401k contributions: pre/post tax and roth.

mittman84 · #1 08-16-2007, 04:06 PM

I am 22 and at my first full time job. I am now eligible to enroll in my companies 401k. They contribute 2% of your salary plus 100% of your contributions up to 6%, and the possibility of another 2% if we hit our goals. I plan on contributing 10% out of my pay.

I am very comfortable picking the funds and such. My question is what % of my contributions do I want to be pre-tax, post-tax, and roth401k. I see there are penalties for withdrawing before 59.5 years old for the pre-tax and roth. I don’t want all my money tied up until then.

Obviously 6% will be going into the 401k one way or another to get the match, with another 4% going somewhere. My question is what is the best way to allocate my contributions between pre, post, and roth? Or should the 4% go into some other form of investment? I am an actuarial analyst and make pretty decent money for someone my age, with the possibility to make a lot more if I continue to pass exams, so I would like to have the option to retire before age 59.5, thus not have the early withdraw penalties.

emon87 · #2 08-16-2007, 07:46 PM

max out you tax advantaged accounts before contributing post tax. The benefit you get in not paying taxes on it all is HUGE

prohornblower · #3 08-16-2007, 08:08 PM

If you are going to have a lot of disposable income (and it sounds like you will), definitely make sure you get the full 4K in your Roth.

6% for sure goes to 401(k), then fill the Roth, then come back to 401(k) if you like, or buy independent mutual funds. I believe the Roth gives one the ability to retire slightly before 59.5 (because you can pull your Contributions out at any time for any reason tax and penalty-free). So at age 55, you'd have ((55-22)*4K) = $132,000 to start drawing from to bridge the gap to age 59.5. That is, if you don't have independent mutual funds to go with it. Also, the 4K yearly limit will rise so it should be more than 132K to draw from.

All-in-all, a 6% match on top of 2% guaranteed is an exceptional 401(k) plan. Make good use of it.

mittman84 · #4 08-17-2007, 10:12 AM

[ QUOTE ]
If you are going to have a lot of disposable income (and it sounds like you will), definitely make sure you get the full 4K in your Roth.

6% for sure goes to 401(k), then fill the Roth, then come back to 401(k) if you like, or buy independent mutual funds. I believe the Roth gives one the ability to retire slightly before 59.5 (because you can pull your Contributions out at any time for any reason tax and penalty-free). So at age 55, you'd have ((55-22)*4K) = $132,000 to start drawing from to bridge the gap to age 59.5. That is, if you don't have independent mutual funds to go with it. Also, the 4K yearly limit will rise so it should be more than 132K to draw from.

All-in-all, a 6% match on top of 2% guaranteed is an exceptional 401(k) plan. Make good use of it.

[/ QUOTE ]When you say Roth are you refering to an IRA of the Roth 401k? My companies 401k is run by Fidelity. Would going to a "Fidelity Investor Center" to talk to an advisor be my best option, or should I seek out a financial advisor on my own?

Badger · #5 08-17-2007, 10:29 AM

[ QUOTE ]
max out you tax advantaged accounts before contributing post tax. The benefit you get in not paying taxes on it all is HUGE

[/ QUOTE ]
I think both of OP's options are tax advantaged here. I'd do what's necessary to get my company matching post tax (Roth 401k) dollars, as they are worth more than pre tax (401k) dollars.

You will also want to consider what your tax situation will look like now vs. when you're 60. That may be difficult, or even impossible, to do, but right now straight out of college it's likely that you're in a lower tax bracket than you will be. This would be another pro to investing post tax dollars, as you'd pay more taxes on this money in a higher tax bracket. Who can say what the tax system will be in 2050 though.

SlowHabit · #6 08-17-2007, 10:44 AM

Get the free moneys by maxing out your 401k.

Then max your Roth.

Then double dip your 401k.

mittman84 · #7 08-17-2007, 10:52 AM

What is my best recourse on finding the rules on early withdrawals (say 55 for example)? Fidelity has a million FAQ on their site, but all I have found only says there are penalties for early withdrawal, nothing specific. I don’t like the thought of having a large 401k that I can’t touch until I am 59.5 without large penalties. Given the career I am going into I probably won’t want to retire before 60, but at the same time I want to have the option. Obviously a large portion of my savings will be pre-tax and Roth, but I would like to have something else that I can use if I decide to retire in my 50’s. Also is it possible for the rules to change and the 59.5 year age restriction goes higher, or is that set for good?

mittman84 · #8 08-17-2007, 10:54 AM

[ QUOTE ]
Get the free moneys by maxing out your 401k.

Then max your Roth.

Then double dip your 401k.

[/ QUOTE ]When you say max out the 401k you mean 6% to get the free money right? Also when you say Roth are you refering to the Roth IRA or Roth 401k? Thanks

Badger · #9 08-17-2007, 11:02 AM

I think people here are missing the fact that a Roth 401k is different from a 401k.

Are the matching rules the same for both in your company? Mine doesn't offer a Roth 401k yet.

So investing in a Roth IRA is a good idea. But that will only leave you with 4k x # of years worked to withdraw without penalty. (Limits will go up, but this is assuming they are roughly in line with inflation)

Also consider the fact that you might not be working as an Actuary until you're 60, but it's likely that you will still be working in some facility. At least you should find some passive income that will let your tax advantaged investments mature.

Also, I have no idea what the rules are like for a Roth 401k. They're not very popular yet, so yes, I think calling and asking an advisor about it is a good idea.

mittman84 · #10 08-17-2007, 11:09 AM

[ QUOTE ]
You will also want to consider what your tax situation will look like now vs. when you're 60. That may be difficult, or even impossible, to do, but right now straight out of college it's likely that you're in a lower tax bracket than you will be. This would be another pro to investing post tax dollars, as you'd pay more taxes on this money in a higher tax bracket. Who can say what the tax system will be in 2050 though.

[/ QUOTE ] This is where I am a little ignorant. If I am retired drawing money from my 401k/IRA isn't that money taxed at a lower rate because it is investment income as opposed to earned income (other than the actual contributions)?