The new job I'm at offers a crappy 401K program--no matching at all!! Should I enroll in it or just keep my money and put it into an IRA when I have the minimum?

November 6, 2007 10:44 AM

The new job I'm at offers a crappy 401K program--no matching at all!! Should I enroll in it or just keep my money and put it into an IRA when I have the minimum?

Past jobs always offered some kind of match, and I took full advantage of that. But since this job isn't matching, I'm not sure what the benefit to me is, other than that the money I put into my 401k will be pre-tax.

I'm only able to put about 3% of my salary away right now, so I was thinking I might be better off stashing that into an ING account every month, and when I have enough putting that into an IRA or something.

Is that stupid? Should I just go with the 401k? Something else I should do?

I'm 27, the plan is thru Morgan Stanley, I have 0 savings except what I have in old 403b accounts.

posted by misanthropicsarah to Work & Money (23 answers total)

The "simple" argument is that Roth IRAs are superior to 401(k)'s when you believe your tax rate will be higher when you retire than now. If you believe your tax rate will be lower when you retire, a traditional IRA or 401(k) would be preferable. I would go for the traditional IRA since there are more choices of providers than your employers provider.
posted by saeculorum at 10:46 AM on November 6, 2007

Seconding saeculorum. Not knowing anything else about your situation and goals, if there is no matching, then the preferred order of investing would be:

(1) Max out a Roth IRA or a traditional IRA. (I think a Roth might be better in your case, but don't know enough details to give you sound advice either way).

(2) Max out your own contribution to a 401(k) if the investment instruments offered meet your needs (e.g., avoid retirement plans that force you to invest in company stock or offer a very limited range of mutual funds).
posted by googly at 11:11 AM on November 6, 2007

Of course, if you did expect to put away more than your max IRA contribution, the difference should go into the 401(k)
posted by Pants! at 11:14 AM on November 6, 2007

Save up the $3000 and get an Roth IRA index fund from a company like Vanguard with low fees. There's no advantage to using your employer's 401(k) plan if they're not contributing.
posted by designbot at 11:27 AM on November 6, 2007 [1 favorite]

If you're 27, and not planning on retiring until you're in your 60s, the Roth IRA is almost certainly the better option.

One caveat--in some cases, you can get lower fees on mutual funds by investing through a 401(k) than you can get on your own, because the plan administrator has used its volume to extract bargains from certain funds. If your job doesn't even offer matching, though, I'm doubtful that they've put a ton of effort into finding a set of 401(k) investment options that are really competitive.

By the way, if you're already using ING Direct, they offer their own IRAs--you should be able to get there from the home page. I haven't investigated the fees associated with each of their investment options, because my IRAs are all through Scottrade (god bless $7 trades!), but if the fees are low it might be convenient for you to deposit that 3% directly into an IRA at ING every month rather than waiting a year to invest a lump sum in an IRA elsewhere, so you can gain the advantage of dollar-cost averaging over the year just as you would in a 401(k).
posted by iminurmefi at 11:35 AM on November 6, 2007

Also, the limit for IRAs this year (2007) is $4,000--although you have until April 15th to make contributions that count towards 2007--and next year the limit rises to $5,000.

Also, you can roll old 403(b) or 401(k) balances over to your new IRA--those don't count towards the contribution limit. In fact, you can even roll over those balances to a Roth IRA, although you'll have to pay income taxes on the entire balance this year (but then you'll never have to pay taxes again on any of it). If you by chance were unemployed for a couple of weeks this year before starting your new job, or you anticipate having a lower income this year or next year than you'll have in the future, it might make sense to roll those over into a Roth and pay the taxes in a year when your income is low (and so you're in a lower tax bracket).
posted by iminurmefi at 11:41 AM on November 6, 2007 [1 favorite]

You may not be eligible to contribute to an IRA in a useful way. By that, I mean that you might not be able to deduct your contribution to a traditional IRA from your taxable income, negating its benefit. Refer to Table 1-2 of form 590 to learn about this. To simplify, if your W-2 indicates that you're covered by a qualifying plan at work, which it will - it's a checkmark in a little box - you can't contribute to a traditional IRA

As for the Roth, you might be able to contribute to it. See Form 590, Can I Contribute to a Roth IRA? for more. The Roth offers no up-front tax benefit but it offers tax-free growth.
posted by ikkyu2 at 12:55 PM on November 6, 2007

"I'm not sure what the benefit to me is..."

You already pointed out the first, but it doesn't sound like you realize how nice of a benefit having this money invested pre-tax really is. You can think of this as at least a partial "match." IRAs cost money. Not a lot, but some. Additionally there are fees associated with making trades or buying/selling funds within them. 401k accounts sometimes (often?) don't have these fees, so you can think of this of something like a partial "match." Additionally, many 401ks offer funds that are not available to the general public. What ever outfit you choose to invest in (IRA, 401k, whatever) will have things you can invest in and many things you cannot. Your company's 401k may have funds available that you want to invest in but couldn't otherwise. Or funds that you'd like to invest in but unless its through the 401k you need a $5000 minimum investment or something.

Either one is a great idea, it's just up to you to decide which funds you are most interested in, and what fees might be associated with your choices.
posted by pwb503 at 1:05 PM on November 6, 2007

If it were me, I'd put some money into this for these reasons, in order of importance:

* Pre-tax $ benefit.

* Easy, slightly-less-painful (because it's automatic) way to build some savings.

* On principle, to support the employer's decision to provide an means for retirement investment (and then agitate from within for matching funds.)

And then I'd also start contributing to a Roth.
posted by desuetude at 1:19 PM on November 6, 2007

One of the things I like about enrolling in the 401(k) plan is that the money is taken out of my paycheck automatically, and I learn to make do without it and not miss it. I don't have to think about making the investments into my retirement, it just happens. On my own, I wouldn't keep up with making regular deposits into a retirement account. Maybe you're more diligent, though.
posted by indigo4963 at 1:21 PM on November 6, 2007

pwb503's first statement is somewhat misleading. Pre-tax benefits are /not/ necessarily a good thing. If your tax rate never changes, there is no difference between tax-deferred money and post-tax money. If your tax rate increases, tax-deferred money becomes worth less than post-tax money. Only when you expect your tax rate to decrease does tax-deferred money become more valuable than post-tax money.

Additionally, IRAs do not necessarily have to have fees. I use thinkorswim, which is entirely fee-free if you make fewer than 3 trades/month. On a similar note, 401(k)s do not necessarily need to be fee-free.
posted by saeculorum at 1:31 PM on November 6, 2007

Vanguard, and I assume most other investment firms, provide automatic electronic investment options. This arrangement is not quite as automatic as taking it out of your paycheck; You'll see the money disappear from your account, but won't have to think about making it happen.
posted by GPF at 1:54 PM on November 6, 2007

The other benefit to qualified money (401k vs. IRA/ Roth) is the higher limit on total contributions. It may not matter here, but if 3% of your salary exceeds $4,000 (you'd be making $133,334 or more a year if it does), a 401k has at least one advantage.

Regardless of your choice of IRA vs. 401k, either has a distinct advantage over a traditional savings account: contributions go in pre-tax and lower your taxable income for the year. While saeculorum is correct that the benefit is 0 if your tax rate today is the same as your tax rate at age 65+, that's a fairly unlikely scenario (and one I would file under Good Problems to Have, unless you're making $0/hour right now).
posted by yerfatma at 1:54 PM on November 6, 2007

There's no advantage to using your employer's 401(k) plan if they're not contributing.

Meh. The tax-free nature of the ROTHs is certainly nice but you can't overlook the fact that the $4000 you can put into a ROTH post-tax would have been $5000 (or more) pre-tax.

So on the one hand you have tax-free earnings down the road. On the other hand you have significant compounding value. If all you can manage is 3% of your salary I'd suggest you go the 401k route, presuming you have access to good funds with no back-end loads.
posted by phearlez at 1:56 PM on November 6, 2007

Please, look at the math! Roth IRAs are nearly /always/ better than 401(k)s!

Say I put $4000 into a Roth vs. $4000 in a 401(k)/IRA. If my tax rate is 20% now and 30% at retirement (which I would believe, given that I intend to make more money then [remember, 401(k) distributions and social security distributions over a certain amount are taxable] and that I believe that taxes will increase in the future). If the two amounts appreciate at 8% a year for 20 years, we have the following:

Cost of Roth: $5000 ($1000 in tax, $4000 in Roth)
Cost of 401(k): $4000

Both at retirement: $19,809

Value after taxes - Roth: $19,809, 401(k): $13,866.

The important part here is that you aren't paying taxes on the (growing faster than inflation) earnings. This holds true even if you don't contribute the same amount to the Roth.

If you contribute $3200 to the Roth ($4000 minus taxes) and $4000 to the 401(k), you will have $15,847 in the Roth, with $13,866 in the IRA.

It all comes down to taxes now versus taxes later. That's really all there is to it. In most cases, unless you plan on either living as a miser to avoid taxes in retirement or you never plan on advancing your career, your taxes will increase, giving a comparitive benefit to the Roth.
posted by saeculorum at 3:37 PM on November 6, 2007

[head swims] This is why some of us didn't bother investing as early as we could've.
posted by desuetude at 4:58 PM on November 6, 2007 [1 favorite]

There's a discussion of the same issue going on now at the Get Rich Slowly forums (run by mefite jdroth).
posted by jacalata at 6:27 PM on November 6, 2007

In most cases, unless you plan on either living as a miser to avoid taxes in retirement or you never plan on advancing your career, your taxes will increase, giving a comparitive benefit to the Roth.

I would point out this is the opposite of the tax planning most people base their investments on. Not that there's anything wrong with a Roth, just that most people don't plan on taking out more money each year than they made during their final, and most likely, highest years of full-employment income.
posted by yerfatma at 5:21 AM on November 7, 2007

The numbers provided also ignore the tax impact at the year of investment (i.e., that you have more money because you are taxed less and perhaps even taxed at a lower rate).
posted by yerfatma at 5:23 AM on November 7, 2007

Please, look at the math! Roth IRAs are nearly /always/ better than 401(k)s!

Say I put $4000 into a Roth vs. $4000 in a 401(k)/IRA.
-snip-

Cost of Roth: $5000 ($1000 in tax, $4000 in Roth)
Cost of 401(k): $4000

Your problem here is you're not doing the numbers right. If you're capable of absorbing a $5000 cost to yourself to make that $4000 contribution to the Roth then you would be putting $5000 in the 401k.

Your assumption about tax rates is a little simplistic too, since odds are you'll be earning more in your working years and be in a higher bracket than when you retire.

I think it's arguable both ways, but compare apples to apples.
posted by phearlez at 8:28 AM on November 7, 2007

It /is/ arguable either way. /I/ plan on having a higher tax rate at retirement (as I said - I intend on making more money and I believe my Social Security/401(k) distributions will bump me up). Hence, blanket "tax-deferred money is always better" advice is absolutely ridiculous.

As I said, preference for tax-deferred vs. tax-paid money is /only/ dependent on the difference between your tax rate now and your tax rate at retirement. There is absolutely nothing else to the equation.
posted by saeculorum at 12:17 PM on November 7, 2007

It is arguable either way, but your model is overly simplistic. As you have argued it, it treats a dollar today as equal to a dollar 30 years in the future. That alone puts the lie to your last statement.

blanket "tax-deferred money is always better" advice is absolutely ridiculous.

Agreed. Most blanket statements are ridiculous. But as you suggest, your advice applies to your situation as you perceive it. Providing your model without qualification to someone looking for financial planning advice online is basically a blanket statement.
posted by yerfatma at 12:22 PM on November 7, 2007

If you are not disciplined, just do the 401(k) now. You'll leave that job eventually, and maybe then you'll know more about if you prefer an IRA or a ROTH IRA and you can convert at that time if you'd like. Actual savings is always better than theoretical savings.

If you are disciplined, hedge your bets and do part in the 401(k) and part in a ROTH. There are benefits to both, we all agree on that. The big 3 companies will give you a good ROTH product with low fees, let you pick funds or go for a managed, "target retirement date" fund, and put you on auto-contribute. I think they even waive the minimums if you auto-contribute, but check reviews online.

I personally think the ROTH is always better because the original money you put in is always yours to take out again, no strings attached. If you lose your job or have something come up, you can take your money out. It isn't a great idea to do that, but you could. It also is a hedge against future tax increases, etc. And let's face it, taxes always go up.
posted by Mozzie at 1:15 PM on November 7, 2007