401K Question

emily1004 · September 2014

For the past five years I've been working for a family members law firm as a part-time paralegal. While my pay was good, I've never had a job that offered me full benefits. Since he told me he would be retiring soon, I started looking for new work. Lucky for me, I just accepted a full-time position at a bigger firm. (I will be going over to the "dark side" from consumer/bankruptcy law to insurance defense.) BUT....they are giving me everything! Full benefits at no cost to me, and a 10% match on a 401K. (I didn't know companies even did that anymore) H and I already have Roths that we max every year, along with some other funds. I would like to also max out the 401K as well. Can someone break it down for me how this works, "401K's for dummies" style?

CuriousKiddosMama · September 2014

Max out your 401k for sure- make sure you are putting. 10% in every paycheck so you get the company match since it is free $. Generally you aren't vested in the free money until you have worked there for X years (for dh it was 5) but after that the money is fully your when you quit.
After you get the free money from your company, then find your Roth if you still have enough to do that.

uncreatedsnow · September 2014

I believe "fully funding" your 401k is you contributing 15%. I would definitely contribute 10% to get the match, that's an awesome match by the way.

smerka · September 2014

You max out 401k contributions at $17,500 per year. Do 401 k up to the match, Roth IRA to the max, and then if you have more money available for retirement savings, finish maxing out 401 k.

hoffse · September 2014

A true fully-funded 401(k) is a max out - as smerka said, $17,500 for 2014.

I would check to see if the firm has a Roth 401(k). If they're willing to match up to 10%, I would bet that they do simply because that's a number that sounds like they care a lot about retirement. My firm has a Roth 401(k) and H's firm also has the Roth option. Both will match against the Roth 401(k) contributions.

Roth 401(k)s have the 401(k) max-out limits but the Roth rules so it's after-tax but grows tax-free. The match does not grow tax-free, but given that it was free money to begin with that's ok.

Obviously a Roth 401(k) means you don't get the tax deduction in the year you make your contribution, but I personally think the lifetime tax savings are worth that if you can afford to do it... especially if you think your income is going to be going up as you get older/progress in your job.

If you have a Roth 401(k) option and decide to go with that, then still contribute up to the match first, then fund your Roth IRA before going back to the Roth 401(k). The tax rules are the same, but usually IRAs have more investment options than 401(k)s. So even in a world of equal tax rules, I think Roth IRAs are marginally better.

Keep in mind that in a regular 401(k) you are taxed on both your gains AND your original contributions when you withdraw money in retirement. You don't get to avoid paying income tax on that money you contributed - your are just deferring the inevitable. Whereas with the Roth you are taxed only on your initial contribution (now) but not any of the gains. Do some research to see if this is right for you, but I think saving yourself the taxes on those gains in retirement is huge, especially if you have many years for it to grow.

Nothing dark about defending insurance companies or other businesses. You wouldn't believe the things people try to get insurance companies to pay for. I think the plaintiffs bar in many states tend to view the defense bar as slimy. Whereas the defense bar often views the plaintiff's bar as overly litigious and aggressive. Both perspectives are probably wrong.

This is why I enjoy corporate/tax work. Most litigators have no idea what we do. .

emily1004 · September 2014

@hoffse. Funny you mention that. In this past job, I worked with people really down on their luck and those who really needed our help, we even did a little pro bono work. BUT I also saw people who tried to get away with keeping (hiding) their yacht and file for bankruptcy with millions of dollars in debt. (Anyone watch the Real Housewives of Jersey...?)

I interviewed with a few firms, one of which was a auto accident, plaintiff injury firm. They seemed the slimiest of all. It is a little difficult for plaintiffs in the state of Michigan because the law very clearly states, and if you want to collect anything, you have to prove "loss of a bodily function". Yet, these plaintiffs are still out playing golf.

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