I feel like conventional wisdom is to max it out but I’m not certain what value of the tax advantage is relative to the benefit of increased near term liquidity. Obviously it makes sense to contribute as much as your employer will match since it’s just free money, but for high earners with backweighted earnings trajectories, does it make sense to contribute any more than that?
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I do 0%. It's not worth it. Limited investment options and liquidity. The next 40-year cycle will not be same or as lucky as the previous 40 for this generation. Not falling for it.
I contribute the minimum but generally agree with this. We no longer live in a time of multi-decade broader economic tailwinds where you can employ a "set it and forget it" strategy, where you contribute some amount of money and end up with a comfortable 7+ figure sum when you retire.
Does your employer not match? I agree with the limited liquidity thesis, but sounds like you're also forgoing a guaranteed 4-6% of your salary every year. Even if the market goes down that's still a material amount. I personally contribute the minimum that is fully matched
U must be a Q Anon guy
We've been through economic emergencies, wars, attacks, and even a pandemic. Have you seen performance over the past 80 years though? Otherwise, what's the alternative?
Very well said
I max my Roth 401k - I think the tax benefit is pretty attractive and when I leave an employer I roll it into a Roth IRA anyways which is self directed.
Not sure I agree with other posters above but maybe I am the greater fool?
You’re 100% right. Roth 401k then Roll to your own IRA later where you have more options (and lower expense cost). How could anyone think you have investment options that can out-gain 401k investment options that are exempt of 20% Cap gains tax for the next 40 years??
I see your point but deferred taxes is a good thing. It's not as black and white as you say when the government is taking 40% before you see shit. If I'm living in Manhattan in a high income tax bracket now and I plan to move southeast for retirement, there is an argument to be made for pre-tax contributions.
Maybe I am naive here, but if I work for company X for 3 years and then leave. During that time I put all the money into target fund 20xx. After joining my new company I can move the money from my old employer to my personal IRA account? I could then put it into any stock/etf?
Glad someone brought it up… been doing just enough to get the match but using the rest for co-invest. More attractive returns than Shitco Target 2065 Fund
Max it and put it all in whatever broad market US index fund is offered. This is basically my “safe” investment fund as my PA is tied up in dogshit tech stocks and TQQQ.
Really surprised some people dont like 401ks. It’s what - 19 grand a year? And it’s tax deductible? Seems like a no brainer for finance guys making half a mil. Basically just another way to invest.
Save the speech if you’re really going full boomer and maxing a TRADITIONAL 401k
Why not? It’s a near inconsequential amount for a high earner that gives you a nice tax shield.
Yeah - seems like a bonehead move not to max out due to tax advantaged nature. I've maxed out since first year out of college as an analyst and still max out as a VP. Definitely limited on investment selection, but I'll take the match and tax advantage all day.
I max it out for the tax shield, employer matches mid single digit %
I max it out. Employer matches 7%.
I mean unless you're going to spend it in the near future or have far more attractive investment alternatives what's the reason for not contributing? Just wrapped up my first year was able to live very comfortably while saving all of my bonus and maxing out my roth 401k on my base.
I don’t get how you wouldn’t just get the match if you really believe in this bs about markets going down over 40 year horizons you should still contribute get the match then withdraw and pay the penalty and tax and you’d still end up ahead….
simple example 100 and if you have 1:1 match then you have 200. You withdraw it pay the penalty (-20) plus 50% taxes incl city and state you walk away with 80. If you didn’t contribute you would’ve gotten 50 (100 - taxes).
I don’t follow people who don’t get the match
To not contribute and therefore not get the company match - that’s literally lighting $ on fire. Beyond insane.
@brofessor it’s your time to shine
I max out the Roth 401k solely as a defense from myself. Theoretically if I blow up my personal account through extremely aggressive / irrational trading strategies I will have a few million to retire on with tax free distributions.
This is basically my approach too. I max out my contributions and employer kicks in 6% and I do that every year. From my perspective, that means I can do fuck-all with the rest of my money. I invest, I take multiple vacations, play online poker, basically do nothing but golf in December, etc. I can do anything I want knowing that I've put away some money and retirement is addressed for the year.
Prettt sure the income limit to contribute to a Roth 401k is 144k, so you’re likely not eligible, just an FYI
Roth 401k has no income limit. Roth IRA does.
Should I max out if there is zero employer contribution?
I mean, you get a tax shield, so in my opinion yes. I haven’t seen a convincing argument otherwise, unless you need short term liquidity.
I only contribute to the extent that my company matches. Honestly, it feels like a waste of money cause you can't withdraw it until you're too old and don't have desires/energy to spend money. So if my employer didn't match it, I would just invest it in SPY in my personal account, so I can withdraw it when I want. However, it's not a huge sum of money, so I figured it's fine to put it in 401k with employer match.
20k a year isn’t moving the needle at this stage and I expect my future tax rate to be significantly lower than what I pay now so the shield makes sense. Beyond that I haven’t really put too much thought it into.
I don't know what "at this stage" means and how if $20k isn't a big deal that you would expect your future tax rate to be significantly lower.
20k pretax is just not a huge proportion of my annual income anymore. It's not nothing but it's not everything.The plan is to live off my personal portfolio once sufficiently sized and that will give me much more flexibility in what I recognize as taxable income relative to working a W2 job. Generally, W2 income is the least tax efficient so even if I was drawing the same amount of capital out of my portfolio as I'm earning in W2 income, which I don’t intend to do, I would be better off.
401k (Roth or traditional) allows you to avoid 20% capital gains tax on investment gains for up to 40 years - how is that not the most obvious no brainer possible? Honestly baffled by the question.
Yeah these responses are embarrassing for a finance forum. Unless you plan to die before you turn 65 you should max your 401(k) and it’s not even a question.
What if I’m trying to take out a mortgage before 30
Getting the max match should be a no brainer. After that, do whatever I guess. But for an IB analyst, I would think you could do the math to see what you’ll need for a down payment and how long it’ll take to save that. Also, the time value of money now vs. at 30 is a big difference
What if I can invest in my firm's private equity co-invest at 3x+ MOICs or direct lending funds at low-teens IRRs instead and don't want shitty low-to-mid single digit returns a year returns on limited investment options?
What if you’re planning on starting your own venture in the next 15 years, still worth to contribute and then pull it out early?
Assuming an employer match, sure. 15 years of compounding matching is *a lot* of free money for you to leave on the table.
Surprised nobody has mentioned the mega backdoor Roth.
Would be surprised if many PE fund 401k plans allowed for such an option. Most banks don’t
Surprising, it seems fairly common at a few consulting firms I know of. But I guess you guys make way more than us so it pays off in the end anyway!
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I used to think it was a no-brainer to max a 401k up to the max amount allowed (think it's currently 20,500). Then i read a book called 'Just Keep Buying' and when you crunch the numbers and assume annual contributions for 30 years with a 2% dividend yield then the after tax benefit of a 401k is 0.73% per year. Then according to a TD Ameritrade study, the average all in cost of a 401k plan is 0.45% compared to say 0.1% for any number of diversified ETFs on a brokerage account. So the after tax benefit of 0.73% is reduced to just a 0.38% annual benefit (0.73%- 0.35%) to the average american. To some the lack of liquidity until you are 60 years old is not worth the 0.38% annual benefit. I personally stopped maxing my 401k out this year after learning the above and seeing the extra fees and limited investment options in my 401k.
Edit: forgot to mention the above assumes you are only ever selling investments in a taxable account at long term cap gains rates.
That doesn't account for the fact that you don't have to pay taxes on the LT capital gains in a 401k at all... You are hit with one tax bill for a 401k (either up-front on the principal if Roth, or at the end on the full amount if traditional), vs. two tax bills in a taxable account (up front on the principal and at the end on the capital gains, which are lower because of the taxes on the principal). Paying taxes twice, as a general rule, is worse than paying taxes once.
Agreed. Doesn't account for price appreciation and the impact of a tax advantaged account on that.
my example assumes 7% annual growth and 15% long term cap gains tax and that in both the 401k and taxable account you don't sell anything until the end of whatever savings period you are assuming. If you are recognizing cap gains every year in the taxable account then that reduces returns about .55% every year, so you need to avoid doing that as much as possible.
I agree with you and my example agrees with you that paying taxes once is better than paying taxes twice, but that only amounts to 0.38% annually in the average 401k account in america. Not a huge premium for locking your money up for 30 years.
The calculus changes a bit if you roll an expensive 401k plan into a self directed IRA every time you change jobs.
You’re a principal in private equity and you can’t understand the advantages of investing using tax advantaged space?
Seriously?
Can someone offer a different perspective in terms of putting investments in real estate properties or franchises? Investing in stocks through a 401k are generally without leverage and offer <10% returns on capital whereas real estate properties or franchisee operations could offer higher return on equity. Has anyone ever tried this path, understanding there is higher risk in general with owning / actively managing real estate?
Both of those options have the potential to be extremely lucrative but its a lot more effort and I think typically higher risk.
Also, how do you plan to source / run either of those while you're working 70+ hours a week. Unless you outsource the operations to another group or person, which eats away at the returns, you are going to be putting in a lot of time.
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