That’s right, I no longer contribute to my four-oh-wunk (401k)….Am I crazy? Is this a mistake? Read on to see why I did what I did, and honestly let me know if you agree/disagree with me 🙂
If you are unsure about what a 401k is, I’ve talked about it in a previous post, so feel free to check it out! But to briefly sum it up, a 401k is a tax-advantaged retirement account provided by your employer/company that you can use to invest in mutual funds, ETF, stocks.
The “tax-advantaged” part is that you can deduct your contribution from your taxable income, which means you’ll pay less taxes today. The catch is that you’ll have to pay taxes at the time you withdraw the money, aka when you retire.
With that out of the way, let’s dive into the bread and butter of this post. One of my biggest goals is to reach FIRE in my 30s. And I’ve decided that contributing to my 401k no longer provides value to this goal. Reasons below!
No Access Until It’s Too Late
The biggest reason is that I will not be able to touch my money until I reach 59.5, literally double the ideal timeframe for my FIRE goal! In order for me to FIRE, I need to have cash flow that allows me to be independent of my day job, and my 401k straight up said “you cannot use your money until you’re 59.5” to my face.
Imagine someone said to you “give me your money, I’ll give it back to you in 20-30 years with interest, but you will not have access to it until then. And also, you’ll have to pay me if you want to use your own money before then.” Doesn’t sound too good now, does it?
Tax-Advantaged Gone Wrong
The second reason is taxes. Sure, I can deduct my taxable income with my 401k contribution now, but it will come back and kick my ass when I withdraw.
This is not a Roth IRA where my gain/dividend is tax-free, and it’s not a taxable account where my gain/dividend is taxed as capital gain (usually at 15% for long-term investment).
401k withdrawal will be taxed as ordinary income, and it will be taxed at your highest tax bracket at the time of withdrawal as applicable.
Useless Matching Benefits (mostly)
The third reason is that matching benefits, one of the biggest reasons why people put money into 401k, does not outweigh the previous reasons.
Typically for 401k, your company would have a matching plan, where they would also contribute to your 401k on top of your contribution (this amount varies). Most companies have a catch called a vesting schedule. Basically, if you leave the company before x amount of years, you will not receive that match. This, in my opinion, makes matching a little bit useless when/if you switch jobs after 2-3 years.
So Am I Throwing Away Free Money?
Yes, I am fully aware that I will be losing out on the “free” money from my employer, but it is something that I am willing to take in return for having access to my money.
To me, 401k is too illiquid and it’s the biggest reason why I’ve decided to stay away from it. I believe that there are other investment accounts better suited for my FIRE goal. On a side note, the broker my company uses to manage 401k is horrible, truly one of the worst that I’ve used 😀
With that said, I am still planning to max out my Roth IRA. To me, Roth IRA is a much better retirement account: it is liquid in the sense that I can withdraw my contribution at any time, and my gain/dividends will be tax-free, no matter how much my income is in the future.
The rest of my money will be invested in my taxable account. This, in time, will build up my cash flow with a growing dividend and at a lower tax rate. Hopefully, this will come to feed me one day. How about you? Do you think that I’ve made a huge mistake by not funding my 401k?