Personal Finance 101 for Young Lawyers Forum

[Anonymous User]

This may be a dumb question, so please bear with me. I have had an investment account with a money manager (like UBS, Morgan Stanley, etc.) that is heavily invested in publicly traded stock. I am going to start at a large firm in the fall and I will inevitably have some conflicts. What should I do? Should I ask the firm/whom should I ask at the firm? I already talked to my account manager and he just told me he would wait to get more info from me.

[pithypike]

Check with your internal compliance guys, but if you aren't making trading decisions it shouldn't matter.

Separately, you should instead DCA into a total stock market index or VOO. Doubt your guys are beating the market after fees.......

[icansortofmath]

You have to ask your compliance. Policies err on the side of caution always so they end up stricter than is probably necessary.

[AVBucks4239]

This may be a dumb question, so please bear with me. I have had an investment account with a money manager (like UBS, Morgan Stanley, etc.) that is heavily invested in publicly traded stock. I am going to start at a large firm in the fall and I will inevitably have some conflicts. What should I do? Should I ask the firm/whom should I ask at the firm? I already talked to my account manager and he just told me he would wait to get more info from me.

Regardless of your potential conflict issues, from a financial perspective, you shouldn't be paying anyone to manage your money, and you should just get a Vanguard account and invest in an S&P 500 index fund.

[logical seasoning]

I work for the state and receive a nice pension. However, I would like to add more to a retirement account so I am more financially free in old age. The state doesn't match 401k or 457... Should I even contribute? If not, is there another investment I would be better off contributing to? Halp-- this stuff is confusing to me

[dabigchina]

I work for the state and receive a nice pension. However, I would like to add more to a retirement account so I am more financially free in old age. The state doesn't match 401k or 457... Should I even contribute? If not, is there another investment I would be better off contributing to? Halp-- this stuff is confusing to me

first things first - does your state offer a 401k/457? If it does, it's almost always worthwhile to contribute to the 401k because you save on income taxes. You're basically guaranteed an extra 20-40% in returns from that alone. The only time when you would think twice about it is if the plan administrator offers shit investment choices with high expense ratios.

[logical seasoning]

I work for the state and receive a nice pension. However, I would like to add more to a retirement account so I am more financially free in old age. The state doesn't match 401k or 457... Should I even contribute? If not, is there another investment I would be better off contributing to? Halp-- this stuff is confusing to me

first things first - does your state offer a 401k/457? If it does, it's almost always worthwhile to contribute to the 401k because you save on income taxes. You're basically guaranteed an extra 20-40% in returns from that alone. The only time when you would think twice about it is if the plan administrator offers shit investment choices with high expense ratios.

Yes the state offers 401k/457, but doesn't match. So you still think it is worthwhile to invest because of the money I contribute is untaxed...

[dabigchina]

I work for the state and receive a nice pension. However, I would like to add more to a retirement account so I am more financially free in old age. The state doesn't match 401k or 457... Should I even contribute? If not, is there another investment I would be better off contributing to? Halp-- this stuff is confusing to me

first things first - does your state offer a 401k/457? If it does, it's almost always worthwhile to contribute to the 401k because you save on income taxes. You're basically guaranteed an extra 20-40% in returns from that alone. The only time when you would think twice about it is if the plan administrator offers shit investment choices with high expense ratios.

Yes the state offers 401k/457, but doesn't match. So you still think it is worthwhile to invest because of the money I contribute is untaxed...

unless you think you'll need that money before retirement (buying a house, funding an emergency fund, kid's college, etc), yes.

[nealric]

I work for the state and receive a nice pension. However, I would like to add more to a retirement account so I am more financially free in old age. The state doesn't match 401k or 457... Should I even contribute? If not, is there another investment I would be better off contributing to? Halp-- this stuff is confusing to me

first things first - does your state offer a 401k/457? If it does, it's almost always worthwhile to contribute to the 401k because you save on income taxes. You're basically guaranteed an extra 20-40% in returns from that alone. The only time when you would think twice about it is if the plan administrator offers shit investment choices with high expense ratios.

Yes the state offers 401k/457, but doesn't match. So you still think it is worthwhile to invest because of the money I contribute is untaxed...

unless you think you'll need that money before retirement (buying a house, funding an emergency fund, kid's college, etc), yes.

It's worth noting that you can generally access 401k money through a loan penalty free if used for buying a house. The only time a 401k might make sense to avoid is if there are high fees on the funds offered AND you can't afford to max out your Roth space. In that case, just focus on the Roth. 401k Also makes less sense if your income is very low, as the deduction may not be worth much. For example, a married couple making $24k combined would owe zero federal income tax anyways so would derive little benefit from a 401k.

[QContinuum]

Yes the state offers 401k/457, but doesn't match. So you still think it is worthwhile to invest because of the money I contribute is untaxed...

Yes. BigLaw firms generally don't match 401k for associates either and it still absolutely makes sense to contribute. 401ks' main benefit is the tax thing. Any matching is just an extra plus.

[logical seasoning]

Got it. Thanks Everyone. I just signed up for a Roth 401k. I can only afford 150 a month at this time, but hey better than nothing

[nealric]

Got it. Thanks Everyone. I just signed up for a Roth 401k. I can only afford 150 a month at this time, but hey better than nothing

Don't forget to check the fees on that Roth 401k. You might be better off just contributing to a Roth IRA through your own broker if the 401k is charging significant administrative fees and/or only giving you access to high fee funds (1% fees some of the bad funds charge may sound "low", but are over 10x what you should be paying and eat a significant portion of your returns).

The big online brokers (Fidelty/Vanguard/Shwab, etc.) will provide a Roth IRA account nearly free and provide access to very low fee index funds.

[QContinuum]

Don't forget to check the fees on that Roth 401k. You might be better off just contributing to a Roth IRA through your own broker if the 401k is charging significant administrative fees and/or only giving you access to high fee funds (1% fees some of the bad funds charge may sound "low", but are over 10x what you should be paying and eat a significant portion of your returns).

The big online brokers (Fidelty/Vanguard/Shwab, etc.) will provide a Roth IRA account nearly free and provide access to very low fee index funds.

For most (including just about all BigLawyers), 401ks are better, because they have much higher annual contribution limits ($19k for 401ks vs. $6k for IRAs*) and receive heightened protection from creditors.

*I recognize that logical seasoning is currently saving $1.8k per year, so isn't affected by the $6k cap for IRAs. However, wanted to clarify for others reading this thread - those who can afford to do so should be saving as much as possible as soon as possible to allow the money sufficient time to grow before retirement.

[nealric]

Don't forget to check the fees on that Roth 401k. You might be better off just contributing to a Roth IRA through your own broker if the 401k is charging significant administrative fees and/or only giving you access to high fee funds (1% fees some of the bad funds charge may sound "low", but are over 10x what you should be paying and eat a significant portion of your returns).

The big online brokers (Fidelty/Vanguard/Shwab, etc.) will provide a Roth IRA account nearly free and provide access to very low fee index funds.

For most (including just about all BigLawyers), 401ks are better, because they have much higher annual contribution limits ($19k for 401ks vs. $6k for IRAs*) and receive heightened protection from creditors.

*I recognize that logical seasoning is currently saving $1.8k per year, so isn't affected by the $6k cap for IRAs. However, wanted to clarify for others reading this thread - those who can afford to do so should be saving as much as possible as soon as possible to allow the money sufficient time to grow before retirement.

Yes, though I would add if your firm's plan allows post-tax contributions and in-service rollovers, you can contribute ~$56k (changes with inflation) and roll the post-tax contributions into a Roth IRA. Sweet deal if you have a plan that works with it.

[Anonymous User]

Question on backdoor Roth IRAs and hoping to get some clarity on overall strategy for these.

Biglaw mid-level, currently max out my 401k with the firm with post-tax contributions (i.e., Roth contributions), my wife maxes hers too and we are over AGI limits for Roth IRAs. I have post-tax dollars liquidity now that I’ve worked for a decent while and it seems like I should just backdoor a Roth up to the limit every year I’m in biglaw with my post-tax money before I put any of my post-tax money into an index or Betterment, etc. because of the beneficial tax treatment. I don’t have any existing pre-tax IRA accounts (so no concerns about paying taxes upon conversion to the Roth) but my wife does have an existing Roth IRA she hasn’t touched in a few years to the extent that matters.

Are there other issues I’m missing here aside from the fact that putting 6K into backdoor Roth is harder to get to than 6K into the market? Seems like a no brainer for me to backdoor and get tax-advantaged treatment before just dumping it in the market, but want to know if I’m missing something glaring.

[wwfeds]

Yes, though I would add if your firm's plan allows post-tax contributions and in-service rollovers, you can contribute ~$56k (changes with inflation) and roll the post-tax contributions into a Roth IRA. Sweet deal if you have a plan that works with it.

*nealric - Can you explain this? How can you use in-service rollovers to go over maximums of 19k in 401k and 6k in IRA?

(First-time poster)

[dabigchina]

Question on backdoor Roth IRAs and hoping to get some clarity on overall strategy for these.

Biglaw mid-level, currently max out my 401k with the firm with post-tax contributions (i.e., Roth contributions), my wife maxes hers too and we are over AGI limits for Roth IRAs. I have post-tax dollars liquidity now that I’ve worked for a decent while and it seems like I should just backdoor a Roth up to the limit every year I’m in biglaw with my post-tax money before I put any of my post-tax money into an index or Betterment, etc. because of the beneficial tax treatment. I don’t have any existing pre-tax IRA accounts (so no concerns about paying taxes upon conversion to the Roth) but my wife does have an existing Roth IRA she hasn’t touched in a few years to the extent that matters.

Are there other issues I’m missing here aside from the fact that putting 6K into backdoor Roth is harder to get to than 6K into the market? Seems like a no brainer for me to backdoor and get tax-advantaged treatment before just dumping it in the market, but want to know if I’m missing something glaring.

Biglaw midlevel should use traditional 401ks, not Roth. There is no way in hell u will be making 300k per year in retirement and so your tax rate will be much lower in retirement than it is now.

But yes, pump money into backdoor Roth before taxable, imo.

[PowerBag21]

I'm a rising 5th year associate and am slated to get my $65k (gross) bonus in a few weeks. I refi'd with FRB shortly after graduating (10 year facility, 2.95% fixed) and have about $160k left in loans. I've been making the minimum payment ever since refinancing, and have been investing my savings in individual stocks and have about $140k between my brokerage account and my checking account.

Would it be crazy to invest my bonus rather than using it to prepay my loan? I'm really torn, as I've been able to get about a 20% annual return (unrecognized) in the market in each of the past two years by investing in individual stocks and I think it's extremely likely that if I invest my bonus, I'd be able to outrun the interest I'd be paying for any period of time such that I'd be able to prepay more of my loans in a year or two with the principal plus returns from my bonus than I would by just prepaying them now.

On the other hand, by prepaying my loans, it would feel really nice to substantially reduce my leverage and would be a nice way to diversify my investments by not dumping everything into equities. Also, if we were to encounter any kind of recession, prepaying my loans and getting the 2.95% return would almost certainly be the better option (although I really do feel that there is still significant upside left in the market for the immediate future, but of course no one really knows).

Seems like most folks on here are all about dumping all bonuses towards prepaying loans, but just wanted to see if anyone had gone the alternative route of putting bonus money in the market and letting it sit and grow. With the extremely low rates FRB and some others offer, I would almost feel guilty for not riding them into maturity as prepaying them almost feels like sending a gift back.

[Anonymous User]

I dunno, I've been making minimum payments on FRB (1.95/5-yr fixed) and investing the balance throughout. Really don't know why you would prepay a fixed obligation when you can clear ~8-9% in the market (or better, as you claim). I get the anxieties about not wanting debt, but seems way more fiscally responsible to look at the long run, accept that you'll have the debt for a while, and set yourself up to be fiscally healthy later in life. (4th-year, ~$57k loans remaining, ~$225k brokerage/401K). My $0.02.

(anon b/c posting financials)

[Anonymous User]

I dunno, I've been making minimum payments on FRB (1.95/5-yr fixed) and investing the balance throughout. Really don't know why you would prepay a fixed obligation when you can clear ~8-9% in the market (or better, as you claim). I get the anxieties about not wanting debt, but seems way more fiscally responsible to look at the long run, accept that you'll have the debt for a while, and set yourself up to be fiscally healthy later in life. (4th-year, ~$57k loans remaining, ~$225k brokerage/401K). My $0.02.

(anon b/c posting financials)

For those who are able to refinance at FRB and pay off their full balance in four years, you can get a pretty hefty benefit from doing so. They'll refund you the lesser of all interest paid over the life of the loan or 2% of the initial balance. I'm investing some, but also making payments that are substantial enough to be sure that my loans will be paid off within 47 months of refinancing so I get the money back. Not to say it's the exact same expected returns as investing, but depending on one's expectations of future market returns, there are arguments for prepaying.

[dabigchina]

i'm fairly conservative, but my thinking is it's generally good to pump equal amounts of money into investments and loans. Biglaw layoffs and market drops both tend to occur during recessions and you don't want to be in a situation where you are both:

1. laid off and
2. portfolio has decreased so that you have negative net worth.

that just sounds way too painful.

[nealric]

Yes, though I would add if your firm's plan allows post-tax contributions and in-service rollovers, you can contribute ~$56k (changes with inflation) and roll the post-tax contributions into a Roth IRA. Sweet deal if you have a plan that works with it.

*nealric - Can you explain this? How can you use in-service rollovers to go over maximums of 19k in 401k and 6k in IRA?

(First-time poster)

Here's a summary of how it works:

https://thecollegeinvestor.com/17561/un ... -roth-ira/

In sum, you can make post-tax contributions beyond the $19k in your 401k. You then roll over the post tax contributions into a Roth IRA. However, not all 401k plans allow post-tax contributions or in-service rollovers, so it depends on your plan.

[JusticeChuckleNutz]

Hey all,

First-year big law associate in my stub year. Desperately trying to get more informed regarding personal finance since I have started and this thread has been a gold mine!

All the discussions I have had with coworkers and seen in this thread make it clear that I should max out my 401k contributions. I am going to do so, but I am still a little unclear on why I should do so. It makes me nervous that the 401K amount is untouchable until I am retirement age. I'm trying to get a handle on why this is universal advice. Is the primary benefit that with a biglaw salary (high tax bracket) it reduces your AGI and thus you save $ on taxes? Additionally, the pre-tax amounts are compounding over your lifetime in the market instead of just sitting in a savings account? Are those the primary benefits?

Please explain it to me like a kindergartner because in terms of financial literacy, I very much am one. If it makes a difference in answering the question, 150K in debt, high COL city.

[The Lsat Airbender]

All the discussions I have had with coworkers and seen in this thread make it clear that I should max out my 401k contributions. I am going to do so, but I am still a little unclear on why I should do so. It makes me nervous that the 401K amount is untouchable until I am retirement age. I'm trying to get a handle on why this is universal advice. Is the primary benefit that with a biglaw salary (high tax bracket) it reduces your AGI and thus you save $ on taxes? Additionally, the pre-tax amounts are compounding over your lifetime in the market instead of just sitting in a savings account? Are those the primary benefits?

Yeah, and those benefits are huge. Anything you can do with pre-tax money is awesome (especially for people on biglaw salaries) and anything involving compounding gains is awesome. One dollar diverted to your 401(k) in your late twenties is worth like $3 at retirement (taking into account inflation).

[papermateflair]

All the discussions I have had with coworkers and seen in this thread make it clear that I should max out my 401k contributions. I am going to do so, but I am still a little unclear on why I should do so. It makes me nervous that the 401K amount is untouchable until I am retirement age. I'm trying to get a handle on why this is universal advice. Is the primary benefit that with a biglaw salary (high tax bracket) it reduces your AGI and thus you save $ on taxes? Additionally, the pre-tax amounts are compounding over your lifetime in the market instead of just sitting in a savings account? Are those the primary benefits?

Yeah, and those benefits are huge. Anything you can do with pre-tax money is awesome (especially for people on biglaw salaries) and anything involving compounding gains is awesome. One dollar diverted to your 401(k) in your late twenties is worth like $3 at retirement (taking into account inflation).

Just to add a couple of additional thoughts - since there are annual limits on how much you can put into your 401(k), stub year is a perfect opportunity to put as much in as possible before rolling into the new year. There's also something to be said for the fact that the 401(k) plan can automate a small amount of retirement savings for you - on a Big Law salary you will adjust very quickly to whatever your monthly salary is (it should be plenty, even with student loan payments), and having your 401(k) contributions come off before you really see the money means you're saving almost $20k a year without noticing/feeling any hardship. There are ways to access your 401(k) account early if you have a hardship or if you need to take out a plan loan, although that's obviously not ideal.