>> What about the "match" from USG? Isn't that a double-digit-win?
>
> You mean the part about the 401(k) comes out of pretax dollars
> so you don't pay income tax or social security on the part that
> goes into the 401(k) until you withdraw the funds?
You actually pay FICA/Medicare on money you contribute to a 401(k); you don't pay it on the way out. But: yes.
> Or the part about if you need it before age 65 the gumming
> socks you with an automatic 10% penalty?
As someone who once needed to do this, I can only say: it's worth it still. Since what ever the investment was making is on both parts -- your net check reduction and the taxes along with it -- it's only the degenerate case (withdrawal after one year?) where the 10% makes it a bad deal. If you've invested in money markets or treasuries, you'll still be better off in most cases. If you happened to self-direct and do well, you can be way ahead. Also: the chances that you're in a higher tax bracket when you put the money in vs when you take it out are considerable, especially if the reason you're taking an early withdrawal is due to financial hardship.
Example: your salary is $50k in 2008. You're single with no dependents and no interesting deductions. Your personal exemption was $3650, and your standard deduction was $5,700. Your taxable income was $40,650. Your tax was $6513 (plus $3825 FICA/Medicare) and your take home income was thus $39,653. Instead of listening to Joanna, say you elected to put in 10%, or $5k. Your taxable income drops to $35,650, your tax drops to $5263 (plus $3825 FICA/Medicare) and your take-home income drops only by $3750. Your $5k earns 3% in one year and is then worth $5150. You lose your job and withdraw all of it, paying a 10% penalty and no income tax because your income is below your exemptions. You're left with $4635 which you "paid" $3750 for one year ago. This is a 23% return in one year, something that would make hedge fund managers drool.
It's also certainly the case that you shouldn't ever invest money that you expect to need before you expect the investment to mature ... but to the extent you are able, a 401(k) isn't anything other than what is advertised: the government is willing to pay you today for money you don't count on until tomorrow. Only if you don't do the math will you come to the conclusion that this is a bad deal.
On a completely different subject:
> This also saves the USG from an increment of liability for social
> security payouts.
That's the spirit: hold their feet to the fire on that one.
/jordan