Is it a better idea to put overtime pay into your pretax 401k?

[Zee]

Hello, as an hourly employee, im doing a lot of overtime. Is it better to raise my 401K contribution (Pretax) to avoid losing a chunk to taxes?

Or being taxed now is the same as being taxed later when i'm over 60?

 

[DaveSimmons]

If you will leave the money in retirement accounts until you're 60 it is a great idea. If you will cash it out as soon as you change jobs it's pointless.

What you should do each time you change jobs is take the 401k and start or add to a "rollover IRA" at a good mutual fund company like Vanguard. Put the money in stock index mutual funds.

If you're 25, $1,000 in an S&P 500 stock index fund now will only cost you $800 (because $200 or so would go to the IRS), and if left alone will give you around $28,000 to spend at age 60 (before taxes, say $20K after taxes).

Give up $800 now, have $20K later. Of course a movie ticket will cost $40, but you're still way ahead of if you try to live on social security.

 

[Pliablemoose]

My employer doesn't count OT into the IRA contribution or matching, just my base salary

 

[alrocky]

If you don't need the money now, you may as well as raise your 401(k) contribution since the income you save now will likely double itself 4 or 5 times before you draw on it.

 

[j00fek]

how do you get your o/t money in your 401k?

you would have change the amount you put in every week

i dont think this will work out

 

[dullard]

You are asking the wrong question. We assume you are putting enough into your 401k to get the full employer match. That is critical. But beyond that, adding to the 401k may or may not be a good idea.

1) Are you saving enough for retirement for your needs? If the answer is yes, then you don't need to put any more in and stop reading this thread. Although, likely the answer is no.

2) Ok, you aren't saving enough for retirement if you reached this point. Now the question is do you put the money in the 401k or do you open a Roth IRA? The 401k isn't taxed now, the Roth IRA is taxed now. The 401k is limited in investment choices and likely to have higher fees. The Roth IRA is unlimited to investment choices and is likely to have lower fees.

3) Do you need the additional choices from the Roth IRA to get diversified investments? If so, take the Roth IRA. Are your 401k fees dramatically higher? If so, take the Roth IRA. We can't answer these questions for you since we don't know your situation.

4) What is left is the question about deferring taxes. Don't let people with bad math (especially the so-called experts) fool you. If your tax rate now is the same as the tax rate when you retire, there is no difference. People will try to tell you otherwise without doing the full math (or they'll pretend to do the math in a way that sounds good), and they will be wrong. But what if your tax rate now is higher than your tax rate when you retire? Well, in that case, you want to pay taxes when you retire - put it in the 401k or traditional IRA if you can. What if your tax rate now is lower than your tax rate when you retire? In that case, the choice is easy, pay the taxes now when they are low - put it in a Roth IRA.

5) Of course, you won't know for sure what the tax rate will be when you retire. But if your income is low now, and if you think the social security problem/medicare problem/Democrats being elected will raise taxes in the future, you can have a good idea of the answer. Taxes are historically quite low now. You are probably best off taking advantage of it and paying taxes now.