401k, really worth it?

Ask your employer to offer a Roth 401k -- avoids Roth IRA contribution limits.

-Mark Bole

Agreed. The OP was all about saving for retirement. But anyone who looks at their 401k balance and thinks it represents net savings for retirement is deceiving themselves badly. And unfortunately, due to the kind of misleading statements made in forums like this, many people do just that.

Joe Taxpayer had the best answer -- you should have a mix of pre-tax and post-tax money saved for retirement.

No, it's not. There is nothing IMMEDIATE about it, and there is nothing FREE about it. It's just deferred employee compensation, like a pension. Do you consider your employer match on Social Security to be "free money" or an "immediate return on investment"? How is the 401k match any different?

This reminds me of the folks who have a balance due when they file their income tax return and don't understand because "I didn't pay any taxes last year, why do I have to pay this year?" Or the folks who think the cash they walk away with from an escrow closing represents their profit on the real estate sale.

Why do you think employer match, if any, on Roth 401k's will still be made with pre-tax dollars?

In exchange for not receiving some of your wages today (that's hardly "free", is it?), and not getting Social Security credits or paying current taxes on the employer match, you agree to lock them up in an illiquid asset (10-13% early withdrawal penalty) for 30 years or more hoping that after inflation, uncertain investment returns and management fees, and tax law changes, you might get a slight break on taxes you pay when you finally take the money out.

Many people don't, finding that in retirement they no longer have tax deductions for dependents and mortgage interest, no longer have tax credits for children, child care, and education, and they now have more taxable Social Security income due to 401k/IRA withdrawals. And they are forced to take the money out at age 70.5 whether they need it or not (or pay a 50% tax penalty on the amount they should have taken out).

If employer 401k matching were truly "free money" or "an immediate return on investment", would all these strings be attached? Or to look at it another way, a 401k is just a pension with the risk shifted to the employee -- so why don't people refer to a pension as "free money" or "an immediate return on investment"?

Don't get me wrong, I have taken advantage of employer match and 401k savings, since it was part of the overall compensation package I weighed when I took the job, but I never carried it on my personal balance sheet at full value, I always offset it by a significant percentage representing early withdrawal penalty and unpaid income taxes.

-Mark Bole

Seems to me that using reasonable intepretations of the words here, it most certainly is immediate and, it may be reasonably characterized as free.

I think you're obfuscating the main issue here. Namely, a person has a job. The employer offers a 401(k) with matching. Should he or she invest at least up to the matching? Yes.

Please also note that in your lecture on what was available to people 30 years ago, you neglect to point out that pensions were much more common then. Today people must typically instead plan using either the 401(k), an IRA, etc.

The difference is that it is optional. If employee A and employee B receive identical salaries, but only employee B enrolls in the 401k plan, then employee B receives *more* total compensation than employee A. The employer will generally not increase employee A's salary to offset this.

John Cowart

Thats robably the best answer since (1) tax laws change and (2) there are limits on tax deferred accounts. A mixture bets on multiple horses.

Most people will disagree with you here.

I'm finnally at the point where compounding is a huge factor and there is nothing "slight" about it.

Plus you can start your retirement withdrawals at any age as long you follow the same rules and keep up for five years.

You dont have to spend it however. You just lose the effects of tax-deferred compounding. A Roth 401K is better, but probably too late for most boomers.

Roth IRA has income limits to when one is eligible, a 401k limits are much higher income amounts. The income limits depend on single or married tax status.

A person which makes 200k will probably be above income limits for Roth, but can still contribute to a 401k. I think the income limits for married couples is $150,000 (and partial contributions allowed up to $160,000).

A 401k can lower one's income (AGI) and possibly allow them to contribute to a Roth, but a Roth does not "affect" 401k eligibility.

If the person making 200k can find a way to contribute 40k (25%) to a

401k, or defer 40k worth on income, they can maintain Roth eligibility for that year.

The advice on "use Roth AND 401k AND taxable accounts is the best.

1) My general suggestion is to contribute 10% of income to 401k. Match or no match. This will reduce your taxes now and help establish a pattern of setting a sizeable amount of money aside. Saving 10% of income will also help you retire into a comfortable lifestyle, as you will be living below your means. Doing this single step is the least amount of paperwork and setup. If a person can spend additional time, they can maximize benefits better. Spend time understanding tax rates and knowing "how much income" you will need in retirement.

2) Max our Roth IRA next. 4k per year now, 5k in 2008. If you are over age 50, their are additional catch up contributions you are eligible for.

3) I would then fund taxable accounts with any amount you can afford to save above and beyond the 401k and Roth.

If your income level in retirement will be higher than it is now, tax rules for 2 and 3 will benefit you. Consider though that eliminating

1) may reduce eligibility for 2). If 3) does real well, it is possible this will also eliminate eligibility for 2).

In addition if you are going to fund kids college, having 3) may not be a good idea in this regard, either.

One 'simple' observation - at an assumed 25% tax rate, you put in $1000 and get the matching, say just $500, you now have $1500 in the account and are out of pocket only $750. You take it out, pay the 10% ($150) pay the tax ($375), you still have $975. This is basically from day one. (and only reflects a 50% match, some match the first 3-5% dollar for dollar) (I will concede that some companies have a vesting schedule for the matching amount, as much as five years. To this point, one shouldn't plan their investments based on this aspect of the impact of job loss.)

I think the semantics of whether it's free or something that was part of one's pay package is a distraction to the math. Isn't 'part of the package' all the reason to take advantage up to the match at a minimum? Alternately, shouldn't one know if there's a matching provision when considering the job?

JOE

But my income is low so I will be lucky to save anywhere near the Roth limits of 4k a year.

So what advice now?

Just go for the Roth over non-matched 401k?

You're right, in my case the return is delayed by two days typically. Not quite immediate. What's the annualized return if I get 50% on my investment after two days? Hmmm....

You're right, it is not free, it is bozzle. And it is deferred for two days (for me). I may have to pay a 10% penalty if I withdraw after two days (by quitting my job), so it's really only a 45% return over two days, which is how much annually? Hmmm...

Employer match for a Roth 401(k) is treated just as a pre-tax contribution to a 401(k) by law. Who said differently?

All this is the same for any mutual fund/stock investment regardless of savings vehicle except the withdrawal penalty and the "slight" tax break. The withdrawal penalty is the price you pay for the "slight" tax break of no tax up front (or no tax in the end in the case of the Roth

401(k)). In many cases this tax break will be more than "slight."

-Will

Hmmm.... bad math. That would be a 35% return. That 3 and 4 are verrrry close together on the keyboard...

Isn't it 30%? At an assumed 25% tax rate, you put in $1000 and get the matching, $500, you now have $1500 in the account and are out of pocket only $750. You take it out, pay the 10% ($150) pay the tax ($375), you still have $975. 975/750 = 30% Doesn't the tax bracket for the short round trip impact the instant bozzle? JOE

If you want to maximize long term benefits, the Roth will be a good choice.

If you want to improve your current tax situation while building a long term wealth building strategy, 401k puts more money to work today (because investments are pre-tax).

If you can handle the Roth, it is a better option, IMO.

If you make 40k per year and invest 10%: the 401k would be a 4k investment, you would pay tax on only the 36k not invested. I calculated the tax paid to be $4345. Take home pay is $31355.

the Roth IRA would be a 4k investment, and you would pay tax on the entire 40k. I calculated tax paid to be 5245 and amount of take home pay is 30755 (after 4k is invested in Roth).

The withdraw advantages of the Roth make it a better long term solution, however 401k allows you to take home more now (but pay taxes later).

For yet another perspective, may I repectfully suggest that Will was correct originally?

A 10% penalty on a 50% match is 5% of the original amount (10% * 50%), reducing the match from 50% to 45%. As to the additional taxes that Joe is considering, he is forgetting that the original contribution that is matched (in his example, $1000) also comes with a tax liability of 25%. That is, $1000 matched with $500 each have a 25% tax liability, thus the ratio remains fixed (or after penalty of 10%, $1000 matched with $450 each have a

25% liability, leaving the ratio at 45%).

One other point - the bozzle may not be immediate - if vesting is not immediate, then the match is not "yours" immediately (though you do have some immediate value - the right to invest it, but that's certainly less than 100% of the value of the match).

Mark Freeland snipped-for-privacy@sbcglobal.net

OK

I make 22k a year...that's it.

22k per year, 4k into roth or 4k into 401k

4k is 18% of 22k. 18% is an excellent savings percentage.

401k 4k contributed (pre tax) to 401k, 18k gross, $1945 is tax paid and net income is $16,055

Roth IRA 4k contributed (post tax), 22k gross, $2545 total tax paid, net income is $15,455.

You pay less taxes with 401k up front.

18K gross 8450 STD deduction + Exemption (5150+3300 in 06)

9550 taxable

Tax is 1055.

The OP is in the 15% bracket. I recommend the Roth for him, and wish him the good fortune to find himself in a higher bracket later in life. The tax deduction of the non-matching 401 isn't worth it. JOE

Thanks

Me too.

Since you are near the low end of US income, social security will pay out about 55% of your income, if that was typical of your career. You only need to come up with an additional 25% or so yourself then.

Yes 22k is typical of what I've made in past. Matter of fact it is the most

I'm not proud of that. Matter of fact I'm worried abt saving for retirement.

I'm "trying" to save for retirement but at 22k its hard to make any REAL progress.

I live in a small rural town and the only jobs available are low paying factory jobs