educate me 401-k

[RandyO]

If I can't touch that money til I'm 62 it's kinda pointless to me.

For all I know I might not even live here by then.

62 is NOT a threshold age for 401k

55
59½
70½

At What Age Can You Withdraw Funds From Your 401k Plan?

[nhbubba]

Are you asking for advice on HOW to invest the money? (Ie which funds, which investments, etc?)

Basically my opinion is, in this order:

1) Max out any company match on your 401k
2) Max out your ROTH IRA contributions
3) Increase 401k savings once 1 and 2 are done

Not doing 1 is basically telling your boss "no thanks" to part of your compensation.
The order of 2 and 3 are arguable based on the tax implications. 3 reduces your tax liability, 2 does not.

By the way, paying off your house in this market would rank somewhere around 15 or 16 on my list of priorities. Yeah, paying mortgage interest sucks and you'll never see that money again and all that. But interest rates are way low. (I'm sure you locked in a pretty sweet rate.) And that interest is tax deductible. Mean while the market is kickin' it. Give up ~4% to earn ~14% on the same money. Seems obvious to me.

And if home prices continue to stay flat... Real estate seems to be a shitty investment right now.

[GixerJockey]

was that if a downturn in the economy causes you to be late on a mortgage payment is but one reason (been there, done that)

Cause/effect...

That isn't how the IRS words it. You can use 401K money to rescue your primary residence. You can not use IRS money to rescue a failing business. (also a possibility of a downturn in economy) Or anything else outside of the 4 things I previously posted.

62 is NOT a threshold age for 401k

55
59½
70½

At What Age Can You Withdraw Funds From Your 401k Plan?

Just to clear things up about those #s. 59.5 is the age where you can start to draw funds with no penalty. 70.5 is the age that you are forced to start to draw money out. These are not set in stone and do occasionally get adjusted.

[nhbubba]

So what about early retirement. If 'vas does pull of "retiring" at 35.. are there no circumstances where he can draw down a traditional IRA or 401k?

[tsorfas]

That's you now saying that. Imagine yourself 30 years from now thinking "oh man, it's so nice to have this extra cushion of half a million sitting there."

For the small reduction in take home pay now(and the tax benefits it provides), you'll have quite a few more options financially when you decide it's time to stop.

I don't know enough about your situation to say weather your "retire at 35" dream is a pipe dream or not, but letting your money grow without having to work at it is never a bad thing.

Half a mil? In 4 years I'm at 23k. How is $500k realistic?
I'm ok at 6% contribution but even that I believe I can use in a better way.

[tsorfas]

So what about early retirement. If 'vas does pull of "retiring" at 35.. are there no circumstances where he can draw down a traditional IRA or 401k?

That's a major question I have as well

[TheIglu]

Half a mil? In 4 years I'm at 23k. How is $500k realistic?
I'm ok at 6% contribution but even that I believe I can use in a better way.

Cause I'm a 1/4 there after 6 years, most of which have been putting a lot less than I have recently. It's all about the interest, bro-heem.

[nhbubba]

Drop $10k in at age 20. Assume annual returns of 12%. Don't put another cent in and you'd have $930,500 at age 60.

[TheIglu]

Drop $10k in at age 20. Assume annual returns of 12%. Don't put another cent in and you'd have $930,500 at age 60.

And there you have it.

Any other questions?

[Petorius]

Assume annual returns of 12%.

Thats quite an assumption. Are you looking at the average return on the S&P since the "beginning of time"?

Edit- Now I'm just being a dick. The point stands.

[nhbubba]

Yeah, but I needed to push the rate to 12% to make the math work.
But yes.. google says S&P returns for 1928 through 2013 was 11.5%.

The point does stand though.

[e30addict]

So what about early retirement. If 'vas does pull of "retiring" at 35.. are there no circumstances where he can draw down a traditional IRA or 401k?

That's a major question I have as well

You can withdraw funds from a 401(k) anytime. It's a matter of how much it costs to do it. There are penalties and taxes involved, but you can touch it before 59 1/2.

[nhbubba]

There are always taxes involved. The drag is the penalty.

Which only re-affirms my opinion on ROTH IRAs further. You can dip into some of that money earlier without penalty or further tax.

[nhbubba]

If you're into the early retirement goal, check out this blog: Mr. Money Mustache — Early Retirement through Badassity
Racing motorcycles (even riding motorcycles) does not fit with his program. But I find it motivational and interesting anyway.

[Petorius]

Basically my opinion is, in this order:

1) Max out any company match on your 401k
2) Max out your ROTH IRA contributions
3) Increase 401k savings once 1 and 2 are done

As an early career person, I should prioritize 2 while my earnings are relatively low? Is that the idea? Then once my income gets to a certain point, I should either prioritize 3 or just max them both out if possible?

[Mustang]

Not reading all this right now - ask me your questions Saturday.

[nhbubba]

There are always taxes involved. The drag is the penalty.

There options.

How Much is TOO MUCH in your 401(k)?

[RandyO]

Cause/effect...

That isn't how the IRS words it.

Doh! no shit, you right, you don't really need a reason for being late on a mortgage payment, ya coulda spent the money on blow

the point I was getting at is that it doen't take much to get an early withdraw without penalty (still gotta pay tax) if ya need it

[scottieducati]

Sav, it's definitely not how much you put in but that you put in consistently and add to your principle while the interest also adds to it. Compound interest is a beautiful thing, particularly while paired with future contributions. You'll earn more off $30k than you do off $20k now, and so on. Building up from nothing is the hard part, once you get a head of steam and some capital behind it is when it really starts to grow.

[e30addict]

There options.

How Much is TOO MUCH in your 401(k)?

Interesting on the SEPP idea.

I kinda knew about the rollover/conversion thing since I did that when I left my last company, but honestly forgot about it.

[tsorfas]

Sav, it's definitely not how much you put in but that you put in consistently and add to your principle while the interest also adds to it. Compound interest is a beautiful thing, particularly while paired with future contributions. You'll earn more off $30k than you do off $20k now, and so on. Building up from nothing is the hard part, once you get a head of steam and some capital behind it is when it really starts to grow.

Got it. Thank you. I didn't know that. It makes sense.

[GixerJockey]

Sav, it's definitely not how much you put in but that you put in consistently and add to your principle while the interest also adds to it. Compound interest is a beautiful thing, particularly while paired with future contributions. You'll earn more off $30k than you do off $20k now, and so on. Building up from nothing is the hard part, once you get a head of steam and some capital behind it is when it really starts to grow.

Compound interest is the 8th wonder of the world.

And it works against you more often that it works for you. When you have an opportunity to let it work for you (IE: 401k), jump all over it.

[CEO]

You've been paying down principal on your mortgage?! Dude, mortgage rates are so low they are basically keeping track with inflation. I.e. the money is free to you.

Your savings account is actually a loss, the percentage you get is less than inflation.

So you paid down your mortgage 40k in two years, with after tax money, which means you spent about 50k of your money buying equity in the house.

If you put that 50k into a 401(k), based on my personal rate of return for a couple years, you'd have probably 70k in there. This doesn't even account for the fact that your employer would be adding/matching along with you for some of it.

Instead, you have equity in an asset (house) whose value has likely not increased at all in the past two years, which is not liquid (i.e. you can't easily get money out if you need it).


So start pumping money into it if you can. The limit is 17.5k a year from you, plus however much your employer will put in. It's a tax shelter (for now) and reduces your taxable income. Add a roth if you want too, if your income is low enough to be allowed to do so.

[nhbubba]

I thought the 401k limit was total contribution, including the employer match. Not that I've ever been disciplined enough to actually hit it..

Tip I overheard recently: If you do top out time your contributions such that they top out on your last paycheck of the year. This way you maximize the employer match. If you top out earlier in the year, you loose the match from that point on. Meaning it pays to balance things out. Harder for folks with bonuses, commission checks that pay in or irregular pay. But worth staying on top of.

I kinda knew about the rollover/conversion thing since I did that when I left my last company, but honestly forgot about it.

Yeah, I forgot how that worked too. I remember being satisfied enough with the answer when I started doubling down on the 401k. But had to google it all over again.

[csmutty]

Last time ceo told me that I listened. I have stopped putting extra on the mortgage and instead opened other investment accounts where I have earned much more than the 5.125% on my mortgage. Well worth it.