Would you contribute to a 401k or TSP without employer matching?

16 Replies

This question is for military and non-military. I have recently started a traditional 401k with a small chunk of my W-2 income contributing. I am active duty military, so there won't be an employer match. I (most likely) will not be staying in 20-30 years, so I sort of feel like this money is just uselessly sitting in the account, maybe it will grow, maybe not. But if I leave the military in 5-10 years, the amount in the 401k won't be high enough to matter, plus I cannot access it (apart from the self-loan feature which may or may not be available when you are no longer active), until age 60 or so.

@Andrey Y. Contributing to both will reduce your taxable income for the year since the contributions reduce your taxable income. That is the main advantage that I see here. 

IMO, the tax reduction (assuming trad, not Roth IRA) isn't worth it vs. the disadvantages. When you eventually withdraw your money from a trad. IRA or 401k, you'll be taxed at ordinary income rates, whereas the investments that generated the gains may be taxable at 15% cap gains rate had they not been invested inside the plan.

Most cash-flow producing investment real estate already has great tax advantages, so other than not being able to reduce your taxable income via a contribution, you may be better off just investing outside the plan in RE, and doing 1031 exchanges to the extent you're able to do so.

Depends - can you earn more on your money outside the 401K then don't contribute.

I was active duty and I do not regret investing in my TSP. I would recommend it as a way to diversify your investments if you do not have any other vehicles to invest in. I did not at the time--and really REI and your TSP should be considered in your investment strategy. What are your goals for your investments? What else would you do with that money? Would you invest in a fund elsewhere in a Roth IRA structure? Many different things to consider.

I hope that helps.

There are a couple unique advantages to the TSP.

1. you can take all bonuses and place into your TSP tax free, otherwise you will get taxed at 30% for all active duty bonuses. i.e. my enlistment bonus was my initial contribution into my TSP while at boot camp, no taxes.

2. You can take a loan out on your TSP. The loan must be repaid in 5 years, cannot be more than 50% or no more than $50K, and will be paid back at the current interest rate of the G fund, which right now is 1.8%. All interest paid is actually paid right back to you, placed into your account.

3. You can open a ROTH TSP now. Which I would definately contribute to vs. the traditional, becasue you pay taxes right now witht eh ROTH vs. your income bracket at 65 with the TRAD.

I personally am still contributing to my TSP even though I would love to add another 10% of my income to my REI ventures. But I am taking a very conservative and diversified approach. I can still use the money though, and pay myself interest which is awesome.

Originally posted by @Michael Roy :

I was active duty and I do not regret investing in my TSP. I would recommend it as a way to diversify your investments if you do not have any other vehicles to invest in. I did not at the time--and really REI and your TSP should be considered in your investment strategy. What are your goals for your investments? What else would you do with that money? Would you invest in a fund elsewhere in a Roth IRA structure? Many different things to consider.

I hope that helps.

Thanks. I do have a self-directed Roth IRA invested in real estate. Apart from passive cash flow, I am not contributing my own funds into it currently.

Originally posted by @Joel W. :

There are a couple unique advantages to the TSP.

1. you can take all bonuses and place into your TSP tax free, otherwise you will get taxed at 30% for all active duty bonuses. i.e. my enlistment bonus was my initial contribution into my TSP while at boot camp, no taxes.

2. You can take a loan out on your TSP. The loan must be repaid in 5 years, cannot be more than 50% or no more than $50K, and will be paid back at the current interest rate of the G fund, which right now is 1.8%. All interest paid is actually paid right back to you, placed into your account.

3. You can open a ROTH TSP now. Which I would definately contribute to vs. the traditional, becasue you pay taxes right now witht eh ROTH vs. your income bracket at 65 with the TRAD.

I personally am still contributing to my TSP even though I would love to add another 10% of my income to my REI ventures. But I am taking a very conservative and diversified approach. I can still use the money though, and pay myself interest which is awesome.

 Interesting points, Joel and others. I actually did strictly traditional simply because of the tax write-offs. But maybe it makes more sense to split some into a Roth. Does anyone know if the funds allocated, ie. G, S, etc. can be set differently for the traditional and roth portions?

@Andrey Y. The lack of an employer match makes a huge difference and makes it a very personal decision and forcing a person to be honest with themselves.  If I was talking to a friend I knew who has difficulty saving and is spending his/her W-2 income on 'stuff' vs. investing in something, then the 401(k), even without an employer match, would make sense to help them save for retirement.  If the individual is good at living within their means and investing the cash flow vs. consuming 'stuff' then they likely already know the answer and should be investing outside of the 401(k).

I wouldn't suggest investing in a 401(k) for the sake of 'diversifying'.  There was a period in 4Q2008 and 1H2009 where nearly every asset was arguably correlated and went down.  :)

Some people believe 'you can't get hurt with dirt', there are others who argue the 'liquidity' of the stock market is better, and there are others who play in both arenas vs. betting on only 1.  Some people can't stomach the nanosecond MTM of the stock market.  Ultimately, it's a self assessment.  If it's going to keep you from sleeping 28 nights of every month, then it sounds like you should avoid it.  :)

Originally posted by @Scott VanHee :

@Andrey Y. The lack of an employer match makes a huge difference and makes it a very personal decision and forcing a person to be honest with themselves.  If I was talking to a friend I knew who has difficulty saving and is spending his/her W-2 income on 'stuff' vs. investing in something, then the 401(k), even without an employer match, would make sense to help them save for retirement.  If the individual is good at living within their means and investing the cash flow vs. consuming 'stuff' then they likely already know the answer and should be investing outside of the 401(k).

I wouldn't suggest investing in a 401(k) for the sake of 'diversifying'.  There was a period in 4Q2008 and 1H2009 where nearly every asset was arguably correlated and went down.  :)

Some people believe 'you can't get hurt with dirt', there are others who argue the 'liquidity' of the stock market is better, and there are others who play in both arenas vs. betting on only 1.  Some people can't stomach the nanosecond MTM of the stock market.  Ultimately, it's a self assessment.  If it's going to keep you from sleeping 28 nights of every month, then it sounds like you should avoid it.  :)

Thats a good point. I called USAA earlier today and talked to one of their "financial advisors". I feel like all they do is regurgitate the same information to every customer. "Diversify, invest more into Roth if you're young, yes you should do tsp.. etc. As soon as I bring up real estate its like they didn't hear me and continue with the same schpiel. I mention 'self-directed' IRA and they just continue on with investing in the TSP. Geez.

Originally posted by @Joel W. :

There are a couple unique advantages to the TSP.

1. you can take all bonuses and place into your TSP tax free, otherwise you will get taxed at 30% for all active duty bonuses. i.e. my enlistment bonus was my initial contribution into my TSP while at boot camp, no taxes.

2. You can take a loan out on your TSP. The loan must be repaid in 5 years, cannot be more than 50% or no more than $50K, and will be paid back at the current interest rate of the G fund, which right now is 1.8%. All interest paid is actually paid right back to you, placed into your account.

3. You can open a ROTH TSP now. Which I would definately contribute to vs. the traditional, becasue you pay taxes right now witht eh ROTH vs. your income bracket at 65 with the TRAD.

I personally am still contributing to my TSP even though I would love to add another 10% of my income to my REI ventures. But I am taking a very conservative and diversified approach. I can still use the money though, and pay myself interest which is awesome.

 Do you know if you can do that loan bit after you've left active duty.

I put a good chunk in my 401k and do get a healthy match. My last employer I lost the match with the union contract favoring a Crappy pension(I was able to get a buyout when I left thankfully). I like the tax benefits on my contributions but the biggest benefit is that it acts as reserves for financing purposes...

Yes, because it is still my money.  The tax savings also contribute.   It serves as reserves for investments and you can take a loan against it.  I would roll it over to a better plan on leaving (you can do that only when you leave an employer).  If you roll it to a different plan on leaving you will still be tax deferred but you may lose the loan provision if there is one. The loan provision is a nice way to get extra cash quickly if you need it. It is low interest and low paperwork option.  It also is a structured saving method because you just adjust to not having that money.

I love the Idea of 401k investing, matching, and saving. I have clients who work with me and we get two to 3 flips a year. The money turns nicely and grows tax free once it is in there. I am open if you need advise or education. 

There are two guys I recommend when it comes to this type of stuff.  

Dmitriy Fomichenko

I also like Jim Hitt with American IRA this guy knows his stuff and can help you well. Google him. He manages over $300,000,000.00 in assets and he has built and managed funds.

I wish  you well.

I'm in the same boat with this question. I had a break in active duty service where I was a GS-10 national guard technician, and I got the 5% matching, so I contributed about $11k. It has gone up to $13k and back down to $11k since 2011.

Not very impressed.

Now I'm back on active duty (AGR Guardsman) and wondering if it's a complete waste of time and money to fund the military non-matching TSP. Just buying and flipping vehicles from Craigslist in my time off I have vastly outperformed my small TSP account from civil service.

And that leads me to think that in the big-boy market of housing, I will also vastly outperform any advantage in the TSP.

On active duty in high BAH zones (I'm in the San Francisco area) most of our pay is tax free to begin with. We don't pay anywhere near the tax rates, percentage wise, of the rest of the country (even though it takes every penny of my $3675/mo housing allowance to live our 2BR life and STILL commute)

But that brings up the other question. I'm not looking to punch out at 20 and move to backwoods Arkansas so I can afford to live on my estimated $2800/mo defied benefit pension. I'm from the SF Bay, and I want to LIVE where I'm from.

So without a VERY aggressive plan to work my limited money between now and the retirement dinner, I don't see how my time in boots will EVER allow me to retire where I was born and raised. Can't buy a house to ride the equity train when your 2BR rental appraises for almost $800k.

So, E-6 promotable at 40 years old with another decade to go for enough active duty retirement points (I had a lot of guard and civil service time, so 16.5 good "years" so far but not full up on pay points), I truly can't crunch the numbers in a way that shows me any benefit to plugging $18k/yr into a Roth TSP. That amount is 50% of my annual rent. Unless it rockets into the stratosphere with gains, I think id be pissing upwind and wondering why the air tastes tangy. I wish I could access my locked up civil service TSP money, but since I'm technically " on leave" from the GS job to serve this "activation", I can neither cash it out with penalties or borrow my 50% out of it.

If I'm missing something here, experienced military BP folks, feel free to square me away.

I've been chewing on this one all week on this TDY (reading BP forums from my Kirtland AFB billeting room every evening).

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