Should I max my 401k?

by Mike

2011 was my first year of making contributions to a 401k.  I started my current job back in August of 2010 and began contributing to get the company match since I started.  This has given me a year and a half of consistent contributions.  Before that there was one other time I contributed to this form of retirement account and that was around five years ago.  As part of a long line of consistently bad financial decisions, I cashed it out when I left the job.

For the last several months I’ve been weighing the benefits of maxing the 401k versus continuing to contribute enough to get the company match.  This has been on my mind for a while and I lean towards not maxing it out.  If you’re reading this blog there is a good chance you spend a good deal of time thinking about money management decisions so I thought I would get a second opinion from you guys.  Before you can make a suggestion it will be helpful to know why I have decided not to max it out, then you can decide if you agree with my decision or think I should reconsider.

There are two main reasons I have not maxed my 401k.  First I don’t think I will benefit (much) from the tax break.  Since this is a popular reason for supporting the decision to contribute the max if you can it seems reasonable to start with it.  By working overseas I already earn a tax exemption for income up to 92,500.00.  So there is not much benefit from maxing.  However, and I just thought of this, I do have to pay state tax.  If I do contribute the max that would reduce my taxable income, right?  Hmmm…. something to ask the accountant about.

Second, I’m not crazy about the investment options offered in this account.  It’s a target date fund through Vanguard and as such gives me exposure to indexing and dollar cost averaging through the monthly contributions with low expenses associated with the funds.  I think I may be better off investing in my taxable account and reaping the reward of capital gain and dividend income.  For this to work I need to be earning a high enough return to offset the taxable events that are recorded in my taxable account. Can I do this?  Who know’s.  I only have one year of data to refer to so making a claim one way or another is rather arbitrary.

Just to be clear, it’s not about whether the money will be invested, it’s about where.

Leave me a comment and let me know what you think.  What would you do?

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