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OK... here goes. My employer has an excellent 401K program. I can contribute up to 15% (up to the Fed. max, what is it, btw?). They match 15% through the year and an additional 10% at the end of the calendar year. Their match is 100% vested and starts after 3 months of employment. Eligibility is immediately upon hiring.

I am not taking part yet, because I'm paying off some very unFoolishly high-interest debt, but in a few months, I'll be out from under that beast and ready to start investing.

The question: Should I go with the 401K, letting the Wise control my money in some (Principal Financial Group) fund because of a) the "free money" of the match and b) the tax deferral, OR, should I do it myself given that even with a simple F4, I can (likely) beat it? (And, over only a few years of better interest, assuming I do beat it, make up the match.)

Problems with doing it myself: I would want to wait until I have about $4K to invest before starting a F4 portfolio. What do I do with the money while it's accumulating? (This is an ongoing question... what do you do with the money for the twelve months and one day before you re-calculate your F4?)

I've read all the Fool 401K stuff, but haven't seen anything address whether or not it's better to do it oneself.

I'm clueless about the benefits/problems of the tax deferral issue...

Help, Oh Fools!
Musik
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Musique writes:

OK... here goes. My employer has an excellent 401K program. I can contribute up to 15% (up to the Fed. max, what is it, btw?). They match 15% through the year and an additional 10% at the end of the calendar year. Their match is 100% vested and starts after 3 months of employment. Eligibility is immediately upon hiring.

I am not taking part yet, because I'm paying off some very unFoolishly high-interest debt, but in a few months, I'll be out from under that beast and ready to start investing.

The question: Should I go with the 401K, letting the Wise control my money in some (Principal Financial Group) fund because of a) the "free money" of the match and b) the tax deferral, OR, should I do it myself given that even with a simple F4, I can (likely) beat it? (And, over only a few years of better interest, assuming I do beat it, make up the match.)

Problems with doing it myself: I would want to wait until I have about $4K to invest before starting a F4 portfolio. What do I do with the money while it's accumulating? (This is an ongoing question... what do you do with the money for the twelve months and one day before you re-calculate your F4?)

I've read all the Fool 401K stuff, but haven't seen anything address whether or not it's better to do it oneself.

I'm clueless about the benefits/problems of the tax deferral issue...


I reply:

Think of your company's match as an instant 100% return on your investment, and the analysis simplifies greatly. I suspect if you run the numbers, the 401(k) beats anything you're likely to do on your own, even if the 401(k) significantly lags the market. (By the way, the 1998 maximum contribution to a 401(k) is $10,000, but I think that does not include your company's match.) Tax is still another reason to use the 401(k). But please remember, it's your money, not mine.

The Foolish Four is modeled on the assumption that dividends sit as cash until reinvested at the start of the new year. I'd suggest a money market for small amounts, and an index fund for larger amounts. But I understand that there are discount brokers that will execute market trades for as little as $5 per trade, in which case you can keep to the Fool's recommended 2% in commissions with a $2000 investment. Good luck!

LET'S GO METS! --Bob
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Greetings, Musik, and welcome. You wrote:

OK... here goes. My employer has an excellent 401K program. I can contribute up to 15% (up to the Fed. max, what is it, btw?). They match 15% through the year and an additional 10% at the end of the calendar year. Their match is 100% vested and starts after 3 months of employment. Eligibility is immediately upon hiring.

I am not taking part yet, because I'm paying off some very unFoolishly high-interest debt, but in a few months, I'll be out from under that beast and ready to start investing.

The question: Should I go with the 401K, letting the Wise control my money in some (Principal Financial Group) fund because of a) the "free money" of the match and b) the tax deferral, OR, should I do it myself given that even with a simple F4, I can (likely) beat it? (And, over only a few years of better interest, assuming I do beat it, make up the match.)

Problems with doing it myself: I would want to wait until I have about $4K to invest before starting a F4 portfolio. What do I do with the money while it's accumulating? (This is an ongoing question... what do you do with the money for the twelve months and one day before you re-calculate your F4?)

I've read all the Fool 401K stuff, but haven't seen anything address whether or not it's better to do it oneself.

I'm clueless about the benefits/problems of the tax deferral issue... </I.,/b>


I'm not sure exactly what your match happens to be. Your maximum contribution to a 401k is the lower of 25% of your gross compensation (less the percentage your employer matches) or $10K. Because you may contribute up to 15% of pay within your plan, it sounds like your employer matches dollar-for-dollar up to 10% with it's recurring match and annual kicker at the end of the year. If so, that means you're getting a 67% immediate, tax-free, riskless return on the money. That argues for a full $10K or 15% contribution to the 401k on your part. Verify the match to ensure this is true and to ensure your full understanding of that match.

Regardless, in Fooldom we believe you should always put enough in your 401k to receive all the Free Money the employer will give you in the way of a matching contribution. Even in a poor investment, it takes years to beat that immediate return on your money. In an average returning vehicle, you can never beat it. Beyond that level, though, it's a different story. Often, you can do better in a nondeductible IRA and/or taxable account. You have to analyze the alternatives against the 401k on a tax-equivalent basis to be sure. And you have to use the same discipline in any alternative as that required by the 401k (i.e., no withdrawals, automatic deposit and automatic increases as your pay goes up). If you have that discipline, then one way to do the analysis is outlined in Step 4 of my 13 Steps to Foolish Retirement Planning available for your reading pleasure at: http://www.fool.com/Retirement/Retirement.htm .

Regards…..Pixy

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Pixy Writes:
different story. Often, you can do better in a nondeductible IRA and/or taxable account. You have to analyze the alternatives against the 401k on a tax-equivalent basis to be sure.<I/>

I almost responded to the original post and I am in no way taking exception to what pixy wrote, but this keeps seeming like it is being thought of as an either/or thing.

But I would think the best of all worlds would be to do both (and yes I know that cash is hard to come by).

But from what I have read even a very modest investment outside of the 401k fund will over enough time grow to a very nice additional nest egg.

Just a thought

oldred22
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Greetings, Oldred22, and welcome. You wrote:

I almost responded to the original post and I am in no way taking exception to what pixy wrote, but this keeps seeming like it is being thought of as an either/or thing.

But I would think the best of all worlds would be to do both (and yes I know that cash is hard to come by).

But from what I have read even a very modest investment outside of the 401k fund will over enough time grow to a very nice additional nest egg.


I agree up to a point. To me, if I can maintain the same discipline outside the 401k as I can within it and if it's clear through analysis that on a tax-equivalent basis an investment outside of the plan will grow me more money that the 401k will, then it is senseless IMHO to continue funding the 401k beyond the maximum matching level.

Regards….Pixy

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Pixy Wrote: then it is senseless IMHO to continue funding the 401k beyond the maximum matching level.

Lol sorry, it was clear in my mind that you would only fund the 401K to the extend of maximum contributions, just forgot to add that part to the post, thanks for making it clear.

And thanks for the welcome too.

oldred22

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Currently, I contribute 10% of my pre-tax salary to my 401K. I only get 2.5% match for my first 4%.

How can I tell whether it is potentially worth it for me to put more than that matched 4% in?

I originally decided on 10% because it was easy, automatic savings specifically for retirement. But... if I can get by with 4% there, and make more on the other 6% somewhere else (as long as I earmark it for retirement), please enlighten me.

I am pretty sure there are lots of tax issues here that are lost on me (being such a new Fool). In case it matters, I believe that I am in the 28% federal bracket.

Thanks for the help...

--AliFool
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AliFool, eager to be Foolish, asks again:

Currently, I contribute 10% of my pre-tax salary to my 401K. I only get 2.5% match for my first 4%.

How can I tell whether it is potentially worth it for me to put more than that matched 4% in?

I originally decided on 10% because it was easy, automatic savings specifically for retirement. But... if I can get by with 4% there, and make more on the other 6% somewhere else (as long as I earmark it for retirement), please enlighten me.

I am pretty sure there are lots of tax issues here that are lost on me (being such a new Fool). In case it matters, I believe that I am in the 28% federal bracket.


Well, to repeat myself because it bears repeating, here's one Fool's opinion.

Yes, it's certainly Foolish to contribute at least enough to receive all the Free Money your employer will provide through a company match. Beyond that, you must compare the after-tax returns in the 401k to that of any other alternative you may wish to consider. Additionally, you must maintain the same discipline in the alternative as you do in the 401k (i.e., automatic contributions that increase as your pay does). See Step 4 of my 13 Steps to Foolish Retirement Planning available at: http://www.fool.com/Retirement/Retirement.htm .

Regards….Pixy
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Hi, Pixy, and everyone. Good news: whether I know which things will benefit me tax-wise or not, I know THIS will -- my employer just announced a move from Merrill Lynch to Vanguard as the administrator of our 401K plan. Can you say, "S&P 500 Index Fund?!" (I HOPE that is one of the choices!)

Happy! --AliFool
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AliFool sez:

Hi, Pixy, and everyone. Good news: whether I know which things will benefit me tax-wise or not, I know THIS will -- my employer just announced a move from Merrill Lynch to Vanguard as the administrator of our 401K plan. Can you say, "S&P 500 Index Fund?!" (I HOPE that is one of the choices!)

And if it's not, just yell like crazy and I'm sure you'll get it. <VBG>

Regards...Pixy
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