Hey,
How do you guys go about maxing out (if you do) your 401K?
Do you put a set amount of money every month into the fund, or do you wait until you get your bonus and max it out then?
I would imagine that you would wait until you get your bonus and then max it out because 401K is pretax and a bonus is taxed at a higher bracket (I think) than monthly income.
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Thats a bit stupid because your not averaging into the market. I have always been a proponent of spreading out the contributions as much as possible into retirement plans. For retirement accounts you are trying to remove the timing aspect and focus instead of just getting market returns with the lowest volatility.
"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
In the past, most analysts contributed minimally from their paychecks (I've seen anything from 0-15%) and then maxed out their bonuses. The most you can put in on a pre-tax basis is $15,500, I believe. Obviously this year, that may end up being a good chunk of a 1st year's bonus, so plan accordingly.
ihavenoidea,
Not sure your plan makes much sense. Bonuses are not taxed at a higher rate, just withheld at a higher rate. As trade4size said, this is a really, really poor strategy.
I contribute 10% of my income, both my bi-weekly paychecks and my bonus, to my 401(k) and have seen it grow substantially, despite being chopped down by the market last year. You're taking a pretty big risk if you just max out once a year and there is no tax benefit to doing so.
The max you can contribute is 20% (unless you're over 55yrs old or something like that) and with the bonus numbers that are expected this year, you won't hit the $15,500 cap if you only contribute from your bonus. I don't see too much of a benefit of contributing the max each year, but not everyone shares the same savings goals.
~~~~~~~~~~~ CompBanker
Thanks for the comments,
CompBanker - What other savings vehicles do you use and recommend? Could you give me some brief insight on them
Roth? Cds? Etc,
Thanks
A 401(k) is all I use for savings. I get a significant match from my company so I feel pretty comfortable with just this.
If you want to learn about other vehicles, go over to fidelity's website and poke around. They have some decent info available to everyone.
~~~~~~~~~~~ CompBanker
Priority is to get the maximum, otherwise you're throwing away free money.
After maxing out my 401(k) match, I put some money into a post-tax Roth IRA, and then I manage a bit myself.
By maximum, I assume you mean to get the maximum company match correct? It may be hard to contribute the maximum annual limit ($15,500 or so) for a first year analyst.
...you must not be making a lot of money in S&T if you are contributing to Roth IRA; singles start phasing out at $95,000 AGI and will not be able to contribute if they make more.
and third - What's up with all the people going into banking and not knowing anything about taxes. Maybe we need a WSO guide to paying taxes, you can really save a lot of money with good tax planning.
You do realize that by yesman saying it would be hard to match 15500 using just his bonus as a first year analyst, that means that he might only get a 30k bonus this year, as a first year analyst. Not sure why you think that wouldnt be a lot of money. just remember champ...S&T has the same bonus pool as IB analysts do
I contribute 5% to my roth 401k. Will bring it back up to 10% once I establish a nice cash cushion. Will open a roth IRA at some point in the near future and do 5% in each.
I posted on this topic before I started banking (I was so naive back then!).
http://www.wallstreetoasis.com/forums/bonus-use-pay-off-student-loans-v…
The answer to your question depends on your personal situation. Personally, I have a decent amount of student loans (not a ton; less than $30,000), and I started banking with no assets other than a few thousand bucks in cash. When I started banking, my plan was to 1) save a cash cushion, 2) invest 10% in my 401k, and 3) pay off my student loans.
I'm very thankful I made saving cash my top priority. There's no job visibility at my firm. I could be let go tomorrow, and if that happens, thanks to my cash cushion, I could survive in the job market for quite some time before I'm really screwed. There's no match on the 401k plan, so I'm not missing out on "free money." Now that I have a solid cash cushion, I don't plan on paying down my student loans early. I expect inflation to soar in the years to come, which will make my student loan balance shrink in real terms.
My advice to you: prepare for the worst and hope for the best. Everyone at my firm is on thin ice, and tomorrow is not guaranteed. If you have enough liquid assets to weather the job market for a year, then invest as much as possible in your 401k. Otherwise, don't bank on being employed for any specific period of time, and make your decisions accordingly.
Everyone says bonuses are taxed at a different rate but I'm not seeing how this is true. The first line on the 1040 Tax Form basically says your cash earnings for the year. It doesn't distinguish between base and bonus, so if you had a 60 base and 20 bonus, you'd put 80.
Does anyone know otherwise?
Everything is taxed at the same rate (except for capital gains, etc.), it just seems like not many people have a clue here about taxes.
Gross Income according to the IRS is all income from any source derived, it doesn't matter whether it is salary, bonus, theft, or a casino forgiving your debt with them - you still pay the same taxes on all of these things, since they simply go into your AGI.
you guys are missing the point here. when you file, nothing is distinguished. when you get paid, the accountants must follow a withholding schedule that will throw you way above your effective tax rate because this schedule implies that the payment is recurring over the year (you get it every month, quarter, whatever schedule they are using). some accountants can note that this is a one-off and withhold you accordingly, but this is usually not the case
unless you have other priorities (building an emergency cash base, for example), you should put it as much as you can in when you get it and should not wait around a whole year. on average, markets will go up 8% or so, so by waiting a whole year not only are you opening yourself up to market timing risk, but you will also be foregoing, on average, this 8%
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