No Match 401(k)’s Are Okay

November 15th, 2007  |  Published in 401K  |  1 Comment

The latest question in to Walter Updegrave is one about a no-match 401(k) and whether or not it’s “worth it” to contribute. The reader is maxing out his Roth IRA and is now wondering whether he should contribute towards his no-match 401(k) or go with a regular brokerage account. Updegrave recommends that he should contribute to it anyway because of the benefits of having your funds in a tax sheltered account.

Let’s see what happens with your brokerage account:

Let’s see what happens if you invest your $5,000 in a taxable account … after 10 years of 8 percent annual returns, your $3,750 would be worth $8,096. This is the same amount that you would have after-tax in the 401(k), except you’ve now got to pay tax on the profit in your taxable account.

Assuming you would owe 15 percent tax on your profit of $4,346 (your $8,096 account balance minus your original investment of $3,750), you would have to fork over $652 to the IRS, leaving you with $7,444 after taxes.

Which is $652 less than the $8,096 you would have after taxes in the 401(k).

The answer is that your funds do better in a 401(k) than outside in a brokerage account.

There’s more to it (if you’re interested) but the numbers don’t lie.

  

Responses

  1. » Roundup: Please Donate One Dollar on Blueprint for Financial Prosperity says:

    November 18th, 2007 at 12:52 am (#)

    […] you have an employer that has no 401k matching contribution policy, it’s okay, it’s still worth it to […]