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401(k) Contribution Question

New Visitor

401(k) Contribution Question

Hi, I am 23 years old and am a full time employee. I recently was encouraged a lot by an elder coworker of mines to enroll in 401k. At first, I was not to happy to sign up for saving toward an age that I may or may not live up to. My mentallity was I can invest that money on other things and make more money. None the less, I signed up and set my contribution to 15%. I make 85k. I also have 15% going to my ESPP. 

Thats about $1,000+ from every paycheck of mines. This takes 30% of my salary. The only thing that calms me down is that this is my first job, I was not making as much as I am now, so what i didnt have tobegin with shouldnt hurt.

 

I am the youngest in the family, have elderly parents (retired pops and stay home mom) and 3 brothers. I also need to start contributing to the house soon, more than I already have. 

 

Now my question is, do you guys think this is viable? Should my 401k contrubution be reduced? Should I wait it through? Should I reduce now? 

 

 

Message 1 of 20
19 REPLIES
Regular Contributor

Re: 401(k) Contribution Question

You definitely should be something away and the younger the better. Depending on who handles the 401(k) there is sometimes an option to add a brokerage account if you do want to do some of your own investing. That said, you might want to consider whether a Roth IRA makes more sense. If this is your first job and you figure you will be making a higher salary in the future, figure out if you want to pay your taxes now in the future.


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Message 2 of 20
Moderator

Re: 401(k) Contribution Question

I'd reduce my ESPP unless discounted (generally, some companies maybe not) before I cut my 401k personally.  401k currently directly reduces one's AGI and that can be a large tax savings in some brackets, and then being tax deferred it's a useful vehicle later after rolled-over to hold various cash-producing investments in.

 

Personally I dump as much as I can into a 401k if I have one when employed, but I switch jobs often enough that when I move on I just roll it over into a self-directed IRA anyway... I get some suboptimal investments as a result for some period of time (7% in the last six months which doesn't suck historically but compared to the astounding returns I've had in my mainline accounts... well, it's less than what I would've had otherwise looking at my recent pattern of self-directed investments over the same timeframe).

 

Long term I suspect you'll wish having invested in 401k earlier, I know I did as if I'd really started getting my poop in a group earlier there's a non-zero chance I'd already have walk away and do something else money right now than doing less and less to maintain my salary in an industry I'm starting to loathe. 

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Message 3 of 20
Established Contributor

Re: 401(k) Contribution Question

What does your employer match on your 401k?  Most employers match up to a certain percentage.  Make sure your contribution to your 401k is high enough to get the full amount of your employer match.

 

If anything, I would start with lowering the amount going into the ESPP if you need additional funds to make ends meet.  Compounding is your friend.  Starting your retirement fund at an early age will help solidify your future.  I wish I had received the same advice as many years back.


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Message 4 of 20
Established Contributor

Re: 401(k) Contribution Question


iapplepro wrote:

Hi, I am 23 years old and am a full time employee. I recently was encouraged a lot by an elder coworker of mines to enroll in 401k. At first, I was not to happy to sign up for saving toward an age that I may or may not live up to. My mentallity was I can invest that money on other things and make more money. None the less, I signed up and set my contribution to 15%. I make 85k. I also have 15% going to my ESPP. 

Thats about $1,000+ from every paycheck of mines. This takes 30% of my salary. The only thing that calms me down is that this is my first job, I was not making as much as I am now, so what i didnt have tobegin with shouldnt hurt.

 

I am the youngest in the family, have elderly parents (retired pops and stay home mom) and 3 brothers. I also need to start contributing to the house soon, more than I already have. 

 

Now my question is, do you guys think this is viable? Should my 401k contrubution be reduced? Should I wait it through? Should I reduce now? 

 

 


What you’re doing is not only viable, you should go further if you can. I max out my 401k, ESPP, and Roth every year and still try to squirrel a few thousand a month into investment savings. It means my take home is a third of my gross, but it’s worth it in the end. As long as you still have just enough to live on, you’re golden.

 

As you make more money in the future, then that excess can go toward non-retirement savings. Stay used to living on as little as it makes saving more easier. Your cost of living won’t go up just because your income does.

Message 5 of 20
Valued Contributor

Re: 401(k) Contribution Question

What kind of match d you get from the 401K?  Employee stock plans I have mixed feelings about. Depends on the plan and the companies growth.  In the 80's I was working pt for a very hot company whose stock was going up over 100% per year for several years and dumped the max into the plan and made out like a king.  Others I have seen drop like a rock. 

Message 6 of 20
New Visitor

Re: 401(k) Contribution Question

Hi this is a reply to all. Thank you for everyone's input. I cannot believe I forgot the most important details!!!

 

My company does not 401k match. However I do get discounted ESPP @ 15% off the lowest price either when I enrolled or on the date of purchase. Whichever is lower. 

 

I feel I have more incentive in maxing out my ESPP vs 401k. 

 

My 401 is not matched but I know is still benficial. I am thinking of decreasing from 15% to...maybe 10% or 5%? 

 

I used to get a check with 2k+... now? $1,200~. 

Message 7 of 20
New Visitor

Re: 401(k) Contribution Question

Hi, my 401k is not matched Smiley Sad 

 

But its like, what would you do? 

 

ESPP you get 15% off when selling. So its like when I need money I can sell my ESPP. 

 

401k though is taking the same chunk. Would you lower 401k a bit knowing that ESPP will give you higher return quicker ?

Message 8 of 20
New Visitor

Re: 401(k) Contribution Question

THIS! This is what I wanted to hear. I was making litterally nothing (pocket money) to making 2k+ every other week. So its like, do I really need all that money? Wasnt I living off WAY little before? 

 

But the only thing that gets me is that my parents are traveling for a bit and I have not started to take over any expenses in the house. So overtime when I start paying I guess i will have a better understanding on how much I really need to live on. 

 

I am the youngest in the house so I was always given and not asked. Now that the family is going through tough times and I was able to land this job, its a live changing experience to get my mind to start taking responsibilites and pay up. 

Message 9 of 20
Established Contributor

Re: 401(k) Contribution Question


iapplepro wrote:

Hi, my 401k is not matched Smiley Sad 

 

But its like, what would you do? 

 

ESPP you get 15% off when selling. So its like when I need money I can sell my ESPP. 

 

401k though is taking the same chunk. Would you lower 401k a bit knowing that ESPP will give you higher return quicker ?


It's not quite that simple on the returns or on the prioritization.

 

ESPP gives you a 15% discount yes, so that's basically "free" money, and that's a good thing. But that alone may not make it the best option in terms of prioritizing all cash toward it vs. a 401k. Here's some things to think about:

 

1. 401k contributions (assuming not a Roth 401k) are tax-deferred, aka pre-tax. This means for every $100 you take out of your paycheck to put into that 401k, it's actually only reducing your net by about $75-$85, depending on your current tax bracket. ESPP is all after-tax withholding, so for every $100 you pay into an ESPP you're actually paying more like $120.

 

2. 401k contributions may grow tax-free but once you withdraw, 100% of the amount of the withdrawal is considered taxable income. If your AGI is very low otherwise (which is possible to do in retirement if you're largely living off non-income sources such as capgains income and/or Roth income), you can keep the tax rate for 401k distributions about on par with that of capital gains (~15%), but if you have too much AGI, the rate on ESPP may eventually be better.

 

3. The other side of point 2 above is ESPP taxation. If you hold the stocks for > 12 months, they become "long term" and thus the *gains* from the fair market price at time of purchase are taxed at capital gains rates, but the difference in price from your purchase price and the fair market are *always* taxable at income rates. If you end up getting some great pricing, this can sting a bit later. For example, I'm sitting on a few thousand shares myself where my purchase price ended up being almost $10/share below fair market at purchase time, so no matter what I do (unless I wait for them to fall below what I paid), I'm looking at tens of thousands of dollars in taxable income the moment I liquidate those shares, plus any capital gains above the fair market rate. If you get RSUs, it's the tax equivalent of executing ESPP at $0/share, so those can really add to the tax bill fast.

 

4. ESPP are stocks, so they can be sold at any time, unlike a 401k. 

 

I know this is a lot of information all at once, but the point I'm making is that both have their pros and cons, and in the end, the up-front appeal of the 15% discount alone shouldn't determine how you save. If you can max both out, then this isn't so much an issue as you are gaining from both. Also note that as your income goes up, you can start leveraging 401k not just as a retirement vehicle, but as a way to suppress your AGI such that you can stay in a lower bracket, qualify for Roth contributions, and other similar tax benefits.

Message 10 of 20