No 401k match, now what?

[TBH]

If you were investing 6k per year before, consider putting 5k into Roth and 1k into the 401k. Meaning max Roth, then use 401k for the rest.

I would be shocked if he was investing $6K per year on a $27K salary when he is also paying college tuition. It would be very hard to max the Roth on a $27K salary.

[pgtr]

#3 is your best bet but #2 does point in the right direction.

Ultimately you want to max out both the 401k and Roth IRAs.

General rule of thumb as to prioritizing investments are as follows:

#1 Contribute to 401k up to amount employer matches

#2 Max out Roth IRA

#3 Max out 401k

#4 Contribute to taxable investments

Good luck!

[lennygaudy]

Hi everyone,

This is a very interesting thread. I'm not financially saavy at all which is why I joined this forum to start educating myself. That said, I'm wondering if this would also apply to my situation. I'm not sure what my tax bracket is but I made a little over 70k last year. I only recently joined my 401k (late October 2008) and my employer does not match. Would this Roth thing make more sense in my case too?

I've never heard of Roth's before so if it does than I'll definitely have some research to do. Right now I'm contributing only 3% and I won't be able to increase that for at least one year because I'm in the midst of rigorously trying to pay down a ridiculous amount of debt and how to build an EF as well for security. So theres no way i could max either the 401k or Roth right now but if I stick to my plan I'll be virtually debt free within a year's time so I should start researching the Roth thing so Im ready when the time comes.

Thanks in advance!

[jIM_Ohio]

Hi everyone,

This is a very interesting thread. I'm not financially saavy at all which is why I joined this forum to start educating myself. That said, I'm wondering if this would also apply to my situation. I'm not sure what my tax bracket is but I made a little over 70k last year. I only recently joined my 401k (late October 2008) and my employer does not match. Would this Roth thing make more sense in my case too?

I've never heard of Roth's before so if it does than I'll definitely have some research to do. Right now I'm contributing only 3% and I won't be able to increase that for at least one year because I'm in the midst of rigorously trying to pay down a ridiculous amount of debt and how to build an EF as well for security. So theres no way i could max either the 401k or Roth right now but if I stick to my plan I'll be virtually debt free within a year's time so I should start researching the Roth thing so Im ready when the time comes.

Thanks in advance!

do you file as single, married or something else? What was your taxable income on your most recent tax return?

[sweeps]

Lenny: There is some disagreement here about whether a 401k or a Roth IRA should be your primary investing tool. First, let me say that investing as much as you can in either one is WAY BETTER than doing nothing. Don't delay investing in one or the other because of quibbles about which one will do marginally better in the long run.

Now that is out of the way, there are several factors to consider when making a (pre-tax) 401k vs. Roth decision.
1. Do you make too much to put money in a Roth IRA? If so, your answer is clear. Choose the 401k.
2. Does your company match contributions? If the answer is yes, then this is almost certainly a win for choosing the 401k first -- at least to the max % that your company matches.
3. Do the funds available in your 401k suck? (Poor performance, high expenses, etc.) If so, then you probably want to choose a Roth IRA -- you have a virtually unlimited choice of funds by choosing that route.
4. Do you expect your tax rates to be much higher at withdrawal time than they are now? If so, you'll probably want to choose a Roth IRA -- that lets you pay taxes now and withdraw your earnings later on tax-free. On the other hand, if you don't expect your tax rate to be higher in the future, then a 401k is probably your choice. (Note that predicting future tax rates is a tricky, if not impossible, task.)
5. (This one is important to me.) Contributing to your 401k is EASY. You basically put it on autopilot and don't even think about it. Managing your Roth IRA, while not terribly difficult either, does require more thought as to how it's going to be funded and when.
6. Do you want more control over your investments, for example, buying and selling ETFs, day trading, etc.? You'll need to choose the IRA. (Note that this is a negative in my opinion. If you want to day trade, then do it with play money outside of your retirement account. But to each his own.)
7. There are other factors that come into play as well, as far as required distributions and estate planning issues. These issues can be complex... I don't really want to go into them here, but these could be important to you. Do some research to learn more.

[lennygaudy]

do you file as single, married or something else? What was your taxable income on your most recent tax return?

I file single and my 2008 taxable income was 36,119. Thanks!

[jIM_Ohio]

At $33950 you are taxed at 25%, so I would advise 401k until you drop your taxable income below $33k.

Meaning:
If you make 70k and put 5% into 401k now ($3500/year)... do some more math...

$36119-$33950= ~$2000

$2000/70k (gross salary)=2.8%

If you said you have "$5000" more to invest I would advise

$2000 or 3% of gross to 401k
then the rest to a Roth.

This way all your money is either
a) being deferred from tax at 25%
b) being invested post tax at 15%

This makes the Roth a huge winner- pay 15% tax now when more than likely your lifestyle is close to 25% bracket.

[lennygaudy]

Lenny: There is some disagreement here about whether a 401k or a Roth IRA should be your primary investing tool. First, let me say that investing as much as you can in either one is WAY BETTER than doing nothing. Don't delay investing in one or the other because of quibbles about which one will do marginally better in the long run.

Now that is out of the way, there are several factors to consider when making a (pre-tax) 401k vs. Roth decision.
1. Do you make too much to put money in a Roth IRA? If so, your answer is clear. Choose the 401k.
2. Does your company match contributions? If the answer is yes, then this is almost certainly a win for choosing the 401k first -- at least to the max % that your company matches.
3. Do the funds available in your 401k suck? (Poor performance, high expenses, etc.) If so, then you probably want to choose a Roth IRA -- you have a virtually unlimited choice of funds by choosing that route.
4. Do you expect your tax rates to be much higher at withdrawal time than they are now? If so, you'll probably want to choose a Roth IRA -- that lets you pay taxes now and withdraw your earnings later on tax-free. On the other hand, if you don't expect your tax rate to be higher in the future, then a 401k is probably your choice. (Note that predicting future tax rates is a tricky, if not impossible, task.)
5. (This one is important to me.) Contributing to your 401k is EASY. You basically put it on autopilot and don't even think about it. Managing your Roth IRA, while not terribly difficult either, does require more thought as to how it's going to be funded and when.
6. Do you want more control over your investments, for example, buying and selling ETFs, day trading, etc.? You'll need to choose the IRA. (Note that this is a negative in my opinion. If you want to day trade, then do it with play money outside of your retirement account. But to each his own.)
7. There are other factors that come into play as well, as far as required distributions and estate planning issues. These issues can be complex... I don't really want to go into them here, but these could be important to you. Do some research to learn more.

sweeps, sounds like I've got to do lots of research. But here are the answers to your questions.

1. Not sure if I make too much-what is the maximum? My gross is $70,771 but my taxable is $36,119.

2. My company does not match.

3. No clue because I don't know anything about investments so I wouldn't know if the returns are satisfactory plus I've only been participating for about 4 months so might be too early to tell.

4. No idea about my future tax bracket, in fact no idea about my current tax bracket! (I know its something I should educate myself about which is why I recently joined this forum so I can get educated re my finances)

5. Given my limited financial knowledge easy is definitely better.

6. Probably not a good idea to have more control over my investments right now given that I'm clueless on the topic.

7. No estate planning issues here but yes definitely must research.

Thanks again for your suggestions/help!

[jIM_Ohio]

4. No idea about my future tax bracket, in fact no idea about my current tax bracket! (I know its something I should educate myself about which is why I recently joined this forum so I can get educated re my finances)

Reference Room


check the fairmark link for tax references

[lennygaudy]

At $33950 you are taxed at 25%, so I would advise 401k until you drop your taxable income below $33k.

Meaning:
If you make 70k and put 5% into 401k now ($3500/year)... do some more math...

$36119-$33950= ~$2000

$2000/70k (gross salary)=2.8%

If you said you have "$5000" more to invest I would advise

$2000 or 3% of gross to 401k
then the rest to a Roth.

This way all your money is either
a) being deferred from tax at 25%
b) being invested post tax at 15%

This makes the Roth a huge winner- pay 15% tax now when more than likely your lifestyle is close to 25% bracket.

Oh I see how that works-so if I get my taxable income under $33950 then my income will be taxed at a lower rate. So the goal is to invest enough in my 401k so that my income is lower than 33,950 which at last year's income would be about 3% contribution.

I'm currently contributing 3% to my 401k which according to your breakdown should be enough to lower my tax bracket except that my 2009 gross income will be about $6,667 higher than my 2008 gross (because I got a second job halfway through 2008 so only half of this 2nd income was accrued last year). I'm not sure how that will affect the taxable income so I may have to increase my contribution to make up for that increase in gross income.

I'm going to try to figure out how much I have to increase my contribution and whether I can swing it this year or not (since I'm currently trying to get out of debt so I need as much $ to throw at that as possible).

It's great to know that you can play around with the numbers like this to beat the oppressive system (lol) I guess this is probably common knowledge to most folks but its news to me, I always assumed when they referred to the tax benefits of the 401k they meant only that it was pre-tax savings without realizing that the amount you contribute also lowers your rate/bracket. Thanks so much!

[jIM_Ohio]

Oh I see how that works-so if I get my taxable income under $33950 then my income will be taxed at a lower rate. So the goal is to invest enough in my 401k so that my income is lower than 33,950 which at last year's income would be about 3% contribution.

I'm currently contributing 3% to my 401k which according to your breakdown should be enough to lower my tax bracket except that my 2009 gross income will be about $6,667 higher than my 2008 gross (because I got a second job halfway through 2008 so only half of this 2nd income was accrued last year). I'm not sure how that will affect the taxable income so I may have to increase my contribution to make up for that increase in gross income.

I'm going to try to figure out how much I have to increase my contribution and whether I can swing it this year or not (since I'm currently trying to get out of debt so I need as much $ to throw at that as possible).

It's great to know that you can play around with the numbers like this to beat the oppressive system (lol) I guess this is probably common knowledge to most folks but its news to me, I always assumed when they referred to the tax benefits of the 401k they meant only that it was pre-tax savings without realizing that the amount you contribute also lowers your rate/bracket. Thanks so much!

Know the tax return you file just a little bit better and you get your answer.

Add the $6600 to your income (line 2 I think)
calculate taxable income (carry thru all other adjustments too)
then look that up on reference room link

Might take your taxable income up $6600, or a fraction of that... just depends on how you do things.

My guess is your taxable income went up from 36k to 42k.

So you need 9k of deductions or adjustments

9k/70k= 13%- so up 401k 13% from the 3% you have now (16% total) before funding Roths. Should drop taxable income into 15% bracket.

[lennygaudy]

9k/70k= 13%- so up 401k 13% from the 3% you have now (16% total) before funding Roths. Should drop taxable income into 15% bracket.

Actually my full-time/primary job is the one whose 401k plan I'm on (my 2nd job is a part-time and I'm not eligible to join their plan) and the total gross from that job was 64,104 so it would have to be 9k/64k which is closer to a little over 14% increase which added to my current 3% contribution would bring the total contribution to 17%. If I'm doing the math right that would mean contributing $10,897.68 but I'd get a little over a thousand extra back in my tax return due to the lower bracket rate.

Well I'm definitely going to make it a goal to be able to max my 401k, as soon as I catch up on my major debts that will be my next challenge-it's just too bad my employer doesn't match but oh well.

Thanks again for walking me through this! Everyone should be required to take a course to learn how to manage their finances-I've wasted so much money on frivolous things (accumulating enormous debt) simply because I hadn't educated myself about budgeting, finances, etc. not to mention how many years I wasted before enrolling in my 401k (almost 8 to be exact), although in my defense I was very young when I started working at my company so retirement was not even something that had crossed my mind.