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Well, while I was still working, my options were limited, and if I wanted a 403b at all, it had to be un-matched. Period. So, that's what I did. I was able to do that for only several years, but it certainly added up to a substantial portion of my total, and it's still growing. Many years, I was able to add just $1,000.00 per year to Trad. IRA, too--- on top of 403b.
There is no RIGHT answer. A lot of factors can come into play. Need for tax deduction, age, etc. Most 401k plans offer Roth options. If there are decent investment choices, that might be a good start for someone who does is considering an after-tax investment, since you can put more dollars away annually in a 401k than in a Roth IRA. The higher contribution amount alone could make this decision for you, assuming your 401k plan has a Roth option.
You raised lots of questions/issues. I hope I can keep some of them straight:
- There seems to be an implicit assumption that the hypothetical investor being addressed doesn't have enough money/earnings to max out all the options.
If one can max out, then Roths tend to become somewhat more attractive (whether in a 401k or in an IRA), because they allow one to contribute a greater after-tax value. For example suppose the limit were say $10K, and one were in a 25% bracket now and in retirement. Then contributing the max, $10K, to a deductible plan would be worth $7.5K in after tax dollars, while contributing $10K to a Roth would be worth $10K in after tax dollars.
The ordering becomes much more important if one cannot max out all options.
Though the 401K contribution limit is higher than the IRA limit, if you're not maxing out everything the higher 401K limit is not a reason to start there first (especially w/o match). If you contribute first to the IRA and max it out, you can then contribute to the 401(k) with extra money.
- Roth 401(k) plan feature. Do most plans now really offer this? I would expect most new plans to offer it, but for existing plans to offer it the plan administrator would have to produce new docs (easy) and the plan sponsor (employer) would have to adopt those docs. Given how many people seem to be complaining that employers don't want to make any changes to improve plans, getting them to move on anything (even this simple) might not be a sure thing.
For example, after nearly a decade, Fidelity still does not offer a Roth option for its individual (solo) 401K(s) - some things do take eons to change.
- Even if you contribute post tax to a 401(k) (i.e. use the Roth option), all employer contributions including matching funds go in pre-tax. One should keep this in mind when allocating between Roth and traditional vehicles.
- Decent investment choices - may not be necessary, depending upon the state of the company and your career expectations. If you expect to be at the company for only a few years and then move on (or retire), it might still be worth participating. If : -- you get a match, certainly up to that amount (assuming immediate vesting); or -- you're maxing out elsewhere - you get more money into sheltered accounts ( and you'll be able to get it out of the 401K fairly quickly); or -- the company is very young/small. Then it's quite possible that it will change plans as it grows into something real. Also, it's a lot easier to push a small company into changing its plan.
- Bob only touched the surface on factors to consider. I won't add to the list, they're virtually endless.
Comments
You raised lots of questions/issues. I hope I can keep some of them straight:
- There seems to be an implicit assumption that the hypothetical investor being addressed doesn't have enough money/earnings to max out all the options.
If one can max out, then Roths tend to become somewhat more attractive (whether in a 401k or in an IRA), because they allow one to contribute a greater after-tax value. For example suppose the limit were say $10K, and one were in a 25% bracket now and in retirement. Then contributing the max, $10K, to a deductible plan would be worth $7.5K in after tax dollars, while contributing $10K to a Roth would be worth $10K in after tax dollars.
The ordering becomes much more important if one cannot max out all options.
Though the 401K contribution limit is higher than the IRA limit, if you're not maxing out everything the higher 401K limit is not a reason to start there first (especially w/o match). If you contribute first to the IRA and max it out, you can then contribute to the 401(k) with extra money.
- Roth 401(k) plan feature. Do most plans now really offer this? I would expect most new plans to offer it, but for existing plans to offer it the plan administrator would have to produce new docs (easy) and the plan sponsor (employer) would have to adopt those docs. Given how many people seem to be complaining that employers don't want to make any changes to improve plans, getting them to move on anything (even this simple) might not be a sure thing.
For example, after nearly a decade, Fidelity still does not offer a Roth option for its individual (solo) 401K(s) - some things do take eons to change.
- Even if you contribute post tax to a 401(k) (i.e. use the Roth option), all employer contributions including matching funds go in pre-tax. One should keep this in mind when allocating between Roth and traditional vehicles.
- Decent investment choices - may not be necessary, depending upon the state of the company and your career expectations. If you expect to be at the company for only a few years and then move on (or retire), it might still be worth participating. If :
-- you get a match, certainly up to that amount (assuming immediate vesting); or
-- you're maxing out elsewhere - you get more money into sheltered accounts ( and you'll be able to get it out of the 401K fairly quickly); or
-- the company is very young/small. Then it's quite possible that it will change plans as it grows into something real. Also, it's a lot easier to push a small company into changing its plan.
- Bob only touched the surface on factors to consider. I won't add to the list, they're virtually endless.