Is it not a good idea to put more than your company's match into 401k?

[nexus5rocks]

I've read the reasons for this is because tax rates will be higher in the future, so the recommendation is to put in just enough to maximize the company match (typically 3-6%).

 

[Uppsala9496]

Ha ha ha.
That is beyond stupid. Just rolled over an old 401k where the match was 4%.
Was there 7 years. My rollover figure is a healthy 6 digits.
Had I followed your advice it would probably only be in the mid 5's.

 

[deadlyapp]

It depends on if you have other tax vehicles you can use other than a 401k that might have similar returns and if you do expect your tax rate to be higher in the future.

More than likely, your return over the duration of the ownership of the 401k will more than offset the amount of extra tax. If you have a Roth or another investment vehicle that has similar returns but is taxed immediately, then yes, it may be a better option to divert.

 

[KB]

One rule of thumb is to max out your yearly Roth IRA contributions before you put in any additional 401k contributions.

 

[NoTine42]

I think that line of thought is: plan to retire in a higher tax bracket $$$
If you plan to retire wealthy, After company match, put more into a Roth, After you max out a Roth, put more into the 401k or other account if your company has poor 401k investment options.

 

[fleshconsumed]

To expand on what others have said, the conventional wisdom is 1) put enough in your 401K to get full match from your employer, 2) if you have money left over to save, put as much as you can into Roth IRA (currently up to $5,500), 3) if you still have money left over to save max out your 401K (you can contribute up to 17.5K in 2014 and up to 18K in 2015), 4) if you still have money left over to save, then open a brokerage account and put it in some kind of index based ETF.

That said, there are some situations where you may deviate from this plan. For example, if after all of you deductions you're over the 25% tax bracket, it may make sense to put just enough money in your 401K to get you out of the 25% tax bracket first before putting any money into Roth IRA. However, otherwise, the above advice about putting enough money into 401K to get full match -> Max out Roth IRA -> Max out 401K is solid.

If you're firmly all the way up in the 25% tax bracket, then I may even go as far as advise to max out your 401K first to reduce the 25% tax burden as far a possible, and only then max out Roth IRA, but then I feel it's sort of becomes a personal call - how much money you will need in retirement vs tax brackets in the future, but that is sort of unpredictable. If you're unsure, once again, stick with the above advice put just enough into your 401K to get full company match -> Max out Roth IRA -> Max out 401K.

 

[Sho'Nuff]

I've read the reasons for this is because tax rates will be higher in the future, so the recommendation is to put in just enough to maximize the company match (typically 3-6%).

Nevermind others beat me to the punch.

 

[nexus5rocks]

It depends on if you have other tax vehicles you can use other than a 401k that might have similar returns and if you do expect your tax rate to be higher in the future.

So this is the part that is fuzzy to me.
You withdraw from your 401k when you retire, which means you've stopped working so you're not earning a paycheck. So these 401k withdrawals essential become your income.
I understand some people may have alternative forms of income from investments, but is that going to be more than your paycheck, to the point where it would bump you into a higher tax bracket?

 

[skimple]

So this is the part that is fuzzy to me.
You withdraw from your 401k when you retire, which means you've stopped working so you're not earning a paycheck. So these 401k withdrawals essential become your income.
I understand some people may have alternative forms of income from investments, but is that going to be more than your paycheck, to the point where it would bump you into a higher tax bracket?

Yes, but you also have to figure in what your tax deductions will be. When they retire, a lot of people no longer have a mortgage deduction. And the don't have deductions or credits for kids, or education. Or a myriad of other deductions.

So your income is lower, but your deductions are lower as well.

 

[Scarpozzi]

One rule of thumb is to max out your yearly Roth IRA contributions before you put in any additional 401k contributions.

This is typically the way to go.

1. 401k Employer Match (If available)
2. Roth IRA
3. 401k through employer (for tax savings via traditional)

After that, you may want your investments more liquid. Locking them up in retirement type funds restricts you from accessing them without penalty. The Roth is a pretty safe gamble, plus you can do riskier investments there without taking a hit from the earnings if you trade more frequently.

When you retire, you want multiple income streams. A RothIRA is ideal because deducting from that will not impact your taxable income in retirement. You'll be able to withdraw more from the ROTH and less from other sources to maximize your annuities.

 

[JimKiler]

I've read the reasons for this is because tax rates will be higher in the future, so the recommendation is to put in just enough to maximize the company match (typically 3-6%).

Correct. 401K are controlled by your employer and therefore anything over the match you should put in an IRA or Roth IRA where you control it.

Enron employees who had stock in the company got hosed because they were switching 401k administrators and therefore no one could touch they balances during the meltdown.

 

[stlc8tr]

So this is the part that is fuzzy to me.
You withdraw from your 401k when you retire, which means you've stopped working so you're not earning a paycheck. So these 401k withdrawals essential become your income.
I understand some people may have alternative forms of income from investments, but is that going to be more than your paycheck, to the point where it would bump you into a higher tax bracket?

There is no one correct answer for everyone since most people's circumstances will differ. The best thing to do is to diversify. Have a bit of investments in a Roth vehicle, a Traditional vehicle, and a regular taxable vehicle. The exact percentages will vary due to your own individual expectations of future tax rates as well as your current tax situation.

 

[fleshconsumed]

So this is the part that is fuzzy to me.
You withdraw from your 401k when you retire, which means you've stopped working so you're not earning a paycheck. So these 401k withdrawals essential become your income.
I understand some people may have alternative forms of income from investments, but is that going to be more than your paycheck, to the point where it would bump you into a higher tax bracket?

The game that everyone is trying to play is to a) maximize your income, or in this case your employer matching your 401K contributions - free money you'll be able to use when you retire even if you do not see a penny right now and b) minimizing your taxes, right now, and in your retirement. Achieving a) is very easy - just contribute enough to maximize your employer match. Achieving b) is not so easy, actually very difficult, because everybody's living situation is different and because nobody knows what tax rules are going to be there in the future. There is a big jump in federal tax rate from 15% to 25% once you cross the ~$35K taxable income threshold. This is also just about where median income falls for a lot of young professionals beginning their careers, numbers will be different based on your occupation and location and whatnot, but it's a pretty good number for someone starting out their career with a college degree. Ideally you would want to stay out of that 25% tax bracket if possible both while you're working, and when you're retired. Which is also why people recommend Roth IRA because Roth IRA distributions do not count as taxable income as long as you do not draw them early. Say someone wants to retire this year, their mortgage is paid off, loans are paid off, and he has 401K, social security, and Roth IRA. If that someone wants to pay as little in taxes as possible, he will only be able to draw up to about 45K from 401K and social security. That 45K will put him right at 35K taxable income after standard deduction and personal exemption, thus that person will only pay up to 15% to the feds. $45K a year if you have your mortgage paid off is a solid retirement income as long as you do not live in a high cost area, but if you are, you can start drawing income from Roth IRA and because Roth IRA is post tax, you won't have to pay any more taxes in retirement on Roth IRA income so it won't bump you into 25% tax bracket.

Basically it's all a game of minimizing your taxes. To be honest, the current rules are already too complex (keep in mind we still haven't talked about Roth IRA contribution limits, the way the Social Security gets taxed, and Required Minimum Distributions that can all affect your retirement plans), and there is no way anybody can predict the future, so I don't think you can find one perfect answer. That's just not possible. I would advise you to stop worrying about it and do the standard route - put enough in 401K to get full employer match -> maximize Roth IRA -> maximize 401K. That is the best you can do, pretty much everyone else in this thread has been telling you this. Worrying about doing better than this is just going to get you a heart attack. You're obviously new to retirement planning, so just follow the advice above and if you're still interested in the math/logic behind this, then hit up fool.com and http://www.bogleheads.org/ especially the forum section. Take it slow and steady. There is a lot to learn, but once you get it, it's pretty simple. In the meantime, once again, put away as much as you can towards retirement while following the above allocation advice.

 

[coloumb]

This is typically the way to go.

1. 401k Employer Match (If available)
2. Roth IRA
3. 401k through employer (for tax savings via traditional)

After that, you may want your investments more liquid. Locking them up in retirement type funds restricts you from accessing them without penalty. The Roth is a pretty safe gamble, plus you can do riskier investments there without taking a hit from the earnings if you trade more frequently.

When you retire, you want multiple income streams. A RothIRA is ideal because deducting from that will not impact your taxable income in retirement. You'll be able to withdraw more from the ROTH and less from other sources to maximize your annuities.

Sorry for being obtuse....

Let's say company match is $4000. I typically max out my 401k every year [17.5k]. Going forward:

1. Open up a ROTH IRA now.
2. Reduce my 401k contribution to 0% as I've already maxed out the company match
3. Divert what I had been putting into 401k into the ROTH IRA to play catch up for this calendar year. It won't be much...but every little bit helps right?

Next year going forward:

1. Put ~$211 per paycheck into Roth IRA which equates to ~$5500 at the end of the year
2. Increase 401k as much as I can afford it [~$12.5k per year with company match].

 

[stlc8tr]

Basically it's all a game of minimizing your taxes. To be honest, the current rules are already too complex (keep in mind we still haven't talked about Roth IRA contribution limits, the way the Social Security gets taxed, and Required Minimum Distributions that can all affect your retirement plans), and there is no way anybody can predict the future, so I don't think you can find one perfect answer. That's just not possible. I would advise you to stop worrying about it and do the standard route - put enough in 401K to get full employer match -> maximize Roth IRA -> maximize 401K. That is the best you can do, pretty much everyone else in this thread has been telling you this.

The Roth option isn't that much better than the Traditional option that I would place it higher on the rankings. I think a 50/50 split is a good compromise.

1. Max 401K match.
2. Contribute the same amount to a Roth vehicle.
3. Split contributions between a Traditional and Roth vehicle.

 

[Gunslinger08]

http://i.imgur.com/PWfvdvB.png

 

[overst33r]

http://i.imgur.com/PWfvdvB.png

Embedded for importance

 

[NikolaeVarius]

I'm actually surprised its so damn important to max out your 401k.

I would totally rather start investment elsewhere for a bit higher return.

 

[JimKiler]

I'm actually surprised its so damn important to max out your 401k.

I would totally rather start investment elsewhere for a bit higher return.

No, if you can find a better fund elsewhere you should prod your HR to change companies to get that fund.

 

[Gunslinger08]

I'm actually surprised its so damn important to max out your 401k.

I would totally rather start investment elsewhere for a bit higher return.

401k is tax free at investment time and grows tax free, so you save a haircut of your marginal tax rate right off the bat and you don't get hit with gains taxes as you go. Unless you have some truly awful investment options, you're going to do better in a tax advantaged account than a standard brokerage account.

Realistically, in the post-pension age, I think we all need to plan for retirement with a blended approach. Traditional 401k/IRA, Roth 401k/IRA, and other savings (cash, CDs, property, brokerage account, etc.). When you have various types of investments to fall back on, you can plan your withdrawals to pay the least amount possible in taxes.

 

[CPA]

Sorry for being obtuse....

Let's say company match is $4000. I typically max out my 401k every year [17.5k]. Going forward:

1. Open up a ROTH IRA now.
2. Reduce my 401k contribution to 0% as I've already maxed out the company match
3. Divert what I had been putting into 401k into the ROTH IRA to play catch up for this calendar year. It won't be much...but every little bit helps right?

Next year going forward:

1. Put ~$211 per paycheck into Roth IRA which equates to ~$5500 at the end of the year
2. Increase 401k as much as I can afford it [~$12.5k per year with company match].

You don't need to do No. 2, that should be done automatically.

 

[CPA]

I'm actually surprised its so damn important to max out your 401k.

I would totally rather start investment elsewhere for a bit higher return.

Many 401K plans allow for self-directing.

 

[OutHouse]

one thing i see missing from all this financial advice is a savings account for funds access for emergencies or to just have liquid cash available.

 

[fleshconsumed]

The Roth option isn't that much better than the Traditional option that I would place it higher on the rankings. I think a 50/50 split is a good compromise.

1. Max 401K match.
2. Contribute the same amount to a Roth vehicle.
3. Split contributions between a Traditional and Roth vehicle.

Mmmm, as I said, it can be a personal preference depending on your beliefs. If you're in the 25% tax bracket, yes, it may make sense to split funds between 401K and Roth IRA after maxing out employer contribution.

 

[JTsyo]

How are people on ATOT putting money into ROTH IRA? Isn't it cut off at $130K?