Need advice - to 401k or not?

[Foodstamp]

I am a brand new dividend investor, learning as much as I can from you experienced folks right now. I have a practical decision to make that I would love your help on. Namely, should I keep contributing to my 401k?

Here is my current situation:

I currently contribute the max to my 401k. It is through Vanguard and I have a mix of 4 low cost index funds that I invest in.

Unfortunately, my employer does not offer a match.

In terms of dividend stocks, I have no real portfolio to speak of so I'm basically just starting out on that side.

My question to you is - For 2015, should I keep investing in the 401k for the tax deferral, or should I lower my contribution to 0%, take that money and use it to accelerate building my dividend portfolio? My goal would be to have enough dividend income to retire in about 10-15 years.

My salary is currently $135,000/ year. My biggest expense is $2,100/ mo in child support (for another 15 years). To max out my 401k at 2015 contribution limits, that would equate to approximately 13% of my paycheck each month. I've calculated it out and will try to save approximately 50% of my after tax income each month for investing.

Thanks for any advice you can provide.

[EricL]

Generally I would recommend that if you aren't getting any company match and your choices for the 401k are limited you are better off going with a ROTH until you have those contribution maxed out and then put your remaining investments into the 401k.

Another consideration is if you are planning on going exclusively the DGI route for your retirement income, holding the funds in a cash account could save you taxes as qualified dividends are taxed at a much lower rate:

• Tax-free for those in the 10% and 15% brackets to the extent qualified dividend income remains within those brackets
  
• Taxed at a 15% rate for those in the 25% up to 35% tax brackets
  
• Taxed at a 20% rate for higher income taxpayers whose income surpasses the 35% tax bracket
  

Meanwhile, 401k withdrawals are all taxed as ordinary income and subject to required minimum distributions down the road and you also pay penalties if you need the funds before you turn 59 1/2. You didn't say how old you are in your original post, but if you plan on retiring before age 59 you may be better off going the cash account route.

[Dividend Watcher]

If you're not filing jointly, then you're above the income limit for a Roth and a Roth conversion although you can fund a conventional IRA and enjoy the tax free compounding now. Then, if you convert to a Roth after you retire (assuming your retirement AGI is below the threshhold) & pay the taxes at the time of conversion, you can enjoy some tax fee income.

Otherwise, you may want to stick with a taxable account instead as Eric mentioned. Since we don't know the details, you may want to see if you can find a fee only financial planner or a good Enrolled Agent (licensed to practice before the IRS and usually cheaper than a CPA) to do some modeling and come up with a plan. Just don't let them sell you anything.

You may want to contact Doug Meeks over at Seeking Alpha and see if he could work up a spreadsheet with the best method to approach this. He's a financial planner in Dallas who's very familiar with dividend growth investing. Don't know if he would do that for a fee without opening an account with him but wouldn't hurt to ask. I've talked with & emailed him over a topic I was thinking about and he's very professional and helpful and I know he knows the tax laws regarding IRAs.