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I would rather invest my money on my own how I see fit and plan my retirement custom-style.

ASSUMING a person knows how to use and invest their money wisely, would it still be a bad idea to entirely disregard a 401k plan?

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do you have match? – littleadv Jan 24 '13 at 20:08
Yes, 50% as is norm. – Aerovistae Jan 24 '13 at 20:08
If there was a norm, we wouldn't ask. Matches often vary. – Chris W. Rea Jan 24 '13 at 20:10
Then don't ignore a 401k plan. – littleadv Jan 24 '13 at 20:11
There is the question of whether the person plans maintaining a residence in the US or moving to another country where the tax changes could impact things here. – JB King Jan 24 '13 at 21:39
up vote 12 down vote accepted

Your question has a built in faulty premise.

"ASSUMING a person knows how to use and invest their money wisely"

I'd ask if you were wise enough to beat the investments offered in your 401(k) after expenses, and with respect to the potential tax savings.

Then, since I'm a proponent of "deposit to the match, even if you have to eat rice and beans to find the cash to do" I'll extend the question to ask if you can beat the choices taking the match into account.

401(k) - Your $1000 starts as $1500 and has a tax due on withdrawal years later.

AeroAccount - You start with $750 (after the tax) and might spend a decade before hitting $1500.

Start your own company? That might be another story. But to invest in the market and still beat the matched 401(k) takes a bit more wisdom than I'd claim to have.

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if you start your own company you would be able to contribute MUCH MORE to the 401k from the profits, so that still wouldn't mean ignore it.... – CQM Jan 26 '13 at 23:43
For maybe the entertainment of other readers, I should note that I went ahead and ignored the 401k and put my money into TSLA stock over the course of February, March, and April. I think it's safe to say I beat the matched 401(k). :D – Aerovistae May 29 '13 at 19:15
Arguably this was a very rare circumstance, and all the advice given here in the answers is 100% true. – Aerovistae May 29 '13 at 19:17
And the guy who made the 401(k) deposit and used it to buy TSLA is twice as well off as you. Many (no, I don't know the percent) 401(k)s allow trading within a brokerage type account. – JoeTaxpayer May 29 '13 at 19:22
That's really neat, there's a fact I didn't know. Just goes to show you how much there is to learn. – Aerovistae May 30 '13 at 2:30

A 50% company match on your 401(k) is a huge amount of free money. You'd have to absolutely crush the professional money managers to justify turning it down. If you can do that, you should quit your job and do it full-time.

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See my comment above :))) – Aerovistae May 29 '13 at 19:16

ASSUMING a person knows how to use and invest their money wisely, would it still be a bad idea to entirely disregard a 401k plan?


A 401k, like an IRA, is a "qualified plan" and as such enjoys certain legal protections.

For a Roth 401k, the taxes are paid now and the interest accumulates tax free, and withdrawals will be tax-free. Doing it on your own means that your own savings will have interest taxed as you earn it.

For a traditional 401k, current savings are deducted from current earnings, and the withdrawals will be taxed. Doing it on your own loses the deferral of tax at this time.

Generally, 401ks and IRAs are highly resistant to judgements in civil lawsuits. If you file for bankruptcy protection at any time in your working career, the assets in these accounts are immune (in most states) from being used to pay off your creditors. If you do it on your own, that savings account will be emptied to pay off creditors in bankruptcy and also will be assets that can be taken from you in civil judgements (for example, you get in a car accident and they sue you). You might never be sued, nor file bankruptcy in your entire life, but you are unnecessarily exposing yourself to risks: anything might happen in the next 50 years. What you will lose in such circumstances far outweighs any perceived benefits you could possibly earn by rolling your own. If you are the sort of person who can max out your 401k and IRA contributions each year, and still have a significant sum to set aside for savings, you should contact an investment advisor and attorney to see about protecting your assets.

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I didn't even think of the risk angle. Good answer. – MrChrister Jan 24 '13 at 22:54

An experienced individual wouldn't ask such questions. I don't say this to take a jab at you, but to provide context. The matter is much more complicated than a simple answer to your question could accomplish.

The short answer is no, not necessarily; but it depends on the details.

Generally, if the employer matches, it's suggested that you take advantage of the match. It's free money. That said, it comes with some strings attached, like a vesting schedule. It's not yours right away, necessarily. Choices are limited in a 401k, but we should still come out ahead with that free money.

The investment choices available in a 401k are also a part of the details. If they meet your needs you should certainly consider the 401k even if the employer doesn't match.

There is also the matter of one's particular tax situation, which is certainly an involved matter. A 401k can certainly be a part of judicious tax planning. It's a matter of working out the details.

Continuing this theme of details and coming back to the employer match: if the employer doesn't mach, I would make sure that I'm maxing out an IRA before considering the 401k. If the employer matched, I would probably contribute to take advantage of that match. However, it quickly becomes complicated here. I'm accustomed to employer matching up to some percentage of pay, which typically works out to be less then the anual contribution limits for a 401k. So, I my plan for such a situation is to contribute up to the employer match in the 401k, then max out an IRA, and then return to the 401k to finish contributing up to its yearly maximum.

There is plenty for you to consider in order to come up with a plan of action. While it's certainly complicated, it's accessible to most people. You don't have to be a genius. In fact, eggheads are regularly trounced by the markets.

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For this particular question, I think you should focus on: 401k accounts, IRA accounts, the difference in how contributions are taxed and the investment choices in such accounts. – George Marian Jan 24 '13 at 22:47

Even ignoring the match (which makes it like a non-deductible IRA), the 401k plans that I know all have a range of choices of investment. Can you find one that is part of the portfolio that you want? For example, do you want to own some S&P500 index fund? That must be an option. If so, do the 401k and make your other investments react to it-reduce the proportion of S&P500 because of it(remember that the values in the 401k are pretax, so only count 60%-70% in asset allocation). The tax deferral is huge over time. For starters, you get to invest the 30-40% you would have paid as taxes now. Yes, you will pay that in taxes on withdrawal, but any return you generate is (60%-70%) yours to keep. The same happens for your returns.

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The match is like a non-deducted IRA only in the sense that there's no deduction for you, but on withdrawal, it's exactly like the pretax IRA, taxed on withdrawal. – JoeTaxpayer Jan 26 '13 at 5:31
@JoeTaxpayer:I think you mean the post-match 401k. So the 401k beats the IRA unless you think the options in the IRA are enough better. In my case I get match on the first 6% but can deposit 15% up to the limit. I do the limit, plus an IRA. – Ross Millikan Jan 26 '13 at 5:38
the company deposit (match) is pretax. that's all i was trying to make clear. – JoeTaxpayer Jan 26 '13 at 5:58

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