401K and saving Newbie Question

[samy77]

Hi all. Big fan and relatively new reader. I have a couple of questions regarding saving. I'm a new attending 1 year out and starting my first big boy job in a couple of months with 401k, etc. I'll be making around $170K with $310K debt ($285 school, $25 car). Here are my questions.

1) with a savings rate of 20% ($34K per year), how am I able to reach after I maximize everything (18K in the 401k (not incl match), $5400 in backdoor IRA, ~$3500 stealth IRA equals $26.9K)?
2) I know the 401k employer max is $18K but the overall contribution limits are $54k. Should I be looking to maximize that side as well? I am planning on incr my savings rate once I put off my loans to about 40% for catch up and early retirement so am a little lost as to where to put it if I'm maxing everything out.

Thanks in advance!

[Craigy]

1) After you've maxed out retirement accounts, you can always invest in a regular brokerage account, which most people on here call a "taxable" account.  You can open one for free at several places, including Vanguard.com, where you can also do your backdoor Roths.  Many also consider paying down things like student debt (notsomuch auto loans though) to count toward your goal savings rate.

2) This depends on the specifics of your 401k.  Assuming you're a W2 employee, you're likely limited to putting in the $18,000.  Your employer might make their own contribution or match to your 401k which will help you put in more money above the 18k limit.  Otherwise, if you're on a 1099, you could have other options like a solo 401k where you can get closer to that $54k.

Also, in general, take some time to read up and familiarize yourself with all of this.  It's a lot to swallow all at once but you'll soon get the hang of it.

[samy77]

When you say taxable brokerage accounts are those different than a 401k? Is there a specific name for these types of accounts? Appreciate the response!

[Peds]

they are different. its essentially buying mutual funds outside of those tax protected buckets, hence taxable.

[Craigy]

samy77 wrote:

When you say taxable brokerage accounts are those different than a 401k? Is there a specific name for these types of accounts? Appreciate the response!

Click to expand...

Yes.

At Vanguard it's just called an "individual account"  https://personal.vanguard.com/open-account/oax/app/triage#/  You put money in the account, like a bank account, and then buy mutual funds or other securities that are then held in that account.  Anybody can open one, it's not part of an employer plan, and you don't have any annual limits on the account.

On the other hand, a 401k plan account is a brokerage account that is specifically designated to hold funds from your employer's 401k retirement plan, and the assets in such account are held in a tax-advantaged manner as described more fully in section 401(k) of the Internal Revenue Code.  The 401k account will be with a firm that your employer selects.

If you max out your 401k and also put money in a regular brokerage (taxable) account, you will end up having several brokerage accounts, possibly at different brokerage firms.  If you choose to fund Roth IRAs (through the backdoor or otherwise) you will have even more accounts.   Most of us on here have several brokerage accounts including 401k, 403b, IRA, Roth IRA, individual taxable accounts, etc.

[djohnflatfeecfp]

samy77 wrote:

When you say taxable brokerage accounts are those different than a 401k? Is there a specific name for these types of accounts? Appreciate the response!

Click to expand...

They are usually identified as an Individual Account on forms but referred to as taxable as the money you put in them is after taxes have been taken out.  Also, there are taxes on dividends on the investments and, as a bonus, taxes on the growth when you sell any holdings.  This is where you want to be careful with what you buy in this account so you are not paying too much in taxes.  Remember, it isn't what you make.  It's what you keep.

You'll probably want to consider ETFs in this account as you can do some nice tax harvesting without worry of wash-sale rules.  Be careful when considering actively managed mutual funds within taxable accounts as they are not always the most tax efficient vehicles.  I do know people who simply buy BRK (Berkshire Hathaway - Warren Buffett's company) in taxable accounts as this kicks out no dividends so no taxes to pay there.  Just taxes to pay on the gains when you sell a holding.

As a bonus, 401ks are referred to as qualified accounts and taxable accounts are often called non-qualified.  It comes down to how they are taxed.

Keep reading and asking questions and you will be one of the experts on the site before you know it.

[ajm184]

'2) I know the 401k employer max is $18K but the overall contribution limits are $54k.'

WRT your above comment:

a. The contribution limit of $54k is divided into two parts, the 1. Employee contribution of 18K and the 2. Employer contribution of $36K.

b. The Employer contribution is the maximum allowable.  This is usually called a 'match' by the employer and is shown as a percentage match.  There are a lot of potential variations to what an employer means by 'match'.  An example of a  'match' is described as: "dollar for dollar for the first 6% of pre-tax income".  For your income, this translates into an employer contribution of 10.2K over a calendar year in addition to the 18k you as employee are looking to contribute.

c.  As other have stated, if you are a 1099 (i.e. contractor) you can set up a solo 401K.  As both employer/employee, you have the added flexibility to maximize the Employer portion of a 401k 'match'.  Given your student debt, you may not want to pursue this maximization 'match' approach right away.

[AdamMGrossman]

Samy, congratulations on the new job!

Something to think about before you tie up too much of your income in retirement contributions: It might be worthwhile to do some projections on your household cash flow, for two reasons:

1. To make sure you aren't unduly stressing your budget right out of the gate.  If you'll be moving, for example, and increasing your household overhead, you just want to be sure you can afford everything without worry.

2. To evaluate whether it would make sense to use a portion of your new income to pay down some of your debt.  There's no "right" answer here.  The decision would depend in large part on the interest rates as well as on your general comfort level with carrying debt.

I am certainly not downplaying the importance of retirement savings, but you will hopefully have a long career of earning at successively higher salaries, so it's worth thinking about whether there are higher-value uses for some part of your new income in the first year or two.

[samy77]

Thanks so much for the advice everyone. I'll keep the taxes in mind, especially since I already have an asset allocation I'm comfortable with (planning the 4 fund portfolio per Rick Perri). I'm going to keep reading and have a better sense of planning thanks to wci and you guys!

Adam, I just refinanced my loans for 3.5% variable rate for a term of 9 years. If things go the way I want them too with picking up extra shifts and living like a resident, should be done with that in 4 years (fingers crossed). During that time I'm planning on saving 20% as well. After making a quick budget without real life data (Aka me living there) and including all bills with retirement and savings included, I should have ~$1,000 of spending money per month for fun and extra expenses. I already have an emergency fund of $40K in cash that I'm planning on either transferring into a high yield savings like Ally or a CD. I have a financial advisor who manages my trad and Roth IRA but my goal is to not need him by end of 2018. The 401k is new so I've been trying to learn ahead of time.

[Craigy]

With a variable rate loan and a large balance, just be sure to keep paying on it aggressively.  You don't want to be in a situation where your 3.5% turns into 8.5% and you still owe $250k.  The risk of that is pretty low, and on your income you could still probably afford the payments, but it won't be fun.

[jhwkr542]

Samy, it seems like you're targeting a 20% savings rate initially as a goal. If you're not already doing so, I would count every dollar put towards loans towards that savings rate goal. With that interest rate, I'd max out employee 401k contribution ($18k), your HSA, and your backdoor Roth. After that, I wouldn't bother with a taxable account until the loans are gone. There's essentially no risk for a guaranteed 3.5% return if not more since rates are trending up. Taxable may do better but there's also risk of it doing significantly worse too. You just never know, so I'd take the guaranteed thing now. Not that everyone would do that, but I'm in a similar position and that's the decision I've made.

[spiritrider]

I generally agree with not getting tied into an specific cash savings rate.

Not contributing to tax advantaged accounts (HSA, IRA, 401k) are a lost opportunity cost. I generally recommend maxing those out if possible.

After that, I recommend aggressively paying off the student loans before any directing any income taxable accounts.

There are those who will want to do a return analysis between debt reduction and taxable investment. Personally, I always come down on the side of student loan debt reduction.

[AdamMGrossman]

Best of luck, Samy!

[MochaDoc]

samy77 wrote:

I already have an emergency fund of $40K in cash that I’m planning on either transferring into a high yield savings like Ally or a CD.

Click to expand...

If you're not earning 3.5% variable in these accounts, the majority of your EF would be best used paying down your massive student loan debt. I'd put 2-3 months of bare-bones expenses aside and then throw the rest at your student loans.

[nachos31]

Quote from djohn: "You’ll probably want to consider ETFs in this account as you can do some nice tax harvesting without worry of wash-sale rules. "

Why no concerns of wash-sales? ETFs are not immune from wash-sale.