Hi everyone, I recently landed a new job where the base 401(k) contribution for all FTEs is 12% of your salary. This is regardless of your contribution, with no additional match. I realize that this is unusual for most people and it is for me as well. In my last job, I got up to a 6% match so I maxed that out and didn’t think on it any further.
I currently contribute an additional 5% on top of the 12% that my employer provides, but got chatting with a coworker who mentioned that they were advised to take that money and, since it was not being matched, put it into the stock market instead. I’m open to learning, but have very little knowledge of stocks, cryptocurrency, or likely any other potential option you may suggest.
For a little extra information, I am in my mid-twenties, earn mid-five-figures/year, have little saved for retirement right now, and am open to any suggestions you may have.
So, what would you do in my situation? Thanks for any replies!
The main concerns here are:
- taxes - 401k contributions defer taxes (or prepay for a Roth account), and there’s only so much tax-advantaged space available
- investment options - 401k plans have limited fund selection, but many are good enough
If you’re planning to invest 5% regardless, choose the account that gives you the best tax advantages that matches your investment plan. For most, that’ll be the 401k in an S&P 500 or total US stock market fund. If the fees aren’t too bad, I’d absolutely go with the 401k.
If you’re in the 12% or below bracket, I recommend Roth if it’s available. If you’re above, deferring taxes is probably the better plan. If your funds are super expensive (say, >0.5% fees for an index fund), you might be better off in a taxable account.
The best I ever had was a 6% full match, and the company contributed another 3% that I didn’t have to match. The result was company contributing 9% and me contributing 3%. So I agree with other comments saying you should probably be contributing about 15% total. That extra 3% doesn’t have to be in the same account though, you could open your own if you get better investment options with lower fees.
12% contribution that you don’t have to match is amazing and just make sure you’re fully vested before you take a new job. Sometimes there is a rule that those contributions are not truly yours until you’ve been at the company for a number of year.
Employers are limited in paying into 401ks for highly compensated employees, and are required to have a certain percentage of their normal employees putting money in if they want to go hog for their execs. That’s why many give matches, to incentivize folks to contribute so that they can then funnel more to the C-suite.
Your coworker is right that the lack of match makes the 401k less appealing. That said, it’s still the stock market, but you may have severely limited options.
You’ll want to do what you’re required to do, but then you should look into a ROTH IRA, which will give you a lot more control over that extra 5%.
If you’re not particularly financially savvy, you should always put 10% into retirement in some sort of cheap index or target date fund.
Definitely do not fuck with individual stocks or god forbid, crypto, unless you are sure you know what you’re doing and prepared to lose 100% of your investment.
The big advantage of putting your additional contributions into the 401(k) is that it reduces your taxable income. The big disadvantage is that the money is locked away for decades; that cash is no longer available to make big purchases like a car, honeymoon trip, etc. There are some exceptions, but be careful that you don’t get hit with penalties.
Personally, if I were in your situation, I would open a no-fee brokerage account and put you additional retirement money into an index fund that tracks the S&P 500 or NASDAQ. If you need the money before you turn 66 then it will be readily available.
Better yet, put it in a Roth. OP can still withdraw the principal penalty-free if they need it, meanwhile it grows tax free.
can still withdraw
That’s subject to plan rules.
grows tax free
If you pay the same effective tax rate now vs retirement, Roth and tax-deferred are equivalent. The benefit of Roth is that it gives you flexibility in retirement, so you can choose how much taxes you pay in retirement instead of whatever you happen to withdraw from your tax-deferred accounts.
So a Roth contribution isn’t an automatic slam-dunk, it really depends on OP’s tax bracket now vs retirement. If OP is in the 12% or lower tax bracket, I highly recommend a Roth contribution, but if they’re above it, I recommend taking the deduction. I’m a little below the top of the 12% bracket, so I actually convert my old pre-tax accounts to Roth up to the top of the 12% bracket since that’s a pretty good tax rate to lock in.
