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Learning, Sharing, and Teaching => Investor Alley => Topic started by: OSUENGY on June 15, 2017, 09:07:52 AM

Title: 401K Advice Needed
Post by: OSUENGY on June 15, 2017, 09:07:52 AM
Hello, relatively new here and not very well versed in investing.

Currently I'm almost 32 years old, in the 25% tax bracket ($62K) and just became eligible to contribute to an IRA through my employer.  My employer offers 25% match with no cap (which I guess is pretty decent if you can contribute the max), so my understanding is I can contribute up to the maximum allowable ($18K right?) and get an extra $4500 from my employer.

My problem is I can't afford to contribute the max at this time.  I plan on paying off a vehicle later this year which should allow me to contribute a lot more.  I don't know whether to contribute to traditional or Roth.  It seems like it's a toss up in my tax bracket, but being that I cannot contribute a large chunk (yet), I'm not sure what the best option is right now. 

Can anyone give some basic advice here?
Title: Re: 401K Advice Needed
Post by: dandarc on June 15, 2017, 09:35:00 AM
What is the rate on your vehicle loan?  Are you paying the car off early, or just coming to the end of the loan with regular payments?

As good as paying off a debt feels, you're leaving a lot on the table by doing so at the expense of 401K.  25% taxes (more if you're in a state with an income tax) plus 25% match.  For every $100 you put in the 401K, you get $150 immediately.  That's really hard to beat.  You'd have to be paying a very high rate on the car to make prioritizing the debt at the expense of the 401K make mathematical sense.

The limit for a 32 year old is $18K if your plan allows it - some plans will cap you at some percentage of income that is lower than the max the law allows.  So check your plan.

In your tax bracket, I'd probably go traditional assuming you don't have a ton of money ($1 million+) in traditional accounts already.

All that being said, bender is right - the goal should be to max the 401K every year, and pay off any high-interest debts and invest even more.  Look at your whole budget - figure out where the money's going.  Make cuts.  If you get things really under control, you might be shocked at how much you can save with relatively modest lifestyle changes.  If you're ready for some face-punches, try posting a case-study.