Do you max out your 401k withholding? Or just match your employer?

Question

I've heard it both ways. Some say just match your employer's maximum and put the rest of the withholding in a IRA. Some say max out your withholding for your 401K?

What are your thoughts and philosophies on this question?

Answer 1

I think you've got it right with the first option....put in at least whatever your employer is going to match..( it amounts to a "raise" if you think about it)....then take out the maximum ( depends on age) Roth IRA every year.......you'll have two different types of income upon retirement. The 401 will be taxable...The Roth, tax- free.
In retirement you can control your income tax by selecting from which source you withdraw funds.....sounds comfy to me!
More importantly : know where your money is being invested...learn about the funds in your 401... spread your investments around, Then take out your IRA with a company like Fidelity or E-trade where YOU direct the investment...absolutely amazing the difference in a few short years in total returns between someone who is " watching" and passive investors who just let the money go into the " regular" or "safety" funds that most plans have.

Answer 2

Totally depends on your employers investment options, your age, and your income level.

If your employer has access to institutionally priced funds then you have access to a whole class of investments that you wouldn't have outside in an IRA. In that regard you could be better served being in that plan then in an IRA. Also remember, that if you're in an IRA then you're buying either directly from the mutual fund company (in which case you're limited to their funds), holding multiple IRA's (more difficult to manage), or buying from a broker (fees, fees, fees).

If you are younger and in lower tax brackets then you may be better served being in a ROTH with excess money. The benefit of a ROTH is found in the comparison of tax rates NOT in the tax free status of the withdrawal. You pay taxes now versus paying them later. So, being in a ROTH is only better if your tax rate is lower when you retire then when you earn it. You do not take out your 401k in a lump sum at age 65-67 so don't assume that your tax rate will be higher. And as a last comment, historically the tax rates for the middle class haven't changed all that much. Tax rates for the upper tiers have declined. So don't expect any super jump in your tax rates between now and then.

Personally? I'm 40+, I've got great funds and great diversity inside my 401k. I'm in the 30% tax bracket and I need those deductions. I'm better served by being in my 401k.

Answer 3

I max out with my employer. I have great options in my plan. I have a 50% match on my first 6%, which really means I dump 9%. Also that 6% gets matched 1-1 in a 401(a), so I really contribute 15%. Then I contribute up to the legal limit in the 401(k). And depending on how well I'm doing that year, I'll contribute into the 457 top hat to really set myself up nice.

Answer 4

Just match it and look for higher yielding places to put your extra money. It's also good to diversify so that if one investment goes down you have others to rely on. Spread your money out in different categories such as mutual funds, real estate, your own business on the side, (preferably one that makes money while you sleep), that way you always have something to fall back on if one tanks or you lose your job.