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12% 401(k) Contribution - What to do? [USA] (kbin.social)

submitted 11 months ago* (last edited 11 months ago) by [email protected] to c/[email protected]

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Hi everyone, I recently landed a new job where the base 401(k) contribution for all FTEs is 12% of your salary. This is regardless of your contribution, with no additional match. I realize that this is unusual for most people and it is for me as well. In my last job, I got up to a 6% match so I maxed that out and didn't think on it any further.

I currently contribute an additional 5% on top of the 12% that my employer provides, but got chatting with a coworker who mentioned that they were advised to take that money and, since it was not being matched, put it into the stock market instead. I'm open to learning, but have very little knowledge of stocks, cryptocurrency, or likely any other potential option you may suggest.

For a little extra information, I am in my mid-twenties, earn mid-five-figures/year, have little saved for retirement right now, and am open to any suggestions you may have.

So, what would you do in my situation? Thanks for any replies!

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[–] [email protected] 3 points 11 months ago (1 children)

The big advantage of putting your additional contributions into the 401(k) is that it reduces your taxable income. The big disadvantage is that the money is locked away for decades; that cash is no longer available to make big purchases like a car, honeymoon trip, etc. There are some exceptions, but be careful that you don't get hit with penalties.

Personally, if I were in your situation, I would open a no-fee brokerage account and put you additional retirement money into an index fund that tracks the S&P 500 or NASDAQ. If you need the money before you turn 66 then it will be readily available.

[–] [email protected] 3 points 11 months ago (1 children)

Better yet, put it in a Roth. OP can still withdraw the principal penalty-free if they need it, meanwhile it grows tax free.

[–] [email protected] 2 points 11 months ago* (last edited 11 months ago)

can still withdraw

That's subject to plan rules.

grows tax free

If you pay the same effective tax rate now vs retirement, Roth and tax-deferred are equivalent. The benefit of Roth is that it gives you flexibility in retirement, so you can choose how much taxes you pay in retirement instead of whatever you happen to withdraw from your tax-deferred accounts.

So a Roth contribution isn't an automatic slam-dunk, it really depends on OP's tax bracket now vs retirement. If OP is in the 12% or lower tax bracket, I highly recommend a Roth contribution, but if they're above it, I recommend taking the deduction. I'm a little below the top of the 12% bracket, so I actually convert my old pre-tax accounts to Roth up to the top of the 12% bracket since that's a pretty good tax rate to lock in.