Savings (pref. pre-tax) options advice needed

[day2204]

I just finished my MBA in May and started working in Aug. So I finally give a look at my employer's 401k plan, we had a 3 month probation before we can contribute, and there's a VERY low HCE contribution amount of 2% pre-tax with no option for post tax contributions, the contribution would equate to less than $3000/yr for me. Additionally my company doesn't match, it almost makes it pointless to consider their 401k.

I am also considering a traditional IRA that I'd max out at $5k (i think i'd be ineligible for the traditional if i contribute to the 401k). Anyway, this nowhere near meets my goal of $15k/yr in retirement savings. I'm frustrated because it feels like I'm in the biggest losing position ever (I should have looked closely at the 401k plan here...) there are a million roadblocks keeping me from lowering my tax base via contributions, I'm not going to meet my goal (at least pre-tax), and I'm already in the most overtaxed group there is Young (27) + single + no kids + renter, furthermore these fricking tax hikes affect me greatly. I love how I'm being precluded from moving forward because of the government's one-dimensional view of who I am, yet I doubt they're taking into account the 100k in student loans I have to pay back....

Anyway, what are my options for saving on a pre-tax basis? Should I just skip the 401k? Seems like being precluded from saving $5k pre-tax in order to participate in a s#!tty 401k saving about $2800 is pointless. Are there any other ways to lower my tax basis or am I ascrewed? I don't have enough health issues to care about putting more than 200-300 away in an FSA each year.

[bjl584]

Why are you so laser focused on taxes? Are you saying that you are only allowed to contribute 2% to your company's 401K? It may be benefical to skip it and just open a Roth IRA. The savings will be post tax, but they will be tax free upon withdrawl. Anything that you save or invest in will be unrealized gains anyway until you sell your position, so you can still build a nice portfolio and not have that much tax exposure today. You would have some from dividends and capital gains, but that should be minimal if you are just starting out.

[disneysteve]

Are you sure you can't do the IRA and the 401k? I'm not sure but certainly check. If you can only do one, certainly choose the IRA. Beyond that, invest in tax-efficient funds or ETFs in a taxable account.

I'm in a similar situation. I have no 401k. I fund a Roth every year for 5K but that's nowhere near 15% of my income. The rest goes into taxable accounts.

[day2204]

Are you sure you can't do the IRA and the 401k? I'm not sure but certainly check. If you can only do one, certainly choose the IRA. Beyond that, invest in tax-efficient funds or ETFs in a taxable account.

I'm in a similar situation. I have no 401k. I fund a Roth every year for 5K but that's nowhere near 15% of my income. The rest goes into taxable accounts.

so are there ETF's and/or tax efficient funds you can contribute to with pre-tax dollars?

and i came to the conclusion i couldn't do both by using an online calculator, i could do the 401k and a Roth IRA, but not a regular IRA (I'll confirm this with an actual person this weekend)

[day2204]

Why are you so laser focused on taxes? Are you saying that you are only allowed to contribute 2% to your company's 401K? It may be benefical to skip it and just open a Roth IRA. The savings will be post tax, but they will be tax free upon withdrawl. Anything that you save or invest in will be unrealized gains anyway until you sell your position, so you can still build a nice portfolio and not have that much tax exposure today. You would have some from dividends and capital gains, but that should be minimal if you are just starting out.

yes, I can only contribute up to 2% of my income. i'm focused on taxes because paying more of my salary as taxes does nothing to help me, this money is essentially gone except for a possible tax refund. saving post-tax limits my income more than pre-tax savings, and with $1500/month student loan payments, every $100 counts.

[disneysteve]

so are there ETF's and/or tax efficient funds you can contribute to with pre-tax dollars?

No. You would be putting in after-tax dollars but the funds would not have major tax implications on an ongoing basis.

Unfortunately, the options for pre-tax savings are very limited.

[bjl584]

yes, I can only contribute up to 2% of my income. i'm focused on taxes because paying more of my salary as taxes does nothing to help me, this money is essentially gone except for a possible tax refund. saving post-tax limits my income more than pre-tax savings, and with $1500/month student loan payments, every $100 counts.

Is part of the interest on your loans tax deductible or do you make too much to qualify?

What are your job prospects and income expectations moving forward? I would think that you should have the potential to earn a high income with $100K in loans. Where did you go to school? I completed a MBA program for around $40K.

[MonkeyMama]

These are serious concerns and considerations.

Here are some options:

**Contribute to non-deductible IRA. You still get the benefit of tax-deferral in the long run, and you won't be taxed again on your contributions. Must keep meticulous records, to avoid double taxation on withdrawal (which may be in several decades). This is the downside, but is a common last resort for many with higher incomes.

**Contribute to a HSA. There is no income limit for contributing, but you have to have a high deductible health plan (HDHP - one that is HSA eligible). This might not work for you, but is a decent tax shelter if you do have a HDHP. The money can be used for retirement if not used for medical. If single, is only about $3500 per year - but is something.

**I'd probably do the 401k. IT's going to be a small piece here and here and here, with your options.

**I would seriously consider other employment options. The greater compensation should be considered; not just salary. I don't know what your industry norms are, but I am a tax accountant and retirement compensation (401ks, profit sharing) is a serious tool to cut taxes for both employees and employers. Being a HCE makes it complex though, as these are government regulations that might affect you everywhere (these are not individual employer's rules). But I think it would be worth investigating companies with more serious matches and less HCE hurdles. Certainly with the tax concerns at your income level. The difference to your bottom line could be sunstantial. I'd be job searching and asking a lot of questions about retirement plans during the job search process. Employers are not shy to boast good retirement benefits - makes them look good though is usually a pretty selfish choice (they get some serious tax breaks too). Some employers are just more generous and offer good matches to all their employees, regardless of income level - which eliminates the HCE concerns. This is something to look for.

[MakeAStash]

Certain after-tax investments can be better. For example, tIRA and t401k withdrawals are taxed as ordinary income, typically a high tax rate. Gains on sales of stock held longer than a year are taxed at the capital gains rate, which is often less than the ordinary income rate. So, if you invest after-tax money in a growth stock that pays no dividend (BRK.B is one of many), let it sit for decades to save for retirement, you'll pay no tax on it or any increase in value until you eventually sell, and then only at the capital gains rate. Tax laws change over time, of course, so don't rely entirely on any one savings strategy.

[day2204]

looking for other employment is clearly the top choice, but i just started here in august so in addition to not really having a story to tell, and am not really in a space to leave just yet.

i've never encountered an HCE issue before as my company before was really small, and i wasn't close to being an HCE, but i'll look out for it in the future

[kaleida]

Wow, that's rough. I have never heard of an HCE limit before and had to google it.

The only idea that popped into my head was to start a business on the side, if you happen to have an expensive hobby that you are really passionate about, operate that business at a loss, and then your business expenses would lower your taxable income.

Is my suggestion even legal? Someone should know ...

ETA: If there's an ehow article that explains how to do it, then it must be legal...right?

http://www.ehow.com/how_6178074_claim-losses-small-business-taxes.html

And if your side business lucks out and makes a lot of money then you could contribute to an SEP-IRA or SEP-401K, which is tax-deductible with a much higher contribution limit

Downsides: it's so much effort!! and if you're operating a side business at a loss then the money will be spent instead of saved.