Child gainfully employed! Advice re:savings options

[frugaldrummer]

So my son finally graduated with a Master's in Social work and has just started his new job with benefits! (YAY!). I don't know his exact income but I believe it's in the 45-55k range with additional performance bonuses. He has some student loans, not sure of the exact total off the top of my head but I think it's around $25k.

My question is this - they offer a 10% match on 401k contributions and automatically enroll employees at 4% unless they request a different amount. Can be changed at any time.  What I am considering is, will he be better off contributing to the 401K and getting the paltry 10% match and the tax deduction, or would he be better served by contributing to a ROTH IRA first instead, since his tax rate will be low at the start of his career and the ROTH could also be tapped for a down payment on a home later without penalty? (My goal for him ultimately would be to do both but we live in a HCOL area so he won't have a ton of free cash in the beginning.)  He's single without dependents, has ongoing medical expenses so will also contribute to his FSA. 

Any insights on how best to crunch the numbers on this?

[terran]

Is the match 10% of his contributions, or is it a 100% match of his contributions up to 10% of his salary?

[frugaldrummer]

Here's the exact language:
"The Company will make a matching contribution to the Plan each
pay period equal to 10% of the pre-tax earnings that you contribute."

I read that as just 10% of the contribution.

[frugaldrummer]

His top tax bracket should be roughly 12% feds and 3% state. 

So if we postulate that he can save $400 a month starting out, and puts that pretax into the 401K, he saves $400 x 12 months = 4800 + 480 employer contribution = 5280.

If he puts the same money into a ROTH IRA he has to pay taxes on it first so he only saves 400 x 0.85 = $340 a month or less, and saves only $340 x 12 = $4,080 in the first year.

That's a big difference - BUT - saving for a home is a priority for him, and the IRA could be tapped for $10,000 of that.

[frugaldrummer]

And, since he's in his 20's, saving money in a ROTH at this age provides a big tax advantage at retirement.

[terran]

Given that his current federal + state marginal bracket will be 15% which also happens to be what we know that level of income will be taxed at again starting in 2025 regardless of what state he lives in at that point I would tend to agree with you about Roth. One thing to look at is the savers tax credit which has certain cliffs that might change the marginal bracket math. In the 12% bracket I tend to think most semi mustachian people will end up in the same or similar bracket in retirement, so Roth vs traditional doesn't much matter. It's really people who expect to have much higher income in the future leading to higher income in retirement (like doctors in residency) where choosing Roth is a clearer win.

The language you posted makes me think they will match up to 10% of his salary ("pre-tax earnings"), but it I can see how you might interpret it how you have. I would suggest your son seek clarification. If it's a full match on the first 10% of his salary that he contributes he should absolutely contribute at least 10%. He may also have access to a Roth option with the 401(k).

[frugaldrummer]

Really ? It says "contribution...equal to 10% of the pre-tax earnings that you contribute", how is that not a 10% match to his contributions?.  I don't see any way to read that as "we will match your contribution 100% up to 10% of your salary".

[terran]

Really ? It says "contribution...equal to 10% of the pre-tax earnings that you contribute", how is that not a 10% match to his contributions?.  I don't see any way to read that as "we will match your contribution 100% up to 10% of your salary".

To my thinking "The Company will make a matching contribution to the Plan each pay period equal to" is pretty clear. Just a long way of saying "the company will contribute." So the part that's a little ambiguous is "10% of the pre-tax earnings that you contribute." So does this mean 10% of your income as long as you contribute that much, or does it mean 10% of the income that you contribute. It seems confusing and matching only 10% of the contribution seems a little strange, so I would want to know more. Like I said, your son should seek clarification.

[frugaldrummer]

I'll have him check, but pretty sure it's 10% of the contribution. Social workers are notoriously underpaid! However there is also some profit-sharing as well as performance bonuses which should raise his income.  I'm hoping to help him budget in such a way that he can save all his irregular income like performance pay (which is calculated by the month - that's nice because one or two bad months doesn't derail a whole year of bonus pay).