I have been thinking a bit about 401ks as of late. Basically, I get that the point of having a 401k is employer matching, and deferred taxation. However, I’m confused as to how much of a benefit it is. I’m 22, single, unmarried, and make 52k a year. Furthermore, I am on the road for his job, so I have no food, housing, or car expenses. Obviously the wise thing to do at this point is to start banking a lot of money for retirement and future expenses. Here’s what I see as the benefits/costs of a 401k:
Before tax income
It costs money to access the savings in the 401k.
If you borrow against the 401k, I don’t think you can change jobs without having to repay the loan or pay stiff penalties
Beyond the costs, it is simply more difficult to access money in a 401k
Relatively limited investment options
So far this year I have been just putting in the amount my company matches, simply because I needed some cash on hand to cover expenses until I was reimbursed, and I was saving up for Lasik. Now I have enough cash on hand, and the Lasik is paid for, so I need to start investing something for my future. I think the key point is gaming the system to minimize my tax liability over the future. The tax brackets (adjusting for my deductions) are:
10% of the income between $8,951 and $16,975,
15% of the income between $16,976 and $41,500,
25% of the income between $41,501 and $87,800,
28% of the income between $87,801 and $173,500,
The obvious observation is that there is a big tax at 41.5k, but only a small one at 87.8k. That means, to me, is that I want to maximize my take home income in the <41.5k bracket, and minimize it in the brackets above. In other words, I should be saving now for future expense, and then put away more and more money in the 401k as my income goes up. Basically, my plan is to put enough in the 401k to get down to the <41.5k bracket, and sock the rest away for future expenses. That will allow me to use my savings to avoid paying interest on loans, and reduce the overall payments. Thus, when I am making more like 60k in a few years, I would have more free income to put into the 401k. Hopefully enough to continue to keep my income out of the 25% tax bracket.