Moved to a buyside job where there is no employer matching/contributions, but there is coinvest opportunities. Got me thinking, is it really worth it to max my 401k, when the only significant benefit is the ability to contribute on a pre-tax basis? I’m not super keen on retiring early (personal choice - understand this is a bit naive as a 20-something), but I honestly feel like I’d rather use my capital to contribute to coinvest opportunities, buy real estate, invest in public equites on a shorter time horizon, etc, than lock up my capital until I’m 60. Especially since I don’t have employer matching benefits.
I completely understand the benefits of saving for retirement and the tax advantages of a 401k, I’m really just curious if anyone else has a similar outlook.
yes, the 401k is a scam
Says the unemployed intern
all paid jobs absorb and degrade the mind
Bump
Yes, I wrote this in another thread and was given MS. The lack of liquidity is not worth it unless you have a very large income. Not saying I need all my money to be cash and liquid in my 20s but I much rather be able to at the latest enjoy my money at 40 than when I'm 60 and there's no point in anything anymore. Just being honest. Now, roth 401k may be a different story because I believe just like a roth IRA you can take out all your contributions at any time penalty free if I'm not mistaken.
you are mistaken
Explain please. I'm genuinely curious. Is not a roth 401k at least a far better option? Thanks
You can withdraw principal from a roth penalty free. Principal but not any gains.
It's laughable to say that when you're 60 there is no point to anything anymore. What a doomer take. You are plenty athletic and cognizant enough to enjoy fabulous world travel and all manner of events when you're in your 60s, bro. You can also withdraw 401(k) penalty free if you're laid off, fired, or quit a job from age 55-59 1/2 (IRS Rule of 55 ), so it's really age 55 that we're talking about, which is the average age of a CEO.
You will also have other sources of money when you're in your 40-50's, presumably you still have worked or at least have invested outside of retirement accounts? But life becomes a lot more expensive in retirement for a number of reasons including inflation (and particularly real asset/expense inflation, not the Fed measure), healthcare costs, and lifestyle creep. Might as well have part of your money set aside that is tax advantaged.
on that topic, might as well max out a HSA too.
You max 401k AND Roth IRA. Very easy
Seeing as you have zero saved for retirement, I would put as much of it as you can away into your 401k (Why you aren't doing that already is beyond me - I mean seriously, It's a straight dollar reduction on your taxable income until you hit the cap. You also might be able to get the benefit of tax deductions - on a pre-tax basis for a Traditional IRA - or qualify for a Roth IRA.) just to start saving for your retirement. I'd sock some of it away for an emergency fund and maybe do something nice with a little bit of it.
Agree with my guy Pizz here. Think its best practice in personal finance to hide money from yourself in more retirement account types (plus the many benefits already discussed). Live below your means month to month, DCA, and don't tinker with your weighting too much.
Sounds like you already convinced yourself that you're going with co-investment tho.
It’s only $19.5k a year and it reduces your tax liability. Why is this even a question?
Because people are dumb.
Source: Many of the posts above yours.
This was the first year I maxed my 401k contribution, after that.. it goes into liquid account
If 19k, or whatever the 401k max is these days, is "too much money to lock up," you're probably talking about retirement planning on the wrong platform. If you can afford to, you obviously max out the 401k AND Roth IRA. If you have coinvest, you're probably not worried about 19k.
Putting lots of your money in co-invest when you're young is a great idea because when your fund collapses, you lose your job, but at least you also lose your savings.
No, the issue is why not just go with the Roth 401k and have at least that option to freely take out those contributions down the line. The AFTER-TAX difference is what is a silly amount to worry over even if taxes somehow magically go down in the future. The Roth IRA is seperate and I'm sure no one in any job is fretting about the 6k there.
you go with the traditional at that level if you believe your taxable income will probably be lower in retirement than what it is now (which i personally think it will be since I wont be working). You defer the taxes to retirement with the traditional and take the tax break now, instead of vice versa with the roth 401k
then yes, you go with Roth 401k in a rising tax scenario
Tax rates have "magically" gone down several times, as recently as 2018: https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rate…
Biden will likely raise them near-term, but who knows wtf will happen thereafter, or what the timing will be specifically for your peak earning years.
There's also the likelihood of spending your peak earning years in a higher tax state vs. retiring in a lower tax state, or simply deciding later in life (once you're a few years distanced from the IB or bust mentality of a college student) that you want to chill out and can retire with less income than you aspire to have right now.
I'm not anti-Roth 401k at all, I think its an awesome option and I put a lot of contributions into it, I'm just advocating diversifying your tax exposure and giving yourself some optionality later in life. If you are as high earning as you plan to be, I wouldn't make early withdrawal options a priority if that ~$19.5k annual contribution is peanuts to you anyway, since you'll have plenty leftover to fund your lifestyle now (and even more if you use the traditional option to lower your current tax liability!).
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What people here are forgetting is that 401k contributions are deducting from income that is taxed at the marginal rate. Even if you're an IB analyst, that last 20K of your income (bonus) will end up getting taxed at a MARGINAL rate of close to 50% in NYC between local, state and federal taxes--even though your EFFECTIVE tax rate is much lower. $20K that I have to pay a 10% penalty on to withdraw in the future is absolutely worth more than $10K now after taxes. This isn't even a question - it's free money.
Obviously, the above is not as applicable if you live in a low cost of living state and earn much less, but this is WSO after all.
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I'm sorry, but this is another level of stupidity. If you have no intention of saving any money whatsoever, then fine, don't do it. But most people in finance want to save--all a 401k does is allow you to save with pretax money instead of post-tax money, which makes a huge difference for high earners (your first point is irrelevant as it just talks about how you're taxed, not how much).
It'd okay to be an intern, just don't be idiotic.
As people have repeatedly tried to explain to you, the marginal tax rate for someone making 180k in NYC is 44%. That is not going to be fixed in the tax return, that is the actual rate you pay on the last dollars in - i.e. the money you will be taking pretax in a 401k.
Feel free to try out this calculator and see for yourself:
Free Income Tax Calculator - Estimate Your Taxes - SmartAsset
this also means that a 19k 401k contribution only costs you 12k in take home pay. really? you can't afford 1k/month in take home locked up, in order to give yourself a much better chance at long term compounding retirement income? guess your bonus isn't so big after all...
Thanks a lot for sharing
I think you're thinking about it correct. The most important thing is to get the full company match on the 401(k). Then you should definitely make sure the timing of your investments lines up with when you expect to need them. If it's 10 years you can do some simple scenarios.
Keep in mind that your retirement money at a young age is CRAZY POWERFUL compounded. Like, take out your HP-12C if you have it and do:
40 N
8 i
19000 PV
0 PMT
FV
FV = $413k if you just do one max year 401(k) and make 8% return until you're 62, and literally don't do anything else.
If you put in only 10k to your 401(k) per year for 5 years and then stop:
5 N 8 i 0 PV 10000 PMT FV (= 58,666)
ENTER PV 0 PMT 35 N FV (= $867,397)
8% returns
$19k for 1 year and stop: $413k
$10k for 5 years and stop: $867k
If you max for 5 years and stop: $1.648mm
If you max for 10 years and stop (at age 32 or when you expect to buy a house etc.): $2.770mm
The above all assumes ZERO company match and 8% returns which is pretty conservative. Very sensitive to returns. For example if you max for 10 years and stop in your early 30's, and you get 10% instead of 8%, you'd have $4.8mm
With a 10% return assumption:
$19k for 1 year and stop: $860k
$10k for 5 years and stop: $1.716mm
Max for 5 years and stop: $3.260mm
Max for 10 years and stop: $4.8mm
If you’re not hitting your max employer match, you’re leaving the world’s easiest money on the table. Above that, you should still max out if you can, but there’s a little more nuance if you have near-term liquidity needs. Hard to justify giving up the free return from tax savings though
It depends on your personal situation. In your case, saving for it would still be good, but you can also save for other things if you know you'll need the money earlier (down payment for a house, kids, fun money, etc.). Personally I'm also saving in a 529 for grad school.
Depends in large part, in my opinion, on your marginal tax rate and relative opportunities otherwise. If you're a 37% federal marginal tax rate and live in NYC, you're likely saving taxes of ~45%-50% on that marginal dollar.
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