How to max out 401K?

Dec 15, 2020 8 Comments

I just joined as a new grad and figuring out this whole investment thing.

In my fidelity account I get to contribute a percentage to my pre tax 401K. What percentage do I put? I want to max out my 401K.

Any other things I should be aware of?

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TOP 8 Comments
  • Synopsys
    AnonEnough

    Go to company page Synopsys

    AnonEnough
    I'm figuring it out too. Have you got a company match? Can you get the match by making Roth 401k contributions? Earnings off Roth contributions are tax free in retirement which is huge for a new grad because you have decades to compound earnings. The Roth contributions are taxed, but the tax you pay at a new grad income slab is likely to be small compared to the huge tax savings in retirement. Seriously do Roth if you have the option and you can afford to pay the tax today.

    Once you get the company match for 401k and you have more money to put towards retirement, are you in a high deductible healthcare plan that offers an HSA? If yes, max out that HSA. Though it is meant for healthcare savings, the contributions AND earnings are all tax free in retirement for any use, not just healthcare. Before retirement, you can use money tax free for eligible healthcare expenses. BTW you can also pay for those expenses out of pocket, save the receipts and reimburse yourself for the next 10 year window from the HSA. Suppose you pay out of pocket for medical expenses for next 10 years, then you decide you absolutely need cash for any expense, you submit those 10 years worth of receipts and get the cash out of your HSA tax-free! Use it for whatever you want.

    After HSA, look into Roth IRAs. They are similar to Roth 401k but company-independent. There are income eligibility requirements for a Roth IRA but through something called back door Roth IRA or mega backdoor Roth IRA, any income level can effectively contribute. Again this is huge for a new grad because your decades of compounded earnings will dwarf the contributions you make today. Better to pay tax on these contributions today and enjoy the much larger earnings tax free.

    For the Roth 401k and IRA, as you get older, the idea is to shift from Roth to pre-tax. If you are near retirement, your tax bracket must be significantly higher than new grad days, there is not much that your contributions will earn by retirement age, so might as well contribute pre-tax and pay tax on the earnings IF your retirement tax bracket is likely to be lower than tax bracket just before retirement.

    Hope this helps!
    Dec 15, 2020 3
    • OP
      Thanks for the info.

      I need to read up more on HSA as I've not looked into it before

      Also, I'm not from the US and am uncertain on where I will retire. Will this affect anything? Are there other things I should tweak given this information?
      Dec 15, 2020
    • Synopsys
      AnonEnough

      Go to company page Synopsys

      AnonEnough
      There are many like you in Blind. Hopefully someone else can help with this question for non-citizens because I don't have tips.
      Dec 15, 2020
  • Divide 19500(2020 max) upon number of paychecks. If you use bonus, then deduct that from 19500
    Dec 15, 2020 0
  • VMware
    iIld64

    Go to company page VMware

    iIld64
    Pour as least $19.5k/12 each month. You can put more, the company will automatically stop putting money in 401k once you reach the limit. I typically max out my 401k after 8 months.
    Dec 15, 2020 1
    • Noodle.ai
      RusHaneman

      Noodle.ai

      RusHaneman
      20k/12 for 2021
      Dec 15, 2020
  • The max contribution for a 401k is 19500 a year but most companies match 50 cents to the dollar up to 6 percent or so of your pay. So at the bare minimum you should contribute whatever the max your company is matching. If you are a more speculative trader you might want to open another retirement account such as a IRA as they are not limited to certain funds or trading styles.
    Dec 15, 2020 0