Why I Stopped Contributing to My 401k

One of the major benefits of a 401k is it allows you to divert taxes on today’s income to your retirement years, when ideally you will find yourself in a lower tax bracket.

Of course, that benefit is not always a given. Tax rates could increase, or your income needs could increase in retirement. Either way, you might find yourself paying more in taxes than you planned on earlier in life.

For me, the tax advantages do not outweigh the other problems/limitations of a 401k. Of course, much of this is very personal, as the company I work for chooses the plan administrator, and the administrator controls the investment options. Your options may or may not be significantly better.

Your employer may also offer a match to your contributions, which would be very hard to pass up as it essentially “free money” towards your retirement.

Having said all that, I chose to not participate in my employer’s 401k for a variety of reasons, but it largely comes down to freedom.

I prefer to invest in things that give me the most freedom – freedom of investment choice, freedom to tap my money if necessary, and freedom to have more control over taxable events now and in the future (sale of stock, withdrawals, etc.).

Roth IRA – An Alternative to the 401k

My wife and I both invest in a Roth IRA. Here, our contributions can always be withdrawn for any reason without penalty, which in effect makes this an extension of our emergency funds – not necessarily a dedicated emergency fund, but additional dollars we could withdraw if it really hits the fan.

The earnings will grow in our Roth IRA accounts and may be withdrawn tax free upon reaching retirement age (59 1/2). If we need money from the Roth before that, we can withdraw contributions without penalty.

Contributing to a Roth IRA also allows us to have more choice with our investments. Rather than being limited to a few mutual fund options with what I believe to be questionable allocations to particular segments, regions, etc, I can invest in something I feel reasonably sure will do well over the next three or four decades. I can speculate with some of my retirement money, or be ultra-conservative, whatever my appetite for risk happens to be at a particular life stage.

Outside of the Roth IRA I prefer to invest in taxable investments, again where I can control taxable events, income, withdrawals, etc. I’ve previously mentioned my strategy to build a portfolio of dividend growth stocks. I would like to eventually own real estate that produces rental income.

I also plan to tap investments before the government-scheduled retirement age of 59 1/2. I don’t know exactly when that will be, but I imagine I will stop working for full-time pay well before 60. I may work part-time, or start my own business, or change careers – who knows. But I’d like to be able to use some of my own money according to my own time table.

Potential Drawbacks to Stopping Your 401k

I am not advocating people stop contributing to their 401k without strong consideration, I’m just sharing my personal strategy. This is how I would allocate funds after getting out of debt:

1. Invest in a 401k up to an employer match. If no match, go to step 2a.
2a. Save a one-year emergency fund in all cash.
2b. Max out Roth IRA contributions.
3. Invest in taxable investments with a low turnover, including single stocks (don’t forget diversity), tax-advantaged mutual funds, hard assets (gold, silver, real estate), certain types of tax-friendly bonds or Treasuries, etc.

One of the benefits of a payroll deduction to a 401k is that the money is siphoned directly out of your paycheck and into your investment accounts. It’s like putting retirement savings on auto-pilot.

Those lacking the discipline to save on their own may benefit from the level of automation a 401k plan provides. I prefer to take a more hands-on approach with our investments, but that doesn’t mean everyone else does (or should).

I’m not one to put out a lot of disclaimers, but I would remind you that you should never do something, or not do something, with your money just because someone on a blog, or TV, or the radio, advocates it. Do your own homework. Talk with a professional. Make your own informed decision.

I’m interested to hear more from readers on this subject. Do you currently invest in a 401k?

Comments

  1. We contribute 6% to my husband’s 401k, which is enough to get the full match (a 50% match on up to 6% of his salary). Beyond that, we’re funding Roth IRAs and we aren’t maxing those out yet. If we get to the point where we are maxing them both, then we’ll go back to the 401k and put more in there.

    We are both 26 and have a long time for compound interest to work in our favor.

    • Wish I had your financial discipline at 26! You are definitely on the right track. Just remember not to lock up all your money in retirement accounts – be sure you can cover a rainy day, or even a series of rainy days!

      • Being the ripe age of 52- I am twice as envious ! I Wish I knew then, ……………….
        If you haven’t done FPU or some other program like that- I would highly recommend it. Learn to battle the cultural materialism when your younger and you will be set all the way thru. Believe me, it is a battle.

    • Kacie,
      I would be very interested in hearing more about how you accomplish this. I know that, at 26 next week, I’m on my own and currently am having about 3% of my current paycheck put into a savings that I call my retirement account. I’m looking to invest it to make it grow, provided my employer does indeed re-institute the match program as it claims it will, but my limited income makes saving very difficult.

      Would you be willing to share some of your financial advice? I know it’s different because you are married. I’m really struggling because I’m trying to be as frugal as possible but still invest yet still have a life that I somewhat enjoy (provided I don’t have a pay cut or job elimination in the near future).

      • I was looking back at our tax returns and realized that when we were young between retirement plan savings and investment savings, we put away 40% to 50% of our income each year. By age 28, we had 2 kids and a mortgage. Our friends always had money to go drinking, go to dinner and the movies or a show. Those are the people who still live paycheck to paycheck and they ask to borrow money because we are “wealthy”! What did we do differently? EVERYTHING is an exercise in how to do it more cheaply. On your own? Rent a room in a house for $400 a month instead of $1100 for a one bedroom apartment. Find someone to commute to work with so you only spend half the gas. Buy a good 3 year old car instead of a new one and keep it for 15 years. Buy a house as soon as you can to get the tax deduction. Buy a fixer upper and learn to be handy. It amazes me how many people will spen $300 on a plumber for a leaky toilet, when the solution is $18, an hour of your time and read the directions. When it comes to having fun, figure out things to do that don’t cost money. I’ve NEVER had a gym membership – there are 200 miles of local trails that my tax dollars paid for. I use them. All that said – treat yourself occasionally. Once a month reward your frugality with something you normally wouldn’t do. Finally, volunteer your time to help someone who has less than you. You will come home grateful for all that you have, with a renewed determination not to ever be in dire straits like those you just helped.

    • Good question, Mike. You can withdraw your contributions at any time, for any reason, without penalty or tax (since these contributions were made with after-tax dollars).

      So yes, theoretically if you have invested $3,000 in a Roth IRA over the last five years, and your balance is say, $18,000, you could withdraw $15,000 (your original contributions) and use it towards a real estate purchase.

      You can only withdraw earnings without an early withdrawal penalty under a very specific set of scenarios. The following site has some good information regarding early distribution rules with respect to earnings:

      http://www.investopedia.com/university/retirementplans/rothira/rothira3.asp#axzz1gR0CPTAc

      • This is a pointless move. You are just adding more restrictions to the real estate. Real estate can be a tax free vehicle without using your Roth, if you take appropriate steps. Consult with a CPA for further details.

        • if you do do it, only pull out the contributions like he said. I think what you are considering is a self directed Roth IRA. All I can say is be careful. If you use leverage in your real estate purchase you may run into UBIT which destroys any ROI for the investment. Again consult a CPA for your personal circumstances.

          • The ROI would be not paying interest on the home. Tangible savings versus unknown gain or loss. The decision is easy for some people depending on their risk comfort. Even with low mortgage interest rates, my retirement account has not been growing.

        • First, let me thank you all for replying.

          How to set up real estate as a tax free vehicle I would be interested to know, but I don’t think that would work for me.

          I just want to pay cash for something like an apartment building, and since I know how to do maintenance I don’t mind managing myself. And I could write off the rental while at the same time giving me a monthly cash flow.

    • I looked into this and found out that there are real estate Roth IRA companies but you have to invest in real estate that neither you nor any family member will ever live in. It is popular for farmland purchase. You can also use up to $10,000 from a ROTH IRA as a downpayment on a first time home purchase. We are currently trying to purchase property using a home equity line of credit the interest of which is tax deductible.

  2. I’m in my mid 50s and since I got my house paid off this past summer, I intend to max out my SIMPLE IRA at work (no 401k offered) in order to decrease my taxable income since I probably won’t be able to itemize for taxes in the future. I also max out my Roth IRA every year. However, I do not have any investments in a taxable account. I have been thinking about doing that for the reasons you mention.

  3. We do 10% in company 401Ks and then another 10% through our financial planner. My company recently added the option of a ROTH IRA but we don’t do it because we make too much. We also have a money market with our emergency savings fund and a savings account through our bank for a smaller emergency fund.

  4. You forgot one alternative available to some: a Roth 401(k). I’m one of the few lucky enough to have this option at work, so I max that out. It still suffers from the problem of having too few choices, but there is a decent selection of index funds. Being able to contribute more than 3x as much as I could to a Roth IRA makes up somewhat for the lack in flexibility, and I can roll it over to a Roth IRA if and when I leave the company.

  5. I do about 6% in my 401K because that is the max for the company match. I tend to not max my roth due to budget restrictions, but when I get a chance I add a 100 dollars here and there to it. I will hopefully contribute more to the Roth in 2012.

  6. I love my company’s Roth 401k because there are two index fund choices with less than 0.10% expense ratios, which is just as good (if not better) than I would get investing on my own anyway. I hope to start maxing it out again after I pay off the mortgage on my primary residence.

  7. I am so glad to finally hear someone else say this! My previous employer offered no match (which is more and more common these days) and the investment options were pretty poor results, I stopped doing this myself too! I invested first in a Roth IRA but since it has not grown in 3 years (after one year of investment, I did not contribute the next), and in year 2 lost a decent amount (still untouched, it is just now back to what I put in) I decided I would stick to Roth IRA CDs–at least I know what I put in and some additional will be in there!! I know the interest rates are low right now, but it beat losing!

    • Amanda, I did something similar with my oldest child’s college fund. I moved her investments in a 529 out of what I considered to be too risky mutual funds and into a “guaranteed fund” consisting of cash, CDs and other forms of minimally risky investments. I’d rather see her fund grow at 3% than drop 20% just a few years from college.

  8. I also am considering to stop contributing to my companies lackluster 401K plan. But what do I do with the account then ? Haven’t looked into the details of a rollover- Is it practical to roll into a Roth now ? any suggestions FD – anyone?

  9. I hate the retirement vehicles that are out there now. While some might make sense, and there are some tax reasons to look at them, I have found that I cannot take advantage of them. For example, I cannot get the tax credit for the ROTH contributions since I make too much money (I am a single parent, and for those of you who complain about the marriage penalty, try being single). I have not contributed in the last 3 years to my ROTH. I have contributed to the max every year, and was lucky to have a 401k from a company I left which I rolled into my ROTH tax free (in 2004 you could do that only that year). I am 37 and my ROTH is okay, I lost a lot the last few years, but I will be able to cover my house and investment property if I must.

    As for 401k, I will only match the minimum to get the full return from my companies match. If they don’t match, I wont. The restrictions for me are not worth the account. While it is nice to get a match from companies, they have crappy options, and no realy way to make any serious money. Plus the restrictions on taking the money out if you want to retire early are a pain.

    For me, since I want to retire early or start my own business soon, is that a majority of my funds are in taxable accounts. I don’t think I will live to 60 to start taking my money out of those other accounts, so I figure I should have access to it now, and why leave a great inheritance but live like a pauper. My child is heading to college in the fall, so I also need funds for that.

    • There is no such thing as a tax credit for the ROTH contributions, no matter how much or how little you make in income.

    • There was never a time where pre-tax 401(k) money could be rollover-converted to a Roth IRA. Not 2004. Not ever.

      And why in the world would you not make it to 60? (Unless you have a terminal illness, in which case I apologize.)

      And like Holly said, no such thing as a tax credit – or even tax deduction – for a Roth IRA. What are you thinking of?

  10. @Murph

    Rolling over a 401k to a rollover IRA is pretty simple. You close the 401k and open a Rollover account and can manage it like any other account. I personally did this with my last 401k and moved it to a Schwab account. I have them manage it and the fees are low. There is really no easy way to roll it into a ROTH unless you want to pay the taxes on the account. Right now the taxes are low (last year for that) and they are going up next year, so look into that sooner rather than later if you are going to do it.

      • @Tania – It is working out well. They seem to do the same thing as everyone else, just at a cheaper price. So if you are looking for managed portfolios, then go ahead and talk to them. You have to talk tot your FA to see if you like working with them. I like mine and he seemed pretty knowledgeable (I am as well, so when I asked things, he knew he had to bring his A game).

    • Can @Murph do that if he is still employed. I’ve heard of folks rolling an old 401k from a previous employer into an IRA, but I am not sure if you are allowed to do that if still currently with the employer.

      • Yes, you can if your company allows it. We’re in the process of rolling my still-employed husband’s 401(k) into an IRA to be able to invest in something other than the limited offerings of the company. We’ll keep contributing to the 401(k) to get the match.

      • J- dude- No Dice -Our company has their benefits administered thru a PEO- employee leasing management company. They claim IRS rules won’t allow me to rollover to another plan as long as we (our company) are contractually obligated to them, and employed with their benefits company. He said possibly if my company was the immediate trustee of the plan, they may allow for hardship reasons (but pay taxes on it now)-but said even IRS rules are controlling where rollovers are concerned.. The plan has better the average fund options, a lot being Vanguard funds (where I have my emergency fund in a Vanguard money market acct anyway.- Thanks Dave) so maybe I just suck it up and start a separate Roth ASIC

        • Hubby’s employer uses Fidelity. No beef with them in general but when we called Fidelity to ask about rolling his 401K over to a ROTH account, we were told that the only way he could close the 401K was to be no longer employed by his employer. So NOT happy about that. So we are looking into opening a ROTH somewhere else and funding it from scratch, then if he ever does leave said employer, rolling it at that time. What a nuisance though.

          • I thought I remembered an IRS regulation that prevented such an action – rolling 401k into an IRA while still employed. Remember, too, that a Roth IRA usues after-tax dollars while 401k contribution are pre-tax, so a direct roll over from a 401k to a Roth is not possible without a traditional IRA to Roth IRA conversion (and taxes).

          • Under the law, Employee deferrals may not be distributed while still employed until the participant has reached age 59.5. Employer contributions (Match and Profit Sharing) may be distributed earlier if the Plan allows and should remain tax deferred if you roll directly to an IRA. Employer Safe Harbor contributions follow the deferral rules and cannot come out until post 59.5.

            Direct rollovers from a 401(k) to a Roth are now possible; again, the plan document must allow for it. In essence, the 1099 is created as though the participant took a direct distribution, but is further coded as deposited to a Roth IRA , so what transfers is now post tax. The trick is having enough withheld topay the proper amount of tax, or having enough ready money outside the rollover amount to pay the taxes if you roll the entire amount to the Roth IRA.

  11. DH contributes just enough to get the employer match. The rest of the $$ goes elsewhere, somewhere where government regulations cannot affect when we can do whatever we want with it whenever we want.

  12. I’ m single and work for a non-profit with no employer matching. When I was first hired, I didn’t contribute to the 403b plan for the first several years because the choices were awful (insurance annuities and high-fee mutual funds). When a 457b plan was adopted – with a respected, low-fee fund as one of the available options – I started contributing and gradually built up to the max allowed. I also max out ROTH IRA contributions every year. I’m pretty satisfied with my current choices and strategies, but if that 457b plan hadn’t come along it would be a different story.

  13. I only contribute 5% as employer match is 5%. Rest goes in to Roth. Agree, if you don’t have employer match Roth IRA provides greater options. Also its related to tax rate betting. Whether tax you are paying now is more or the tax you’d pay in future is more.

  14. In 2009 my company stopped matching 401k contributions so I did too. I put that money towards our debt. Fast forward to 2011, I’ve paid off 5 of 6 debts and the company reinstated the company match up to 2%, so I’m back in the game. With the 2% reduction in soc sec taxes, I don’t even notice that money not in my paycheck. Also in 2011, we got a small raise (2% – weird pattern huh) so I took that and put it in a Roth 401k.

  15. FD,

    Great post! I for one am not a fan of giving up control (or freedom) of my money. Also, I am not a fan of qualified plans (any of them) in general. Why would the government create a solution (tax avoidance) with a program they created (taxation)??

  16. Thanks Jason. I am looking for an alternative to paying into my 401k as I just don’t see the benefits any more. The Roth IRA looks like a good option so I may look into this a little more. Has making the switch been a successful one so far?

    Cheers,

    Jon

    • Jon, well, it’s tough to compare apples to apples since some of the underlying investments from the old 401k are difficult to obtain, but overall I would say, yes, my venture into a Roth IRA has been successful.

  17. Thank you very much for your advise. A couple of days ago I found myself struggling what to do with my money. I didn’t want to leave my money on 401k. You have answered what I have been looking for.

  18. I’ll try and argue the other side. Personal situation first: Married, two kids, a mortgage, two small businesses (1 for me, 1 for my wife) both in our low thirties.

    We max out our 401k through Sharebuilder401k which offers ETF options for anything from European equities to 10 yr treasuries. About 12 options total. In my mind, it is far more important to know when to be in and out of the market than to worry about the specific investment vehicles due to the fact that interelatedness among all asset classes is at an all-time high.

    Assuming you can master the in-vs-out timing mechanics (poor assumption for most of us) the specific investment choices matter less than the fact that by investing pre-tax dollars your ability to generate returns is much higher in a 401k than in a Roth IRA.

    An example may help, perhaps. Persons A and B earn $15,500 they decide to invest for their retirement every year. Person B has only $12K to grow due to having paid out the 3K in taxes. Over time assuming equal success in investing, person B should be much further ahead as they’ve invested the 3K year after year and reaped the benefits of compounding to boot.

  19. We do not contribute to a 401k because we are in the 10% tax bracket and are taking advantage of the low bracket to put as much in our Roths at that rate. Once we hit the 15% bracket, we will start using the 401k as well.

  20. Yeah I think more people need to understand that a lack of flexibility is a real and measurable cost, in the same way that an opportunity cost is. Investment and savings are about much more than figures, or even “the bottom line”.

    • This is fair, but most 401(k) plans offer at least one low-expense index fund, which is, for most people, a good choice for at least a portion of their savings.

  21. I am a huge proponent of Roth IRA’s. They are fantastic, but you have to keep an eye on the tax benefits when it comes time for filing your taxes. There are certain things you can take advantage of by re-classifying your contributions if your income is within certain limits.

  22. Hi! We currently invest 6% in our 401k plans which both of our employers match. We also each contribute $300/month to our Roth IRA accounts ($600 total). My only concern is that our current Roth investments are in a target date fund (we are 29 and 30 yrs old) but I am not sure that is the best place to have that money. I am glad to have found your blog!

  23. I run the 401k plan at my company (I’m the finance and HR guy) so I’m pretty familiar with how the plans work. I’m also a frugal dad and relentless retirement saver so I’m pretty keen on learning about this stuff. Being human I may have some things wrong, but here’s what I think I know:

    - as soon as you leave an employer, you may roll the 401k to an IRA. It’s very easy. If you have a Roth 401k you can roll that to a Roth IRA. Most people stay in jobs for only a couple years these days, so you’ll find your IRA collects your funds pretty quickly, allowing you to get the tax deferment without worrying about investment option lock-in for too long

    - 401k plans are allowed by law to offer loans against your balance with certain restrictions. Most plans do offer that. So you can access the funds in an emergency if you need to. Balances must be paid back in full if leave that plan though (change employers)

    - I believe you can take a non-penalty withdrawal from a 401k for a first home purchase down payment

    - all tax-deferred plans are a tax rate arbitrage. However, even if your tax rate in the future is higher than the one you have now, you will have investment earnings on the tax you didn’t pay now, and those will grow tax free. It’s a complicated calculation, based on unknowable assumptions, to see if you will be better off to pay tax now or defer it. You can make guesses at least, but it’s still a spreadsheet problem basically. For most tax rate values (now and future), you’ll be better off deferring tax.

    - If your company provides a match for your 401k (or SIMPLE IRA), there is virtually no way you can lose financially by contributing at least enough to take advantage of the match

    - IRAs may purchase real-estate or anything you want really, with certain restrictions (like as mentioned above, you can’t use an IRA to own real estate you or your immediate family live in – other than that, fair game). The way to do it is to create a company to do whatever you want, then have the IRA invest in the company. There are investment advisors that can set these up for anyone

    - I believe it is possible to retire early (before 59 1/2) and still take penalty-free withdrawals from your IRA. The process is called “annuitization”, and what you do is you set up a withdrawal plan where you take substantially equal withdrawals based on your expected remaining actuarial life expectancy. That way you can retire early and still take advantage of tax deferred savings

    - When you rollover an IRA from one account to another, instead of doing a direct rollover you may take possession of the money so long as you deposit into the destination IRA within 60 days. You may have multiple IRA accounts, and you may withdraw funds (partial or total) for a rollover once per year per source IRA account. In this way, you may for short periods of time (those 60 days) make full use of some of your IRA funds for emergency needs. You will take a massive penalty (as if you withdrew the funds, instead of rolling over) if you don’t get them into another IRA account by 60 days, so this shouldn’t be done lightly. However, this allows you to keep some of your normal emergency funds in less liquid (2+ months) investments, knowing you may use the IRA funds to fill in temporary liquidity needs.

    - It is still possible despite your IRS-determined AGI to convert your traditional IRAs to Roth IRAs this year – it’s part of the Bush tax cuts. You’ll recognize the balance of the traditional IRA as income, but you can optionally recognize it this year, or in two equal parts next year and the following year. A nifty trick if you can’t otherwise take advantage of the Roth option because your AGI is too high. I keep part of my retirement savings in traditional (tax-deferred) format and part in Roth (tax paid, but tax-free growth) format in order to have what I think of as “tax rate diversification” since as mentioned above I can’t know whether it’s better to do one or the other. I’m not so much hoping to average out, just to prevent disaster in case tax rates go to 75% or something.

    That’s all the tricks I know, hopefully this helps people.

    FWIW, my wife and I are just barely ineligible to contribute to Roth plans by AGI limitations. We completely max out our traditional 401k (mine) and SIMPLE IRA (hers). 401k investment options are limited, however “strategic asset allocation” is more important than specific funds (look it up on “dshort”‘s site – google will find it), so that’s not a huge deal. We roll over any 401k funds into IRAs whenever possible (job changes, we use ETrade and Schwab for IRAs, both are great). We converted our entire existing IRA balance to Roth IRA last year under the Bush tax cut provision simply to diversify tax rate risk. I have used the 60-day rollover trick once, it’s quite useful. Once my IRA balance gets big enough I intend to do the IRA-owned company thing so I can take part in non-exchange-traded investments.

    Cheers!

  24. One other thing – as the payroll guy at my company, we use ADP (as do most companies?) and it is trivial for us to do direct deposits for one person into multiple accounts. Many of my employees do this. I’m sure other payroll companies offer it (in order to compete with ADP if nothing else). This means that even if you aren’t doing a 401k, you can “pay yourself first” by having a set amount of each paycheck go into a separate savings account, and have the balance of the paycheck go into checking (or wherever), so the “automated” aspect of 401ks isn’t a difference in reality between using a 401k or taxable savings. You can (and should!) automate both

  25. For every dollar I invest in my 401k I save 34 cents in taxes (federal + state marginal tax rates). That is a HUGE benefit that I haven’t seen mentioned.

    • That’s the question workers have to answer for themselves – do I want my money and pay taxes now, or do I want a tax break now and not get my money for 20, 30, or 40 years? I’ve chosen to get my money now and use it when I want, and not give an interest-free loan to make some investment bank so they can get rich. I’m careful with money, though, so saving is not a problem for me. Those auto-deductions are probably a good idea for people who have trouble putting money away. Just hope you plan to retire when the market is up!

  26. Ill share what I do and why….First, the typical 401k isnt an investment vehicle, its a savings vehicle. Thats how I look at it. I contribute 11%. Thats a little over 4k. I get 1200 dollars match from the company. Pushes it to 5200 or so. And it helps bring my pay down for tax purposes. I dont care what the 5200 dollars does after that, as long as it keeps up with inflation. Its served its purpose. I max out a traditional IRA. Thats another 5k dollars deducted on my taxes. I go from paying taxes on over 40k to paying taxes on less than 30k. You cant do that with a Roth. I send as much as I can, last year it was 5900 dollars into a taxable account. I load up on dividend stocks in my ira and taxable account. My taxable account is also my emergency fund. I keep about 2k in my checking/savings account for break downs and emergencies, but if anything really bad happens, I can hit up my taxable account. I do not see any wisdom in building up a years expenses in cash sitting in a bank. I save about half my net income each month, in addition to the 11 percent into the 401k. I know everyone here loves the Roth, but combining the 401k tax savings with the tax savings of a traditional IRA works well together. The 401k is a good tool if used properly. Just have to have realistic expectations.

  27. Bottom line, contribute to at least get the match. But really, 10% into your 401k isnt going to hurt most people. Thats really a baseline, jumping off point though.

  28. I was one of the many unfortunate people who were caught in the housing market crash. I had started a partnership in 2005 and went all in. As a civil engineer specializing in residential site development, how could I go wrong? Fourteen months later, the company folded, I lost my entire retirement savings, even though I was broke, the land value kept going up for a few years which made me have to pay huge sums for taxes. What was learned? Cash is king. I didn’t work for 2.5 years, lived on unemployment and food stamps, rented out spare rooms to other people who were having a hard go of it, went back to school and came out the other side more content with having very little.

    I think people focus too much on getting this HUGE retirement fund to rely on. Since getting a job this June, earning the same amount that I did 10 years ago, a few things have changed. I have no home. I rent an apartment for cheap (no taxes, no utilities, no repairs/upkeep), I have absolutely NO debt. I have $25,000 cash to my name, a new vehicle that should last a decade (at least it’s warranty is for 10 years), and live in a town that has a low cost of living, and my commute is under 5 minutes. I am saving $1,700+ per month. This is going into savings account which will be used to purchase a home in the next two years (maybe sooner if the right deal pops up).

    Why am I not investing in Roth or 401K? I found while unemployed that renting out a portion of the home that you live in (occupy) has more advantages than most investments. My house payment was $1,460/mo (15 year schedule including P, I, T & ins.). Renting two rooms generated $900 cash each month. I was also able to depreciate the home and take advantage of any repairs and/or maintenance that was required. You need to be comfortable allowing strangers to live in your home (SCREENING is IMPORTANT). Not only did it make more economical sense, but it allowed me to help some people who were going through some trying times. Renting a room for $400-$500/month including utilities is a steal in the area I was in. It made me feel so good to be able to help others and provide a nice place for them to stay.

    I don’t know of a single investment that can provide $900+/month in passive cash income than doing what I did.

    Does anyone else have some suggestions or comments for what I have been doing the past few years? I would like to do it again in the future (when I get the next home). Are there any recommendations?

  29. It’s rare that you hear anyone advocating to not contribute to a 401k – and for that I applaud you. Like you say, freedom is a great thing and when you put money in a 401k, it is in the hands of your company’s financial advisers.

  30. You say you are dedicated to saving…but you are passing up the FREE money from your employer…that is absolutely nuts!!!

    Even if your employer choices are ‘limited’ they are probably safer than what you would pick for yourself. You will save tons more money in your employer plan!

    At 26 you still have soooo much to learn about investing & FREEDOM is not the priority for many. This is immature as is your thinking.

  31. Oh, you can take your profits from your employer sponsored plan and put it into another investment yourself. This is how you can control your losses and make $$$ too!

  32. @SuHurley -

    1- 401k -> traditional IRA rollover when you leave that job -> traditional IRA to Roth conversion per temporary tax law from GWBush

    2- if all your retirement funds are tax-deferred but you want to retire before their age restriction (59 1/2), how do you access the retirement money to do so? It’s about retiring early not dying early, and that’s where annuitization could help

  33. I currently do not have a 401k. Here’s why:

    * My employer does not provide a company match
    * The options available in the plan are of average return and higher than average costs/fees
    * I cannot afford to invest more than the IRA max of $5,000 at this time, so I’m sticking with that since an IRA gives me maximum freedom of choice.

    Once I’m able to invest more than the $5,000 IRA limit, I’ll probably start a Roth IRA for the extra, but I wish Congress would make all deferred comp retirement plans have the same contribution limit… why is an IRA only 5k, while a 401K is more than 3 times that amount?

  34. @JoeMorgan – that sounds like a great way to go about things, you’re working everything to advantage. I’m mainly replying (again) to say “hear hear!” to the comment on the deffered comp limits. You forget that SIMPLE IRA is $16,500, and SEP IRA is $49,000. Really? $49,000 for the SEP IRA? Why is something useful for saving money basically only available to people that have a ton of money? But the peon IRAs (traditional and Roth) are only $5k?

  35. I contribute to a 403(b) through work, mostly because of the wicked matching by the university I work for. After 1 year of FT employment, if you put in NOTHING, the uni puts in 5%. They also match up to 5%, dollar for dollar. So now that I’m in year 2 of employment, by putting in 5% myself, I actually get another 10% free money from the uni. During my first year of employment, I started a 5% voluntary contribution, which I’m still contributing now. So in total, I’m putting in 10% and am getting 20% put into the 403(b). Instant 100% return, bazinga! :) Definitely helps to take the sting out of market downturns when I compare only the Employee contributions to the accounts total. (A little more depressing when I look at the total contributions including Employer contributions.)

    We also started a traditional IRA last year and will continue to put in whatever we can each year up to the max deductible amount given our income.

    But in doing some calculations & research, I’m considering stopping the voluntary 5% 403(b) contributions since they are unmatched and instead putting that towards a Roth IRA. It will increase my taxable income, but it will give me tax-free income in retirement. Still thinking about that one… IF hubby’s pension lasts until retirement, we might be in a relatively high tax bracket (somewhere on the order of 70-80% of his average last few years of salary); not sure I want to have taxable 403(b) retirement funds as our only other source of income beside my SS (which he won’t get due to how IL pensions work), and so non-taxable retirement funds are attractive. On the other hand, if his pension does NOT last, then we’ll be in a much lower tax bracket (with only my SS and our 403(b) income and it won’t help as much to have the non-taxable Roth IRA. Oh, decisions, decisions!

    • This is exactly why I don’t like any tax deferred programs.Have you ever considered what rate you are deferring to? Given the choice I will always choose to go with a tax free account.

  36. I stopped contributing to my 401K for completely different reasons. I investigated the companies in which the funds were invested. I would not personally choose to invest in the majority of those companies, as I am opposed to their business practices and avoid their products and services. There was no “green” choice, which is what I am interested in. I felt that investing in companies whose business practices I dislike, just so I could make a bigger buck, didn’t say much about my character. Greed is greed at any level, and I couldn’t really complain about these companies if I was investing in them. So I stopped contributing to my 401K and I’m saving money in an IRA at a credit union. Yes, I’m losing my employer match, but I don’t feel like a hypocrite anymore.

    • KH, Depending upon the size of your employer you may have the ability to request an offering that is green, socially conscious, etc. It can’t hurt to ask. I work for a CU and we do listen to our employeess on what types of investments they want.

      • Thanks, GR. Months before I made my decision to opt out, I asked that very question at an open meeting with the representatives of the investment company and of my employer. The investment company representatives said that they did have some “green” investment choices. I made a request of my employer (we have over 500 employees) that one or more of those choices be added to the investments from which we could choose. I was told that they would not consider adding such an investment, neither now or at any time in the future. I ruminated on that for awhile, and then ended my contributions.

  37. I have not seen anyone mention this, so I will say it. Your 401k account is probably the most legally protected savings vehicle you will ever own. If you walk away from your house, your mortgage lender can’t get at it. If you get sick and rack up huge medical bills that you are unable to pay, they can’t tap into your 401k. If you get sued or have to declare bankruptcy, your 401k balance is protected. Insurance may protect you from many of these scenarios, but not all of them.

    Also, I believe most social benefit programs don’t count 401k balances against you for the purposes of granting benefits. However if you have a significant amount of money in after tax accounts or other types investments, you will likely be denied due to the asset tests. For example: http://www.brookings.edu/~/media/Files/Projects/retirementsecurity/03_increasing_saving.pdf

    While most of us may never need to worry about these things, we should at least be aware of all the facts in order to make the best assessment on our money saving options. I see a lot of people rag on 401k plans as it seems to be a popular thing to do, but they don’t seem to consider all the facts before making rash decisions.

  38. We saved like crazy when we were younger and are now retired. The 401k’s are marketed as save now when you are in a higher tax bracket and take out when you are in a lower tax bracket. The catch is that for every $1 taken out of your IRA/401k, 50 to 85 cents of that dollar is taxed. If you are in the 15% tax bracket in retirement, that $1 you took out is taxed as if it were $1.85, making the real tax on that dollar 28%. If I had known that, I would have done some things differently.

  39. As I re-read my comment, I see I was unclear. For each additional dollar earned, 50 to 85 cents of Social Security is taxed.

  40. I stopped putting money into my 401k because I dont want to give the irs 25 percent or more in taxes. I have a high yeild savings with american express, and guess what at retirement I,ll only pay taxes on the intrest not the full amount. think about it with a 401k you may not pay now but you will pay later

  41. I wish I would have wised-up years ago, but I guess with age comes the wisdom. Unfortunately. I used to put a whopping 27% in my 401(k). Yep. Did it go up? You bet but only at that level. Forget it. I now contribute a flat 10%. I get company match up to 6%. 10% is easy to calculate. The rest is going to my ROTH and personal stock investing. I only have about 5-6 years left before retirement but it’s better than nothing, I guess. Jason (Frugal Dad), do you ever use your money? I mean, I’d like to buy a home but do I dare take it out of my “retirement money?” That is, my stock investments. Since they are essentially my retirement, I’m not sure if I should ever take anything out. I love putting money away but I hate taking it out. I’m really frugal but hey, I can’t take it with me. Would just taking out capital gains be a good strategy? I have no idea what it will take to live on retirement 25 years from now.

  42. I’m curious if anyone has thoughts on this situation — my 401k vests at 20% per year of employment. My 2 year anniversary is in February (=40% vested). I contribute 4%, my company contributes 2%. At this point, there is close to $11k in the 401k. The company also has a pension plan with a cliff vesting schedule at 3 years, 100%. That currently holds about $3k.

    Sounds nice. However, I’m receiving job offers in industries I’m more passionate about and I don’t know if I’ll be with the same company for 3 years or even 5 years. I’ve been wondering if I should STOP contributing to my 401k. Any thoughts?

  43. We share a similar goal – replacing active income with passive income to cover basic living expenses. As you say, that becomes much easier without a mortgage payment, which is a prime motivator for paying off our mortgage early.

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