Roth 401K Match versus save up cash at a more rapid pace

Member since 2019 · 16 posts · 0 votes

I have been contributing to a Roth 401k at work. In order to get the full match I put in 6% to get a 4% match. It has built up to almost $9,000. I read Scott Trench's Set for Life for the second time the other day and I was considering maybe holding off on the match to build up significant amount of money for a down payment on a rental property. The thing is I'm not sure it's worth it. I only estimate i'll be able to save roughly $2,400 more a year. Versus roughly around $4,000 a year in my roth 401k. Is there any advantages like using it to qualify as reserves? Or taking out a loan against it penalty free once it builds up.

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Eamonn McElroy

Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes

@Oneil Guntner

"I have been contributing to a Roth 401k at work. In order to get the full match I put in 6% to get a 4% match. It has built up to almost $9,000. I read Scott Trench's Set for Life for the second time the other day and I was considering maybe holding off on the match to build up significant amount of money for a down payment on a rental property."

Assuming you meet the vesting requirements, you get an instant 67% return by contributing 6% to your workplace retirement plan. Where else can you get a guaranteed return like this?

Contribute 6%, then find a way to save more outside of the retirement plan.

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Fred Cannon
Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes
6y
@Oneil Guntner if you take out a loan it is usually a 5 year limit on pay back so you would need to adjust your
Bills accordingly. Don’t take out a loan and then suspend your monthly savings because you can’t afford the loan and to save.
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Oneil Guntner
"I have been contributing to a Roth 401k at work. In order to get the full match I put in 6% to get a 4% match. It has built up to almost $9,000. I read Scott Trench's Set for Life for the second time the other day and I was considering maybe holding off on the match to build up significant amount of money for a down payment on a rental property."
Assuming you meet the vesting requirements, you get an instant 67% return by contributing 6% to your workplace retirement plan. Where else can you get a guaranteed return like this?
Contribute 6%, then find a way to save more outside of the retirement plan.
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Oneil Guntner
OP
Member since 2019 · 16 posts · 0 votes
6y
@Fred Cannon Can you explain this to me like I’m five?
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Oneil Guntner
OP
Member since 2019 · 16 posts · 0 votes
6y
@Eamonn McElroy honestly this is what I was thinking. I’m still putting $2400 a year in savings on top of this. I’ll just try to gain a higher income since that is such a high return on investment before the growth even happens.
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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
6y
@Oneil Guntner
Please note that matching contributions are made on a pre-tax basis (ie deposited in the pre-tax account).
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Oneil Guntner
OP
Member since 2019 · 16 posts · 0 votes
6y
@George Blower That is good to know, I was assuming I was paying the taxes for the contributions.
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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
6y
Originally posted by @Oneil Guntner:
@George Blower That is good to know, I was assuming I was paying the taxes for the contributions.

1) yes - your employee roth contributions are post-tax and deposited in a Roth sub-account

2) Employer matching contributions are deposited in a separate pre-tax account
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Account Closed
Member since 2018 · 127 posts · 106 votes
6y
I would recommend continuing contributing to your 401k to get the match. That is free money that you are passing up, assuming you are not looking to leave your company and therefore have not met the vesting period.
With that being said, one thing to consider in Scott Trench's book is what are your goals? Is your goal to be filthy rich when you get to retirement? Is it to retire early? Is it just financial independence? Depending on what you want to achieve, contributing to your 401k t o get the match may be part of the solution.
Another thing Scott Trench talks about is, is it worth it? For example, on a typical persons budget, the biggest cost expenditures are housing, transportation, and food. Cutting down on those categories will have bigger impacts to a typical person budget than cutting down on entertainment. For the other categories in a typical budget, I think he says to not really pay much attention to them because the amount you save isn't going to drastically impact your ability to save. I think your 401k falls in that later category.
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Nik Corbaxhi
Rental Property Investor · Stratford, CT · Member since 2019 · 154 posts · 115 votes
6y
@Oneil Guntner, 4% matching on your 401k is a significant return with very low risk to you (other than knowing your vesting timeline as each company has different vesting methods). So you are pretty much getting $0.67 for every dollar that you are contributing on your 401k. There is no real estate investment that will give you that return, no doubt about it, not without a whole lot of risk exposure anyways.
As far as taking a loan against your 401k, as mentioned, the longest time would be 5 years to pay it back. This is also dependent on whether you foresee yourself in your company for 5 years or longer. If you end up leaving, I think you have to pay all the loan back within a few months. So if you decide to take a loan against your 401k, make sure it is not substantial to the point where you cannot paid it back if you were to lose your job. Also it is not technically penalty free as you have to pay interest on the loan, even though the interest is to yourself in the form of 401k investment. You can argue that the money is on your 401k, but you cannot touch it without a penalty until being vested, hence limiting your cash flow today.
Having been in your situation, I always capitalized on 401k first (especially since mine was 4%, dollar to dollar match), and then tried to figure out ways on how to aggressively save for investment opportunities, without touching 401k account.
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
6y
@Oneil Guntner
Here's how I'd think about this situation:
Suppose I have more or less the following net worth profile:
I'm 27 years old. I earn $60,000 per year, I have $9,000 in my retirement account and $5,000 in cash. I have no other debts. I save about $1,500 per month.
The goal here, at least the goal for the reader of Set for Life, is to obtain financial freedom as rapidly as possible.
The first step is to increase the savings rate methodically and obtain a nest egg of ~ one year of expenses in some sort of liquid form. This, in my opinion, helps people stop living paycheck to paycheck and begin reframing their career and life goals from playing to "get by" to playing to win.
However, there are always tradeoffs. In this case, one could contribute 6% of the salary to get a 2/3rds match. Specifically, that would mean contributing $3.6K to get a match of $2.4K, all pre-tax( a total of $6K).
If one didn't take this match, one would pocket ~$2600 (rough guess at after-tax profile) after-tax.
I think in this case, especially if the match vests fully and immediately, that it's hard to say no and not take it.
Now, if you are living paycheck to paycheck and have no emergency fund, then this becomes a harder decision. But for the person with the above profile, they are only slowing their savings progress after-tax by $2,600 per year - delaying their progress by about a month and a half at a savings rate of $1500 per month.
The answer for me would be to take the match, and then get super aggressive about saving up outside of that.
Podcast Guest on Show #223
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Oneil Guntner
OP
Member since 2019 · 16 posts · 0 votes
6y
@Scott Trench
First of all, thank you so much for taking your time to comment. I’m on the second round of listening to your book on audible because you were in my top 10 I wanted to revisit this year which sparked this post.
I can relate to your example. I’m 24 and have 8,800 in my Roth 401k. I do have a $1,000 emergency fund saved up but besides that I’m just saving for a wedding. I have now made the purchase on a ring in which I did use credit card churning to get points since I saved up the cash. I’m anticipating I will start making commissions in 2020 forming a team with my mom on the residential side of real estate and I may be doing commercial lease renewals as well. That’s what I’m going to use to create the freedom of options you talk about in your book. I’m planning on reinvesting any commissions I earn.
Final Decision: I will continue investing in my 401k to get the free money
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Oneil Guntner
OP
Member since 2019 · 16 posts · 0 votes
6y
@Brian Spies
Thank you for the comment. I agree it should be based on my personal goals which would probably be an even spread of everything. Scott Trench’s point about cutting out the big things versus the little things is one of my favorite lessons in the book. I think “I Will Teach You to Be Rich” may also talk about it but I’m a big advocate of not getting into a huge amount of debt over the big purchases in life like college, house, etc.. and then you can afford some small items here and there or even some more larger items every once in a while as well.
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