Advice for new grad starting career in NY/NJ

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realclemsongrad
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Advice for new grad starting career in NY/NJ

Post by realclemsongrad »

For a new grad working in NY and living in NJ, I am advising the following based on my research. I wanted to get your input based on the intricacies of NJ/NY tax laws.

1. Contribute to tax advantaged 401 max out.
2. Max out HSA (pick the High deductible plan that is HSA eligible). Pick treasury bills as the investment choice.

Now comes the part I am less clear about

1. Between after tax 401k (this company offers mega back door 401k) and Roth (he will be eligible) which one to choose? At his income level I double he can max all the mega backdoor but at least he can contribute the same as Roth.

2. I looked at NJ 529 BEST plan, and the savings on NJ tax seems small. I am leaning towards encouraging to use Roth/401K after tax in lieu of this 529.

Any advice based on the NJ/NY tax laws?

Thanks
Cuz789
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Re: Advice for new grad starting career in NY/NJ

Post by Cuz789 »

1. I think you may be confused on what a mega back door 401k is. This is to get around the ~$22.5K tax advantaged personal contribution limit. That $22.5K can be in a traditional or roth 401K (or both) based on what the individual wants. The mega back door roth allows a person to contribute above and beyond the $22.5K limit (up to $60K+ including employer contribution) by putting in after-tax dollars and converting them to roth.

2. Do they have a need for the money to be in a 529 at this point? Are they planning to go back to school or pay for a qualifying expense for themselves or someone else? I wouldn't contribute to the 529 at this time and put it all in the MBDR.
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id0ntkn0wjack
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Re: Advice for new grad starting career in NY/NJ

Post by id0ntkn0wjack »

realclemsongrad wrote: Tue Apr 02, 2024 6:05 pm
2. Max out HSA (pick the High deductible plan that is HSA eligible). Pick treasury bills as the investment choice.

Are you planning on using the HSA for ongoing medical expenses or for future expenses?

The triple tax advantaged benefit of an HSA kind of lends itself to a long term investment option which might benefit to a bit more upside growth than TBills if you can handle the risk and are not dependent on the funds in the short term
I moved 10% of my equities into BLV (Vanguard Long Term Bond ETF) in January 2021. Follow my advice at your own peril.
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grabiner
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Re: Advice for new grad starting career in NY/NJ

Post by grabiner »

realclemsongrad wrote: Tue Apr 02, 2024 6:05 pm 2. Max out HSA (pick the High deductible plan that is HSA eligible). Pick treasury bills as the investment choice.
You don't need to use Treasury bills, which are essentially cash. You can use a Treasury or TIPS fund for the HSA investments; these are also exempt from state tax in NJ. (NJ does not even tax capital gains on "qualified investment funds" which hold Treasury bonds.)

If you are investing your HSA for retirement, then it is just part of your retirement portfolio. Thus, as long as you hold any bonds, and don't have a good reason to hold bonds somewhere else (such as the TSP G fund or TIAA Traditional Annuity), you might as well hold the bonds in your HSA for the tax advantage, and hold most of your stock elsewhere.

If you do have a good reason not to hold bonds in the HSA, use a tax-efficient, low-dividend fund such as Vanguard Total Stock Market to minimize the tax costs. You will still owe NJ capital-gains tax when you sell if you are a resident of NJ at the time.
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realclemsongrad
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Re: Advice for new grad starting career in NY/NJ

Post by realclemsongrad »

Cuz789 wrote: Tue Apr 02, 2024 7:54 pm 1. I think you may be confused on what a mega back door 401k is. This is to get around the ~$22.5K tax advantaged personal contribution limit. That $22.5K can be in a traditional or roth 401K (or both) based on what the individual wants. The mega back door roth allows a person to contribute above and beyond the $22.5K limit (up to $60K+ including employer contribution) by putting in after-tax dollars and converting them to roth.

2. Do they have a need for the money to be in a 529 at this point? Are they planning to go back to school or pay for a qualifying expense for themselves or someone else? I wouldn't contribute to the 529 at this time and put it all in the MBDR.
He has no plans on doing any more school. I only considered 529 for tax advantaged and tax benefit. But doing the numbers on NJ1040 It does not seem that great.
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realclemsongrad
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Re: Advice for new grad starting career in NY/NJ

Post by realclemsongrad »

id0ntkn0wjack wrote: Tue Apr 02, 2024 7:56 pm
realclemsongrad wrote: Tue Apr 02, 2024 6:05 pm
2. Max out HSA (pick the High deductible plan that is HSA eligible). Pick treasury bills as the investment choice.

Are you planning on using the HSA for ongoing medical expenses or for future expenses?

The triple tax advantaged benefit of an HSA kind of lends itself to a long term investment option which might benefit to a bit more upside growth than TBills if you can handle the risk and are not dependent on the funds in the short term
Yes HSA is for ongoing medical expenses but being that young I do not anticipate many so at this point all goes well it is for the later years.
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realclemsongrad
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Re: Advice for new grad starting career in NY/NJ

Post by realclemsongrad »

grabiner wrote: Tue Apr 02, 2024 9:50 pm
realclemsongrad wrote: Tue Apr 02, 2024 6:05 pm 2. Max out HSA (pick the High deductible plan that is HSA eligible). Pick treasury bills as the investment choice.
You don't need to use Treasury bills, which are essentially cash. You can use a Treasury or TIPS fund for the HSA investments; these are also exempt from state tax in NJ. (NJ does not even tax capital gains on "qualified investment funds" which hold Treasury bonds.)

If you are investing your HSA for retirement, then it is just part of your retirement portfolio. Thus, as long as you hold any bonds, and don't have a good reason to hold bonds somewhere else (such as the TSP G fund or TIAA Traditional Annuity), you might as well hold the bonds in your HSA for the tax advantage, and hold most of your stock elsewhere.

If you do have a good reason not to hold bonds in the HSA, use a tax-efficient, low-dividend fund such as Vanguard Total Stock Market to minimize the tax costs. You will still owe NJ capital-gains tax when you sell if you are a resident of NJ at the time.
Thank you @grabiner for the solid advice. He has 100% equity so far and all of it if I recall is VTI having said that, his portfolio is not large (just graduating).
Joe Public
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Re: Advice for new grad starting career in NY/NJ

Post by Joe Public »

If you are asking about MBD 401(k) compared to Roth IRA, then, depending on the details of the employer plan, the Roth IRA may have more flexibility with investment options, withdrawal options, etc.
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realclemsongrad
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Re: Advice for new grad starting career in NY/NJ

Post by realclemsongrad »

Joe Public wrote: Wed Apr 03, 2024 6:56 pm If you are asking about MBD 401(k) compared to Roth IRA, then, depending on the details of the employer plan, the Roth IRA may have more flexibility with investment options, withdrawal options, etc.
@joepublic.

Thank you. Yes the debate is between doing ROTH IRA vs after tax component of MBD 401k. I understand the investment options, can you please elaborate on the withdrawal options? Which one would be preferrable. He is only looking for 7K so his budget can fit either options.
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Re: Advice for new grad starting career in NY/NJ

Post by muffins14 »

realclemsongrad wrote: Wed Apr 03, 2024 7:24 pm
Joe Public wrote: Wed Apr 03, 2024 6:56 pm If you are asking about MBD 401(k) compared to Roth IRA, then, depending on the details of the employer plan, the Roth IRA may have more flexibility with investment options, withdrawal options, etc.
@joepublic.

Thank you. Yes the debate is between doing ROTH IRA vs after tax component of MBD 401k. I understand the investment options, can you please elaborate on the withdrawal options? Which one would be preferrable. He is only looking for 7K so his budget can fit either options.
withdrawing should eventually be the same, since at some point they can move the Roth 401k into a Roth IRA
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Joe Public
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Re: Advice for new grad starting career in NY/NJ

Post by Joe Public »

realclemsongrad wrote: Wed Apr 03, 2024 7:24 pm
Joe Public wrote: Wed Apr 03, 2024 6:56 pm If you are asking about MBD 401(k) compared to Roth IRA, then, depending on the details of the employer plan, the Roth IRA may have more flexibility with investment options, withdrawal options, etc.
@joepublic.

Thank you. Yes the debate is between doing ROTH IRA vs after tax component of MBD 401k. I understand the investment options, can you please elaborate on the withdrawal options? Which one would be preferrable. He is only looking for 7K so his budget can fit either options.
With a Roth IRA, contributions may be withdrawn at any time without penalty. With an employer plan, the terms of the plan will dictate some of the parameters regarding whether in-service distributions or rollovers are permitted, etc. That may or may not be of significance to your son, but it is good to know what the plan details are.
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realclemsongrad
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Re: Advice for new grad starting career in NY/NJ

Post by realclemsongrad »

Joe Public wrote: Thu Apr 04, 2024 12:25 pm
realclemsongrad wrote: Wed Apr 03, 2024 7:24 pm
Joe Public wrote: Wed Apr 03, 2024 6:56 pm If you are asking about MBD 401(k) compared to Roth IRA, then, depending on the details of the employer plan, the Roth IRA may have more flexibility with investment options, withdrawal options, etc.
@joepublic.

Thank you. Yes the debate is between doing ROTH IRA vs after tax component of MBD 401k. I understand the investment options, can you please elaborate on the withdrawal options? Which one would be preferrable. He is only looking for 7K so his budget can fit either options.
With a Roth IRA, contributions may be withdrawn at any time without penalty. With an employer plan, the terms of the plan will dictate some of the parameters regarding whether in-service distributions or rollovers are permitted, etc. That may or may not be of significance to your son, but it is good to know what the plan details are.
Thank you @joepublic and @muffin14. I will walk him through this.
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