Thanks, everyone, for your encouragement on my post yesterday! I really appreciate it.
I called Shane’s employer’s human resources department with questions I had about his Roth 401k. I was directed to the “plan information line,” and a helpful representative answered my questions regarding maxing out the 401k. (By the way, a Roth 401k means we pay taxes on the contributions now, rather than when we cash it out at age 59.5).
This is important: He told me that the limits on how you can contribute to your plan could vary from plan to plan, so you should absolutely check with your HR department to learn specifics for your plan.
With our plan, we can contribute up to 50 percent of each paycheck to the 401k, but no more. I *think* that’s based on the gross paycheck, but I’ll need to confirm that as we get closer to “attack mode.”
We can change our contribution amount each month, but it could take one or two pay cycles for that change to take effect.
And, just to be clear, you can’t just write a check and send it to your 401k. It needs to come straight from your paycheck.
We’ll try to max out the 401k if and only if we still have our six-month emergency fund in place, and it still seems like a good idea at the time. A lot can happen in one year, and if we decide that maxing it out isn’t in our best interest, then we won’t.
But, assuming all systems are “go,” we’ll increase our contributions, so that we’re making close to the maximum contribution for several months toward the end of 2009.
We’ll likely go four or so months at around $400ish, then jump to $1500 to $1900 for the last few months until we hit $15,500 in contributions for the year.
That means that for the latter part of 2009, my husband’s take-home paychecks are going to be really small. We’ll have to use money from savings to live off in that time (NOT our emergency fund; rather, we’ll use savings specifically for this purpose).
Then, around December of 2009, whatever money we have left over after the max-out will go toward opening a Roth IRA.
We’ll see how it goes! It’s still a long ways off, but if we don’t start preparing for it now, we won’t be able to do it.
Interesting & Aggressive Goals!
I would suggest you modify your funding order to the following: fund 401k to company match, fully fund Roths (for both of you!), then finish funding the 401k.
http://www.usatoday.com/money/perfi/columnist/krantz/2005-11-25-retirement-accounts_x.htm
Congrats on the bump up in your emergency savings!
Hi LGB-
Thanks for that link! That’s helpful. I’m so new to 401ks and IRAs that I didn’t realize that you could withdraw your contributions from your IRA.
I wouldn’t want to do that unless I had some crazy, bizarre emergency (I think), since I do want that money to go to retirement, but it’s nice to know that option would be avaiable if we needed to use it.
We’ll be doing more research into funding our retirement, and give your suggestion heavy consideration.
And, about the bump in our emegency savings–our economic stimulus money arrived in our checking account today! Yay!
I’m curious as to why you’d rather fund the 401(k) in huge chunks at the end of the year, rather than in a steady stream over the year. By spacing your contributions steadily over the number of paychecks expected, you keep your income level throughout the year, and you will increase the balance more rapidly, which will assist you in achieving more in terms of compounding.
If you’re concerned about dramatically decreasing take home pay, why not ramp up to a higher contribution level by increasing the contributions by $100 per month. If you don’t miss the 1st $100, then increase it again the next month and then againg the next month until you reach a point where you feel that your budget is being stretched uncomfortably.
Finally, I am a huge proponent of putting any salary increases directly into your 401(k) plan. That way you actually get to keep all of the raise, rather than sharing a portion with the federal government [through taxes].
Finally, it really is important to put away as much as possible when you are young and your income is modest. As you are more successful in your career, and make more income, you may find that you are no longer eligible to contribute to deductible IRAs because of the income limitations. So, if you can comfortably contribute to both a 401(k) and IRA, than definitely do so.
Hi Pam!
We have a few reasons for not wanting to pay about $1291/per paycheck into the 401k for the year. Mainly, it’s to ensure that we will have enough money to live on for the entire year.
Right now, my husband’s take-home paycheck minus $1291 for the 401k is less than we need to cover our basic monthly expenses.
Going into 2009, we’ll need a few thousand in savings to live on for part of the year, if I’m not able to earn much money in 2009.
While funding our 401k is a high priority, paying our bills is the higher one, and we want to make sure we’ll be able to do that.
By starting out slow, we’ll be able to put aside some additional savings to pay our bills as the year goes on.
And, if we increase contributions by $100 (or so) per month, we won’t hit the max-out point by year’s end, I believe.
If my husband gets a raise between now and then, part of that will certainly go into our Roth 401k (but we pay taxes on it now, since it’s a Roth).
Thanks for commenting!