topic Re: 401(k) Contribution Question in Personal Finance

401(k) Contribution Question

Anonymous — Wed, 22 Nov 2017 21:00:27 GMT

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?

Re: 401(k) Contribution Question

rooeez — Wed, 22 Nov 2017 21:30:16 GMT

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.

Re: 401(k) Contribution Question

Revelate — Thu, 23 Nov 2017 03:33:52 GMT

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.

Re: 401(k) Contribution Question

Tazman81 — Thu, 23 Nov 2017 03:35:41 GMT

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.

Re: 401(k) Contribution Question

iced — Thu, 23 Nov 2017 04:18:40 GMT

@Anonymous 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.

Re: 401(k) Contribution Question

Anonymous — Thu, 23 Nov 2017 19:51:28 GMT

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.

Re: 401(k) Contribution Question

Anonymous — Wed, 29 Nov 2017 18:27:21 GMT

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~.

Re: 401(k) Contribution Question

Anonymous — Wed, 29 Nov 2017 18:30:11 GMT

Hi, my 401k is not matched

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 ?

Re: 401(k) Contribution Question

Anonymous — Wed, 29 Nov 2017 18:35:18 GMT

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.

Re: 401(k) Contribution Question

iced — Wed, 29 Nov 2017 19:33:36 GMT

@Anonymous wrote:
Hi, my 401k is not matched

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.

Re: 401(k) Contribution Question

minski — Thu, 30 Nov 2017 05:21:42 GMT

@Anonymous 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?

Thanks so much for posting this. I'm in my mid-30s and wishing I'd started contributing into retirement plans sooner. I've been thinking of increasing my contribution from 3% to 12% but wasn't sure whether I'd be able to live off my take home. I probably make about as much as or a little less than you with OT.... I don't have ESPP though

Re: 401(k) Contribution Question

Kree — Thu, 30 Nov 2017 14:58:29 GMT

I would also consider saving 3-6 months pay in easy accessible bank accounts before starting to save for retirement. You never know when you might lose your job, or have other unexpected expenses. Making 7% of your money is meaningless, if you end up paying 22% on a CC bill a year later.

Re: 401(k) Contribution Question

bada_bing — Sat, 02 Dec 2017 04:23:52 GMT

Unfortunately there isn't a super simple answer. You have to evaluate all

the options available to you and how they are influenced by your financial

situation. Taxes are the big issue, but there are others. Things I would look

into are:

1. How good is your 401K plan as far as investment options, costs and

flexibility for things like loans, in plan withdrawals, after tax contributions ?

Whoever manages your benefits (HR ?) would be a good contact to ask

questions. In general, a 401K that doesn't have a match is usually a lower

priority for savings.

2. Do you have an HSA (health savings plan) option available ? Generally,

a HSA is the single best place to save longterm money. Better than an IRA,

a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

3. You need to check with whoever does your income taxes to see if you

are eligible for tax deductible IRA contributions. You may be over the income

limit. If not, a tax deductible IRA is a better place for savings than a 401K with

no match. The annual limit on IRA contributions is $5500. If you go for a deductible

IRA (strongly recommended), you need to pick a good custodian. I would

recommend Schwab, Fidelity, Vanguard or TdAmeritrade (and no one else).

4. If you are not eligible to make tax deductible IRA contributions, do you have

existing IRA balances? If not, you can do an easy and legal end-around called

a backdoor Roth to get money into a Roth IRA. Google backdoor Roth for info.

5. As long as you pay attention to tax efficiency, investing in a regular account

is a very good option. Again, pick a good custodian for a brokerage account, the

same ones as recommended for IRA's.

The generally recommended order for investing savings goes something like:

1.Invest in your 401K up to the match (you don't get a match)

2. Invest in an HSA up to the limit available to you.

3. Invest up to the limit available to you in an IRA or Roth IRA. The decision

on which is best requires evaluating your current taxes and estimating what

you might be paying in retirement. For most people the deductible IRA is

the best choice if they have that available.

4. Go back and fill up whatever you have left to save in your 401K.

and/or

Invest in an after tax brokerage account. There are some 401K plans that

are bad enough that they are never worth investing in.

5. A wild card is your ESPP. They are so individual in terms they have to

be individually evaluated to see where they best fit in the order.

However your plan shakes out, I would support saving as much as

you can whenever you can. Don't let the annual limits influence when

think you have saved enough. There are good places to put every dollar you

can possibly save.

Re: 401(k) Contribution Question

Kree — Sat, 02 Dec 2017 15:57:06 GMT

@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,
a HSA is the single best place to save longterm money. Better than an IRA,
a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

Why do you say this? I tried an HSA once. Set it to my deductible on my insurance. Didn't even spend half of it. Jan 1st rolled around, and bampf rest of the money gone forever. Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

Re: 401(k) Contribution Question

iced — Sat, 02 Dec 2017 17:54:33 GMT

@Kree wrote:
@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,
a HSA is the single best place to save longterm money. Better than an IRA,
a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

Why do you say this? I tried an HSA once. Set it to my deductible on my insurance. Didn't even spend half of it. Jan 1st rolled around, and bampf rest of the money gone forever. Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

FSA != HSA. FSAs work similarly but can only be used the year they are paid into and do not carry over from one year to the next. HSAs not only carry over from year to year, but employer to employer (or even no employer) and once you hit a certain age you can also withdraw from it for non-medical expenses (though it's subject to income tax for the amount not used on medical). Many also have the option to be invested in equity plans, unlike FSA.

Re: 401(k) Contribution Question

Anonymous — Thu, 07 Dec 2017 01:39:51 GMT

@bada_bing wrote:
If not, a tax deductible IRA is a better place for savings than a 401K with
no match.

While this is almost certainly true in practice, it's still worth checking. In theory, a company may set up a 401(K) with a great set of low cost funds, using their money there rather than on a match.

But yes, it's more likely that a company that doesn't match also doesn't have a great set of funds.

Re: 401(k) Contribution Question

Anonymous — Thu, 07 Dec 2017 01:43:02 GMT

@iced wrote:
@Kree wrote:
@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,
a HSA is the single best place to save longterm money. Better than an IRA,
a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

Why do you say this? I tried an HSA once. Set it to my deductible on my insurance. Didn't even spend half of it. Jan 1st rolled around, and bampf rest of the money gone forever. Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

FSA != HSA. FSAs work similarly but can only be used the year they are paid into and do not carry over from one year to the next. HSAs not only carry over from year to year, but employer to employer (or even no employer) and once you hit a certain age you can also withdraw from it for non-medical expenses (though it's subject to income tax for the amount not used on medical). Many also have the option to be invested in equity plans, unlike FSA.

Right, you will see HSA's referred to as "triple-tax advantaged" You contribute money tax deferred, the growth is tax deferred, and eventually you can withdraw it to use it for medical stuff without paying taxes. Makes a Roth (where you have paid tax on the original investment) seem mean!

Re: 401(k) Contribution Question

Kree — Thu, 07 Dec 2017 02:05:07 GMT

@Anonymous wrote:
@iced wrote:
@Kree wrote:
@bada_bing wrote:

2. Do you have an HSA (health savings plan) option available ? Generally,
a HSA is the single best place to save longterm money. Better than an IRA,
a Roth, a 401K or ESPP. The annual limit for a single guy is low though ~$3400.

Why do you say this? I tried an HSA once. Set it to my deductible on my insurance. Didn't even spend half of it. Jan 1st rolled around, and bampf rest of the money gone forever. Now I know a study of 1 isn't very reliable, but I feel like I can't remember ever actually hitting my deductible.

FSA != HSA. FSAs work similarly but can only be used the year they are paid into and do not carry over from one year to the next. HSAs not only carry over from year to year, but employer to employer (or even no employer) and once you hit a certain age you can also withdraw from it for non-medical expenses (though it's subject to income tax for the amount not used on medical). Many also have the option to be invested in equity plans, unlike FSA.
Right, you will see HSA's referred to as "triple-tax advantaged" You contribute money tax deferred, the growth is tax deferred, and eventually you can withdraw it to use it for medical stuff without paying taxes. Makes a Roth (where you have paid tax on the original investment) seem mean!

I hav an HSA at my new job, but my current salary and budget are pretty much the same. Thanks for the advice, I will certainly look into it in the future when I can actually save money.

Re: 401(k) Contribution Question

Thomas_Thumb — Sat, 09 Dec 2017 17:06:13 GMT

@Anonymous wrote:
Hi, my 401k is not matched
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 ?

I'd forget about the Company 401k since it is not matched. No doubt investment choices are limited.

You would be better off setting up a Roth IRA and contributing to it. Less restrictions on withdrawls, more investment options if done through a company like Fidelity and advantageous for those starting early in their career (typically lower tax bracket).

I advise against having all your investment/savings tied to the company stock even if you get a 15% discount. Seen too many stocks drop rapidly. I had one that lost 90% of its value over night.

Again, the company 401k is a poor choice relative to alternatives given no matching $$$. After maxing out contributions in the Roth IRA, I'd suggest funding a traditional IRA account at the same full service investment firm. The issue is auto draft/deposit from your pay check. If you can't set-up the auto deposit, it is easy to "forget" to make regular contributions.

Re: 401(k) Contribution Question

iced — Sat, 09 Dec 2017 05:33:29 GMT

I would caution against abandoning the 401k altogether unless you *know* you will contribute more to other vehicles, including Roth. Roth IRA is good but it’s limited to $5500 a year. At 85k, there’s no reason you shouldn’t be striving for at least $15k a year saved toward retirement (in addition to your ESPP) - if you don’t use a 401k, make sure you save that remaining $9500 somewhere.