Author Topic: 401K Employer Match vs Extra Pay  (Read 7902 times)

Truckman

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401K Employer Match vs Extra Pay
« on: January 13, 2014, 06:38:40 AM »
We're just starting out investing. My wife's 401K is through Fidelity. Right now we have nothing going in to it. She doesn't really get an employer match. The way it works is she gets this extra pay ($3.08/hr) called Health & Welfare Benefit. However, if she puts into the 401K and elects to have employer match, the match comes out of the Health & Welfare Benefit money. 

Would it be better then to just forgo her 401K and invest directly into a Vanguard fund?

CommonCents

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Re: 401K Employer Match vs Extra Pay
« Reply #1 on: January 13, 2014, 07:08:38 AM »
No because a 401k is tax advantaged.

Truckman

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Re: 401K Employer Match vs Extra Pay
« Reply #2 on: January 13, 2014, 08:31:58 AM »
OK. So the tax advantage will outweigh the higher fees associated with it (since it's not Vanguard, if I'm understanding correctly)?

Is there a general rule of thumb then, as far as how much to put in to it, and other investments? For example, max out 401K first, then max out IRA, then the rest in to Roth? Something like that? 


matchewed

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Re: 401K Employer Match vs Extra Pay
« Reply #3 on: January 13, 2014, 08:42:55 AM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Frankies Girl

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Re: 401K Employer Match vs Extra Pay
« Reply #4 on: January 13, 2014, 08:46:54 AM »
Check her plan to see what her investment options are. I have my 401K through Fidelity, and my plan includes some of their Spartan series index funds, with expense ratios very close to Vanguard's index fund offerings.
https://fundresearch.fidelity.com/mutual-funds/summary/315911404
^this is the under 10K investor level at .10% expense ratio, but if you get over 10K in there it will flip to the advantage class and drop to .07% expense
https://fundresearch.fidelity.com/mutual-funds/summary/315911800

If you're getting any match at all, it's worth going in to at least get the match. It is also worth it if contributing to the 401K knocks down your taxable income, and drops you into a lower tax bracket. And it grows tax deferred, so there's another benefit.

If there isn't a decent match (I'm not sure I understand how that benefit works) then opening a Roth IRA at Vanguard is a good idea, but that's after tax contributions and you can only kick in $5,500 per year right now per person...


MooseOutFront

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Re: 401K Employer Match vs Extra Pay
« Reply #5 on: January 13, 2014, 09:44:08 AM »
My view is that all retirement saving needs to start with maxing out tax advantaged space under almost any circumstance. 

1. 401k match
2. HSA max
3. 401k max
4. Roth IRA max
5. Taxable Investment account

An early retiree with low expenses will have years of low income to get this 401k/HSA/Roth money back out tax free through a variety of ways.

A 401k plan would have to be really bad to kill the tax advantage.  Especially since you can just roll it out of there when you change employers or quit.

Truckman

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Re: 401K Employer Match vs Extra Pay
« Reply #6 on: January 13, 2014, 10:01:16 AM »
Check her plan to see what her investment options are. I have my 401K through Fidelity, and my plan includes some of their Spartan series index funds, with expense ratios very close to Vanguard's index fund offerings.
https://fundresearch.fidelity.com/mutual-funds/summary/315911404
^this is the under 10K investor level at .10% expense ratio, but if you get over 10K in there it will flip to the advantage class and drop to .07% expense
https://fundresearch.fidelity.com/mutual-funds/summary/315911800

If you're getting any match at all, it's worth going in to at least get the match. It is also worth it if contributing to the 401K knocks down your taxable income, and drops you into a lower tax bracket. And it grows tax deferred, so there's another benefit.

If there isn't a decent match (I'm not sure I understand how that benefit works) then opening a Roth IRA at Vanguard is a good idea, but that's after tax contributions and you can only kick in $5,500 per year right now per person...

Thanks for the links!

She has 29 investment options:

Quote
ABF LG CAP VAL INST (AADEX)
FID CONTRAFUND K (FCNKX)
NUVEEN WIN LGCP GR I (NVLIX)
SPTN 500 INDEX INST (FXSIX)
GS MIDCAP VALUE INST (GSMCX)
MSIF MID CAP GRTH I (MPEGX)
PRU/J SMALL CO Z (PSCZX)
ROYCE LOW PR STK IS (RLPIX)
HARBOR INTL INST (HAINX)
HRDG LVNR INTL EQ IS (HLMIX)
ING GLOBAL REL EST I (IGLIX)
TRP RETIRE INCOME (TRRIX)
TRP RETIREMENT 2005 (TRRFX)
TRP RETIREMENT 2010 (TRRAX)
TRP RETIREMENT 2015 (TRRGX)
TRP RETIREMENT 2020 (TRRBX)
TRP RETIREMENT 2025 (TRRHX)
TRP RETIREMENT 2030 (TRRCX)
TRP RETIREMENT 2035 (TRRJX)
TRP RETIREMENT 2040 (TRRDX)
TRP RETIREMENT 2045 (TRRKX)
TRP RETIREMENT 2050 (TRRMX)
TRP RETIREMENT 2055 (TRRNX)
MIP CL 1
PIM REAL RETURN INST (PRRIX)
PIM TOTAL RT INST (PTTRX)
TMPL GLOBAL BOND ADV (TGBAX)
TRP HIGH YIELD (PRHYX)
FID RETIRE MMKT (FRTXX)

We're both really, really green when it comes to this stuff. But at quick glance it looks like the closest to an Index Fund is the SPTN 500 INDEX INST (FXSIX).

As for how the benefit works:  She gets $X salary. In addition to that, she gets an extra $246/pay in what is called Health & Welfare Benefits. This is "meant" to help cover unpaid sick-leave, co-pays, etc... Out of this extra money is where the so-called "employer contribution" to her 401K is drawn. So really, there is no employer contribution, the match comes from her own money. Off hand I'm not sure what the match is as far as percentages go, but I don't think she will get matched past what the H&W amount is.

mpbaker22

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Re: 401K Employer Match vs Extra Pay
« Reply #7 on: January 13, 2014, 10:06:14 AM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Remember that you'll be taxed at the end too.  Shockingly, a lot of people assume they'll never be taxed on this money because they put it in pre-tax and it grows tax free.  It's tax deferred, so when you take it out, you pay normal income taxes.  The advantage to a mustachian is you have low expenses, so you can afford to only take small amounts out, so your income tax rates will potentially be lower than your current rate.  Alternatively, if you're not maxing out an IRA, it might be even better to put it in a traditional IRA?  Again, it's a math problem.

matchewed

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Re: 401K Employer Match vs Extra Pay
« Reply #8 on: January 13, 2014, 10:14:38 AM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Remember that you'll be taxed at the end too.  Shockingly, a lot of people assume they'll never be taxed on this money because they put it in pre-tax and it grows tax free.  It's tax deferred, so when you take it out, you pay normal income taxes.  The advantage to a mustachian is you have low expenses, so you can afford to only take small amounts out, so your income tax rates will potentially be lower than your current rate.  Alternatively, if you're not maxing out an IRA, it might be even better to put it in a traditional IRA?  Again, it's a math problem.

You're totally right. I have a bad habit of assuming that people on the forum are "typical" mustachians (whatever that means); decent income and low expenses. That leads my advice to be rather specific and I ignore things like future taxes as they will generally be much lower than present taxes given my unspoken assumptions.

Truckman

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Re: 401K Employer Match vs Extra Pay
« Reply #9 on: January 13, 2014, 10:37:03 AM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Remember that you'll be taxed at the end too.  Shockingly, a lot of people assume they'll never be taxed on this money because they put it in pre-tax and it grows tax free.  It's tax deferred, so when you take it out, you pay normal income taxes.  The advantage to a mustachian is you have low expenses, so you can afford to only take small amounts out, so your income tax rates will potentially be lower than your current rate.  Alternatively, if you're not maxing out an IRA, it might be even better to put it in a traditional IRA?  Again, it's a math problem.

You're totally right. I have a bad habit of assuming that people on the forum are "typical" mustachians (whatever that means); decent income and low expenses. That leads my advice to be rather specific and I ignore things like future taxes as they will generally be much lower than present taxes given my unspoken assumptions.
We're far from "typical" mustachians, we're typical anti-mustachians. Consumerus Extremus.  I hope to be putting up a case study post soon, but we've got a long road ahead of us and a short time to get there. Will be making some big changes here in the future, and be doing things that we've never done before.

Truckman

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Re: 401K Employer Match vs Extra Pay
« Reply #10 on: January 13, 2014, 11:56:04 AM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Just checked 2012 tax file, we're in the 25% bracket. From checking online, it looks like we were $4K above the line. I'm not sure how much difference there will be between this year and last year.  Assuming not much difference from last year to this year, all we would need to do is get $4K (roughly) into her 401K before April 15 this year to get us into the next lower tax bracket? 

Is there another way to figure out how much we need to put in to her 401K besides doing our taxes to figure out what our Taxable Income is (after deductions, etc...)?  Or just do them, don't file, put the money into the 401K, and redo them?

mpbaker22

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Re: 401K Employer Match vs Extra Pay
« Reply #11 on: January 13, 2014, 01:13:18 PM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Just checked 2012 tax file, we're in the 25% bracket. From checking online, it looks like we were $4K above the line. I'm not sure how much difference there will be between this year and last year.  Assuming not much difference from last year to this year, all we would need to do is get $4K (roughly) into her 401K before April 15 this year to get us into the next lower tax bracket? 

Is there another way to figure out how much we need to put in to her 401K besides doing our taxes to figure out what our Taxable Income is (after deductions, etc...)?  Or just do them, don't file, put the money into the 401K, and redo them?

Are you familiar with marginal tax rates?  Just based on your post, it sounds like you aren't thinking through the tax situation as clearly as you could.
As a basic run-down, you pay the tax rate at each income level for each dollar up until the top of that income level.  For an example, a single person making $50,000 in 2013 would pay the following amounts in these tax brackets:

10% of the first $8,925 or $892.5
15% of anything between $8925 and 36,250 or .15*(36,250 - 8,925) or 4,098.75
25% of anything between $36,250 and $50,000 or .25*(50,000-36,250) or 3437.5
The total would be 892.5 + 4098.75+3437.5 = 8,428.75.  That averages to a 16.8% tax rate, but the marginal rate is 25%

In your case, I'm assuming you're married with AGI of $76,500?  By reducing your taxable income to $72,500, you're saving $4,000*your marginal tax rate or $4,000*.25 = $1,000.  By reducing it another $4,000 to $68,500, you save an additional $4,000*.15 = $600.

Again, when I use the word save, it really means save now, and you'll potentially pay more later.  But you'd only pay more later if you expect your future marginal tax rate on the $4,000 to be higher than 25%.


Let me know if you need clarification on anything I wrote.

Truckman

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Re: 401K Employer Match vs Extra Pay
« Reply #12 on: January 13, 2014, 01:58:49 PM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Just checked 2012 tax file, we're in the 25% bracket. From checking online, it looks like we were $4K above the line. I'm not sure how much difference there will be between this year and last year.  Assuming not much difference from last year to this year, all we would need to do is get $4K (roughly) into her 401K before April 15 this year to get us into the next lower tax bracket? 

Is there another way to figure out how much we need to put in to her 401K besides doing our taxes to figure out what our Taxable Income is (after deductions, etc...)?  Or just do them, don't file, put the money into the 401K, and redo them?

Are you familiar with marginal tax rates?  Just based on your post, it sounds like you aren't thinking through the tax situation as clearly as you could.
As a basic run-down, you pay the tax rate at each income level for each dollar up until the top of that income level.  For an example, a single person making $50,000 in 2013 would pay the following amounts in these tax brackets:

10% of the first $8,925 or $892.5
15% of anything between $8925 and 36,250 or .15*(36,250 - 8,925) or 4,098.75
25% of anything between $36,250 and $50,000 or .25*(50,000-36,250) or 3437.5
The total would be 892.5 + 4098.75+3437.5 = 8,428.75.  That averages to a 16.8% tax rate, but the marginal rate is 25%

In your case, I'm assuming you're married with AGI of $76,500?  By reducing your taxable income to $72,500, you're saving $4,000*your marginal tax rate or $4,000*.25 = $1,000.  By reducing it another $4,000 to $68,500, you save an additional $4,000*.15 = $600.

Again, when I use the word save, it really means save now, and you'll potentially pay more later.  But you'd only pay more later if you expect your future marginal tax rate on the $4,000 to be higher than 25%.


Let me know if you need clarification on anything I wrote.
Actually, no I wasn't that familiar with the marginal tax rates. I was just reading a bit about them after I posted.  In all honesty, the shame of it is that I had no idea that's how taxes were done. So much learning to do....

teen persuasion

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Re: 401K Employer Match vs Extra Pay
« Reply #13 on: January 13, 2014, 06:16:36 PM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Just checked 2012 tax file, we're in the 25% bracket. From checking online, it looks like we were $4K above the line. I'm not sure how much difference there will be between this year and last year.  Assuming not much difference from last year to this year, all we would need to do is get $4K (roughly) into her 401K before April 15 this year to get us into the next lower tax bracket? 

Is there another way to figure out how much we need to put in to her 401K besides doing our taxes to figure out what our Taxable Income is (after deductions, etc...)?  Or just do them, don't file, put the money into the 401K, and redo them?

Are you familiar with marginal tax rates?  Just based on your post, it sounds like you aren't thinking through the tax situation as clearly as you could.
As a basic run-down, you pay the tax rate at each income level for each dollar up until the top of that income level.  For an example, a single person making $50,000 in 2013 would pay the following amounts in these tax brackets:

10% of the first $8,925 or $892.5
15% of anything between $8925 and 36,250 or .15*(36,250 - 8,925) or 4,098.75
25% of anything between $36,250 and $50,000 or .25*(50,000-36,250) or 3437.5
The total would be 892.5 + 4098.75+3437.5 = 8,428.75.  That averages to a 16.8% tax rate, but the marginal rate is 25%

In your case, I'm assuming you're married with AGI of $76,500?  By reducing your taxable income to $72,500, you're saving $4,000*your marginal tax rate or $4,000*.25 = $1,000.  By reducing it another $4,000 to $68,500, you save an additional $4,000*.15 = $600.

Again, when I use the word save, it really means save now, and you'll potentially pay more later.  But you'd only pay more later if you expect your future marginal tax rate on the $4,000 to be higher than 25%.


Let me know if you need clarification on anything I wrote.

Wouldn't that be taxable income, not AGI? IOW, after deducting their standard deduction (or itemizations) and personal exemptions?

If I understand the "match" thing, the OP can put $17.5k in the 401k PLUS the "match" money, correct?  That would drop your taxable income even more, another $6400.  I like Roth IRAs, but if you are looking to reduce taxes, putting $5500 each in a traditional IRA would reduce your taxable income another $11k.

hoppy08520

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Re: 401K Employer Match vs Extra Pay
« Reply #14 on: January 13, 2014, 07:19:20 PM »
My view is that all retirement saving needs to start with maxing out tax advantaged space under almost any circumstance. 

1. 401k match
2. HSA max
3. 401k max
4. Roth IRA max
5. Taxable Investment account

An early retiree with low expenses will have years of low income to get this 401k/HSA/Roth money back out tax free through a variety of ways.

A 401k plan would have to be really bad to kill the tax advantage.  Especially since you can just roll it out of there when you change employers or quit.
+1 on all of that. I think there are a few cases where you can reverse #3 and #4 but I think in most cases your order is correct--if you can, max both so you don't have to decide. Also some people might actually be able to do Traditional IRA if income is low enough.

mpbaker22

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Re: 401K Employer Match vs Extra Pay
« Reply #15 on: January 13, 2014, 10:44:05 PM »
Depends on what tax bracket you're in and what the fee difference is. There is no generic piece of information that will fit your particular circumstance.

This is a math problem for the most part. Figure out your tax savings if you maxed your 401k. Figure out what the fees would be on that maxed amount. If your tax savings are greater than your fees then the 401k is a better choice.

Just checked 2012 tax file, we're in the 25% bracket. From checking online, it looks like we were $4K above the line. I'm not sure how much difference there will be between this year and last year.  Assuming not much difference from last year to this year, all we would need to do is get $4K (roughly) into her 401K before April 15 this year to get us into the next lower tax bracket? 

Is there another way to figure out how much we need to put in to her 401K besides doing our taxes to figure out what our Taxable Income is (after deductions, etc...)?  Or just do them, don't file, put the money into the 401K, and redo them?

Are you familiar with marginal tax rates?  Just based on your post, it sounds like you aren't thinking through the tax situation as clearly as you could.
As a basic run-down, you pay the tax rate at each income level for each dollar up until the top of that income level.  For an example, a single person making $50,000 in 2013 would pay the following amounts in these tax brackets:

10% of the first $8,925 or $892.5
15% of anything between $8925 and 36,250 or .15*(36,250 - 8,925) or 4,098.75
25% of anything between $36,250 and $50,000 or .25*(50,000-36,250) or 3437.5
The total would be 892.5 + 4098.75+3437.5 = 8,428.75.  That averages to a 16.8% tax rate, but the marginal rate is 25%

In your case, I'm assuming you're married with AGI of $76,500?  By reducing your taxable income to $72,500, you're saving $4,000*your marginal tax rate or $4,000*.25 = $1,000.  By reducing it another $4,000 to $68,500, you save an additional $4,000*.15 = $600.

Again, when I use the word save, it really means save now, and you'll potentially pay more later.  But you'd only pay more later if you expect your future marginal tax rate on the $4,000 to be higher than 25%.


Let me know if you need clarification on anything I wrote.

Wouldn't that be taxable income, not AGI? IOW, after deducting their standard deduction (or itemizations) and personal exemptions?

If I understand the "match" thing, the OP can put $17.5k in the 401k PLUS the "match" money, correct?  That would drop your taxable income even more, another $6400.  I like Roth IRAs, but if you are looking to reduce taxes, putting $5500 each in a traditional IRA would reduce your taxable income another $11k.

Do I look like an accountant or something?  I'm just a guy whose done my own taxes twice and I stayed at a holiday inn express once (I think).  I like Roths because I'm already saving so much in a 401k, and I like to be able to withdraw contributions if I need/want to for any reason.

Truckman

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Re: 401K Employer Match vs Extra Pay
« Reply #16 on: January 14, 2014, 05:56:22 AM »
We couldn't find anything in her paperwork regarding how the contribution comes from her Health & Welfare money, so she's going to call her benefits division today to get more information.  We did find out though that the contribution is 50% of her contribution up to 8%, meaning she needs to put in 8% to get 4% from them.  The thing is, the way we understand things now (with further clarification coming today, hopefully), their contribution isn't really a contribution from them because it's taken from the Health & Welfare money.

teen persuasion

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Re: 401K Employer Match vs Extra Pay
« Reply #17 on: January 14, 2014, 08:47:17 AM »
So, if the employer contribution (from the Health & Welfare money) is only up to 4% of her salary, unless DW makes over $160k per year, the 401k match will not use up all of that Health & Welfare money.  Some will still go into her paycheck.  But up to 4% could be tax sheltered in DW's 401k, in addition to up to the max of $17500.

You are right, they are not contributing any more (than they already contribute thru the Health & Welfare money), but you have the option to tax shelter some of that money, if you wish.  My DH can only contribute the max of $17500, and there is no match at all.  We still do it for the tax benefit.

Truckman

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Re: 401K Employer Match vs Extra Pay
« Reply #18 on: January 14, 2014, 12:54:07 PM »
Got it.  Thanks!

Now I just need to work on her to do it. She seems very reluctant and untrusting of her co. in handling the 401K...