big little swinging dick I am, I get this question pretty frequently from friends and family members in their 20s (and some even in their 30s). So you’ve managed to get yourself out of school without within five years without knocking a girl up (or getting knocked up, we’re a progressive blog nowadays, FYI) and/or dying from alcohol poisoning, and you’ve landed your first full time job in the real world. You’re getting paid the smedium bucks. I’m talking like $40,000/year. At first, you may think to yourself, “Whoa. That’s a shitton of money.” But in reality, this money will barely be able to help you afford not moving back in with mom and dad. Nothing like wasting $100,000 for a degree in marketing that means absolutely dick. But you know what? Fuck it. Almost all of us make the same stupid mistake by picking a degree that will get us no where with our first job. Besides, college is a sunk cost at this point anyways. Let’s just hope you’re not one of those poor bastards (no pun intended) that has to pay student loans for the next 15 years because you have shitty parents (on a side note, I highly recommend not having shitty parents). Or perhaps you’re one of those bigger idiots who decides they still don’t know what they want to do with their life after four years of college so you decide to go back to school for a Masters. Nothing like adding more debt on top of debt.
But I digress. Being somewhat of an idiot in college (I say somewhat because I’m assuming you made it out) and getting an entry level job in the cube isn’t the end of the world. In fact, I’m trying to help you amend those stupid decisions you made by setting yourself up for an early retirement – even if you are only making $1,000 after taxes every two weeks.
You see, you don’t have to make a six figure salary in order to live a decent life (although it does make things a hell of a lot easier). In fact, it’s all about how well you manage your money. That’s why you see idiots like Pete Rose still signing baseballs in his 70s while the retired school teacher down the street from your parents in her early 60s is out grocery shopping at 10:00 am on a Tuesday in October. She didn’t call up her bookie every day in between 5th and 6th period to lay down $5,000 on the Reds. Pete, on the other hand…
So back to the focus of this blog. The very first thing you should do once you land a new job other than doctoring up your Bumble profile to make yourself sound more important than you actually are to impress the ladies (or the men) if you’re single is to inquire about contributing to a retirement plan. You’re probably thinking to yourself right now, “Are you fucking kidding me? This guy’s a fucking loser. I should be thinking about contributing to a retirement plan right away? I just got the job!” Two things, chief: A. I am a fucking loser, and B. Yes, you should be thinking about contributing to a retirement plan right away. Here’s why: Nobody, and I mean NOBODY, wants to retire later in life. Let’s face it. 99% of jobs suck. Wouldn’t it be nicer not doing anything you don’t want to do all day long? To put it simply, the earlier you start saving for retirement, the earlier you will be able to retire, and the more money you’ll have to fuck around with while doing so. It’s called the power of compounding (which is another blog for another day).
So here’s how to start. If you’re not a sole proprietor, chances are your employer offers a 401(k) plan. According to the nerds over at Investopedia, a 401(k) plan is a qualified employer-sponsored retirement plan that eligible employees may make salary-deferral contributions to on a post-tax and/or pretax basis. Let’s focus on the last part of that sentence. Specifically, regarding how eligible employees can make salary-deferral contributions on a post-tax and/or pretax basis.
- Post-tax contributions = Roth 401(k)
- Pretax contributions = Traditional 401(k)
The difference between the two is essentially the timing of when you’re paying the taxman. For a Traditional 401(k), you’re taking a percentage of your salary before taxes and contributing that money to your retirement account. Therefore, you don’t pay your taxes until you withdraw that money from your account (which is not intended to do until you’re over the age of 59.5 years old AKA a long fucking time). For a Roth 401(k), you’re taking money after it gets taxed and contributing it to your retirement account. Therefore, when you take the money out of your account, you aren’t paying ordinary income taxes like you would when you take a withdrawal from a Traditional 401(k). However, you still gotta wait til your dick probably isn’t getting hard on its own anymore (or your pussy’s drier than the Mojave Desert, i.e. after the age of 59.5 years old) in order to take distributions without incurring a premature distribution penalty.
So should you be contributing your hard earned peanuts to a Traditional 401(k) or a Roth 401(k)? First, let’s make sure you’re hitting the company match. What the hell is a “company match?” Most employers typically offer a low percentage anywhere from 1-6% of your annual salary where they’ll match your retirement plan contributions (i.e. the company match). This is basically a way for an employer to entice employees to contribute to their 401(k) plan. And if you don’t do this, you’re a fucking idiot. It’s essentially FREE money that your company is giving you. At the very minimum, make sure you’re contributing at least the company match to your 401(k) plan (although it’s almost universally recommended to contribute at least 10% of your salary to your retirement plan if you can afford to do so). Now, back to the main question. Which type of 401(k) plan should you be contributing to? Well, here’s the question you need to answer: Will you be in a higher or lower tax bracket in retirement in comparison to where you are now?
I know a lot of shit can change now until 30-50 years from now (shoutout to me on doing the math for our reader demo), but here’s what the current federal income tax brackets look like in 2018 (via Forbes):
According to these rates, if you’re making less than roughly $40,000/year, there’s no fucking reason you should be deferring taxes now. Pay the 12% now and contribute your money into a Roth 401(k). Then, take out that money tax-free whenever you’re (most likely) paying higher taxes and you’re swinging through the drive through line to pick up your Rx of Viagra (I don’t know what girls do for dry pussies). On the other hand, if you’re raking in the big bucks (i.e. over $40,000/year), you’re most likely better off contributing your money tax-deferred in a Traditional 401(k). Now, like I mentioned earlier, tax rates are likely to change between now and the time you retire so you’re probably okay to go either way if you’re hovering around that $40,000 marker. However, if you’re a real big baller (but not quite Lavar Ball big baller) and you’re making over six figs, you should definitely be contributing money in a Traditional 401(k). Chances are you’ll be paying a way lower tax rate whenever your nuts are smacking off of your inner thighs every time you take a step (I don’t know what’s going on in the pussy department other than the fact that it dries up).
So what’s the moral of the story here? Fuck taxes. Pay as little of them as humanly possible. But make sure you do that shit legally so you don’t end up in the clink like Martha.