Author Topic: Reader Case Study - To 401k or not  (Read 1947 times)

tugarug

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Reader Case Study - To 401k or not
« on: February 02, 2015, 07:33:35 PM »
First post here, thanks!

I've just finished my first year of post-college full time employment. I finished school with no student loans or debt of any kind, and in the past year I've saved a little over $30k.

Here is a current snapshot:

Age
24

Monthly Income
$4k, after taxes

Monthly Expenses
$250 - rent (incl. utilities)
$50 - phone
$1000 - discretionary (gas, insurance, fun, etc)

Assets
$30k

Liabilities
$2500 truck (cash value)
$3k per year in repairs

My question:

I'd like your thoughts on a 401k. Would you contribute only what my employer will match (around $4k), or would you contribute the maximum amount of $17k? The latter is attainable at my current spending rate, but at the cost of flexibility. A 401k isn't of much use if I'd like to retire at 34.

rpr

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Re: Reader Case Study - To 401k or not
« Reply #1 on: February 02, 2015, 07:42:36 PM »

My question:

I'd like your thoughts on a 401k. Would you contribute only what my employer will match (around $4k), or would you contribute the maximum amount of $17k? The latter is attainable at my current spending rate, but at the cost of flexibility. A 401k isn't of much use if I'd like to retire at 34.

Welcome to MMM forums. Read the following Blog post.

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Also google Roth Conversion Pipeline. For example,

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Edit: Definitely max out the 401k and IRA if you can. You are likely in the 25% tax bracket federal + x% state tax. In my state, the tax bracket would be 7-8%. That is almost a 33% marginal tax bracket. Every $ you put in the 401k, you save $0.33 in taxes. If you somehow able to max out both Trad IRA and 401k, you can save almost $8K in taxes. That is a very nice and tidy sum.
« Last Edit: February 02, 2015, 08:07:35 PM by rpr »

kpd905

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Re: Reader Case Study - To 401k or not
« Reply #2 on: February 02, 2015, 07:50:43 PM »
I'd contribute the max of $18k, then try to also max out an IRA.

As rpr posted, there are many ways to get the money out early, and penalty free.

tugarug

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Re: Reader Case Study - To 401k or not
« Reply #3 on: February 02, 2015, 08:08:30 PM »
Thank you both, especially to rpr for the jlcollins link. I feel much more confident knowing about the Roth conversion option.