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October 8, 2013 at 9:08 am
JonahI was listening to the Wallet Doctor on the radio this morning and I’m not sure I understood his advice to a caller.
The caller was explaining that his employer was no longer going to match his 401K contributions and wondered if it would be better if he did something else with his monthly $ investment instead of investing it in the 401K plan.
Here’s what I need clarification on: 1.
I belive Dave said to stop investing in the 401K and to #1, build a 3 month emergency fund with this $ and after that time return to contributing to a retirement plan.
Does that sound like a D.R.
philosophy? 2.
If an employer is NOT matching 401K contributions, I believe he suggested depositing the same funds into a Roth IRA fund rather than the 401K plan.
I had thought that it was better to contribute to the 401K as the tax on this income is deferred but if I understood Dave, he was saying that it was better to be taxed on the income now and take those funds and deposit them into a Roth IRA plan (with no tax to applied when I withdraw one day, correct?).
Thank you for your guidance, CindyOctober 8, 2013 at 9:10 am
KennyI should say I didn’t hear the show so I don’t know what step in the plan the caller was on. If the caller wasn’t to the investment step, then I can completely understand making sure there was liquid funds for the 3 to 6 month fully funded emergency fund step. This holds true for anyone, why invest your money in a vehicle you will be penalized to early withdraw from if something catastrophic should happen.
Dave’s usual advice on 401K’s is to contribute up to the point where you receive your companies match. If the company isn’t matching, there is no benefit to using the 401K versus a Roth. You’re going to be taxed on one end or the other, and Dave hasn’t ever dabbled in advice on when it was best to pay the tax to the KGB oops IRS.
Sharon H.
[MOD EDIT: URL removed]October 8, 2013 at 9:12 am
BentonIf you are not getting the 401K match you should max out the Roth IRA because the money will be tax free in the future.
So if you are at the point of investing, you should put money into your 401K up to the company match, put the rest into the Roth, then go back and put more into the 401K.
I am assuming they have the emergency fund in place.
We can’t do Roths so we just max out our 401k and invest the rest at Vanguard.October 8, 2013 at 9:15 am
Nigel1) I belive Dave said to stop investing in the 401K and to #1, build a 3
month emergency fund with this $ and after that time return to
contributing to a retirement plan.
Does that sound like a D.R.
philosophy? If the caller did not have his 3-6 month emergency fund in place, then yes this is correct.
2) If an employer is NOT matching 401K contributions, I believe he
suggested depositing the same funds into a Roth IRA fund rather than
the 401K plan.
I had thought that it was better to contribute to the
401K as the tax on this income is deferred but if I understood Dave, he
was saying that it was better to be taxed on the income now and take
those funds and deposit them into a Roth IRA plan (with no tax to
applied when I withdraw one day, correct?). Yes, all growth in a ROTH is tax free. You pay tax on the money going in, but not coming out. That’s why these are sooooo great!! Blessings, Deb <*)))October 8, 2013 at 9:19 am
MurrayThank you for all your great advice.
It all makes complete sense.
I’ve been struggling and hardly able to contribute at all to my emergency fund.
I’m relieved to learn that it’s o.k.
NOT to continue to contribute to my 401K unless 1) I have my emergency fund in place and 2) unless my employer should decide to match contributions (and I don’t see that happening) I will instead contribute to a Roth.
Thank you, thank you!!! But I’m also extremely relieved to know I have a means of creating the emergency fund.
I was beginning to panic over the fact that I just don’t seem to have the $ to save fore the emergency fund after the basics are paid for every month.
I know, I’m a catastrophy waiting to happen!!! Cindy -
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