401k Question for Pharmacists

[shaq786]

I'm a little bit confused about 401k's and alot of people in my class are confused too.

I work for walmart and I get paid 58/hour in GA salaried full time.

1. The bottomline question is what percentage of my monthly income do I put into my 401k to get the maximum in tax deduction?

Here was my initial understanding on how this works:

As a single guy, having no other major financial issues, I will get taxed 20% of my income. So if I put 20% of my paycheck into my 401k, I will probably be taxed a total of 5k instead. And now I have all this money in my 401k that potentially has a chance of being a retirement fund and if not that then I can atleast take some of it out when I retire. Correct me on this paragraph if needed.

2. What kind of 401k would best suit the needs of what I am trying to do in the above paragraph?

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[confettiflyer]

I'm a little bit confused about 401k's and alot of people in my class are confused too.

I work for walmart and I get paid 58/hour in GA salaried full time.

1. The bottomline question is what percentage of my monthly income do I put into my 401k to get the maximum in tax deduction?

Here was my initial understanding on how this works:

As a single guy, having no other major financial issues, I will get taxed 20% of my income. So if I put 20% of my paycheck into my 401k, I will probably be taxed a total of 5k instead. And now I have all this money in my 401k that potentially has a chance of being a retirement fund and if not that then I can atleast take some of it out when I retire. Correct me on this paragraph if needed.

2. What kind of 401k would best suit the needs of what I am trying to do in the above paragraph?

1. The maximum is approximately $15,000 a year if you're <55 (this # changes so i could be off +/- $2000 or so, check with the current law.

The more you put in, the less you get taxed, so you're on the right track. Example, say you make $100k/yr, if you put NOTHING away, you get taxed on $100k (progressive tax bracket, you calculate it).

IF you put away the maximum $15k, your taxable income becomes $100k - $15k = $85k. So you get taxed on $85k -- it's as if that $15k never existed (it'll get taxed when you withdraw it...when you're older).

2. If you're a total noob, you'll get a list of investments you can stick your money in. Stick to ETF's and target date funds (they're usually named "Retirement Target 2050" or "iShares S&P 500 Index Fund" This is worth another post.

EDIT: just checked, the maximum is $16,500/yr... you can also look at other ways to reduce your taxable income (are houses in your area cheap/are you ready to settle in one area? pop out some kids? future kids...put money into a 529?)

 

[awval999]

I'm a little bit confused about 401k's and alot of people in my class are confused too.

I work for walmart and I get paid 58/hour in GA salaried full time.

1. The bottomline question is what percentage of my monthly income do I put into my 401k to get the maximum in tax deduction?

Here was my initial understanding on how this works:

As a single guy, having no other major financial issues, I will get taxed 20% of my income. So if I put 20% of my paycheck into my 401k, I will probably be taxed a total of 5k instead. And now I have all this money in my 401k that potentially has a chance of being a retirement fund and if not that then I can atleast take some of it out when I retire. Correct me on this paragraph if needed.

2. What kind of 401k would best suit the needs of what I am trying to do in the above paragraph?

You will be a highly-compensated employee at Walmart and not be allowed to defer the maximum amount. This is an IRS issue do to the fact Walmart does not have a high percentage of employees contributing to its 401k. You need to talk to HR.

 

[Dr Wario]

Most of what confettiflyer said is correct, and yes the current maximum contribution is 16500 in 2011. Also, not to forget to at consider your employer's matching structure. Some require vesting periods for contributions and some base their contribution percentage on the annual profit. Try to maximize this the best you can. Be aware, with 401ks it is very difficult and expensive to withdraw any of the money until you are 59 and 1/2 years old so do not expect to use it as an emergency fund.

You may also want to see if Walmart offers a roth 401k option, these work much like roth IRAs in that you are taxed on the incoming contributions now, but are never taxed on earnings. I would guess the tax rates for high earners like pharmacists will be going up in the future so you may want to hedge some of that by paying the taxes now.

On a side note, I would not recommend using target date retirement funds, they typically have very high expenses which reduce your return. I would stick to index funds which are typically the best performers in the limited selection most companies offer in their 401k plans.

 

[type b pharmD]

Most of what confettiflyer said is correct, and yes the current maximum contribution is 16500 in 2011. Also, not to forget to at consider your employer's matching structure. Some require vesting periods for contributions and some base their contribution percentage on the annual profit. Try to maximize this the best you can. Be aware, with 401ks it is very difficult and expensive to withdraw any of the money until you are 59 and 1/2 years old so do not expect to use it as an emergency fund.

You may also want to see if Walmart offers a roth 401k option, these work much like roth IRAs in that you are taxed on the incoming contributions now, but are never taxed on earnings. I would guess the tax rates for high earners like pharmacists will be going up in the future so you may want to hedge some of that by paying the taxes now.

On a side note, I would not recommend using target date retirement funds, they typically have very high expenses which reduce your return. I would stick to index funds which are typically the best performers in the limited selection most companies offer in their 401k plans.

I dont know much about investing, but I am a big fan of the roth idea mentioned by Dr Wario. Although the contribution limit (for IRA at least) is way lower than 401k.. if you are AT ALL paranoid about the government and about taxes, you should highly consider it. Personally, I think taxes are probably headed upwards for the next several decades, so it makes sense to pay now at the lower rate than pay when you retire at possibly (likely?) a higher rate.

 

[awval999]

Sometimes I think no one is listening.

1. He will be a highly-compensated employee at Walmart and will only be allowed to defer ~4% of his income. This is due to the fact that the "rank-and-file" at Walmart do not participiate in the 401k.

2. Walmart does not offer a Roth 401k (very few places do)

3. He makes too much money for a Roth IRA (although he could back-door Roth, which in itself is a new thread)

 

[confettiflyer]

Sometimes I think no one is listening.

1. He will be a highly-compensated employee at Walmart and will only be allowed to defer ~4% of his income. This is due to the fact that the "rank-and-file" at Walmart do not participiate in the 401k.

oooh HCE, ouch. what a pain. OP is kind of screwed.

any deferred compensation programs available? it's wal mart, i doubt it...what a pain.

 

[psychoandy]

As a single guy, having no other major financial issues, I will get taxed 20% of my income. So if I put 20% of my paycheck into my 401k, I will probably be taxed a total of 5k instead. And now I have all this money in my 401k that potentially has a chance of being a retirement fund and if not that then I can atleast take some of it out when I retire. Correct me on this paragraph if needed.

I guess if you average out your tax brackets I suppose it is 20% of income. But even then, unless you have massive amount of tax credits I don't see how you would only pay 5k in tax. Assuming you take standard deduction and exemption, and max out on 401k (which i don't think will work since you are HCE), which I estimate to be around 100k, your tax liability before credits is something like 18k/year.

 

[Dr Wario]

Sometimes I think no one is listening.

1. He will be a highly-compensated employee at Walmart and will only be allowed to defer ~4% of his income. This is due to the fact that the "rank-and-file" at Walmart do not participiate in the 401k.

2. Walmart does not offer a Roth 401k (very few places do)

3. He makes too much money for a Roth IRA (although he could back-door Roth, which in itself is a new thread)

Could you explain #1 a bit more in detail, I read that the first time but honestly have never heard of any IRS rules that would limit 401k contributions because not many people in the company participate. I'm not saying it doesn't exist, I just don't know about the rule so I'd like details. Edit: Just read the rules about HCE vs nonHCE plan participation, that really blows... So what will HCEs be able to contribute at walmart?

As to #3, yes the non-deductible trad IRA with roth conversion is a good idea. For other readers, do not forget that roths do have a drawback that is sometimes overlooked, it is that in a deferred plan you are using pretax dollars and thus your principal balance is larger so return percentages will equate to larger dollars.

 

[confettiflyer]

Could you explain #1 a bit more in detail, I read that the first time but honestly have never heard of any IRS rules that would limit 401k contributions because not many people in the company participate. I'm not saying it doesn't exist, I just don't know about the rule so I'd like details. Edit: Just read the rules about HCE vs nonHCE plan participation, that really blows... So what will HCEs be able to contribute at walmart?

As to #3, yes the non-deductible trad IRA with roth conversion is a good idea. For other readers, do not forget that roths do have a drawback that is sometimes overlooked, it is that in a deferred plan you are using pretax dollars and thus your principal balance is larger so return percentages will equate to larger dollars.

HCE rule has been in force since the inception of 401k accounts. This can happen to anyone at any company, though the problem is more pronounced as places like wal-mart vs. Google or something.

bottom line here is the OP is up a creek with respect to reducing his taxable income on the retirement aspect. consider the lack of ability to save more pre-tax as a hidden cost of working there.

at this point in life with such a high income, you should probably hire an accountant and maximize your tax deductions/shelters throughout the year (ie max any pre-tax health savings accounts up to how much you spend, etc...).

 

[pharmdguru]

Shaq, glad you're looking to invest fully in your 401k! Below is my take:

-WMT no longer has HCE's (starting in 2011) so you CAN contribute to your 401k with the IRS max of $16,500. WMT matches your contribution up to 6% of your yearly salary. So at $58/hour and 40 hours/week, Walmart will match your first $7,234 per year (6% x $120k/year) that you contribute. Your first goal should be to maximize the company contribution, therefore you should invest a minimum of 6% of your salary. Also, there is no "vesting" period of the match meaning that once WMT contributes towards your 401k, it is fully yours. WMT contributes every paycheck when you contribute. Many companies will match your contribution but make you work for 5 years before it is yours and fully "vested". (NOTE: there is a 1 year wait at WMT before you can contribute to 401k.) Overall, the 401k at WMT is tops in the retail industry which is much different than previous years when Pharmacists were HCE's.

-I also suggest that you take part in the associate purchase plan which is a 15% stock discount given to ALL associates for the 1st $1800 of WMT stock purchased. To maximize this benefits, purchase $70 of WMT stock via payroll deduction with each paycheck ($1800 divided by 26 pay periods).

-Additionally, you can take advantage of the WMT health insurance benefit by enrolling in a high deductible plan with a Health Savings Account. This is a great benefit for associates that minimally use insurance and are looking for tax savings. As a salaried employee, you are eligible for health insurance from your FIRST day of employment. The associate only PPO insurance costs ONLY $26 per month with a $3000 deductible. The IRS will allow you and wmt to contribute a total of $3000/year to your HSA. WMT matches your first $600. If you do not need to use your HSA money, it rolls over every year!

Hope this helps!

 

[Jabberwocky12]

Shaq, glad you're looking to invest fully in your 401k! Below is my take:

-WMT no longer has HCE's (starting in 2011) so you CAN contribute to your 401k with the IRS max of $16,500. WMT matches your contribution up to 6% of your yearly salary. So at $58/hour and 40 hours/week, Walmart will match your first $7,234 per year (6% x $120k/year) that you contribute. Your first goal should be to maximize the company contribution, therefore you should invest a minimum of 6% of your salary. Also, there is no "vesting" period of the match meaning that once WMT contributes towards your 401k, it is fully yours. WMT contributes every paycheck when you contribute. Many companies will match your contribution but make you work for 5 years before it is yours and fully "vested". (NOTE: there is a 1 year wait at WMT before you can contribute to 401k.) Overall, the 401k at WMT is tops in the retail industry which is much different than previous years when Pharmacists were HCE's.

-I also suggest that you take part in the associate purchase plan which is a 15% stock discount given to ALL associates for the 1st $1800 of WMT stock purchased. To maximize this benefits, purchase $70 of WMT stock via payroll deduction with each paycheck ($1800 divided by 26 pay periods).

-Additionally, you can take advantage of the WMT health insurance benefit by enrolling in a high deductible plan with a Health Savings Account. This is a great benefit for associates that minimally use insurance and are looking for tax savings. As a salaried employee, you are eligible for health insurance from your FIRST day of employment. The associate only PPO insurance costs ONLY $26 per month with a $3000 deductible. The IRS will allow you and wmt to contribute a total of $3000/year to your HSA. WMT matches your first $600. If you do not need to use your HSA money, it rolls over every year!

Hope this helps!

By any chance are you in any way affiliated with Wal-mart? It does sound interesting, however.

 

[awval999]

Shaq, glad you're looking to invest fully in your 401k! Below is my take:

-WMT no longer has HCE's (starting in 2011) so you CAN contribute to your 401k with the IRS max of $16,500. WMT matches your contribution up to 6% of your yearly salary. So at $58/hour and 40 hours/week, Walmart will match your first $7,234 per year (6% x $120k/year) that you contribute. Your first goal should be to maximize the company contribution, therefore you should invest a minimum of 6% of your salary. Also, there is no "vesting" period of the match meaning that once WMT contributes towards your 401k, it is fully yours. WMT contributes every paycheck when you contribute. Many companies will match your contribution but make you work for 5 years before it is yours and fully "vested". (NOTE: there is a 1 year wait at WMT before you can contribute to 401k.) Overall, the 401k at WMT is tops in the retail industry which is much different than previous years when Pharmacists were HCE's.

-I also suggest that you take part in the associate purchase plan which is a 15% stock discount given to ALL associates for the 1st $1800 of WMT stock purchased. To maximize this benefits, purchase $70 of WMT stock via payroll deduction with each paycheck ($1800 divided by 26 pay periods).

-Additionally, you can take advantage of the WMT health insurance benefit by enrolling in a high deductible plan with a Health Savings Account. This is a great benefit for associates that minimally use insurance and are looking for tax savings. As a salaried employee, you are eligible for health insurance from your FIRST day of employment. The associate only PPO insurance costs ONLY $26 per month with a $3000 deductible. The IRS will allow you and wmt to contribute a total of $3000/year to your HSA. WMT matches your first $600. If you do not need to use your HSA money, it rolls over every year!

Hope this helps!

I no longer work for Walmart (I was an intern there for 3 years), but I would be very surprised if they satisifed the "safe harbor" provisions of the IRS code for 401k's. I am interested if any other Walmart pharmacists have heard of this 2011 change in 401k's.