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Subject:  Re: 401K or do-it-myself? Date:  9/24/1998  8:52 AM
Author:  TMFPixy Number:  5597 of 87438

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: .


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