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I am fortunate to be at a company with a pretty high 401K match, 50% with no cap.

Normally when I've saved in the past, I've done the 401K up to the amount matched, and then chose other savings options. In this case...I'm wondering if it makes sense to just completely max out my 401k before moving on to the Roth and then other types of savings.

Here's the wrinkle, at this point in my life if I were to fully max my 401k contribution, I wouldn't have much remaining for other retirement* savings.

So with that in mind, what's smarter in their 30's with two young kids who already has six months of emergency savings and began funding 529's for the kids.

  1. Fully Max 401K and nothing else
  2. Partially fund 401K and max out IRAs for self and spouse

For clarity, I am trying to pick the best place to put retirment money,should I fund the roth 100% then use the 401k or viceversa?

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  • 8
    To be clear, are you trying to decide between the 401(k) and other retirement accounts, or the 401(k) and other non-retirement accounts? I don't think there's a strong argument for allocating retirement savings to anything other than the 401(k) here, but in the latter case, it depends on what your savings goal is. Taking full advantage of the match doesn't help if you have needs unrelated to retirement.
    – chepner
    Jul 11 at 13:54
  • When you say 50% with no cap, do you mean you can put in post-tax money that exceeds $19,500? Jul 12 at 12:06
  • Good point, @chepner, I will edit in the answer, which is that I'm picking the best places to store retirement funds, keeping in mind that I have this awesome match.
    – FoxDeploy
    Jul 12 at 13:24
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    @mhoran_psprep, I learned that an individual can place up to $19,500 into a 401k, and then company match applies on top of that amounts. So if I fully funded the 401k at $19,500 the company could add another $9,750 for a total of $29,250.
    – FoxDeploy
    Jul 12 at 13:26
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    @FoxDeploy I think mhoran_psprep is asking whether the match applies to after-tax contributions, which are not counted in the $19.5k limit.
    – nanoman
    Jul 13 at 6:14
71

Max out the 401k. The uncapped match is a free 50% rate of return and no other investment can match this.

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    @Jay he's going to pay tax on it eventually.
    – Seth R
    Jul 12 at 4:01
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    @SethR: True, but typically retirees have lower income than workers. So, deferring taxes still has a substantial financial benefit.
    – Brian
    Jul 12 at 19:54
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    @nanoman you're splitting hairs. Assuming the 401k is reasonably managed (diversified, index funds, etc., which I would expect a company that offers this program has ensured it is) then I do not see a reasonably likely path that anything might outperform the 50% match considering that, for whatever risk level you're going after, most off-the-shelf investments will offer similar rates of return. You just can't beat the 50%, and yes, it is a 50% return. Return is simply the ratio of value / investment - crucially, time is not a factor in return unless you make it so.
    – corsiKa
    Jul 13 at 8:25
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    @nanoman I think it is, at best, something to consider but a 50% match is never going to have a practical contender. Most importantly, your risk rate. There are many options to get double digit returns, but they also carry massive risk. There's no risk on a match. And sure, if you're never going to have a roll over opportunity FOR YOUR ENTIRE 41 YEAR CAREER then that might make a lick of sense. But in reality, it doesn't. Take the match to the max every time. Don't encourage people to do dumb things to make a hair splitting point on the internet. This is peoples' money here.
    – corsiKa
    Jul 13 at 9:24
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    @nanoman Your scenario is ridiculous. No one thinks it's a double digit return every year. It is, however, an immediate 50% return with every new deposit going forward. There is no fund, literally no fund, that could possibly compete with that. There is nothing to evaluate. You take the match for as much as you are able to invest. You are making a much, much bigger deal over a small detail than it warrants.
    – corsiKa
    Jul 13 at 10:31
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It's very tempting to max out the 401(k), for the reason Hilmar mentioned. Remember, though, that there's more in life to save for than emergencies. For example:

  1. House down payment
  2. Vehicle maintenance and eventual replacement (I don't count easily foreseeable irregular expenses as emergencies)
  3. Vacation
  4. Continued 529 contributions.
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    529s are a poor option if you still have 401k/IRA contribution limits available. 529 money counts against you when doing a FAFSA but retirement accounts don't, but you can use IRA money for higher education without penalty.
    – stoj
    Jul 12 at 16:08
  • Money in an IRA may not be counted, but withdrawals are counted as income, which can affect financial aid. There are a lot of other differences between an IRA and 529, so I don't think it's as clear cut as you make it sound.
    – Dan A.
    Jul 12 at 17:20
  • If I were in this situation I'm pretty sure I'd just take a 401(K) loan for about any other expense. Jul 12 at 19:09
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    529s also depend on your child actually wanting college and college still being expensive when they're 18... and you can't take either one to the bank. Jul 14 at 15:38
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There is at least a tiny bit of consideration for diversity of retirement savings: tax deferred 401k with already-taxed Roth. But as has been said here, an instant 50% return on funds is virtually unbeatable, even if income taxes will need to be paid on it and its earnings in the future.

With that in mind, OP should check out his plan to see if they have Roth 401k possibilities. That is, he can pay the taxes on contributions to the 401k today and then withdraw them and their earnings tax-free at retirement age. The company contribution will remain tax-deferred, but again, this lends itself some diversity in savings which I do think has value given the uncertainty of future tax laws and rates.

Many 401k plans allow a mix of regular and Roth contributions, too, so OP may be able to tune this knob a little.

And if OP can't find direct documentation, it may be worth a quick visit with HR. A lot of times plan choices like that comes about because someone asks for it. It is possible that no one else has asked for it to date, but all HR has to do it ask their provider to turn it on for the plan. (As an aside, this is also a good avenue to ask your employer for funds in your plan with better expense ratios, better diversity, etc. These things often don't get changed until someone asks.)

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  • It's always possible to roll 401k to IRA later on though, and take the tax hit over time or in a favorable year. Also worth asking HR if the employee funds can go to their IRA while the match goes to the 401k; I've worked a places that allowed this.
    – brichins
    Jul 14 at 15:42
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The answer to this question is not set until the time you leave your employer. You could max out the 401K in July, and cut it back to 3% in August. That is the key to understanding the right course of action.

Given your fully funded emergency fund and the match, I would max out the 401K whenever you can. You may want to cut back on that savings for special needs like Christmas or when you might need a new car. However baring any other hinderances dump as much money as you can into your 401K. Nothing like getting a 50% return on your money from day one.

Keep in mind your employer's policy may change, the laws surrounding 401K may change, or you may change jobs. It is "time to make hay while the sun is shinning".

As far as college for the kids what do you envision? If you are planning on community college then transfer to university, it is fairly easy to just cash flow. You may not even need 529 savings. If needed you could cut back on your 401K then, after your earlier contributions and matches have had time to grow.

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Take the FREE MONEY

I have to agree that the 50% match is free money. 50%, even though it only applies one time, constitutes years of growth even in the best conditions.

My own personal style is to max out the 401(K) up front - i.e. I fund the full $19,500 in the first few months of the year. It makes for an irregular paycheck, but it locks in the contribution even if I lose the job or change jobs to a company without a 401(K).

There are 2 tax categories here: Traditional IRA and 401(K).... and Roth IRA and 401(K).

There is a gotcha with a traditional IRA or 401(K)

Since you're not paying taxes today, you must pay taxes on withdrawal or conversion - and that can be an extreme burden late in life.

Now, the mathematicians in the crowd say "well, your tax rate will be lower in retirement" - snort those mathematicians haven't spent a lot of time in skilled nursing facilities. Here's what REALLY happens.

With a traditional IRA/401K, you (read: highly competent saver who did everything right) find yourself with more IRA/401K than you have bankable lifetime. You have 2 bad choices:

  • Distribute from the IRA at a faster rate than you were hoping for, into other investments -- pushing yourself into the same tax bracket you were in while you were working.
  • Fail to distribute enough from the IRA while you are healthy, and start having medical problems that necessitate distributing at a very high rate - pushing yourself into an even higher tax bracket than when you were working.

The cure for all these problems is Roth. With a Roth, the taxes are pre-paid, so the large withdrawals have no effect.

Take the free money anyway

Even so, the 50% FREE MONEY is way, way more than enough to pay those awkward taxes five times over and then some. So a traditional IRA/401(K) with a 50% match is still a better deal than a Roth anything with no match.

Seek the best of both worlds: Take the 401K with match, then convert to Roth 401(K) at some happy future date, e.g. in the event you take a gap year.

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  • Thanks for putting bullet points as well! I like the answer, easy to follow :)
    – FoxDeploy
    Jul 15 at 17:57

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