Yesterday, GM announced that it would be suspending the company’s matching contributions into its employees’ 401(k) retirement plans starting November 1 and lasting until financial conditions improve. For people like me who make their living working for a corporation, the 401(k) match is practically expected.
One way to look at the company match, if dollar for dollar like the plan offered by my employer, is as if it were an immediate 100% return on your money. There’s no sense in turning down a guaranteed doubling of your money, so it makes sense to choose to contribute to your 401(k) at least enough to receive the maximum match.
After that, if the investment options are good, it’s a good idea to contribute as much as possible. I’m working at investing in my 401(k) to the maximum amount allowed by law, but it looks like I’ll fall short this year. I’ve decided to invest beyond the maximum match offered by my company, 4% of my salary.
If those who make these decisions at my company were to announce that the employer matching contribution would be suspended, I would probably continue investing in the 401(k) for the tax benefit, half in a traditional 401(k) and half in a Roth. But if I didn’t have extra income, I’d probably be investing only 4% of my salary, taking advantage of the maximum company match and nothing more. Without the company match, I would have a tougher choice.
My investment options in the 401(k) are mediocre at best. Expense ratios are high, and I’d prefer index funds rather than managed mutual funds. But in the end, it still makes sense to invest in a 401(k), rather than invest in a regular brokerage account, thanks to the tax advantaged status. In a regular brokerage account, you’ll have to pay taxes on your gains in addition to having less to invest with in the beginning after tax.
This also assumes that you will be in a lower tax bracket when you retire, which may not be the case considering your goal is to have as much retirement income as possible and the fact that low tax rates and high national debt now may mean higher tax rates all around in the future.
Would you invest in your 401(k) if your company stopped matching a portion of your contributions?
Photo credit: femaletrumpet02
Yesterday, I received my final 2007 401(k) statement in the mail. According to their records, my account’s performance in the fourth quarter last year was down 3.50% while my performance for the entire year was up 7.09%. That’s a bit of a let-down from 2006, when my 401(k) performance was a strong positive 16.25%. It would be nice to see good performance this year, but I’ll be more concerned with performance when I approach the point of needing my retirement funds.
(Those measures are internal rates of return including cash flow. Looking at pure balances, my account was up 45% in 2007.)
This year, I’ll be contributing to a Roth 401(k) in addition to the traditional. My asset allocation for my contributions in one account will mirror the other, so I would expect similar returns in each account this year. See also Russell Bailyn’s article about the benefits of a Roth 401(k).
How was your 401(k) performance in 2007?
Here are some articles from around the web I’ve enjoyed lately. [click to continue…]
Starting in January, my company will begin offering Roth 401(k) retirement accounts for employees. Later this month, I will be able to adjust my current contribution amounts to take advantage of tax diversification through the Roth 401(k), but I won’t be able to increase my total contribution if it affects my company stock fund purchases. To increase my total contribution, I will have to wait for another open trading window, which we probably won’t have until next year.
I’m wondering if maxing out my total 401(k) contribution will be an achievable goal for 2008. The government limits total 401(k) contributions for 2008 to $15,500 (plus an additional $5,000 for those over 50 years old). Employer matching contributions, up to 6% of the employee’s salary, are not included in this limit.
I ran a few scenarios using this Roth 401(k) vs. Traditional 401(k) calculator, the results seem to be more favorable to be invested completely in the Roth 401(k), whether my tax rates are higher now or at retirement, if I maximize my contributions from now until retirement. Part of this is likely due to the fact that investment gains are not taxed in the Roth 401(k) as long as funds are withdrawn properly in retirement.
The legislation that created the Roth 401(k) expires in 2010, unless it is extended. I’ll be taking advantage of this account for the next few years.
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