How much do you contribute to your 401k?

For the more senior people I assume most of you are maxing out so this is geared towards the analysts/associates.

At 85k base with a 4% match on 4% of income you'd need to contribute about 17% pre-tax (excluding bonus) in order to max out your 401k contribution. That's pretty rough, particularly with expenses in NYC. Also the markets are fairly high right now, may see a substantial correction in a year or two. Regardless, how much are you all contributing?

I'm doing 8% + company's 4% match and then throwing $100 a week into a Roth IRA, since you can tap the Roth without penalty for educational expenses so if I end up getting my MBA by then I should have about 22k or so which should float my living expenses for 2 years... obviously wouldn't cover tuition or room and board.

In your response please include your title/year ex; (2nd year Analyst)

 
Best Response

On a salary of $80K, contributing $18K is a bit of a stretch I know, but many of you who do not have debt and are in your second fiscal year should try to aim for it. It's $700 every two weeks pretax, which translates into about $420 per paycheck in take-home pay assuming a 40% federal state and local tax rate. Your match is on top of the $18K limit. Same with your $5500 IRA contribution. So if you get a 6% match from your employer, you could easily sock $28K into an IRA. Your bonus can now fund the $5500 Roth IRA contribution. If you're at the income limit, that's fine-- just make a traditional contribution and roll it over to a Roth.

Your first fiscal year (stub year), I strongly recommend Roth contributions. You probably aren't going to get past the 15% tax bracket, so you might as well contribute cheap after-tax money to a Roth. You will have plenty of time in the next fiscal year to contribute pre-tax money.

Again, this is on a case-by-case basis. If you have student debt that you're paying 6.8% interest on, paying that down is probably a good investment after getting your employer match. But for those of you without debt, I recommend maxing out your retirement contributions and doing it in the following order:

1.) Get employer 401k match (READ: FREE MONEY) 2.) Roth IRA 3.) Max out 401k

The Roth vs. pre-tax question is a biggie and is a lot more complicated than a lot of the financial advice out there tends to make it. But to keep it short, if you're working a partial year, Roth makes the most sense. You will probably never be in such a low tax bracket again. If you're working a full year and planning on an MBA later, pre-tax makes the most sense (convert it later). If you're bumping up against $200K in MAGI and have investment income, pre-tax probably makes more sense (avoid ACA surcharge). If you're planning on retiring to a 25% tax bracket lifestyle, pre-tax makes more sense.

If you don't see your income going down anytime soon and plan on getting to retirement with a lot in a pretax 401k, (most of you who don't plan on an MBA and don't drive a rusty honda) Roth makes more sense.

Me: $9K pre-tax, 9K Roth + Company Match, $5500 Traditional IRA -> Roth conversion Title: QR Year: 3 (But some prior sellside experience)

 

I like that you are forward looking and considering possible future outcomes like a substantial correction. I think of savings holistically and then break it up to how I may wish or need to spend it.

So if you think its rough now to save 17% (live off of 70.5k), imagine how you might try to get by if you are impacted by a substantial correction. Perhaps 17% isn't enough...

Perhaps not all should go to 401k but some should go to rainy day fund. But total savings should be enough so that you can live off of it should there be a correction.

Top down approach, how much should you save vs spend (perhaps you may wish to think hard about this break). For your savings, retirement vs non-retirement (rainy day fund). For retirement Roth vs Traditional

Rainy day fund may not get any tax benefits but it gives you liquidity that you may need.

Traditional 401k gives you immediate tax savings but you pay that tax at retirement. While Roth makes you pay that tax now but gives you the tax free withdrawals. What is your tax rate now vs what do you think might be your tax rate at retirement (based on both current tax level vs income & changes to tax rates due to US government's balance sheet progression over time).

Roth also provides two other nuanced benefits for those who are or expect to be in the top 5%. It doesn't require you to take withdrawals and allows you to pass on to your heirs tax free (maybe too early for you to think about this). Second it effectively increases your max beyond 18k. * In traditional you contribute 18k pre-tax which is the equivalent of 18k x (1 - marginal tax rate) post-tax contribution/costs. * In roth you can also contribute 18k but its post-tax contribution so the pre-tax equivalent is 18k / (1 - marginal tax rate). The way you can also think about this is how much/less money is left for you to spend under both scenarios (Roth, you have less to spend currently). The other way is how much more/less money do you have to withdraw and spend in the future. Roth you have same $ amount but its tax free so its 100% of the future value of 18k. Traditional is future value of 18k x (1 - future tax rate).

 
dc10023:

I like that you are forward looking and considering possible future outcomes like a substantial correction. I think of savings holistically and then break it up to how I may wish or need to spend it.

So if you think its rough now to save 17% (live off of 70.5k), imagine how you might try to get by if you are impacted by a substantial correction. Perhaps 17% isn't enough...

Perhaps not all should go to 401k but some should go to rainy day fund. But total savings should be enough so that you can live off of it should there be a correction.

Top down approach, how much should you save vs spend (perhaps you may wish to think hard about this break). For your savings, retirement vs non-retirement (rainy day fund). For retirement Roth vs Traditional

Rainy day fund may not get any tax benefits but it gives you liquidity that you may need.

Traditional 401k gives you immediate tax savings but you pay that tax at retirement. While Roth makes you pay that tax now but gives you the tax free withdrawals. What is your tax rate now vs what do you think might be your tax rate at retirement (based on both current tax level vs income & changes to tax rates due to US government's balance sheet progression over time).

Roth also provides two other nuanced benefits for those who are or expect to be in the top 5%. It doesn't require you to take withdrawals and allows you to pass on to your heirs tax free (maybe too early for you to think about this). Second it effectively increases your max beyond 18k.
* In traditional you contribute 18k pre-tax which is the equivalent of 18k x (1 - marginal tax rate) post-tax contribution/costs.
* In roth you can also contribute 18k but its post-tax contribution so the pre-tax equivalent is 18k / (1 - marginal tax rate).
The way you can also think about this is how much/less money is left for you to spend under both scenarios (Roth, you have less to spend currently). The other way is how much more/less money do you have to withdraw and spend in the future. Roth you have same $ amount but its tax free so its 100% of the future value of 18k. Traditional is future value of 18k x (1 - future tax rate).

This is helpful analysis, but I'd just add some nuance to it. The one feature everyone forgets about a pre-tax 401k is that it has a conversion option. A Pre-Tax 401k can be converted into a Roth, but aside from recharacterization (which can only be done before October of the year after you convert), you can't unconvert Roth money into pre-tax money and get a tax deduction.

If you expect that at some point in the future not unreasonably far off (IE not so far out that 6% returns dwarf a 28% vs 15% tax rate), you will be in a lower tax bracket, and you will not have enough money to convert to come close to your current tax bracket, it makes sense to make some pre-tax contributions.

Where does this matter?

Grad school.

A lot of analysts are going to go back to grad school at some point in the future. Some of them will leave IBD, get an MBA, and go back to IBD, without qualifying for a new industry. This means their MBA tuition and books may be tax deductible as a business expense.

Great. So what is an MBA to do with a $60K tax deduction when he has a $25K internship?

Well, if you have a pre-tax IRA to convert to Roth, you get to basically convert tens of thousands of dollars of it for free or at a very low tax rate (at some point you will hit the AMT on your deduction however.)

There are other cases where it helps too. Some of us have non-competes, others are worried about being laid off. Still others will make it to retirement with no pre-tax savings and therefore no taxable income-- their first $10k of pre-tax income would have been withdrawable for free.

So I largely agree, but any reasonable Markov Decision Process analysis will have the optimal behavior to leave some money pre-tax for most people. Maybe not a whole lot, but some.

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