Tuesday, April 10, 2007

401(k) Contribution

Recently I was thinking about my 401(k). Since this is my first job, this is the first time I have ever had to make this decision: How much should I contribute? How much can I contribute?

The answer to the first is tough. The answer to the second was a quick web search.

So alright, its a limit of $15,500, which is more than 20% of my annual income, and therefore obviously way too high to consider.

Doing a little research, I found that my employer will match up 2 for 1 ($2 for every $1 I contribute), up to 3% of my annual income, making that the very minimum that I should contribute, since an employer match is essentially a free and instant return on your investment.

Contributing above that has only a tax benefit, as 401(k) contributions are pre-tax. While this portion of income is taken out of taxable income this year, when retirement comes around, the money you take out is still taxed at your income tax bracket then.

For many, this makes sense, since by retirement they will be in a lower tax bracket than their working years. However, in my line of work, 60 is when I would reach the prime of my career, and so the reverse would be true for me. Therefor, paying taxes now is better than doing so later.

Thus, I have decided to contribute only enough to pick up the free money and leave it at that.


Stephanie @ PoorerThanYou said...

Whoa, $15,500 is only 20% of your annual income? Honey, you are doing very well ;)

Are you planning to use any other investment vehicles above and beyond that 3% in your 401(k)? Like contributions to a Roth, since you're thinking that you're in a lower tax bracket now than you will be at age 60.

Finance Guy said...

Yes, I will also be maxing out my Roth IRA contribution, which is $4000. Have to wait a few months before that's complete.