Author Topic: 401k  (Read 4231 times)

Offline Zevi16

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Re: 401k
« Reply #20 on: October 17, 2018, 06:33:49 PM »
1. the difference in 401K and roth is if contribution is pre or post tax.  if you think that you will be in a higher income bracket when you retire you should put in roth. if your income bracket is higher today put in 401K(. also, you only pay taxes on the withdrawals (retire with a million but withdraw 50K a year, pay tax on 50K)


I was thinking along these lines. Correct me if I知 wrong.
If I am currently paying 21% tax and I put away $2,000 a year. In a 401k I won稚 pay that 21% on the 2k but when I take it out in 30 years I値l have to pay the 21%+/- on the 2k plus all the interest. Whereas in a Roth, I OU the 21% now and then I知 done with tax on all the interest.

Is that a correct?


3. yes the interest goes in to your account but its only post tax  (if its a 401k you will pay tax again upon withdrawal) its as if you loaned yourself the money.

Can you explain this in more detail?

Offline cholent

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Re: 401k
« Reply #21 on: October 17, 2018, 07:36:28 PM »
I was thinking along these lines. Correct me if I知 wrong.
If I am currently paying 21% tax and I put away $2,000 a year. In a 401k I won稚 pay that 21% on the 2k but when I take it out in 30 years I値l have to pay the 21%+/- on the 2k plus all the interest. Whereas in a Roth, I OU the 21% now and then I知 done with tax on all the interest.

Is that a correct?

Can you explain this in more detail?
The point you are either missing or ignoring is that you may be at a different tax bracket when you withdraw than you are now. If you expect your tax rate to rise, a Roth makes sense. If you expect it to fall, a traditional makes sense. Keep in mind that many people are in a lower tax bracket after retirement than they are during their earning years.
Don't ask stupid questions and you won't get stupid answers

Offline thaber

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Re: 401k
« Reply #22 on: October 17, 2018, 10:05:17 PM »
The point you are either missing or ignoring is that you may be at a different tax bracket when you withdraw than you are now. If you expect your tax rate to rise, a Roth makes sense. If you expect it to fall, a traditional makes sense. Keep in mind that many people are in a lower tax bracket after retirement than they are during their earning years.
I think that at at a 21% tax rate, he's rightfully more concerned about profits, which will be post tax in a Roth. Assume he's making 10% a year in his money, a Roth is a no brainer lechaora

Offline cholent

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Re: 401k
« Reply #23 on: October 17, 2018, 10:12:15 PM »
I think that at at a 21% tax rate, he's rightfully more concerned about profits, which will be post tax in a Roth. Assume he's making 10% a year in his money, a Roth is a no brainer lechaora
Fair enough. I'll still go back to my original point, which is that he should be doing both (but Roth first if you are correct)
Don't ask stupid questions and you won't get stupid answers

Offline ExGingi

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Re: 401k
« Reply #24 on: October 17, 2018, 10:30:03 PM »
I think that at at a 21% tax rate, he's rightfully more concerned about profits, which will be post tax in a Roth. Assume he's making 10% a year in his money, a Roth is a no brainer lechaora
Let me start by getting this off my chest: Why is this in the CC board?

Now that we've cleared that, let's just establish that if everything remains equal (tax rates, tax bracket, growth rates) there shouldn't be any nominal mathematical difference between a ROTH and a Traditional (I won't say 401k, because there are other features other than deductibility that could come into play, and if employer offers it there could also be a ROTH 401k).

Let's use $1,000 and a 20% rate as an example. Using your hypothetical 10% annual growth rate, and assuming it's there for 38 years, making the final balance 34x the original deposit.

If we took $1,000 pre-tax it would grow to $34,000. And after being taxed at 20% we get $27,200.
If we first paid $200 in taxes, and only invested $800, the final balance would be... $27,200 which would be tax free.

If there's an employer match, that is an absolute no-brainer to maximize that match (I've seen very lucrative matches for educators).
I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

Offline thaber

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Re: 401k
« Reply #25 on: October 17, 2018, 10:36:43 PM »
Let me start by getting this off my chest: Why is this in the CC board?

Now that we've cleared that, let's just establish that if everything remains equal (tax rates, tax bracket, growth rates) there shouldn't be any nominal mathematical difference between a ROTH and a Traditional (I won't say 401k, because there are other features other than deductibility that could come into play, and if employer offers it there could also be a ROTH 401k).

Let's use $1,000 and a 20% rate as an example. Using your hypothetical 10% annual growth rate, and assuming it's there for 38 years, making the final balance 34x the original deposit.

If we took $1,000 pre-tax it would grow to $34,000. And after being taxed at 20% we get $27,200.
If we first paid $200 in taxes, and only invested $800, the final balance would be... $27,200 which would be tax free.

If there's an employer match, that is an absolute no-brainer to maximize that match (I've seen very lucrative matches for educators).
You're not compounding

Offline ExGingi

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Re: 401k
« Reply #26 on: October 17, 2018, 10:41:24 PM »
You're not compounding

1.10^37 = 34 (rounded). How is that not compounding? And regardless of what the multiplier is, A x B x C = A x C x B.
I've been waiting over 5 years with bated breath for someone to say that!
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Offline thaber

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Re: 401k
« Reply #27 on: October 17, 2018, 10:43:30 PM »
1.10^37 = 34 (rounded). How is that not compounding? And regardless of what the multiplier is, A x B x C = A x C x B.
Sorry, misread, then @cholents point is the biggest factor

Offline ExGingi

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Re: 401k
« Reply #28 on: October 17, 2018, 10:45:27 PM »
Sorry, misread

You still didn't answer the big question at the top of my post. Why is this in the CC board?
I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

Offline ExGingi

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Re: 401k
« Reply #29 on: October 17, 2018, 10:52:05 PM »
Sorry, misread, then @cholents point is the biggest factor

Right. But who knows? Which is why you do whatever makes sense for you at the given time. It is also a good idea to establish even a minimal ROTH early on, in order to get through the 5 year rule (or at least one of them).

I am having an unusually large deduction on my 2018 taxes. I therefore decided to convert as much of my non-ROTH retirement accounts as I can this year, that will more or less take advantage of the deduction. Point is, you never know what's in the future. It's might be a good idea to use some diversified tax strategies.
I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

Offline Lou Bob

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Re: 401k
« Reply #30 on: October 17, 2018, 10:56:18 PM »
You still didn't answer the big question at the top of my post. Why is this in the CC board?
probably because of this...

Credit Cards

Talk about credit cards or bank accounts including deals, offers, *or any other financial topics*
Always use an Amex, you'll thank me one day.

Offline ExGingi

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Re: 401k
« Reply #31 on: October 17, 2018, 11:41:47 PM »

probably because of this...

Credit Cards

Talk about credit cards or bank accounts including deals, offers, *or any other financial topics*
I guess you're right. Never read that fine print on the CC board.
I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

Offline Zevi16

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Re: 401k
« Reply #32 on: October 18, 2018, 01:46:42 PM »
Right. But who knows? Which is why you do whatever makes sense for you at the given time. It is also a good idea to establish even a minimal ROTH early on, in order to get through the 5 year rule (or at least one of them).

I am having an unusually large deduction on my 2018 taxes. I therefore decided to convert as much of my non-ROTH retirement accounts as I can this year, that will more or less take advantage of the deduction. Point is, you never know what's in the future. It's might be a good idea to use some diversified tax strategies.
My problem is that you guys are all talking as someone that knows the basics. Im a noob here.
I need to look into this properly to make an educated decision. As of now I am doing a mix but i can change any month.

Offline ExGingi

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Re: 401k
« Reply #33 on: October 18, 2018, 02:05:37 PM »
My problem is that you guys are all talking as someone that knows the basics. Im a noob here.
I need to look into this properly to make an educated decision. As of now I am doing a mix but i can change any month.

With all due respect, this is probably NOT where you should be seeking advice.

In one of my posts above, I explained how certain things work from a nominal mathematical standpoint.

Don't make the mistake of equating Finance and Math. There's a lot more that goes into finance than just numbers.

Just like with the Radio shows, which while often presented by qualified experts, and other time by people that are more media wizards than they are financial experts (though I am sure they are doing very well financially), it is impossible, and morally wrong to give financial advice based on a brief conversation. There's a lot more information that needs to be known, before qualified advice (or even just a meaningful educated opinion) can be given.
I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

Offline Zevi16

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Re: 401k
« Reply #34 on: October 18, 2018, 02:29:22 PM »
With all due respect, this is probably NOT where you should be seeking advice.

In one of my posts above, I explained how certain things work from a nominal mathematical standpoint.

Don't make the mistake of equating Finance and Math. There's a lot more that goes into finance than just numbers.

Just like with the Radio shows, which while often presented by qualified experts, and other time by people that are more media wizards than they are financial experts (though I am sure they are doing very well financially), it is impossible, and morally wrong to give financial advice based on a brief conversation. There's a lot more information that needs to be known, before qualified advice (or even just a meaningful educated opinion) can be given.
Right. I just had one question originally. About taking out for first time homebuyer.
The rest is all additional info. I do hold tho that personal experience is also great for research. (Same as we do for everything on DDF)

Offline Redbull3

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Re: 401k
« Reply #35 on: October 18, 2018, 02:35:13 PM »
I was recently told that you can take out of the 401k for a first time home buyer. Is that the case?
No, we will be charged the 10% hardship fee and growth taxes. The $10k withdrawal for first time home purchase with NO hardship fee is for IRAs only.
We can borrow though for any purpose - up to $50k or half the balance of 401k, whichever is less.

Pretty ironic, I just looked into this yesterday for first time b/c I was under same impression, and saw this thread today.

Offline 000

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Re: 401k
« Reply #36 on: October 18, 2018, 03:49:50 PM »
There are a few benefits of a Roth IRA
1) There is no penalty to withdraw the ORIGINAL amount you deposit put in for ANY reason before retirement (59 and 1/2) however you cannot withdraw any profits without a penalty.
2) You avoid any taxes on dividends and/or capital gains. (Please talk to a financial planner/CPA for all the exact parameters if you are a day trader.)
3) (This is just my opinion) The tax rate when you retire will probably be much higher with all of Americas unfunded liabilities.

Please remember you can only contribute $5500 a year (combined to a Roth and/or tradtional IRA) 18k and change to a 401k.

Offline Redbull3

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Re: 401k
« Reply #37 on: October 18, 2018, 04:05:27 PM »
Let me start by getting this off my chest: Why is this in the CC board?

Now that we've cleared that, let's just establish that if everything remains equal (tax rates, tax bracket, growth rates) there shouldn't be any nominal mathematical difference between a ROTH and a Traditional (I won't say 401k, because there are other features other than deductibility that could come into play, and if employer offers it there could also be a ROTH 401k).

Let's use $1,000 and a 20% rate as an example. Using your hypothetical 10% annual growth rate, and assuming it's there for 38 years, making the final balance 34x the original deposit.

If we took $1,000 pre-tax it would grow to $34,000. And after being taxed at 20% we get $27,200.
If we first paid $200 in taxes, and only invested $800, the final balance would be... $27,200 which would be tax free.

If there's an employer match, that is an absolute no-brainer to maximize that match (I've seen very lucrative matches for educators).
I found this super helpful.. TY!

Offline ExGingi

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Re: 401k
« Reply #38 on: October 18, 2018, 04:37:44 PM »
There are a few benefits of a Roth IRA
1) There is no penalty to withdraw the ORIGINAL amount you deposit put in for ANY reason before retirement (59 and 1/2) however you cannot withdraw any profits without a penalty.
2) You avoid any taxes on dividends and/or capital gains. (Please talk to a financial planner/CPA for all the exact parameters if you are a day trader.)
3) (This is just my opinion) The tax rate when you retire will probably be much higher with all of Americas unfunded liabilities.

Please remember you can only contribute $5500 a year (combined to a Roth and/or tradtional IRA) 18k and change to a 401k.

1) Correct, with some exceptions and caveats which might allow penalty-free withdrawals before 59 1/2 (though not tax free), or impose a penalty (but not a tax) after 59 1/2 but before 70. See https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/withdrawal_rules

2) Though beware of holding any assets that give a K-1 rather than 1099. IINM Those could be subject to UBIT if held in an IRA.

3) I agree with you that the overall tax burden will be higher, but I don't know if it will be the income tax rates, or other taxes that will be imposed. (Remember Willie Sutton's line: "that's where the money is", I would not be surprised if a future Congress comes up with something to extract Federal revenue out of retirement accounts). I think that both a VAT and a Wealth Tax (along with doing away with loopholes like step-up in basis, and FMV deduction on charitable donation of appreciated securities for which a capital gains tax was never paid) are somewhere in our future, though it might be one an not the other.

I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

Offline skyguy918

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Re: 401k
« Reply #39 on: October 18, 2018, 05:08:27 PM »
Let me start by getting this off my chest: Why is this in the CC board?

Now that we've cleared that, let's just establish that if everything remains equal (tax rates, tax bracket, growth rates) there shouldn't be any nominal mathematical difference between a ROTH and a Traditional (I won't say 401k, because there are other features other than deductibility that could come into play, and if employer offers it there could also be a ROTH 401k).

Let's use $1,000 and a 20% rate as an example. Using your hypothetical 10% annual growth rate, and assuming it's there for 38 years, making the final balance 34x the original deposit.

If we took $1,000 pre-tax it would grow to $34,000. And after being taxed at 20% we get $27,200.
If we first paid $200 in taxes, and only invested $800, the final balance would be... $27,200 which would be tax free.

If there's an employer match, that is an absolute no-brainer to maximize that match (I've seen very lucrative matches for educators).
1) There is no penalty to withdraw the ORIGINAL amount you deposit put in for ANY reason before retirement (59 and 1/2) however you cannot withdraw any profits without a penalty.
1) Correct, with some exceptions and caveats which might allow penalty-free withdrawals before 59 1/2 (though not tax free), or impose a penalty (but not a tax) after 59 1/2 but before 70. See https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/withdrawal_rules
Just to connect the dots here, if you 'establish that if everything remains equal (tax rates, tax bracket, growth rates)', then while Roth and Traditional are mathematically identical, the above point makes the Roth much more attractive. This eliminates a barrier many people erect for themselves when it comes to saving/investing: sure I have money sitting around that I can save/invest, but if I put money in my Traditional 401k/IRA it's locked in. What if I need the money later? Well with a Roth, you can still get at the principal at any time.

This is more or less how I arrived at my retirement savings strategy over the last 5-10 years. I put whatever I had to into a Traditional 401k to get the full match from my employer, and I maxed our Roth IRA contributions. Now I can't do IRA's anymore so I have to figure out a workaround (thankfully this won't be too hard).