How much should I contribute to my 401K?
- 25 years old, single
- No debts of any kind
- 25% Tax rate
- Employer contributes 3% of my salary to my 401K, regardless of my contributions to the plan. In other words, the amount they contribute does NOT change whether I contribute $0, or the max allowed by the IRS.
I also have a Roth IRA, and I try to contribute the maximum allowed amount every year.
Given that I'm currently saving for a down payment on my first home, I'll probably contribute very little, or none at all to my 401K during this first year. But looking forward, does it still make sense to set money aside in this 401K plan?
I know some of the tax advantages of leaving it in a 401K, but it still makes no sense to me since the money will still be taxed years from now when I retire.
Wouldn't it be better to pay those taxes now, get my money and invest it somewhere else?? What am I missing here?
Thanks in advance. Any help would be appreciated.
To answer your concern Madoff.. I can't claim to have 6-8 months of my salary saved up, but I do have some cushion in an emergency fund. You never know these days, but I consider my job to be pretty safe. Fortunately, I can also count on my family in case of financial hardship.
As far as the 20% down payment.. I believe you're right on track and we share the same philosophy. I'm planning on putting at least that much money on the table.
Sassy, this might be a rookie question, but there's one thing I still don't understand.
What do you mean when you say that my tax-rate will be less on retirement?? With the career opportunities that (hopefully) will be coming my way, and a continuous increase in my income, am I not supposed to end up in a higher tax-bracket by the time I retire??
I like that 15% savings strategy.. never thought of it that way.