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My employer does not match any 401k contributions for what they deem "highly compensated" employees, and because of my income I can't contribute to a Roth. So, a few questions: Should I bother contributing to the 401k at all? If I leave the position for greener pastures (preferably ones where the employer will contribute to my 401k) will it be a headache to transfer it over? If I can't use Roth and I won't get any deductions for traditional, what should I invest in? I'm in my mid 20s.
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Oct 25, 2011 13:41
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HiddenReplaced posted:My employer does not match any 401k contributions for what they deem "highly compensated" employees, and because of my income I can't contribute to a Roth. In the order of financial funding operations, you should fund your traditional IRA to the max first, then turn to your 401k. Even though they are not matching, it will still grow tax-deferred and has a high contribution limit of 17,000. The IRA earnings and income will not be taxed until you start receiving withdrawals, so despite the lack of a deduction, there is value. After you fund both of those, you should begin funding the taxable portion of your investment portfolio.
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Oct 25, 2011 14:04
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If you're earning that much money you might be SOL. Assuming your company has a decent 401k plan with good funds I think you're probably just better off going through them. I THINK (someone can correct me if I'm wrong) that all contributions to an employer 401k give you a tax benefit where as if you open an IRA and earn over a certain amount you lose that benefit. IRAs have a max of $5k/year although you might be able to convert a standard IRA into a Roth IRA so you might want to put $5k in an IRA and then just contribute through your employer 401k. I'm pretty sure even a so-so 401k plan is going to be better than anything outside of a tax advantaged account. Edit: Random question about this situation.. so highly compensated employees get screwed on using retirement accounts. If you aren't considered a HCE you have a theoretical max of $49k but as an HCE you have a max of $16.5 (assuming under 50). Edit 2: I just read the wiki on HCE, it makes more sense now. Lyon fucked around with this message at 14:21 on Oct 25, 2011 |
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Oct 25, 2011 14:08
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HiddenReplaced posted:My employer does not match any 401k contributions for what they deem "highly compensated" employees, and because of my income I can't contribute to a Roth. It is ridiculously easy to transfer (i.e., rollover) a 401k. Note that, unless your new employer has a great provider (like Vanguard), you are probably better off rolling it over into a Vanguard rollover account. I think that you can also still do the invest-in-a-traditional-IRA-and-immediately-convert-to-Roth thing, so that's something to look into.
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Oct 25, 2011 15:36
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I have a boss who is affected by the HCE classification, but she is actually limited as to how much she can contribute? I guess effectively that reduces the amount of matching she gets, but I think at most she could contribute something like ~$5,000 to her 401k. Don't forget about the back-door Roth IRA (that still works next year, too, right?) You can contribute $5,000 as a non-deductible amount to a traditional IRA, and then immediately convert it to a Roth (because there is currently no restriction on max income to convert from traditional to Roth). This is exactly the same as being able to contribute $5,000 to a Roth with no penalty.
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Oct 25, 2011 16:24
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flowinprose posted:I have a boss who is affected by the HCE classification, but she is actually limited as to how much she can contribute? I guess effectively that reduces the amount of matching she gets, but I think at most she could contribute something like ~$5,000 to her 401k. Some Website posted:For a highly-compensated employee, the total of your elective deferrals and contributions made for you by your employer under a section 401k plan or SARSEP can be no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees in a calendar year. So is the ADP % of income? So if all the non-HCE employees are averaging $1k/person into the 401k on an average salary of $40k that means they are contributing 2.5% of their pre-tax income. The HCEs would be limited to a max of 3.125% of their salary?
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Oct 25, 2011 16:54
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Lyon posted:So is the ADP % of income? So if all the non-HCE employees are averaging $1k/person into the 401k on an average salary of $40k that means they are contributing 2.5% of their pre-tax income. The HCEs would be limited to a max of 3.125% of their salary? Yeah I know it's tied somehow to the contribution percentage of employees on average. My specific example comes from a big-box retail chain and my boss is the pharmacy manager. She gets paid something like $130,000/year, So $5,000 would be around 3.5% of her salary.
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Oct 25, 2011 17:09
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It's only to the match contribution as I read the statute. Further, this is why many employers have created automatic enrollment knowing that many employees are too lazy to change it. It ups the max match for the HCE's.
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Oct 25, 2011 18:06
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gvibes posted:I would still max the 401k. Tax deferred investing is nice for the tax-inefficient portions of your portfolio. Thank you all for your answers. My employer does offer Roth 401(k) as an option, but that will subtract from the amount I can put into the regular 401(k) (so they would share the cap of 16.5 or whatever it is now). Would that be a good option to make up for missing out on Roth IRA?
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Oct 25, 2011 19:15
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Roth 401(k) makes sense if you think you'll be in a higher tax bracket when you retire while the traditional makes sense if you'll be in a lower tax bracket. If you're earning 200k right now but plan on living on 100k/year when you retire Roth probably doesn't make sense. You'd be paying more taxes on it now due to being in a higher income bracket. Depends on your current income, planned retirement spending, etc. Edit: You could max either the traditional or the Roth 401(k) and then fully fund a traditional IRA (I'm assuming you don't qualify for Roth due to income level). If you chose to max the Roth 401(k) and wanted to keep the traditional IRA pre-tax to have both types of retirement account that would be fine. If you maxed the traditional 401(k) you could then convert your fully funded traditional IRA into a Roth IRA because right now there are no penalties. Or you could max both the traditional 401(k) and the traditional IRA (or vice versa), it all depends on your situation. Lyon fucked around with this message at 19:39 on Oct 25, 2011 |
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Oct 25, 2011 19:35
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Lyon posted:Roth 401(k) makes sense if you think you'll be in a higher tax bracket when you retire while the traditional makes sense if you'll be in a lower tax bracket. My thinking was that, although I'll be getting hit up for 1/3rd right now, there's a pretty good chance tax rates will be much higher by the time I retire. I think you make a good point though, diversification is probably for the best. Based on my concerns about increasing tax rates, I will probably use the Roth 401(k) and a traditional IRA. For traditional IRAs do I just work with a private group and then give my employer paperwork so they make the pre-tax deduction?
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Oct 25, 2011 19:55
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That is a question I don't know the answer to but that sounds likely. You probably create the account with a financial institution and then setup a pretax direct deposit with your work. I'm sure they're familiar with how to do it. Vanguard tends to be the most recommended company to setup retirement accounts with in BFC if you don't currently have any investments/IRAs.
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Oct 25, 2011 20:03
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It's not that complicated, you make the transfers yourself and plug the number into turbotax at the end of the year. Employers are not involved.
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Oct 25, 2011 20:04
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HiddenReplaced posted:My thinking was that, although I'll be getting hit up for 1/3rd right now, there's a pretty good chance tax rates will be much higher by the time I retire. There are maximum income limitations for a traditional IRA if you have a 401k as well, and it is quite low. The limit for a Roth IRA is somewhat higher. If you exceed either, your only option is a backdoor Roth.
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Oct 25, 2011 20:34
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Chin Strap posted:There are maximum income limitations for a traditional IRA if you have a 401k as well, and it is quite low. The limit for a Roth IRA is somewhat higher. If you exceed either, your only option is a backdoor Roth. I don't think there's an income limitation on traditional IRAs, but there is a limit on what you can deduct, and I am well above that limit. I am also above the income limit on Roth IRAs. So...no matter what, whatever I put into an IRA is getting taxed (and I will just end up converting it to a Roth). Maybe I should just do regular 401(k) and a traditional IRA and then convert.
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Oct 25, 2011 20:44
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HiddenReplaced posted:My employer does offer Roth 401(k) as an option, but that will subtract from the amount I can put into the regular 401(k) (so they would share the cap of 16.5 or whatever it is now). Would that be a good option to make up for missing out on Roth IRA?
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Oct 25, 2011 21:17
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gvibes posted:I really have no idea. I think I ended up splitting it 50/50 between normal and Roth 401k. Given the uncertainty of taxes going forward it could be a good idea to split them. We are nearly the lowest the tax rates have been in more than a century. Taxes will go up in some appreciable way in the next 30 years. You can count on it. It is a good idea to have taxible income simply to take advantage of credits and deductions. If 100% of your income is tax free (from previously taxed income) at some point you will have overpaid tax. (Herman Cain's 999 plan not withstanding)
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Oct 25, 2011 21:35
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KennyG posted:Given the uncertainty of taxes going forward it could be a good idea to split them. We are nearly the lowest the tax rates have been in more than a century. Taxes will go up in some appreciable way in the next 30 years. You can count on it.
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Oct 25, 2011 21:56
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It may have been mentioned, but is there a good "how much should I save" calculator that adjusts for inflation? All of them seem to target a dollar amount without any adjustment for inflation. They suggest we could retire on a about a million five in today's dollars, which is absurdly low for a target date 35+ years out. Aren't all of these calculators completely screwing people?
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Oct 26, 2011 00:38
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Tai-Pan posted:It may have been mentioned, but is there a good "how much should I save" calculator that adjusts for inflation? Retiring on 1.5 million in today's dollars, 35 years from now is actually quite a lot of money. If your annual expenses are 75k a year (in today's dollars, and likely a bit high as you would probably own your home), that is a 5% withdrawal rate. With 0% investment return, that will last you 20 years. Conservative investments would likely yield about 3-4%, which would make that balance last even longer.
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Oct 26, 2011 00:58
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I'm a couple of months into my first teaching job @46k. Right now my budget is looking at about $800 savings a month (after a $600 payment on my much too large loan for my 7 year bachelors degree). 6.4% of my salary is automatically contributed into TRS, which is matched by the state. How much should I be looking into putting in a Roth, and how should I go about getting this started? Or should I be more aggressively going after my ~50k in loans?
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Oct 26, 2011 01:46
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tuckfard posted:I'm a couple of months into my first teaching job @46k. Right now my budget is looking at about $800 savings a month (after a $600 payment on my much too large loan for my 7 year bachelors degree). Are all your loans federal? You should consider putting your loans on the IBR plan so they are forgiven tax free in 10 years. That will free up a few hundred dollars a month to invest in retirement.
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Oct 26, 2011 01:58
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blar posted:Are all your loans federal? You should consider putting your loans on the IBR plan so they are forgiven tax free in 10 years. That will free up a few hundred dollars a month to invest in retirement. They are, I'll look into that.
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Oct 26, 2011 02:24
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blar posted:Are all your loans federal? You should consider putting your loans on the IBR plan so they are forgiven tax free in 10 years. That will free up a few hundred dollars a month to invest in retirement. The 10-year forgiveness is only for public employees and a few other "public good" jobs. It's 30 years for the rest of us.
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Oct 26, 2011 02:40
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tuckfard posted:I'm a couple of months into my first teaching job @46k. Right now my budget is looking at about $800 savings a month (after a $600 payment on my much too large loan for my 7 year bachelors degree). At your income level, it's an ideal time to maximize your Roth IRA, especially with how much free cash flow that you have. You are in a relatively low marginal tax bracket (25%, assuming you're single) and now would be the perfect time to pad that account. At $800 a month, you will have it funded in six months each year. After that, I would absolutely apply the remaining $4,600 on to the student loan. Even if your investment returns are not amazing, the tax haven alone for the Roth IRA is a very powerful tool for retirement.
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Oct 26, 2011 02:45
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I'll be single until sometime next summer. She makes about the same i do. We live together right now which is why I'm able to save a good amount. So the next step is getting a Roth started. Do I need to have a large first deposit or anything saved up or can I start this up later this week when I get my next check? Sorry for all of the silly basic questions, I'm pretty clueless on this stuff.
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Oct 26, 2011 03:17
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tuckfard posted:I'll be single until sometime next summer. She makes about the same i do. We live together right now which is why I'm able to save a good amount. Charles Schwab has a $1,000 account minimum on their Roth IRAs without any service fees. Really a great custodian and doesn't nickel and dime you. You will have access to virtually any security (although you should stick to low-cost index funds!) and enjoy their great customer service. You can set up auto-draft to have contributions automatically come out of your checking account. There are a lot of other good custodians, but I find that Schwab is the best/easiest to get into.
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Oct 26, 2011 03:34
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TraderStav posted:Retiring on 1.5 million in today's dollars, 35 years from now is actually quite a lot of money. If your annual expenses are 75k a year (in today's dollars, and likely a bit high as you would probably own your home), that is a 5% withdrawal rate. With 0% investment return, that will last you 20 years. Conservative investments would likely yield about 3-4%, which would make that balance last even longer. Am I missing something? How is 75k in today's dollars a useful number? In 35 years, that probably won't even cover my property taxes. Assuming a steady inflation rate, wouldn't you need about $195,000 to maintain the buying power of 75k?
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Oct 26, 2011 07:00
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Tai-Pan posted:Am I missing something? How is 75k in today's dollars a useful number? In 35 years, that probably won't even cover my property taxes. Assuming a steady inflation rate, wouldn't you need about $195,000 to maintain the buying power of 75k? You seem to have it backwards: "today's dollars" is the more useful number that allows you to talk about the future with the purchasing power of today's dollars. Talking about future dollars is a less useful number, because a Snickers bar might cost $50 future dollars.
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Oct 26, 2011 07:31
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Tai-Pan posted:Am I missing something? How is 75k in today's dollars a useful number? In 35 years, that probably won't even cover my property taxes. Assuming a steady inflation rate, wouldn't you need about $195,000 to maintain the buying power of 75k? Just what plester said, what this is accomplishing is allowing you to compare apples to oranges. By taking inflation out of the picture (by stating both values in the same base year, 2011 dollars) you are able to better understand what that number means. When I said you would be able to have the purchasing power of today's 75k, that really means the future value of 75k. The reason things are expressed in current dollars is because you can understand them. For instance, you may be paying $12k a year for your mortgage now, $2000 a year in fuel, $4000 in dining, etc. and expect to have 75% of that spend in retirement. This allows you to produce a number ex-inflation that you need to target. When you build your financial plan, you will strip out inflation expectations of your portfolio return (if you expect 3% inflation, and have an expected return of 8% on your portfolio, you would forecast your growth out 5% instead) and be able to wrap your arms around the numbers better. You could also use future dollars and include inflation assumptions into your portfolio, but typically that is not done because it is assumed that a diversified portfolio will outpace inflation by the market premium and negate that effect. tl;dr: If that $1.5M number is bothering you, open up Excel and put in a cell code:
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Oct 26, 2011 13:36
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TraderStav posted:tl;dr: If that $1.5M number is bothering you, open up Excel and put in a cell Okay, so that seems like a really bad idea, doesn't it? I just asked two otherwise intelligent analysts exactly this question and one assumed the 1.5 million was the "final" target and the other didn't understand why the value didn't account for inflation. That means that in a best case scenario 50% of people using these calculators will assume they need to have 1.5 million in the bank upon retirement.
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Oct 26, 2011 16:09
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Tai-Pan posted:Okay, so that seems like a really bad idea, doesn't it? I just asked two otherwise intelligent analysts exactly this question and one assumed the 1.5 million was the "final" target and the other didn't understand why the value didn't account for inflation. That means that in a best case scenario 50% of people using these calculators will assume they need to have 1.5 million in the bank upon retirement. I see your point, but your statistics are very very flawed with a sample size of 2. I will go ahead and agree with you that perhaps these calculators need to be more clear with what they are offering for their conclusions, but overall, the practice and methodology is not flawed. Frankly though, I don't believe that there are too many people making rash and final financial decisions such as this based on a cursory use of a lightweight tool they barely understood to begin with.
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Oct 26, 2011 16:13
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TraderStav posted:Frankly though, I don't believe that there are too many people making rash and final financial decisions such as this based on a cursory use of a lightweight tool they barely understood to begin with. That is certainly a pleasantly delusional concept. Wasn't there a study saying something like 60% of Americans did not even have access to $1,000 in an emergency? Regardless, I have been using excel for 10 years daily now and I never knew about the FV function. Very cool. I love Excel.
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Oct 26, 2011 16:28
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Tai-Pan posted:That is certainly a pleasantly delusional concept. Wasn't there a study saying something like 60% of Americans did not even have access to $1,000 in an emergency? I don't believe it's delusional at all. I'm a financial planner and it has been my experience that the majority of people may occasionally kick the tires at calculators like these and want to do something about their finances, but rarely do. They'll do one half-assed on their lunch break, get a number, then move right on to ESPN.com. Very little thought is actually carried on to execution for many people. I'd contend that the vast majority of people filling out those calculators get a "That's interesting" feeling and that's it.
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Oct 26, 2011 16:34
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My wife is currently working as a long-term substitute teacher and has access to a 403b with employer match. There is no guarantee that she will be able to stay with this job, but she expects to be able to stay in public education for the rest of her life. Should she begin contributions to this account? Or should we just get a Roth IRA? We are currently both 26 years old. Basically, can I do both the 403b and the Roth, and then if she can't get a permanent position, roll the 403b into the existing Roth? Insane Totoro fucked around with this message at 17:05 on Oct 26, 2011 |
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Oct 26, 2011 17:02
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Insane Totoro posted:My wife is currently working as a long-term substitute teacher and has access to a 403b with employer match. There is no guarantee that she will be able to stay with this job, but she expects to be able to stay in public education for the rest of her life. Should she begin contributions to this account? Or should we just get a Roth IRA? We are currently both 26 years old. Even if there are vesting terms for the 403b that she winds up not meeting because she loses the job, she can roll it over (probably a traditional IRA so you don't pay up front taxes on the amount you have bee putting away). But it would be dumb to not try to take advantage of the employer match, that is throwing away free money.
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Oct 26, 2011 17:12
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Insane Totoro posted:My wife is currently working as a long-term substitute teacher and has access to a 403b with employer match. There is no guarantee that she will be able to stay with this job, but she expects to be able to stay in public education for the rest of her life. Should she begin contributions to this account? Or should we just get a Roth IRA? We are currently both 26 years old. If it's HIGHLY probable (I'm talking, like CERTAIN) that she will not be there long enough to vest, then I'd recommend funding the Roth until you hit the maximum, then fund the 403b. However, the match is very important as Chin Strap noted, so you need to consider that.
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Oct 26, 2011 17:17
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Okay here's the deal. She is currently a long-term substitute. However if she was not asked to come back, she would just return to substitute teaching. The point of contention is whether or not a daily substitute teacher "counts" for a 403b's vesting period. Furthermore, can you "carry" the same 403b across school districts? Insane Totoro fucked around with this message at 17:53 on Oct 26, 2011 |
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Oct 26, 2011 17:49
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Insane Totoro posted:Okay here's the deal. She is currently a long-term substitute. However if she was not asked to come back, she would just return to substitute teaching. I am not sure, but if you can't, you could roll that balance over into an IRA. There is little benefit to remain in a 403b or 401k plan once you leave a 'company' as you are only able to buy their funds and may be subject to other fees. Sounds like a call needs to be put into the schools 403b administrator or HR (do schools have HR?) to clarify that point.
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Oct 26, 2011 18:09
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I guess the problem might be that she substitutes across several school districts. The trouble is that their HR department is incredibly unhelpful.
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Oct 26, 2011 18:28
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