Starting my career on the right foot

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error
Posts: 12
Joined: Sun Aug 20, 2017 6:23 pm

Starting my career on the right foot

Post by error » Sun Aug 20, 2017 7:40 pm

Recently graduated with a BS in the IT field.
Will pursue a Masters in the near future.
Will be starting at a job in about 3 weeks.
Have basically no knowledge of anything related to finances. No one in my family knows either. I will be the first college graduate and first to have a high paying job. Basically I am left to fend for myself when it comes to learning what to do/ not to do.

I would like some advice on how to make sure I take advantage of everything available to me.
I'm in my late 20's and still live at home and it has to be that way for about 2 years at least. This however puts me in a position to save nearly all of my income and to invest it appropriately. My salary will be in the neighborhood of 80k. I have no debts because I saved my money and went to cheap schools. I have about 20k in my checking account. No reason to have it in savings because I have BoA and they have terrible interest rates. I have been thinking of maybe going to Ally bank for my savings account. My masters degree will probably cost somewhere in the neighborhood of 10-20k.

Since it is already late in the year I might not have enough money to max out retirement accounts, but by next year I plan on doing so.
The company I will work for has a 100% match up to 6% salary 401k, and I will probably get an HSA. I plan to max those out along with a Roth IRA. I believe I have the option of a 401k or a Roth 401k, but am not sure yet.

I have debated getting a financial advisor and/or a tax advisor to help, but there are so many options and so many factors that go into choosing someone. I feel like I would want A fiduciary from NAPFA, but at the same time would want someone well versed in tax laws to get me most out of my income. Ideally I would have a financial advisor that could also be my tax guy, so I would only have to see one person. I would want low fees, but it might not matter too much because I might only use them for a year or two and then try to do it on my own if I am able to learn enough to do it on my own.

I did some rough estimating and think I will have an income of just under 25k this year( not counting bonus, i don't even know if i will get one this year). If i am correct I could use the 401k to basically reduce that down so i don't have to pay any federal taxes on it. I had planned on distributing my money like so:
1) 401k to employer match (6%)
2) 3400 to HSA
3) 5500 to Roth IRA
4) The rest goes to 401k to reduce income to untaxable levels.
5) After taxes go to 0, I either put more in 401k or into savings

My employer offers ESPP, but I don't know the details of this. So I might use some of the remaining money to try and make a profit with ESPP if I can do it this year.

There are many things I don't know about my benefits which is why I plan of contacting my recruiter and asking them. I have only ever had min wage part time kind of work before though so I am not even sure of the correct way finding out this information. Should I wait until I start to do this? For example, I might want to try to participate in the mega backdoor Roth conversion, but I don't know if I can contribute non Roth after tax to my 401k and don't know if I can take in service.

I am very prone to suffering from regrets and missed opportunities which is why I want to make sure that I have the foundation set day 1 to get the most out of my income.

Summary Questions:
How to pay little/no taxes on 25k income?(estimated income for the remainder of this year)
How does setting up a 401k work? Is it provided for me? Do I have to set it up?
Does the way I plan to distribute my income above make sense?
Should I get a financial advisor? should they be fiduciaries? NAPFA?
Should I get a tax advisor? How to find a good one?
Could I/ Should I get someone that will be a financial advisor and tax advisor all in one?
How to find a good financial advisor? Are Dave Ramsey's elps a good resource for finding these people in my area?
How to set up a Roth IRA?
What is the process involved with actually depositing money into Roth IRAs/401ks/HSAs?
Given the option of roth 401k and 401k, which to choose?
Does Mega backdoor Roth sound doable in my situation?(assuming I can do after tax contributions and can do in service transfers)
The basics on how to start investing? where do I go? How do I buy/sell etc?
How does the process of ESPP work? Where do i buy them? Where do I sell them? where does that money go after I sell them?
What questions should I ask my recruiter? I will email about the 401k and Mega backdoor, but what else should I ask?
What are some potential mistakes I could make? What are some things that I could potentially miss out on?

Any and all Advice appreciated
Thanks

curmudgeon
Posts: 1218
Joined: Thu Jun 20, 2013 11:00 pm

Re: Starting my career on the right foot

Post by curmudgeon » Sun Aug 20, 2017 11:10 pm

I'll give you a few points to get started:

Plug your income into this tax estimate tool to get a feel for how taxes are likely to work. Put some various income levels allowing for 401K or IRA. https://www.taxact.com/tools/tax-calculator.asp Don't forget about state taxes if they apply, but I haven't seen simple estimators for those.

401K is set up and managed by your employer. HR will have paperwork for you when you on-board. Just make sure you sign up for 401K as soon as possible, as it sometimes take several weeks for everything to get going. You can defer up to $18.5K per year in 401K. Pay attention to the expense rates on the 401K funds and don't just pick the one with the best return last year. There is a wide variation in the quality of 401K plans; some have stupid restrictions and/or poor fund choices. When you see what is offered, you can check back here for advice.

This year, you could also do a deductible IRA, but I think I would go for Roth instead because of the lower income. Note that you can do Roth IRA or TIRA, but not both. You might be marginal on being able to do a deductible (TIRA) next year because of income limits, but Roth should still be open to you (if/when you hit Roth income limits, see "backdoor Roth").

There are advantages to not having all your savings in retirement accounts. I would keep a mix of taxable and tax-deferred. With single tax filing status, maxing the 401K is definitely advantageous. Your taxes are likely to be pretty simple; use the 401K/HSA/IRA, and move on. Stay away from getting fancy on tax-avoidance schemes. This year Roth 401K might make sense, but starting next year I think you will want to be holding down the taxable income by standard 401K.

I don't think you need or want a financial or tax advisor. Just take it a step at a time and don't get too crazy. It would be different if you had started facebook while you were in school or something, but you are just joining the generic middle class and mostly you pay your taxes and move on.

Lots of providers for IRA or Roth IRA. You might start by looking at Vanguard. If you want a local office, Schwab or Fidelity are good options.

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dratkinson
Posts: 3932
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Starting my career on the right foot

Post by dratkinson » Mon Aug 21, 2017 3:02 am

BH Starting my career on the right foot.


Congratulations on your early debt-free start.



Read three books ASAP. (What I wish I knew in my 20s.)

--Personal financial management: The Only Investment Guide You’ll Every Need, Andrew Tobias (helped me); or How to Make the Most of Your Money, Jane Bryant Quinn (recommended by others but haven’t read it). Covers a wide range of personal finance topics: life insurance, credit cards, debt, introductory retirement investing....

--Investing for retirement: The Bogleheads' Guide to Investing. A structured overview of retirement account types, appropriate investment choices for each account type, tax considerations,....

--Mate selection: Date… or Soul Mate, Warren. Priceless if it helps avoid bad marriage/divorce.

Get the books from your local library.

Begin reading in the Wiki (Quick links, screen top left) while waiting for your books.



Emergency funds (generic). Just starting out and with nothing saved/invested, it is advised to slowly build and keep an EF containing 3-12 months (our choice) of living expenses. Why? So you don't need to tap your retirement investments to handle a ST financial emergency. Keep this money in a taxable account and tiered in cash or near-cash equivalents: credit cards, cash in a drawer, checking, savings, mmkt account/fund, bonds, savings bonds (one year lockout), HELOC, ... stocks.

The short answer (generic). Our EF grows/evolves as we grow/evolve as a manager of our finances.
--Just starting with zero saved/invested. LBYM (live below your means) and use excess income to pay debt on time and slowly create a 3-6mo EF (tracked separately so you don't lose focus on it).
--After 6mo EF created. LBYM and use excess income to pay debt on time and fully fund annual tax-advantaged investments.
--After annual tax-advantaged investments fully funded. LBYM and use excess income to accelerate debt repayment (except home mortgage).
--After non-mortgage debts repaid. LBYM and use excess income to increase EF to 12mos and begin taxable investing.
--After 12mo EF created, and taxable investing well established as extended EF tier. You have “enough” so separate EF tracking not needed.

Enough. Senior investors say when we have "enough" (as defined by us), we don't need a dedicated EF as all of our investments become our EF.

Note. In using the "enough" concept of EF creation, we still keep a large chunk of cash liquid. If we have sufficient income, we may feel we need to keep only 1yr liquid. Some retirees, living on retirement withdrawal, report keeping 5yrs liquid to ensure they avoid selling during a down market (assumes any market decline will correct within 5 years).

Bottom line. Our EF grows/evolves as we grow/evolve as a manager of our finances. When our EF is small, we keep it separate and track it separately from our retirement investments so we don't lose focus on it. When our EF is large, it's upper tiers get merged with our retirement investments and we no longer track them separately (it's simpler that way). It’s your choice how/when the change happens.


In your case, your excess EF can be used to pay for your MS.



Retirement investing (generic).

See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _placement
See Wiki topic: https://www.bogleheads.org/wiki/Three-fund_portfolio
See forum discussion: viewtopic.php?f=10&t=88005&newpost=1506953

3-fund portfolio. The 3-fund portfolio is recommended for all account types (self-employed, employer, personal, tax-free, tax-deferred, and taxable). It can be replicated in each account, or spread across all guided by your investment options’ availability/costs. However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund.

Preferred retirement investing order (generic).
--Employer’s retirement plan to get the company match (it’s free money, but most restrictive choices)
--IRA (more and better choices)
--Spousal IRA (if spouse not working, qualifies based on your earned income)
--Employer’s retirement plan to annual contribution limit (maximize annual tax-advantaged space because more is better than less)
--Taxable investments (if you have more to invest after filling annual tax-advantaged space, no annual contribution limit). Round out your AA using the most tax-efficient options.

See Wiki topic: https://www.bogleheads.org/wiki/Priorit ... nvestments

Begin creating a 3-fund portfolio by investing in your employer’s retirement plan (probably the worst options) by choosing the best options (lowest-cost, broadest-index). Then invest in your IRA (unlimited good options) by buying whatever you need to fill out the missing pieces of your 3-fund portfolio not available from your employer’s plan. Finally, if you have more to invest after filling all of your annual tax-advantaged space, then begin taxable investing (choose only the most tax-efficient options).



HSA. Know nothing about them except that others recommend them as a stealth IRA. So believe the 3-fund portfolio recommendation applies here, too.



Employer stocks. You'd hate to have your employer go bankrupt (think GM, Enron,...) and you lose your job and stock investment at the same time. So it's recommended to keep employer stock ownership to <5% of your total investments (if needed, to show solidarity with your employer). How? Convert the stocks to cash as tax-efficiently as possible, and redeploy the cash into your retirement investments. You will owe tax on any capital gains.



How to set up a 401k. Your employer's HR dept will walk you through the process.



How to set up a traditional IRA (tIRA), Roth IRA (rIRA), taxable investing accounts. It’s simpler to keep your IRAs and taxable accounts at one home. Many here use low cost brokerage accounts from Vanguard, Fidelity, TDAmeritrade, Charles Schwab. Your choice.

Select your account home, call them and tell them the type(s) of account(s) you want to open and they'll tell you how to do it. In my day, they sent you paperwork, you filled out the paperwork and send it back with a check. Today you can probably do the same things online or by phone.

Everyone wishes they had only rIRAs at retirement time. Why? No RMDs (required minimum distributions).

Your income is low now, so now is the best time to contribute to a rIRA. Why? Contributions to a tIRA are deductible, but in a low tax bracket, the tax advantage is also low. Advantage: rIRA.

If you believe you will one-day use the backdoor Roth concept, then starting now with a rIRA is a no-brainer.



Account management. Interlink your accounts (checking, savings, taxable investments,...) so you can easily move money among them by initiating a transaction by phone or online. These moves will probably be by ACH (automated clearing house) and will take 2-business days each.

For each link, you will need the bank routing number for one account so you can link it to a second account.

Example. To link your checking account to your Vanguard taxable mmkt account, Vanguard must know: (1) your bank’s ABA routing number and (2) your checking account number. Get this information from your bank. Your bank will print a sheet that identifies your checking account’s DD (direct deposit) information.

Example. Your bank’s DD information on your checking account is the same information needed by your employer’s HR department so they can DD your salary to your checking account.

If uncertain about how to do something, then call the Vanguard et al CSR (customer service representative) and ask for advice.



Automatic Bill Payment (ABP). Many use bank online bill payment plans to push money to your creditors. But there is a simpler way. What? ABP plans.

ABP is set up with each of your TRUSTED! creditiors (rent/mortgage, insurance, utilities, credit cards,...) to allow them to pull their payment from your checking account each month on the due date.

I've used ABP plans >10 years and no problems noted. My only task is to open the monthly mailed statements and annotate my checkbook register with the date/amount of each payment to be withdrawn.

The ABP payment will be withdrawn from your checking account on the due date, or 2-3 days later. Why? Your creditors' office staff doesn't work on weekends/holidays, so they withdraw the payment on the next business day. It's okay for them to withdraw the money late, it's not okay for you to make a late payments.

Mailed statements. I prefer mailed statements, as they are hard to forget and become more important as we age and need to leave a paper trail for our heirs.



Tax returns. I assume you’ve been doing your own tax returns. If not, then start. It’s easy enough to do using any of a number of different popular tax s/w providers.

With a low income (<$64K), you also qualify for freefile online tax s/w from the IRS. I’ve successfully used the OLT option. The only caveat to get free tax returns (fed+state+efiling) is you must enter from the IRS website.

See: https://www.irs.gov/uac/free-file-do-yo ... s-for-free

Once your income increases, you can still use OLT, but you’ll have to pay for it. As its fee is less than other popular tax s/w products, it's still not a bad deal.

N.B. With low income this year and if you contribute fully to a rIRA (or tIRA), you may qualify for the Savers Credit.

See: https://www.irs.gov/retirement-plans/pl ... ers-credit



401k. After you have access to your 401k, come back and post your complete financial situation in the format requested in the sticky “Asking Portfolio Questions” and we’ll help you select appropriate 401k options.

By then you’ll have done your required reading and have a better understanding of the advice you’ll receive.



Financial/tax advisor. Notice with above, you’ll learn to manage your daily finances and apply tax considerations to your retirement investing.

Bottom line. Once you know enough to select a good advisor, you won’t need one for your daily life.

You may need one to leave a complicated legacy, but you can wait on that for now.



Welcome.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

cherijoh
Posts: 3918
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Starting my career on the right foot

Post by cherijoh » Mon Aug 21, 2017 6:46 am

error wrote:
Sun Aug 20, 2017 7:40 pm
My masters degree will probably cost somewhere in the neighborhood of 10-20k.
Be sure and check with your employer to see if they offer any tuition assistance for furthering your education. In some cases you have to complete the class and achieve a certain grade and then they will reimburse you.
error wrote:
Sun Aug 20, 2017 7:40 pm
Since it is already late in the year I might not have enough money to max out retirement accounts, but by next year I plan on doing so.
The company I will work for has a 100% match up to 6% salary 401k, and I will probably get an HSA. I plan to max those out along with a Roth IRA. I believe I have the option of a 401k or a Roth 401k, but am not sure yet.
Check and see what the maximum % of your salary you can contribute. Also see if your company offers "true up" matching. I started my current job mid-September 8 years ago. My company permitted up to 75% of salary to go towards your 401k. I had sufficient savings to throw 75% of my salary for the rest of the year (the final 5 paychecks due to lag in enrollment). My company offered "true up" matching, so I received regular matching (100% for first 5% of salary) for the 5 paychecks with 401k contributions. Then in February of the next year I received the rest of the match to bring it up to 5% of what I had contributed.

It sounds like your expenses are low enough that you could try and super-charge you 401k by accelerated contributions to your 401k for the remainder of the year - even if you can't max it out. If your company offers "true up" matching, I would strongly encourage this! For example, if you started your contributions on October 1st and just put in 6% of your salary, you would end up with 25% of the maximum annual company match. But if you bumped your contribution up to 12%, you would get 50% of the maximum annual match with "true up" matching. NOTE: some companies only match based on each paycheck, but it is still beneficial to stretch your budget and sock away more since you will lose the remaining tax-advantaged space on Dec 31.
error wrote:
Sun Aug 20, 2017 7:40 pm

I have debated getting a financial advisor and/or a tax advisor to help, but there are so many options and so many factors that go into choosing someone. I feel like I would want A fiduciary from NAPFA, but at the same time would want someone well versed in tax laws to get me most out of my income. Ideally I would have a financial advisor that could also be my tax guy, so I would only have to see one person. I would want low fees, but it might not matter too much because I might only use them for a year or two and then try to do it on my own if I am able to learn enough to do it on my own.
You don't need an advisor. You also don't need a tax guy - just get a tax software package. I suggest you download a free copy of Bill Bernstein's "if You Can" from his website. Then read some of the books on his reading list. Just based on your post and the question you ask, I can tell that you are sensible and fully capable of going it on your own. Sure you could make a few minor mistakes but the great thing is that you are starting small and in the long run the most important thing is to live below your means and save, save, save! Clearly you already have that covered! :happy
error wrote:
Sun Aug 20, 2017 7:40 pm

I did some rough estimating and think I will have an income of just under 25k this year( not counting bonus, i don't even know if i will get one this year). If i am correct I could use the 401k to basically reduce that down so i don't have to pay any federal taxes on it. I had planned on distributing my money like so:
1) 401k to employer match (6%)
2) 3400 to HSA
3) 5500 to Roth IRA
4) The rest goes to 401k to reduce income to untaxable levels.
5) After taxes go to 0, I either put more in 401k or into savings
Sounds like a sensible plan to me. I wouldn't worry too much about the ESPP - having too much invested in employer stock isn't a good idea, so I would max out other benefits before considering it.
error wrote:
Sun Aug 20, 2017 7:40 pm

There are many things I don't know about my benefits which is why I plan of contacting my recruiter and asking them. I have only ever had min wage part time kind of work before though so I am not even sure of the correct way finding out this information. Should I wait until I start to do this? For example, I might want to try to participate in the mega backdoor Roth conversion, but I don't know if I can contribute non Roth after tax to my 401k and don't know if I can take in service.
Most employers have a benefits handbook that is posted somewhere on the employer's intranet. It is your friend on what you can and can't do (including your 401k options). Although I have found that people rarely read it. :oops: I had a recent discussion with a teammate who is in his early 60s and he knew nothing about when he can "officially retire" in order to get the maximum retiree benefits. Don't depend on HR since I have found they rarely have a deep understanding of the benefits offered - unless you consult a benefits hotline in which case they are probably informed. But still read the handbook first!

Is your recruiter internal or external? I asked my internal recruiter for additional details on the 401k plan beyond the "100% match of the first 5%". I was told that no one had ever asked her for the information before, but she was able to forward me a couple of pdf files with the 401k options and expense ratios.

Olemiss540
Posts: 56
Joined: Fri Aug 18, 2017 8:46 pm

Re: Starting my career on the right foot

Post by Olemiss540 » Mon Aug 21, 2017 7:44 am

The responses above will give you plenty of a head start. I would weigh in the following:

Try to max out your Roth 401k and Roth IRA by the end of the year then switch to Traditional 401k starting in January (since you will be in such a low tax bracket this year). Use some of your savings to support your living expenses while you do this and rebuild your savings account once you lower your contribution rate in January.

Contribute the maximum to your HSA.

Do NOT hire anyone, instead come back here and post the selections offered by your company's 401k providers and we can assist to ensure you are in a low cost index based fund.

Read these forums daily and you will have a very good understanding by the time you complete your taxes for 2017 (which you should do on your own). Completing one's taxes is the best way to gain an understanding for tax rates and will help you in understanding how to minimize taxes moving forward.

Your employer will give you all the information you need to setup and select your HSA/401k options once you have started, no need to worry about starting this process prior to your first day.

Work hard and keep a positive attitude, this will help more than any investing decisions you could make. Good luck and congrats on such a wonderful job opportunity!

error
Posts: 12
Joined: Sun Aug 20, 2017 6:23 pm

Re: Starting my career on the right foot

Post by error » Mon Aug 21, 2017 9:13 am

Great advise so far,

curmudgeon:
Thanks for the tax calculator. There are a few things I don't understand. Instead I tend to use https://smartasset.com/taxes/paycheck-calculator to estimate taxes and income.

Everything I have read says I can contribute 18k to 401k, not 18.5k you say. Is it really 18.5k?

Roth does seem the way to go. The gains will eventually outgrow the contribution so it is nice to have it all be tax free. If I save diligently then it's possible my tax bracket will not fall very far in retirement. That's the kind of problem I would like to have.

I guess I will go with a traditional 401k since dealing with a Roth for only a few months seems a bad investment of effort. The reason I am interested in maxing out retirement accounts is because there are contribution limits. I will never be able to make up missed contribution opportunities.

I might not need advisors, but boy would it be nice to have a tax guy. I have had very simple tax returns up to now (part-time worker, full time student, no investments) and use TurboTax, but Every year it is still very frustrating doing it.


dratkinson:
I might have to delay reading those books as I was given a stack of things to learn before my first day. That might take up a good bit of my time. Hopefully I will be able to finish that and start reading some of the things you suggest before I start.

My grad school charges about $11,392 per year (fees might alter this a bit). Where I will be working covers up to 5k a year if I am full-time student (I think its 80% of tuition up to 5k) 2.5k if part-time student. If it takes me 2 years I can expect to pay under 13k for my masters degree. I think about 15k-20k in savings will be enough to cover school and small emergencies until I finish school. I should also start building how much money I have available so that in 2-4 years I can buy a home. At the moment, I can't live anymore below my means, I very rarely spend any money. I am ok with continuing this because I don't like eating/drinking out or spending money the way others do.

Nice link to tax-efficiency, I had heard it before, but had no idea what it meant. I will enjoy reading it in full later.

Does AA mean "advantaged accounts"? as in tax advantaged account?

Everything I read about HSAs seems good. Pre-tax contribution, growth not taxed, money used for medical expensed also not taxed. A few other benefits as well.

I don't plan on holding stocks in my company necessarily. I think ESPP might be good though if I can get a 15% discount and sell it immediately. Not sure of the details just yet though.

I will probably go with Vanguard or Fidelity as those are the ones I hear most often. I think my company uses Voya for 401k.


cherijoh:
Good to know that some have max % of salary able to contribute. I have heard of True up before, is there any situation where true up would be bad?

You say that you received the rest of the match in February, would that count towards the last year’s taxes? or for the year in which you received them? I assume that even though you got it in February that it didn't count towards that year's max contribution, correct?

I mentioned it above, but I don’t plan on holding ESPP stock, but to turn around and sell it. Only if I get a good discount and can sell it quickly though. Maybe not this year as the amount I would gain would be small because of my limited income.

I will look for the handbook once I am in the system. It is unfortunate that I can't look at the details of the benefits unless I am already in the system. How are people supposed to do research on benefits if they don't have access to the information.

Recruiter is a Senior IT Recruiter within the company. She has told me to contact her if I had questions about benefits and I plan on doing so. I just wanted to know what to ask her first.


Olemiss540:
I noticed you suggest a r401k for the first year as did curmudgeon. What exactly is the benefit of this? does the Roth also lower my taxable income?

I like the idea of free Advisors on this forum, can't beat free.


Thanks to all for your information and support
It will be a few weeks, but I will respond back with more details of the 401k once I get them. And if I get more information between now and then I will supply it.

Olemiss540
Posts: 56
Joined: Fri Aug 18, 2017 8:46 pm

Re: Starting my career on the right foot

Post by Olemiss540 » Mon Aug 21, 2017 10:57 am

Roth 401k is suggested for your first 4 months ONLY due to the low amount of income you are going to have. Due to the graduated scale of our income tax system, you will have a VERY low tax rate this year (lower than you will ever have again), so putting this year's money into Roth and the switching to traditional next year (when you are in a higher marginal tax bracket) is a no brainer.

Making the switch back to traditional in Jan will probably only take 3 or 4 mouse clicks, so it is definately worth the trouble as the money you invest now will grow tax free for the rest of your career!

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BolderBoy
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Location: Colorado

Re: Starting my career on the right foot

Post by BolderBoy » Mon Aug 21, 2017 11:21 am

Olemiss540 wrote:
Mon Aug 21, 2017 10:57 am
Roth 401k is suggested for your first 4 months ONLY due to the low amount of income you are going to have. Due to the graduated scale of our income tax system, you will have a VERY low tax rate this year (lower than you will ever have again), so putting this year's money into Roth and the switching to traditional next year (when you are in a higher marginal tax bracket) is a no brainer.

Making the switch back to traditional in Jan will probably only take 3 or 4 mouse clicks, so it is definately worth the trouble as the money you invest now will grow tax free for the rest of your career!
I agree 100% with this. You'll see it as a "missed opportunity" if you choose not to do it. And max it out - $18k this year if you can live off of other funds.
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

error
Posts: 12
Joined: Sun Aug 20, 2017 6:23 pm

Re: Starting my career on the right foot

Post by error » Mon Aug 21, 2017 1:57 pm

Olemiss540 wrote:
Mon Aug 21, 2017 10:57 am
Making the switch back to traditional in Jan will probably only take 3 or 4 mouse clicks, so it is definately worth the trouble as the money you invest now will grow tax free for the rest of your career!
Ok, seems simple and I will do it if I have the option. Do I convert the roth 401k to a roth IRA when I switch to a t401k? is that simple? Or do I just forget about the r401k until retirement? I assume if I can roll it over to a rIRA that it won't be subject to the 5500 limit.

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dratkinson
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Location: Centennial CO

Re: Starting my career on the right foot

Post by dratkinson » Mon Aug 21, 2017 2:19 pm

error wrote:
Mon Aug 21, 2017 9:13 am

dratkinson:
I might have to delay reading those books as I was given a stack of things to learn before my first day. That might take up a good bit of my time. Hopefully I will be able to finish that and start reading some of the things you suggest before I start.

Okay. But read the books before you begin obligating yourself to spend serious money. Why? Personal financial management and retirement investing is simple---do a few thing right and avoid serious mistakes. The suggested books will teach you how to avoid serious mistakes. You want to get your financial life off on the right foot? The books describe the way.

My grad school charges about $11,392 per year (fees might alter this a bit). Where I will be working covers up to 5k a year if I am full-time student (I think its 80% of tuition up to 5k) 2.5k if part-time student. If it takes me 2 years I can expect to pay under 13k for my masters degree. I think about 15k-20k in savings will be enough to cover school and small emergencies until I finish school. I should also start building how much money I have available so that in 2-4 years I can buy a home. At the moment, I can't live anymore below my means, I very rarely spend any money. I am ok with continuing this because I don't like eating/drinking out or spending money the way others do.

Does AA mean "advantaged accounts"? as in tax advantaged account?

AA = Asset allocation. As a new young conservative investor, you'll begin investing with 25-30% bonds, so your AA will range from 75/25 (stocks/bonds) to 70/30.

Everything I read about HSAs seems good. Pre-tax contribution, growth not taxed, money used for medical expensed also not taxed. A few other benefits as well.

I don't plan on holding stocks in my company necessarily. I think ESPP might be good though if I can get a 15% discount and sell it immediately. Not sure of the details just yet though.

If you get a 15% discount and sell immediately, you'll owe tax on STCG (short term capital gains). STCGs are taxed at your highest marginal tax rate on your federal tax return. But if you wait 1-yr (>365 days) to sell, you’ll be taxes on LTCG (long term capital gains). LTCGs are taxed less then STCGs.

This is one example of why you need to do the reading before you begin obligating serious money.


I will probably go with Vanguard or Fidelity as those are the ones I hear most often. I think my company uses Voya for 401k.


Olemiss540:
I noticed you suggest a r401k for the first year as did curmudgeon. What exactly is the benefit of this? does the Roth also lower my taxable income?

A Roth does not lower your taxes (contribution is not tax deductible), but it can be rolled tax-free into a rIRA upon retirement. Meaning you'll have tax-free growth/withdrawals and no RMDs in retirement. And since you'll be in a low tax bracket this year, the tax savings from a traditional 401k will also be low. Better to pass up a ST low tax benefit to get a LT high tax benefit.

If you believe a backdoor Roth is in your high tax bracket future, then Roths (401k, IRA) are even better for you in a low tax bracket.

Ditto... required reading... before you talk to HR and obligate serious money. In this case: before you decide upon the type of 401k to use this year.

Example. Assume your age is 29, contribute $18K to a t401k this year, the market returns 7%/yr, and you retire at age 65. At age 65, that $18K grows to $220K (HP12C financial calculator: n=37, i=7%, pv=-$18K, pmt=0, fv=$220K, mode=end). You will owe tax on the full amount when you roll it over into a rIRA, or withdraw it by annual RMDs.

On the other hand, it you contribute that $18K to a r401k this year, the only tax you owe is on the original contribution... and all of the growth would be tax-free.

Which do you prefer? To pay tax on $220K in a higher tax bracket at a future date? Or to pay tax on $18K in a lower tax bracket this year? Knowledge allows you to easily answer this one question and avoid a serious mistake.

We can only answer the questions you ask, or the ones we intuit. But that still leaves a boatload of unanswered questions, and therefore the opportunity to make multiple serious mistakes. And as you know, it's much easier to avoid a problem, than it is to fix a problem.

You really do want to read the personal finance and investing books for the answers to your unasked questions. At least skim them looking for pertinent topics/answers before you talk to HR.

And since you don't have the time to study them in depth now, suggest you buy the books (instead of borrowing them from the library) so you can skim them now and read/re-read them later. Please use the “Amazon” link (screen top) to buy them so the forum will earn a referral fee (doesn’t increase the cost of your order).

d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

curmudgeon
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Re: Starting my career on the right foot

Post by curmudgeon » Mon Aug 21, 2017 11:20 pm

error wrote:
Mon Aug 21, 2017 1:57 pm
Olemiss540 wrote:
Mon Aug 21, 2017 10:57 am
Making the switch back to traditional in Jan will probably only take 3 or 4 mouse clicks, so it is definately worth the trouble as the money you invest now will grow tax free for the rest of your career!
Ok, seems simple and I will do it if I have the option. Do I convert the roth 401k to a roth IRA when I switch to a t401k? is that simple? Or do I just forget about the r401k until retirement? I assume if I can roll it over to a rIRA that it won't be subject to the 5500 limit.
You leave the Roth401k alone until you leave this employer, at which time you roll it into your roth IRA. Just pick an appropriate long-term investment for it (depends on your specific fund availability, but there is usually at least a tolerable S&P 500 index fund available). Rollovers don't generally have tax implications or contribution limits. You can change your choice of investments for this pretty much any time, but it's not a good idea to chase performance).

And yes, as you noticed earlier, the 401K employee contribution limit is $18K this year.

dandinsac
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Re: Starting my career on the right foot

Post by dandinsac » Mon Aug 21, 2017 11:55 pm

In my opinion, being a top performer and getting rewarded for it is much more important than optimally managing your after tax income. I would spend 90% of your improvement time becoming better at being an employee and maybe 10% managing money. An increase of 10-15% in salary will dwarf a slightly more efficient after tax return or investment strategy. Learning the industry, developing IT skills, and improving business skills such as meeting leadership, public speaking, effective writing, etc. will go a long way to moving up in salary. Finding a mentor who can guide you is invaluable as it's difficult to know where to focus your efforts when you're starting out.

Good luck!

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dratkinson
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Re: Starting my career on the right foot

Post by dratkinson » Tue Aug 22, 2017 1:42 am

dandinsac wrote:
Mon Aug 21, 2017 11:55 pm
In my opinion, being a top performer and getting rewarded for it is much more important than optimally managing your after tax income. I would spend 90% of your improvement time becoming better at being an employee and maybe 10% managing money. An increase of 10-15% in salary will dwarf a slightly more efficient after tax return or investment strategy. Learning the industry, developing IT skills, and improving business skills such as meeting leadership, public speaking, effective writing, etc. will go a long way to moving up in salary. Finding a mentor who can guide you is invaluable as it's difficult to know where to focus your efforts when you're starting out.

Good luck!
+1 Investing your time to improve your human capital (job skills) does return the greatest salary benefit.


But! the proceeds of an increased salary will be wasted without the knowledge of how to manage your money. Search internet for multiple examples of former lottery winners who died broke.

By three methods we may learn wisdom:
First, by reflection, which is noblest;
second, by imitation, which is easiest;
and third by experience, which is the bitterest.
--Confucius

The BH recommended books* and forum will teach you what is known to work so you can imitate the lessons in your financial life. Once you have the required knowledge, then you can "do a few things right and avoid serious mistakes."
  • * My short list of books for you is a subset containing, IMO, critical must-know first information.

    Search Wiki for full list of recommended "books" (search term) and read several over the coming years to round out your investor education.
After the time required for the initial learning and accounts setups, the time required to manage your finances will be only a few hours/year (including the time required to do your taxes). Why?

Because you'll choose wise investments and put your financial life on autopilot:
--set up DDs to pay yourself first,
--where appropriate, choose all-in-one funds so they rebalance/manage themselves,
--where appropriate, choose discrete funds and rebalance with new money,
--inter-link your accounts for ease of money movement,
--set up appropriate ABP plans to free up monthly bill paying time,....

Notice, you do all of the above only one time or in a few minutes/month. After that your financial arrangements take care of you.

Example. For your r401k and without knowing more about your options, curmudgeon's S&P500 suggestion* is a good choice. Why? It's all major US equities, invested from now until retirement so compound interest should do wonders for your retirement nest egg. It’s a good plan.
  • * The US economy is ~50% of the world economy. The S&P500 is ~80% of the US economy, derives ~40% of its income from international operations, and excludes bonds that would limit growth. So the S&P500 + Roth combination is a good choice for relatively stable LT growth, and no RMDs and tax-free withdrawals in retirement.
The enemy of the good plan is the dream of a perfect plan.
--Clausewitz



Come back when you know more about your employer's 401k options and post your full financial situation in the format requested in the sticky "Asking Portfolio Questions."

Before then, skim the suggested books and look through the Wiki so you may become aware of your unasked questions. Ask them when you post your full financial situation for review.



If managing your finances worries you, then you'll learn to do it. The learning will be much less bitter if done BEFORE you make serious mistakes.

Your opportunity to begin* making serious mistakes starts when you talk to HR.
  • * This assumes you have not already begun making serious mistakes... like buying whole-life insurance from a college buddy "...because you'll need it when you start a family and it's cheaper to buy when you are younger." At least, that's how he sold it to me.


Simple action steps.
--Gather the information and post your 401k options and full financial situation for a forum review.
--Learn just enough to set up your accounts and put your financial life on autopilot. Then do it.
--After above is done, then spend the majority of your time improving your human capital.
--Spend some time each year improving your investor education. (Could read just one recommended book.)

It really is that simple.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

error
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Re: Starting my career on the right foot

Post by error » Thu Sep 14, 2017 6:13 am

I started the job and now I can start providing the information. It might come slowly as I find myself with very little time now. But before I do, should I abandon this thread and move to "Investing - Help with Personal Investments" board?

MP173
Posts: 1791
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Re: Starting my career on the right foot

Post by MP173 » Thu Sep 14, 2017 9:02 am

You received some great advise here. I am really impressed with your situation and how you have positioned yourself for personal success.

About 25 years ago I read an article on saving for college and that prompted me to dive into "personal finance". It took me months to decide which mutual funds to use (pre-internet days for me). While the funds chosen were not perfect (higher cost) I was able to take advantage of the tremendous bull market of the 90s. One of the most important issues to consider is to be invested when the market moves higher. How to know this? No one knows. Thus, be disciplined and be aware that there will be downdrafts as well as spectacular upward movements.

Do not be afraid of making mistakes (but try to minimize those). I try to look at my mistakes as learning experiences. On the other hand, do not try to hit a "home run" with every decision. Most wealth is slowly built by hitting "singles" year after year.

Good luck to you. The advise about your personal growth in your career is golden.

Ed

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dratkinson
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Re: Starting my career on the right foot

Post by dratkinson » Fri Sep 15, 2017 3:07 am

Start drafting a new topic to be posted in the first forum section. Follow the guidelines in the sticky "Asking Portfolio Questions."

Do NOT post your topic until after you have provided all of the requested information. Why? It requires ALL of the requested information to craft EACH piece of an investing game plan. E.G., what you put in a taxable account... depends upon what you put in your IRA, which depends upon what you put in your 401k, which depends upon your available 401k options and ERs, which depends upon your AA, and tax brackets, which depend upon federal and state tax codes. As everything depends upon everything, piecemealing your information will only cause confusion, slow the process, and delay your answers. So take all the time you need to gather all of your information. We'll wait.

After you post your new topic, then come back to this topic and post a link to your new topic. Why? So those who have been following you here will find you there.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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TomatoTomahto
Posts: 6415
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Re: Starting my career on the right foot

Post by TomatoTomahto » Fri Sep 15, 2017 5:51 am

dandinsac wrote:
Mon Aug 21, 2017 11:55 pm
In my opinion, being a top performer and getting rewarded for it is much more important than optimally managing your after tax income. I would spend 90% of your improvement time becoming better at being an employee and maybe 10% managing money. An increase of 10-15% in salary will dwarf a slightly more efficient after tax return or investment strategy. Learning the industry, developing IT skills, and improving business skills such as meeting leadership, public speaking, effective writing, etc. will go a long way to moving up in salary. Finding a mentor who can guide you is invaluable as it's difficult to know where to focus your efforts when you're starting out.

Good luck!
So true! DW's efforts at managing her human capital return at least 50x what marginal improvements I can wheedle out of our investments.

error
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Re: Starting my career on the right foot

Post by error » Sun Sep 17, 2017 12:48 pm

Created new Thread here:
viewtopic.php?f=1&t=227846

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FiveK
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Re: Starting my career on the right foot

Post by FiveK » Sun Sep 17, 2017 1:35 pm

error wrote:
Sun Aug 20, 2017 7:40 pm
Recently graduated with a BS in the IT field.
dratkinson wrote:
Mon Aug 21, 2017 3:02 am
N.B. With low income this year and if you contribute fully to a rIRA (or tIRA), you may qualify for the Savers Credit.
error, if you were a full time student for more than 4 months in 2017, you won't qualify for the saver's credit.

But if you do qualify, contributing ~$1,300 (check your actual numbers) to your t401k will save ~60%, making that portion worth putting in the traditional account, while everything else (401k and IRA) goes to a Roth.

error
Posts: 12
Joined: Sun Aug 20, 2017 6:23 pm

Re: Starting my career on the right foot

Post by error » Sun Sep 17, 2017 3:57 pm

FiveK wrote:
Sun Sep 17, 2017 1:35 pm
error, if you were a full time student for more than 4 months in 2017, you won't qualify for the saver's credit.

But if you do qualify, contributing ~$1,300 (check your actual numbers) to your t401k will save ~60%, making that portion worth putting in the traditional account, while everything else (401k and IRA) goes to a Roth.
I was only a part-time student in 2017. According to IRS.gov I am eligible for the credit.
Sorry, but where is the "$1,300" figure coming from?

I should also say I have some updated estimated income numbers:
I estimate 8 pay periods.
I estimate about 23k income before anything taken out.
I will put 3,300 into an HSA this year so I will be left with about $19,700. and because of benefits it will knock me back down to about $19.5k
I anticipate 10% federal tax and 3% state.
According to smartasset tax calculator I am looking at $17,147 after tax income with $2,553 total taxes.
I have set into motion a roth 401k contribution of 40%.
17147 * 0.40 = 6,858.8 contributed to roth 401k
I get 100% match up to 6%.
I am not sure which part of my income the 6% is coming from for the roth 401k. If it is from 19,700 then company match is 19,700 * 0.6 = 1182

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FiveK
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Re: Starting my career on the right foot

Post by FiveK » Sun Sep 17, 2017 4:24 pm

error wrote:
Sun Sep 17, 2017 3:57 pm
FiveK wrote:
Sun Sep 17, 2017 1:35 pm
error, if you were a full time student for more than 4 months in 2017, you won't qualify for the saver's credit.

But if you do qualify, contributing ~$1,300 (check your actual numbers) to your t401k will save ~60%, making that portion worth putting in the traditional account, while everything else (401k and IRA) goes to a Roth.
I was only part-time in 2017. According to IRS.gov I am eligible for the credit.
Sorry, but where is the "$1,300" figure coming from?
That was assuming your income would be $80K * 6/26 = $18,462, with no other additions or subtractions. With the number below I got $1,550 using the tool mentioned at the bottom.
I should also say I have some updated estimated income numbers:
I estimate 8 pay periods.
I estimate about 23k income before anything taken out.
I will put 3,300 into an HSA this year so I will be left with about $19,700. and because of benefits it will knock me back down to about $19.5k
I anticipate 10% federal tax and 3% state.
According to smartasset tax calculator I am looking at $17,147 after tax income with $2,553 total taxes.
I have set into motion a roth 401k contribution of 40%.
17147 * 0.40 = 6,858.8 contributed to roth 401k
I get 100% match up to 6%.
I am not sure which part of my income the 6% is coming from for the roth 401k. If it is from 19,700 then company match is 19,700 * 0.6 = 1182
For your planning, do not use calculators such as smartasset, TaxCaster, etc., that ignore the saver's credit.

If you have a copy of TurboTax or similar for last year's taxes you could use that, although the actual tax brackets will be slightly different.

As your situation is relatively simple, Tools and calculators - Personal_finance_toolbox should work well for you. Put in your numbers and it will show the breakpoint for your 401k contribution. The federal tax calculations are very good; state ones are approximate (although a recent update added state tax brackets).

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