With good equity, is it worth it to invest in a 401k?

[lamp]

Hi there,

Medium-time reader, first time poster. I am relatively financially illiterate, but working on it, so please do point out glaringly stupid assumptions and statements I make.

The situation:
I'm in my mid-twenties, and have been steadily working towards a particular type of job, which I have just obtained. I have basically no savings or investments, which I will be rectifying over the coming months. My question stems from my new company offering a 401k plan and me not being sure if it's a good idea to invest in it. Along with this job comes a very sizable amount of equity in a company that's on an upward path. At my start date my equity is worth well in excess of one million dollars. As it vests over the next 4 years, I have no idea how much it'll be worth, but I can fairly safely assume: more.

So, with that in mind, does it make sense to put away four or five percent of my my salary ($100k) towards this specific kind of savings (401k) while I have the money from my equity on the horizon, or would it be better to invest in a different way, considering?

Thanks for any help, and I hope that these comments are in line with the forum in general, which I am brand new to. I'm excited to start being more intelligent with my money so I'm open to any input.

[arebelspy]

Does your 401k only invest in company stock or something?

If so, I'd put in the point to matching, then diversify.  Actually I might do that either way.

Otherwise I don't understand the question, why wouldn't you invest in the 401k to diversify your equity holdings?

But you know what they say about counting your chickens...  Do the mathematically superior choice given your situation, without counting on that 250k+/yr bonus.

Beyond that, it's the same "where to invest my stache" question in some other recent topics you should read for advice.

[lamp]

I don't think I'm asking about diversifying, in particular. It's a normal 401k like any other company's.

I'm just asking if it makes sense to put money in a traditional retirement account when I will have money that eclipses whatever contributions I'll make over the course of many years in the new future. Is that the right place to put that small percentage of salary, is what what I'm asking.

[arebelspy]

I don't think I'm asking about diversifying, in particular. It's a normal 401k like any other company's.

I'm just asking if it makes sense to put money in a traditional retirement account when I will have money that eclipses whatever contributions I'll make over the course of many years in the new future. Is that the right place to put that small percentage of salary, is what what I'm asking.

To me this boils down to a "should I invest at all" given your situation with the stock vesting.  I'd argue yes, as no company is 100% secure (look at Enron, Lehman Bros, etc.), and putting all your eggs in one basket is risky.

So I'd say yes, it makes money to still invest.

If you say no, I don't need to invest at all anymore, then of course you wouldn't use a 401k.  If you say

But if you agree it's still good to invest, then it's just a question of "where" should I invest (stocks, bonds, real estate, precious metals, etc. etc.), and my previous statement of "it's the same "where to invest my stache" question in some other recent topics you should read for advice" holds true.

Perhaps your question is based on a misconception of what a 401k actually is?  Since in your case it's not solely for buying your company's stock, it's completely independent of that stock, and if you think should I still invest, a 401k can be a good place, depending on your situation.   A 401k is not an investment itself, it's a vehicle for other investments.

[velocistar237]

The only reason not to do the 401k is because you already have too much in retirement accounts and don't need any more. If the equity is non-retirement, then it makes sense to max out the 401k to get the tax benefits, unless you plan on retiring with bigger expenses than you have now.

[BStash]

I used to be not that big on 401k, but I now believe it is an amazing thing especially for higher income folks.  It really reduces your tax bill, and any company match is even better.  It can be somewhat inflexible, but I think this is overstated. 

Worst case scenario is you lose your job or you really want the money and you'll pay 10% penalty.  If you lose your job and need it (probably unlikely if your equity is realized), then your tax rate will be much lower at that time anyways and likely mitigate the 10% penalty.

My advice: Pay the max you can put in there and then decide later if you really need to pull it out.  You can do a lot of things with it later like roll it into an ira where you can buy property, etc.  It doesn't need to stay in stocks if you leave the company.  It's nice to watch it start piling up tax free.  I try to get the max $17k when I make enough and my company allows the right %.  It saves me $6k on my tax bill.

[AJ]

I would say in your situation it is even MORE important to invest in the 401(k), even if you decide to let it sit there in cash, for the tax write off. It sounds like you can use all the write offs you can get, given your income now and in the future. If I were you I would max it out, and also max out a Roth while you are still under the income cap. Yeah, maybe you'll be super-rich soon, but why pay more taxes than you have to?