Question:
Should we always contribute the max to our 401k with company contribution?
Blue T
2011-08-29 13:44:23 UTC
Should we always contribute up to the max of the matching for our company contribution?

I am on my first year of working for this company, should i start contributing to the max now or should i wait for 4 years of working here till my company is 100% vested in me before I should contribute to the max ? I figure there is no point of contributing max now since my company is not 100 percent vested in me yet, and if i were to quit or get layed off, I still wont get to keep those company match anyways right? Can you give me some advice on what I am doing is a good idea?
Four answers:
John W
2011-08-30 00:44:06 UTC
Generally, a 401k doesn't offer very good investment choices as the plan provider's customer is your employer and not you, your employer want's the lowest cost to him so the plan provider makes their money off the high fees and loads of the mutual funds offered to you in the 401k. Some employers will pay the plan provider more in order to offer their employees a better selection of mutual funds but this is the exception not the rule. However the employer's match is free money, basically doubling your investment right off the bat so even though the investment choices are poor, investing up to the employer's match is a good decision as the match guarantees a decent return.



After you've met the employer's match, you should consider maxing out your IRA which typically offers much better investment choices. Brokerage IRA accounts are available and they offer all the investment choices that you would have with a brokerage account. You still have to make sound investment choices but if you're willing to put the time and effort into it, you should be able to do better with an IRA than a 401k. The Roth only has an advantage over the standard IRA early in your career when you're underpaid, if your career is going well, you should switch contributions to a traditional IRA while keeping your Roth. The contribution limit of the IRA's is only $5,000 a year so after you've maxed out your IRA's, you go back to adding contributions to your 401k. Even though the investment choices are likely to be bad, tax deferred is still better than taxable investing. If you've maxed out both your IRA contribution limit of $5k a year and your 401k contribution limit of $16.5k a year then contribute your excess to a Brokerage account. Try to hold municipal bonds and long term buy and hold growth stocks in your Brokerage account rather than anything producing taxable income, keep your portfolio balance point inside your tax shelters. That way, you'll be effectively extending your tax shelter as much as possible.



There are two vesting concepts, one is that if you manage to hold the job for 4 years, then perhaps your job is more secure, the other, that of your vesting in the company match starts with when the match is made so if you wait 4 years to start contributing, that just means you won't be vested for 8 years. You should start the contributions as early as possible but only up to the match and then contribute to your IRA's. Not starting now only guarantees you won't benefit from the program.
Chicane
2011-08-29 22:22:48 UTC
I'm getting my 401k up as fast as possible. Right now i sit at 15% a week, and my company only matches 2%. My advice is getting rolling as fast as possible, so this way if you have a family you can lower it down to 6% and still have a good foundation for it. The faster you get units, the better you are in the future.
2011-08-29 20:56:37 UTC
go for the max for two reasons,



1) you will be making money on companies money through divident and price increase etc which you might not have to return



2) if you will wait and end up working for the company for more than 4 years then you will lose the money that company might have given you during the first four years (may amount to about 15-25% of your salary right now)



note



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Go with the flow
2011-08-29 20:47:44 UTC
Go for the max. You might end up working there the full 5 years

At least that money will grow for 5 years tax free (huge advantage)

And, you can roll it over to an IRA if you get fired - to continue the tax savings


This content was originally posted on Y! Answers, a Q&A website that shut down in 2021.
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