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Regarding 401ks....

HybridSquirrel

HybridSquirrel

Diamond Member
If my employer doesn't match 401k contributions, should I still be funding it? Or should I stick more into my Roth IRA? Currently set at 15% contribution for my 401k and 5% for my Roth.

Is there really a point to putting that much into it if they aren't matching and I don't fit into a higher tax bracket?

edit: A little more information

I don't make it past the $34,500 threshold into a higher tax bracket.
 
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You should be maximizing the Roth IRA first, up to $5,000 year (depending on income). It doesn't matter what % of your income that is, just make sure its 5,000.

You should also continue to contribute to the 401k because it reduces your taxable income. This can mean turning a tax debt into a tax rebate. You may want to work with a tax expert to calculate the exact % to save.
 
Afaik, both are tax sheltered vehicles, you should be maxing out both if you can. even if you don't get a match, you still benefit from it.
 
KB said:
You should be maximizing the Roth IRA first, up to $5,000 year (depending on income). It doesn't matter what % of your income that is, just make sure its 5,000.

You should also continue to contribute to the 401k because it reduces your taxable income. This can mean turning a tax debt into a tax rebate. You may want to work with a tax expert to calculate the exact % to save.
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I talked to a tax guy, he said since I don't make enough to get pushed into a higher tax bracket, that it really won't effect me too much as far as changing the tax rate on my income.

I try to max them out, but its hard. I think I topped off at 3000 in my Roth last year, and that was me trying to survive on 60 bucks a week after contributing to it.
 
In your 401k you still get:
- instant tax savings at your highest marginal tax rate
- tax-sheltered growth -- no taxes on dividends and capital gains until you take the money out at retirement

Like mariok2006 says you should try to max out both if you can afford to. If you can only do one then there is no fixed answer but most people the Roth IRA is a better deal since withdrawals at retirement will be tax-free.

I talked to a tax guy, he said since I don't make enough to get pushed into a higher tax bracket, that it really won't effect me too much as far as changing the tax rate on my income.
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Taxes don't work that way. Your first $X dollars are always taxed at the same % rate no matter how much you make. If you make extra money, only that extra money may be taxed at a higher %.

But: the 401k is taken off the top, so the amount you save is based on the part of your income being taxed at the highest rate.
 
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DaveSimmons said:
In your 401k you still get:
- instant tax savings at your highest marginal tax rate
- tax-sheltered growth -- no taxes on dividends and capital gains until you take the money out at retirement

Like mariok2006 says you should try to max out both if you can afford to. If you can only do one then there is no fixed answer but most people the Roth IRA is a better deal since withdrawals at retirement will be tax-free.
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the way I thought it was for a Roth is basically...

you put in 10,000, its worth 20,000 when you retire. you don't get taxed on the original 10,000 you put in, but you do on the other 10,000 you made on it.
 
HybridSquirrel said:
the way I thought it was for a Roth is basically...

you put in 10,000, its worth 20,000 when you retire. you don't get taxed on the original 10,000 you put in, but you do on the other 10,000 you made on it.
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Nope, all growth in the Roth IRA is tax-free. 0% is taxed when you take it out at retirement.

Everything (both growth and the original) is taxed when you take it out of the 410k or traditional IRA at retirement, all $20K in your example. That's because you got the tax deduction up front when you put in the money.

Since you're in a low tax bracket now, you'll get more value out of the Roth IRA. The 401k doesn't save you much on taxes now, and you have to pay taxes at retirement.
 
DaveSimmons said:
Nope, all growth in the Roth IRA is tax-free. 0% is taxed when you take it out at retirement.

Everything (both growth and the original) is taxed when you take it out of the 410k or traditional IRA at retirement, all $20K in your example. That's because you got the tax deduction up front when you put in the money.

Since you're in a low tax bracket now, you'll get more value out of the Roth IRA. The 401k doesn't save you much on taxes now, and you have to pay taxes at retirement.
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That makes sense. I always thought you had to pay taxes on Roth gains, just not till you take it out.

so since they aren't matching, just focus on maxing (or trying to max) my Roth as a primary objective?
 
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max out roth first if you expect your rates to be higher in the future. as we're probably going to be raising tax rates, not a terrible assumption.
 
roth first since you can choose where you want to invest it. ie: vanguard/fidelity/etc...
your 401k plan fund options were described and could very well be laden with high expense funds.
 
It makes a lot of sense to fund your retirement sufficiently. If your employer matches it is easier to fund it sufficiently. But simply since your employer doesn't match doesn't mean you should give up.

Generally, you need to save 15% of your salary each year if you want to retire with the same lifestyle that you have now. You'll need to save more than 15% if you want a better lifestyle in retirement and less than 15% if you are willing to live like you are poor. Of course, if you are expecting big life changes you might need to adjust a bit from the 15% rule of thumb. Your 15% + 5% sounds like it is a proper amount of savings.

Now the question is WHERE should that 15% go. Right now the best options available for most people are these:

1 best) HSA
2) Roth IRA
3) IRA
4) 401k
5 worst) Taxable account

The taxable account is clearly the worst since you are taxed the earliest (so it can't grow as much) and often taxed the most (full income tax on the principal and then tax on the gains). Then as you move up that list, you go to better and better options.

The 401k is generally very limited in investments (you can't buy whatever you want) and is generally an expensive method of investing (high fees are common). The 401k is also quite restrictive on how you can withdraw the money.

I put the IRA in the middle since you get to choose your investments from any possible investment and since you can get a very low fee investment. But you are still quite restricted on how you withdraw the investment.

The Roth IRA is #2 since you are much more free to withdraw as you wish. And since your tax rate is low now you can take advantage of that low tax rate and never pay taxes on it or the gains again.

The HSA is just the best all around, even though very few people do it. You can often withdraw at any age and any amount you wish and often without ever paying a penny in tax on the principal or the gains. The only main hitch is if you withdraw before retirement you need a matching medical expense. Also, investment choices could be limited until places like Vanguard finally let you have one.
 
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If it's an either/or choice:

Pick the Roth if you're comfortable making your own investment decisions or want an index fund.

Pick the 401(k) if you want a target-date fund.

Generally speaking, 401(k)s offer very limited investment options that fail to outperform the market and still have onerous fees. If you're super hands-off you can take a target-date fund in the 401(k), but if you want any modicum of control at all go with the Roth.
 
Corporate Thug said:
dullard, what is a HSA?

Health Savings Accounts? You can use that as a retirement account?
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yeah, its basically a pre-tax savings account, with no growth. When you hit retirement age and haven't used the money, you take can take it out. Some of them let you take it out at the end of the fiscal year if you haven't used it....some of them only go so high as the HDHP insurance plan doesn't cover (ex. I have a 2500 deductible before insurance kicks in, so I can only keep up to 2500 in) Why would I want to open an HSA if I have an amazing ppo health insurance plan? And for that matter can you even open one without an HDHP plan?


also, our 401k is through fidelity, and they have a set plan with a target retirement date...i just set mine at 62 and it makes investments for me based on when I want to retire...fees are pretty reasonable...less than .5% of what you make annually or something (i think)
 
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If no match I wouldn't bother. Roth IRA first and then regular IRA after, no need to bother with 401k from what I can tell.
 
Doppel said:
If no match I wouldn't bother. Roth IRA first and then regular IRA after, no need to bother with 401k from what I can tell.
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yeah...i mean its nice because i can contribute $100 pre-tax and only lose $80 in take home (not real numbers)...but I really wish they matched and I just figure it out after I received my statement..
 
HybridSquirrel said:
yeah, its basically a pre-tax savings account, with no growth. When you hit retirement age and haven't used the money, you take can take it out. Some of them let you take it out at the end of the fiscal year if you haven't used it....some of them only go so high as the HDHP insurance plan doesn't cover (ex. I have a 2500 deductible before insurance kicks in, so I can only keep up to 2500 in) Why would I want to open an HSA if I have an amazing ppo health insurance plan? And for that matter can you even open one without an HDHP plan?
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An HSA (health savings account) is a pre-tax savings plan. That part you have correct. Beyond that, I think you need to learn a bit more about them before posting.

You cannot open an HSA without a high deductable health insurance plan (HDHP). By that, you need a deductable of at least $1200 for a single person or $2400 total for your family. Why would you want an HSA? Because the premiums tend to be near $0/month (expecially if your company pays premiums for their employees), it covers you for almost any catastrophy, and you can then get the tax benefits of the HSA. In other words, in general your only cost is that you pay for the deductable out of pocket (as low as $100/month for a single person $200/month for a family). That is the worst-case scenario, as you might not even need to use the insurance and meet that deductable. That worst-case cost is lower than the premium in many other plans even most so-called amazing PPO plans.

The tax benefits are that it is pre-tax investment and the investment gains aren't taxed if you have a medical expense of the withdrawl size or larger. Suppose a person is in the 25% federal tax bracket and 8% state income tax bracket, puts $3000 into the HSA, invests and gets 8% return for 40 years. Since it is pre-tax, that $3000 only costs you $2010. In 40 years that becomes $43,666. You can then withdraw it and pay taxes or if you have medical expenses (like most people do in retirement), withdraw the full $43,666 and never pay taxes.
 
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