401(k) strategies: Should money be taken out before or after taxes?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
 1. Cell phone life expectancy
 2. MLM question
 3. Discovering new music
 4. Asking for money at wedding
 5. Cold homemade laundry detergent
 6. Prayer
 7. 401(k) withdrawals: before or after taxes?
 8. Pennies
 9. Interest rate versus APR
 10. Interest rate increase

Everyone in my family has brown hair except for our youngest child. I’ve never noticed any effects on my hair from the swimming other than it feels soft after swimming and loses a bit of shine.

Recently, after one of our regular swim sessions at a local pool, a person asked us if our youngest had ever had green hair from swimming (as his hair is very light colored). She suggested (from experience) that we should use conditioner in his hair just before getting in the pool.

Given that her hair looked great, I thought this was a tactic I’d pass on to any readers who were spending a lot of time in the pool this summer.

Q1: Cell phone life expectancy
 I’ve just spent several weeks, several hours trying to fix my cell phone through the store (they replaced my SIM card because the old SIM cards weren’t working on the new 4g network). Through their tech support. Their final solution was a hard reset (wiping my phone clean and starting over again). So far so good, except I still have the same original problem. The phone wasn’t synching with my email accounts, calendar or contacts.

In the setting back up phase, I have just found out that my Windows Mobile 6.x operating system is no longer supported by Microsoft. They are forcing everyone to move to Mobile 7, i.e., new phone. The apps store is no longer available, including the software to sync to my PC.
 I just tried an alternative way of syncing through my gmail account. It’s not working either.

Apparently, my 2 year old phone is obsolete. I feel like I’m being forced to migrate to a new phone.

I don’t do games, internet or need apps.
 I just want text, email, calendar and contacts on my phone. Right now, I get 25% of what I want and what I had.
 I use Wi-Fi, no data service needed.
 The big thing, I want something that’s going to last 4-5 years.

SO NOW, I’m researching a new cell service and phones. Decided to check which might have the longest life expectancy. Of course, there’s no such research, except some antecdotal information. Looks like the average life expectancy on a cell phone is 12-18 months.

I am willing to give up email, meaning give up the smart phone for something simplier, if it means I can keep the same phone for 4-5 years.
 Is that so unrealistic?
 What are the cell phone companies intentions? Are they going to push everyone to smart phones?
 What’s the average life expectancy of the simpler phones? Is it better than the smart phones?

Do I go with the newest operating systems and the newest device? With the assumption that they all have about the same life expectancy and just leapfrog the timing. And lower my expectation of longevity to a maximum of 2 years? I hate that idea. That goes against every frugal fiber of my being.
 - Cal

Your biggest concern seems to be software obsolescence on your cell phone, and that’s a tough situation. The cell phone market moves pretty quickly through software on the major smartphone operating systems (Windows, Android, and iOS).

The reason for that is that most cell service providers operate contracts on a two year basis and then offer heavily discounted phones for new contract signings, meaning most people do replace their phones at around the two year mark. The entire market basically revolves around the idea that everyone’s switching their phones in two years.

If I were you, I’d just get the best “free” phone from your provider of choice and hop on the two year rotating bandwagon. It’s what I’ve been doing for more than a decade now and it’s worked fine. Even the low-end phones have most of the features you describe. For example, U.S. Cellular – my provider – offers two phones for free with a new contract that do everything you describe. Other providers have similar low-end offerings.

Q2: MLM question
 I have a question about MLMs if you have time. A friend of mine is doing zeekler and says she is able to make a lot of money with almost no work. This always is a red light to me because I believe it almost always takes work to make a lot of money. Do you have any opinion on zeekler? Thanks in advance!
 - Andy

Zeekler in essence works like nearly every other MLM/network marketing business out there. Essentially, anyone can sign up to sell the product for a commission, which in this instance is auction bids, but it takes a lot of effort to sell these bids. So how do people make money? They convince other people to sign up to sell the product, using the original person as a referral, and the referrer gets a cut of the sales commission.

All of these systems work using more or less that same model. You only make a lot of money if you’re near the top, meaning you have a lot of people you’ve referred who are out there making sales.

Your friend might be in this position with zeekler, but it’s also very likely that your friend is mostly just seeking another rep that used them as a referral – in this case, you.

I don’t like this business model very well. While there is nothing inherently dishonest about it, the nature of the system tends to draw in people who use really shady practices, plus it’s often hard for people just starting out to build a big empire of referrals as the market is already saturated with them.

Q3: Discovering new music
 How do you go about discovering new music? All of the radio stations around here seem to play the same eight songs over and over again. I like some of the music my kids listen to but a lot of it is awful. There’s got to be a better way of finding interesting new stuff.
 - Jerry

I usually either use Youtube or Pandora.

With Youtube, I just look up videos of songs I know I like, then follow the “recommended videos” links a few times until I start seeing videos for music I’m unfamiliar with. As long as I stick with music that I know I like, I’ll usually end up finding stuff that’s at least tolerable. For example, last week I spent a lot of time discovering Shirley Bassey on Youtube.

With Pandora, you can set up a radio station based on an artist that you like. That station will mix in songs from other artists, and you can vote these new songs up or down to help Pandora figure out what you like and don’t like. I’ve found a lot of music this way.

Q4: Asking for money at wedding
 I am a recent law school graduate who is getting married in October. Currently jobless, although there is part time work waiting for me in August after the bar. My fiancee is a PhD candidate on a stipend. Needless to say, we both have some sizable student debt.

As we were getting our wedding registry together, it occurred to me that we really don’t need much at all. “Need” is even too strong a word for our situation. We’ve either thrifted everything or got it second hand through family. It all works, and I can’t imagine why we need new items that serve the same function at this juncture in life. They’d be nice, true, but they aren’t necessary.

And so, I thought, what are some things that are holding back the next stage of our lives? What could people really help us with, as generous family and friends are prone to do for weddings?

My answer: our student loans. Realizing, of course, that the social sentiment of gifts is important, and that my idea is a bit weird for the circumstances, I’m wondering whether we should just be asking for money to help us start our lives. On one hand, I don’t want people to feel offended by that request; it could be viewed as too forward. On the other, our loans are truly the biggest impediments to getting to that next phase of our lives together. My friends and family are generally very understanding people; but there is a bit of tradition and practice involved in a wedding.

So, if you have any input on that, I’d really appreciate it. Do we forego the wedding registry and ask for money, in lieu? Or do we not do the registry and say nothing? Or is this just a bad idea?
 - Geoff

This would be something to discuss with the people closest to you (parents and perhaps grandparents and siblings), but I wouldn’t broach the subject with the wider group of people attending your wedding.

The important thing to remember is that a wedding gift is just that, a gift. People are choosing to give you something. The only reason registries exist is so that people who choose to can use it as a hint as to what gift to get for you. Telling someone what gift to give you is rather tactless.

If you receive a gift that you won’t use, you can usually return that item, of course, which quietly solves the problem.

Q5: Cold homemade laundry detergent
 I’ve been using your homemade powdered laundry detergent in my front loader, and I just noticed today when I pulled my clothes out that there were goopy lumps of detergent on them. I only use the cold cycle, and I use about 2 tablespoons per load. Have you ever had this problem? If so, how did you correct it? I am assuming that the cold water didn’t do a good enough job dissolving the grated soap in my detergent.
 - Kelly

I haven’t personally experienced this problem. We have a top-loading washer and I wash most clothes on warm-cold or cold-cold and I haven’t seen “globs” in my clothes that I can recall.

Typically, I add some water to the basin before adding detergent, and then I let a bit more water run in before putting my clothes in. That’s likely a big part of the difference.

My suggestion would be the same whether you’re using homemade powdered detergent or store-purchased powdered detergent: spread out the detergent when you add it. Don’t just add it all in one spot. Distribute it around the machine yourself.

Q6: Prayer
 Did you find prayer to be a useful tool during your financial recovery?
 - Alvin

Absolutely. I find that prayer is incredibly powerful for putting my mind at ease and helping me to focus on what I need to do.

Of course, I never prayed for any sort of direct intervention from God to solve my money problems. I didn’t pray for, nor did I expect, money to start falling from the sky. Instead, all I asked for was guidance and resolve to do what I needed to do.

Whether or not the guidance and resolve I needed came from a higher power or not is a theological question that is beyond my skill level to debate, but I can certainly say that the act of prayer helped me toward finding the answers I needed and the toughness to follow a new path.

Q7: Before or after taxes?
 The company that my husband works for will match his 401k contribution up to 5%, we are getting ready to up the 2% he currently contributes to the 5% max. My question is they give the option of having the money taken out either before taxes or post taxes, which is the better option? Is there a difference in the amount of taxes we would have to pay when he retires?
 - Denise

I’m not 100% sure what options are available to you from your description, but it sounds like you have the choice between a regular 401(k) (where the money is taken out before taxes) or a Roth 401(k) (where the money is taken out after taxes).

If that is the case, a Roth 401(k) – where the money is taken out after taxes right now – will result in you paying less taxes when he retires. Any money that comes out of a Roth 401(k) once you reach retirement age is tax free.

If you have the option to get a Roth 401(k) for your contributions, you should do so. Your employer match will be contributed to a regular 401(k), so you’ll have some of your money in retirement (the money you contributed to the Roth) being tax free and some (the money your employer contributed to the regular 401(k)) being taxed.

Q8: Pennies
 A friend of mine just told me that the government is strongly considering stopping production of the penny and probably the nickel, too. How exactly will that work? How will they give change?
 - Aaron

There are a lot of possible plans out there floating around.

The one I’ve heard a lot about lately – and the one I’m probably most in favor of – is simply stripping away the last digit from our prices. For example, if something costs $1.54 today, they’d just round it to $1.5. If something costs $2.49, they’d just round it to $2.5. There would be no need for the nickel or dime. Sales taxes would be rounded, too, just as they are today. Nickels and pennies remaining in circulation would just be deposited in banks and eventually the metal would be used in other manufacturing processes.

Why am I in favor of this? It currently costs the government 2.5 cents to make a penny and 11.1 cents to make a nickel, according to this report. That seems outrageously wasteful to me.

The change would take some getting used to, but it would be a pretty nice money saver over the long term.

Q9: Interest rate versus APR
 Could you explain the difference between an interest rate and an APR? I bought my first place a few years ago and never understood it. Now my brother just closed on his first place and we are both thoroughly confused!
 - Lois

The APR you’re quoted is a combination of the loan’s interest rate with other expenses associated with your loan such as the origination fee.

APR is a better reflection of the true value of your loan than the straight interest rate, because some lenders will quote you a low interest rate and then tack on a bunch of fees. The APR would include those fees.

Truth in lending laws require banks and lenders to post the APR right along with the interest rate they’re charging. Of course, they don’t require institutions to explain what the APR actually is.

Q10: Interest rate increase
 Will the interest rates on savings accounts ever go back up? I used to get 5-6% on my savings back in 2005 and 2006, but today I can barely get 1%.
 - Ellen

The interest rates on savings accounts roughly follow the Federal Funds Rate, an official interest rate that’s set by the Federal Reserve Board that says how much interest is charged when banks make short-term loans to each other. Banks are free to give out whatever savings account rates they want, but it would be poor business for them to stray very far from the Federal Funds Rate.

From the middle of 2005 to early 2008, we went through a period where the Federal Funds Rate was relatively high, often above 5%. That was reflected on the high interest rates that banks were giving out on their savings accounts. When the economy started struggling in 2008, the Federal Reserve dropped the Federal Funds Rate pretty quickly and savings accounts follow suit.

The real question is whether or not the Federal Funds Rate will ever go up again. Usually, the rate goes up whenever the economy is doing really well and it goes down when the economy is doing poorly. The long-term economic forecasts I’ve seen seem to indicate that the rate will stay low until sometime in 2014, but, just like weather forecasts, that may very well change in the coming months or years.

My gut feeling is that we’ll see an economic recovery and a rise in the Fed Funds Rate (followed by a rise in savings account interest rates) in the next five years or so.