401k as a taxable investment

[corn18]

It has always irritated me when TH says that the 401k employer match is a one time thing and then you are stuck. So, let's play his game and run a scenario. These are based on my numbers.

$24k into 401k this year
$17,865 employer match

That's a 74% ROI. In one year. Guaranteed. But now that money is stuck in a gubment quagmire and cannot be accessed without a lot of pain. Especially before 59 1/2.

So, let's pull it all out. NOW.

$41,865 withdrawal
-$4186 10% penalty
-$16,746 39.6% taxes

$20,933 in my pocket. That really sucks, right? I put in $24,000 and get back $20,933.

But what if I got paid that $24,000 as taxable? I would have to pay 40% tax on that, so that leaves me with $14,400 to invest. I would need to make a 68% return on that $14,400 to match the $20,933 that I had IN MY POCKET from the 401k.

2 things. One, the idea of putting $24k into the 401k and then pulling it out immediately is stupid. Two, even if it is stupid, it beats the pants off of any investment you could make with the aftertax portion of that $24k.

What's my point? Contribute to your 401k up to the employer match no matter what your other goals are. One time free money is still better than what you could do with that outside the 401k.

Tom

[Gailete]

Of course those numbers will vary depending on if you are vested in the whole amount that the business contributes. I know it used to take a long time, but since I won't have one of them anymore, I have n't bothered to keep up.

[Singuy]

Well your numbers can't be beat considering at the income you are making, even a small percentage match from your employer becomes almost 18k..lol. Most people will be lucky if they get 1/4 of that.

So the less you make, the more you are penalized if you were to cash out early.