Tiny match in 401k, is it worth it?

[Moneybeans]

So I know the standard advice is ALWAYS go up to the match in your employer 401k plan because it's FREE MONEY. But......I have an issue with mine.

My plan is a 10% match on up to 15% of contributions. Basically, if I make 100k, I would put in 15,000 and the match would be 1,500. Obviously I have to invest 15% to get the full match.

The problem comes in the form of a weird characteristic of my plan; the match only applies to Traditional 401k, not the Roth 401k. I've asked this question in other places before and I get the "my employer match goes into the traditional, even if I'm investing in Roth, check on that." I can 100% assure you I get no match on the Roth 401k contributions.

That said, I feel very uncomfortable having ALL of my 401k tied up in a traditional, having to pay taxes on all the distributions when that time comes. I don't want to save more than 15% into 401k, as I want to save for other diversified things.

Would you forego a small percentage of match to put it in the Roth 401k so the earnings would come back tax deffered? Maybe 10% in traditional (effectively going from a 1.5% match to a 1% match) and 5% in roth?

[nereo]

well, the first question I'll ask is "are you certain that investing in a Roth 401(k) is the best strategy for you?" 
For most people planning early retirement, the answer is no.

Second question - what makes you uncomfortable having your 401(k) tied up as traditional?


10% is a pretty lackluster company match, but I still wouldn't forego it unless my investment options (e.g. "fees" and selection) were truly terrible. You mentioned that you want to save in other 'diversified things' - what are your options and what would you like to diversify into that you cannot in your current company offerings?  Do you have a different set of options available for a Roth 401k?

I tend to change employers every few years, so my 401(k)s just get rolled over into my IRA, and at that point I can decide whether I'd rather move them into a traditional or Roth depending on my taxable burden that calendar year.

[thd7t]

I will second what Nereo said about the traditional 401(k).  You withdraw your funds in ER at your lowest tax bracket and pay taxes at your highest when you are working.  The traditional 401(k) lets you take advantage of this.

Regarding the match, I can't imagine that the fees will be as high as the match, so either you're getting a little free money, or you're subsidizing your expensive funds.  I still think this would put you ahead.

[MDM]

That said, I feel very uncomfortable having ALL of my 401k tied up in a traditional, having to pay taxes on all the distributions when that time comes. I don't want to save more than 15% into 401k, as I want to save for other diversified things.

If you aren't going to save very much in your traditional account, the marginal rate on traditional withdrawals is likely to be very low.  Therefore you should save more in traditional accounts.

See discussion in Investment Order (beyond just the numbered lists).

[Boofinator]

What everyone else has said. Traditional is almost certain to beat Roth in the long term if you FIRE (and if you don't FIRE, you'll be one rich mofo, so who cares about not having optimized lifetime taxes?).

And, just to clarify, are you positive the 10% match is tacked on to the 15%? Or might it be 10% of your salary up to 15% you put in (a 67% match)? I'm not an expert, but 10% is super low and almost insulting: https://www.investopedia.com/articles/personal-finance/120315/what-good-401k-match.asp.

That said, I feel very uncomfortable having ALL of my 401k tied up in a traditional, having to pay taxes on all the distributions when that time comes. I don't want to save more than 15% into 401k, as I want to save for other diversified things.

Why? Traditional 401k is a great investment vehicle for most people, even without a match. Could you let us know which "diversified" investments you are considering?

[MDM]

You withdraw your funds in ER at your lowest tax bracket....

Although the OP would probably benefit from more traditional contributions (see previous posts), it's not for this reason.

Withdrawals based on any new traditional contributions will come on top of other "unavoidable" income such as pensions, SS benefits, and withdrawals based on previous traditional contributions.

Because withdrawals from this and future years' contributions will come "on top of" withdrawals based on previous years' contributions, one needs to look at marginal instead of effective rates.

[thd7t]

You withdraw your funds in ER at your lowest tax bracket....

Although the OP would probably benefit from more traditional contributions (see previous posts), it's not for this reason.

Withdrawals based on any new traditional contributions will come on top of other "unavoidable" income such as pensions, SS benefits, and withdrawals based on previous traditional contributions.

Because withdrawals from this and future years' contributions will come "on top of" withdrawals based on previous years' contributions, one needs to look at marginal instead of effective rates.

Thanks for that explanation.  I was suggesting that lower marginal rates are achievable in retirement (if you are spending less than you earned), but your point is good and your explanation is great.

[Moneybeans]

To answer the questions:

Don't plan on FIRE right now, because I like what I do and really don't do too awful much outside of it. That said, if I were to do FIRE, I wouldn't worry at all about Traditional. I just think I'll end up in a higher tax bracket at normal retirement based on projected distributions and I'm not so sure that 1.5% of compounded growth will make up for the taxed earnings. I have about 35 years until retirement

My diversified part is just real estate, want to have some passive income coming from paid off properties. In the meantime, I'll have it invested in index funds until I have enough to pay cash for these properties. I'm fairly high risk in investments, but not risky at all in cash flow.

The same funds are in both Traditional and the Roth.

Yes, the match is almost insulting haha. I put in 500 bucks and get 50 bucks.....better than nothing I guess. It's a far cry from my old company where I had 100% match up to 6%. Difference in 4500 of match a year. I've done the math on the compounded difference and it makes me shed a tear or two (almost a million dollar difference).

Thanks for all the input

[phildonnia]

...
The problem comes in the form of a weird characteristic of my plan; the match only applies to Traditional 401k, not the Roth 401k. I've asked this question in other places before and I get the "my employer match goes into the traditional, even if I'm investing in Roth, check on that." I can 100% assure you I get no match on the Roth 401k contributions.

You may be misunderstanding. 

The employer match always goes into a traditional 401(k).  That means that if you contribute to a Roth, and the employer matches, you have your own contributions going into the Roth, and the employer match going into a traditional.  This is pretty common.  This is probably what is going on, and someone just explained it to you badly.

I've never heard of this "weird characteristic" you described, so you may want to carefully read the plan information, or discuss it with your plan administrator to make sure you are understanding correctly.

[Moneybeans]

You may be misunderstanding. 

The employer match always goes into a traditional 401(k).  That means that if you contribute to a Roth, and the employer matches, you have your own contributions going into the Roth, and the employer match going into a traditional.  This is pretty common.  This is probably what is going on, and someone just explained it to you badly.

I've never heard of this "weird characteristic" you described, so you may want to carefully read the plan information, or discuss it with your plan administrator to make sure you are understanding correctly.

I had both a Roth and a Traditional at my old company and the match always went into the traditional. However, this plan matches 0% on the roth. I at one point was only investing in the roth. I received 0 match. I had never heard of it either, it's a small company. I have reached out to the plan administrator before to confirm and that is the case.

[Boofinator]

Maybe I missed it, but what tax bracket are you in?

[Moneybeans]

Maybe I missed it, but what tax bracket are you in?

24%, I hope/plan to be in the 35% at retirement. I live pretty frugally.

[MDM]

Maybe I missed it, but what tax bracket are you in?

24%, I hope/plan to be in the 35% at retirement. I live pretty frugally.

Have you charted the path that will reach a 35% marginal rate?  Absent other income, that requires (in today's dollars and using a 4%/yr withdrawal rate) >$5 million in traditional accounts for a single filer, and >$10 million for MFJ.

[Boofinator]

So you are currently in a (relatively) high tax bracket and have 35 years until retirement. Here is why I so strongly recommend Traditional for people in your situation:

First off, you're saving your combined tax bracket immediately off the bat. Not sure what state you're in, but at least 24%. Imagine for a second your real estate investments yield similar to the stock market over the years; in this case, you'd have 32+% (1/(1-24%)) more in stocks than in the real estate investment (everything else being equal). This is without any match.

Second, think of Traditional as insurance. If five or ten years down the road you become disillusioned with your current profession and want to do something else that earns much less (or if you get laid off and can't find a job), you can pull Traditional funds practically tax free. Again, assuming identical returns for a Traditional vs. Roth account, you'd be about 32% ahead in Traditional.

Finally, even if you are a multi-millionaire, and you do happen to be one of those rare individuals who make it into a higher tax bracket n retirement, who cares? You'd have won the game at that point. (Assuming tax brackets aren't something like 50+% on low incomes.)