Non-match vesting 401k versus Roth IRA?

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Non-match vesting 401k versus Roth IRA?

Postby mattgrommes » Mon Apr 23, 2007 8:41 pm

I just signed on with a new company who offers a very good match for their 401k, 7%, but I won't be able to start getting the match until July 08. They also have a vesting schedule for the money, which I didn't read very closely since I can't participate but I believe that means I won't get all the money from the match until I've been there 5 years.

My question is should I go ahead and start contributing to the 401k now or put money into a Roth IRA? Since I can't get the match on the 401k I'm leaning toward the Roth but I'm new to this stuff and aren't sure.

Any thoughts would be greatly appreciated. Thanks in advance.

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Postby oeolycus » Mon Apr 23, 2007 9:08 pm

I would first carefully reread the schedule and the requirements for getting the match.

With the information you've given, I'd suggest contributing to the Roth because you can be more selective with your brokerage and the funds. If there's even a tiny match (typically 1%) for contributing to your retirement through your company's 401k, be sure to contribute the min. amount.

The big rule of thumb is: start today.

Other rules include:
    1. Think long-term
    2. GRQ = :(
    3. Take every cent you can from your company, including HSA, retirement contribs., etc.
With regards to 3., I even shred my company's old faxes for TP at home--and would you believe a melted paperclip is essentially a Centrum?

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Postby tinyhands » Tue Apr 24, 2007 8:38 am

Agreed. You should first start by setting up a budget to see how much excess income you have after paying your bills. Without a matching contribution, your first best option is usually a fully-funded Roth. Then, depending on your monthly budget, go ahead and contribute to the 401k as much as you can (up to the limit, of course) which will also lower your taxable income.

Once the match kicks in, put that at the top of the priority list: Contribute up to the max match, fully fund the Roth, then with whatever is left in your budget contribute to the 401k beyond the match. If you max out at the limit of your 401k and still have money left over in your budget (lucky you!) you might begin investigating taxable savings accounts (in the form of a brokerage account).

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Postby nickel » Tue Apr 24, 2007 8:42 am

Yes, what tinyhands said...

Get the match
Max the Roth
Max any other tax-deferred options
Build a tax efficient portfolio outside of tax-advantaged accounts

In that order. (In my opinion.)

The only thing that could change this would be if you knew you wouldn't be there long enough for the matching funds to vest. In that case, it becomes nothing more than a tax-deferred account, and I'd out the Roth at the top.

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Postby mattgrommes » Tue Apr 24, 2007 8:42 pm

Thanks for the advice everybody. I have a lot to learn about these things but between the GRS blog and forums I've already probably quadrupled what I knew only a year ago. :D

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Postby MossySF » Wed Apr 25, 2007 9:48 am

The extra twist you should consider is your current tax bracket. If you are being taxed highly right now, put as much as possible into a 401K whether you get match or not. If all else is equal, what you pay in taxes now versus what you will pay in the future controls the whether Roth IRA is better than non-matched 401K. While you can't predict the future with certainty, you can semi-guess based on how much you have saved up for retirement and how much you currently pay in taxes.

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