Hudson2508 said:

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18% match on a 4% contribution.

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This sounds terrible but I'm confident I don't understand it..

My former employer would match me dollar for dollar (100%) up to a 10% contribution. One of the best I've seen.

How does your scenario equate to this from an apples-to-apples comparison?

Sounds like his company gives him 18% and yours 10%

I'm reading it as he only has to contribute 4% of annual salary, and company will contribute 18% of annual salary

permabull said:

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ea1060 said:

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The Pilot said:

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I think most people mean maxing out 401k to mean maxing out to the 22k limit, not the employer match.

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+1. Ive never heard anyone say max out their 401k that meant maxing out the employer match.

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You guys must not hang around people who make sub $60k a year. I hear people in that range say they "max out their 401k" all the time and they mean they get the full employer match

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literally have NEVER heard anyone make this dumb a statement, even people that can't afford to max still know there's actually a max limit higher than the match %

this would be like paying the min credit card payment each month while racking up debt/interest and calling it "paying off your cc in full each month"

Does any of this back door Roth IRA thing get around the income limits for Roth IRA's?

Yes, that's the point of the "back door". You contribute to traditional IRA with post-tax dollars, and then transfer that into a Roth IRA so that all gains are not taxed.

You have to be careful of the pro-rata rule though if you have IRAs with both pre- and post-tax dollars. This is a hurdle I had to get past due to a previous employer's 401k converting to an IRA, but my current 401k allowed me to rollover that pre-tax IRA into current 401k.

permabull said:

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I hear lots of people say they do this but it has different meanings to a lot of people.

Level 1. Maxing out the employer match
Level 2. Maxing out the 22.5k pretax or Roth limit
Level 3. Maxing out the 66k employee/employer limit for pretax/Roth/after-tax (bonus points for Roth converting the after tax portion)

I think most people in the real world who claim to max their 401k mean Level 1, I suspect most on this board means Level 2.

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great post.

I have been pondering the same thing.

I always have done Level One

now trying to get up to Level 2

never anywhere close to Level 3.

because I have been building a private after tax Fidelity brokerage rather than investing every dollar into 401Ks.

Our firm has a safe harbor plan. No mega backdoor roth allowed.

Maxing out your 401k to the 21k limit is great and prudent, but its primary power is capturing more money from your employer. Its secondary power is that you never see the money so you can't get tempted to spend it instead of investing.

Lets for example say my company matches 8% and I have 100k salary after payroll taxes. They put in 8k, I put in 8k. For the next 14k I am now playing the 'roth or not to roth game'

If you really want to you can do a roth 401k.

txaggie_08 said:

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I'm reading it as he only has to contribute 4% of annual salary, and company will contribute 18% of annual salary

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Ah, yes, that is a great deal then if that's what he means.

one MEEN Ag said:

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Maxing out your 401k to the 21k limit is great and prudent, but its primary power is capturing more money from your employer. Its secondary power is that you never see the money so you can't get tempted to spend it instead of investing.

Lets for example say my company matches 8% and I have 100k salary after payroll taxes. They put in 8k, I put in 8k. For the next 14k I am now playing the 'roth or not to roth game'

If you really want to you can do a roth 401k.

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What are some of the factors you look for `when determining to roth 401k or not to roth 401k with the remaining 14k? I go back and forth on this often

There is a lot of variables for roth or traditional but I plan to retire early and have a very low income for my first few years of retirement which will give me a chance to do some large (i.e. 80k+ a year) roth conversions at an effective tax rate lower than my current marginal tax rate.

EliteZags said:

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permabull said:

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ea1060 said:

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The Pilot said:

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I think most people mean maxing out 401k to mean maxing out to the 22k limit, not the employer match.

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+1. Ive never heard anyone say max out their 401k that meant maxing out the employer match.

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You guys must not hang around people who make sub $60k a year. I hear people in that range say they "max out their 401k" all the time and they mean they get the full employer match

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literally have NEVER heard anyone make this dumb a statement, even people that can't afford to max still know there's actually a max limit higher than the match %

this would be like paying the min credit card payment each month while racking up debt/interest and calling it "paying off your cc in full each month"

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Well everyone I know claims to pay their credit card off every month, yet 35% of American's carry a balance... so there might be some truth to that.

I have heard people say they paid cash for their car even though they used a heloc to pay for it.

I have heard people say they own their house outright but really have a liquid asset line of credit they used to pay it off.

DouglasPearce said:

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one MEEN Ag said:

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Maxing out your 401k to the 21k limit is great and prudent, but its primary power is capturing more money from your employer. Its secondary power is that you never see the money so you can't get tempted to spend it instead of investing.

Lets for example say my company matches 8% and I have 100k salary after payroll taxes. They put in 8k, I put in 8k. For the next 14k I am now playing the 'roth or not to roth game'

If you really want to you can do a roth 401k.

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What are some of the factors you look for `when determining to roth 401k or not to roth 401k with the remaining 14k? I go back and forth on this often

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Honestly, I'm going back and forth on it as well. Under normal market conditions, taxing structures, and retirement withdraws its been proven to be a wash investing pretax or post tax.

Its basically a test of what you think is going to change about those assumptions. Do you think taxes will rise considerably in the future? Do you think you'll need some access to investments in your 50s before you reach penalty free withdraw age?

If your answer is yes to either of those, Roth gives you more flexibility. Because roth's are political plutonium to tax on the withdraw. And you can always withdraw your post tax contributions in a roth account penalty free. So lets say you've socked away 100k in contributions to a roth over your career, and its grown to 400k total. You can pull 100k out when your 57 and sick of working and need some cash to carry you over to 59.5. I've seen people use their own Roths as pseudo 529s for their kids. Withdraw previous contributions when they go off to college.

In my mind the pros to not pursuing a back door roth IRA is really just the hassle factor. And when money hits my bank account, I've already got more things to do with it than dollars that are available. I know myself well enough to know that if a dropped my 401k by 500 a month, its not going into 500 post tax. So the paycheck out of sight out of mind helps me out alot. Also, I hate paying tax to the government in the short term. I always think I can beat the market with my 20% further dollars now instead of later. Results remain dubious.

My job just recently offered roth 401k this year. Typing this out is convincing me to split future contributions into that a bit.

My current and previous employers did 401k matching whether my contribution was roth or not, so i contribute the full 22,5 in my roth 401k, and they put 6% of my salary into a traditional 401k. That's how i diversify while hiding as much money from myself as possible

It's a wash if tax rates stay the same. If taxes go up in the future the equation favors the roth. Do you think taxes are going down?

I used to work with a guy who said he was maxing his 401k when he really meant that he was maxing the match, so they do exist. We made similar money and he acted like i was crazy when i told him i contributed the irs max. Many years and personal finance conversations later he now maxes his 401k and no longer uses consumer debt

Just do 100% of your salary in January every year until you hit the max. Time value of money for the win.

Charismatic Megafauna said:

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It's a wash if tax rates stay the same. If taxes go up in the future the equation favors the roth. Do you think taxes are going down?

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This is what I'm coming around to believing with some conviction. I used to be in the boat that it wouldn't materially change one way or the other, we'd all just print until the heat death of the universe. Looks like the fed is going to force congress to balance the checkbook somehow. And it aint gonna be reducing entitlements.

EliteZags said:

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permabull said:

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ea1060 said:

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The Pilot said:

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I think most people mean maxing out 401k to mean maxing out to the 22k limit, not the employer match.

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+1. Ive never heard anyone say max out their 401k that meant maxing out the employer match.

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You guys must not hang around people who make sub $60k a year. I hear people in that range say they "max out their 401k" all the time and they mean they get the full employer match

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literally have NEVER heard anyone make this dumb a statement, even people that can't afford to max still know there's actually a max limit higher than the match %

this would be like paying the min credit card payment each month while racking up debt/interest and calling it "paying off your cc in full each month"

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Maxing out the 401k always meant maxing out what the company would give you with your contribution from my point of view, but I knew it had two meanings. I also had parents that had pensions. I also had no formal education on it until my mid/late 20s as I worked in a really small business (I'm an old co-worker with someone on this thread oddly enough ) and I learned with him. I'll make sure my daughter has it differently, but I grew up poor as ****. Had to learn it.

No way i could put in $15k a year on a $45k a year salary pre-tax living on my own fresh out of college. I thankfully have the ability to get close to doing $20k the last few years, so thankful for that.

I mean, but if you did, couldn't you then be damn near eligible for SNAP?

Carlo4 said:

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EliteZags said:

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permabull said:

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ea1060 said:

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The Pilot said:

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I think most people mean maxing out 401k to mean maxing out to the 22k limit, not the employer match.

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+1. Ive never heard anyone say max out their 401k that meant maxing out the employer match.

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You guys must not hang around people who make sub $60k a year. I hear people in that range say they "max out their 401k" all the time and they mean they get the full employer match

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literally have NEVER heard anyone make this dumb a statement, even people that can't afford to max still know there's actually a max limit higher than the match %

this would be like paying the min credit card payment each month while racking up debt/interest and calling it "paying off your cc in full each month"

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Maxing out the 401k always meant maxing out what the company would give you with your contribution from my point of view, but I knew it had two meanings. I also had parents that had pensions. I also had no formal education on it until my mid/late 20s as I worked in a really small business (I'm an old co-worker with someone on this thread oddly enough ) and I learned with him. I'll make sure my daughter has it differently, but I grew up poor as ****. Had to learn it.

No way i could put in $15k a year on a $45k a year salary pre-tax living on my own fresh out of college. I thankfully have the ability to get close to doing $20k the last few years, so thankful for that.

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I mentor the new engineering hires in my building. I work for a F500 company. Show them all the ropes of finances. You should see the look on their faces when I tell them to max out their HSAs, 401ks, IRAs. and sign up for the employee stock purchase program. About 30k out the door for retirement, 5k deferred to every 6 months for ESPP.

They all balk. Say they can't afford it, won't be able to take trips with friends, or buy that new car. I tell em they'll never have this much free cash as a percent of their budget until they retire. They usually see the light the longer they've been with the company and start to realize they have to start planning today for retirement.

Why would you pay high marginal tax rate to put the money in a Roth.

You retire.
Your income is now social security, which isn't fully taxed.
You take out of your tax deferred 401k and pay tax rates that get taxed in each income bracket, including the lower ones.
But when you're saving money into the 401k from your salary, it's coming from your highest tax rate. When you withdraw in retirement, gets taxed at the lowest tax rate.

Tax deferred is much better deal than roth for most investors. The only time roth makes sense if you're somehow in a very low tax bracket. But most people in those low brackets don't have a lot of extra income to save. If you make enough to max your retirement accounts you're better off going with the tax deferred option first.

Carlo4 said:

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EliteZags said:

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permabull said:

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ea1060 said:

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The Pilot said:

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I think most people mean maxing out 401k to mean maxing out to the 22k limit, not the employer match.

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+1. Ive never heard anyone say max out their 401k that meant maxing out the employer match.

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You guys must not hang around people who make sub $60k a year. I hear people in that range say they "max out their 401k" all the time and they mean they get the full employer match

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literally have NEVER heard anyone make this dumb a statement, even people that can't afford to max still know there's actually a max limit higher than the match %

this would be like paying the min credit card payment each month while racking up debt/interest and calling it "paying off your cc in full each month"

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Maxing out the 401k always meant maxing out what the company would give you with your contribution from my point of view

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I tell everyone I ran a marathon last year
(26miles cumulatively throughout the year)

Charismatic Megafauna said:

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It's a wash if tax rates stay the same. If taxes go up in the future the equation favors the roth. Do you think taxes are going down?

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Its not a wash if they stay the same. Its a wash if your effective tax rate becomes your current marginal rate, which means taxes would need to more than double for that to happen for most people in the 22%+ brackets

A person earning $150k today would be in the 22% bracket but likely after deductions and the graduated tax scale pay around 10-12% in taxes. If they retired and started withdrawing the money they tucked away getting a 22% discount by doing pre-tax would only pay about 12% if they took out $150k a year.

12% < 22%

Another good use for the mega backdoor Roth (which is how I'm currently using it):

I had my own self-directed Roth that I had been maxing out for years - $7-$8k, or whatever the limit was. I'd been doing backdoor for years because I exceeded the income limits.

Then I rolled over my old 403b to an account managed by my FA. So now I can't contribute to my self-directed Roth without being taxed on that money again (co-mingling of pre and post tax IRA contributions caused tax problems).

So, I started out my mega backdoor Roth with that $8k that I was putting into my original Roth so I don't lose that savings opportunity. Only down side is I used to do my Roth contribution as an annual lump sum, and I have to do my mega backdoor contribution as a percentage of my salary that comes out of every paycheck. But at least I can continue saving that $ in a tax-free account, and I have the option to increase my contribution at any time.

Brian Earl Spilner said:

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It's such an OP financial move for those who can do it. It's not quite triple tax advantaged like an HSA, but it's incredibly powerful to have gains you'll never pay tax on.

Everyone whose employer allows them should be doing a mega backdoor.

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Evil PwC offers the mega-backdoor. We've even trained our offshore help desk folks on how to set it up. Just call them up and they can set up the distribution rollovers for you. It's pretty wild how openly they support it.

I'm old. My wife and I both contribute the full $30k allowed. I also offer a profit share for my team, so we can add around $36k additional in matching funds.

I was stupid when I was younger and didn't fully participate in great 401k plans. My kids won't make the same mistakes I did.

permabull said:

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Charismatic Megafauna said:

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It's a wash if tax rates stay the same. If taxes go up in the future the equation favors the roth. Do you think taxes are going down?

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Its not a wash if they stay the same. Its a wash if your effective tax rate becomes your current marginal rate, which means taxes would need to more than double for that to happen for most people in the 22%+ brackets

A person earning $150k today would be in the 22% bracket but likely after deductions and the graduated tax scale pay around 10-12% in taxes. If they retired and started withdrawing the money they tucked away getting a 22% discount by doing pre-tax would only pay about 12% if they took out $150k a year.

12% < 22%

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This is why traditional tax deferred accounts will end up better for most savers.

I had my FA run analysis on this deferred vs Roth debate a few years ago and it was mostly a wash with a slight improvement in Roth's favor. That's just my situation.

Having said that, it's pretty moot at this point for us. I don't even have a 401k to contribute to anymore and my wife is currently retired so what's done is done. If my company ends up adding a 401k option, we will take a look at it again at that point. Same for wife if/when she goes back to work.

Sorry for the confusion. This is what I mean. I only have to contribute 4% of my comp. Company matches 18% of my total salary/bonus. It's a wonderful deal. They even do me one better and take the overage of the $66k and put it in a annuity I can use for certain things like college tuition before I retire.

Wanna hire me?

Hudson2508 said:

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Sorry for the confusion. This is what I mean. I only have to contribute 4% of my comp. Company matches 18% of my total salary/bonus. It's a wonderful deal. They even do me one better and take the overage of the $66k and put it in a annuity I can use for certain things like college tuition before I retire.

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Do you work at Unicorn Inc?

Haha, it's a great company. I'm an owner so it's fun to be apart of it. Funny thing is we have a hard time convincing young people this type of comp is better than our competitors who might offer slightly higher salary.

I can retire at a young age if I choose to. Good problem even if I won't be ready to.

Carlo4 said:

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Maxing out the 401k always meant maxing out what the company would give you with your contribution from my point of view

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this is still annoyingly baffling to me, wtf do you call 'really' maxing out 401K then?? SuperMaxing the 401k?