We've got Scott from New York City - it doesn't say New York City, it just says New York.
"Good day." Maybe he's from Australia? "Good day. Thanks for the podcast." All right. "My
question is, do you still advise contributing to a company 401(k) or 457 even if the company
does not provide any matching funds? Since I work for a state agency there is no matching,
however, I have a pension that I contribute to, which amounts to about 5% of my income
each year. Would you suggest contributing some funds to the 401(k) or 457, or some funds
to an IRA, or some combination? I like the tax deductibility, but I would also like the
free money. But seems you can't have both working for the state. Thanks for your time."
All right so he's asking, he's got a 401(k)/457 plan through the good state of New York. They're
not matching any funds, but he will have a state pension that he's contributing into.
So I would say absolutely. You want to take advantage of all savings plans that you have
available to you because even if they don't match, I mean, a lot of companies don't match.
Yeah and a lot of companies don't even have plans at all. So I would agree with you, Joe.
And furthermore, like a lot of 401(k) plans have Roth options... so think of this alternative:
either not contributing at all or contributing to a Roth. It's the same tax consequence,
but now you've got a whole bunch of money in a Roth IRA, a Roth 401(k), that will be
tax-free in the future - so that seems like a no brainer. It depends upon your tax bracket
and a whole bunch of things, it depends how much you've already saved and things of that
sort. But just a general answer is yes. Take advantage of the savings vehicles that you
have as long as you can afford them.
Yeah. Out of sight out of mind is really good. There are so many different statistics out
there, for individuals that do have a 401(k), 457, 403(b), any type of employer-sponsored
plan, as they approach retirement, they have much more in regards to wealth and liquid
assets than someone that didn't necessarily have it, even though they had the same income
or the same salary.
Yeah and that happens because of the fact that out of sight out of mind, and a lot of
us - most of us - maybe not all, but most of us, we kind of get to whatever our paycheck
is, it's like we kind of know that's in our checking account and we figure out ways to
spend it. Maybe we save some, but it's hard to be super-disciplined. And as you get raises,
you tend to spend a little bit more. If you can autopilot that and have money go to the
401(k) or in this case the 457 or both, then out of sight out of mind and it's safe.
Yeah I would look at a few things. I'm not familiar with the state of California - pff,
state of California. If the state of New York does have a Roth option in the 401(k) plan.
That's something to look into, Scott. If they do, you probably want to beef up, I would
say, it depends on what how many years to retirement - it sounds like there's probably
a few years here because he's just kind of now investigating his retirement plans. But
if he's going to have a pension, what we've found is that people that have a decent-sized
pension, they're not necessarily good savers, because they're like, "well here, I have a
really good pension," and then we find out that they just bank everything on the pension.
Right, because they feel like they don't have to save.
They don't have to save, or they think that was their savings. "I'm putting 5% into my
pension." Well are you still putting into Social Security? Sometimes when we see state
plans, depending on the state, is that they don't put into Social Security, they only
put into the state pension. And so then they will get the state pension benefits, but they
don't get Social Security and then they're thinking, "well wait a minute, I thought I
was gonna get both?" So you need to do little bit more due diligence here, Scott. But if
you have the excess capital or cash flow to do it, absolutely look into it. Do you want
to do an IRA, like Al said? Yeah, Roth. Because if I have a larger pension, it'd be nice to
supplement that income, potentially, with some tax-free income to go along with it.
So even though you've got no free money, there is no free lunch, Scott.
I've got a quick question here. Normally with the order of savings, we talk about pay off
debt, then contribute to the company match, and then Roth IRA, and then go back to the
401(k) or whatever the company plan is. What would be the order of events if there is no
match involved?
Well, it depends on what's his income? If there's no match involved, and if he has a
Roth 401(k) option, then it depends on his taxable income. Because it's so much easier
to put the money into a 401(k) plan or 457 plan versus to establish a Roth IRA through
Fidelity, Vanguard, TD Ameritrade, Charles Schwab. And then if someone thinks of that,
they're like, "oh, I don't want to do that, whatever, I'll do it next year, next year
whatver." I would, in this case maybe you go to the 401(k) first, see what the income
is, and then if they're savvy enough, then open up the Roth.
Yeah I agree with that, and here's why - it's because when you try to open up a Roth IRA,
let's say before April 15th of the following year, so this this year, 2019 it's $6,000,
and then it's like to write a check for $6,000 s a lot more difficult than to have $1000
or $200 withdrawn from each paycheck. You hardly miss it, you don't really see it. And
I think, to piggyback Joe on one of your comments, I think a lot of people that we see that have
pension plans, and they they have good pension plans, and so they have a lot of ordinary
income that puts them in a higher tax bracket - those folks that have been able to put money
into a Roth IRA, whether it is a Roth IRA or a Roth 401(k), are generally pretty happy
because they have some tax diversification. It's those folks that don't have a pension
plan where then they might want to have a little bit more balance. But those that have
a larger pension plan, if they can favor the Roth, that's often a good strategy.
Right, because how tax brackets work is that you fill up certain brackets with the income
that you're deriving from your investment sources. If I already have a fairly large
pension, that might already put me up into let's say the 22% tax bracket. Where if I
have a 401(k) plan, I could say, you know what, I'm only going to pull from the 401(k)
plan to the top of the 12% tax bracket, but any additional income that I need I'll just
take from other sources - cash, my taxable account, or my Roth account. So there's more
diversification there. But what we found is that, let's say if I'm a really good saver
and I also have a large pension. Now you're stuck in a higher bracket and then all your
dollars that you saved were in these retirement accounts, it's going to be taxed at ordinary
income rates. A lot of that money could be lost to tax unnecessarily.