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IRA vs 401k

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akasephiroth
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IRA vs 401k  Reply with quote  

Hello! i was searching the net for some advise and found this site. A little about me first. Im 30 married with 3 kids. I work as a auto tech with Honda. My current income runs about 40-50k a year currently and it is on the rise with education and training being done to improve my worth the the company. The dealer currently has a 401k plan where he will match contribution up to a said amount. For those not interested they can invest in the "Christmas Plan" where an employee can pay in the same as the 401k plan, it will be matched and this become comes your christmas bouns each year. Im torn between the 2 plans. The Christmas plan is basically for those who plan to blow savings instead of saving them however at 30 years old would i be better to take this style plan and invest it into my own IRA plan or something similer? thanks for any advise.
Post Mon Dec 14, 2015 2:25 pm
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oldguy
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The dealer currently has a 401k plan where he will match contribution up to a said amount.


The 401k system is hard to beat for a young person. Example. Say that you invest 10%/yr. About $5000 in your case. And your company matches it - that is $10,000/yr going into your account. If you invest that $10k/yr into an 11%/yr stock index fund, it will be about $2,200,000 in 30 years. (The compounding works surprisingly well).

In my case, I funded my 401k for 1982 (when it was invented) until my 1998 retirement - in those 16 years it grew to almost a million - and that was WITHOUT 'matching' (matching was invented about the time that I retired).

Aside. That $5000 investment cuts your fed income tax costs, altho your $3000 child tax credit already wipes out much of your tax bill. But as the kids reach age 17 and start dropping out of the Credit system, the $5000 tax deduction will become more of a factor)
Post Mon Dec 14, 2015 3:43 pm
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akasephiroth
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Would i be better though taking the same money (in the from of the christmas bouns program) and investing it into my own 401k program.
Post Mon Dec 14, 2015 3:47 pm
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oldguy
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Would i be better though taking the same money


No, the Christmas Plan would be after-tax dollars - and the 401k is pre-tax dollars. Eg, you would need to earn about $6000 to get the $5000 'net' to invest in your own plan. But the 401k would invest the $5000 directly.

Whatever plan you choose - roth, ira, 401k, your own - they all are taxed, just at different points. The 401k is taxed when you take it out, the roth is taxed when you put it in, etc.

Eg - say that you start with $6000 gross and pay $1000 tax to get $5000 net. Invest $5000/yr at 11% for 30 yrs = $1.1M. Or you could have the $6000/yr put directly into a 401k at 11%/yr, that = $1.32M but you owe $200,000 in tax when you sell - so you still net $1.1M.

A key thing to watch is your return - the generic stock market index returns a longterm average of 11%/yr - so $5000/yr = $1.1M. But if you invest in stocks/bonds that pay only 5.5%/yr, that $1.1M is cut to $382,000. The point is - whatever type of account you choose, the choice of RETURN is the important decision for you.
Post Mon Dec 14, 2015 5:41 pm
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