An individual recently got offered a job that paid significantly more than what she is making now (more than $18k - which is the maximum 401(k) contribution). She currently makes $30k a year. However, this company does not have a 401(k) plan for their employees. After talking about it and researching, it appears that all the available retirement plans/options would never equal the $18k of a 401(k). Her current company offers a 401(k) plan and matches up to 4%. From a long-term planning point of view, is the bump in salary worth not having a 401(k)?

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    Do you know her current salary? Can't assign a value to the 4% match without current salary.
    – Hart CO
    Jul 25, 2017 at 19:26
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    IMO, higher earnings always, always, always trumps tax savings. 401(k) et. al. are just tax shelters, get the money and figure out what to do with it, but don't leave money on the table because the maximum capacity of your usual tax shelter is smaller. (401k vs individual IRA).
    – quid
    Jul 25, 2017 at 19:30
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    @MichaelC. Above certain levels, the IRS phases out tax exempt contributions to retirement accounts. The additional taxes on income (higher tax bracket + lower deductions for contributions) is a damper on the percentage of the raise, and would come into play for higher base pay amounts. Thus it would change the answer. Jul 25, 2017 at 19:48
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    Actually, since the pay increase you suggested is greater than the annual 401k contribution limit, then there is no salary that makes 4% matching more attractive than an >18k pay bump.
    – Hart CO
    Jul 25, 2017 at 19:56
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    I'm kind of surprised this question has so many upvotes. As asked, the answer is a no-brainer. IMHO a much more interesting question would be: how much salary would you be willing to forego in order to have access to a 401k? (e.g. You make 48K w/o a 401K. Would you accept 47K w/ a 401k instead? Or 46, or 45, etc...)
    – TTT
    Jul 26, 2017 at 19:15

4 Answers 4


From a long-term planning point of view, is the bump in salary worth not having a 401(k)?

In this case, absolutely. At $30k/year, the 4% company match comes to about $1,200 per year. To get that you need to save $1,200 yourself, so your gross pay after retirement contributions is about $28,800.

Now you have an offer making $48,000. If you take the new job, you can put $2,400 in retirement (to get to an equivalent retirement rate), and now your gross pay after retirement contributions is $45,600.

Now if the raise in salary were not as high, or you were getting a match that let you exceed the individual contribution max, the math might be different, but in this case you can effectively save the company match yourself and still be way ahead.

Note that there are MANY other factors that may also be applicable as to whether to take this job or not (do you like the work? The company? The coworkers? The location? Is there upward mobility? Are the benefits equivalent?) but not taking a 67% raise just because you're losing a 4% 401(k) match is not a wise decision.

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    I had to read "post-retirement pay" twice to figure out what that meant here.
    – Kimball
    Jul 26, 2017 at 4:24
  • It is also worth taking into consideration how likely you pay is to rise in future. This new company might have great opportunities for future pay rises (since they pay more now), or they might be moving to the top of their salary range and not get another future pay rise.
    – MikeS159
    Jul 26, 2017 at 12:05
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    @Mike159 Even if the offer is right at the top of the range the company is able to pay, the bump from $30k/year to >$48k/year (I'll call it $50k/year for simplicity) is a 67% bump in pay. Assuming a generous 5%/year, that's a decade's worth of raises. (After 10 years of +5%/year, you're at about 63% above where you started.) If your raises are 2.5% per year, that's 21 years!
    – user
    Jul 26, 2017 at 13:59
  • @MichaelKjörling, yes in this case that is true. But generally the long term prospects are always worth considering when moving.
    – MikeS159
    Jul 26, 2017 at 14:54
  • Completely correct answer. It might also be worth mentioning that you can get similar or identical tax advantages as you would have had with the 401(k) on your self-saved retirement savings by opening a personal IRA.
    – reirab
    Jul 26, 2017 at 22:07

4% of 30k ($1,200) is dwarfed by an $18,000 base pay increase. At 48k maxing out IRA will take ~11.5% of gross income, so at current position (30k salary) 401k contributions would likely be limited to the matching portion anyway.

The long-term benefit of a deferred tax retirement plan can't fully be known since tax rates can change over time. If rates increase, the benefit can be mitigated. Personally, I only contribute to 401k enough to get full employer matching, and then I prioritize HSA, IRA, after those, some people like to go back to 401k to max, but I prefer other investments.

At this low of an income range, the increase in base pay is far too significant to worry over potential differences in tax-deferred vs after tax investments.

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    I agree with this assessment. An even bigger tax benefit (long term) is to take the extra salary and max out an individual Roth IRA using after-tax money. Unless laws really get changed and the country survives the rioting that would ensue, contributions to a Roth IRA are free from future government seizures through taxation.
    – rocketman
    Jul 25, 2017 at 19:49
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    @rocketman the bigger tax risk with a Roth account IMO is that the people who want to replace some or all of the federal income tax with a national sales tax of some sort get their way. Jul 26, 2017 at 18:57
  • @rocketman-At the moment, there's not enough retired people who have sizable Roth IRA accounts to attract much attention. Do you really think that after many people who saved using Roth IRA for their entire career and now have all this tax-free money sitting out there is not going to attract the politicians attention? After all, those evil-greedy rich people with large sums of cash don't want to contribute their fair-share of taxes. It's an easy sell to a sizable percentage of the population. Most people don't realize that when a politician says "rich people" they generally mean YOU.
    – Dunk
    Jul 26, 2017 at 19:49

If she does take this job and not have a 401k, tell her to make sure she opens up an IRA account. It has a lower contribution limit ($5,500 a year for people under 55) and no sort of company matching, but has the same tax benefits a 401k has. It's definitely a wise investment if she doesn't have access to a 401k (still a wise investment even if she does)

  • In this tax bracket, and depending on other tax deductions, a Roth IRA might be a good option. If non-IRA deductions would drop taxable income down into the 15% tax bracket (~$38k for 2017), it might make sense to pay that tax up front. That tax rate is so low that the future income tax paid on retirement income has a good chance of being substantially higher, especially if retirement is a long way away for this individual (so the investments will have a long time to appreciate).
    – asgallant
    Jul 26, 2017 at 15:46
  • Whatever she does, she mustn't fall into the trap of forgetting to put that money (or more) away for retirement, just because it passes through her bank account rather than being deducted by her employer.
    – thelem
    Jul 26, 2017 at 16:55

A 401k is pretty good, but it's not magic.

  • It's a tax deferred savings account. But you can have your own IRA which is also tax deferred. The limit isn't as high (5.5k vs 18k) but is that a cap that is going to be challenged?
  • Remember that the 401k (and the IRA) is not tax free - it's tax deferred. This is nice but not perfect (you'll pay that tax when you take the money out in 40 years). It is also not necessary, as you can still save and invest for retirement using your regular after tax money. What's the cost of not having tax deferred savings? Very hard to say, but it's going to be far less than 50%.
  • There's some 401k match from the company. This is free money, which is nice. But the scale is insignificant compared to the potential salary increase.

Personally, I'd consider a 30k salary with a 401k and a 2k employer match less valuable than a 36k salary, let alone a 48k salary. If worried about retirement savings simply set up that IRA and put in the full 5.5k allowance.

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    Roth IRA's and Roth 401ks allow earnings to grow tax free, which when compounded over one's career will earn much much more than if that money had been put in another type of non-tax deferred account. Sure it's not necessary, but I think you're underplaying it's importance Jul 26, 2017 at 17:35
  • Correct, but the 5.5k limit applies whether Roth or Traditional. The choice between the two is based solely on whether expected tax rate will be higher than current tax rate. A good option is to split between the two. Jul 26, 2017 at 17:49
  • Is that a cap that is going to be challenged? -- The IRS will almost certainly challenge it; if you go over the limit, it's unlikely that your excess contributions will be given the same tax exempt status. Jul 26, 2017 at 23:41
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    @RobertHarvey I think he meant "are you going to save more than $5.5K, thereby benefiting from an increased cap?" Not "Is the IRS going to challenge you if you exceed the cap"
    – D Stanley
    Jul 27, 2017 at 14:38

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