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How does one get use to maxing out their 401k when they make so little to begin with? Do you just get used to not eating? Living in a box under a bridge?
How much do you all make that you are able to contribute the full amount? Is there a magic number I should atempt to obtain?
Certainly it's easier the more you make, but here's a thought experiment. Apparently you're making under 17.5K annually. Somehow you're getting by. Let's say you got a new job that apid you 50K/yr. You'd likely be ecstatic. You could put 17.5K in a 401K and STILL have almost double the amount afterwards that you have now.
However, many people currently earning 50K would say "there's NO WAY I could max out my 401K and get by".
How does one get use to maxing out their 401k when they make so little to begin with? Do you just get used to not eating? Living in a box under a bridge?
How much do you all make that you are able to contribute the full amount? Is there a magic number I should atempt to obtain?
Quote:
Originally Posted by synchronicity
Certainly it's easier the more you make, but here's a thought experiment. Apparently you're making under 17.5K annually. Somehow you're getting by. Let's say you got a new job that apid you 50K/yr. You'd likely be ecstatic. You could put 17.5K in a 401K and STILL have almost double the amount afterwards that you have now.
However, many people currently earning 50K would say "there's NO WAY I could max out my 401K and get by".
i had already stated that. i said in a regular forum it would be 3-5 percent, but in the finance forum i would expect 10 percent, since the niche is different. to go from 1 out of 15 to 3 out of 5 is just not realistic.
were not ever going to meet each each other and were behind a computer, why do we have to constantly misrepresent how much one has in a 401k or how much one makes.
im honest. im entry level. ill be starting at roughly 30,000. im using this forum to look at resources for starting a 401k and roth ira. im in my 20's.
I WANT to max out my 401k, but that will be 60 percent of my gross. Unless I got a part time job, I could not max it.
realistic responses can lead to realistic discussion.
saying i fully fund my blah blah blah and have a net worth of 5 million blah blah blah is great for your online character profile, but not helpful for people like me looking for advice.
granted there ARE people who are like that, but there arn't 60 percent of people like that. there is likely less than 10 percent of people like that.
I think your expectation of such a small jump is what is throwing you off. I am not surprised by the amount of income or worth people have in here given it is a finance forum. It's all about perception too. Growing up my parents both made (and still make) less money than I do now. When I had friends whose parents made $100k I thought they were quite rich and in a very elite % of the population just due to my naivety! Now I make over that, but I am surrounded by coworkers, clients, and friends who make that much and more so all of a sudden it doesn't seem as crazy and I realize there are a lot more people out there making good money (and much more than I do now) than I realized when I was younger. 10 years ago I would have said the same thing you are saying now. Today, it doesn't seem illogical in the least.
For another example: I play guitar. I am above average, considered 'really good' by my friends who are casual players and have even recorded a few label-backed albums. However, there are a couple guitar forums I read where I can easily admit half the users on there can play circles around me! But it is a technical guitar forum and it just attracts the cream of the crop who are wanting to better themselves. The % of excellent players on that forum is MUCH, MUCH higher than the % of excellent players overall. Much more than a jump between your expected 3-5% to 10%.
Certainly it's easier the more you make, but here's a thought experiment. Apparently you're making under 17.5K annually. Somehow you're getting by. Let's say you got a new job that apid you 50K/yr. You'd likely be ecstatic. You could put 17.5K in a 401K and STILL have almost double the amount afterwards that you have now.
However, many people currently earning 50K would say "there's NO WAY I could max out my 401K and get by".
That should frame the issue for you right there.
I only made $17k or so this year because I was unemployed for 10 months. I did just get a new job making $30k a year. I am forcing myself to contribute 6% but I still have not addressed many needs that I have that I put off due to not having the funds. I have not been to the dentist in years for example. I am not sure I consider what. I do as "getting by". It's more like struggling and doing without a lot. I still need to have my wisdom teeth taken out. The decision to put it off is quickly coming back to haunt me.
I do also support two young children and frankly this is becoming downright scary as I am pushing my late 30's.
I only made $17k or so this year because I was unemployed for 10 months. I did just get a new job making $30k a year. I am forcing myself to contribute 6% but I still have not addressed many needs that I have that I put off due to not having the funds. I have not been to the dentist in years for example. I am not sure I consider what. I do as "getting by". It's more like struggling and doing without a lot. I still need to have my wisdom teeth taken out. The decision to put it off is quickly coming back to haunt me.
I do also support two young children and frankly this is becoming downright scary as I am pushing my late 30's.
well, we all have to live with the decisions we've made, and learn from them.....for example, having two young children (assuming they're yours), when you're in your late 30s and make 30k.
that said, even a little bit helps. just put as much as you can in your 401k and through compounding, it'll grow before you know it. However, taking care of yourself and your young children is more important in my opinion than having a large sum in your 401k. perhaps you can do both, through budgeting and cutting waste.
Are you sure that's best? Roth's are good for people who'll have high income in retirement, but wouldn't you be better off putting all of that into your 401k. You'd see immediate tax benefits. I would think if you took the money you put in a Roth and used it in your 401k then you could use the tax savings to, say, buy a Roth IRA.
Actually not in my case.
An IRA's benefits (at least as I understand them) are only good if you itemize. I have no kids, no work expenses, and a very low mortgage balance, and live in a low cost of living/low salary area, so I have never itemized in my entire life, despite owning a house for 10 years. I always do the calculations, just in case, but the standard deduction always comes out better. If I was to put the $11k from the 2 Roth IRAs into the 401k instead, it would bump me into being able to itemize, but at least some of the benefit would be wasted getting to the point where it was more than the standard deduction. On a Roth, I get the full benefit (I think) with the earnings not being taxed.
In addition, it is a moot point anyway, because my husband's 401k is actually a Roth 401k, so no difference either way for us.
I particularly like the poster who told us in an abstracted way that he/she makes $400,000 a year and contributes $28,000 more than allowable (max $23,000 for those over 50) to the plan. So, I'd take most of these answers with a grain of salt.
You might want to sprinkle that salt on the crow you're going to have to eat because you're the one who is confused about the tax deferral limits. While the elective deferral limits for employees to contribute to their 401(k) plans is $23,000 ($17,500 +$5,500 catch-up), the total defined contribution limit - including the employer contribution - is $51,000, just as the poster stated.
Quote:
Originally Posted by rranger
Nothing wrong with it at all. But 1) in my experience, people who make that kind of money aren't on this board advertising it, 2) companies don't match more than 100% of a total contribution (in fact, I don't think it's even possible under the law), and 3) read 1 and 2 again until you understand.
Yes it is allowable under the law. Employers can contribute up to 100% of the employee's salary or $40,000, whichever is less. (See 26 U.S.C. 415(c)(1)(a))
An IRA's benefits (at least as I understand them) are only good if you itemize.
That is incorrect. An traditional IRA is deductible as an "above the line" deduction, meaning basically you take it on the front page of your 1040 (Line 32, to be precise), not on schedule A with the total reported on the back page of your 1040 (Line 40 is where the standard/itemized deduction is reported). It reduces adjustable gross income (AGI).
Circular 230 Disclaimer - this is not tax or legal advice. Please consult with an appropriate tax professional and do not rely on me. Nothing I can say will hold any water with the IRS if they come to audit you.
That is incorrect. An traditional IRA is deductible as an "above the line" deduction, meaning basically you take it on the front page of your 1040 (Line 32, to be precise), not on schedule A with the total reported on the back page of your 1040 (Line 40 is where the standard/itemized deduction is reported). It reduces adjustable gross income (AGI).
Circular 230 Disclaimer - this is not tax or legal advice. Please consult with an appropriate tax professional and do not rely on me. Nothing I can say will hold any water with the IRS if they come to audit you.
Ok, well that is good to know. Thanks for that.
Then from that perspective, I believe my effective tax rate last year was around 8%. So I'd save 8% of 11k or $880 saved up front if we contributed to a regular 401k. Hardly enough to fund an additional Roth IRA at that point. Plus I'd lose the long term benefits of the Roth. I expect my effective retirement income to be roughly the same as my current income, so Roth vs Regular wasn't a huge deal breaker either way. I chose to gamble that taxes would likely be higher in the future and long term gains would be worth not being taxed on.
The original question is still irrelevant though, as both our IRA and our 401k are both Roth accounts, so which we contribute to first makes little to no difference tax-wise.
Then from that perspective, I believe my effective tax rate last year was around 8%. So I'd save 8% of 11k or $880 saved up front if we contributed to a regular 401k. Hardly enough to fund an additional Roth IRA at that point. Plus I'd lose the long term benefits of the Roth. I expect my effective retirement income to be roughly the same as my current income, so Roth vs Regular wasn't a huge deal breaker either way. I chose to gamble that taxes would likely be higher in the future and long term gains would be worth not being taxed on.
The original question is still irrelevant though, as both our IRA and our 401k are both Roth accounts, so which we contribute to first makes little to no difference tax-wise.
Actually, it's your marginal rate (or rather "the effective rate over the marginal income you would be putting into your 401K"). For example, if you are well into the 15% bracket (I'm just assuming federal income taxes here, not state or anything although those may be impacted as well), then your tax savings would be 15% of that 11K, as otherwise that 11K would be taxed federally at a 15% marginal rate.
If your income is low enough that some of that 11K would be taxed at 10% and the rest at 15%, then your tax savings would be....well, somewhere between 10% and 15% once you figured the math. Similarly, if you were just barely in the 25% marginal bracket by, say, 2K of taxable income, then your tax savings would be 25% of 2K and 15% of 9K. You should get the idea.
I get that for you it's a moot point, just explaining overall how it works. And don't worry - I once had a Tax Manager at a Big 4 accounting firm who couldn't grasp the concept of marginal tax rates for 401K contributions. I kid you not.
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