Whats a good 401k strategy?

JSonDx's picture
Rank: Senior Chimp | banana points 16

Incoming FT Analyst. I do have plans to attend B-school years later, so I am looking to save some money. But I dont want to just save money for B-school. Would like it for traveling, retirement, etc.

Anyone know an ideal savings strategy? I havent started working yet (BB) so I dont know what they're offering, but I'm looking to gain a general understanding early.

I wont be living paycheck to paycheck and I have no student loans, so I dont mind maxing out any contributions.

Thoughts?

Comments (115)

May 29, 2013

Your fund selection will probably suck so you should most likely invest in the index funds offered. I would be 100% invested in equities at your age in your 401k.

May 29, 2013

(deleted)

May 29, 2013

You do understand the age restrictions for withdrawing money from qualified accounts, right? Distributions prior to age 59 1/2 from qualified accounts (401Ks) are subject to a 10% IRS penalty on top of the taxes. This is not the correct account to save for your upcoming travel plans....this is a retirement account.

As far as saving for retirement you need to review the fund lineup. Index funds might be best but that isn't always the case. At your age I'd probably go 90% equities with a healthy dose of both core international and emerging markets equities. On the fixed income side I might consider both a global bond fund and emerging markets debt fund. In this area I would only use active management

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May 30, 2013
sfbroker:

You do understand the age restrictions for withdrawing money from qualified accounts, right? Distributions prior to age 59 1/2 from qualified accounts (401Ks) are subject to a 10% IRS penalty on top of the taxes. This is not the correct account to save for your upcoming travel plans....this is a retirement account.

As far as saving for retirement you need to review the fund lineup. Index funds might be best but that isn't always the case. At your age I'd probably go 90% equities with a healthy dose of both core international and emerging markets equities. On the fixed income side I might consider both a global bond fund and emerging markets debt fund. In this area I would only use active management

He can withdraw from his IRA/401ks penaltly free before the age of 59 1/2 as long as he says it is for school purposes.

"The way to make money is to buy when blood is running in the streets."

-John D. Rockefeller

May 29, 2013

Just buy the SPY every month, or whatever the lowest cost index funds are, in your plan. Do this up until you exhaust the match, then max Roth IRA (if you qualify), then max IRA, then traditional brokerage account. Don't forget about compliance. I wouldn't worry too much about getting the equity/fixed income ratio down...you've got a long career to go.

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May 29, 2013

All equities. FI sucks. Overbought right now (yeah, I know it's for retirement but FI returns over the past twenty-five years have come from declining rates, and they can't go down much further).

And you're young, so all equities. Since you can afford the risk, I'd take on some EM. A lot of them are LATAM heavy, but if you have opportunity to get exposure to more of the world, do that. Take on some small-cap, mid-cap, and international.

You're probably going to get some actively managed REITs. If they're equity REITs, it might be worth taking a look because they will act as an inflation hedge. But you've got to look out for the fees. If it's a CMBS REIT, stay away. Spreads are tight and even though they can probably get tighter, you're going to run into the same problem as other FI (rates can't go down much more).

If there's one thing, to take away from this though, stay away from bonds. I work with a former Fixed Income PM (retired, not fired), and he's never owned a bond in his entire life (he's 60ish) and doesn't plan to.

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May 30, 2013

I understand the prevalent view that in principle you should go all-in on equities at an early age, however are we currently not facing such huge macro risks that you may want to wait a little or at least keep some cash? Equities indices are currently at top levels and I would expect quite a drop once the Fed adjusts their policy, or we have public revolts in the Southern European countries (unemployment is so insanely high and historically this has led to odd political arrangements a few times) or something else happens. Maybe I spend too much time on zerohedge but quite a lot of my money actually is in real estate, precious metals and cash, next to a mix of equity index trackers.

May 30, 2013

Fun facts on 401ks

You can also withdraw up to $10,000 for a down payment on a first time home purchase as well so long as you roll it over into an IRA first to avoid any penalities.

Sometimes in cases of 'extreme hardship' you cantake money out sometimes with a penalty sometimes without if the hardship exceeds certain limits.

I would be very careful withdrawing money from an 401k. There are a ton of technicalities and ways the IRS will try and levy a 10% fee in addition to taxes

All in all, use it for your retirement only but in your situation I would max it out.

"I am not sure who this 'Anonymous' person is - one thing is for certain, they have been one hell of a prolific writer" - Anonymous

May 30, 2013

pensions are a scam. If the markets do well, you get the money you were entitled to, if they dont, you're fucked. It's like buying a call option, but with limited upside (i.e. pointless).

May 30, 2013
trazer985:

pensions are a scam. If the markets do well, you get the money you were entitled to, if they dont, you're fucked. It's like buying a call option, but with limited upside (i.e. pointless).

This is very true but you're forgetting that they're tax deferred, so even if you do marginally ok, it's still a good investment after taxes.

My drinkin' problem left today, she packed up all her bags and walked away.

May 30, 2013

Thanks for all the answers. So what would you suggest doing if I wanted to save money for a shorter time horizon (about 5 years). Is there anything type of strategy that can be done that wont get me hit with a penalty?

May 30, 2013
JSonDx:

Thanks for all the answers. So what would you suggest doing if I wanted to save money for a shorter time horizon (about 5 years). Is there anything type of strategy that can be done that wont get me hit with a penalty?

To the bond-hating "investor" - I guess all those people, institutions, corporations et al that own bonds are suckers, since yields are so low and prices can only go down, eh? How much did that mantra cost you over the past 5 years? You should start a hedge fund and quit your 9 to 5, since predicting interest rates with accuracy can be a pretty profitable business.

Put aside what you will need in a cash taxable account (not an IRA or retirement account). Use short term munis - there are many ST muni funds out there and google will do the work for you just pick one that doesn't move around a lot and has good liquidity. Your yield will be less than 1% but it is tax-free and the price is not volatile.

If you would like to take more risk, go with a BPK, a term trust that has a duration which puts the average maturity date of its holdings around December 2018, this is also the date the fund will be liquidated. This means that most of the assets are maturing around the time you will need your money, so there is less interest rate risk. They buy mostly investment grade munis. That yields 4% tax-free but the NAV changes daily, as does the market price.

You are likely going to be paying transaction fees every time you buy these funds, so do it once a month or so and make sure the $10 you pay isn't more than you are earning in interest on the new money. If it is, keep it in cash, find a lower cost broker, or make transactions with larger dollar amounts.

If you do buy muni funds, you will likely have to pay state taxes. Talk to your tax guy for more info.

May 29, 2013
1337:

To the bond-hating "investor" - I guess all those people, institutions, corporations et al that own bonds are suckers, since yields are so low and prices can only go down, eh? How much did that mantra cost you over the past 5 years? You should start a hedge fund and quit your 9 to 5, since predicting interest rates with accuracy can be a pretty profitable business.

I'm talking about retirement savings. Bond's suck over the long-term. If you're investing over the next few years, sure, buy some bonds. They'll have lower vol than the equities, and if you plan on spending the cash in a few years, you'll want that lower vol. I do think muni bonds are a good play in the short-term.

imo, IG is basically played out. It's all relative value plays now. High yield is way overbought. Spreads are very tight, and again, it's relative value. And when inflation finally rears its ugly head (I don't know when), that 4% coupon you're getting is going to kill you.

If I had liabilities, I'd hold bonds. But this kid doesn't. He's planning for retirement 50 years from now. Buy some stocks.

But yeah, I hate bonds, so sue me.

May 30, 2013

I work with people on debt reduction and investments pretty often, my advice would be for 5 years to not invest in the market. DON'T think that I'm saying to to get any matches you can get on a 401k, invest what you need to in a 401k to get a maximum match. The money that you put in there you should probably go into a S&P 500 index fund, this will minimize the costs of admin fees and your tax hit on the account. I don't think I need to tell you what a huge different in compound gains 1 or 2% makes. 5 years isn't that long and a unexpected drop in the market/whatever you invest in could easily kill of any of the gains you would've recieved so I would probably go with a bond index.

Determine your financial retirement goals, what you want to retire with and when and then google or download a compound interest rate calculator and figure out how much you need to put away. I'd match your 401k and then max your applicable IRA(Roth if you figure you'll make more later or Traditional if you figure you'll make less) and give a nudge more in the way of a Roth since there are other benefits for it. Then just put the amount you want for your short term in a bond index.

Don't worry about getting all crazy with mutual funds on trying to make it diverse by investing in many different markets, an S&P 500 index fund has been found to be less risky while still beating out, on average, 80-85% of other funds. Looking at Vanguards 500 fund I think they beat out 98% after taxes, but that's a special case. Plus, if you just invest in an index you don't have to worry about currency differences.

May 30, 2013

Not a strategy that has tax advantages, no.

I mean you can start a roth IRA and take out your principal penalty free at any time, but if you take out whatever gains are in the account you get penalized.

If you want to save for traveling or whatever, just save money. You don't need to do it in a retirement account.

May 30, 2013

Check out the different deferral options you have in your 401(k). You'll get whacked with penalties the hardest on pre-tax deferrals, but after-tax deferrals (if your plan offers them), aren't as hard on the penalties for early withdrawals. Talk to your HR department or 401(k) administrator to see if your plan offers after-tax deferrals, and do your own research to see if they're right for you. Everything comes at a cost - while you might not be faced with an early withdrawal penalty with after tax deferrals, note that if you ultimately don't withdraw your funds until retirement, your earnings are taxable (unlike Roth deferrals, which are also after-tax).
But, I agree with the others - a 401(k) is a retirement account, not a piggy bank for travel use.

May 30, 2013

Start by asking how much you will need in 5 years time and how much you have today. Then you can back out various rates of return to get from point A to B assuming different levels of contributions. Once you have a rough idea on the desired return you need you can start to think about various asset allocations that will get you the desired return with acceptable risk. Having an end number in place before you begin investing will likely allow you to make more optimal asset allocation decisions.

May 30, 2013

General asset allocation is your decision, and I assume you have a view on equities vs. fixed income. Might be worth taking a look at top 10 holdings in the prospectus, rebalancing last year, I realized every equity fund in my 401(k) held significant AAPL stock, and so bought an offsetting position (Short Tech ETF since I can't trade actual stocks). If you want to invest in commodities, do it outside the 401(k), as fees on those investments tend to be higher than the basic index funds. For further tax optimization, buy your dividend stocks/REITs/MLPs (I think they are all overbought, but hey diversification) in a Roth IRA (assuming you reinvest dividends) and buy any true growth investments that will be long-term capital gains or tax exempt munis in your taxable PA.

Roth IRA fund can be used for grad school, but depending on tax brackets/liquidity/interest rates you may or may not want to do this.

May 30, 2013

Want my advice? Do not invest in anything your employer can directly manipulate. So dont buy stocks, bonds, derivatives, or any other marketed security. Stick to real assets. Stick to things that others build value and equity in for you.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

May 29, 2013
heister:

Want my advice? Do not invest in anything your employer can directly manipulate. So dont buy stocks, bonds, derivatives, or any other marketed security. Stick to real assets. Stick to things that others build value and equity in for you.

I can't tell if you're joking, but what real asset are you recommending he buy? Value is what someone is willing to pay for something. And people don't build value and equity in something for someone else. They do it for themselves. When you buy stocks, you're along for that ride.

May 30, 2013
FundofFun:
heister:

Want my advice? Do not invest in anything your employer can directly manipulate. So dont buy stocks, bonds, derivatives, or any other marketed security. Stick to real assets. Stick to things that others build value and equity in for you.

I can't tell if you're joking, but what real asset are you recommending he buy? Value is what someone is willing to pay for something. And people don't build value and equity in something for someone else. They do it for themselves. When you buy stocks, you're along for that ride.

People build value in everything for others. Lets take stocks for example. I buy stock a at 100/share. The value will never change unless someone offers more, therefore the equity increase is derived from others. Now lets look at real estate. Appreciation is derived by others feeling the value is worth more than you paid, however more value can be created in the form of rents. Through rents others are actually paying for the equity you are creating with additional cash flows.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

May 31, 2013

Well, I'm still in college but with no student loans if possible maxing out your contributions make sense. So does buying a house when you're ready in 5-6 years so saving up for a down payment in non 401K accounts is probably a good move.

May 31, 2013

asset allocation according to risk is the most basic but honestly better than timing. If you have self directed brokerage account it's a diff story. Go with an S&P, REIT, Emerging Market, Fixed Income and Cash/Preservation to deploy as you like.

If the glove don't fit, you must acquit!

May 31, 2013

Convert to IRA, then buy Apple and Chipotle

maybe throw in some Rick's for diversification purposes

May 31, 2013

my 401k is all mutual funds but more aggressive ones (tech, intl, etc). pretty much sticking with long term hold for the most part. up 50% in 2009.

May 31, 2013

Like Bateman, my 401k/IRA is mostly aggressive mutual funds, with several individual equities that I believe in the long term prospects for (5-10 years out). I've got enough short term thinking and falling knives with my normal trading account, it's nice to force myself to have some long term investing perspective.

May 31, 2013

do an IRA if you can.

Best Response
May 31, 2013

Build an emergency fund equal to 6 months expenses (ideally a year, but I know that's a hard bargain).
Do your 6% match; make out a Roth IRA.

Then I'd set aside some money for some alternative investments, maybe a FOREX trading account, do some swing trading, etc.

But have some fun. It's not all about building this HUGE platform of dollar signs. It'd be great to be 30 and a millionaire or 40 and retired, but don't forget to be 20 something and shitfaced. Save up a far amount to go on a vacation OR start a collection OR something.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller.

"Live fast, die hard. Leave a good looking body." - Navy SEAL

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May 31, 2013

They don't match a Roth 401K at all? Or their contributions are pre-tax?

As others have said, throw $5.5K into a Roth IRA right now and get another $5.5K ready to deposit Jan 1, 2016 for the 2016 year.

Once you've done that and have 6 months expenses in cash I would start bumping up your 401K contributions or going to a taxable brokerage account.

Personally, I put 10% into my 401K my first year (match was at 6%). I have intermediate savings goals that made me not want to lock it all up until I'm 59.5 so I didn't max it out but I felt like it was a good start and I liked the fact that it was getting taken out of my paycheck automatically.

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May 31, 2013
SECfinance:

They don't match a Roth 401K at all? Or their contributions are pre-tax?

As others have said, throw $5.5K into a Roth IRA right now and get another $5.5K ready to deposit Jan 1, 2016 for the 2016 year.

Once you've done that and have 6 months expenses in cash I would start bumping up your 401K contributions or going to a taxable brokerage account.

Personally, I put 10% into my 401K my first year (match was at 6%). I have intermediate savings goals that made me not want to lock it all up until I'm 59.5 so I didn't max it out but I felt like it was a good start and I liked the fact that it was getting taken out of my paycheck automatically.

Yeah they don't match a Roth 401k, just a traditional one. So it seems like people are saying I should use a Roth IRA instead of a 401k? So don't put anything in the 401k at all? Thanks again for the responses.

May 31, 2013

Don't bother with the 6 month emergency fund if you have a Roth IRA/401K. You can draw the contributions out penalty and tax free, its only the earnings you can't touch. By contributing to a Roth IRA, you are essentially making yourself an emergency fund. And it grows every year when you contribute to it. Just be careful if you every have to draw out of it that you don't draw out more than you've contributed.

What I'd do:
1. Do traditional 401k and get the match
2. Do Roth IRA, try to max the 5,500
3. If you can keep saving, start contributing back to the 401k. I'd personally go Roth, but others would say go traditional. It's up to you. In the end, you are winning either way because you are saving so early. Don't stress too much about it.
4. If you can do more (like I do), then I'd look at doing an after-tax contribution to your 401k (if they offer it). The IRS limit is $53,000 total to an 401k (18,000 in the traditional/roth bucket, and the rest in the special after tax 401k). This is attractive because your earnings will be tax deferred until retirement, unlike a brokerage account where you pay taxes/capital gains.
5. Taxable brokerage account, plenty of people to give you advice on what to look into.

May 31, 2013

So you're 22 years old? A Roth IRA/401k is an amazing waste of money. It will be at least 40 years until you can touch that money. In 40 years, the government will almost certainly renege on its Roth promises and will tax distributions. Remember the January 2014 State of the Union speech? President Obama proposed taxing 529 plans after the fact. In the next 4 decades it's a mathematical certainty that the federal government will hit a severe fiscal crunch with Medicare and Social Security--Congress won't miss a beat by taxing the upper middle class to preserve benefits for the middle class. Roth IRA/401k distributions WILL be taxed in the future, that you can be confident of. It's not a matter of "if" but "when", and I'd say a 40 year time horizon is a pretty good bet for the government to change its mind.

May 31, 2013

A judge, who will be in the group you describe and probably have a Roth and/or traditional Ira, will have to deny a challenge to those taxes. Pretty unlikely.

May 31, 2013
anonymousbro:

A judge, who will be in the group you describe and probably have a Roth and/or traditional Ira, will have to deny a challenge to those taxes. Pretty unlikely.

That's not correct. Congress has the absolute taxing authority. It can absolutely tax ex post facto, and it has on many occasions. I think it's terrible public policy, but retroactive tax authority is within the power of Congress.

May 31, 2013

that is a really good problem to have. I would buy a house, then buy another one! and rent the Sh!t out of it!

May 31, 2013

In a similar position to yourself -- I set my 401(k) contribution to 10% per paycheck (95% of it goes to what is essentially a S&P 500 index fund and 5% goes to a real estate fund which I treat as a little play money).

I've built up a ~$10k buffer and so anything that I have left over post-401k contributions and expenses, goes into a brokerage account where I invest in companies of my choice (typically safe, dividend paying companies). I'm hoping to build a significant base to where I can let compound interest take over.

Just my 2 cents. I'm sure there are tons of ways to allocate your capital. Good luck.

May 31, 2013

You know, one reason I chose the Roth route is BECAUSE I am making a bet that taxes will be higher in the future than they are now, not just because I'll be richer, but because of the things Vtech is talking about. I'd rather pay the taxes now than pay the EU style taxes later.

I suppose what Vtech is saying could happen, but in that case, your tax deferred options would be shot to hell as well. I'd rather bet that such a massive tax change doesn't stand up to legal/political challenges. The bonus is that if things seem to be heading in that direction, I can simply withdraw all of my Roth contributions before they drop the hammer. I'd only be taxed on the earnings in this scenario, which is what would have happened if I did the traditional, tax deferred route anyway.

May 31, 2013
John-Doe8:

You know, one reason I chose the Roth route is BECAUSE I am making a bet that taxes will be higher in the future than they are now, not just because I'll be richer, but because of the things Vtech is talking about. I'd rather pay the taxes now than pay the EU style taxes later.

To me, this strategy makes NO sense. One in the hand is sometimes better than 2 in the bush. You're robbing the poorer version of yourself (the one today) to potentially (and that's the key word) benefit the wealthier version of yourself (the one that could very well be dead in 40 years anyway).

With regard to rising tax rates, my guess is that the government will begin with the lowest hanging fruit (529s, Roth IRA/401ks, the highest marginal tax rate, closing tax loopholes (e.g. carried interest), etc.) when desperate times come before raising taxes on the middle and upper-middle class, which would have far more negative political ramifications.

May 31, 2013
NuclearPenguins:

So I'm really at a loss here for what I should do and thought I'd check here first to get everyone's thoughts on the situation.
1st year analyst, just started in June. 80k base and no student loans. Rent is only $750/mo and I live in the Midwest so costs of living are far lower than in SF or NYC. Possible plans to go to B-school but not 100% certain on that.
My bank matches up to 6% for a traditional 401k so I already have that set at 6%, but they don't match a Roth 401k. Should I still put money in that as well? Right now I just have way too much money getting deposited into my checking account every month and I don't know if I should start investing in some ETFs or something too.
Thanks!

Do you have a Roth IRA? If not, max that out.

May 31, 2013

There have been three instances were a tax was retroactively placed.

The History of Retroactive Taxes

In August 1993, President Clinton signed a law raising tax rates on high-income earners and estates. The new rates applied back to the beginning of 1993, and although disgruntled taxpayers went to federal court seeking to have the retroactive application of the rules invalidated, those arguments proved fruitless.

In 1987, Congress passed laws retroactively repealing an estate-tax provision, a repeal which cost one taxpayer $2.5 million. The Supreme Court ruled that taxpayers have no right to rely on tax legislation being permanent, with the majority arguing that as long as lawmakers act with "a legitimate legislative purpose," retroactive application is constitutional. Even though one Supreme Court justice argued that the government had used "bait and switch taxation," he nevertheless concurred with the unanimous holding of the Court.

A 1976 tax-law change affected homeowners' ability to shelter capital gains from the sale of a home from taxation. One homeowner took advantage of rules that allowed half of all gains to be free of tax, but six months later, President Ford signed a law retroactively limiting the taxable amount. Just as it did more than a decade later, the Supreme Court upheld the law as being constitutional.

For the 529 college savings plan commentators largely said people would be taxed going forward and not retroactively.

I don't see a future were the government taxes Roth IRAs as it would discredit tax any and all tax laws, effects a majority of the population, disproportionately hurt lower income citizens (wealthy Americans would simply leave the IRAS as inheritance).

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May 31, 2013
modestlocke9:

For the 529 college savings plan commentators largely said people would be taxed going forward and not retroactively.

Removing the 529 tax exemption would have taxed withdrawals/distributions of 529 capital gains. There was no "going forward" in the tax proposal since that would make no sense whatsoever. You have a 529 savings plan? Then you were to pay capital gains tax on your earnings at distribution, according to the proposal. That's not technically a retroactive tax, but it's changing the rules on people after they made their strategic decision to invest.

modestlocke9:

I don't see a future were the government taxes Roth IRAs as it would discredit tax any and all tax laws, effects a majority of the population, disproportionately hurt lower income citizens (wealthy Americans would simply leave the IRAS as inheritance).

This is just an asinine statement. Roth IRAs are held by less than 10% of the public, so how in God's name could taxing Roth distributions effect "a majority of the population"? That's just a patently absurd statement.

I already posted a link from the U.S. Department of Treasury with at least 5 examples of retroactive tax changes. There are definitely more than 3 examples.

May 31, 2013

Good luck trying to forecast tax rates 40-50 years from now. I simply match my employer's 401k limit, max out Roth, and pour the rest into a brokerage account that I invest myself.

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May 31, 2013

If by Midwest you mean Chicago IL, Roth conversions are state tax free. 401K contributions avoid state tax. Roth contributions, however, do result in a state tax on your income.

In other words, you get a 3.75% discount (actually more like 5%-6% discount after tax) if you contribute pretax and convert later.

If you do a Booth or Kellogg MBA and make penalty free withdrawals via pretax IRA distributions, also shifting income from high tax to low tax years (NOT a 401k- you need a rollover to avoid the penalty), state tax exemptions for retirement income would also apply.

I am a fan of going Roth your first year (while you are in the 15% tax bracket) and then making pretax contributions afterward, with a view towards converting and withdrawing when you are doing an MBA or if you find yourself unemployed (a common feature of this industry). But if you can figure out a way to contribute to a pretax 401K and do an in plan conversion, that saves IL residents up to $750 in state tax on a Roth contribution.

If you will probably experience income volatility during your career (EG your career looks more like a trader's than a nurse's), pretax 401ks give you a free long gamma position- at least until you never have to worry about earning less than $500K.

Whether or not taxes will apply to Roths or what tax rate will apply to 401ks in the future, it at least makes sense to get an optimal tax rate on the conversions. And almost ever since we've had a tax code, graduate students, part year employees, and unemployed people have enjoyed lower marginal tax rates than bankers- often a 0% or 10% or 15% rate, regardless of top marginal rates at the time. There is a certainty you fall into one of those rates this year. And there is a very decent chance that you will fall into one of those categories sometime in the next half a century.

So I think it always makes sense to tuck some money away in a pretax account if everything else is in a post tax account. And I also think it makes sense to make contributions and conversions to Roths in years where you are in a low tax bracket.

May 31, 2013

Oh god why do these discussions always have to get so personal and political.

Again IMHO the optimal strategy is the same regardless of where you think the tax code is going, provided that our RKMAP (Radical Kenyan Muslim Atheist President) does not convert all Roths into pre-tax IRAs and our ECARs (Evil Corporatist Anarchist Republicans) do not institute a fair tax or flat tax. Both outcomes seem pretty extreme to me.

Now that I have offended everyone, can we get back to giving this kid some advice?

-Build emergency savings.
-Get employer 401k matches. Make Roth contrive your first year, then switch to pretax.

Let's not complicate this with a political personal tax debate.

May 31, 2013
IlliniProgrammer:

Oh god why do these discussions always have to get so personal and political.

Again IMHO the optimal strategy is the same regardless of where you think the tax code is going, provided that our RKMAP (Radical Kenyan Muslim Atheist President) does not convert all Roths into pre-tax IRAs and our ECARs (Evil Corporatist Anarchist Republicans) do not institute a fair tax or flat tax. Both outcomes seem pretty extreme to me.

There's no politics at all in this discussion. The federal government is occupied by both Democrats and Republicans, neither which is trustworthy to keep its promises. Obama's 529 proposal is just a perfect example of what can and will likely happen in the future with these government-regulated retirement plans. And when SS and Medicare start to crumble under the demographic weight just wait and see how fast both parties move to renege on past promises to the upper-middle class.

May 31, 2013
IlliniProgrammer:

Let's not complicate this with a political personal tax debate.

I'm sorry, but you're a f*cking idiot. You're not going to tell me what to talk about.

May 31, 2013

Never debate a libertarian. They'll drag you down to their level of delusional paranoid cynicism and beat you with experience.

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May 31, 2013
IlliniProgrammer:

Never debate a libertarian. They'll drag you down to their level of paranoid cynicism and beat you with experience.

Right. "Paranoia". Because the President of the United States didn't propose in the State of the Union Address to retroactively change the 529 rules. Ya know, it's not paranoia if it's true. And I'm not a libertarian.

May 31, 2013

Of course you're not a libertarian. They're as hard to find as True Scotsmen!

Look I'm sure you have a lot of very earnest and detailed questions about Operation Jade Helm, too. I don't think any of them are proof of a socialist takeover.

Can you please take your anti-government bandwagon to some other thread so we can get back to financial advice?

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May 31, 2013

I just want to issue a warning that I wish I had as I've seen posts suggesting you allocate the $5,500 maximum into a Roth as early as possible in a tax year. There is a maximum income of around $116K for single filers. At an $80K base + average banking bonus, you're most likely going to be subject to a penalty. This doesn't take into account a mid-year promotion or salary bump that may take place. Be certain that you have a great target on your true salary before allocatiing that early because I have already made that mistake for 2015 thinking I was getting ahead by allocating that cash into my Vanguard Roth Day 1.

May 31, 2013

Needs to be reworded, but another good, logical argument against doing a Roth.

May 31, 2013

I disagree. You're forgetting that the tax deduction benefit of a traditional IRA is limited if you have a retirement plan at work. You can't deduct anything if you make more than $70K as a single filer in this situation.

Without a deduction, he'd pay taxes on the income he saved now, AND taxes on all earnings in the future. Just do a Roth and only pay the taxes now, protect the earnings. As @NewYork7 stated, just be careful not to exceed the limits. And as I stated in reply above, Roth 401ks have no income limit.

May 31, 2013
NewYork7:

I just want to issue a warning that I wish I had as I've seen posts suggesting you allocate the $5,500 maximum into a Roth as early as possible in a tax year. There is a maximum income of around $116K for single filers. At an $80K base + average banking bonus, you're most likely going to be subject to a penalty. This doesn't take into account a mid-year promotion or salary bump that may take place. Be certain that you have a great target on your true salary before allocatiing that early because I have already made that mistake for 2015 thinking I was getting ahead by allocating that cash into my Vanguard Roth Day 1.

Good point but you can always pull out the excess contribution before Oct 15th following the tax year without penalty iirc. I wonder if it's also possible to recharacterize to a traditional IRA and then convert to a Roth.

It's important to be careful with this stuff. For instance, when I say you can use 401K money to pay for school penalty-free, you've got to convert from a 401k to a rollover IRA first before you can take penalty free withdrawals for educational expenses. (Otherwise you pay a 10% penalty)

May 31, 2013
NewYork7:

I just want to issue a warning that I wish I had as I've seen posts suggesting you allocate the $5,500 maximum into a Roth as early as possible in a tax year. There is a maximum income of around $116K for single filers. At an $80K base + average banking bonus, you're most likely going to be subject to a penalty. This doesn't take into account a mid-year promotion or salary bump that may take place. Be certain that you have a great target on your true salary before allocatiing that early because I have already made that mistake for 2015 thinking I was getting ahead by allocating that cash into my Vanguard Roth Day 1.

You can always recharacterize your contribution.

May 31, 2013

Virginia Tech, you are always getting into arguments over these small points. Jeeze, it's just a 401k.

I just have my bank withdraw a percentage of my paycheck every pay period to ensure that I max mine out.

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May 31, 2013

I haven't read the entirety of this thread, but I saw Roth IRA and I'm pretty sure you aren't even eligible for a Roth IRA if you make over $131,000 as a single individual. And if you're over $116,000, you can't contribute the full $5,500 per year; they scale you down to $0 once you hit $131K.

And as an investment banker, you'll be making more than that either right away, or at least (if all goes well) for the remainder of your career.

Technically a Roth 401k will have less value at retirement, but given it won't be subject to income tax in the distribution phase it would provide a higher monthly income than a traditional 401k. If you want to put in more than just the $18,000/year allowed under current 401k caps you could always open a brokerage account.

May 31, 2013

How would a Roth 401k have less value at retirement?

May 31, 2013
SF_G:

And as an investment banker, you'll be making more than that either right away, or at least (if all goes well) for the remainder of your career.

Not right away, most incoming analysts start in June/July so they only have half a year's worth of salary and no bonus.

May 31, 2013

sorry if this is repeating myself, I skipped the argument about congress and roths and whatever else was being debated. I wrote a thread on "what should I do with my money?" questions a while back and in essence, here's what to save for:

  1. retirement & emergencies (6 months may be too much for a 22yo, I advocate that for families, 3mo is usually enough)
  2. bullshit (vacations, cars, bail money, ludes, etc.)
  3. specific goals (house down payment, wedding, etc.)

there are differing thoughts on retirement, as in only do the % that the company matches and putting the rest into brokerage accts, Roths, etc. yes, the most efficient thing to do would be to max the traditional 401k to get the match, max out a Roth IRA if you're eligible, and dollar cost average into a brokerage account. in a perfect world, everyone would do that and stick with the plan.

the first problem with that is people don't stick with the plan, they just end up spending more money and not saving, so I'm not a fan of that strategy. now assuming you have discipline and do save, there's another thing to consider...

just be aware that your emotions are going to try to ruin you. you will either end up sitting on too much cash waiting for a huge opportunity or be poorly diversified with 40% of your assets in amzn, tsla, or some other similar bullshit. to combat those urges, just dollar cost average into a diversified basket of funds (either indexed or active, and whatever your preference, I'd choose mutual funds instead of ETFs) on a regular basis (monthly, weekly, whatever), and let it go, just put it on autopilot, maybe revisit once a year to rebalance, but until you start a family, do not change your strategy.

reality is if you're working 80-100 hours a week in banking, you don't have time to be a good investment analyst as well (unless you're not busy), so the advice about swing trading, forex, etc., is awful. maybe do this with $1,000 of play money that you don't care if you lose, but not with retirement money.

my opinion? MAX your 401k, not just the 6%, the full 18k. if you can save more than that, do a Roth IRA then brokerage. otherwise, your 401k will do the dollar cost averaging for you, and you're more likely to stick with the plan, even though the investment choices are rigid. anecdotally, I've seen this work better long term.

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May 31, 2013

I too, read the first few and skipped the Congress, retroactive-tax debate.

It all comes down to how you live and plan your finances, and how other people's advice based on their own lifestyles / model of thinking matches with yours. Apply what matches with you.

So to begin, I'm of the belief that its not useful to buy expensive things. I care about looking good enough, living comfortably enough, etc. Good enough. Vacations to popular destinations - sure. And a vacation to Thailand is close. Dont do a Eurotrip just for the [Insta]gram. Do it because its new, because you'll grow as an individual, and because you're at least sorta genuinely curious about it. I'd live at a standard supported by my previous salary, with the previous salary already generous with 401k / savings, etc. What you do with the difference is up to you. [If its your first job, just spend half an hour / an hour one day calculating your potential expenses, from the bottom up.]

First and foremost, if you can resist peer pressure to spend on an extravagant lifestyle, you're already many steps ahead. In times of severe economic volatility, IB business can slow dramatically. Heard it directly from someone who worked in an investment bank 30 years ago. So, I'd save. Save for rainy days first, before investing. I'd personally save with 6months expenses for emergency fund, 2 months in savings, with additional annual contribution to match inflation.

Then, I'd max my 401k and Roth IRA as much as income caps allow. Passive investing with the lowest possible fees is the wisdom. Like what thebrofessor said, its unlikely IB analysts have time to source and analyze great investment ideas. David Swenson (Yale Endowment manager who has beat the market consistently) said, unless you have access to the best of the best managers, best to stick to passive investing.

Again, this is what I'd do. Apply what matches with your intended lifestyle.

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May 31, 2013

Yes it definitely makes sense to contribute to your 401K.

Just because you plan on retiring before 60 or 65 doesn't mean that you shouldn't invest in your 401K. Your 401K should not be your only retirement savings. Most employers will match a substantial portion of your contributions (essentially "free" money).

So the very simple solution is you use your other savings until you hit the retirement age and then you start withdrawing from your 401K. It isn't very complicated.

May 31, 2013

Yes, have a different savings account for when you want to retire, but use your 401k once you are of age, because most employers double your input, so it would be economically wise to get that free $$ while you can

I didn't say it was your fault, I said I was blaming you.

May 31, 2013

401k is insurance, not investment. I maxed out.

May 31, 2013

wake the F up guys, Bonus is taxed post contribution .

You're welcome.

hollr

May 31, 2013

Well...

no problem then, just get the employee match and be done with it.

401K's are generally good ideas, you should be able to save and still put at least 10K in your 401K. I'm a fan of tax deductions so I like the 401K.

May 31, 2013

Do most/all banks in the states match 401 as a first year?
What is the standard match? Is there a cap?
Thanks

May 31, 2013

no, generally no first yr match. matches can be anyware from a 0-5% of contribution to 0-5% of comp in general.

May 31, 2013

I think a ~4-5% contribution or at least match (as a % of total comp, not of contribution) is fairly standard.

While it's not an investment bank, McKinsey contributes 12% of an employee's comp to their 401k.

May 31, 2013

Isn't there a vesting period?

May 31, 2013

.

May 31, 2013

citi has no match, and merrill does % of contribution.

May 31, 2013

that's what I thought. Bet this perk gets tweaked by some firms in the near future.
usually need three years here before any sort of retirement % match or vesting.

May 31, 2013

I put in 10% and 6% is matched dollar for dollar by my company. Everyone i've ever talked to has advised me to max out my 401(k). Now, either the world is whacked or these people who have far more experience than I do actually know what they're talking about. I did the quick math awhile back and I think every 2% in my 401(k) equated to $30 less on a bi-weekly basis. This is definitely one of those situations where you'll thank yourself later in life.

May 31, 2013

My match is 100% vested on payday. However, it does come in the form of company stock (boo!). I don't think I'll have a problem selling it off when I choose to. However, seeing as financials have a lot of potential upside right now, I'm going to hold onto it. If I wasn't so young and the money wasn't essentially a free gift, I'd be a little disturbed knowing 3/8ths of my retirement fund is in a single stock.

May 31, 2013

citi matches starting this year

May 31, 2013

Additionally, are most employer matches pre-tax only?

May 31, 2013

I do a blend of the two. I have the highest possible pre-tax that will get matched (where I work only pre-tax contributions are matched). I also have a post-tax contribution, seeing as I would rather withdraw that money later tax free (hopefully when I'm in a higher tax bracket than I am today).

May 31, 2013

Just about all employer match is pre-tax in typical 401k's. Also keep in mind that if your employer matches 5% of your salary, you need to contribute over 5% after tax/roth to get the full match.

One thing that needs to be clarified is do you mean after tax or roth? After tax can be withdrawn without penalty but the earnings are always taxable, roth 401k works the same as roth IRA. 401k's are almost ALWAYS going to be cheaper than IRA's because you're buying mutual funds in bulk that have lower expense ratios and fewer fees (annual, withdraw, etc), but if you have a small employer the plan fees can get excessive quick and you usually do not have as many options as a retail account.

In my opinion roth/after tax is much better because starting out you will be in a lower tax bracket unless you make over 75k or so depending on state/fed taxes, in which case you should consult your tax adviser as they would know better than anyone. Also who knows what taxation will be in the future when you withdraw, so I feel to pay tax now and earn tax free is a greater benefit than earn on taxes that you would have paid now. Some do like to hedge with a 50/50 split etc, but employer match is pre-tax as mentioned earlier so keep that in mind. Lastly, the reason I prefer after tax is because if you leave your employer you can rollover your pre and post/roth accounts to a new 401k or IRA and withdraw any amount of after/roth money without penalty as long as you rollover all the pretax earnings on roth and pre-tax employer match.

Another good benefit is that 401k's generally cannot be touched by any creditors, just court orders through divorce (QDRO).

Sorry about the wall o text, I used to manage retirement accounts. Let me know if you have any other questions.

If the glove don't fit, you must acquit!

May 31, 2013

This would make a great interview question.
I think there are too many imponderdables.

We can start with the ticky-tack factors: let's assume there are no differences in employer matching, in creditors being able to touch them, etc.

First, putting $X away after-tax gives more of a tax shield than $X pre-tax. It is surprising that the dollar amounts are the same - one really should be able to put away less after-tax. Anyhow, lets' put that aside too.

It's essentially a bet on whether your marginal tax rate today is higher/lower than the rate when you take out the money.

Factors that influence that are:
- Your income today vs. in the future, to the extent that income determines tax rates (the factors below also contribute, so it's not the only thing)
- Geography -- your state/local tax burden could be higher/lower today than in retirement, depending on where you live now/in future, and unlike many things you can control this
- Overall level of taxation -- will undoubtedly increase, which favors paying the taxes now
- Structure of taxation. If the US changes how it taxes people (e.g. adds a VAT), it is conceivable that income tax rates could decrease even if overall taxation increases
- Rule of law: If the government really needs money, would the government go so far as to change is mind about the treament of Roth accounts? I have to imagine that they would grandfather existing accounts, but you never know

As with anything, it's probably a good idea to be hedged.