Here is the next installment in our theReader’s Questions Serieswhich highlight questions emailed to me by you, the readers ofMoney Q&A. Be sure to find out at the end of this article how you can receive a free copy of Dave Ramsey’s book,The Total Money Makeoverif your money question is chosen to be featured onthe blog.
If you’re not familiar with Dave Ramsey’s book, you should run right out and get it. It is one of mytop ten best personal finance booksthat everyone should read. Now….on to our reader’s question.I recently received an email from a reader, Ralph, who ask…
I’ve been investing more than my company’s match. So for instance if my401k company matchis 5% and I invest 10%, is it better to continue or just invest the 5% that’ll get the match and invest the rest in a Roth IRA?
This is a great question that a lot of investors have to tackle when they are deciding where to put those finite investing dollars to work. You often can’t be everywhere at once.
So, the real question is where to start and where to go after you get going with your retirement investing. There are several things that you should consider in order to maximize your savings and minimize your tax liability as well.
401k Company MatchIs Most Important
It is very important to invest enough money in your employer’s 401k retirement plan in order to capture your company’s matching contribution. This is essentially free money and a 100% rate of return on your investment.
Like Ralph mentioned in his email quoted above, he earns a401k company matchon the first 5% of his income that he contribution to his 401k retirement plan. After putting in 5%, Ralph’s company gives him another 5% free, hence the 100% rate of return.
This is the typical agreement that many employers have with their workers who contribute to their 401k retirement plan. Offering the401k company match matching contribution is cheaper in the long run for the company that offering a traditional pension which is why it has become a very popular option.
But, now what should you do with additional investments over the 5%? Continuing to invest in your company’s 401k retirement plan after your initial 5% may not be the best idea.
Taxes Rule The Decision
Do you think that taxes will rise from now until the time you retire? Delaying the time that you pay your taxes into the future may not be the best idea if you are going to be in a higher tax bracket later in life when you withdrawal the money and owe taxes on it.
If you think that taxes will rise over your career and qualify to invest in a Roth IRA, you will most likely save more money in taxes investing money in a Roth instead of a 401k retirement plan. A 401k requires investors to contribute pre-tax dollars initially and then pay taxes on the total amount withdrawn in retirement.
Roth IRA contributions are invested initially with after-tax dollars from your paycheck that have already been taxed, and then your earnings and interest on your contributions can then be withdrawn tax-free in retirement.
The Final Word: Where To Invest
I personally think that income taxes will tend to rise over the long-term. Most young workers are typically in a low income tax bracket early in their careers, and the goal of everyone is to continue to earn more money throughout your careers in order to get into a higher tax bracket after earning more.
So, I typically recommend that people should always invest enough to capture their employer’s 401k company match. After that, if you qualify to contribute to a Roth IRA, then that should immediately be your next stop for an investment.
After you have captured your employer’s401k company match and matching contribution and maxed out your Roth IRA to the tune of $5,000, then you should consider investing more in your 401k. Until then, consider including your Roth IRA as fast as possible.
Past Readers’ Questions:
- How To Prioritize Which Bills To Pay First
- Should You Put Your Emergency Fund In Mutual Funds?
- How Do You Start Saving If You Live Paycheck To Paycheck?
- How To Find A Payment Plan Without Cutting Necessities
- Is My Money Save In A Bank?
- Is It Better To Save For Closing Costs Or Pay Down Loan?
- Is A $1,000 Emergency Fund Enough To Start?
- What To Invest In After The 401k Company Match
Do you have a money question that you would like to ask? Email me your money, investing, retirement, savings, or other question to Questions[at]MoneyQandA.com. If I pick your question for next week’s article in the series, I’ll send you a free copy of Dave Ramsey’s book, The Total Money Makeover, or you can pick from any of these other free books instead.
FAQs
Aim to contribute at least enough of your paycheck to grab the employer match, then consider bumping up the percent you contribute by 1% or 2% each year.
What is a good investment question? ›
Am I comfortable with the level of risk? Can I afford to lose my money? Every investment carries some degree of risk, some higher than others. A good rule of thumb – the higher an investment's potential return, the higher the risk of losing your money.
Is a 5% match on a 401k good? ›
A study by Vanguard reported that the average employer match was 4.5% in 2020, with the median at 3% of salary. In 2023, if you're getting at least 4% to 6% in 401k employer matching, it's considered a “good” 401k match. Anything above 6% would be considered “great”.
How much should I contribute to my 401k if my employer matches? ›
Key takeaways
Match formulas vary, but a common setup is for employers to contribute $1 for every $1 an employee contributes up to 3% of their salary, then 50 cents on the dollar for the next 2% of an employee's salary. Ideally, workers should aim to save 15% of their pre-tax income each year, including any match.
Should I contribute to my 401k after a match? ›
The Bottom Line. An employer may or may not offer the benefit of matching. If yours does, though, it's typically wise to try your best to contribute what's needed to get as much of these additional funds as you can. By doing so, you can boost your savings for years to come.
Should I invest in a 401k if my company does not match? ›
We generally recommend contributing to a 401(k) even if your employer doesn't match, but you might want to pass over the 401(k) if: You can't afford to make any contributions to a retirement account (in which case you should take a hard look at your budget and start planning how you can start saving).
What are four 4 very good tips for investing? ›
With that in mind, here are four risk-management principles to get you started—and to stick with throughout your investing career.
- Align your risk with your goals. What are you investing for and how are you going to achieve it? ...
- Diversify. ...
- Rebalance. ...
- Watch out for leverage.
How to decide whether to invest in a company? ›
In this blog, we discuss 6 key factors to consider when investing in a company to determine if this will be a good decision for you.
- The company's management team. ...
- The company's financial situation. ...
- The company's competitors. ...
- The company's customers. ...
- The company's suppliers.
What should I look for in a good investment? ›
Look for Value
Don't go with the hype. Instead, look for true value when you invest. This means that you need to learn about different methods of valuing investments and search out investments with good valuations. You want to be able to find stocks and other investments that are underpriced in relation to their value.
Is 6% 401k matching good? ›
This is especially valuable if your employer matches your contributions. Many employers match as much as 50 cents on the dollar, on up to 6% of your salary. Most advisors recommend contributing enough to get the maximum match. Turning down free money put towards your retirement nest egg doesn't make sense.
Your employer can never take back your vested funds. However, if any portion of your 401(k) balance is not vested, your employer may reclaim this money under certain circ*mstances — for instance, when your employment status changes.
What's the average 401k balance by age? ›
Average and median 401(k) balance by age
Age | Average Account Balance | Median Account Balance |
---|
35-44 | $91,281 | $35,537 |
45-54 | $168,646 | $60,763 |
55-64 | $244,750 | $87,571 |
65+ | $272,588 | $88,488 |
3 more rowsAug 8, 2024
How much do I need in a 401k to get $2000 a month? ›
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
Is it worth contributing more than employer match 401k? ›
While you may not get more from your employer once you exceed your matching requirement, contributing more than your match allows you to not only save more, but also take greater advantage of your tax-advantaged account and compounding interest.
How to maximize a 401k match? ›
Follow these tips to maximize your earning potential:
- Join your employer's plan. ...
- Start saving early. ...
- Contribute enough to get your employer's match. ...
- Save beyond the company match, if possible. ...
- Be mindful of annual contribution limits. ...
- Avoid early withdrawals.
Should you max out 401k without employer match? ›
But matching is optional and some employers don't do it. Even if your employer doesn't offer a match, there are still plenty of good reasons to max out your 401(k) each year. A financial advisor can help you evaluate your retirement saving options.
Is it worth contributing to 401k without employer match? ›
If your employer doesn't offer any match, you may be wondering if you should still participate. The short answer, in most cases, is that it does still make sense to contribute to a 401(k) because it can offer significant tax advantages.
Does employer match count against contribution limit? ›
Does Your 401(k) Contribution Limit Include Employer Matches? Employer matching contributions are not included in the annual 401(k) contribution limit for elective deferrals. No matter how much your employer contributes to your 401(k), you are entitled to contribute up to $23,000 of your wages to your 401(k) in 2024.
Is a 3% employer match good? ›
If you're earning a salary of $100,000 and an employer offers to match your contributions up to 3% of your pay, you're really bringing in $103,000—and you don't have to pay taxes on all of that income. While an employer match isn't going to make or break your retirement savings, says Zigmont, it can offer a nice boost.