Would you contribute to a 401k/Roth IRA, or not?

59 Replies

My wife's employer offers what seems a good retirement plant. If she contributes to her 401k/Roth IRA 3% of her basic salary, the employer will contribute the same 3%, plus an additional 1% of her basic pay. For example, let's say she makes $100,000. She will contribute annually $3,000 (3%) and the employer will contribute $4,000 (4%).

Would you take advantage of this plan or would you rather do something else (SIDRA, solo 401k, invest it directly without going through any retirement plan vehicle, etc.)?

@David Fernandez

I would definitely take advantage of it. You can do Self direction in an Ira as well. And invest outside both the Ira and 401k. In other words Do it all if you have the income. 

Thank you all @Sam Josh , @Wes Woodhouse , @Nuhan Demirkan , @Carl Fischer , and @Brian Schmelzlen !

I never looked into these types of employer investments/retirement plans as I invest our funds myself and when I worked for someone else, my employer didn't offer one. 

When my wife told me about it, It  also looked like a good benefit to me; however,  I probably read/heard to much hate about these types of plans on here and similar sources of information.

Definitely take them up on it. I liquidated some of my IRA this year, and am paying the penalties. With that deal mentioned, it would still be a net benefit even with early withdraw.

Whether to contribute beyond the matching is another question that is much harder to answer and requires a lot more depth of your situation, plans, etc. 

@David Fernandez

Some will disagree with me, but, not only should you take advantage of the plan, if you and your wife can afford it, max out ($18,000 annually) her contribution to the 401k. Doing so will reduce your taxable income and you can invest the $$ you would have otherwise given the government. Let's say your tax rate is 30%. 30% of $18k is $5400. By maxing out the contribution you now have $5400 more to invest than you would have otherwise had. Compound that difference plus interest for 20 years and the result is significant. 

Too many newbees are on the BP blog and fall for the trap of taking the shiny nickel. Putting the money in a 401k is a horrible idea if your goal is to be out of the rat race before 65 yo. It's only free money if you live to 65 and the investment doesn't implode or get eaten up by advisor fees. Invest in real estate!

@Shawn M.

I'm trying to understand your logic... Suppose I'm trying to get out of the rat race before 65 y.o. I can put small portion of my assets ($3K/yr) in an investment that pays me guaranteed 133% return on my money (that is the case with David's situation). You said that it would be "horrible idea" to do so. What is the alternative that you propose??

@Dmitriy Fomichenko

How can you say guaranteed?  I'd prefer to fund an early retirement plan, investing in Cashflow today puts money in your pocket today. If you do it now there will be no need for a 401k plan. 

Shawn, under that 401(k), if his wife puts in $3k, she is given $4k and the money grows tax-free. She also gets a tax deduction (in the form of less taxable income) by contributing the $3k.

Having compounding interest, primarily on money that was given to you, growing tax-free is a good deal. The downside is that the money is tied up, but that also means it is more likely to be there when you are retired and no longer able to work.

No one is arguing against investing in real estate (we wouldn’t be on BP if we didn’t think it is a great way to build wealth), but why put all your eggs in one basket especially if you can use someone else’s money to diversify?

Make the contribution and take the match.  Never leave the employers $ on the table.  

If possible, contribute more to benefit from the tax saving nature of the 401k.  

Or, if you can afford it, and if the company offers it, make a Roth 401K contribution.  That way you pay the taxes now and all gains are tax free in the future.  

If your wife stays with the employer, after a time, she'll likely able to borrow from those funds should she need to.  Then repay her own account with interest.

If she stays long enough to be vested, assuming she isn't immediately vested, all the funds will be hers upon leaving this job. Then, she could roll it over into an SDIRA/Roth SDIRA if she wants to make the funds available for investing in RE or a regular IRA rollover/Roth IRA rollover for investing in standard stocks and bonds or a combination thereof.

It's a good idea to diversify your portfolio with a variety of investment types.  So, investing in mutual funds or ETF through an employer plan isn't a bad thing, it's just another piece of the puzzle.  

And finally, she can access the funds penalty free at 59 1/2.  Or earlier if she takes it as an annuity.  

This is one of the topics that is a religious war on this site. Shawn calling them horrible is ridiculous. Limited, yes. Drawbacks, yes. Horrible, not unless your plan has high fees which plenty do.

I personally regret having as much money in there as I do. And I have stopped funding mine despite the match and I have a decent plan with low fees and very low fees in index funds.

Why you say? Because life circumstances (and some mediocre decisions too) ran up my credit card debt. Though I don’t really regret doing what I needed to do. There is no way I’m going to beat the interest with the products available. I can’t even withdraw it without leaving my company.

My biggest complaint is that I wish I had it available for real estate investing. Because real estate is a game I can play and win opposed to stocks which I have little influence over. I can go in or out but it seems like everything in my plan goes up or down at basically the same rate
following the market.

I’ve seen the math that shows why it makes sense to buy at a constant rate. And I did it. But what I saw was for years at a time I got a lousy return. Then the market would jump and it would be okay but not great. If I had a way to bet against the market in it I’d be a lot happier. And before you call me an idiot for not understanding how all that works. That’s my point. I shouldn’t be in stocks. 90% of people don’t get it and do it wrong too.

The best thing that can be said about the match is you can usually borrow half at decent rates which happens to be the matches money.

There are other downsides too. Yes the 401k is pretax now but you pay when you take distributions. Yes the match is great but think diluting your focus is not helpful.

Even though I don’t like it much now, they have their place and are a decent option with the match.

My 2 cents, for what it’s worth: Even if you make 0 rate of return, your wife’s employer is handing her 3% free money plus the savings on tax rate by lowering your taxable income. I’m not good on the maths, but isn’t that 100% return on investment?

If you’re afraid the market will crash again, be conservative and put it in low risk buckets. You’ve still been given 100% of your initial investment!

So maybe you have $3k less a year to spend on investment, but how likely is that to break you or end your ability to invest if you’re both working? There are people in this country that spend that much on coffee...

Another vote for yes, absolutely she should contribute to the 401-k. I'd contribute enough to capture every matching nickle. 

I'll add I'd leave those funds in 401-k plans - I would NOT cash them out early to invest in real estate - I'd leave them there until retirement (or until I had a low income year where it would make sense to do a Roth conversion). 

Not every nickle needs to be invested in real estate. I'm an advocate in diversification. I'd invest the retirement funds in stocks and bonds - REITS if I must have more RE exposure...

If you are interested in asset protection, note that some states protect 401-k funds differently than other assets, including IRAs. For this reason consider keeping 401-k funds in 401-k accounts...