401k if employer doesn't match or student loans?

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lacrossebrother

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Re: 401k if employer doesn't match or student loans?

Postby lacrossebrother » Tue Jan 03, 2017 7:23 pm

does biglaw really let you contribute $18k?
i'd think they'd put a cap so as to not fuck up the HCE limits

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Re: 401k if employer doesn't match or student loans?

Postby RaceJudicata » Tue Jan 03, 2017 7:42 pm

lacrossebrother wrote:does biglaw really let you contribute $18k?
i'd think they'd put a cap so as to not fuck up the HCE limits



VERY basic understanding of this on my part, but I think firms maintain two plans - one for associates and one for partners and staff so as not not mess up the HCE limits.

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SemperLegal

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Re: 401k if employer doesn't match or student loans?

Postby SemperLegal » Tue Jan 03, 2017 11:22 pm

Pro tip. If someone is referencing an "IRA 401 (k)" take it with a grain of salt. If you're in biglaw, talk to someone on ECB. If not, talk to your HR.

If you are in Biglaw your guaranted rate of returm is about 35%, because you can contribute pre tax, but can't deduct student interest. You also can likely get a >2% interest rate on your loans. Mathematically, it's usually best to max out the 401k. That said, there's a lot to be said for aggressively paying off your loan and removing the golden handcuffs.

If you aren't in biglaw, find an employer with a match. Other than that, it's to fact sensitive to guess. If your PSLF, then tax planning is super important.

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Re: 401k if employer doesn't match or student loans?

Postby Anonymous User » Wed Jan 04, 2017 12:40 am

OP here. I'm doing biglaw, market salary and bonus. Wife is also biglaw ($200k salary, no bonus) with $140k in debt though she's leaving to clerk after this year for two federal judges (two years) and then planning on returning to firm. I plan on applying to clerk for a year (might be 2018 or 2019). We'd like to be able to buy a house and have a kid in 4 years or so. We're trying to figure out the right mix of saving, paying off loans, and 401k contributions.

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Re: 401k if employer doesn't match or student loans?

Postby Anonymous User » Wed Jan 04, 2017 10:36 am

OP again - does it make any sense to contribute to a 401k in order to try to go down a tax bracket? Instead of just taking that money and putting it towards the student loan?

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Re: 401k if employer doesn't match or student loans?

Postby RaceJudicata » Wed Jan 04, 2017 10:55 am

Anonymous User wrote:OP again - does it make any sense to contribute to a 401k in order to try to go down a tax bracket? Instead of just taking that money and putting it towards the student loan?


Based on your posts (and assuming you filed jointly as a married couple), you are either comfortably within the 33% tax bracket ($231,450 to $413,350) or just within the 35% bracket ($413,350 to $466,950) (basing my napkin math on two biglaw salaries (don't know class year, so a minimum of 200k + 180k).

If you are in 33% bracket, you can't possibly reduce your tax rate (i think you'll also be pretty comfortably in that bracket during wife's clerkships). And if you are in the 35% bracket, you won't be for tax year 2017 (wife's salary will drop in august, reducing your annual income to below the $413 threshold.

Regardless of this, i don't think this is an effective plan. Honestly, I think you could make an argument that its better to be in a higher tax bracket (as far as 401k is concerned), because you are getting a better tax savings (i.e., $10k to 401k, avoiding tax of 33% vs. 10k to 401k avoiding tax of 35%; 2% benefit of being in higher tax bracket).

Would love to hear other's thoughts, but that is just my $0.02.


ETA: I think your situation (given the fluctuations in incomes due to clerkships and overall debtload) warrants speaking with a financial planner to make sure you aren't making a mistake.

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Re: 401k if employer doesn't match or student loans?

Postby Nebby » Wed Jan 04, 2017 10:58 am

SemperLegal wrote:If your PSLF, then tax planning is super important.

Why?

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Re: 401k if employer doesn't match or student loans?

Postby ClubberLang » Wed Jan 04, 2017 10:58 am

If you are making 400k a year as a couple you should not seek financial advice on a message board.

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Re: 401k if employer doesn't match or student loans?

Postby RaceJudicata » Wed Jan 04, 2017 11:14 am

ClubberLang wrote:If you are making 400k a year as a couple you should not seek financial advice on a message board.


Truth.

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Re: 401k if employer doesn't match or student loans?

Postby favabeansoup » Wed Jan 04, 2017 11:27 am

RaceJudicata wrote:
ClubberLang wrote:If you are making 400k a year as a couple you should not seek financial advice on a message board.


Truth.


A fee only financial advisor OP. Don't get some lowlife who is going to pump you for those insurance plan commissions or otherwise. Get that fiduciary relationship beforehand.

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Re: 401k if employer doesn't match or student loans?

Postby v5junior » Wed Jan 04, 2017 11:29 am

RaceJudicata wrote:
Anonymous User wrote:OP again - does it make any sense to contribute to a 401k in order to try to go down a tax bracket? Instead of just taking that money and putting it towards the student loan?


Based on your posts (and assuming you filed jointly as a married couple), you are either comfortably within the 33% tax bracket ($231,450 to $413,350) or just within the 35% bracket ($413,350 to $466,950) (basing my napkin math on two biglaw salaries (don't know class year, so a minimum of 200k + 180k).

If you are in 33% bracket, you can't possibly reduce your tax rate (i think you'll also be pretty comfortably in that bracket during wife's clerkships). And if you are in the 35% bracket, you won't be for tax year 2017 (wife's salary will drop in august, reducing your annual income to below the $413 threshold.

Regardless of this, i don't think this is an effective plan. Honestly, I think you could make an argument that its better to be in a higher tax bracket (as far as 401k is concerned), because you are getting a better tax savings (i.e., $10k to 401k, avoiding tax of 33% vs. 10k to 401k avoiding tax of 35%; 2% benefit of being in higher tax bracket).

Would love to hear other's thoughts, but that is just my $0.02.


ETA: I think your situation (given the fluctuations in incomes due to clerkships and overall debtload) warrants speaking with a financial planner to make sure you aren't making a mistake.


https://blog.mint.com/planning/the-diff ... ates-1212/

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Re: 401k if employer doesn't match or student loans?

Postby SemperLegal » Wed Jan 04, 2017 12:07 pm

Nebby wrote:
SemperLegal wrote:If your PSLF, then tax planning is super important.

Why?


Because AGI determines your repayment amount, so you can double dip. If you max out your 401k or 403b, it's possible your income will be below the repayment threshhold. Depending on your plan features If you go into private practice afterwards, you may still be able to triple dip by borrowing from your own accounts, making (unlikely, but possibly) deductible interest payments to your self.Plus, by creatively shifting between Roths and pre tax in years with low or no salary (i.e. gaps between fellowships/funding), you can "pay" your tax at a zero percent rate now and never pay again

That's actually true for all IBR, which is what I meant.

For non PSLF people (or anyone with a potential tax bomb and low income), 401k assets are very important because they are bankruptcy remote.

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Re: 401k if employer doesn't match or student loans?

Postby AVBucks4239 » Wed Jan 04, 2017 12:27 pm

Anonymous User wrote:OP again - does it make any sense to contribute to a 401k in order to try to go down a tax bracket? Instead of just taking that money and putting it towards the student loan?


OP, I mean this in the nicest way, but your lack of understanding personal finance is striking given your high income. You need to read some books to understand how the basics work, because it seems clear to me that you don't even remotely understand marginal tax rates, the benefits of pre-tax investments, debt vs. investing, etc. This is the personal finance version of you driving a car and not knowing which pedal is for gas and which is for brakes.

I'd read "I Will Teach You to Be Rich," as well as "Boglehead's Guide to Investing," to get a basic sense of what you're dealing with. If you don't understand what's in there, hire a fee only financial adviser that is a fiduciary.

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Re: 401k if employer doesn't match or student loans?

Postby bruinfan10 » Wed Jan 04, 2017 4:19 pm

SemperLegal wrote:Pro tip. If someone is referencing an "IRA 401 (k)" take it with a grain of salt. If you're in biglaw, talk to someone on ECB. If not, talk to your HR.

If you are in Biglaw your guaranted rate of returm is about 35%, because you can contribute pre tax, but can't deduct student interest. You also can likely get a >2% interest rate on your loans. Mathematically, it's usually best to max out the 401k. That said, there's a lot to be said for aggressively paying off your loan and removing the golden handcuffs.

If you aren't in biglaw, find an employer with a match. Other than that, it's to fact sensitive to guess. If your PSLF, then tax planning is super important.

ugh. i was trying to distinguish a roth 401(k) from a pre-tax/traditional-ira-style 401(k). a number of firms offer both options. would've been cleaner for me to just say "traditional 401(k)." but i'm not sure there's "a lot to be said" for biglawyers eschewing tax-advantaged accounts to pay off their loans slightly faster.

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Re: 401k if employer doesn't match or student loans?

Postby SemperLegal » Wed Jan 04, 2017 5:41 pm

bruinfan10 wrote:
SemperLegal wrote:Pro tip. If someone is referencing an "IRA 401 (k)" take it with a grain of salt. If you're in biglaw, talk to someone on ECB. If not, talk to your HR.

If you are in Biglaw your guaranted rate of returm is about 35%, because you can contribute pre tax, but can't deduct student interest. You also can likely get a >2% interest rate on your loans. Mathematically, it's usually best to max out the 401k. That said, there's a lot to be said for aggressively paying off your loan and removing the golden handcuffs.

If you aren't in biglaw, find an employer with a match. Other than that, it's to fact sensitive to guess. If your PSLF, then tax planning is super important.

ugh. i was trying to distinguish a roth 401(k) from a pre-tax/traditional-ira-style 401(k). a number of firms offer both options. but great pro-tip, you got me, would've been more accurate for me to just say "traditional 401(k)," so i'm sure there's also "a lot to be said" for biglawyers eschewing tax-advantaged accounts to pay off their loans slightly faster.


Sorry for being snide.

To clarify, a Roth IRA and a Roth 401(k) are the most common post tax contributions. Traditional IRAs and Traditional 401 (k) [or just 401k or IRA with no descriptor] are pretax, with 401(k) being "more" pretax.

The "a lot to be said" is me obliquely referring to non economic factors. $18k a year will put a sizable dent in debt loads. For a 10 year, $100k loan at 6%: one extra 18k payment in the current year results in either:
(a) $11k in interest savings and 2 years earlier of a payoff if you don't refi or
(b)$200 less in monthly payments if it's reamortized in year 2 over the intital term.

So if their only concern is to pay it off (or reach a number that they can service over thirty years), then OP should consider that.

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Re: 401k if employer doesn't match or student loans?

Postby bruinfan10 » Wed Jan 04, 2017 5:50 pm

SemperLegal wrote:Sorry for being snide.

To clarify, a Roth IRA and a Roth 401(k) are the most common post tax contributions. Traditional IRAs and Traditional 401 (k) [or just 401k or IRA with no descriptor] are pretax, with 401(k) being "more" pretax.

The "a lot to be said" is me obliquely referring to non economic factors. $18k a year will put a sizable dent in debt loads. For a 10 year, $100k loan at 6%: one extra 18k payment in the current year results in either:
(a) $11k in interest savings and 2 years earlier of a payoff if you don't refi or
(b)$200 less in monthly payments if it's reamortized in year 2 over the intital term.

So if their only concern is to pay it off (or reach a number that they can service over thirty years), then OP should consider that.

That makes sense. I've just had a number of friends who went biglaw--and could afford to refi at a low rate and max their 401(k)s---who wouldn't even consider tax advantaged accounts, reasoning that a guaranteed saving on interest beats a variable return in the stock market (as we've seen repeated in this thread a number of times), failing to take into account the separate, significant tax savings they would pull off by maxing their retirement accounts, regardless of market performance. it made me feel crazy to be funding my 401(k) for a while, but now that my debt is almost gone, i'm pretty sure it was a no-brainer (absent the non-economic justifications you listed).

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Re: 401k if employer doesn't match or student loans?

Postby Anonymous User » Wed Jan 04, 2017 6:36 pm

To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?

If so, why are we making that assumption? Plenty of big law associates making 180k now will make more than that in retirement. Obviously not a guarantee, but I've found so much of the personal finance advice online useless because it doesn't speak to the situation of high earning (wife and I are at 300k) young people (were 28) who have major upside in earning potential (ie partners, GC's, etc).

And yes I know that it's possible that biglaw $$ is the most I'll ever make.

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Re: 401k if employer doesn't match or student loans?

Postby v5junior » Wed Jan 04, 2017 7:17 pm

Anonymous User wrote:To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?

If so, why are we making that assumption? Plenty of big law associates making 180k now will make more than that in retirement. Obviously not a guarantee, but I've found so much of the personal finance advice online useless because it doesn't speak to the situation of high earning (wife and I are at 300k) young people (were 28) who have major upside in earning potential (ie partners, GC's, etc).

And yes I know that it's possible that biglaw $$ is the most I'll ever make.


No, I was not. See my original post. In any event, you could still realize tax savings b/c you don't have to pay the taxes for another 30+ years. TVM and all that jazz.

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Re: 401k if employer doesn't match or student loans?

Postby bruinfan10 » Wed Jan 04, 2017 7:19 pm

Anonymous User wrote:To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?

If so, why are we making that assumption? Plenty of big law associates making 180k now will make more than that in retirement. Obviously not a guarantee, but I've found so much of the personal finance advice online useless because it doesn't speak to the situation of high earning (wife and I are at 300k) young people (were 28) who have major upside in earning potential (ie partners, GC's, etc).

And yes I know that it's possible that biglaw $$ is the most I'll ever make.

Wait, I get that some small number of people will continue making 200-300k a year post-biglaw, but earning more than that amount "in retirement?" Like....you're going to be a partner/GC well past 65/70? I guess in that scenario, you're better off using a ROTH 401(k) for tax-free growth, but that's not a super realistic scenario?

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Re: 401k if employer doesn't match or student loans?

Postby Anonymous User » Wed Jan 04, 2017 7:36 pm

bruinfan10 wrote:
Anonymous User wrote:To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?

If so, why are we making that assumption? Plenty of big law associates making 180k now will make more than that in retirement. Obviously not a guarantee, but I've found so much of the personal finance advice online useless because it doesn't speak to the situation of high earning (wife and I are at 300k) young people (were 28) who have major upside in earning potential (ie partners, GC's, etc).

And yes I know that it's possible that biglaw $$ is the most I'll ever make.

Wait, I get that some small number of people will continue making 200-300k a year post-biglaw, but earning more than that amount "in retirement?" Like....you're going to be a partner/GC well past 65/70? I guess in that scenario, you're better off using a ROTH 401(k) for tax-free growth, but that's not a super realistic scenario?



If you have $3-4MM (ie saving 100-150k annual for 30 years, not crazy if you make 400-600 as GC or partner plus spouse working and def not crazy if v50 partner) in retirement savings plus SS plus a maxed 401K, actually pretty easy to see how you'd be making 300+ in retirement just on passive income/distributions. As long as we're being financially rational, would we not want to account for this possibility?

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Re: 401k if employer doesn't match or student loans?

Postby SemperLegal » Wed Jan 04, 2017 7:43 pm

bruinfan10 wrote:
Anonymous User wrote:To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?

If so, why are we making that assumption? Plenty of big law associates making 180k now will make more than that in retirement. Obviously not a guarantee, but I've found so much of the personal finance advice online useless because it doesn't speak to the situation of high earning (wife and I are at 300k) young people (were 28) who have major upside in earning potential (ie partners, GC's, etc).

And yes I know that it's possible that biglaw $$ is the most I'll ever make.

Wait, I get that some small number of people will continue making 200-300k a year post-biglaw, but earning more than that amount "in retirement?" Like....you're going to be a partner/GC well past 65/70? I guess in that scenario, you're better off using a ROTH 401(k) for tax-free growth, but that's not a super realistic scenario?


It's a hard prediction. A lot of people suggest a mix of the two because then you can selectively drawdown depending on your income for the year (although there are Required draws for retirees above a certain age).

However, you can almost certainly predict that your income [actual or AGI] will NOT increase every single year from Stub year to death. Youll have years in which youll change jobs, partner draws will be down (possibly negative), youll take medical or personal sabbaticals, youll do a stint in government, or you'll outlive your careers.

This is complicated even more because inflation pushes the brackets up while changes in law effect the rates.

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Re: 401k if employer doesn't match or student loans?

Postby Biglaw Investor » Thu Jan 05, 2017 5:13 pm

Anonymous User wrote:To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?


No, we're definitely not all making that assumption but it's quite possible that it will be true. Keep in mind what I wrote earlier about taking advantage of the tax arbitrage. You are saving taxes at your marginal rate today but paying them at your effective rate in retirement. It's a big difference. And, even if you end up with a boatload of income in retirement, there's worse problems to have, right?

Also, as @SemperLegal has pointed out, it's recommend to develop a mix of pre-tax and post-tax retirement money anyway because it allows you to control your taxable income in retirement. For example, if you need $100K/yr in retirement, you might decide to draw $50K from a pre-tax account and get the other $50K from a post-tax account, allowing you to keep a relatively low effective tax rate on the $50K of income. If you're in Biglaw, max out those 401(k)s and do backdoor Roths.

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Re: 401k if employer doesn't match or student loans?

Postby Biglaw Investor » Thu Jan 05, 2017 5:20 pm

AVBucks4239 wrote:OP, I mean this in the nicest way, but your lack of understanding personal finance is striking given your high income.


I don't think it's striking at all. Most lawyers and doctors have no clue how to manage a high income. It's not taught in professional school and if you didn't grow up with money, it's not something you appreciate needing to know until the big salary is thrust upon you. Good that OP is asking the questions today and trying to figure it out.

AVBucks4239 wrote:I'd read "I Will Teach You to Be Rich," as well as "Boglehead's Guide to Investing," to get a basic sense of what you're dealing with. If you don't understand what's in there, hire a fee only financial adviser that is a fiduciary.


I'm sure OP will understand those books, both of which are great recommendations. If you decide you don't want to do it yourself, then a fee-only financial advisors can be a great resource. OP should also check out the Bogleheads forum which is full of helpful people and information. I'd also recommend Jim Dahle's book, The White Coat Investor: A Doctor's Guide to Personal Finance, as a good starting point.

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Re: 401k if employer doesn't match or student loans?

Postby spyke123 » Thu Jan 05, 2017 5:40 pm

v5junior wrote:
Anonymous User wrote:To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?

If so, why are we making that assumption? Plenty of big law associates making 180k now will make more than that in retirement. Obviously not a guarantee, but I've found so much of the personal finance advice online useless because it doesn't speak to the situation of high earning (wife and I are at 300k) young people (were 28) who have major upside in earning potential (ie partners, GC's, etc).

And yes I know that it's possible that biglaw $$ is the most I'll ever make.


No, I was not. See my original post. In any event, you could still realize tax savings b/c you don't have to pay the taxes for another 30+ years. TVM and all that jazz.


I don't know why but TVM never crossed my mind till I saw this. It looks like TVM may be one of the biggest reasons to invest in 401k.. I mean even if we are to be in a higher tax bracket in retirement, TVM will ensure that we are much better off paying higher taxes in the future. Like someone said earlier, deferred taxes are no taxes paid.

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Re: 401k if employer doesn't match or student loans?

Postby unlicensedpotato » Thu Jan 05, 2017 5:50 pm

spyke123 wrote:
v5junior wrote:
Anonymous User wrote:To confirm -- everyone talking about tax savings for 401k is assuming their current rate is higher than it will be in retirmernt, correct?

If so, why are we making that assumption? Plenty of big law associates making 180k now will make more than that in retirement. Obviously not a guarantee, but I've found so much of the personal finance advice online useless because it doesn't speak to the situation of high earning (wife and I are at 300k) young people (were 28) who have major upside in earning potential (ie partners, GC's, etc).

And yes I know that it's possible that biglaw $$ is the most I'll ever make.


No, I was not. See my original post. In any event, you could still realize tax savings b/c you don't have to pay the taxes for another 30+ years. TVM and all that jazz.


I don't know why but TVM never crossed my mind till I saw this. It looks like TVM may be one of the biggest reasons to invest in 401k.. I mean even if we are to be in a higher tax bracket in retirement, TVM will ensure that we are much better off paying higher taxes in the future. Like someone said earlier, deferred taxes are no taxes paid.


No, because you need the tax savings you set aside to grow at the same rate as your 401k to cover your tax bill for the 401k (assuming identical income and identical tax rates). Plus even that actually won't cover it because you have tax leakage every year from dividends in the taxed account.

The way to go for most people is probably what was said above -- traditional 401k + backdoor roth + taxable account



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