Author Topic: To make 401k/IRA contributions or not...  (Read 2456 times)

ardrum

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To make 401k/IRA contributions or not...
« on: May 10, 2016, 11:19:53 AM »
My employer matches 25% of the first 2% of my salary for the company 401k.  However, there is a schedule for years of service that determine vesting in the employer contributions.

1 Year: 20% vested
2 Years: 40% vested
3 Years: 60% vested
4 Years: 80% vested
5 Years: 100% vested

I am approaching one year employment in about 6 weeks.  I have not yet contributed to this plan in favor of paying off student loans to this point (still about $31k left there ranging 5.16%-6.55% depending on loan).  I plan on staying with this company for at least 2 years.

Do you think it would be advantageous for me to contribute up to the matching 2% figure even with this vesting schedule?  By my calculation, if I stay at least two years I could have "free" 10% return (25% match and 40% of the total vested... .25*.4).  It isn't that amazing, but it may still beat the alternative of strictly paying off student loans.

I am leaning toward it being worth it because I will also get to deduct those contributions too (I am in the 25% marginal tax bracket).  Otherwise, I would focus on student loans with the rest of my non-consumer spending.  I have thought about making traditional IRA contributions too to the $5500 limit to get that tax deduction. 

I can save $32-34k in 2016 in total, so it would roughly break down as $1360 to 401k , $5500 to traditional IRA, and the remaining $25-27k at student loans. 

Any input?  Good plan?  Bad?  Thanks!


MDM

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Re: To make 401k/IRA contributions or not...
« Reply #1 on: May 10, 2016, 11:30:35 AM »
Do you think it would be advantageous for me to contribute up to the matching 2% figure even with this vesting schedule?  By my calculation, if I stay at least two years I could have "free" 10% return (25% match and 40% of the total vested... .25*.4).  It isn't that amazing, but it may still beat the alternative of strictly paying off student loans.
Yes.  Your math and reasoning are correct - go for it.

ardrum

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Re: To make 401k/IRA contributions or not...
« Reply #2 on: May 10, 2016, 11:43:23 AM »
Traditional IRA too?  I plan to live frugally for life so I think my future tax rate would be way lower than 25% (especially if I can get that traditional to roth ladder going down the road). 


seattlecyclone

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Re: To make 401k/IRA contributions or not...
« Reply #3 on: May 10, 2016, 11:44:38 AM »
I would max out the retirement contributions in the 25% bracket. Your student loan interest isn't that high (especially if your income is low enough that you can deduct the interest), and you could still make some pretty good progress on paying down your loans even if you max out the retirement accounts. Once your student loans are gone it looks like you'll have a bunch of extra cash to save above and beyond the 401(k) limit, but there's no going back to make 2016 401(k) contributions once the year is over.

Assuming your $32k-34k savings number is in after-tax dollars, then putting $18k in the traditional 401(k) and $5,500 in a traditional IRA, in the 25% tax bracket this will only reduce the amount you have available to put toward your loans by $17,625. This would leave $14k-16k left over to put toward your debt, putting you on track to be done with the loans in about two years and have a good start on your retirement savings all at the same time!

ardrum

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Re: To make 401k/IRA contributions or not...
« Reply #4 on: May 10, 2016, 01:19:40 PM »
My income this year will unfortunately be too high ($68k gross with possible raise coming soon) to deduct the interest.  It was great last year though since I only worked half the year and got the full deduction.

I am guessing you may still have the best plan in mind though, seattlecyclone.  I think I am a little bit emotionally attached to the idea of paying off all student loan debt, but with analyzing the situation it may be best not to pass up on the benefits of traditional 401k/IRA.  I have put a huge dent in my student loans so far though (used to be mid $50's!) since graduating last May.  I have targeted around $20k+ more to save yet this year (have already saved over $14k so far in the form of paying student loans down).





« Last Edit: May 10, 2016, 01:33:42 PM by ardrum »

seattlecyclone

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Re: To make 401k/IRA contributions or not...
« Reply #5 on: May 10, 2016, 01:43:52 PM »
My income this year will unfortunately be too high ($68k gross with possible raise coming soon) to deduct the interest.

If you contribute the full $18k to your 401(k), your MAGI will be only $50k (plus any raises), putting you well below the $65k limit for a full deduction.

MDM

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Re: To make 401k/IRA contributions or not...
« Reply #6 on: May 10, 2016, 04:42:06 PM »
Traditional IRA too?  I plan to live frugally for life so I think my future tax rate would be way lower than 25% (especially if I can get that traditional to roth ladder going down the road).

You might find it worthwhile to use the case study spreadsheet,  particularly the 'Calculations' and 'Investment Order' tabs.

It won't contradict any of the good advice you have already received from seattlecyclone, but might help you do some self-analysis as well.

ardrum

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Re: To make 401k/IRA contributions or not...
« Reply #7 on: May 10, 2016, 05:25:33 PM »
My income this year will unfortunately be too high ($68k gross with possible raise coming soon) to deduct the interest.

If you contribute the full $18k to your 401(k), your MAGI will be only $50k (plus any raises), putting you well below the $65k limit for a full deduction.

Oh, nice!  For some reason I thought the income limit was much lower. 

https://www.irs.gov/publications/p970/ch04.html