401k Noob Question -

Submitted by BlueDoe1775 t3_10q7h73 in personalfinance

Hello everyone!

I am very new to investing/retirement planning and taking a look at my 401k, I have some questions I hope someone can help me with. If you take a look at my post history, you'll see I'm paying off $15k worth of CC debt and I have gotten the balance down to $3k before I start to pay back my parents.

Now for the 401k:

  • I currently have 10% going towards before tax contribution and 2% going towards Roth. Is this smart? I have a basic understanding that the Roth is after tax dollars and I won't need to pay taxes on this in the future but are the percentages ok? Do people flip flop yearly?
  • My job matches 35%, but how do I know I'm putting in enough to get this match? I would like to put in just that amount and keep working on my debt payoff.
  • Is it smart to keep my 401k going as I tackle my debt? I know some people stop it, but that's free money that would go out the window.
  • My 401k is invested in "REKTX", I have no clue what this is besides each share is around $20. Could I switch this to the S&P 500? I have my 401k through Empower.

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I only have about $6k in my 401k and a few hundred in a TSP I need to get rolled over.

Thank you all for your help! This sub has changed my life...

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thegelatoking t1_j6oas22 wrote

  • it's fine. save yourself the trouble and just leave it; no need to flip flop.

  • Job would state something like "matches 35% up to $X" read how much it will match up to. Then you can put just that exact amount.

  • contribute enough to get the full match which is free money.

  • pick a target date fund closest to the year you turn 60-65 years old

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Spiritual_Jaguar4685 t1_j6ocd2t wrote

Great questions! I'll do my best.

1a) In general splitting investment money between pre- and post- tax vehicles is smart. Good for you! Yes, Roth accounts function sort of like super high interest savings accounts. After a few years you gain the ability to extract your principal (the money you put in) just like a bank account with zero hassle or tax problems. Obviously I'd recommend not doing this but it's nice to know in case of emergency.

1b) The issue is that your ability to put money into Roth accounts varies based on your income. At a certain point you're no longer allowed to put money into Roth accounts if you earn too much money. I'd recommend you talk to a "fiduciary financial advisor" about this as your specific case is for you only.

2a) Your job matches 35%? Of what? That sounds like a confusion. Most jobs match based on your salary. So terms to look for are a percentage MAX and a percentage rate. For example my employer matches half of my contribution up to a maximum of 3%. So I need to put in 6% of my annual salary in order for my employer to give me 3% of my annual salary as a match. It doesn't sound likely to me that your employer actually matches up to 35% of your annual salary, if they do, that's a sweet gig.

2b) You should talk to you HR or payroll departments to clarify the match and figure out what you need to contribute to get your maximum match. Yes, then stop contributing and pay off your high interest debt. Maximize first, then pay off the debt is the "smart" path, if you can afford it.

  1. Yes, I think it's smart to maximize your 401(k) match first, then pay off debt. I wouldn't go over the match though, I'd get it, and then pay off debt.

4a) REKTX is something called an mutual fund that is designed to appeal to people who want to retire around the year 2055. It's basically geared to be in high risk/high reward investments now and slowly over time move money to low risk / low reward investments as you get closer to retirement. That way you know what you have at retirement and aren't at risk of a market crash making you bankrupt the day you retire.

4b) Personally, I'd just keep dumping money into the 2055 fund if that sounds like approx. when you're going to retire. There are other funds usually in 5 year brackets you can jump to if that's not the case. If you're looking more like 2040, or 2065, there are funds that you can switch to for that. Personally, I'd not recommend the S&P 500 as an "all in" plan as that's a very high risk basket for "all your eggs". The retirement date funds are intended to be a "fire and forget" type of long term investment and are perfect for people who don't' want to micromanage their finances. If you are interested and would like to take more control over your investments again I'd advise you get a fiduciary investment planner to help you.

As a final word of advice, the key word in hiring someone to help you here is "fiduciary'. That term means they are legally bound to advise you and make choices in your best interest, and you pay them for their time. If they don't have that term, then they don't have that legal restriction and can advise you to do whatever they feel like, including expensive services that they receive kick backs or compensation for selling you on. Fiduciary agents work for you to make you money, non-fiduciary agents work for banks and financial services to make them money.

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BlueDoe1775 OP t1_j6odjaw wrote

Oh my goodness, thank you so much for taking the time to write this out. I truly appreciate it. If I wasn't in debt, I would give you gold, haha!

I'm not a high earner (yet) and make $52k pre tax so I don't think I'll reach that threshold super soon.

I will send an email right now about the match because yes, the 35% on it's own just doesn't make sense to me.

I'll keep my 401k in that mutual fund for now as 2055 is approx retirement age for me.

Again, thank you so much! I will come back to this comment when I am confused.

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Spiritual_Jaguar4685 t1_j6ofkzg wrote

Ok, I didn't want to ask your salary, but since you offered it I can update my advice.

In theory, your debt is "bad" debt, meaning your interest is more than you'll likely get on the market.

The 401(k) is free money, so absolutely get that match first.

Then get rid of your credit card debt.

After that, shift to the Roth IRA. In theory you are in a "low" tax bracket at the moment, our current income taxes rates are historically low AND you're not a super high earner. That means the "smart" bet is paying your income taxes now rather than in retirement. Once you start to earn around $73k the law starts to reduce how much you're allowed to put into a Roth IRA, at ~$82k you can't anymore.

So here's the plan for you - get your match, pay off your debt, then start pumping up your Roth IRA. You're allowed to put in a maximum of $6,500 into your Roth IRA right now, I assume you won't be hitting that level but if you can, do it.

If you're a super-saver and you can save beyond the $6,500 or your get more compensation start going past the $73k limit, then start moving your contributions back to the 401(k).

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BlueDoe1775 OP t1_j6ohbqf wrote

This is exactly what I will do, thank you!

I chose FSKAX for my Roth IRA, is it suggested to invest in different things for the Roth IRA or keep it all dumped into one fund?

I'm going to try my hardest to max it out after I pay off my debts!

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BlueDoe1775 OP t1_j6p6xav wrote

I just got word back that they match 35% of whatever I put in, once a year.

Does that sound normal? Like if I put in $10,000 a year, they'll put in $3,500.

Does that mean I should max it out if I can afford that?

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PolarisB t1_j6oe7qn wrote

  1. I mostly hear people say max out your 401k before putting money into a Roth. I personally invest more in my 401k, but do put some in my Roth just to have a balance.

  2. Your job likely matches 35% up to a certain percentage of your paycheck, so you'll need to find out what that is through your employer. For example it might be 35% of the first 6% that you put in. In this example on a 100k salary you would put in 6k and they would put in 2.1k. Then any extra you put in doesn't get matched by them.

  3. I would recommend putting in the minimum required to get the full match of your employer (if you can afford to) then focus the rest of your money on paying off your debt.

  4. REKTX is a target date retirement fund. Basically it's more aggressive early on and closer to your retirement date it will get more conservative to make sure you don't lose a lot of money right before you need it. My 401k has a similar target date retirement fund and I asked a financial advisor the same question. Basically you can invest it in something else like the S&P 500 if you really want, but that will need to be done manually by you and it's just more effort. My personal recommendation would be to leave the 401k on what it is and put your Roth investments in S&P 500 if you want stock in that.

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BlueDoe1775 OP t1_j6oiut8 wrote

Thank you so much!! I just asked HR about the matching question. It's hard to put into words but I will get to the bottom of it

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