How often do you floss? Every day? Once a week? Never? It’s something we all know we are supposed to do. None of us want to lose our teeth, and yet somehow flossing often falls off the list of things we get to in the day. Saving for retirement can be similar if we don’t automate the process. We know we are supposed to save for it, we know we want to retire, and yet it’s hard to prioritize over more urgent matters. That is why I advocate using your 401(k) even if your company doesn’t match. It makes the process automatic.
But I want a match!
We all want things we can’t have. We would all love a 401(k) match, but the reality is many companies don’t offer matches any more. This is especially true for start ups who offer stock options instead of 401(k) matches. Take the money out of your paycheck and appreciate the fact that you are automatically saving pre-tax dollars from each paycheck towards your retirement.
But can’t I just contribute to my IRA?
If you want to make tax deductible contributions to your IRA you need to pay attention to the income limits. Many times married couples make too much money to make tax deductible contributions. If you are eligible I still advocate saving to your 401(k) first because the money comes out of your paycheck pre-tax and you can contribute at much higher limits. You can save up to $18,000 a year ($24,000 if your over 50) in a 401(k) and only $5500 ($6500 over 50) in an IRA.
What about a Roth IRA?
Roth IRA’s also have income limitations, although they are higher than traditional IRAs. If you live in an expensive city your high income still may make you ineligible to contribute to a Roth. Roth IRAs allow you to contribute after tax money into your account. The withdrawals will be tax free in the future. This is a good option, but I still advise taking the immediate tax advantage by automatically saving to your 401(k) first. If you max out your 401(k) and have money left over, then look into contributing to a Roth or Traditional IRA.
The Bottom Line
Personal finance isn’t that complicated. We know we should save for the future. We know the younger we start the better. What happens is we often get analysis paralysis. We start doing complicated calculations and reading articles that go into great detail about how it’s not worth contributing to a 401(k) if you don’t get a match. Then we end up not doing anything. I tell clients to contribute to their 401(k) even if they don’t get a match. You receive the tax advantages today. You have no idea what the future holds for tax law, or your life. The sooner you start contributing the better, and when the money is automatically pulled out of your check you have less of a chance using that money elsewhere.
Need help putting together an investment plan for your 401(k)? Reach out and schedule a call.
Have a colleague who isn’t saving in her 401(k) because she wants a match? Please share this article with her.