401(k) Contribution Question

[minski]

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@Anonymous wrote:

Hi, I am 23 years old and am a full time employee. I recently was encouraged a lot by an elder coworker of mines to enroll in 401k. At first, I was not to happy to sign up for saving toward an age that I may or may not live up to. My mentallity was I can invest that money on other things and make more money. None the less, I signed up and set my contribution to 15%. I make 85k. I also have 15% going to my ESPP. 

Thats about $1,000+ from every paycheck of mines. This takes 30% of my salary. The only thing that calms me down is that this is my first job, I was not making as much as I am now, so what i didnt have tobegin with shouldnt hurt.

I am the youngest in the family, have elderly parents (retired pops and stay home mom) and 3 brothers. I also need to start contributing to the house soon, more than I already have. 

Now my question is, do you guys think this is viable? Should my 401k contrubution be reduced? Should I wait it through? Should I reduce now? 

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Thanks so much for posting this. I'm in my mid-30s and wishing I'd started contributing into retirement plans sooner. I've been thinking of increasing my contribution from 3% to 12% but wasn't sure whether I'd be able to live off my take home. I probably make about as much as or a little less than you with OT.... I don't have ESPP though

[Kree]

I would also consider saving 3-6 months pay in easy accessible bank accounts before starting to save for retirement.  You never know when you might lose your job, or have other unexpected expenses.  Making 7% of your money is meaningless, if you end up paying 22% on a CC bill a year later.

[bada_bing]

Unfortunately there isn't a super simple answer. You have to evaluate all

the options available to you and how they are influenced by your financial

situation. Taxes are the big issue, but there are others. Things I would look

into are:

1. How good is your 401K plan as far as investment options, costs and

flexibility for things like loans, in plan withdrawals, after tax contributions ?

Whoever manages your benefits (HR ?) would be a good contact to ask

questions. In general, a 401K that doesn't have a match is usually a lower

priority for savings.

2. Do you have an HSA (health savings plan) option available ? Generally,

a HSA is the single best place to save longterm money. Better than an IRA,

a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

3. You need to check with whoever does your income taxes to see if you

are eligible for tax deductible IRA contributions. You may be over the income

limit. If not, a tax deductible IRA is a better place for savings than a 401K with

no match. The annual limit on IRA contributions is $5500. If you go for a deductible

IRA (strongly recommended), you need to pick a good custodian. I would

recommend Schwab, Fidelity, Vanguard or TdAmeritrade (and no one else).

4. If you are not eligible to make tax deductible IRA contributions, do you have

existing IRA balances? If not, you can do an easy and legal end-around called

a backdoor Roth to get money into a Roth IRA. Google backdoor Roth for info.

5. As long as you pay attention to tax efficiency, investing in a regular account

is a very good option. Again, pick a good custodian for a brokerage account, the

same ones as recommended for IRA's.

The generally recommended order for investing savings goes something like:

1.Invest in your 401K up to the match (you don't get a match)

2. Invest in an HSA up to the limit available to you.

3. Invest up to the limit available to you in an IRA or Roth IRA. The decision

on which is best requires evaluating your current taxes and estimating what

you might be paying in retirement. For most people the deductible IRA is

the best choice if they have that available.

4. Go back and fill up whatever you have left to save in your 401K.

and/or

Invest in an after tax brokerage account. There are some 401K plans that

are bad enough that they are never worth investing in. 

5. A wild card is your ESPP. They are so individual in terms they have to

be individually evaluated to see where they best fit in the order.

However your plan shakes out, I would support saving as much as

you can whenever you can. Don't let the annual limits influence when

think you have saved enough. There are good places to put every dollar you

can possibly save. 

[Kree]

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@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,

a HSA is the single best place to save longterm money. Better than an IRA,

a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

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Why do you say this?  I tried an HSA once. Set it to my deductible on my insurance.  Didn't even spend half of it.  Jan 1st rolled around, and bampf rest of the money gone forever.  Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

[iced]

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@Kree wrote:

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@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,

a HSA is the single best place to save longterm money. Better than an IRA,

a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

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Why do you say this?  I tried an HSA once. Set it to my deductible on my insurance.  Didn't even spend half of it.  Jan 1st rolled around, and bampf rest of the money gone forever.  Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

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FSA != HSA. FSAs work similarly but can only be used the year they are paid into and do not carry over from one year to the next. HSAs not only carry over from year to year, but employer to employer (or even no employer) and once you hit a certain age you can also withdraw from it for non-medical expenses (though it's subject to income tax for the amount not used on medical). Many also have the option to be invested in equity plans, unlike FSA.

[longtimelurker]

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@bada_bing wrote:

If not, a tax deductible IRA is a better place for savings than a 401K with

no match.

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While this is almost certainly true in practice, it's still worth checking.   In theory, a company may set up a 401(K) with a great set of low cost funds, using their money there rather than on a match.

But yes, it's more likely that a company that doesn't match also doesn't have a great set of funds.

[longtimelurker]

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@iced wrote:

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@Kree wrote:

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@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,

a HSA is the single best place to save longterm money. Better than an IRA,

a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

---

Why do you say this?  I tried an HSA once. Set it to my deductible on my insurance.  Didn't even spend half of it.  Jan 1st rolled around, and bampf rest of the money gone forever.  Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

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FSA != HSA. FSAs work similarly but can only be used the year they are paid into and do not carry over from one year to the next. HSAs not only carry over from year to year, but employer to employer (or even no employer) and once you hit a certain age you can also withdraw from it for non-medical expenses (though it's subject to income tax for the amount not used on medical). Many also have the option to be invested in equity plans, unlike FSA.

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Right, you will see HSA's referred to as "triple-tax advantaged"   You contribute money tax deferred, the growth is tax deferred, and eventually you can withdraw it to use it for medical stuff without paying taxes.  Makes a Roth (where you have paid tax on the original investment) seem mean!

[Kree]

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@longtimelurker wrote:

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@iced wrote:

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@Kree wrote:

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@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,

a HSA is the single best place to save longterm money. Better than an IRA,

a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

---

Why do you say this?  I tried an HSA once. Set it to my deductible on my insurance.  Didn't even spend half of it.  Jan 1st rolled around, and bampf rest of the money gone forever.  Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

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FSA != HSA. FSAs work similarly but can only be used the year they are paid into and do not carry over from one year to the next. HSAs not only carry over from year to year, but employer to employer (or even no employer) and once you hit a certain age you can also withdraw from it for non-medical expenses (though it's subject to income tax for the amount not used on medical). Many also have the option to be invested in equity plans, unlike FSA.

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Right, you will see HSA's referred to as "triple-tax advantaged"   You contribute money tax deferred, the growth is tax deferred, and eventually you can withdraw it to use it for medical stuff without paying taxes.  Makes a Roth (where you have paid tax on the original investment) seem mean!

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I hav an HSA at my new job, but my current salary and budget are pretty much the same. Thanks for the advice, I will certainly look into it in the future when I can actually save money.

[Thomas_Thumb]

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@Anonymous wrote:

Hi, my 401k is not matched  

But its like, what would you do? 

ESPP you get 15% off when selling. So its like when I need money I can sell my ESPP. 

401k though is taking the same chunk. Would you lower 401k a bit knowing that ESPP will give you higher return quicker ?

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I'd forget about the Company 401k since it is not matched. No doubt investment choices are limited.

You would be better off setting up a Roth IRA and contributing to it. Less restrictions on withdrawls, more investment options if done through a company like Fidelity and advantageous for those starting early in their career (typically lower tax bracket).

I advise against having all your investment/savings tied to the company stock even if you get a 15% discount. Seen too many stocks drop rapidly. I had one that lost 90% of its value over night.

Again, the company 401k is a poor choice relative to alternatives given no matching $$$. After maxing out contributions in the Roth IRA, I'd suggest funding a traditional IRA account at the same full service investment firm. The issue is auto draft/deposit from your pay check. If you can't set-up the auto deposit, it is easy to "forget" to make regular contributions.

[iced]

I would caution against abandoning the 401k altogether unless you *know* you will contribute more to other vehicles, including Roth. Roth IRA is good but it’s limited to $5500 a year. At 85k, there’s no reason you shouldn’t be striving for at least $15k a year saved toward retirement (in addition to your ESPP) - if you don’t use a 401k, make sure you save that remaining $9500 somewhere.