401k contribution question

[moyet]

Hello all,

New poster here; I lurked on the now defunct MSN board and here for the past few months and have a question regarding my 401K contribution.

I often hear that one should contribute "up to the match" for a 401K contribution, and then begin funding an IRA account. If the company I work for matches 10% of the yearly contribution, at what point (if any) should I stop the 401K to then fund an IRA? Thanks.

[gooddecisions]

The people that practice this will tell you to contribute 10% to take advantage of the full match and then add 5K to your IRA. I personally prefer to take the full tax advantage of the $16,500 401(k) contribution and then fund my IRA with the tax savings, which is almost 5k.

[moyet]

Thanks for your response.

[Deleted]

Mar 27, 2011 19:11:23 GMT -5 @moyet said:

Thanks for your response.

Like the previous poster said it depends on you and I also say the tax bracket you are in.

If you are at 15, I say you might want to take advantage of the ROTH and max it each year.

In our case, we are at 25% so prefer to dumb 25% into our 401K accounts (max allowed by our jobs) and just contribute as much as we can to the ROTH (last year was 1.5K into each account)

[Plain Old Petunia]

I wouldn't stop until I hit the max if my employer were matching 10% of every dollar I contributed. That is a pretty sweet guaranteed return.

[cronewitch]

Put in the full amount you are getting a 10% match so put in 16,500 and get 1,650 free money if you plan to work there until it vest.

[DVM gone riding]

Yeah I can't afford to put 16500 into a 401k AND 5k into a roth, but if you can more power to you. I contribute more then enough (5%) to get my full match and then go to the ROTH, but if I could get a 10% match I wouldn't bother with a different acct at all and would JUST do the 401k. 20% if your income in retirement accts every year should be enough unless you started late. After that I would look at other things, like RE or even just good ol cash.

[gooddecisions]

Crone's response made me relook at your initial post.

"If the company I work for matches 10% of the yearly contribution..."

Do you mean your employer matches 10% of your contribution (which is how it reads above) or they will match up to 10% of your salary based on the percentage you are contributing?

[moyet]

My firm contributes 10% of what I contributed for the prior. Last year, I contributed $9500.00, so their 2010 contribution (received in February of 2011) to my 401K was $950.00.

[DVM gone riding]

well shoot I don't like your company, that is a terrible match!! to me me match means you put in a dollar they put in a dollar, or in some cases .50 in your case you put in a dollar and they put in .10 that is no match!!

[Deleted]

Mar 27, 2011 23:52:00 GMT -5 DVM gone riding said:

well shoot I don't like your company, that is a terrible match!! to me me match means you put in a dollar they put in a dollar, or in some cases .50 in your case you put in a dollar and they put in .10 that is no match!!

I have to agree...

I say in your case max your ROTH IRA first then contribute whatever amount you can afford to the 401K just for the tax benefit.

[gooddecisions]

It doesn't really change my answer. I'm of the camp who believes that in the long run tax deferred compounding is worth more than after tax compounding and have yet to see a calculation that proves otherwise- that is unless what's offered in your employer sponsored 401(k) is garbage or the admin fees are high or maybe you're in the 15% bracket.

If you were able to tighten your belt and contribute 16,500 to your 401(k), that would really only cost you $12,375 assuming you're in the 25% bracket, if you're higher than that- it costs you even less. You can then plan to put that $4125 into a roth and have a tax advantage account almost funded at the max. On top of that, you get your match from your employer.

In the end, you're not really saving $21,575 out of your hard earned salary- it's only setting you back $16,500. Play with the numbers, if this doesn't quite fit your situation.

[RoadToRiches]

I was going to ask this, but since we are talking about 401k.

So, max is 16.5k per year. Does that include what my work puts in there?

My work does 50 cents on every buck I put in UP TO 6% of my salary.

So, if I understand correctly, lets say I make 60k per year, the maximum they will put in my 401k is $3600? So maximum I am allowed to put in of my own money is $12900?

[gooddecisions]

No, the $16,500 is the limit that you can contribute regardless of what your employer contributes.

[RoadToRiches]

ohh gotcha..

WOW, so in my case, I have potential to actually have more than 20k a year in my 401k! That is a nice chunk of mulla!

[RoadToRiches]

WOW some pretty crazy numbers. I am 35. This is what I put in. I need to get crackin on this!

Contribute 0.0% Contribute 25.0%
Plan type 401(k) 401(k)
Current balance $7,000 $7,000
Years to invest 25 25
Annual rate of return 9.00% 9.00%
Annual salary $64,488 $64,488
Expected annual salary change 0.0% 0.0%
Your contribution* $0.00 per year $16,122.00 per year
Your employer's match $0.00 per year
This is a 50% employer match up to a maximum of 6.00% of your annual salary. $1,934.64 per year
This is a 50% employer match up to a maximum of 6.00% of your annual salary.
Total you will contribute $0.00 $403,050.00
Total your employer will contribute $0.00 $48,377.52
Total at age 60 $60,362 $1,660,518

[moyet]

Thanks all, especially gooddecisions. This is the first company that I've worked for that had a match, so I am pleased with any help I can get! In addition to the match, at the end of every year, they deposit an additional 7.5% of your gross income into the 401K, and you become fully vested with those funds after 6 years, with vesting starting after the 2nd year.

[Deleted]

Mar 28, 2011 20:44:46 GMT -5 @moyet said:

Thanks all, especially gooddecisions. This is the first company that I've worked for that had a match, so I am pleased with any help I can get! In addition to the match, at the end of every year, they deposit an additional 7.5% of your gross income into the 401K, and you become fully vested with those funds after 6 years, with vesting starting after the 2nd year.

You should have mentionned the 7.5% gross contribution from the get go.
Suddenly it is a pretty good plan:)

But since you get the 7.5% of your gross income no matter what, I say if you are in a 15% bracket to still go ahead and max the ROTH IRA first amd contribute what you can afford to the 401k.

[qofcc]

I say if you are in a 15% bracket to still go ahead and max the ROTH IRA first amd contribute what you can afford to the 401k.

I'm not sure about that. If you're at the beginning of your career and you expect to be in a higher bracket later, then yes, it might make sense to take the Roth while you can if having a Roth is important to you, but if you're later in your career and expect to be in the same or lower bracket, then I'd take the 10% match. It's 10% guaranteed return the first year. That's better than the return you can expect in your Roth.

[jkapp]

Mar 27, 2011 23:52:00 GMT -5 DVM gone riding said:

well shoot I don't like your company, that is a terrible match!! to me me match means you put in a dollar they put in a dollar, or in some cases .50 in your case you put in a dollar and they put in .10 that is no match!!

Hey, my company it is 1% of your salary as long as you are contributing something. Not much at all, but considering they had to cut out the 401k match the past two years we are happy to get much of anything.

[Deleted]

Contribute the maximum to which they will match. So if they'll match all the way up, then keep contributing as long as they match.

The advantages to the ROTH IRA are a) Investment Options b) Accessibility.

I view a ROTH IRA as a backup emergency fund so I like to fund the ROTH if possible.

[Deleted]

Mar 29, 2011 13:50:30 GMT -5 @davebo said:

Contribute the maximum to which they will match. So if they'll match all the way up, then keep contributing as long as they match.

The advantages to the ROTH IRA are a) Investment Options b) Accessibility.

I view a ROTH IRA as a backup emergency fund so I like to fund the ROTH if possible.

Same here, our ROTH IRA is like extra padding for an EF

[commentator]

Mar 27, 2011 23:52:00 GMT -5 DVM gone riding said:

well shoot I don't like your company, that is a terrible match!! to me me match means you put in a dollar they put in a dollar, or in some cases .50 in your case you put in a dollar and they put in .10 that is no match!!

I agree that an employer who provides a 100% or higher return on a 401 contribution is nice but a 10% return is nothing to sneeze at.

My advice to the OP is to put as much as you can afford into the 401 and enjoy that immediate 10% return.

[Deleted]

I would take advantage of the match, even if it is just 10%, max out the 401k, if you can.