Maxing out 401(k) as a first year analyst?

The max 401(k) contribution this year is $17,500. On a first year analyst comp (~120k salary+projected bonus), does it make sense to contribute all $17,500? That is a sizable chunk that greatly affects my monthly budget.

Also, it seems like I'd likely be ineligible for a Roth IRA if it takes into account salary+bonus (Roth max income limit is ~120k), but does anyone have more info on this?

 

Even if you don't max it out, definitely put a good amount into the 401k (personal opinion). The earnings you get compounded over the next 40 years (assuming you retire in your mid sixties) will be huge and well worth it. Your bank also probably matches which is just free money for you.

If you have any loans from undergrad it might also be worth paying those down rather than maxing out the 401k too depending on what rate you have.

 
okay24:

120k salary as an analyst? lol

I think OP meant $120 k (salary + bonus).

Also I've been tempting to ask this. I'm an international student and will very likely head back to my home country after 5-7 years of working/attending grad school in the States. What should I do in regard to 401k? Should I put in the contribution to lower my taxable income and then withdraw money out of 401k later with a penalty, or should I just forget about it altogether? Thanks in advance.

Nothing is true; everything is permitted.
 

Just do it...thank me in 30 years. Ask them to take 15% off of each paycheck until you reach the max. If you bonus out above the max, then great. If not, you've still saved a decent chunk of change. You can take a 15% hit in lifestyle, if you are making that much right out of college.

 
Best Response

Agree with @"TechBanking"... My only caveat would be if you are just starting out and need to get on your feet like I did when I first started, it's more important to get a couple suits and shirts and make sure that you can make your rent for a couple months, but completely agree with him on the value of just taking it out of the paycheck. Your lifestyle will contract to fit the net pay you see hit your account every month, and while it's fun to grab a couple extra beers every now and then, you won't miss that money. Additionally, maxing your 401k is going to help you come tax time as it lowers your taxable basis. The most important thing though, as TB mentioned is the fact that you are going to be saving a significant portion of your pay every year and those savings will compound in a diversified portfolio so that you can retire.

A lot of kids come on here thinking they are going to be masters of the universe and they may very well do that. Arguments can be made against consumption smoothing if you are very confident in your earning potential. For me, at least, saving money in my 401k was a priority, along with paying off student loans because it gave me peace of mind and allowed me to have more flexibility and freedom. It becomes easier to make decisions to untether from a stressful career on the street 5 years down the road if you are single, have already paid down all your student loans, and have saved 500k for retirement.

If it helps, don't look at it as income you are forgoing. Think of it as buying peace of mind.

 

@"Ezio Auditore" Under current law you should be able to roll all of the money into an IRA and then elect to take "Substantially Equal Periodic Payments" to avoid the additional 10% tax. I would wait to take distributions until after leaving the US and having no other US income. Your income tax rate for the $$ will be much lower.

Before taking this advice, you should talk to your own CPA as everyone's circumstances are different. The true answer to any question about tax is: "It depends."

"Everybody needs money. That's why they call it money." - Mickey Bergman - Heist (2001)
 

What AcctNerd is referring to is called "72T" withdrawal and it is a little more complicated than simply taking out substantially equal periodic payments. There are a ton of rules regarding how the money must come out and the minimum withdrawal schedule is based on the method you elect on the front end: life expectancy, amortization method or annuitization method....talk to your tax person in advance of doing anything.

 

1st order of business is to get an emergency fund (3-6 months of salary in case of, well...emergencies) once that's built up, then go to 401k. the power of compounding with tax deferral is orders of magnitude higher when you're young, suck it up, go out 2 less nights per month, and thank me later. after a decade or so of that, PM me, if you have 7 figures I may want you as a client :).

if you want to do a Roth with that kind of income, get married to a stay at home wife (http://www.rothira.com/roth-ira-limits); I'd be surprised if you worked at a BB and it didn't offer a roth 401k, check with your HR person. I have my reasons for preferring Roth vs. traditional, don't care to open up that can of worms here on WSO though, the point is once you have your rainy day fund, do yourself a favor and pay yourself before you spend. the best way to do this is through a 401k, and if you have the income where you can max it out, do it.

PM me if you want to talk further.

 

Even if you exceed the income limit, you can make a backdoor Roth. Takes two seconds to set up. If you invest in stocks, it's an easy way to dump 5.5k every year.

You should contribute to your 401k up to the match (3% or 6% or w/e it is nowadays)... anything after that is dependent on a lot of factors. 401k is tax-deferred, meaning you're taxed when you take distributions. If your earning ability remains constant in retirement, it's not really worth it to defer ~10k in pre-tax consumption at age 22... you could get yourself a nice bike for that price...

When you start making more, it's time to start to consider more inventive ways to reduce your tax burden. It's not difficult to start an LLC and deduct your housing and discretionary purchases (computer, furniture, etc)

 
  1. 401K up to company match
  2. Max IRA (either traditional/backdoor Roth or Roth depending on income level)
  3. Emergency fund (3 - 6 months)

From there, it's individual preference. Personally, as a first year analyst I contribute 10% to my 401K even though my company match is roughly half that. I probably won't bump that too much higher in the future, because I will want to save for some more near-term items as well, like a house and a car (mine probably has 2-3 more years in it and I don't like big car payments).

Also, not sure what protocol is at the BB's but my firm does not take 401K contributions from bonuses. Worth considering as maxing out the 401K would likely require some fiddling with contribution percentages a bit during the year.

MM IB -> Corporate Development -> Strategic Finance
 

The max 401(k) contribution is $17,500/year, which translates to ~$1,458/month. But I see some of you commenting I should only contribute up to my employer match (e.g., if my BB fully matches up to 6%, then I should only contribute 70,000*.06=4,200/year or 350/month). Is it common for most BBs to only match up to ~6%?

(In my budgeting, if I assume I max out my 401(k) contribution at 17,500/year, that's 1,458/month, so you can see how that greatly impacts my monthly spending. It's basically the difference between living in an absolute shithole and living somewhere half-decent.)

Also, regarding a Roth IRA, would I be eligible to contribute to it my first calendar year as an analyst? I start in July, so 6 months salary + 6 months stub bonus = ~60,000, which is less than the 120,000 Roth IRA income limit. I'm just not sure if this is how they calculate eligibility, or if it's based on fiscal year earnings or run-rate annualized income.

 
SwaGGeReR:

The max 401(k) contribution is $17,500/year, which translates to ~$1,458/month. But I see some of you commenting I should only contribute up to my employer match (e.g., if my BB fully matches up to 6%, then I should only contribute 70,000*.06=4,200/year or 350/month). Is it common for most BBs to only match up to ~6%?

(In my budgeting, if I assume I max out my 401(k) contribution at 17,500/year, that's 1,458/month, so you can see how that greatly impacts my monthly spending. It's basically the difference between living in an absolute shithole and living somewhere half-decent.)

Also, regarding a Roth IRA, would I be eligible to contribute to it my first calendar year as an analyst? I start in July, so 6 months salary + 6 months stub bonus = ~60,000, which is less than the 120,000 Roth IRA income limit. I'm just not sure if this is how they calculate eligibility, or if it's based on fiscal year earnings or run-rate annualized income.

6% is a common match for big companies. I would at least contribute enough to get the match. You can contribute to a Roth IRA since it's based on your calendar year earnings.
 
SwaGGeReR:

Also, regarding a Roth IRA, would I be eligible to contribute to it my first calendar year as an analyst? I start in July, so 6 months salary + 6 months stub bonus = ~60,000, which is less than the 120,000 Roth IRA income limit. I'm just not sure if this is how they calculate eligibility, or if it's based on fiscal year earnings or run-rate annualized income.

Based on fiscal earnings, not run rate annualized. And most banks I know of pay out bonuses (even stubs) early the following year once EOY numbers are in. So it most likely won't affect what you can contribute this year, but I would double check with your firm when bonuses are paid. Also, someone mentioned that their bank doesn't deduct 401(k) contributions from bonus. I would double check on this as well, since my bank did (required more tweaking of contribution % after the early year bonus). Roth is great and you're totally eligible this year, but standard does give you a nice little tax break now if you're in need of the extra cash but still want to contribute.

 

I'm not sure I understand the relevance of whether the bank deducts 401(k) contributions from your bonus. I thought you just tell the bank you want to contribute $x / x%, and they take it out of every paycheck, like so:

Assuming you're paid semi-monthly and want to contribute the max employer match (let's say 6%): Income = $70,000/year = 5,833/month = 2,917/semi-month -->

2,917 - .06*70,000/24 = 2,742 Taxable Income every semi-month

Is the above accurate? Or is it the case when an employer says they'll match 6% of your annual income, they mean salary + bonus (70,000 + ~50,000), which then changes things?

 

I'm doiung 3%. Personally, I'd prefer to have more accessible money now. which I use to invest in Equities. I'd rather have more money in the shorter term (3-5 years) than save up for many years later. Think it is all personal preference.

 

depends on how you feel about taxes. at a 30,000 foot level, it makes more sense to do Roth now if you think tax rates or your tax bracket will go up over time. the opposite would argue for traditional. that's the objective part of it, the subjective part of it is the beauty of not having to pay taxes on withdrawals in retirement. personally, I believe that the gov't will have to raise taxes across the board to pay for its immense debt burden, so I'm 100% Roth currently.

all of that said, no one ever went broke saving money. the important thing is having the right habits, the vehicles in which to save is secondary. good on you for maxing it out, pat yourself on the back.

 

On $70k base living in NYC you'll kill yourself if you max out your 401k contributions w/o using your bonus. Do the employee matching percentage during the year, so like 700/month including the match, *12, 8400, then use 9k of your bonus to finish out the contributions. Not sure if you can do that or not, but it makes way more sense than taking 1/3 of your pretax income. You need discretionary income otherwise you'll turn 30 and wonder why you didn't have more fun during the early years.

 

Yes, you can start contributing towards your Roth 401-K rather than a Traditional 401-K (assuming your company offers the Roth alternative). A Roth/Traditional IRA is completely separate from your 401-K and has a max contribution of $5,500, but you can only contribute if you make less than $114,000 all-in. If you make under $114,000 then you could contribute $17,500 into your 401-K and also $5,500 into your IRA.

 

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