401K questions......

[CHCRandy]

They match another 6% at a full 100%? My last job was 50% up to 6%, (i.e. if I put in $1000, they put in $500 on top of that).

My current company has a Simple IRA - no vesting period, 100% on first 3%.


OK, I'll be the wet blanket, CHCRandy, I think you'll at least take my thoughts into consideration.

You don't always have to invest in a company sponsored 401K; sometimes that "free" money isn't free.

About half of INGO just fell out of their chairs.

Here's some reasons why I suggestion considering not investing in a corporate 401K.
(1) You might, leave before the vesting period is up. At that point, the free money is lost and you're stuck with a pittance in an account you really don't want and then have the headache of trying to transfer it.
(2) Most 401K's have high fees and a very limited option of mutual funds. Randy, I'm sure you'll agree that's a horrible prospect when trying to make money grow.
(3) 401K's are income deferment. That's a key point. You're putting your income into that account and will draw income from it when you retire.
(4) There's a lot of rules on when and how much you need to withdraw from that account once you retire.
(5) You pay taxes on what you withdraw - the deferred income and interest (i.e. growth).

For a long time I eschewed a company 401K for these reasons and shoved as much money as possible into a Roth IRA. Why?
(1) Roth IRA's can be wholly self directed - I can buy and sell as much stocks as I want.
(2) The money is always under my control.
(3) The money grows tax free.
(4) Withdrawing from a Roth IRA is much more flexible.
(5) When I was young and in a lower tax bracket it made much more sense to pay the taxes up front and let the money grow (and grow and grow) tax free.

Now that I'm in my 40's, I'm in a much higher tax bracket and have less time for money to grow, so I'm shifting over to investing in the company's Simple IRA - which has big fees and limited investment options.

Jetta...The stars must have aligned because I pretty much agree with everything you said which is why I asked to start with. I like the Roth for the simple fact your contribution can be withdrawn at any time without penalty and no taxes when older. I guess a person could always have a 401K and a Roth...is that correct? It's just hard to not take advantage of them matching you $ to $ up to 6% of pay...but if you leave the job after a year, you got nothing but what you would have had to start with, maybe even a loss after fees.

 

[JettaKnight]

Jetta...The stars must have aligned because I pretty much agree with everything you said which is why I asked to start with. I like the Roth for the simple fact your contribution can be withdrawn at any time without penalty and no taxes when older. I guess a person could always have a 401K and a Roth...is that correct? It's just hard to not take advantage of them matching you $ to $ up to 6% of pay...but if you leave the job after a year, you got nothing but what you would have had to start with, maybe even a loss after fees.

I do now actively contribute to both a Simple IRA (a 401K for small companies) and a Roth IRA. For me, I need the benefit of lowering my current tax liability so most goes to my Simple IRA. Plus, the limit on a Roth IRA is $5500 and the 401 K limit is $18,000.

TL/DR: A Roth IRA can grow faster, but a 401K gets a head start because of funds matching.

At one point I calculated out that even with company matching, my Roth IRA would exceed a 401K up until about my mid-40's. The reason is that I could achieve higher expect returns by investing in stocks and index funds instead of the pathetic mutual funds of a 401K. This was all based on historical returns, not me pretending to be a super stock picker.

At 40-50, the numbers start to change: there's not enough time for compound interest to get the Roth IRA to catch up and beat the 401K.

What you can't do is fund a tradition IRA to any degree if you're eligible for a company plan. This does affect me because my wife's company 403B sucks big time.


IANACPA, YMMV, yada, yada, yada.

 

[Thegeek]

Tell her to put 12% in and live like she never had it in the first place. She'll thank you in 20 years.

 

[WebSnyper]

Congrats on your daughter's new job.

Looks like they've already covered the technical aspects of your questions. Here's by 2 bit investment advice - actually worth less than $0.25. I'm a believer in index funds....US large cap, US small cap, international. They tend to do better than actively managed funds, on average, due to much lower fees. Any good sized company would offer an array of these options. She can round out with some bond or stable funds, but she should be aggressive at her age since she has time on her side. She's just buying lower if the market goes down at this point.

However, everyone has a different comfort level. Most important is getting into the habit of saving, as several have already mentioned.

This is an important aspect, she should look at the expense ratio of the funds that she will invest in within the 401k. I agree index funds are generally good for low fees (the index fund manager just has the fund following the established index, so there is not much active management and therefore the fees should be less).

They will make a 4% investment whether she does or not, but if she invests 6% they will match up to 6%, but the 4% is separate of that. So if she puts in 6% they will put in 10%.

Thanks to everyone for your advice.....it is really appreciated.

Sounds pretty good, and as most have said, many companies vest a % each year over the vesting period.

They match another 6% at a full 100%? My last job was 50% up to 6%, (i.e. if I put in $1000, they put in $500 on top of that).

My current company has a Simple IRA - no vesting period, 100% on first 3%.


OK, I'll be the wet blanket, CHCRandy, I think you'll at least take my thoughts into consideration.

You don't always have to invest in a company sponsored 401K; sometimes that "free" money isn't free.

About half of INGO just fell out of their chairs.

Here's some reasons why I suggestion considering not investing in a corporate 401K.
(1) You might, leave before the vesting period is up. At that point, the free money is lost and you're stuck with a pittance in an account you really don't want and then have the headache of trying to transfer it.
(2) Most 401K's have high fees and a very limited option of mutual funds. Randy, I'm sure you'll agree that's a horrible prospect when trying to make money grow.
(3) 401K's are income deferment. That's a key point. You're putting your income into that account and will draw income from it when you retire.
(4) There's a lot of rules on when and how much you need to withdraw from that account once you retire.
(5) You pay taxes on what you withdraw - the deferred income and interest (i.e. growth).

For a long time I eschewed a company 401K for these reasons and shoved as much money as possible into a Roth IRA. Why?
(1) Roth IRA's can be wholly self directed - I can buy and sell as much stocks as I want.
(2) The money is always under my control.
(3) The money grows tax free.
(4) Withdrawing from a Roth IRA is much more flexible.
(5) When I was young and in a lower tax bracket it made much more sense to pay the taxes up front and let the money grow (and grow and grow) tax free.

Now that I'm in my 40's, I'm in a much higher tax bracket and have less time for money to grow, so I'm shifting over to investing in the company's Simple IRA - which has big fees and limited investment options.

Rollovers are not that difficult, but you do have to pay attention to the fine print and govt regulations otherwise you could end up with a penalty.

401k's are really nice for someone who may not actively manage individual stocks, etc and that stay through vesting periods (if any, my company doesn't do a vesting period on the 401k), and can reap the benefits of company matching.