What is Digg?44 Comments
- GalacticCmdr, on 10/12/2007, -1/+19Do you even understand what a 401(k) is? From your comment you obviously do not.
- EDubya, on 10/12/2007, -0/+14Pension plans are run by corporations, not 401k's.
- AndySomnifac, on 10/12/2007, -0/+14401k does not mean your employer has control of your money. It is not stock in your company. The money is yours, regardless of what happens to your employer.
With my 401k account, I can choose what sort of fund allocation my money gets, and reflects the kinds of risks that I'm willing to take as a fairly young person who has several decades left to contribute. I've been with my company long enough that I am fully vested in anything they have contributed, so they money is mine. - kyoung989, on 10/12/2007, -2/+12@ Veamon
A 401k only sucks if you're stupid. Are you trying to say that you're stupid? - spkaine, on 10/12/2007, -0/+8I work for Paychex, and we recently introduced the Modern portfolio theory, created by Nobel Prize winner Harry Markowitz.
Employees of our clients are able to chose this option. What that means is that a genius investor will be watching my stocks/bonds/investments instead of me. I need that because I suck at said investing.
One of the most agreed upon items about a 401(k) vs a pension plan or defined benefit plan is that the employer has limited risk/expense in the long term. In most cases, the employer agrees to match a certain percent of the employees' contributions. When the employee stops contributing, so does the company.
Not so with a pension or defined benefit plan. These are run on life expectancy of their employees and age weighted/calculated. The employer controls the funds, and if they haven't planned well, you are *****.
If you haven't already started contributing to an IRA/401(k) plan, start today. "It's not what you make, it's what you keep." - truebullfan, on 10/12/2007, -1/+8Not sure the difference btw 401K and an IRA is but I know if you want to have a lot of savings during retirement you better start early.
Instead of buying that new car or expensive item when you first get a job you should start an IRA or 401K. I maybe wrong but doesnt your employer match how much you contribute to your 401K? - neko, on 10/12/2007, -2/+9I think 640k will be enough for anybody.
- ltbarcly, on 10/12/2007, -1/+8@spkaine
My company USES paychex to handle payroll, and let me tell you, you guys are crap.
But to actually respond to what you said, there are no 'genius investors'. If there were then Mutual funds would do better than Index funds. They don't. (To be precise, a few funds beat the index funds every year, about the same number you would expect to beat the index fund by pure chance. It is very rare for a fund to consistently beat the corresponding index fund by any noticeable margin. To add insult to injury, when a fund does beat the index for a few years in a row, everybody invests in it. Since it is much harder to invest a huge amount of money than it is to invest a large amount of money, the fund usually doesn't do nearly as well from that time forward.)
To make a long story short, there is nobody you can hire that will beat the Dow Jones or Nasdaq, so why not just invest in those if you aren't interested in picking individual stocks yourself? Financial advisors will give you lots of reasons, and of course the REAL reason is that they get a cut.
In the end, either read up on investing (real investing, not get rich quick stock picking plans, read Graham http://www.amazon.com/gp/product/0060155477/104-5271812-8515146?v=glance&n=283155 , the guy who taught Warren Buffet how to invest) or just buy an Index fund and 'let it ride'. - Clemson, on 10/12/2007, -1/+7"Young people would probably be best served with a Roth IRA or a Roth 401k as the income built up in these will be tax free when you withdraw it."
This is a common misconception... yes, owing no taxes on your retirement nest-egg sounds like the way to go -- but pre-tax contributions to a 401k plan amounts to years of compound interest on money otherwise coughed up to Uncle Sam.
Let's do a little math:
Income: $50,000
Years until retirement: 30
Tax Brackets: 25% (federal) + 10.6% (state - national average) + 7.65% (FICA) = 43.25% OUCH!!
Investment APY: 11.5% (average return of S&P 500 over last 50 years)
Scenario 1 - Roth IRA:
A $4000 contribution per year (monthly installments) equates to $997,399.73 after 30 years.
Scenario 2 - 401k:
Assuming the tax brackets above, $4000 in after-tax money equates to $7048.46 in pre-tax money. A $7048.46 contirbution per year (monthly installments) equates to a whopping $1,837,942.54 after 30 years.
Sure, the distributions are taxable in the second scenario - but assuming the same tax levels, a 5% annual distribution would still yield more after taxes ($52,151.62 vs. $49,869.99). Also, if you decide to retire in a state where there is no state income tax (retirees don't move to FL for the weather alone!), you could end up in an even better position ($61,892.72).
So, while they both offer advantages, there is much to be said about the compounding interest on the tax deferred contributions to a 401k...
Which ever way you decide to go - always invest the amount your employer will match into your 401k plan. This is a 100% instant return on investment!! - JavaMac, on 10/12/2007, -0/+5You are right on truebullfan...that's why Albert Einstein once called compounding interest "the greatest mathematical discovery of all time".
A 401K does not necessitate an employer match. But a lot of companies do it. Plus companies can give you a bonus directly into your 401k which will also be tax free...doesn't help you buy a 60" plasma screen, but it does help you retire comfortably. - VMark, on 10/12/2007, -0/+5Slightly off topic but..
A lot of places are offering online savings accounts with great APYs. HSBC is offering 5.05%, which is higher than most CDs I see.
http://www.hsbcdirect.com/1/2/1/appinfo?code=husa&ceprod=ESAV - danielwsmithee, on 10/12/2007, -0/+4The problem with managed accounts like this is every time a trade is made a fee occurs, and the expense ratio goes up. ltbarcly is correct the highly managed money-market accounts in general are no more successful then index funds. These money-market managers make huge amounts of money if the account is successful, if there was a model that could guarantee optimal success they would be using it.
- kyoung989, on 10/12/2007, -1/+3Most companies do match a certain portion of your contributions (e.g. my employer matches dollar-for-dollar what I contribute, up to 6% of my total annual income). You can contribute up to $15,000 a year ($20,000 if you're over 50) to a 401k. IRAs have a contribution limit of $4,000 a year ($5,000 if you're over 50). All contributions are pre-tax.
Young people would probably be best served with a Roth IRA or a Roth 401k as the income built up in these will be tax free when you withdraw it. The same contribution limits apply to the Roth accounts as for the Traditional IRA and 401k, except that you can't contribute to a Roth IRA if you make over $110,000 and eligibility starts phasing out at the $95,000 income level.
The health of a 401k is not tied to the company you work for unless they only match contributions with company stock or you are stupid enough to have too much of your contributions allocated to the companies stock. - danielwsmithee, on 10/12/2007, -0/+2If you are saving a lot when your young, you should look into a Roth IRA. You pay taxes on what you make now instead of what you make at retirement (or when you take it out). The difference is if you expect to make more money while working, or at retirement. Personally I plan on making more at retirement.
- inactive, on 10/12/2007, -0/+2Does your company require you to put in 15% to get the 5% matching?
If your company will match at 5% then take the 10% and invest it yourself. The best investment anyone can have is buy a home. If you are not looking for a home or already have one take the 10% and put it on the market. If you are not investment savvy then find a quality money manager that pays themselves off of what you make and will not make decisions without your approval. By only no load mutual funds and teach your self how to invest. There are many good books and classes at community colleges you could take at night or over the summer.
The reason I don't like to tie up all of my investing in 401K is if I need money for an emergency taking my out of the 401k will be taxed, you have to pay penalties, and you have to pay it back before it will continue to make money.
Also, everyone should not have taxes taken out of your check automatically. Take that money and put it in a separate savings/money market account and pay the taxes at the end of the year. My bank will move a % of my money from each pay check automatically. I have been making $150-$200 in interest every year and I don't have to wait for a return. - danielwsmithee, on 10/12/2007, -0/+2My company does both. It is pretty nice they match the first 3%, then give a bonus of up to 4%. The first two years I have gotten 3.3% and 4% as bonuses.
- danielwsmithee, on 10/12/2007, -0/+2That is a good rate! I'll have to look into that.
- Mackman, on 10/12/2007, -0/+1First put enough in your 401k to get the maximum employer match. Then fully fund your ROTH IRA. Then go back and and max out the 401k. Stop at the point that you run out of money.
Truthfully though I wouldn't be asking for investment advice on digg. The best plan depends on your personal situation. - merm, on 10/12/2007, -0/+1Not necessarily true. Vanguard has several managed accounts (mutual funds) that charge a very low fee around 0.2% annually with no trading costs.
Look at their Target Retirement X, or LifeStrategy funds - MoneyTutor, on 01/08/2009, -0/+1All jokes aside, you will live past 60 and you will probably be broke.
Retirement is not a laughing matter or one to be taken lightly. You're probably one of the lucky ones that can start saving a tiny amount now and have a million at retirement and don't know it. http://wheretofindjoannbrown.blogspot.com. - deemadden, on 10/12/2007, -0/+1Man oh man! I've never seen so much comment activity from so few diggs! All I can say is, I changed my 401k to make use of this feature, and have noticed a significant improvement in my portfolio since I have. Clearly, some of you guys are very young, and probably not nearly as freaked out as you should be about the fact that Bush has single-handedly decimated your social security benefits while he wasn't busy scaring the bejeezuz out of everybody about the wrong problem in the wrong place (Iraq), to the point that by the time most of you turn 67, there ain't going to be anything to be had. So get used to saying, "welcome to wal-mart! enjoy your shopping experience today!"
However you do it, everybody should work on a nest egg for themselves, if they can. Period. - ucffool, on 10/12/2007, -0/+1@marvin69
How do you opt not to get taxes taken out from your paycheck? Most W-4's I've filled out with 'zero' values still take it out of the paycheck.
This assumes you are an EMPLOYEE status, not self-employed and otherwise. - danielwsmithee, on 10/12/2007, -0/+1@Clemson
At some point though your nest egg can get so large that you will bump into a higher tax bracket at retirement then during your career though correct. I don't feel like working through the math but I assume that is a very high number that most of us will not obtain. For example if I am making $50k a year now, but am saving enough that I will be able to pull $200,000 at retirement per year. Just a thought, thanks for the explanation. - ichoudhury, on 10/12/2007, -0/+1Perhaps this is a stupid question (and not the proper place for it, but since many 401K/IRA literate diggers are looking at it, I am taking this opportunity)...
I am contributing a 15% on 401K (my company matches only 5% but I do not have any IRA. Almost everywhere the recommendation is to invest on Roth IRA after investing on 401k=what company matches (more the merrier). My situation is, I cannot do more Roth IRA after that 15%. I can do 5% to match company matches and invest the 10% on Roth IRA (or not)...
Here's my question -> Why don't I just invest on 401k (maximum to reach at 15000) and hope some type of Tax reform take place (Flat Tax or Fair Tax) and government don't take out so much of it when my time comes up? (long long away) ... or do you think it will only get worse as it has over the last several decade and I rather pay on Roth up front and don't deal with uncertainty? - ScottMitchell, on 10/12/2007, -0/+1Roth IRAs have income limits. IIRC, if you make more than $90k as an invidivual or like $150k as a married couple, NO ROTH FOR YOU! I don't know if the Roth 401(k) has such restrictions or not.
Similarly, the tax deferred part of traditional IRAs seeps away with the more you make. - MoneyTutor, on 01/08/2009, -0/+1Did I understand you correctly? You can only afford to invest 15% of your income. Since you can only afford to invest 15% of your income, you can contribute enough to your 401(k) to get the company match and put the rest into a in a Roth IRA.
Most company 401k's do not allow a brokerage account. A brokerage account would allow you to invest in mutual funds other than those offered by your company. A brokerage account would also allow you to invest in stocks. This is an excellent article on that subject: http://www.associatedcontent.com/article/1305552/4 ... - NanoStuff, on 10/12/2007, -0/+1"by the time most of you turn 67, there ain't going to be anything to be had. So get used to saying, "welcome to wal-mart! enjoy your shopping experience today!""
Exactly, because we all know the economic system 50 years from now will be exactly the same.
Yes that was sarcasm, or was I not clear enough? - MoneyTutor, on 01/08/2009, -0/+1It's good to see so many people engaged and asking questions. I would love to network with you.
- kyoung989, on 10/12/2007, -0/+1@ ScottMitchell
To answer your question, the Roth 401k does not have an income limit.
@ Clemson
It's really quite unfair to be comparing a 401k to a Roth IRA because the 401k has a higher contribution limit. In your scenarios, the Roth IRA is capped at $4,000 while the tax-equivalent of $7,048.46 is deposited into a 401k. You are able to contribute $3,000 more to the 401k because of the higher limits. The true comparison would be Roth IRA vs. Traditional IRA or Roth 401k vs. Traditional 401k. That way, the Roth accounts both have the same contribution limits as their tax-deferred counterparts. By making the contributions the same, the Roth accounts have the clear advantage, provided you assume that your future tax bracket will be the same as today or higher (which is likely the case).
That's why the Roth vehicles are far superior to Traditional accounts for young people - investors are likely in a lower tax bracket today than they will be at retirement.
As a young person, the order of preference for retirement vehicles should go as follows:
1) Roth 401k
2) Traditional 401k
3) Roth IRA
4) Traditional IRA
Pretty much every retirement specialist agrees on this order. - kyoung989, on 10/12/2007, -0/+1@ Mackman
You have it exactly right. Hey everyone, listen to Mackman! - lilamae, on 01/05/2009, -0/+1Of one thing you can be sure, however much you save, the government will take more than its fair share.
- spkaine, on 10/12/2007, -0/+1@Clemson
Your math is flawed. FICA and State Tax needs to be deducted PRIOR to a 401(k) investment, so the only tax benefit is federal.
By putting lots of money in your 401K, you are hoping that your (federal) tax bracket will less when you retire then it is today. Or, you can use the new Roth provision of the 401k - lilamae, on 01/05/2009, -0/+1One warning. High interest rates indicate more risk. HSBC may be having some financial difficulties if it's offering significantly more interest on CDs than a similar sized bank. I would think about shorter term CDs if you invest here.
- rax262, on 10/12/2007, -0/+0Speaking as someone who works to educate the public about the benefits of saving and putting your money in the right type of assets, I can truly say that these "lifetime funds" are a breath of fresh air. We've found that folks do far better if you deduct the contribution before the employee ever sees it and don't require them to make a lot of decisions. Basically it's a fire and forget retirement missile. The only part that's up to the participant is how big of a "warhead" they want to put on it.
- Rodzirra, on 10/12/2007, -1/+1>If you haven't already started contributing to an IRA/401(k) plan, start today.
>"It's not what you make, it's what you keep."
I actually stopped contributing to a 401(k) for that very reason. "WTF?!?" you may be saying? Think about it this way: The money I dump into a tax deffered account is not taxed. Yet. When I retire, what will the tax rate on my retirement funds be? I haven't the slightest clue, but with the direction government finances are going (>$40 Trillion in unfunded liabilities already), I have almost no confidence that it won't be ridiculously high. - sundar77, on 06/17/2009, -0/+0A self directed ira, sometimes known as a "Checkbook Individual Retirement Account", allows Individual Retirement Account monies to be placed into a checking account, making the funds a more liquid asset.
http://www.brooklyntroy.com - stonebear, on 10/12/2007, -2/+2http://www.answerbag.com/q_view.php/1460
- Clemson, on 10/12/2007, -1/+0kyoung989,
My objective was to compare two scenarios that cost you the same amount of money. I used the ROTH IRA limit as a baseline in my calculations... I could have just as easily used some other arbitrary amount. Comparing $4000 contributions towards a 401k vs. Roth IRA doesn't make sesnse, because the contribution to the 401k only "costs" $2270.
For every dollar of after tax money (Tax Brackets: 25% (federal) + 10.6% (state - national average) + 7.65% (FICA) = 43.25%), you have the option of saving $1.76 to a tax-deferred account. That extra $.76 really adds up (via compound interest), even if it will be taxed at retirement. - NanoStuff, on 10/12/2007, -1/+0I'm highly confident I won't be retiring, so I plan investments primarily for short and mid-term payoff.
If I don't live to 60, there's wasted retirement money right there, and if I do live until 60, I'll live until 200... so there will no longer be retirement and as such no point investing for a day that won't come. - ichoudhury, on 10/12/2007, -2/+1Perhaps this is a stupid question (and not the proper place for it, but since many 401K/IRA literate diggers are looking at it, I am taking this opportunity)...
I am contributing a 15% on 401K (my company matches only 5% but I do not have any IRA. Almost everywhere the recommendation is to invest on Roth IRA after investing on 401k=what company matches (more the merrier). My situation is, I cannot do more Roth IRA after that 15%. I can do 5% to match company matches and invest the 10% on Roth IRA (or not)...
Here's my question -> Why don't I just invest on 401k (maximum to reach at 15000) and hope some type of Tax reform take place (Flat Tax or Fair Tax) and government don't take out so much of it when my time comes up? (long long away) ... or do you think it will only get worse as it has over the last several decade and I rather pay on Roth up front and don't deal with uncertainty? - scott1, on 10/12/2007, -17/+1"trust some company (aka Enron)"
They've been out of bussiness for a few years now.
BTW Enron wasn't an insurence company - inactive, on 10/12/2007, -33/+1401k=suck.
Better to manage your own, then trust some company (aka Enron) to manage it for you. Wake up at 60 and find out you have no more retirement.
Check out the new & improved 
© Digg Inc. 2009
— Content created and posted by Digg users is