Is a 401k a benefit when evaluating a new job?

Adam Funk |

No, a 401k is not much of a benefit for most people. A 401k is not more compensation, and it is not anything special that you couldn’t do yourself for most people. A 401k is merely a retirement savings account that you can efficiently move money into directly from your paycheck without it landing in your checking account…before temptation. However, most employers allow you to split your paycheck and direct deposit into multiple accounts, which can accomplish the same result of building savings in any type of account you’d like.

So, when is a 401k actually a benefit? When the company offers a match, the match is the benefit. Or, if you plan to save and defer more than $6,000 per year into a retirement account and you’ll likely be in a lower marginal tax bracket in retirement. Or you make too much money that you can’t deposit into your own IRA or Roth IRA.

A 401k “Match” is the benefit. It is extra compensation over your stated salary. For example, a company may match dollar for dollar up to 4%. If you make $50,000 per year and you direct 4% ($2,000) into your 401k, then the company will also deposit another 4% ($2,000) into your 401k. So, it is like a 4% raise or the equivalent of making $52,000 per year. The average 401k match is 4.7% this year according to Fidelity, one of the largest custodians of retirement accounts. If your company offers a match, then you should at a minimum be putting that much % into your 401k. If you don’t then it’s like saying, “no, it’s fine if you don’t pay me lol”

Another way that a 401k is a benefit is if you make more than $64,000 per year (single) or $193,000 (married) which phases you out of simply putting money into your own IRA account. A 401k is a tax deferred account similar to an IRA. So, if you make less then these thresholds, then you could simply open your own Individual Retirement Account IRA which actually gives you more control of the money and more investments to choose from than most 401k’s offer. You can deposit up to $6,000 per year into an IRA or Roth IRA, whereas you can deposit a higher amount of $19,000 into a 401k. But most people don’t ever deposit that much into their retirement accounts each year. I prepared 120 tax returns this year and only 3 clients maxed out their 401k. The 401k is a good tool for the higher income people. And eventually when you switch jobs you’ll likely just roll it over into an IRA anyway.

And it’s only a benefit if you believe you will be in a lower tax bracket when you retire or start taking money out of the account. For example, you are a school teacher, married with children, and combined making $100,000 per year, and will likely get a pension and social security when you retire. You are currently in the 12% tax bracket, but when you retire and pull the money out it will likely be taxed at a higher % because of all that other retirement income. Another scenario is you save for emergencies or a down payment of a new house inside of your retirement account (you don’t save intentionally into any other account) at 12% tax bracket, but when you take the money out next year it pushes you into the 22% marginal tax bracket plus penalties. Mathematically, you may lose money to taxes by putting money into a 401k today.

There is one significant benefit of a 401k that most people never take advantage of. Mostly because laws prevented it in the past, and many 401k providers still don’t offer it. It is the ability to call a real person and ask for help with financial planning and investment advisement. Although it is hit or miss if you get a good phone jockey when you call. But studies have shown that ongoing financial planning and coaching services can add almost twice as much to your net worth by the time you retire.  

Talk to a CFP® today and start your planning for retirement and for all the other fantastic and unknown expenses during your working years. Give us a call at Savings Coach

The Savings Coach
Adam Funk CFP®