Saturday, November 17, 2007

No Match 401k?

Well someone ask Walter Updegrave about whether contributing to a 401k without a match is worth it?

His answer was yes, try and maximize your retirement savings before you start investing in a taxable account.

This is exactly my thoughts exactly. Because the 401k has many advantages over the taxable account. First there is a tax break. That means you don't pay taxes on the income until you withdraw it.

Second, the gains are not taxed annually. In a 401k the gains are reinvested and compounded. However in a taxable account you have to potentially pay taxes on gains, dividends, interest annually. That amount is not compounded and reinvested.

Third, the limit on the 401k is a lot more than Roth IRA. It's hard to imagine retiring on just $4k/year. However with the 401k you are able to save $15.5k/year. That's substantially more. Plus this increases the diversification of your portfolio. How so? Well instead of just saving in a Roth IRA and taxable account, you also have a tax deferred retirement account. The more diversified investments you have the better off you'll be. You never know what the tax brackets/rules will be in the future. It could be that all 401k withdrawals after a certain age is taxed only at 15%.

So overall, I agree with Walter Updegrave. I'm happy that he talks about maximizing retirement savings first instead of ignoring the 401k just because of the lack of a match.

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