Author Topic: Possible to Trade Salary for 401k?  (Read 3118 times)

FrankRickard

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Possible to Trade Salary for 401k?
« on: September 16, 2014, 12:28:06 PM »
Hey all, first time poster, HUGE fan of the site. I'm 23, no debt, and my 'Stache is just under 21k right now. Mostly in IRA and 401ks (specifically well-diversified index funds within those accounts). No transportation expenses, as I take bus to work for free. Take home pay is about $4400/month, of which about $1,000 gets spent on housing, food, utilities, etc. I save everything else.

With that background, I'm expecting a solid bonus coming up, along with a decent raise (~5k bonus, 10k raise). Salary at my job is great, especially right out of college. Trouble is, the 401k has some drawbacks. Vests 20% after 3 years (I've been here 1), 40% after 4, 60% after 5, and 100% after 6. Don't see myself here past 3 years, max. It's a 50% match up to 6% of your salary, and I'm maxing out my contribution.

Anyways, I'd hate to lose all that tax-deferred, free money of if/when I leave. So my question is, can I ask for a full vest of my 401k from here on out in lieu of some of the bonus? Or to apply the bonus to my 401k account instead? Or are plans standardized to not allow for that?

Basically my dilemma is if they have me the money it would be fully taxed and I'd just end up putting it into a savings account anyway, so I'd like to skip that step and get it right to a 401k if possible. My living expenses are pretty set and only going to fall in the future so I don't need the money for consumption at all.

If it's not possible to do this, does anyone have advice on where to save the bonus/raise? So far I haven't had to venture much past my Fidelity 401k and IRA plans.

Thanks in advance for the advice!

Jellyfish

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Re: Possible to Trade Salary for 401k?
« Reply #1 on: September 16, 2014, 12:34:36 PM »
I only have experience working for large employers, but with them there is virtually no flexibility within the 401(k) plans.  However based on the salary you describe you are well under the annual salary limit for IRA contributions.  You should be able to take your $5K bonus and contribute it to an IRA, which would still reduce your taxable income for the year. (unless you've already contributed the max for 2014 of $5500...wasn't clear from your post.)

seattlecyclone

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Re: Possible to Trade Salary for 401k?
« Reply #2 on: September 16, 2014, 12:35:54 PM »
Things like a vesting schedule are often standardized across the plan. If the company is small enough, you may be able to negotiate for a special "profit sharing" contribution in lieu of a taxable bonus. The worst that can happen is they say no.

I do encourage you to max out your personal contributions as much as you can. I don't believe it is legal for them to have any sort of vesting schedule for your own contributions; these should be yours to roll over in full when you leave.

Beric01

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Re: Possible to Trade Salary for 401k?
« Reply #3 on: September 16, 2014, 12:41:19 PM »
Hey all, first time poster, HUGE fan of the site. I'm 23, no debt, and my 'Stache is just under 21k right now. Mostly in IRA and 401ks (specifically well-diversified index funds within those accounts). No transportation expenses, as I take bus to work for free. Take home pay is about $4400/month, of which about $1,000 gets spent on housing, food, utilities, etc. I save everything else.

With that background, I'm expecting a solid bonus coming up, along with a decent raise (~5k bonus, 10k raise). Salary at my job is great, especially right out of college. Trouble is, the 401k has some drawbacks. Vests 20% after 3 years (I've been here 1), 40% after 4, 60% after 5, and 100% after 6. Don't see myself here past 3 years, max. It's a 50% match up to 6% of your salary, and I'm maxing out my contribution.

Anyways, I'd hate to lose all that tax-deferred, free money of if/when I leave. So my question is, can I ask for a full vest of my 401k from here on out in lieu of some of the bonus? Or to apply the bonus to my 401k account instead? Or are plans standardized to not allow for that?

Basically my dilemma is if they have me the money it would be fully taxed and I'd just end up putting it into a savings account anyway, so I'd like to skip that step and get it right to a 401k if possible. My living expenses are pretty set and only going to fall in the future so I don't need the money for consumption at all.

If it's not possible to do this, does anyone have advice on where to save the bonus/raise? So far I haven't had to venture much past my Fidelity 401k and IRA plans.

Thanks in advance for the advice!

First of all, welcome to the site! I'm 24 - looks like we're similar age. :-)

401(k) plan may or may not be standardized depending on your 401(k) provider, but I've definitely heard of negotiations to fully vest earlier. With that being said, they were when one first joined a company. A company has little motivation to change your vesting plan after you have joined. In addition, asking to fully vest sooner after you have joined would definitely give a company cause for concern, potentially hurting your career at the company. The entire reason these policies exist is to get people to stay longer, so they're going to become worried if it seems you want to leave sooner.

My 401(k) company contributions fully vest after 4 years, and I've been here 2 year so far. Will I still be here in 2 years? Perhaps I will, perhaps I won't, but I will just take that money into consideration if I take up a different job. If I do take on a different job, I'll want to make the raise is more than the money I'm losing due to the vesting.

FrankRickard

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Re: Possible to Trade Salary for 401k?
« Reply #4 on: September 16, 2014, 01:15:07 PM »
Thanks for the warm welcome -- always nice to hear from 20 something's with the same money views as I have. There aren't too many of them unfortunately...

That's a great point. I definitely don't want to damage my future (however long it is) with the company over a couple thousand bucks. You mentioned it being hard to negotiate after being hired--have you found employers to be flexible with 401k vesting and matching in the hiring process, or is that standard too?

Good advice about the IRA, but I've already hit my $5,500 mark. So Fidelity account then?
« Last Edit: September 16, 2014, 01:18:13 PM by FrankRickard »

frugaliknowit

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Re: Possible to Trade Salary for 401k?
« Reply #5 on: September 16, 2014, 01:42:37 PM »
No, I do not think you will be able to negotiate any of this.

I would definitely not sweat this.  First, the vesting refers only to the employer's match.  It has nothing to do with money you put in. 

Secondly, it is often argued (not so much by folks on this blog) that you should be "tax diversified" (google it if not familiar with the term).  You might consider putting your bonus in a Roth IRA (tax free part of tax diversified) or a traditional IRA (tax deferred part of tax diversified). 

Still a "third bucket" in tax diversification is a "capital gains bucket" (money you've paid income tax on already, but will throw some dividend income, and will require capital gains tax upon sale).  Within a capital gains bucket, you probably want to invest in mutual funds that throw off minimal dividends and do not trade much.  Vanguard has a category called "tax efficient" funds that are designed for this.  An S&P 500 index fund is almost as tax efficient (maybe 2% taxable dividends per year).
 
Many planners argue, put enough into your 401K for the match, then fill up the Roth (or traditional), then add to the 401k, then add to a capital gains bucket (or pay off mortgage).  There are plenty of places you can invest your money efficiently!

Tax deferred + Tax Free + Capital Gains = Tax Diversified 
Oh, and cash equivalents so you don't lose the above in an emergency (especially in a down market)!

DangleStash

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Re: Possible to Trade Salary for 401k?
« Reply #6 on: September 16, 2014, 01:45:24 PM »
Also mid-20s here.

One more thing to consider - with your bonus, you may be able to structure with payroll to apply your 401k % to it, or see if you can have it put 100% into your 401k.  That wouldn't be at risk if you left, and you'd still have the same AGI impact as an IRA.

I'm on the fence right now, probably not going to do that just because I'm saving to buy a place, but may look into it in the future.  I know it's an option where I work (just the way payroll processes it).

ThirdTimer

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Re: Possible to Trade Salary for 401k?
« Reply #7 on: September 16, 2014, 02:37:15 PM »
I second not sweating this. If that $4,400 is your take-home pay before you withhold money for your 401(k), and your maxing out an IRA and your 401(k), then you should be in a pretty low tax bracket, so the difference between getting the money taxable or tax-free directly into the 401(k) is maybe a 15% haircut, which is not nothing, but probably not enough money that it's worth tipping your hat about possibly wanting to leave. As for the vesting on the employer match, the difference between 0% and 100% of the 3% employer match works out to something like $1500 a year, right? For the 3 years max you'll stick around? I'd just bring that into negotiations when you go out to look at a new job. Something along the lines of how you're very interested in their company, but by leaving now you'd be sacrificing your employer match, and would it be possible for them to make you whole in the form of a $5,000 signing bonus? They may say no, but then you just take those $5,000 (or $3,000, or whatever) into account when weighing the job offer and decide if you still come out ahead taking the new job vs. staying in the old one.

As for where to put that taxable money, start a Vanguard account!

FrankRickard

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Re: Possible to Trade Salary for 401k?
« Reply #8 on: September 16, 2014, 03:57:50 PM »
Awesome advice all around. Thanks everyone!