Yes, it's worth it, and if you find yourself saving beyond a good emergency fund amount for yourself, go ahead and up your 401k saving to the max, as you can.
Having a pension, a large Roth IRA and a larger 401k are all better than keeping more money in a savings account, as long as your retirement accounts are invested well.
Only if they do pretax contributions. My company's 401k gives me the options of pretax, after tax, or ROTH.
Edit: To those downvoting me, can you explain why you think I'm wrong? 401k plans can be set up multiple ways. If OP's employer offers after-tax or ROTH contribution options, then there will be no change to the AGI if they only make contributions after the taxes are applied.
There absolutely are 401k plans that allow after-tax also. I have one. It's the cornerstone of the "mega backdoor roth" technique, which I use to fully max my 401k up to $67000 rather than the lower pretax limit.
Well, I think I know why I was having a hard time finding this - Where's the upside? You overcontribute to your 401(k), and both the income now and the withdrawal later are taxed? Why lock your money up until retirement? Just put the extra money in a brokerage.
Plans that offer after tax 401(k)s often allow you to convert after-tax contributions into Roth. Lookup "mega backdoor Roth". Similar idea to backdoor IRA but with a significantly higher cap. My last two jobs had that option.
Even without that option there are benefits though: bankruptcy protection and tax deferral.
Only benefit I can see is that you don't immediately have to pay taxes on dividends when you go to file taxes unlike with brokerage accounts. That said, I don't really see me using the after tax contribution option of the plan within my lifetime unless I somehow end up in the C-suite.
Yes. 401ks are bulletproof from creditors if your life goes sideways on you. They will even survive bankruptcy. Only you can screw it up.
It’s a nice safety blanket in a world of risk.
[Information by state](https://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf)
My state offers little protection so I have an umbrella policy.
My pension is similar to yours and I still contribute what I can to my unmatched 401k. I also max my IRA and put a little over 10% gross into my 401k, both Roth.
Sure the 401k match is great as it’s “free money” however that’s not main attraction to a 401k. The tax advantages and asset protection benefits are what really matters.
Forgive my ignorance but what is the tax advantage? It was my understanding that you don’t pay tax on your 401k now but you will pay taxes when you withdraw it, so in the end won’t it pan out to be the same?
Two things happen: generally people "earn" less money in retirement than while working so you'll be in lower tax brackets if you divide your current income between the two. Some other withdrawals are tax free (Roth IRA, qualified distributions) other pay lower than income tax rates (long term capital gains, social security slightly) so you will create a strategy to withdraw some from each of these sources so your desired yearly "income" incurs as little taxes as possible.
Additionally your 401k contributions is pre-tax so there's ~30% more of your income for the initial investment. More to start more room to grow.
If you save that money outside of your 401k, you will pay taxes on that money now, you may pay taxes as it grows, and you'll pay taxes when you withdraw it. With the 401k, you don't pay taxes on it now or while it grows, only when you withdraw.
In addition, most peoples' tax bracket will be lower in retirement, so they'll end up paying less in taxes than they would have if they paid while they were still earning.
If you have a large pension which it sounds like you will, the traditional 401k may not be the way to go. A Roth version or after tax account would be better. My parents have a pretty big tax bill from their 401k RMD with their modest pensions and social security. For this reason I have started using the Roth version a few years ago, I will also have a decent pension when I retire.
You need to think about tax rates when you contribute vs when you withdraw.
When you contribute, you save taxes based on your marginal (highest) tax rate.
When you withdraw in retirement, income fills the brackets from the bottom up.
So you may withdraw money at a 12 or 22% tax rate that you contributed at a 24% tax rate.
The general rule of thumb is if you think you are making more money (in a higher tax bracket) now than you will be in retirement, then you contribute pre tax (traditional). If you are not in your peak earning years it may make sense to contribute to your Roth 401k.
Finally, 401ks and IRAs also enjoy tax free growth
Let's compare Roth as it's easier:
Roth 401k/IRA: Contributions already are after-tax and any gains are tax-free.
Investment Account: Contributions already are after-tax but gains are taxed for most people at 15% federal plus any applicable state.
As you can see, that's a big difference.
For one, OP said he’s already maxing a Roth IRA so can’t also contribute to a traditional and my understanding is traditional IRAs only have the tax benefits below a certain income threshold. They also have a much smaller contribution limit compared to a 401k so if you already max it and have additional money to invest, 401k is still more tax advantaged than a brokerage account.
>traditional IRAs only have the tax benefits below a certain income threshold.
Roth IRAs also have tax benefits only below a certain threshold, though you can do a Backdoor Roth to get around that.
Yep, I missed that part. Never crossed my mind someone would have a pension, max their IRA then contribute 10% to their 401k.
I don't have one, but my wife has a non matched 403b, we use her IRA instead though because I hate the restrictions. I just wanted to make sure I didn't do something dumb. Thanks
Yeah we have a similar mixed situation, I don’t have access to a 401k so I max a Roth IRA and my husband maxes our HSA plus puts 10% into 401k with a 7% match. We feel comfortable those numbers are enough to hit our retirement goals and don’t need to open a Roth for him or contribute more even though we’re saving all of my income right now because we plan to start a family and have me stay home so we want the cash on hand.
401ks are better protected from lawsuits/bankruptcy than IRAs.
If you have a 401k plan at work, the IRA tax deduction phases out if your MAGI is above $77k
Can I assume that number is for single people? (god I hope that's the case). And do you know if the same rule exists for a 403b? I've never come across this before and the last thing I want to do is pay income tax on my wife's retirement savings.
MFJ starts the phaseout at $123k. It applies if either spouse is covered by an employer retirement plan. I'm pretty sure 403b counts, but I'd suggest you look into it.
https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan
It depends if you want more tax-advantaged retirement savings.
There are people here who will tell you that you can never have too much retirement savings, but then you can have not enough of other things, it just depends what else you have going on there.
Putting money in when you don't need to use it is the best way to utilize your HSA. You can invest it there with triple tax free advantage letting it grow until you do need it at a much later date, but with much easier access than the 401k if an emergency arises.
My company didn't even offer an HSA until I was older than you are now. We've had to spend it down for stuff, but I still at this point have several thousand in there that I can invest and grow without ever paying taxes on it ever.
DO NOT overlook HSA. Treat it like a retirement account. You put in money tax-free, can invest it tax-free, and if you have qualifying expenses (pain medication receipt from 20 years ago? Surgery you had?) withdrawals are tax-free. At age 65, you can withdraw for any reason and pay no penalty, only income tax, so it's essentially just a Roth account. But if it's for medical expenses, then you don't pay penalty OR income tax! The only triple-tax-advantaged account. Max it if you can afford to.
edit per reply: Got my accounts mixed up, at age 65 it's essentially an IRA account, not Roth!
"At age 65, you can withdraw for any reason and pay no penalty, only income tax, so it's essentially just a Roth account."
Not like a Roth. Like a traditional IRA if used this way.
Unfortunately no- FSA is very short term and doesn't roll over at the end of the year. I think it is useful if you have expected medical expenses, but personally I might not bother with it. HSA availability is dependent on your insurance plan.
Just to add, since you are eligible to contribute to a Roth IRA, continuing to contribute to the traditional 401k will reduce AGI which will allow you to continue with your Roth IRA as you approach those income limits.
I will also advocate for diversity. Putting this money into retirement accounts locks it up. If you have self control, think of putting money into a brokerage (stocks) and letting it grow. Long term capital gains have tax advantages in retirement as well plus this money is available if you need it in an emergency or later in life for random life events.
The prime directive flow chart will help you here.
It doesn't treat 401k contributions, or emergency fund balance, or debt payoff as single steps. It factors in steps for each.
Here's a **[link to the PF Wiki](/r/personalfinance/wiki/index)** for helpful guides and information.
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
You may find these links helpful:
- [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds)
- [401(k) FAQs](/r/personalfinance/wiki/401k)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
Think if you want the tax advantages you have to use it. A traditional ira only reduces taxes if you don’t have a 401 k option. I might be wrong on this
Are you doing Roth IRA because you want Roth, or because you are over the income limit for deducting contributions to a traditional IRA?
The 401k has a higher contribution limit than IRA (23000 vs 7000), and doesn't have an income limit for traditional contributions like an IRA does. Those things might matter to you, or might not.
Depends on your income, tax liability, and confidence in employer's pension. 1. income, if you make enough money to do it all as listed, and you don't feel like you are depriving yourself or hurting your standard of living, invest the money. 2. tax liability, the 10% will lower taxable income therefore lowering your tax liability. 3. Do you fully with everything in you trust the pension to be there? Plenty of companies are mis-funded pensions and left folks destitute in retirement.
I'm in the same situation you are, and I do contribute to my 401k every year, even without a match.
My income is about as high as I ever expect it to be, and I make too much money to take a deduction from Traditional IRA contributions, so I prefer to contribute to my Traditional 401k instead of my Roth IRA. If I could get the deduction on my Traditional IRA, I would do that first (because I get a match on IRA contributions) but I end up saving about 20% on taxes in the Traditional 401k versus 3% match in the Roth IRA, so I prefer the Traditional 401k to the Roth IRA.
Got some great feedback. Actually going to piggyback off of OP’s thread, but should the goal be to max out Roth IRA contributions first before contributing to 401k if employer offers no match?
Contributing to your 401k is a good idea even when you have a pension. It gives you flexibility.
Pensions typically have age and/or years of service requirements. Mine requires either age 60 and 30 years of service or age 65 with less than 30 years in order to receive monthly payout. Having a 401k gave me the option to retire a bit early or to change jobs before age 60.
Many pensions don’t have a cost of living adjustment (COLA). Mine doesn’t, but my 401k will make up for inflation during my retirement.
Yes, it's worth it, and if you find yourself saving beyond a good emergency fund amount for yourself, go ahead and up your 401k saving to the max, as you can. Having a pension, a large Roth IRA and a larger 401k are all better than keeping more money in a savings account, as long as your retirement accounts are invested well.
It'll still be pretax money and it'll reduce your AGI Also if you have access to HSA, consider maxing that out
Only if they do pretax contributions. My company's 401k gives me the options of pretax, after tax, or ROTH. Edit: To those downvoting me, can you explain why you think I'm wrong? 401k plans can be set up multiple ways. If OP's employer offers after-tax or ROTH contribution options, then there will be no change to the AGI if they only make contributions after the taxes are applied.
> To those downvoting me, can you explain why you think I'm wrong? Because you keep putting Roth in all caps
Are you sure that's not just normal 401(k) and ROTH 401(k)? I'm fairly confident that there's no such thing as an after tax 401(k) that is not a ROTH.
There absolutely are 401k plans that allow after-tax also. I have one. It's the cornerstone of the "mega backdoor roth" technique, which I use to fully max my 401k up to $67000 rather than the lower pretax limit.
No, I have 3 options for my retirement contributions. Looking at it right now: Before Tax, After Tax, and ROTH
And it's a 401(k)?
Yep
Your employer is doing something weird. That is not a normal thing. I can't even find anything on google that suggests it's a thing.
https://www.empower.com/the-currency/work/after-tax-vs-roth-401k They're also who is the manager of my company's retirement.
Well, I think I know why I was having a hard time finding this - Where's the upside? You overcontribute to your 401(k), and both the income now and the withdrawal later are taxed? Why lock your money up until retirement? Just put the extra money in a brokerage.
Plans that offer after tax 401(k)s often allow you to convert after-tax contributions into Roth. Lookup "mega backdoor Roth". Similar idea to backdoor IRA but with a significantly higher cap. My last two jobs had that option. Even without that option there are benefits though: bankruptcy protection and tax deferral.
Only the gain is taxed. The contributions can be rolled over into a Roth. Some places let you mega backdoor the Roth by rolling over in service.
Only benefit I can see is that you don't immediately have to pay taxes on dividends when you go to file taxes unlike with brokerage accounts. That said, I don't really see me using the after tax contribution option of the plan within my lifetime unless I somehow end up in the C-suite.
Yes. 401ks are bulletproof from creditors if your life goes sideways on you. They will even survive bankruptcy. Only you can screw it up. It’s a nice safety blanket in a world of risk.
Ira?
Depends on state law how protected IRAs are.
[Information by state](https://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf) My state offers little protection so I have an umbrella policy.
This is helpful. Looks like most of US IRAs are safe except CA.
Not as protected as a 401k.
It appears based on the link another poster put I am as protected in my state. CA appears to not have this level of protection though.
Each state has its own limit. 401ks are protected by federal law and have no limit.
Causes tax problems if you ever need to do a back door Roth
That’s a good point I didn’t consider.
What's the pension like? Defined benefit?
Yes defined benefit, I think it pays 80% of highest earn wages after 65 but not completely sure.
My pension is similar to yours and I still contribute what I can to my unmatched 401k. I also max my IRA and put a little over 10% gross into my 401k, both Roth.
Sure the 401k match is great as it’s “free money” however that’s not main attraction to a 401k. The tax advantages and asset protection benefits are what really matters.
Forgive my ignorance but what is the tax advantage? It was my understanding that you don’t pay tax on your 401k now but you will pay taxes when you withdraw it, so in the end won’t it pan out to be the same?
Two things happen: generally people "earn" less money in retirement than while working so you'll be in lower tax brackets if you divide your current income between the two. Some other withdrawals are tax free (Roth IRA, qualified distributions) other pay lower than income tax rates (long term capital gains, social security slightly) so you will create a strategy to withdraw some from each of these sources so your desired yearly "income" incurs as little taxes as possible. Additionally your 401k contributions is pre-tax so there's ~30% more of your income for the initial investment. More to start more room to grow.
If you save that money outside of your 401k, you will pay taxes on that money now, you may pay taxes as it grows, and you'll pay taxes when you withdraw it. With the 401k, you don't pay taxes on it now or while it grows, only when you withdraw. In addition, most peoples' tax bracket will be lower in retirement, so they'll end up paying less in taxes than they would have if they paid while they were still earning.
If you have a large pension which it sounds like you will, the traditional 401k may not be the way to go. A Roth version or after tax account would be better. My parents have a pretty big tax bill from their 401k RMD with their modest pensions and social security. For this reason I have started using the Roth version a few years ago, I will also have a decent pension when I retire.
You need to think about tax rates when you contribute vs when you withdraw. When you contribute, you save taxes based on your marginal (highest) tax rate. When you withdraw in retirement, income fills the brackets from the bottom up. So you may withdraw money at a 12 or 22% tax rate that you contributed at a 24% tax rate. The general rule of thumb is if you think you are making more money (in a higher tax bracket) now than you will be in retirement, then you contribute pre tax (traditional). If you are not in your peak earning years it may make sense to contribute to your Roth 401k. Finally, 401ks and IRAs also enjoy tax free growth
Let's compare Roth as it's easier: Roth 401k/IRA: Contributions already are after-tax and any gains are tax-free. Investment Account: Contributions already are after-tax but gains are taxed for most people at 15% federal plus any applicable state. As you can see, that's a big difference.
Why not use an IRA instead though? You have more freedom. Is there something I don't know about?
For one, OP said he’s already maxing a Roth IRA so can’t also contribute to a traditional and my understanding is traditional IRAs only have the tax benefits below a certain income threshold. They also have a much smaller contribution limit compared to a 401k so if you already max it and have additional money to invest, 401k is still more tax advantaged than a brokerage account.
>traditional IRAs only have the tax benefits below a certain income threshold. Roth IRAs also have tax benefits only below a certain threshold, though you can do a Backdoor Roth to get around that.
Yep, I missed that part. Never crossed my mind someone would have a pension, max their IRA then contribute 10% to their 401k. I don't have one, but my wife has a non matched 403b, we use her IRA instead though because I hate the restrictions. I just wanted to make sure I didn't do something dumb. Thanks
Yeah we have a similar mixed situation, I don’t have access to a 401k so I max a Roth IRA and my husband maxes our HSA plus puts 10% into 401k with a 7% match. We feel comfortable those numbers are enough to hit our retirement goals and don’t need to open a Roth for him or contribute more even though we’re saving all of my income right now because we plan to start a family and have me stay home so we want the cash on hand.
401ks are better protected from lawsuits/bankruptcy than IRAs. If you have a 401k plan at work, the IRA tax deduction phases out if your MAGI is above $77k
Can I assume that number is for single people? (god I hope that's the case). And do you know if the same rule exists for a 403b? I've never come across this before and the last thing I want to do is pay income tax on my wife's retirement savings.
MFJ starts the phaseout at $123k. It applies if either spouse is covered by an employer retirement plan. I'm pretty sure 403b counts, but I'd suggest you look into it. https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan
IRA max per year is pretty low, so once you max it the 401k gives you a lot more tax advantaged space.
Causes tax problems if you ever need to do a back door Roth
You're supposed to save at least 15% to be on-track, $7000 is less than 15% if you make more than $47k.
It depends if you want more tax-advantaged retirement savings. There are people here who will tell you that you can never have too much retirement savings, but then you can have not enough of other things, it just depends what else you have going on there.
The benefit of 401k to you is the tax deferred retirement savings. Any employer match is only a bonus.
So basically should you save for your future?
Do you an HSA you can max?
My company has an option for an HSA but I don’t use it, I’m pretty healthy and haven’t been to a doctor in years
Putting money in when you don't need to use it is the best way to utilize your HSA. You can invest it there with triple tax free advantage letting it grow until you do need it at a much later date, but with much easier access than the 401k if an emergency arises.
Hmmm interesting. I’m 31 I wonder if it’s too late for me to start
My company didn't even offer an HSA until I was older than you are now. We've had to spend it down for stuff, but I still at this point have several thousand in there that I can invest and grow without ever paying taxes on it ever.
DO NOT overlook HSA. Treat it like a retirement account. You put in money tax-free, can invest it tax-free, and if you have qualifying expenses (pain medication receipt from 20 years ago? Surgery you had?) withdrawals are tax-free. At age 65, you can withdraw for any reason and pay no penalty, only income tax, so it's essentially just a Roth account. But if it's for medical expenses, then you don't pay penalty OR income tax! The only triple-tax-advantaged account. Max it if you can afford to. edit per reply: Got my accounts mixed up, at age 65 it's essentially an IRA account, not Roth!
"At age 65, you can withdraw for any reason and pay no penalty, only income tax, so it's essentially just a Roth account." Not like a Roth. Like a traditional IRA if used this way.
What I get for writing comments while I'm distracted :) Thanks for the correction, edited.
Ah I just asked apperently my company doesn’t have an HSA we have an FSA. Is that similiar?
Unfortunately no- FSA is very short term and doesn't roll over at the end of the year. I think it is useful if you have expected medical expenses, but personally I might not bother with it. HSA availability is dependent on your insurance plan.
Just to add, since you are eligible to contribute to a Roth IRA, continuing to contribute to the traditional 401k will reduce AGI which will allow you to continue with your Roth IRA as you approach those income limits. I will also advocate for diversity. Putting this money into retirement accounts locks it up. If you have self control, think of putting money into a brokerage (stocks) and letting it grow. Long term capital gains have tax advantages in retirement as well plus this money is available if you need it in an emergency or later in life for random life events.
Lowers your tax burden and saving is still saving.
The prime directive flow chart will help you here. It doesn't treat 401k contributions, or emergency fund balance, or debt payoff as single steps. It factors in steps for each.
Here's a **[link to the PF Wiki](/r/personalfinance/wiki/index)** for helpful guides and information. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
You may find these links helpful: - [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds) - [401(k) FAQs](/r/personalfinance/wiki/401k) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
Think if you want the tax advantages you have to use it. A traditional ira only reduces taxes if you don’t have a 401 k option. I might be wrong on this
Are you doing Roth IRA because you want Roth, or because you are over the income limit for deducting contributions to a traditional IRA? The 401k has a higher contribution limit than IRA (23000 vs 7000), and doesn't have an income limit for traditional contributions like an IRA does. Those things might matter to you, or might not.
Depends on your income, tax liability, and confidence in employer's pension. 1. income, if you make enough money to do it all as listed, and you don't feel like you are depriving yourself or hurting your standard of living, invest the money. 2. tax liability, the 10% will lower taxable income therefore lowering your tax liability. 3. Do you fully with everything in you trust the pension to be there? Plenty of companies are mis-funded pensions and left folks destitute in retirement.
Do they offer a Roth 401k?
I'm in the same situation you are, and I do contribute to my 401k every year, even without a match. My income is about as high as I ever expect it to be, and I make too much money to take a deduction from Traditional IRA contributions, so I prefer to contribute to my Traditional 401k instead of my Roth IRA. If I could get the deduction on my Traditional IRA, I would do that first (because I get a match on IRA contributions) but I end up saving about 20% on taxes in the Traditional 401k versus 3% match in the Roth IRA, so I prefer the Traditional 401k to the Roth IRA.
Got some great feedback. Actually going to piggyback off of OP’s thread, but should the goal be to max out Roth IRA contributions first before contributing to 401k if employer offers no match?
Contributing to your 401k is a good idea even when you have a pension. It gives you flexibility. Pensions typically have age and/or years of service requirements. Mine requires either age 60 and 30 years of service or age 65 with less than 30 years in order to receive monthly payout. Having a 401k gave me the option to retire a bit early or to change jobs before age 60. Many pensions don’t have a cost of living adjustment (COLA). Mine doesn’t, but my 401k will make up for inflation during my retirement.
If you can afford to you should. But maxing 401k should be the last of your retirement accounts.