What are the proper investment vehicles for someone who recently graduated college and is in his first job? Should I invest the max in my 401k, and try to max out my ira? Or should I invest in my 401k and invest in stocks on my own, etc. I guess it’s a pretty vague question but any insight is appreciate.
Along those same lines…add 60K in debt to the previous post and then provide an answer if you would.
I just graduated from college last May and I am trying to put as much as possible in both my 401k and Roth IRA. I thinking that building up a good base in which to compound dividends, albeit boring, will pay off better in the future. I don’t have time to trade and until I have enough capital, i.e. more than 25k, my returns won’t justify the added risk of puttin all my earnings into 2 or 3 stocks. If you don’t mind me asking, where do you work?
Putting away too much in your 401k or IRA really limits your flexibility in the short term. I usually recommend 1/3 to pay off debt from college, 1/3 to after tax liquid savings, 1/3 to 401k/IRA. If you have more debt than average, allocate a little less to your 401k but maintain the highest level to which you receive company match, usually 3-6%. If you have no debt, focus on building your after tax savings to 6-9 months earnings, then bump up your 401k & IRA to the max.
Great advice, thanks guys and I welcome more advice. I’ll stick to contributing max 401k, trying to max out my Roth IRA, and save the rest w/ the possiblity of investing in a couple large cap DRIPs. As far where I work, I’d rather not say the company name but it’s about as entry level as entry level gets for an asset management company in Philadelphia, PA. Not a glamorous job at all…I plan on taking CFA level 1 in June, then hopefuly move into an entry level equity research position.
Anybody thought about the concept of NOT using tax deferred vehicles because taxes are historically very low right now, especially on a “non-accrual” basis. By accrual I mean if we actually paid taxes when the government spent the money, our taxes would be very high right now. Many economist argue that taxes will have to be much higher in the future. Other supporting arguements would be: Your taxes are low when your income is low. Your income is likely very low at the start of your career. It will be higher at the end of your career when you might want that capital for something like a house or a non-tradeable business investment. If you’re in the financial biz, you probably know how to harvest tax losses. Thus you can mitigate some of your taxes in the near term. Capital gains rates will likely always be lower than regular income rates in the future, just as they have been in the past, and currently are.
virginCFA, I almost posted exactly what you posted. I think there is something to be said for taking the tax hit early on.
virginCFAhooker Wrote: ------------------------------------------------------- > Anybody thought about the concept of NOT using tax > deferred vehicles because taxes are historically > very low right now, especially on a “non-accrual” > basis. By accrual I mean if we actually paid > taxes when the government spent the money, our > taxes would be very high right now. Many > economist argue that taxes will have to be much > higher in the future. > > Other supporting arguements would be: > > Your taxes are low when your income is low. Your > income is likely very low at the start of your > career. It will be higher at the end of your (> career when you might want that capital for > something like a house or a non-tradeable business > investment. > > If you’re in the financial biz, you probably know > how to harvest tax losses. Thus you can mitigate > some of your taxes in the near term. > > Capital gains rates will likely always be lower > than regular income rates in the future, just as > they have been in the past, and currently are. Yeah, this does make some sense - but if you follow this logic aren’t you essentially betting that (your current income tax rate) < (capital gains rate + future tax rate) ? I haven’t read up on all the details of the 401k (basically I just assumed that maxing out is the smartest option because eveyone says so), but I thought that basically the reason that it is a good idea to use a 401k is that you save BOTH on the capital gains tax AND you assume that your income tax rate will be lower when the money is withdrawn, since you won’t be working. Even if you assume that income tax rates will be 10% higher in the future when you withdraw and your tax bracket is the same, you’d still have a 5% savings from the capital gains tax (assuming 15%). This is also assuming that you buy and hold - if you don’t, you’d have an even greater tax burden in the taxable account. Let me know if my assumptions are incorrect, I’m doing this from memory…
Let’s say you pay 40% of your net income to uncle sam. ------------ you buy a stock for $100. if it goes down $20 you sell it and take a loss. The gov’t pays for 40% of your loss, you lose $15. if it goes up $20 you sell it in a year and pay 15% tax, $3, you gain $17. -------------- do the same thing in your IRA it goes down $20, you lose $20 if it goes up $20 (more likely since stocks tend to go up), you earn $20. --------------- Rinse & Repeat. 20 years later where will that leave you?
Whether you want to put a lot of $$$ into IRA or not, I would recommend you at least open an IRA with $1. This is because you can tax benefit to buy home when you established your IRA account for 5 years
virgin, I marginally agree with your assessment. However, the income limits and yearly contribution limits really make this a non-issue. For most college grads starting out, it can be easy to overestimate the importance of saving for retirement. Saving for flexibility in your young career is more important, imho.
ymc Wrote: ------------------------------------------------------- > Whether you want to put a lot of $$$ into IRA or > not, I would recommend you at least open an IRA > with $1. This is because you can tax benefit to > buy home when you established your IRA account for > 5 years Can you elaborate more? I know you can use money in a Roth for a qualified purchase after 5 years (ie first home purchase). I don’t know why you would open one for $1 (if you even can) just to let it sit for 5 years probably earning close to nothing. What sort of equities should recent grads shoot for? I’m being fairly diverse and investing in LCB, MCB, and SCB ETF’s. Is there anything I should be doing? Feel free to start reply with, “well, when I was your age, I wish…” Regards, Kev
i say max out roth ira if you qualify, which coming out of college you should. also invest in 401k at least to max out company match.(most is 6%). the reason i say max out roth ira is b/c in 5 years you may not be able to contribute to a roth account but you should have many options(have a good mix of taxable assets and nontaxable assets). invest in dividend paying stocks in 401K, invest in pure growth in Roth IRA. also I would hold 5-10k in liquidity in money market (one that doesn’t invest in subprime!). if you can get away from paying taxes, either by account layering or deferring capital gains, that is one of the best returns you can achieve. order i would recommend is follows: 1. 401k to company match (6%-10%) pretax income 2. Max out roth ira (I think $4k) 3. start a money market for $5k-10K of liquidity 4. anything left over invest in personal account which should consist of non-dividend paying stocks and hold to delay capital gains tax.
goldenkah2 Wrote: ------------------------------------------------------- > Along those same lines…add 60K in debt to the > previous post and then provide an answer if you > would. i’ll pull a suze orman on you. is the 60K all student loan debt? if any is credit card, you should use any money left over to pay it down!. student debt is good debt b/c it’s tax deductible (if you qualify), and you can consolidate when/if rates move lower, (I’ve locked in a 1.825% on a portion of my student debt, which b/c of my salary, i can not deduct however, i will never pay that off early…)
Not to hijack, but capital gains was mentioned: What’s the consensus on whether or not the 15/5% rates will be repealed in 2010?