sup new grads. at this point a lot of you have started your new jobs and when you got paid for the first time you were like “woah i have more than $50 in the bank how many poptarts can i buy with this thing.” but then you remembered that during orientation / when you were eavesdropping on that other new grad who seems super smart and has her life together (i.e. didn’t spent 3 hours at ikea choosing between white stained oak veneer and brown stained ash veneer for your MALM bed frame) she mentioned using 401ks and IRAs and you were like oh damn i guess i should figure out what else do with my ca$h money other than convert it all to frosted strawberry poptarts but still maybe it’s a good retirement investment i mean it has 7 vitamins & minerals and you’ll need it when your body is frail?
if the impending panic of not knowing what the difference is between a traditional 401k vs a roth 401k didn’t make you spend your saturday nights devouring books with confident, smiling guys on the cover promising you they will teach you to be rich, i’m here to help. i read the personalfinance subreddit for like 5 minutes so i’m kind of an expert now. srsly though, take my recommendations with a boulder of salt because they worked for me and should make sense for a lot of people but i don’t want you knocking on my door 10 years later complaining that you were planning on investing all your money into bitcoin and you would’ve been a billionaire but instead you put your money in a 401k and let your dreams be dreams.
in this post, i’ll be talking about two types of retirement accounts: 401ks and iras. don’t panic if you don’t know what these are because we’ll get into that later.
retirement accounts exist to get you to put your money away and save for retirement rather than blowing it all on frosted strawberry poptarts. the reason why retirement accounts are attractive is because they provide tax benefits. i won’t go into the specifics here, but the tax benefits allow you to do things like reduce the taxes you pay now and not have to pay taxes on the money you make from your investments (which you can’t do with a normal investment account).
when you put money into a retirement account, you choose among different options offered by your retirement account provider to invest in stocks and bonds (i.e. it doesn’t just sit there collecting interest like a savings account).
this doesn’t have to do with retirement investing but i wanted to say this first because it’s such a good idea and i didn’t know about it until bank of america was like “sup bro thanks for withdrawing money in tokyo we took $10 + 3% of the money you took out as the ATM + foreign transaction fee i hope you don’t mind missing $40 lol” and then my buddy alex taught me that your bank can be a homie instead of an asshole.
lemme throw down some reasons why you should sign up for charles schwab:
no monthly maintenance fee
when my sister left her job (and stopped getting regular paychecks) and had less than $1500 in her bank of america checking account, they started charging her $12 a month as a “monthly maintenance fee”. that’s $144 a year, which means 43 boxes of these $3.33 16-count poptart boxes, which means they swiping 688 poptarts from you a year! not cool.
no foreign transaction fees
remember when bank of america took 3% of my international transactions including ATM withdrawals? most banks (e.g. wells fargo, citibank, chase, EVERYONE) do something similar, but our homie charlie doesn’t. that means that when you’re abroad, you can focus on finding wasabi-flavored kitkats in japan rather than trying to calculate how many poptart boxes your bank is stealing from you.
no atm fees
there are no charles schwab atms. that’s because every atm is a charles schwab atm. schwab will reimburse you for every atm fee at the end of every month, which means you can use any atm for free, from bank of america atms to the sketchy atm in the corner of the bar that you really don’t trust but you really wanna play big buck hunter so ok fine you’ll take the risk.
using charles schwab should be a gr8 idea for most ppl but may not be for you if you really want to talk to tellers face-to-face at brick-and-mortar locations or regularly deposit large amounts of cash into your bank account (hello it’s 2016, all the cool drug dealers use venmo/square readers now)
if you read that tip and were like woah who is roth and do you bike a 401k i tried running a 5k and gave up? then slow down cowboy and let’s get you up to speed.
if you don’t know anything about 401ks, go read /r/personalfinance’s wiki page on 401ks.
here’s a quick refresher if you just want a reminder or told yourself you’d read the wiki page later because this post is just too much fun: 401ks are retirement investment plans that’s sponsored by your employer. if your employer is a homie, then they’ll provide a match which means they’ll put into your 401k plan a % of what you put in aka FREE MONEY BABY. max out your 401k contribution so that you get the full match.
it’s not always easy to do this during your first year so lemme give you a real world example of what this might look like. google is my employer and google is a homie so they provide a 50% match for contributions up to $18,000. that means if i put in $18,000 into my 401k plan in a given year, google will put in $9,000 to help a brotha out. that’s enough to eat 100 poptarts every day for a year and still have 6,500 of those babies left over!!!
to get a full match, i needed to put in $18,000 between when i started work in early august and when i could make my last contribution which is the end of december. since i only had 5 months to do this rather than the full 12, i spent most of my paychecks contributing to my 401k and used the rest on rent. no spending money = calling my grandpa to ask him if i can borrow some money to hold me over until january and then i’ll pay you back i wish i could explain why i’m broke when i’m working at google but hear me out this is really difficult to explain because i don’t think 401ks existed in korea when you worked (do they now?) and my korean is not that good and oh what it’s no problem? thank you!!!. borrowing money to maximize my 401k contribution might seem a bit extreme, but i was able to promise him a date by which i would pay him back and he was cool with it so why not?
you might not need to borrow money. maybe you don’t need to contribute as much, maybe you get paid more than me, maybe your rent is lower, maybe you don’t spend hundreds of dollars on importing poptart flavors from different countries around the world every month (i don’t actually do this but would be a cool hobby). regardless, the important thing is that you know that this option is available to get some free money from your employer if they match.
so why roth? roth differs from the other type of 401k (traditional) essentially by when you get taxed: in roth 401s, you get taxed now when you put money into your 401k vs. traditional 401ks where you get taxed when you take money out of your 401k. the reason why most of you new grads will want to get taxed on your 401k now as opposed to later is the same reason why it was hard for me to contribute enough to get the full match: you’ll only work for less than half a year before the tax year ends. which means that unless you were making bank while still in school, your income for your first tax year will be low which means your tax rate will be low. as long as you think the tax rate you have for this year will be lower than the tax rate you’ll have when you take money out of your 401k, it makes sense to contribute roth instead of traditional.
what if you plan on quitting your job in a year to go travel the world or start a company? would putting money in a 401k lock it up so that you won’t be able to access it when you need it most? there’s a 10% withdrawal penalty if you withdraw your money before you’re 59.5 years old, but you may still come out ahead if your employer’s match is high enough. for example, maxing out my roth 401k by contributing $18,000 results in $27,000 in my account thanks to a 50% match. if i were to withdraw early, i would incur a 10% penalty which means i would get back $27,000 * 90%, or $24,000, and subsequently only pay taxes on the employer match. this is a much better outcome than if i had simply kept the $18,000 as an emergency fund. the crazy thing about this is that even if you have debt to pay off, you might be better off investing in your 401k to get the full employer match rather than using that money to pay off the debt. make sure to do your own calculations if you’re planning to withdraw early to verify that this will work for your situation.
long story short: for the majority of new grads, it makes the most financial sense to invest as much needed into your roth 401k contribution to get the fullest match from your employer.
as before, here’s /r/personalfinance’s wiki page on IRAs.
if you maxed out your 401k match and want to invest more, you can do so in an ira. ira stands for “individual retirement account” which means unlike your 401k, your employer isn’t involved and it’s up to you to open the account and put money in it. the max you can put in is $5,500 and roth iras are dope because you don’t get taxed on the earnings from your investment!
we’re going roth for the same reasons we chose roth for the 401k above: working only part of the year = less annual income = low tax rate for your income this year. making only part of your annual salary may also help toward being able to contribute to a roth ira in the first place: if you’re single, you need to make less than $117,000 during the year to contribute.
unlike the 401k where you need to contribute before the end of the tax year (dec 31st), you have until tax day (april 15) to contribute to your ira. so if you went broke putting money into your 401k, you can still save up enough to invest in your ira for the first few months of the following year.
retirement accounts aren’t the most exciting things in the world to think about especially when you’re in your early 20s but hopefully these money tips will help you feel a little better about yourself when your friend asks you how much money you spend on poptarts because your pantry is overflowing with them and there’s crumbs all over your bed and you can tell him that you can consume 43,000 more poptarts guilt-free thanks to your smart 401k investing decisions
special thanks to isaac reynolds who reads books about this stuff and drew sweet graphs on napkins to teach me how everything works (all useful info in my post come from him; any mistakes are mine alone) and also amazon for having poptarts ready for delivery 24/7