max you can put into an IRA is $2000/year (I think), but I thought if you contributed to a 401(k), then it was even less. Anybody know?

 

[Total Refected Power]

skoorb: even tho it may be over 1m later, the inflation factor won't make it worth as much.

What's the alternative? Having saved nothing and living on some kind of goverment pension, if Social Secutity is even there.

Save now and as much as you can. The effective return is huge when you consider the current tax savings, the match, the tax-deferred growth and the likelyhood of being in a lower tax-bracket in retirement. Plus, states like FLORIDA are popular with retirees because of the lack of state income tax. Another 5% in your pocket.

PAY YOURSELF FIRST!!! You will alwasys have nagging debts.

 

[Total Refected Power]

bigsmooth:


A deductible IRA is a no-go if your company offers 401k/403b plan. Roth IRA is OK with 401k up to 2000/yr per spouse. Of course you can open a non-deductible IRA and enjoy tax-deferred growth too.

Best plan:

Fully fund 401k to 10,500/yr
ROTH IRA to 2000/yr
Non-deductible IRA

 

[Ender510]

How about IRA's? How does this factor into the picture? As for 401K, is there a max on this? I believe I saw it @ 10.5K.. so what happens if the monthly rate they take out exceeds the 10.5? Let's say the deductions hits this by june/july of the year.. does that mean that no more is taken out?

How about Roth IRAs? How does this work? Is this a separate check that I need to write to a financial institution up to $2k a year? Or can I tie all this together? Right now, I have schwabb taking care of my ESPP.. but just wondering what other options I have..

As for tax background, I am in CA and single 25..

 

[Ender510]

TRP: WOops.. looks like you answered my questions as I was writing them.. do u know if Schwabb would take care of all these things? As for Roth IRA, is this taken out before taxes? Also, would it be automatically deducted as the 401K is or does it depend on the company you work at? Thanks everyone for the responses btw..

 

[vi edit]

bigsmooth, TRP answered the max contribution question. You also have to fall under a certain income level as well. I believe that you have to be under $90,000 or so as an individual or a little under $200,000 as a couple to be able to contribute to a Roth IRA.

The Roth IRA is done post taxes and isn't taxed at the time of withdrawl. A normal IRA is done pretaxed and is nailed hard by the taxman when you withdrawl it when you retire.

 

[LadyNiniane]

bigsmooth asked, "isn't there some rule that limits how much you can put into an IRA in a given year depending on how much you contribute to other retirement accounts such as a 401(k)? "

Yes, but the rules are different for 401(k) plans than they are for IRAs. The maximums for 401(k) contributions are determined by the total amount that the company is paying in (in matching funds, fees, etc.), and will be different for each company. You can contribute the maximum percentage allowed (varies, but usually 10% - 15% of your annual salary, with some or no match over and above that), and any limits will only kick in if you are in one of the top salary brackets for your company.

And I will also add a resounding "Yes" to the 401(k) debate - if you leave and go to another company that has a 401(k) plan, you can roll funds over from one to the next, or (as has been already suggested), you can move them to an IRA of some sort. Rollover funds do not count against your yearly IRA contribution limit, BTW.

Lady Niniane

 

[BigSmooth]

Wow, thanks all, you guys are quick!

 

[Ender510]

And I will also add a resounding "Yes" to the 401(k) debate - if you leave and go to another company that has a 401(k) plan, you can roll funds over from one to the next, or (as has been already suggested), you can move them to an IRA of some sort. Rollover funds do not count against your yearly IRA contribution limit, BTW.

Thanks, definitely good info to know..

Okay.. so I am pretty clear on 401K I believe.. now, the question is which fund to go with!

As far as IRAs though.. are these the differences?
Roth vs Regular
Roth is taxed beforehand and regular IRA's are taxed later? Is that correct? How about the interest earned on both? Are those taxed when you take out? There was also a comment saying that you get hit hard when you pull out early out of the regular IRA.. does that mean you don't w/ the ROTH?

Also, what if I decide to retire early? Like 50 or something, how does that work? Or do I have to wait until 65? Wow, you guys are rreally knowledgable..

 

[Total Refected Power]

How about IRA's? How does this factor into the picture? As for 401K, is there a max on this? I believe I saw it @ 10.5K.. so what happens if the monthly rate they take out exceeds the 10.5? Let's say the deductions hits this by june/july of the year.. does that mean that no more is taken out?

10,500 is the max for 401k. There are limits to the % you can save. If you make 35K they don't let you save 10,500/year. I think for some places it is 14-15% of salary. Others are 25% (403B). ASK YOUR BENEFITS OFFICE. They will know all. Anyhow, once you hit the limit, payroll will stop contributing and your monthly take home goes back up.

How about Roth IRAs? How does this work? Is this a separate check that I need to write to a financial institution up to $2k a year? Or can I tie all this together? Right now, I have schwabb taking care of my ESPP.. but just wondering what other options I have..

Roth IRA are usually separate. You open an account with Scwabb or another brokerage if you desire and send them the money. It can be in installments or a lump sum up to 2K/year. There is an income limit for singles and couples. Check the web. You can buy stocks, mutual funds, money market, bond funds etc in your ROTH account.

ROTH is AFTER-TAX money that is invested. However, the profits are tax-free!!!! Awesome deal if you income qualify. Do it!!!!!

 

[virtuamike]

Still think you should pay off at least your credit card debt ASAP, school debt not too bad because interest on that isn't too horrible. I'm in the same situation, age 22, credit cards and school loans. Full time job at the university, offering me a 403B. Better to pay off high interest debt first. What money you save on taxes each month by putting it into retirement won't cover interest lost on credit cards. Also depends on what you can do with the cash. If you can return 20% on the money that you would've put into 401 then you're ahead of the game. In other words, if you can spend $200 on something, sell off on e-bay for $240, you're making more than if put into retirement.

Of course the secret is to make the transactions invisible to Uncle Sam (you're supposed to report goods barter but what he can't see won't hurt you).

 

[LadyNiniane]

Ender510 asked, "Okay.. so I am pretty clear on 401K I believe.. now, the question is which fund to go with! "

The plan administrator (i.e., Schwaub, Principle Group, TWRowe, etc.) is chosen by your company, but they will offer several varieties of investment options within whatever plan they have.

Mix it up, as much as you can - some high-risk, some low-risk, some guaranteed. Talk to the company administrator (usually someone in your HR department), or ask if the plan has recommended investment paths for different long-term earnings options (just out of college, married with children, empty nesters, retiring in 5 years).

Lady Niniane

 

[Total Refected Power]

ROTH AFTER-TAX contribution. Profit, never pay tax! NEVER! You can withdraw the 2000/yr at any time since you already payed taxes on it. There is also the exception for 10,000 with no penalty for 1st time home buyer. There are penalties. Check the web. Info is EVERYWHERE.

Dedutible IRA. You invest up to 2000K/yr and deduct that from your regular income taxes. It grows tax-deferred. When retire you get taxed at your then income tax rate, which should be lower as a retiree.

In general, 59.5 is the magic age of retirement before massive penalities kick in. At 65, there are no penalities.

 

[Total Refected Power]

now, the question is which fund to go with! "

That's up to you and your risk level. At your age most people suggest going 100% stocks. I am 33 and invest 100% in large-cap growth. Plenty of years before retirement to weather any down-turn and enjoy the inevitable upswings.

As older you get, diversify to less risk, ie cash, bonds, but be careful of inflation as these investments don't hope up as well as equities.

As often stated here, learn as much as you can and talk to a professional.

 

[Adul]

If you ahve enough put away, you can retire when ever you want. Though companie retirement benifits won't kick in until your 65.