4 ms·

If your company doesn't do any 401k matching, how worth is is to put money into it vs. regular investing? In my case it's likely I may want access to the money

If your company doesn't do any 401k matching, how worth is is to put money into it vs. regular investing? In my case it's likely I may want access to the money before retirement age, so I'm not sure what the best option is.

bretthoerner 10y ago
> in my case it's likely I may want access to the money before retirement age In that case always max (currently $5,500/yr) a Roth IRA first, because you can withdraw the principal before retirement. Second, if your company 401k offers loans the typical (maybe this is a legal thing?) max I hear is 50% up to 50k total. You're making a loan to yourself that pay back into the investment. Keep in mind if you leave the employer you may have to pay off the loan... If you really might need access to your money it's probably best to stick to Roth IRA + taxable (non-retirement) investments. Another thing about 401ks is the fund choices can sometimes be shit. If they're all high expense rate funds I don't even bother. These days the companies I've worked at typically offer one or two halfway decent index funds, YMMV.
enraged_camel 10y ago
The primary advantage of a 401k is that contributions are deducted from your taxable income. If you make $100,000 and put 10% of that into a 401k, your income tax will be based on a $90,000 income. You do pay taxes on the money you put into a 401k when you start withdrawing from it during retirement, but what matters is this: if you believe your income during retirement (i.e. the money you'll be paid regularly out of your retirement accounts) will be less than your income today, then contributing to a 401k means you will end up paying a lot less in taxes overall, over the course of your life. There are ways to take money out of your retirement accounts before retirement age, but it depends on certain scenarios[1]. If you need to access the money before retirement age outside of those scenarios, then do a regular brokerage account. Regardless though, you should definitely open a Roth IRA if you're eligible, and contribute the maximum amount every year. Contributions to your Roth IRA are after-tax, so they won't be taxed when you take them out during retirement - since they have already been taxed. This makes them very advantageous. [1]http://www.bankonyourself.com/401k-withdrawal-rules http://www.bankonyourself.com/401k-withdrawal-rules
- anarazel 10y ago
  If you plan on staying a us resident, that is. Several cross-national taxation agreements (Germany, Austria at least), don't have double-taxation avoidance for roth type accounts.
masterponomo 10y ago
It depends on how you will access it before retirement. If you withdraw early, you incur a 10% penalty and you pay income tax. If you borrow it from yourself, you don't have the penalty but it may impact your ability to continue to invest (see rules for your plan). That said, there is a great benefit even w/o company matching: you don't pay income tax on your contributions until you withdraw them. This lowers your taxable income, which may put you into a lower tax bracket.
mholmes680 10y ago
A 401k without some matching shouldn't be called a 401k in my opinion. You'll have to weigh the pre-tax advantage vs. the limited selection of funds available in the 401k offerings and 10% early-withdrawal penalty. If I had some unique situation where I wanted money more accessible, I'd forego the 401k and get into an IRA with Vanguard, with one or more index-tracking ETFs (VTI i think?). But, I'd make sure its done every single payday automatically and directly. No stop off at the savings/checking account. *This is not professional investment advice.
- bretthoerner 10y ago
  > A 401k without some matching shouldn't be called a 401k in my opinion. I partially agree, but the big difference between a crap 401k with at least one decent index fund and a Traditional IRA is that I can dump 18k/yr into the 401k. IRAs phase out quickly and have low deposit/yr maxes. Considering how often people change jobs these days, the 401k is a way for most people I know to shove 18k/yr into a special bucket so they can move it to Vanguard within a few years when they leave the company.
  - tcoppi 10y ago
    There are also a few providers that will let you do in-service rollovers to either traditional IRAs or Roth IRAs. Many also don't advertise this, but will do it if you ask(mine is one of these). It is definitely worth asking about if you have crappy funds in your 401k, as is talking to your management about getting a better 401k provider.
100k 10y ago
Another thing to keep an eye on when making this decision is fees. A lot of 401ks have terrible fees that will eat your growth. Whereas if you use a Vanguard IRA you can easily get into funds with 0.18% fees or less. I've used a non-matching 401k mostly to save more money (and roll it into a Vanguard IRA as soon as possible) but a lot of advice I've read on the internet suggests maxing a Roth IRA before contributing to a non-matching 401k. (I don't have a Roth yet because it's always seemed crazy to me that my taxes will be higher in retirement than now. I see in this thread they have other advantages, like being able to withdraw principle.)

bretthoerner 10y ago

> in my case it's likely I may want access to the money before retirement age In that case always max (currently $5,500/yr) a Roth IRA first, because you can withdraw the principal before retirement. Second, if your company 401k offers loans the typical (maybe this is a legal thing?) max I hear is 50% up to 50k total. You're making a loan to yourself that pay back into the investment. Keep in mind if you leave the employer you may have to pay off the loan... If you really might need access to your money it's probably best to stick to Roth IRA + taxable (non-retirement) investments. Another thing about 401ks is the fund choices can sometimes be shit. If they're all high expense rate funds I don't even bother. These days the companies I've worked at typically offer one or two halfway decent index funds, YMMV.

enraged_camel 10y ago

The primary advantage of a 401k is that contributions are deducted from your taxable income. If you make $100,000 and put 10% of that into a 401k, your income tax will be based on a $90,000 income. You do pay taxes on the money you put into a 401k when you start withdrawing from it during retirement, but what matters is this: if you believe your income during retirement (i.e. the money you'll be paid regularly out of your retirement accounts) will be less than your income today, then contributing to a 401k means you will end up paying a lot less in taxes overall, over the course of your life. There are ways to take money out of your retirement accounts before retirement age, but it depends on certain scenarios[1]. If you need to access the money before retirement age outside of those scenarios, then do a regular brokerage account. Regardless though, you should definitely open a Roth IRA if you're eligible, and contribute the maximum amount every year. Contributions to your Roth IRA are after-tax, so they won't be taxed when you take them out during retirement - since they have already been taxed. This makes them very advantageous. [1]http://www.bankonyourself.com/401k-withdrawal-rules http://www.bankonyourself.com/401k-withdrawal-rules

anarazel 10y ago
If you plan on staying a us resident, that is. Several cross-national taxation agreements (Germany, Austria at least), don't have double-taxation avoidance for roth type accounts.

masterponomo 10y ago

It depends on how you will access it before retirement. If you withdraw early, you incur a 10% penalty and you pay income tax. If you borrow it from yourself, you don't have the penalty but it may impact your ability to continue to invest (see rules for your plan). That said, there is a great benefit even w/o company matching: you don't pay income tax on your contributions until you withdraw them. This lowers your taxable income, which may put you into a lower tax bracket.

mholmes680 10y ago

A 401k without some matching shouldn't be called a 401k in my opinion. You'll have to weigh the pre-tax advantage vs. the limited selection of funds available in the 401k offerings and 10% early-withdrawal penalty. If I had some unique situation where I wanted money more accessible, I'd forego the 401k and get into an IRA with Vanguard, with one or more index-tracking ETFs (VTI i think?). But, I'd make sure its done every single payday automatically and directly. No stop off at the savings/checking account. *This is not professional investment advice.

bretthoerner 10y ago
> A 401k without some matching shouldn't be called a 401k in my opinion. I partially agree, but the big difference between a crap 401k with at least one decent index fund and a Traditional IRA is that I can dump 18k/yr into the 401k. IRAs phase out quickly and have low deposit/yr maxes. Considering how often people change jobs these days, the 401k is a way for most people I know to shove 18k/yr into a special bucket so they can move it to Vanguard within a few years when they leave the company.
- tcoppi 10y ago
  There are also a few providers that will let you do in-service rollovers to either traditional IRAs or Roth IRAs. Many also don't advertise this, but will do it if you ask(mine is one of these). It is definitely worth asking about if you have crappy funds in your 401k, as is talking to your management about getting a better 401k provider.

100k 10y ago

Another thing to keep an eye on when making this decision is fees. A lot of 401ks have terrible fees that will eat your growth. Whereas if you use a Vanguard IRA you can easily get into funds with 0.18% fees or less. I've used a non-matching 401k mostly to save more money (and roll it into a Vanguard IRA as soon as possible) but a lot of advice I've read on the internet suggests maxing a Roth IRA before contributing to a non-matching 401k. (I don't have a Roth yet because it's always seemed crazy to me that my taxes will be higher in retirement than now. I see in this thread they have other advantages, like being able to withdraw principle.)