I don't understand the purpose of putting money into 401k or roth (new grad-ish here)

Google
payday

Go to company page Google

payday
Dec 3, 2020 629 Comments

Why should I put money into 401k that I cannot take out until im 65? Because it is not taxed?

So I will have millions in my 401k but I will be 65 years old so what is the purpose? Especially if I plan on retiring around 40-45.

Even with my employer (google) 50% match, I don't see the benefit.

Why don't I put 0% of my paycheck, and instead invest in a fund that will give me 5-10% per year? I can quite literally become a millionaire by 40 simply by investing this way, and I won't have to wait until 65 to get my money and enjoy it. What is the benefit of putting money away in 401k???

why have millions of dollars but no youth to spend it on?
#personalfinance #investments
edit: thanks guys for the explanations below! I get it now! Going to quickly max my 401k and roth!
edit2: Blind is really full of people who think they are geniuses huh, thank you to all the people who genuinely answered and helped, I will continue to learn and make sure I become a multi millionaire by 40!

comments

Want to comment? LOG IN or SIGN UP
TOP 629 Comments
  • Meh I’m not gonna need that money for awhile so 100% instant Growth with match and + 5-10% returns per year and no tax if I don’t need until I’m older sounds better to me over time.
    Dec 3, 2020 16
    • Salesforce / Eng
      MaskUp2020

      Go to company page Salesforce Eng

      MaskUp2020
      Dude, nobody making tech TC only saves the 401k max unless they have a nasty coke habit or numerous ex wife’s.

      You should be putting in 2x that + most equity and bonus into after tax savings.
      Dec 8, 2020
    • Boeing
      VAcH41

      Go to company page Boeing

      VAcH41
      Guys, they are trying to under why it’s beneficial to invest in a 401k when there are other options that grows money faster.

      Instead of jumping all over them, just say you don’t know and move on. Obviously, if you knew you would have answered the question instead of being a pretentious arse.

      401ks are liked because of the company matching and typically they are perceived as less risky.

      Like many said on here you don’t have to use it but it’s a benefit and sort of like leaving money on the table when you don’t use it. You also can borrow from yourself instead of banks. But if you think you can make more and retain it for the long haul do so. You can also elect to get on your company’s 401k at any point.
      Dec 8, 2020
  • Amazon
    isonqblbs

    Go to company page Amazon

    isonqblbs
    Because you can take out with 10% penalty and + tax any time. But you get to save money an taxes , collect gains on those tax write offs and also collect employer match and gains on employer match. If you don’t put it there it will get taxes and so will the gains on the investment .

    No 401k questions in Leetcode huh?
    Dec 3, 2020 4
    • Amazon
      isonqblbs

      Go to company page Amazon

      isonqblbs
      Should have googled it
      Dec 3, 2020
    • Google
      eXiN20

      Go to company page Google

      eXiN20
      Agree with Amazon. The other piece of this is time horizon. Even if op invests outside 401k and makes a million or two by age 40, who guarantees that those funds are going to last until 80 years old. Rather the strategy should be to maximize 401k AND invest on the side to get enough funds to retire early and have 401k funds that kick in at 65.
      Dec 6, 2020
  • Google
    x oogler

    Go to company page Google

    x oogler
    Let's do some math. For simplicity I'll assume that your effective tax rate is 30%

    You put x dollars in 401k
    Google matches 50%, so you get 1.5x
    If you need money now, you withdraw and pay 10% penalty+taxes. 1.5x*(1-0.3-0.1)=0.9x
    If you were to take the money as salary, you would've gotten 0.7x
    Max federal contribution = 19500
    19500*(0.9-0.7)=3900
    Easiest 4k bucks you'll ever make

    If you don't need the money now, you also get the benefit of pre tax growth
    You put x dollars in 401k, get 1.5x after match
    After a little while they grow (suppose) 10%, so you get 1.65x
    If you withdraw them, after penalty and taxes, you end up with 1.65x*(1-0.1-0.3)=0.99x.
    If you were to take the money as salary, you would've gotten 0.7x. After 10% growth it would've been 0.77x. After you pay taxes on growth that's 0.77x-0.07x*0.3=0.749x
    On 19500, your win is 19500*(0.99-0.749)=4699.5
    Note that this is 20.5% more than you would've gotten if you withdrew immediately because the pre-tax amount was growing
    Dec 4, 2020 7
  • Indeed
    inbread

    Go to company page Indeed

    inbread
    It’s a tax benefit - lowers your taxable income.

    It’s free money from your employer.

    Seems pretty obvious to me.
    Dec 3, 2020 8
  • Flagged by the community.