Author Topic: absolute beginner 401k question  (Read 3280 times)

BarriosFam

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absolute beginner 401k question
« on: April 10, 2015, 11:18:17 AM »
Hello,
  My husband and I have just started our mustachian journey and we are in the pay off debt step. My question is about future investment once we are debt free.  His company has a 401K match of 3% if he contributes 5%. So to me it seems like it would be bad to let this free money not be claimed. I am confused though about how a 401K fits into early retirement due to penalties and such for early withdraw. Can someone please explain this part?

JLee

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Re: absolute beginner 401k question
« Reply #1 on: April 10, 2015, 11:28:01 AM »
Absolutely - at least do the amount to get the maximum employer match (free money).

Then read this: http://forum.mrmoneymustache.com/ask-a-mustachian/how-do-you-retire-early-with-only-401k/ :)

tarheeldan

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Re: absolute beginner 401k question
« Reply #2 on: April 10, 2015, 11:30:48 AM »
What JLee said! Specifically, for part 2: http://www.madfientist.com/retire-even-earlier/

Frankies Girl

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Re: absolute beginner 401k question
« Reply #3 on: April 10, 2015, 11:33:09 AM »
Your husband should put into the 401k right now to at least to get the match - that's leaving free money on the table. AND the best time to start investing is ASAP. Look for the lowest cost funds that are as close to index funds as you can (you can start a thread about what your 401k fund choices are and ask for help picking over in the investment alley section).

Debt repayment is VERY important, but get that match first. Contributing to pre-tax retirement accounts like the 401k also helps to reduce your taxable income so you might just owe less to the IRS as you start upping the contributions, so get on that as soon as you can - free money match, investments for your future, and less taxes paid out... it's a win x 3.



As far as tapping retirement accounts early, it can be done and without penalties. It's been discussed all over the forum, like here for example:
http://forum.mrmoneymustache.com/ask-a-mustachian/how-do-you-retire-early-with-only-401k/?topicseen

Basically, Roth pipeline or SEPP/72t methods. Google them to learn more, or do some searches around the forum.


BarriosFam

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Re: absolute beginner 401k question
« Reply #4 on: April 10, 2015, 12:54:58 PM »
Thanks everyone for the resources! This statement though has brought up another question.

Debt repayment is VERY important, but get that match first. Contributing to pre-tax retirement accounts like the 401k also helps to reduce your taxable income so you might just owe less to the IRS as you start upping the contributions, so get on that as soon as you can - free money match, investments for your future, and less taxes paid out... it's a win x 3.


We were thinking that debt repayment is such a crisis that we should put every penny we can scrounge toward it. Not contributing to the 401K right now gives us an extra $200 a month (after taxes) to put toward debt and thus saving on the interest also. Am I right in interpreting the above comment to mean we are not thinking correctly on this?


sirdoug007

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Re: absolute beginner 401k question
« Reply #5 on: April 10, 2015, 01:02:15 PM »
The 401(k) match is a 60% immediate return on your investment!   For example, He puts in $5000, the company adds $3000 = 60% return.  You just can't give that up.

None of your debt will be even close to this interest rate.  Get the free money and pile everything else onto your debt.

seattlecyclone

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Re: absolute beginner 401k question
« Reply #6 on: April 10, 2015, 01:04:43 PM »
Thanks everyone for the resources! This statement though has brought up another question.

Debt repayment is VERY important, but get that match first. Contributing to pre-tax retirement accounts like the 401k also helps to reduce your taxable income so you might just owe less to the IRS as you start upping the contributions, so get on that as soon as you can - free money match, investments for your future, and less taxes paid out... it's a win x 3.


We were thinking that debt repayment is such a crisis that we should put every penny we can scrounge toward it. Not contributing to the 401K right now gives us an extra $200 a month (after taxes) to put toward debt and thus saving on the interest also. Am I right in interpreting the above comment to mean we are not thinking correctly on this?



With your 401(k) match, you're getting an instant 60% return on your investment. This is almost certainly better than the result you will have by paying down your debt faster, regardless of the interest rate. Max out the match first and then pay off your debts.

Jack

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Re: absolute beginner 401k question
« Reply #7 on: April 10, 2015, 01:14:13 PM »
Thanks everyone for the resources! This statement though has brought up another question.

Debt repayment is VERY important, but get that match first. Contributing to pre-tax retirement accounts like the 401k also helps to reduce your taxable income so you might just owe less to the IRS as you start upping the contributions, so get on that as soon as you can - free money match, investments for your future, and less taxes paid out... it's a win x 3.


We were thinking that debt repayment is such a crisis that we should put every penny we can scrounge toward it. Not contributing to the 401K right now gives us an extra $200 a month (after taxes) to put toward debt and thus saving on the interest also. Am I right in interpreting the above comment to mean we are not thinking correctly on this?

Yes, you're not thinking correctly. Paying off debt gives you an X% annual return, where X < 10% for most kinds of debt and X < 30% even for ridiculous things like defaulted credit cards. In contrast, contributing to the 401K up to the match gives you a 60% instant return, which blows everything else out of the water.

I mean, if you're in the kind of debt where Vinnie's gonna bust your kneecaps if you don't pay, or if you're paying 300% on a payday loan or something, then by all means, get rid of that first. Otherwise, getting the 401K match wins.

BarriosFam

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Re: absolute beginner 401k question
« Reply #8 on: April 10, 2015, 02:36:31 PM »
Awesome, thanks everyone. When I said ABSOLUTE beginner I was not kidding :)