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 30, 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
CypressLB:

I work with people on debt reduction and investments pretty often.....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.

You would think that you would know that a 401k is a tax deferred account if you are giving all of this financial advice.

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.

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May 30, 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

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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.

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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

Well, what we are talking about is a Roth-Ira (because a traditional is taxed when you take it out anyways). For that, it is very arguable that you have a quasi contractual right to not be taxed later because you paid taxes now to avoid that. Taxing the earnings and withdrawals essentially becomes a "taking" of that contractual right. This invokes some level of scrutiny and the due process clause (I think). So, there would be a lot of room for a judge to rule against the tax.

Out of curiosity, can you list some more famous retroactive taxes?

Edit: this would be my argument at least.

May 31, 2013

Come on. There's no "contractual" agreement, implied or otherwise, with taxation. You'd be hard pressed to find a judge who would agree with that line of reasoning.

Here is a short list:

http://www.treasury.gov/connect/blog/Pages/Retroac...

May 31, 2013

you pay taxes every year that you contribute to a Roth-Ira. Why would you do that unless you were expecting to not have to pay on earnings and withdrawals?

May 31, 2013
anonymousbro:

you pay taxes every year that you contribute to a Roth-Ira. Why would you do that unless you were expecting to not have to pay on earnings and withdrawals?

That's exactly my point. If Congress retroactively changes the rules and taxes Roth distributions then Roth holders will have made an abysmal investment. Over the course of 40 years it is almost a certainty that Congress will change the rules ex post facto given the state of the U.S. entitlement system. In fact, it wouldn't surprise me at all if an activist IRS unilaterally re-writes the rules and a judge upholds it.

The courts have established that Congress has absolute taxing authority and Congress has retroactively changed tax law before so apparently no judge has established a contract breech for retroactive taxation.

May 31, 2013

i don't want to continue this disagreement because it's taking away from the thread, but I do think that there are distinct analytical differences between the situations you cited and a Roth IRA (not saying there aren't examples of congress similar to a Roth out there, idk)

I guess we will eventually find out who is right.

May 31, 2013

Well, your opinion is wrong. Congress has the power of retroactive taxation and to tax at any time for any reason, as Chief Justice John Roberts reconfirmed in his detestable 2012 ACA ruling. This is an established fact, not subject to your opinion. Therefore, a 20-something should consider the implications of making investment decisions today based on assumed future tax law 40 years from now (really 50 years from now when the retirement age is moved back).

May 31, 2013

So I'm just going to entertain this not because I agree but because I'm curious. What are his other options then?

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May 31, 2013
bfin:

So I'm just going to entertain this not because I agree but because I'm curious. What are his other options then?

Huh? His options would be to not invest in a Roth IRA or 401k, if you accept that Congress will likely eventually tax distributions of Roth accounts sometime in the next half century. It's a numbers game. Congress needs money; Congress taps a source of money from a tiny minority of voters (I think less than 10% of people even have 1 Roth IRA account) in order to help preserve benefits for a much larger percentage of voters. For a 22-year-old, you're literally talking about a 50-year time horizon for Congress to retroactively change the rules. Congress has retroactively changed rules for federal employee retirement; what makes us think that it won't do the same with regular retirement accounts when Medicare and Social Security's fiscal condition begins to deteriorate?

May 31, 2013

Vtech I understand that part but my question is, what are his other options then. Considering he will not have any other tax break avenues(No kids, no spouse, no house). What are you suggesting...?

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May 31, 2013
bfin:

Vtech I understand that part but my question is, what are his other options then. Considering he will not have any other tax break avenues(No kids, no spouse, no house). What are you suggesting...?

Anything else that is tax-deferred, such as a regular 401k or IRA. Congress can't renege on its promise because it is already promising to tax distributions from tax-deferred accounts.

BTW, my advice contradicts nearly every financial planner in America, so take it with a grain of salt--if one runs the Excel, Roth accounts create more retirement income than tax-deferred retirement accounts. But my perspective looks out 50 years and asks, "Are retirement account rules and taxation likely to be the same 50 years from now or different?" If the answer is "different" then one should hedge and invest in tax-deferred retirement accounts. I think financial planners make the mistake by running Excel without considering geo-political realities. We're talking 50 YEARS of cultural, political, fiscal, and economic evolution.

May 31, 2013

that decision is actually an excellent example of why a judge might not uphold that tax. The gay marriage and recent upholding were done with at best shoddy legal reasoning. In fact there has been a distinct judicial trend in moving away from opinions based in law, and essentially moving to opinions based on the result that the judges want. I know this because I just finished the first year of law school. The gay marriage decision directly contradicts the overturning of DOMA in which the court held, in part, that the states had the right to define marriage. The ACA upholding happened because there were more liberals than conservatives on the Supreme Court, same thing for the gay marriage. So, the real determination of what you're describing will be how 5 justices feel about the tax. The days of judges analyzing issues purely in the black box of legal reasoning is over. So finally, as I have said, it is not guaranteed that the tax will be upheld. If you do disagree with what I'm saying, 3 justices in the ACA decision, and four justices in the gay marriage decision basically say the same thing.

Also, Out of curiosity why do you think they will pick a Roth instead of doing a wealth tax? Do that many more people hAve a traditional Roth, that won't be dead in 50 years? (I assume it's mostly 40 years old people and above) If that's the case then your premis that the Roth's are a minority is flawed. The traditional IRA might well Move to 10% because as you said most financial advisors are telling clients to do a Roth. If that happens then who's to say they won't tap the traditional as it has become the minority?

May 31, 2013
anonymousbro:

that decision is actually an excellent example of why a judge might not uphold that tax. The gay marriage and recent upholding were done with at best shoddy legal reasoning. In fact there has been a distinct judicial trend in moving away from opinions based in law, and essentially moving to opinions based on the result that the judges want. I know this because I just finished the first year of law school. The gay marriage decision directly contradicts the overturning of DOMA in which the court held, in part, that the states had the right to define marriage. The ACA upholding happened because there were more liberals than conservatives on the Supreme Court, same thing for the gay marriage. So, the real determination of what you're describing will be how 5 justices feel about the tax. The days of judges analyzing issues purely in the black box of legal reasoning is over. So finally, as I have said, it is not guaranteed that the tax will be upheld. If you do disagree with what I'm saying, 3 justices in the ACA decision, and four justices in the gay marriage decision basically say the same thing.

Also, Out of curiosity why do you think they will pick a Roth instead of doing a wealth tax? Do that many more people hAve a traditional Roth, that won't be dead in 50 years? (I assume it's mostly 40 years old people and above) If that's the case then your premis that the Roth's are a minority is flawed. The traditional IRA might well Move to 10% because as you said most financial advisors are telling clients to do a Roth. If that happens then who's to say they won't tap the traditional as it has become the minority?

Your position is wrong. Judges have never once, in 100 years, denied Congress the right to change tax law retroactively. The 16th Amendment gives Congress the absolute authority to levy income taxes. The ACA decision was asinine because it gave Congress the authority to mandate every aspect of one's existence under the guise of taxation, which is fundamentally unconstitutional.

They will tax everything they can tax. Roth IRA is just low hanging fruit because a tiny minority of the electorate possesses them. Wealth tax will probably happen, too. They aren't mutually exclusive.

May 31, 2013

So, just to be clear here, I wasn't the person that threw MS at you. Your entire position is entirely wrong. It is absolutely insane to make a decision between a Roth IRA and a traditional IRA based on some crazy idea that you believe it is certain that the Roth distributions will be taxed. One idea of support that you used for this position is that Roth's are in the minority so congress will be more likely to tax them. As I have said earlier in this thread, between all of the current old people who have traditional IRAs dying, and the fact that almost all financial advisors are advising their clients to do a Roth IRA, it is very likely that Roth's will in fact be a majority. Also, considering that there are numerous other ways to make up the social security deficit and Medicaid deficit it isn't that necessary. For example, social security is taken out at around 6.2% up to around 110,000 (haven't looked at most recent numbers). It is easy enough to take off the up to around 110,000 dollars and create a huge amount of revenue(probably still hitting a minority). Also, the percentage can be increased as well. Medicare is around 2% and could be moved to 3%. Another drastic idea is that entitlements can be reduced or the conditions to receive these benefits can be altered.

Further, it's not exactly like traditional IRAS would be safe under your scenario either. If congress did so choose, then it could go back and retroactively tax the contributions(or gains) of the traditional IRA, and tax that present value of that amount out of your account (to account for the fact that you've technically owed taxes as far back as the retroactive date), which would probably completely wipe you out if you're talking 20, 30, 40, 50 years of inflation.

An actual retrospective tax on Roth IRA distributions would be absolutely unworkable. It would totally wipe out most accounts if it were back-dated more than a few years. For example, assuming they followed how traditional IRA distributions are done, you are required to take 12,000 out each year and be taxed on that (you don't actually have to take it out, but you're taxed either way). So, you can imagine that the present value of that starts to sore a lot as you go further back in retrospective dating. You could tax current Roth distributions, but then you might incentivize those people to rely on SS and Medicare more heavily than they might otherwise. (SS is taxable after a certain amount of income, which distributions are included in under traditional IRA, can't speak to current Roth though and whether those distributions are currently included. If they are, then this point is invalid.)

Edit: the point of the last two paragraphs is that going through with taxing these two would be a terrible decision economically and it would harm the markets and the broader economy. (As all of the extra taxation would take more money out of the markets since these accounts are specifically designed to hold money for the markets.)

May 31, 2013
anonymousbro:

So, just to be clear here, I wasn't the person that threw MS at you. Your entire position is entirely wrong. It is absolutely insane to make a decision between a Roth IRA and a traditional IRA based on some crazy idea that you believe it is certain that the Roth distributions will be taxed. One idea of support that you used for this position is that Roth's are in the minority so congress will be more likely to tax them. As I have said earlier in this thread, between all of the current old people who have traditional IRAs dying, and the fact that almost all financial advisors are advising their clients to do a Roth IRA, it is very likely that Roth's will in fact be a majority. Also, considering that there are numerous other ways to make up the social security deficit and Medicaid deficit it isn't that necessary. For example, social security is taken out at around 6.2% up to around 110,000 (haven't looked at most recent numbers). It is easy enough to take off the up to around 110,000 dollars and create a huge amount of revenue(probably still hitting a minority). Also, the percentage can be increased as well. Medicare is around 2% and could be moved to 3%. Another drastic idea is that entitlements can be reduced or the conditions to receive these benefits can be altered.

Further, it's not exactly like traditional IRAS would be safe under your scenario either. If congress did so choose, then it could go back and retroactively tax the contributions(or gains) of the traditional IRA, and tax that present value of that amount out of your account (to account for the fact that you've technically owed taxes as far back as the retroactive date), which would probably completely wipe you out if you're talking 20, 30, 40, 50 years of inflation.

An actual retrospective tax on Roth IRA distributions would be absolutely unworkable. It would totally wipe out most accounts if it were back-dated more than a few years. For example, assuming they followed how traditional IRA distributions are done, you are required to take 12,000 out each year and be taxed on that (you don't actually have to take it out, but you're taxed either way). So, you can imagine that the present value of that starts to sore a lot as you go further back in retrospective dating. You could tax current Roth distributions, but then you might incentivize those people to rely on SS and Medicare more heavily than they might otherwise. (SS is taxable after a certain amount of income, which distributions are included in under traditional IRA, can't speak to current Roth though and whether those distributions are currently included. If they are, then this point is invalid.)

Edit: the point of the last two paragraphs is that going through with taxing these two would be a terrible decision economically and it would harm the markets and the broader economy. (As all of the extra taxation would take more money out of the markets since these accounts are specifically designed to hold money for the markets.)

You're really living in a ridiculous fantasy world if you think Congress makes taxation decisions based on rational market-oriented thought (we have the highest corporate income tax in the developed world!). The fact that you think the idea that congress may retroactively change the rules with taxation is "crazy" months after the President of the United States suggested the idea with 529 plans is breathtakingly naive. Remember, a 22-year-old has 50 year time horizon for the rules to change and for the fiscal condition of the country to change.

Sure, regular IRAs and 401ks COULD be taxed retroactively but the administration of that would be nearly impossible since you'd have to retrace decades of annual earnings. It would be very easy to simply tax distributions on earnings for rich Roth holders.

To your point on what financial advisors suggest and how it impacts percentages, Roth contribution limits are far lower than tax-deferred limits and I'm fairly sure employers can't contribute to Roth accounts, so even if 100% of people had Roth accounts the absolute dollars would be far less than tax deferred accounts, hence minimal political fallout.

May 31, 2013

The crazy part is trying to predict what issues we will be having around 50 years from now when you would be withdrawing from a Roth IRA. The social security is fucked point is 2034 which is a good 31 years before the 50 year point. If they make a fix it will likely be at that point. He won't be affected by any distribution taxes as he won't be eligible to take distributions.

Edit: I have a Roth-IRA, and my employer did contribute to that.

May 31, 2013
anonymousbro:

The crazy part is trying to predict what issues we will be having around 50 years from now when you would be withdrawing from a Roth IRA. The social security is fucked point is 2034 which is a good 31 years before the 50 year point. If they make a fix it will likely be at that point. He won't be affected by any distribution taxes as he won't be eligible to take distributions.

Edit: I have a Roth-IRA, and my employer did contribute to that.

Well, that's interesting because I understand that Roth IRAs are independent of employer retirement accounts and that employers don't contribute to Roth IRAs. I'm not even sure how that would work if they did.

http://wiki.fool.com/Can_an_Employer_Contribute_to...
But whatever. If you want to invest in a Roth IRA then more power to you. But you have basically lost the moral authority to complain when the government changes the rules.

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

Dude, by your logic no one should invest for retirement. A Roth is just one small component of a diversified retirement plan. Everyone's goal here should be to make themselves ineligible for a Roth based on income levels. Roth IRAs are for poor people.

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May 31, 2013
junkbondswap:

Dude, by your logic no one should invest for retirement. A Roth is just one small component of a diversified retirement plan. Everyone's goal here should be to make themselves ineligible for a Roth based on income levels. Roth IRAs are for poor people.

Actually, you've kind of hit the nail on the head. If you run the numbers and adjust for inflation, it's nearly impossible to save your way to (an upper-middle class) retirement without brutal sacrifice. The most logical way to "save for retirement" is to acquire real estate assets at maximum leverage (that is, maximum leverage that allows for break-even or positive cash flow) and to eventually payoff the mortgage debt. In addition, acquiring businesses that throw off cash flow is a great way to "save" for retirement.

I would (and I do) contribute the maximum amount I can to my tax-deferred accounts up to a balance of $100,000 and then if I need a quick line of credit for something else I can borrow up to $50,000 from that 401k and pay myself back with interest. Like you said, Roth IRAs are for poor people, and I would argue for people who aren't particularly savvy.

You say, "Well, be diverse in your retirement investments." Problem is, it's often a zero-sum game. I used to invest my Roth IRA (yes, I have a big Roth IRA) in self-directed investments, but found that the bureaucracy made it nearly impossible. So for every dollar I put into my Roth IRA (or 401k, for that matter) was one I couldn't use for a more rational long-term investment that would actually pay cash flow in retirement.

May 31, 2013

So, I'm trying to understand your argument. You're basically saying that an investment that is essentially making X dollars into X*some number of dollars, let's say 100,000 into 300,000, isn't worth it because it doesn't produce a yearly cash flow?

May 31, 2013
anonymousbro:

So, I'm trying to understand your argument. You're basically saying that an investment that is essentially making X dollars into X*some number of dollars, let's say 100,000 into 300,000, isn't worth it because it doesn't produce a yearly cash flow?

No....I'm saying that when you purchase real estate and businesses you can leverage up at 50-90% into assets that produce organic dividends, and with real estate the long-term trend is that it appreciates at about the rate of inflation, thereby preserving your future organic dividend cash flow relative to inflation. You'll end up with retirement assets that are largely paid off and that produce organic cash flow. People get really excited when they run the numbers to see what their future retirement account is going to look like. I've got news for you--$3 million in 30 years is not worth $3 million today.

One might advise a person to invest in both government-regulated retirement accounts and real estate and other collateralized assets, but I'd argue that for every $1 you sock away in a government-regulated retirement account is $1 that you can't free up for better investments. And the U.S. federal government is the LEAST trustworthy organization on planet Earth and it WILL change the rules on people. We can strategize all we want in 2015 about our retirement accounts in 2055, but Congress can and will change the rules ex post facto so long as they can get away with it.

May 31, 2013

Agreed, but Roth 401Ks have no income limit.

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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

Again this argument is just not persuasive. The government could do everything you're talking about, and then fix it back to normal, (maybe repeating this process numerous times but ending up on normal when he's ready to retire) so that he is never affected by it. Furthermore, if he ends up on the ideal path from this job, then he won't even need to distribute the Roth, and he can just give it as inheritance. (Traditional forces you to withdraw or at least pay taxes on a minimum amount)

Now, your argument to put the money into real-estate or business. That is something I'd love to flesh out more.

I could agree with this as someone who has given around 40-50k in rent to people since 2009. Also, having an instant return, even if it is just paying the mortgage and other expenses, does seem better than account you can't touch until youre 60+ years old. Also, a 60,000 apartment will pay a lot more than a 60,000 bond. At least around here.

But you said yourself in the RE deal thread, that valuations are way up because of the low interest rates. Also, the rent from this would be taxable where as gains within one of the savings accounts isn't. Also, he probably doesn't have a ton of time to manage the property considering his line of work.

No matter what, the minimum he should do is match his employers contribution as that is a guaranteed immediate return on your money. Tbh my dad never did any more than this because he liked toys more than planning for retirement and between, social security (though we can't count on it) his distributions and income from his farm he makes 60k a year. Not great compared to the numbers most bankers will be looking at in retirement, but more than teachers around here make.

I think he should move from renting a house to owning a house if the market around him is good enough he could sell without having to wait too long. Nothing fancy, less than 100k, or whatever the equiv of a starter house is in your area. Has the benefit of beginning to earn you ownership in a home, and you should start paying a lot less. Which will allow you to save more for b school which is what you should worry about, not about adding more Than the minimum match you have added. Then when you get out you can worry about which one to choose. Not taking cost of living loans over the course of b-school will save you about 50k+ in loans so that should definitely be a goal.

Edit: or if you're in a college town, buy something that you know students will want to rent when you leave, and you can start renting as a way to have extra money in b school. (maybe a condo) Also, the buying part may be a bit optimistic for where you're at. It's feasible where I'm at, and I've been considering it so that's why I suggest it. Either way the saving for b school is the big take away.

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

I meant in terms of the contribution caps that are placed upon each. A Roth 401k has an annual contribution cap of $5,500 before age 50 and a maximum of $6,500 after age 50), which is relatively low. A traditional 401k allows you to contribute $18,000 per year before age 50 and $24,000 per year after that.

If you maxed out both in terms of annual contributions, the traditional 401k would have the higher value at retirement accordingly. However, on a dollar-per-dollar basis, the Roth 401k would yield more. It's just that its annual contribution cap is far lower than a traditional 401k.

However, if you contributed to each equally, but invested the tax savings from a traditional 401k (because it's not taxed until after), the traditional 401k would be the better bargain in the end over the Roth 401k.

May 31, 2013

Double post

May 31, 2013
SF_G:

I meant in terms of the contribution caps that are placed upon each. A Roth 401k has an annual contribution cap of $5,500 before age 50 and a maximum of $6,500 after age 50), which is relatively low. A traditional 401k allows you to contribute $18,000 per year before age 50 and $24,000 per year after that.

If you maxed out both in terms of annual contributions, the traditional 401k would have the higher value at retirement accordingly. However, on a dollar-per-dollar basis, the Roth 401k would yield more. It's just that its annual contribution cap is far lower than a traditional 401k.

However, if you contributed to each equally, but invested the tax savings from a traditional 401k (because it's not taxed until after), the traditional 401k would be the better bargain in the end over the Roth 401k.

Uhhh....the Roth 401K has a cap of 18,000, same as traditional. The Roth IRA has a cap of 5,500.....which is the same as traditional.

You are mistaken my friend.

May 31, 2013

Sorry, you're right. I was thinking of Roth IRA.

A traditional 401k could still yield more than the Roth if the upfront tax savings from the traditional are invested into a brokerage account. So would it be worth having a Roth 401k if that approach was taken?

And regarding the traditional IRA to Roth IRA conversion, when would be the best time to do that? It seems to make sense in a low-income year or when income tax rates are hiked, but if you're over the income cap, wouldn't it essentially just become a dead account from that point forward given you can't contribute to it further?

May 31, 2013
SF_G:

Sorry, you're right. I was thinking of Roth IRA.

A traditional 401k could still yield more than the Roth if the upfront tax savings from the traditional are invested into a brokerage account. So would it be worth having a Roth 401k if that approach was taken?

And regarding the traditional IRA to Roth IRA conversion, when would be the best time to do that? It seems to make sense in a low-income year or when income tax rates are hiked, but if you're over the income cap, wouldn't it essentially just become a dead account from that point forward given you can't contribute to it further?

First point: It would yield "more", but then your account would be taxed when you withdrew funds. There wouldn't be any taxes when you withdrew from a Roth. The tax burden would wipe out the gains from what you are talking about; you'd end up with even less because the brokerage account would be taxed for capital gains and dividends.

Second: The best time to do that conversion is immediately, because you owe taxes on any gains from the account in between when you start the traditional IRA and then convert it. It's not a dead account, because you just keep repeating the rollovers every year. You'll contribute the full $5,500 each year.

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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

But what benefit would a Roth IRA provide if you're only eligible for one in the very short-term?

May 31, 2013

OP could do Roth IRA for the first half year, then for his first full salary year choose to do a "Backdoor" Roth IRA by contributing to a traditional IRA (or after tax IRA if his income exceeds the limits for tax deductible contributions) and then converting it to a Roth (which would get you around income caps for contributing to a Roth).

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.

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May 31, 2013

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

May 31, 2013