Author Topic: Question re: maxing out 401k  (Read 1220 times)

eca_mmm

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Question re: maxing out 401k
« on: July 27, 2017, 05:05:05 PM »
Please for give me if this is a redundant question.

New to the MMM world and only recently started taking my finances seriously, so I'm not quite there yet, but soon I expect to have remaining debt (student loans, etc) all paid off. At the moment I contribute 5% of my gross income to my company 401k to get the maximum company match. My question: once my debt is paid off and I have emergency funds set aside, which makes more sense to do first?

1) contribute more to company 401k to max out (18k annually or whatever it is)
2) still contribute to company 401k to get the company match (5%), but then put everything else in an index fund (Vanguard)
3) some other hybrid scenario i haven't thought of

One caveat here is that I don't own a home. I'm not sure that I'm cut out for owning a home and at the moment I enjoy living in a rent controlled apartment (rent goes up an average of 3% annually, more or less), but the flexibility down the road might be nice. For that reason, I would assume that going the index fund route would be best, but if i don't end up buying property would it be a bad move to not max out my 401k?

Some additional details for context:
-35, single, no kids
-I live in the SF Bay area. Needless to say, a considerable down payment will be needed if I decide to buy a house
-my gross annual income is between 120-130k, so I'm in the 4th or 28% tax bracket at the moment

Happy to provide any additional details if that helps. Thanks in advance for any advice.

Paul der Krake

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Re: Question re: maxing out 401k
« Reply #1 on: July 27, 2017, 05:22:38 PM »
Max out your 401(k).

At the 28% bracket, that's a whole $5k of money that would otherwise go to taxes. Unless the interest rate on your debt is at usurious levels, it's the better deal.

Lady SA

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Re: Question re: maxing out 401k
« Reply #2 on: July 27, 2017, 05:34:27 PM »
It all has to do with taxes. Taxes take out the biggest chunk of your earnings, so you need to figure out how to pay them the most efficient way. It has to do with your current tax rate and your expected tax rate when you will be taking the money out (in retirement). Most people's tax rates will be lower in retirement because you are only withdrawing an "income" equal to your living expenses.

You can either pay taxes now, or later. At your current tax bracket, you are better off shielding as much money as possible from Uncle Sam now, and paying that tax later because you will owe less.

So, max out your 401k, stat.

FIRE 20/20

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Re: Question re: maxing out 401k
« Reply #3 on: July 29, 2017, 06:48:13 AM »
Here's the post you want to read:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

One thing that concerns me about your question is that you are mixing up two very different concepts.  A 401(k) is a type of account, and you can invest in different types of investments in your 401(k).  An index fund is a type of investment, not a type of account. 

Your question is a little like asking should I buy an economy car or should I put high octane fuel in it?  One is a vehicle, the other is fuel - it's not an either or decision. 

If you understand the difference and were just speaking loosely - ok.  If you don't understand why your question is phrased oddly, then I'd recommend doing some more research.  Here's a good start:

http://jlcollinsnh.com/stock-series/