Company 401K FUNDING

Submitted by Phillip Moore on Wed, 2022-12-07 18:04

I am 24 years old and am employed with a company that offers a 401k Plan. I have not chosen to contribute to the plan in the two years that I have been there. I have been able to save a substantial amount of money that I currently have in a traditional savings account with my bank. I would like to begin contributing to my company 401K on a regular basis but first I would like to invest a good portion of may current savings into a retirement plan. I have checked but don’t see a retirement plan option that allows me to contribute as that much in a years time. I read about an option called “401k Swap” and was wondering if this would be a good option. From my understanding, I would sign up for my company 401K Plan (Traditional 401k or ROTH 401k) and contribute a certain percentage each monthly pay period to equal the amount that I would like to invest in a years time. I believe that if I do this in 2023 I can contribute up to $22,500 per year into the 401k Plan. I will use the funds currently in my savings for my personal expenses to offset the lower amount I will net each month in my monthly paycheck.

Is the “401K Swap” a legitimate plan that makes sense? It seems that I would be reducing my taxable income significantly by contributing this much to a Traditional 401k plan. I would only do this for 1 year. Are there other options to invest that much into a retirement plan in a year?

Thanks!



Submitted by Alan - IRA critic on Wed, 2022-12-07 18:37

  • If your 401k offers a company match, that’s “free money” you have missed the last 2 years, and your bank savings account has probably paid almost no interest, at least until recently.  You also qualify for IRA contributions of 6000 for 2022 and you can make that contribution up till 4/15/2023, and 6,500 for 2023 which you can make till 4/15/2024, but IRA contributions do not receive a matching contribution unless you qualify for the Savers Credit based on your income.
  • What you asked about appears to be just dipping into your savings to finance a temporarily larger 401k contribution than you would otherwise be able to afford. That’s fine as long as you maintain an adequate emergency fund for unexpected expenses. 401k contributions are locked in while you still work there, except for loan features, which are best to avoid.
  • In both IRAs and 401k plans you have a choice between pre tax contributions and after tax Roth contributions. Which is better depends on your situation and assessment for the future. A Roth account will eventually be qualified and fully tax free (at 59.5), whereas your pre tax accounts will be taxable when you take distributions, with a 10% penalty until 59.5. If you feel your future job prospects and earnings are good and you will soon be in a higher tax bracket, you might direct your contributions to Roth now, and then switch to pre tax when your tax rate rises. And nothing wrong with splitting your contributions to the 401k between pre tax and Roth, so you will have some of both. Any company matching you receive always goes into your pre tax account. Your plan probably also allows you to change your % contributions periodically and change your investment direction as well, so there is plenty of flexibility with most plans. Check with HR for the details and also with a trusted co worker familiar with the plan provisions. 

Submitted by David Mertz on Wed, 2022-12-07 19:48

If you are eligible to contribute to a Roth IRA, it makes sense to contribute your emergency funds to a Roth IRA because at any time you can take a distribution from your Roth IRA up to the amount of your contributions and not own any tax or penalty.   The same cannot be said for your 401(k) contributions.  Contributing to a Roth IRA also starts the 5-year clock for qualified Roth IRA distributions, which could be beneficial if you ever want use any of the earnings in the Roth IRA to fund a first-home purchase.

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