Quote:
Originally Posted by renter16
I signed up for 401K years ago at one of my jobs because I was making more money and didn't miss it at all. But now with them not offering higher salaries there is no way I want my check to be ever lower after taxes than it already is which is why I declined. I would need a huge raise to even consider something like this because there is already too much coming out of the check as it is now.
Now my salary has increased closed to $3000 more a year due to COLA raises since 2014 but I just feel it's not enough at this time. And I thought 401K was something optional that was beneficial so why is my employer being so aggressive in getting people to sign up?
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We need to clear up some misconceptions you have about the 401(k) and retirement.
Your 401(k) is your retirement. It is YOUR money being contributed to those accounts which you can begin to withdrawal without a tax penalty starting at age 59 1/2.
The most your contribute and as early as possible pays you the biggest return on investment. If you are going to delay contributing to your 401(k) waiting for that future big raise, it will never come, because you will have a lifestyle to consume whatever your take home pay is.
This is what you need to do. Tell us your gross salary. What kind of expenses do you have for rent/mortgage, etc. Are you married, do you have children or anyone else to support? Then we can better advise you what you should be doing. At the very least you should be contributing money to take advantage of the employer's matching funds, because that's free money for you.
Why is the company encouraging you to contribute? Because the people at the top, the highly compensated people in the same 401(k) plan can get their contributions reduced because enough people as a whole for your company aren't contributing to it. The max is $18K a year and if over age 50, it is $24K a year. Top executives trying to put in $24K year might get several thousands dollars a year returned to them from the plan because the plan numbers show not everyone is contributing. That answers your question, but there is nothing sinister about you saving for your retirement.
A 401(k) reduces your income. It isn't a tax deduction. To make the numbers simple, if you were grossing $100K a year, and contributed $18K to your 401(k) plan, your taxable gross would be lowered to $82K. At $82K you are paying less in taxes, because your gross has been reduced. All you are doing to deferring your compensation into your 401(k) retirement account.
You can do an IRA which has a limit of $5k a year, and if over age 50 $6500 a year. This reduces your federal tax bill. Same thing as the 401(k), in that it goes into account that is yours and can take it out without tax penalty at age 59 1/2. Just like the 401(k), you have to pay tax on the money when you withdraw it.
There is also a ROTH IRA which is different from an IRA. A ROTH IRA doesn't allow you to take a tax deduction for the money you put in there, but when you take the money out later for retirement you don't pay any tax on it.
To speak frankly about this, it would be major stupid not to contribute to a 401(k), IRA or ROTH IRA. The sooner the better. There are people who wait until they are in their 40s thinking they can start saving for retirement and it is near impossible for them.
You should look into getting the book The Automatic Millionaire. One of the important concepts it has in there, is that it explains how to decide how you want to retire to determine what percentage of your current income needs to be invested in retirement. The best thing to do, is set the goal by having it done automatically and then learn to live on what is left over, doing that first before simply saying it can't be done and never saving a good portion for retirement.
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