How do you compare the value of a 401k match with salary?

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durazno

How do you compare the value of a 401k match with salary?

Post by durazno »

If you're negotiating compensation at a new job, how do you compare the value of a 401k match with your salary?

For example, if an employer pays a match of up to 6% of your gross salary, and you earn $100,000 per year in salary, do you value the 401k match at $6,000? Or is the match worth more than that, since it's tax deductible?

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G-Money
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Re: How do you compare the value of a 401k match with salary

Post by G-Money »

I value the match the same as gross salary. So, in your example, $6,000 in match is worth exactly $6,000 to me.
Don't assume I know what I'm talking about.
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mhc
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Re: How do you compare the value of a 401k match with salary

Post by mhc »

The match will get taxed when you withdraw from your 401k, so it is not tax free.

Assuming if the extra $6000 came as pay and you would invest it, then you would receive $6k *(1-Tax Rate - FICA). FICA may not be the full amount (6.2%+4.2%) if you normally max out SS contribution. If it goes into the 401k, I believe you will avoid FICA and pay taxes at your rate in retirement, which could be lower.

I think the $6k in the 401k is more valuable. You would have to plug in your exact numbers to see how much. Assume that you invest the money for the same amount of time with an expected return. Since the 401k has more money invested, it will win. By how much, depends on your circumstances.
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Re: How do you compare the value of a 401k match with salary

Post by Epsilon Delta »

mhc wrote:Assuming if the extra $6000 came as pay and you would invest it, then you would receive $6k *(1-Tax Rate - FICA). FICA may not be the full amount (6.2%+4.2%) if you normally max out SS contribution. If it goes into the 401k, I believe you will avoid FICA and pay taxes at your rate in retirement, which could be lower.
The employer share of FICA (6.2%) is not a cost to the employee, and should not be considered when evaluating a compensation package.
mhc wrote: I think the $6k in the 401k is more valuable. You would have to plug in your exact numbers to see how much. Assume that you invest the money for the same amount of time with an expected return. Since the 401k has more money invested, it will win. By how much, depends on your circumstances.
Multiplication is still commutative. The only thing that matters is the difference between current marginal tax rate and marginal tax rate in retirement.

If you don't max out your (and your spouses) tax deferred space a 401k match is not worth more than the equivalent cash.

Since the original question was about negotiating compensation, rather than evaluating compensation, the usual answer is to ignore it and let the HR representative talk up the match. When the position is reversed (going from a job with a good match to none) is when you have to keep mentioning you're losing the valuable match.
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Re: How do you compare the value of a 401k match with salary

Post by momar »

Depends on how much I am making. If its way more than I need, the match is very valuable. If it's just enough to meet my needs, the match is worthless. If it is a little more than that, the match is worth less than the equivalent salary; how much less depends on how far I am from retirement. And so on.
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Re: How do you compare the value of a 401k match with salary

Post by mhc »

Epsilon Delta wrote:
mhc wrote:Assuming if the extra $6000 came as pay and you would invest it, then you would receive $6k *(1-Tax Rate - FICA). FICA may not be the full amount (6.2%+4.2%) if you normally max out SS contribution. If it goes into the 401k, I believe you will avoid FICA and pay taxes at your rate in retirement, which could be lower.
The employer share of FICA (6.2%) is not a cost to the employee, and should not be considered when evaluating a compensation package.
mhc wrote: I think the $6k in the 401k is more valuable. You would have to plug in your exact numbers to see how much. Assume that you invest the money for the same amount of time with an expected return. Since the 401k has more money invested, it will win. By how much, depends on your circumstances.
Multiplication is still commutative. The only thing that matters is the difference between current marginal tax rate and marginal tax rate in retirement.

If you don't max out your (and your spouses) tax deferred space a 401k match is not worth more than the equivalent cash.

Since the original question was about negotiating compensation, rather than evaluating compensation, the usual answer is to ignore it and let the HR representative talk up the match. When the position is reversed (going from a job with a good match to none) is when you have to keep mentioning you're losing the valuable match.
Your statements do not make sense to me.

A person can only invest what they have after income taxes and FICA. Does an employee ever pay FICA on a company match? Does an employee making $100k pay FICA on $6k in additional pay?

401k avoids cap gains. Taxable investing doesn't necessarily.

If tax rate is different now than in the future, then the commutative property of multiplication does not hold as you mentioned.

The question is how do you compare. The context is negotiating. I think you have it backwards.
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Re: How do you compare the value of a 401k match with salary

Post by Dutch »

I would value it at a little more than gross wages. Net after taxes would be a little higher than regular gross wages. Since it will be subject to (presumably) lower taxes at withdrawal.
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Re: How do you compare the value of a 401k match with salary

Post by nisiprius »

How quickly does the match vest?
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Re: How do you compare the value of a 401k match with salary

Post by MathWizard »

Count it as $6K.

It is worth more if you needed more tax advantaged space, and couldn't get it.
(IRA's max, Max in 401K, but this amounts to somewhere close to $30K, not even counting
any 529 plans or spousal IRAs.)

It is worth less if you need the money now, or the plan is bad, since you might be able to
invest better if you had the $6K.

On balance, I expect nether is the case, so only the fact that it is forced savings (an incentice for your saving)
has extrra value.
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Re: How do you compare the value of a 401k match with salary

Post by Epsilon Delta »

mhc wrote:
Epsilon Delta wrote:
mhc wrote:Assuming if the extra $6000 came as pay and you would invest it, then you would receive $6k *(1-Tax Rate - FICA). FICA may not be the full amount (6.2%+4.2%) if you normally max out SS contribution. If it goes into the 401k, I believe you will avoid FICA and pay taxes at your rate in retirement, which could be lower.
The employer share of FICA (6.2%) is not a cost to the employee, and should not be considered when evaluating a compensation package.
mhc wrote: I think the $6k in the 401k is more valuable. You would have to plug in your exact numbers to see how much. Assume that you invest the money for the same amount of time with an expected return. Since the 401k has more money invested, it will win. By how much, depends on your circumstances.
Multiplication is still commutative. The only thing that matters is the difference between current marginal tax rate and marginal tax rate in retirement.

If you don't max out your (and your spouses) tax deferred space a 401k match is not worth more than the equivalent cash.

Since the original question was about negotiating compensation, rather than evaluating compensation, the usual answer is to ignore it and let the HR representative talk up the match. When the position is reversed (going from a job with a good match to none) is when you have to keep mentioning you're losing the valuable match.
Your statements do not make sense to me.

A person can only invest what they have after income taxes and FICA. Does an employee ever pay FICA on a company match? Does an employee making $100k pay FICA on $6k in additional pay?
Does an employee ever pay $10.4 (10.4%) FICA tax on an additional $100 in pay? I'm assuming your using last years FICA rates and including the employer share, but perhaps you're making a different error.
mhc wrote:
401k avoids cap gains. Taxable investing doesn't necessarily.

If tax rate is different now than in the future, then the commutative property of multiplication does not hold as you mentioned.
I commented on the advice you gave, not the advice you didn't didn't. You said "Since the 401k has more money invested, it will win." This is complete and utter garbage.

One thing to note is there are diminishing returns to additional tax deferred space. There is a bigger advantage to getting the first half of your assets into tax deferred accounts than getting the rest of your assets into tax deferred accounts. Getting an additional $6000 of tax deferred space from an employer match rather than cash is providing additional space, so it is less valuable than simply having a 401(k) available in the first place. It could well be that the extra value is close to zero.
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Re: How do you compare the value of a 401k match with salary

Post by mhc »

Epsilon Delta wrote: I commented on the advice you gave, not the advice you didn't didn't. You said "Since the 401k has more money invested, it will win." This is complete and utter garbage.
The $6k of employer matching is never subject to FICA. The $6k of extra income would have to pay FICA (you are correct tha10.4% was wrong, it should be 6.2%).

That alone shows that the 401k has more money invested. What is the complete and utter garbage?
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Re: How do you compare the value of a 401k match with salary

Post by momar »

mhc wrote:
Epsilon Delta wrote: I commented on the advice you gave, not the advice you didn't didn't. You said "Since the 401k has more money invested, it will win." This is complete and utter garbage.
The $6k of employer matching is never subject to FICA. The $6k of extra income would have to pay FICA (you are correct tha10.4% was wrong, it should be 6.2%).

That alone shows that the 401k has more money invested. What is the complete and utter garbage?
The 6k of extra income gets you more social security.
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Re: How do you compare the value of a 401k match with salary

Post by mhc »

momar wrote:
mhc wrote:
Epsilon Delta wrote: I commented on the advice you gave, not the advice you didn't didn't. You said "Since the 401k has more money invested, it will win." This is complete and utter garbage.
The $6k of employer matching is never subject to FICA. The $6k of extra income would have to pay FICA (you are correct tha10.4% was wrong, it should be 6.2%).

That alone shows that the 401k has more money invested. What is the complete and utter garbage?
The 6k of extra income gets you more social security.
I was thinking about this more this morning. A higher salary will more likely compound to a higher salary. A 401k match more than likely won't.
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Re: How do you compare the value of a 401k match with salary

Post by grabiner »

icedtea wrote:If you're negotiating compensation at a new job, how do you compare the value of a 401k match with your salary?

For example, if an employer pays a match of up to 6% of your gross salary, and you earn $100,000 per year in salary, do you value the 401k match at $6,000? Or is the match worth more than that, since it's tax deductible?
If you aren't maxing out the 401(k), the match is of equal financial value. If you earn $100,000 and contribute $10,000 to a 401(k) with a $6000 match, you are in the same situation as if you earn $106,000 and contribute $16,000 to a 401(k) with no match. It's actually slightly better, because you don't pay SS and Medicare tax on the $6000. If you are maxing out the 401(k), the match has the advantage that it gives you more tax-deferred savings; an extra $6000 of salary which you would have to pay tax on and invest in a taxable account is not as good as $6000 in a 401(k).

But there are two reasons the match may be inferior. One is that it is politically much easier for an employer to reduce or terminate the match than to cut your salary. The other is that it reduces your reported salary; if you have a salary of $100,000 plus a $6000 match, you can only qualify for a $28,000 mortgage payment under a 28% housing-to-income rule. The reported salary may also put you in an inferior position if you negotiate for a new job somewhere else; employers request a "salary history", not a "total compensation history".
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Re: How do you compare the value of a 401k match with salary

Post by Watty »

nisiprius wrote:How quickly does the match vest?

+1


Even though there are tax advantages the any delayed vesting will make it worth less.

This is especially true is you are not maxing out all your and your spouses retirement accounts including any catch up amounts if you are over 50. In your example if you were not maxing out all your retirement accounts then they could pay you $106K and you could make an additional $6K contribution with out having to worry about any vesting issues. That would be worth a lot more than a $6K match that needed to vest over a few years.
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Re: How do you compare the value of a 401k match with salary

Post by market timer »

I value $1 in 401K the same as $1 in taxable. My marginal tax rate is approximately 40%. Therefore, receiving a $6K match is equivalent in my mind to receiving an extra $6K post-tax, or $10K pre-tax.
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Re: How do you compare the value of a 401k match with salary

Post by john94549 »

It gets complicated, as many threads and posts herein illustrate. Some 401Ks are better than others. It benefits you little if the 401K match is 3% but the ER of available funds in the 401K is in the order of 1.5%. Another employer, for example, offers a 401K with low-cost Vanguard funds with ER's at 0.05%, and the same 3% match. I doubt most folks dig deep into 401Ks when job-hopping, but it's not a bad idea. And vesting is a huge issue. A 401K vested from day one is ever so much better.

My wife literally "lost" about $100K from a 401K plan when she was fired before she vested.
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