Been in my career for about a decade now and have never enrolled in a 401k plan. I believe my current employer will match up to 3% of my income, if I contribute the max. Given my income, I would not be able to use 401k contributions to lower my AGI on taxes.
My income is too high to contribute to a Roth IRA.
With that being said, I have been saving for my own retirement (or whatever else) in a "plain vanilla" brokerage account. I'm stashing away FAR more than the 401k contribution limit + employer match. My rationale is that I would like the freedom to do whatever I want, without paying attention to retirement age, having more investment options available (e.g. real estate), not having to worry about tax implications, etc. Goal is to retire by 50 or 55.
To me, there is value in having immediate liquidity and the option to increase/decrease my "contributions" on a whim. I realize the importance of staying disciplined and not raiding my brokerage account without strong reason.
Should I switch employers, which I believe I inevitably will, there would be no administrative hassles with moving or tracking seperate accounts/plans. It's nice having all my assets consolidated in a few places, instead all over the place.
What am I missing by not participating in a formal retirement plan? Maybe some degree of personal asset protection (i.e. lawsuit/divorce)?
Which financial company do you work for that only offers 3% matching? That seems a bit miserly to me for banking.
I think most of your analysis is spot on, I am in a similar situation because I'm not eligible for Roth and I make too much for the tax benefits of an IRA and I don't like the IRA lock-up either. So I too manage my own investments. However, I still participate in the 401k because my employer matches 6% and you are essentially getting a 100% return on that money. Plus, if your company offers a stock purchase plan, it's usually a requirement to do it via the 401k (and I buy that stock too). So for those two reasons I do participate but again, I think most of your analysis (especially the ability to direct that money to whatever investment you want) is spot on.
One thing I forgot to mention is that you can also do loans against a 401k. So while your money is locked up until retirement, you can still borrow from it if you ever need a cash injection and pay a very reasonable rate - and you're the beneficiary of the rate! I think of it as capping the interest I will ever have to pay since I'll never need to take a ridiculous loan out for the rest of my life, I can always just pull from my 401k at a reasonable rate and pay the interest to myself.
I believe my company matches 100% of contributions up to 3% of total comp. If your company matches only 50% up to 6% of comp, it's essentially the same thing.
I know you can borrow against your 401k, but I believe there are limits and it's quite a technical process. If you don't follow all the rules accurately, you could end up getting hit with penalties that go to Uncle Sam.
I don't think you pay the interest to yourself......you would pay interest to whichever company fronts you the money.
Missing a lot:
- 401k contributions are deducted from your W2 income (and your AGI is thus lower). There is no income phase out. There is only a phase out on employer matches
- You are missing a free 3% every year
- Your income is too high for a Roth IRA. But not too high for a backdoor Roth. What does this mean? Contribute to a traditional IRA and immediately convert to a Roth. You never pay taxes on those dollars again
- You can always put excess funds in a brokerage account. It isn't one or the other
- You say not having to think about tax implications - all you're saying is you're okay paying more taxes
- Agree there isn't as much freedom with retirement-type accounts, but there is a good amount of freedom. You can always pull out Roth contributions tax free. You can get 401k loans. But you're not wrong. Hopefully you would have enough sitting outside retirement accounts to still be able to do what you want. In these types of careers, because of the limits on contributions, most of your net worth should sit outside retirement accounts at 50-55, even if you max out everything
- You can always increase/decrease your contributions on a whim with retirement accounts
- Switching employers - I guess there's an extra step, but it's pretty easy to roll a 401k to your new employer or your IRA
- The amount of tax savings is likely in the range of mid six figures if you max out from 25-55
- Roth IRAs are also great to pass on to beneficiaries - a lot of continued tax free growth for your children
don't you still eventually pay taxes once you start withdrawing? I'm contributing to 401k but only because of the employer match. in terms of taxes, I rather pay 30% now than 60% in the future when most jobs will be done by robots and most people will be living on UBI.
If you think your effective tax rate will go up you should contribute to Roth accounts/ roll over to a Roth account. Then you pay the tax now but there is no tax at retirement age.
To Lancer's point, Roth is a great option then. Also keep in mind that when you contribute to traditional 401k, you are saving at the marginal tax rate. When you are withdrawing in retirement, you are paying at your effective tax rate. So you would have to believe that your effective tax rate in the future > marginal tax rate today. Very possible. I basically do 50/50 traditional / Roth
You can do a mega backdoor Roth to get around income limit. I do it yearly
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