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The 401K program offered by my employer doesn't include a company match.

Should I participate in the plan? What are the criteria one should use for estimating the worth of the situation?

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A 401k plan allows you to save more money for your retirement than you can in an IRA. Whether this is important in your life plan is something that you need to figure out. Some people feel that they cannot afford to put money away: the salary is too low, or they need the money for other things such as diapers for the baby or the latest gizmo or alimony payments etc. Some conscientiously cut back on current expenses as much as possible to put money away for the future. The company match, if any, is icing on the cake, but if you eat your cake, you don't get the icing; you have to save your cake. –  Dilip Sarwate Jul 14 '12 at 23:30
    
@DilipSarwate that should've been an answer... –  littleadv Jul 15 '12 at 2:33
    
Are you saying "Let them eat cake" or "You can't have your cake and eat it, too"? –  JoeTaxpayer Jul 15 '12 at 3:15
    
I asked a similar question, maybe those answers will be relevant to your situation as well! –  bhamby Jul 17 '12 at 18:11

3 Answers 3

up vote 4 down vote accepted

With a match, the 401(k) becomes the priority, up to that match, often ahead of other high interest debt.

Without the match, the analysis is more about the cost within the 401(k).

The 401(k) is a tax deferred account (let's not go on a tangent to Roth 401(k)) so ideally, you'd be skimming off money at 25% and saving it till you retire, so some of it is taxed at 0, 10, 15%. If the fees in the 401(k) are say 1.5% between the underlying funds and management fee, it doesn't take long to wipe out the potential 10 or 15% you are trying to gain.

Yes, there's a risk that cap gain rates go away, but with today's tax law, the long term rate is 15%. So that money put into a long term low cost ETF will have reinvested dividends taxed at 15% and upon sale, a 15% rate on the gains. There are great index ETFs with sub - .1% annual cost.

My simple answer is - If the total cost in that 401(k) is .5% or higher, I'd pass. Save the money in an outside account, using IRAs as best you can.

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I believe @Dilip addressed your question alread, I am going to focus on your second question:

What are the criteria one should use for estimating the worth of the situation?

The criteria are:

  • Are you between two tax braket? If yes, you might want to take advantage of the $17,000 dollars max 401K contribution to get your Adjusted Gross Income below the tax bracket.
  • Do you have enough cushion that you can afford to save more than what a traditional IRA allows? Traditional IRA lets you take advantage up to $5,000 with tax benefits, the 401K to the 17K limit discussed earlier.
  • Some Employers 401K providers will allow for cheaper investment products. Without transaction fees, or other.

I hope this helps.

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What does tax bracket have to do with it? How is reducing the AGI from one tax bracket to another any different than reducing it within the same bracket? –  user102008 Jul 15 '12 at 7:42

Another consideration that is not in the hard numbers.

Many people, myself included, find it hard to have the discipline to save for something that is so far off. The 401K plan at work has the benefit of pulling the money out before you see it, so you learn to live on what is left more easily. Also, depending on the type of 401K it attaches penalties to using the money early disincentive you to pull it out for minor emergencies.

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