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Should I Contribute to My Company Retirement Plan Even Without an Employer Match? - YMYW podcast - YouTube
Channel: Your Money, Your Wealth
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We've got Scott from New York City - it doesn't
say New York City, it just says New York.
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"Good day." Maybe he's from Australia? "Good
day. Thanks for the podcast." All right. "My
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question is, do you still advise contributing
to a company 401(k) or 457 even if the company
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does not provide any matching funds? Since
I work for a state agency there is no matching,
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however, I have a pension that I contribute
to, which amounts to about 5% of my income
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each year. Would you suggest contributing
some funds to the 401(k) or 457, or some funds
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to an IRA, or some combination? I like the
tax deductibility, but I would also like the
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free money. But seems you can't have both
working for the state. Thanks for your time."
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All right so he's asking, he's got a 401(k)/457
plan through the good state of New York. They're
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not matching any funds, but he will have a
state pension that he's contributing into.
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So I would say absolutely. You want to take
advantage of all savings plans that you have
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available to you because even if they don't
match, I mean, a lot of companies don't match.
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Yeah and a lot of companies don't even have
plans at all. So I would agree with you, Joe.
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And furthermore, like a lot of 401(k) plans
have Roth options... so think of this alternative:
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either not contributing at all or contributing
to a Roth. It's the same tax consequence,
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but now you've got a whole bunch of money
in a Roth IRA, a Roth 401(k), that will be
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tax-free in the future - so that seems like
a no brainer. It depends upon your tax bracket
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and a whole bunch of things, it depends how
much you've already saved and things of that
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sort. But just a general answer is yes. Take
advantage of the savings vehicles that you
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have as long as you can afford them.
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Yeah. Out of sight out of mind is really good.
There are so many different statistics out
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there, for individuals that do have a 401(k),
457, 403(b), any type of employer-sponsored
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plan, as they approach retirement, they have
much more in regards to wealth and liquid
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assets than someone that didn't necessarily
have it, even though they had the same income
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or the same salary.
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Yeah and that happens because of the fact
that out of sight out of mind, and a lot of
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us - most of us - maybe not all, but most
of us, we kind of get to whatever our paycheck
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is, it's like we kind of know that's in our
checking account and we figure out ways to
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spend it. Maybe we save some, but it's hard
to be super-disciplined. And as you get raises,
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you tend to spend a little bit more. If you
can autopilot that and have money go to the
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401(k) or in this case the 457 or both, then
out of sight out of mind and it's safe.
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Yeah I would look at a few things. I'm not
familiar with the state of California - pff,
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state of California. If the state of New York
does have a Roth option in the 401(k) plan.
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That's something to look into, Scott. If they
do, you probably want to beef up, I would
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say, it depends on what how many years to
retirement - it sounds like there's probably
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a few years here because he's just kind of
now investigating his retirement plans. But
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if he's going to have a pension, what we've
found is that people that have a decent-sized
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pension, they're not necessarily good savers,
because they're like, "well here, I have a
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really good pension," and then we find out
that they just bank everything on the pension.
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Right, because they feel like they don't have to save.
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They don't have to save, or they think that
was their savings. "I'm putting 5% into my
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pension." Well are you still putting into
Social Security? Sometimes when we see state
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plans, depending on the state, is that they
don't put into Social Security, they only
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put into the state pension. And so then they
will get the state pension benefits, but they
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don't get Social Security and then they're
thinking, "well wait a minute, I thought I
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was gonna get both?" So you need to do little
bit more due diligence here, Scott. But if
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you have the excess capital or cash flow to
do it, absolutely look into it. Do you want
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to do an IRA, like Al said? Yeah, Roth. Because
if I have a larger pension, it'd be nice to
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supplement that income, potentially, with
some tax-free income to go along with it.
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So even though you've got no free money, there
is no free lunch, Scott.
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I've got a quick question here. Normally with
the order of savings, we talk about pay off
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debt, then contribute to the company match,
and then Roth IRA, and then go back to the
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401(k) or whatever the company plan is. What
would be the order of events if there is no
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match involved?
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Well, it depends on what's his income? If
there's no match involved, and if he has a
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Roth 401(k) option, then it depends on his
taxable income. Because it's so much easier
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to put the money into a 401(k) plan or 457
plan versus to establish a Roth IRA through
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Fidelity, Vanguard, TD Ameritrade, Charles
Schwab. And then if someone thinks of that,
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they're like, "oh, I don't want to do that,
whatever, I'll do it next year, next year
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whatver." I would, in this case maybe you
go to the 401(k) first, see what the income
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is, and then if they're savvy enough, then
open up the Roth.
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Yeah I agree with that, and here's why - it's
because when you try to open up a Roth IRA,
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let's say before April 15th of the following
year, so this this year, 2019 it's $6,000,
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and then it's like to write a check for $6,000
s a lot more difficult than to have $1000
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or $200 withdrawn from each paycheck. You
hardly miss it, you don't really see it. And
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I think, to piggyback Joe on one of your comments,
I think a lot of people that we see that have
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pension plans, and they they have good pension
plans, and so they have a lot of ordinary
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income that puts them in a higher tax bracket
- those folks that have been able to put money
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into a Roth IRA, whether it is a Roth IRA
or a Roth 401(k), are generally pretty happy
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because they have some tax diversification.
It's those folks that don't have a pension
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plan where then they might want to have a
little bit more balance. But those that have
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a larger pension plan, if they can favor the
Roth, that's often a good strategy.
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Right, because how tax brackets work is that
you fill up certain brackets with the income
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that you're deriving from your investment
sources. If I already have a fairly large
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pension, that might already put me up into
let's say the 22% tax bracket. Where if I
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have a 401(k) plan, I could say, you know
what, I'm only going to pull from the 401(k)
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plan to the top of the 12% tax bracket, but
any additional income that I need I'll just
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take from other sources - cash, my taxable
account, or my Roth account. So there's more
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diversification there. But what we found is
that, let's say if I'm a really good saver
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and I also have a large pension. Now you're
stuck in a higher bracket and then all your
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dollars that you saved were in these retirement
accounts, it's going to be taxed at ordinary
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income rates. A lot of that money could be
lost to tax unnecessarily.
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