My employer matches up to 4% on 401K. My contribution is 6% of my gross pay. I vaguely remember reading at one point that you should contribute up the the employer max (free money), but anything beyond that should go into something else, like an IRA or paying down personal debt (if applicable).
I dont have any personal debt. Is there any reason I should change my personal contribution to 4% and put the extra into an IRA or something else? Isn’t an IRA based on the stock market too? Is one medium risk fund all that different from another? Are there other reasons I may be missing?
The employer match makes a 401(k) a better value. There’s just no real reason to put in funds above the matching rate because you can earn better returns elsewhere.
If you are within the income limits of an IRA (which are relatively low for people with retirement accounts at work), the IRA is a better idea because it has none of the hidden or not so hidden fees that a 401K plan has - it isn’t by accident that most of the funds in a 401k have higher fees than the best mutual funds you could find yourself. Plus in an IRA you have the option of buying individual stocks and bonds and skipping all fees entirely except the commission to buy it in the first place.
Edit to add, so you save vs a 401k buy getting the same tax benefits, but with lower/no fees on your investment choices.
Your matching contribution is tax deferred. My employer is a 403(b) plan and we pay 5%. We match up to another 5%.
So, lets say you contribute 10%. We would give you the basic 5% as an employee. Then contribute another 5% to the plan as a matching amount.
Example 2 - You contribute 7%, then we pay 5% plus another 2% matching. You just lost 3% that we were willing to give you.
If you elect not to contribute at all. We still pay the basic 5%. But, you’ve just thrown away the other 5% we would have matched.
There are lifetime deferral limits that are a huge PITA for our benefits coordinator. She constantly has to check that our higher paid employees don’t go over the limit.
The rule of thumb is that you invest retirement money in this order:
401k up to employer match.
IRA up to limit
Remainder of 401k up to limit
taxable accounts.
Obviously, your milage may vary. How much money you make, what you want to invest in, when you want to retire, etc. can all change that.
The basic reasons they’re in this order are:
401k match is free money.
IRAs are somewhat more flexible than 401ks. You have more investment choices, you can often get lower fees (although not always. Some 401ks are awesome), and, if you do a Roth IRA, you have a lot more flexibility about when you take the money out.
401k is still tax-deferred, which makes it better than a normal taxable brokerage account.
This is what’s left. If you want to invest more for retirement, it’s usually your only option at this point.
This only applies to retirement money. If you want to invest for the near term, like to buy a house in a few years, or you want to pay off loans you have, those are other considerations, and it’s pretty tough to come up with general rules, although I tend to be in favor of:
Accumulate an emergency fund of 3+ months expenses.
401k up to employer match
Pay off any high-interest-rate debt
then go from 2 onward in the first list.
FWIW, I personally contribute above the employer contribution to my 401k, but only after filling up a Roth IRA.
If I understand you correctly, an employee paying 10% to the account gets another 10% matched, giving a total of 20%. What industry do you work in? That is far more generous than anything I’ve even heard of. The standard Silicon Valley plan is up to 6% gets matched 2/3 or up to 4%.
[QUOTE=<snip> The standard Silicon Valley plan is up to 6% gets matched 2/3 or up to 4%.[/QUOTE]
Thats how my plan is and every plan I have had before. It’s usually a 50-75% match up to a certain %, so to get the max contribution (4%) from the employer, you have to put in 6%. If you drop yours to 4% the match will drop.
The rule/guideline I have always heard is to put whatever % it takes to get the max match from the employer but no more. Anything over that, put it somewhere else like a IRA.
Definitely put enough in to get the maximum match possible - anything else is leaving free money on the table.
And while the lists of “do in this order” are valid, it can be complicated by your personal tax situation. For example if your income is high enough that you can’t put money into a Roth, or a deductible IRA, then you might be better off putting more pretax money into the 401(k).
It’s worth doing some number crunching and what-if scenarios to see which you think is better for you.
Personally, we’re both putting in enough to get the match, plus some more, with a mix of regular and Roth 401(k). Not bothering with separate IRA contributions most years, as we’re beyond the income limit for Roth IRAs.
The regular 401(k) is so we can reduce our current taxable income.We’ll need to re-think things next year when we take a look at the tax situation.