401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

[smokey0066]

I've been spending alot of time reading through other posts and have really taken a good hard look at my savings. After thinking about my future I was wondering if it would be worth while to start doing some tax diversification?

My current savings include:
I have somewhere around 6 months of salary saved up, a lump sum of cash for emergencies. Probably won't be adding much more to this, maybe just trickle in cash into this account as it becomes available.

I just opened a Roth IRA with full contribution for 2006, and I will fully contribute for 2007 at the end of Feb 07.

My 401k has a full match for the first 6%. I started with 6% and have slowly worked my way up to 12% this past year (first year of working) of pre tax contribution.

So my questions: I feel I've got a good start for saving for my future and will hopefully have a substantial retirement fund to draw from when the time comes. I will probably be increasing my 401k contribution to something around 15%-20% for 2007. I currently still have quite a bit of money available for investment at the end of each month. Would it make sense to split my contribution up with 10% pre-tax and put the remaining in as post-tax? From what I understand this will reduce my tax bracket (assuming I do end up with a large retirement fund) when I retire and start withdrawing from my accounts. How do I figure out whats the optimal benifit I will gain by increasing/decreasing the tax bracket I'm in? Would 50/50 be a good start for pre/post tax contribution? Also am I putting too much into my 401k? What are other options to saving/investing money? I've thought about investing in stocks but I'm not sure I have the time available to properly manage a brokerage account on my own.

I'm 23 if you're wondering, have been teetering on taking out a chunk of my savings to use as a downpayment on a sports car but I'm staying strong and holding back best I can.


Thanks guys for the wealth of knowledge. I've been a hour or so each night reading through old posts for the last week here.

[creditcardfree]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

What is the total amount you have to invest...percentage of your income?

I think I would keep retirement totals at 15-20% (divided amoung a maxed out roth and 401k pretax). Any extra I have to invest I would put in a stock mutual fund assuming my goal or need for the money was more than 5 years out, such as a house downpayment. If you have a goal or need that is less than 5 years...maybe that sports car...I would save in a money market account at the highest yield you can find...so that you don't risk losing the principal investment.

If you take a percentage of the 401k you are already investing and invest it post tax, your tax withholding will go up, since this money is now taxable and your net check will be lowered to adjust for that withholding. Just something to think about.

I have to say I'm very impressed with your savings thus far as a 23 year old. You are doing great! Good luck.

[sweeps]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

Rarely should you contribute to your 401k post-tax. Contribute the maximum pre-tax ($14,000) and contribute the maximum to your Roth ($4,000). If you still have some left over, buy into some mutual funds in a taxable account to take advantage of favorable capital gains treatment.

[smokey0066]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

Thank You.

With my current income I could comfortably put away half my monthly income (one paycheck).

My maximum pre-tax contribution is 25% and at that rate I would max out my 401k for 2007 before the end of 2007. I don't understand why post tax contribution is bad. Doesn't that reduce your income tax when you start withdrawing from your 401k since that money was already taxed?

I re-read my post above and I wasn't very clear. I should have asked how do you figure out what the optimal ratio of pre/post tax contribution is since reducing the pre-tax contribution will likely increase my tax bracket if I were to contribute post tax.

Right now all my extras at the end of each month go into ING Saving which is fairly high but not the highest interest saving account out there. That is my "emergency fund".

I have nearly zero monthly expenses although I do go out quite a bit and enjoy my youth. I have zero debt at the moment (THANKS to Mom and Dad for college). So I am trying to take advantage of that now with the fact that my savings will compound even if I reduce my savings when my life changes in the future. My public education did teach me something =D but not enough.

[humandraydel]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

You are correct in that AFTER tax contributions to a 401k will not be taxed when withdrawn at retirement. However, the EARNINGS on that contribution will still be taxed. And when you think about it, after compounding for 30 years, the earnings will be WAY more than your contribution. The only good thing about after tax contributions is that they will grow tax deferred. You won't get the "tax break" now though.

The general pecking order (for retirement savings) is this:

1. 401k contribution up to maximum company match
2. Max Roth IRA (if eligible)
3. Max 401k with pre-tax dollars (assuming funds are decent)
4. Contribute post-tax dollars to 401k
5. Contribute to a taxable account

[scfr]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

A big reason to consider taxable accounts outside of your 401K is investment options. Perhaps you are lucky enough to have tons of excellent options available within your 401K, but if your 401K isn't perfect and you invest outside of it the sky is the limit as far as where you put your money.

[creditcardfree]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

I posted this on another thread too. But this website allows you to calculate your net paycheck. You should be able to put in different amounts in the deductions area for your pre and post tax 401k contributions.

[kv968]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

I agree with the others, your best bet is to max out the pre-tax up to the 25% limit. The advantage of contributing post-tax is that if you think you'll be in a higher tax bracket than you are now when you start taking withdrawls, you can pay the lower tax now instead of the higher tax later. However, when you start taking the withdrawls in retirement, most likely you're income level will be the same or less than it is now since you won't be working as much, if at all. And using pre-tax money means you're actually contributing more than if you did post-tax. For example, if you're in the 25% tax bracket and wanted to contribute 10% of your gross earnings, you would have to contribute about 13% of your post-tax money to equal the 10% of the pre-tax.

As far as your excess of the 25% limit, if your options in the 401k are good then keep contributing there post-tax. If they aren't that great, then you could use a taxable account. Just make sure to only hold tax-efficient funds, such as index funds, in it.

[Broken Arrow]

Re: 401k Advice.. Pre/Post tax contribution? Additional Saving/Investment Tips?

I'm 23 if you're wondering, have been teetering on taking out a chunk of my savings to use as a downpayment on a sports car but I'm staying strong and holding back best I can.

The core topic has been covered well enough, so I just want to say to keep up that good fight!