No employer match, Who cares?

I was just working on our Net Worth post and I was looking at this graph.

Asset Chart 010316 TW
Traveling Wallet’s asset allocation

and it just made me feel like man what a mistake!

Your assets graph made you feel like what a mistake? Really?!?!?

Yeah it did, and it’s that little orange section right there.

This post is part of my 30 day writing challenge. Each week I will be focusing on one topic. This week I have chosen to focus on Money. If talking about Money is your thing, don’t forget to come back everyday until Monday when I choose my new topic for the week.

5 years ago

5 years ago I didn’t know anything about retirement or a 401K, but I did know one thing about investing (thanks bro) and that was

That if Joe started investing at 25 and Mark started investing at 35, Joe would have more money then Mark even if Mark invested  for longer time. This article start investing today explains it in more detail. (Article assumes they both try to retire at the same age of 60).

So the one thing I did know was the sooner you start the better it is. Simple as that.

But what I’ve learned since then, and was really driven home this year during tax time, was that…

You can get an immediate win.

Sure all the money you put into a 401K or IRA when your 20 feels like its gone, gone forever. A plush retirement is a pay out very far in the future for a 20 year old. But you can get an immediate win. A win only as far out as the next tax season.

That win is dropping your earned income and therefore being able to keep more money for yourself.

If you have and employer and they offer a 401K and a match and you’re not contributing at all. Well that’s a shoot yourself in the foot moment. It’s a huge, huge mistake. You are giving away money. And no matter what you earn and what your life is like I think you can set aside 1 %. When you realize that you can live with out those $$ then you can up it and up it until you get your entire employer match.

401k match
Just a little rough example in case you don’t believe me. $11.60. Can you not spend just $11.60 for the entire month. With an employer match you automatically double your money.

No employer Match

Where things get a little gray is when there is no employer match. And that is what Mr. Roamers situation was way back when. In 2012 he was a contract worker. But he still had a 401K available to use. Just no match.

Back then we didn’t know better and all we thought was, well, with no match why am I going to lock my money away.

Why indeed?

The problem was there was no incentive to do it. Even though Mr. Roamer was stock piling money naturally, just because he didn’t spend as much as he earned. He still didn’t seem to want to part with it.

Hindsight is 20/20 and looking back it seems like it was a mistake.

We just didn’t know what we were missing. Not only would Mr. Roamer’s account be much bigger now. He would have also saved himself some money that could have been his instead of Uncle SAM’s. All because regardless if you have an employer match or not, YOU ARE dropping your taxable income by the amount you contribute. What I think was a mistake was forgoing a retirement savings plan just because there was no match and not understanding the tax benefits of contributing.

No 401K plan at all

Okay so I shouldn’t rule out my 401K even if it doesn’t offer a match, but my sister’s company doesn’t even offer her a 401K. What then?

Fine so your employer doesn’t offer you a 401K. Well, there are IRA’s and if you qualify and use the traditional IRA you get the deduction. Which means you get the tax advantage and lower your tax bill.

IRA deduction
See, no retirement plan at work = full deduction. Straight from the IRS site

This year, contributing to these accounts (our 401K and IRAs) was really driven home during our tax time. As we worked on our taxes, things started looking ugly. As in, it said we would owe. Finally! I located where to input our contributions to our IRAs and

BAMB! no bill!

We even lowered it enough to qualify for a refund.

Immediate win!

It’s money you get to pocket that you would have otherwise paid out.

Asset Chart 010316 TW

So why is looking at this graph make me think what a mistake?

It’s hard to play the “what if?” game. Nobody really knows what would have happened if they had done things differently in the past. But it seems like a mistake that the orange isn’t much bigger. That is why I wanted to tell you about it. Because if you aren’t saving into your 401K, then you should really reconsider, given all the information.

I know for us, it turned out alright either way. The extra money was being saved, not spent. So we were able to drop big wads of cash into our student loans once we realized the money would do more good there then sitting in our bank accounts.

If you are really a low…and I mean low earner this year there was even a tax credit for saving for your future.

But if you make good money and can drop yourself to a different tax bracket or lower your tax bill by maxing out your 401K and IRA then DO IT!  You should see some money back in your pocket after tax time.

IRA deduction 2
Just in case you want to know if you can deduct those IRA contributions with an employer retirement account. Straight from IRS site

So to reiterate

  • Save to get the employer match (this is a no brainier start with just 1% if you have to)
  • then save as much as you can until you max out your 401k
  • No 401K , Save in a Traditional IRA instead
  • Max out your IRA
  • All this means you are lowering your tax bill which means WIN!!

This really is a WIN WIN, your future self wins by having money be set aside for retirement. You WIN now by lowering your tax bill and keeping more of that money in your pocket.

Need to find out more about keeping more of your money by lowering your taxes. I highly recommend you check out the Mad FIentist tax avoidance section. Here’s a good post to start with.

What do you think? Should you save as much as you can into these 2 accounts to lower your taxes?

The Roamer traveling wallet

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6 thoughts on “No employer match, Who cares?”

  1. Thanks for your insight! Great reminder of the benefits! 🙂
    I try to explain the benefit of contributing to a 401k keeping the taxable amount of your income low to whomever will listen! I also contribute to a Roth IRA. I figure that gives me 2 sources of money in retirement, taxes & untaxed. We’ll see how that all works out when the time comes.
    If you increase your 401k by 1% at a time, I’ve found the amount saved in taxes makes my take home pay difference $5 or less. 🙂
    Two years ago I found the world of “FIRE” and realized I could be saving a lot more in my 401k, and the tax savings made it very easy to do (or easier to ‘stomach’). It involved challenging myself to make changes in my spending & then up the 401k incrementally. 1% here & there was a very smooth transition.

    1. Jacq
      Thanks for stopping by and taking the time to comment.
      I think a lot of people miss the part where you get to keep more of your money since you lower your tax burden. I agree with you, I also found that making a 1% increase at a time was very negligible when I got the paycheck. It was always something as small as $5-$10.

      Congrats on your journey! I hope the changes you’ve made have made you happier too.

    1. Yeah, looking back is frustrating sometimes. But if you haven’t heard the best time to start is now. Since we can’t change the past. Definitely find out where you fall in the income bracket. So that you can decided between a ROTH or a Traditional.

  2. I started maxing out my 401K in the second year. I wish I would have done it the first year. Just start doing it from the beginning and get used to the lower income. It will make a difference once it starts snowballing.

    1. Doing it now is so much better then never starting and being in the position most people are. So congratulations for starting. But I hear how you feel. I wish I would have started sooner as well. But at least it was going to debt repayment so it still helped in the long run.

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