401k(s) are not the best way to save for retirement?

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misterno
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401k(s) are not the best way to save for retirement?

Post by misterno » Wed Jun 08, 2016 9:29 am

This author has to be out of his mind. No wonder it is from Kiplinger's

http://wealth.kiplinger.com/reader/kipl ... yptr=yahoo

This guy does not even comprehend the gigantic advantage of re investing non taxed money over long periods of time while pounding on 401ks. He is clueless.

Any thoughts?

[typo in title corrected - moderator prudent]

The Wizard
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Re: 401(k)s are not the best way to save for retirement?

Post by The Wizard » Wed Jun 08, 2016 9:35 am

401, not 410, but not that bad an article.
I've written on this before, that it's good to get your 401/403 tax deferred balance up to a certain level and then start pre paying taxes and do Roth 401/403 contributions if possible.

In my case, I stayed in the 25% marginal tax bracket all though my full-time employment due to maximal 403(B) pre-tax contributions.
I'm now in the 28% bracket in retirement and always will be, subject to tax law changes, obviously.

I figure that somewhere around $1.5M balance in my 403(B), I should have began putting half of my contributions into the Roth 403(B) option that was available to me. Oh, well.

Thing is, the majority of workers, if you believe the newspapers, do NOT max out their tax deferred contributions, and thus will likely not exceed $1M accumulation by age 65, adjusted for inflation. Those folks can ignore that article...
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markcoop
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Re: 410k(s) are not the best way to save for retirement?

Post by markcoop » Wed Jun 08, 2016 9:54 am

There have been a number of comments on this site talking about why t401K/IRAs are better than ROTH accounts because you can control the taxes. You may even be able to create a situation where you retire early and have years of ROTH conversions with little or no taxes. I've always been skeptical of those posts. Sure, I believe you should try to plan for a few years of ROTH conversions after you retire. I also like the idea of having some money in both buckets to play some tax games in retirement (withdraw up to, say the 15% bracket, a certain amount from trad'tl money and the rest you need from ROTH money). However, to devise a whole strategy around it seems extreme. Too many variables can change to destroy such a plan. Another reason I have been skeptical is mentioned in this article. I hope to spend more in retirement. I don't want to be limited by some artificial plan to max out tax savings. Having some money in each bucket gives you flexibility. I do believe you probably want a decent amount in t401k/IRAs, but putting some in ROTH IRAs gives you more options. I hope to do some conversions as well, but don't want to be limited by the amount of conversions available to me in retirement in low tax brackets. Having said that, the article is extreme in going the other way (put all in ROTH). To me, you should put money in both buckets. I think approaching retirement with 75% t401k/IRA and 25% ROTH seems like a good place to be.
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Re: 410k(s) are not the best way to save for retirement?

Post by bigred77 » Wed Jun 08, 2016 10:11 am

I thought the article was ridiculous at best.

Even if you are in the same tax bracket in retirement as you were in your working years, your deferring 100% of your 401k contributions at your marginal (or sometimes the step above) tax bracket. When you withdraw, your money(excluding SS for now) is taxed at your effective tax rate. The vast majority of retiree's would still come out ahead by utilizing 401k's instead of taxable savings. The vast majority of retiree's in the same tax bracket (or lower) in retirement would still come out ahead by utilizing 401k's instead of Roth 401ks (all else equal).
The Wizard wrote: In my case, I stayed in the 25% marginal tax bracket all though my full-time employment due to maximal 403(B) pre-tax contributions.
I'm now in the 28% bracket in retirement and always will be, subject to tax law changes, obviously.

I figure that somewhere around $1.5M balance in my 403(B), I should have began putting half of my contributions into the Roth 403(B) option that was available to me. Oh, well.
.
I'm sure you've run the numbers for your own situation but i still think there's a chance you came out ahead with traditional 403(b) contributions even if you are now in a higher marginal tax bracket. Regardless, I imagine your case would be extremely rare among US household.

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Re: 410k(s) are not the best way to save for retirement?

Post by KlangFool » Wed Jun 08, 2016 10:13 am

markcoop wrote:There have been a number of comments on this site talking about why t401K/IRAs are better than ROTH accounts because you can control the taxes. You may even be able to create a situation where you retire early and have years of ROTH conversions with little or no taxes. I've always been skeptical of those posts. Sure, I believe you should try to plan for a few years of ROTH conversions after you retire. I also like the idea of having some money in both buckets to play some tax games in retirement (withdraw up to, say the 15% bracket, a certain amount from trad'tl money and the rest you need from ROTH money). However, to devise a whole strategy around it seems extreme. Too many variables can change to destroy such a plan. Another reason I have been skeptical is mentioned in this article. I hope to spend more in retirement. I don't want to be limited by some artificial plan to max out tax savings. Having some money in each bucket gives you flexibility. I do believe you probably want a decent amount in t401k/IRAs, but putting some in ROTH IRAs gives you more options. I hope to do some conversions as well, but don't want to be limited by the amount of conversions available to me in retirement in low tax brackets. Having said that, the article is extreme in going the other way (put all in ROTH). To me, you should put money in both buckets. I think approaching retirement with 75% t401k/IRA and 25% ROTH seems like a good place to be.
markcoop,

If you believe in having money in all 3 buckets:

1) Trad. 401K

2) Roth IRA

3) Taxable account

Maxing Trad. 401K contribution and put the tax savings into (2) and (3) gives you that. If you put most of your money into Roth 401K, you are limiting your tax flexibility.

I am a prime example. My portfolio is at

1) Trad. 401K / Rollover IRA (45%)

2) Roth IRA (10%)

3) Taxable account (45%)

<<To me, you should put money in both buckets. >>

In my opinion, you should have money in all 3 buckets. And, you could have that if you contribute more to Trad. 401K and put the tax savings into taxable account. Why that is not a good option?

KlangFool

randomguy
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Re: 410k(s) are not the best way to save for retirement?

Post by randomguy » Wed Jun 08, 2016 10:23 am

1) "You saved tax on your seed, but you will owe tax on your harvest." - sounds good. But it ignores the fact that having a 25% smaller harvest is about the same as paying 25% on that larger harvest. People struggle a lot with this. You pay more taxes with the traditional but you also have more money.

2) "You are NOT in a lower tax rate bracket in retirement". Seems like he doesn't understand that you are in the same tax bracket because of those IRA contributions. And because of our progressive system your tax burden is likely to be lower even being in the same bracket. Obviously if you are making a lot more money in retirement than when you are working, roths probably would have worked out better.

3) Sure. And don't you think the government will want to get their hands on your ROTH dollars? How many candidates(from both parties) have proposed national sales taxes of various types over the past couple of election cycles. Will it happen? Who knows. Will taxes go up? Well at some point the trend of lowering them has to stop. But who knows. Guessing tax policy is hard.

4) Suggesting life insurance in the 401(k) is financial suicide:)


The ROTH versus traditional can vary from individual to individual (pensions and early retirement versus working til 67+) so the paying taxes early isn't totally crazy but I feel most people fall into the group where maxing out traditional works out better. The article definitely doesn't go into any detail of why to pick one over another

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DaftInvestor
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Re: 401k(s) are not the best way to save for retirement?

Post by DaftInvestor » Wed Jun 08, 2016 10:26 am

What does he mean by this statement:
Look into “maximum-funded life insurance” as a 401(k) option. Be careful on this one, but if you have a really good financial person on your side, they can help you set it up in the proper way.
I have always subscribed to the philosophy of not mixing up investments with insurance - whenever you do - you lose.
Is he suggesting we buy Whole-Life?

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Re: 410k(s) are not the best way to save for retirement?

Post by markcoop » Wed Jun 08, 2016 10:38 am

KlangFool wrote:In my opinion, you should have money in all 3 buckets. And, you could have that if you contribute more to Trad. 401K and put the tax savings into taxable account. Why that is not a good option?
KlangFool
I don't think we disagree. I have maxed out my t401K and Roth IRAs for many years. But that worked for me because I was maxing out both accounts. How you get money into the different buckets may be different for different people. For example, perhaps a younger person in the 15% bracket should put 100% into Roth accounts.
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Re: 410k(s) are not the best way to save for retirement?

Post by The Wizard » Wed Jun 08, 2016 10:56 am

markcoop wrote:
KlangFool wrote:In my opinion, you should have money in all 3 buckets. And, you could have that if you contribute more to Trad. 401K and put the tax savings into taxable account. Why that is not a good option?
KlangFool
I don't think we disagree. I have maxed out my t401K and Roth IRAs for many years. But that worked for me because I was maxing out both accounts. How you get money into the different buckets may be different for different people. For example, perhaps a younger person in the 15% bracket should put 100% into Roth accounts.
In general, Klang is right, some mix of accounts is likely optimal. But it depends a lot on what your employer offers. $5500 or $6500 into your Roth IRA each year isn't much, but it's a start.

And working people in the 15% bracket often don't have much $$ left to invest after living expenses...
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KlangFool
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Re: 410k(s) are not the best way to save for retirement?

Post by KlangFool » Wed Jun 08, 2016 11:07 am

markcoop wrote:
KlangFool wrote:In my opinion, you should have money in all 3 buckets. And, you could have that if you contribute more to Trad. 401K and put the tax savings into taxable account. Why that is not a good option?
KlangFool
I don't think we disagree. I have maxed out my t401K and Roth IRAs for many years. But that worked for me because I was maxing out both accounts. How you get money into the different buckets may be different for different people. For example, perhaps a younger person in the 15% bracket should put 100% into Roth accounts.
markcoop,

I agreed. At 15%, it is a gray area. Either Roth 401K or Trad. 401K is fine. But, the bias should be towards Roth 401K. At 25% and above, Trad. 401K should be the choice for 99+% of people.

KlangFool

EnjoyIt
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Re: 401k(s) are not the best way to save for retirement?

Post by EnjoyIt » Wed Jun 08, 2016 11:33 am

If you are in a high tax bracket traditional is best. If you plan on retiring early traditional is best so that you can do some lower rate conversions. Even if you can do traditional at 39.6% and in the future do conversions up to 25%, you are coming out way ahead. That is my plan.

My ideal scenario:
Max out traditional and defined benefit plan
max out Roth
Put large sums into taxable

retire early and live off of taxable while moving $100k/yr from traditional to Roth. A family can easily shift over $1 million to Roth accounts during that time

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Re: 401(k)s are not the best way to save for retirement?

Post by JW-Retired » Wed Jun 08, 2016 11:36 am

The Wizard wrote:401, not 410, but not that bad an article.
I've written on this before, that it's good to get your 401/403 tax deferred balance up to a certain level and then start pre paying taxes and do Roth 401/403 contributions if possible.

In my case, I stayed in the 25% marginal tax bracket all though my full-time employment due to maximal 403(B) pre-tax contributions.
I'm now in the 28% bracket in retirement and always will be, subject to tax law changes, obviously.

I figure that somewhere around $1.5M balance in my 403(B), I should have began putting half of my contributions into the Roth 403(B) option that was available to me. Oh, well.
I agree with this. Should have used my Roth 401k option at some point. Our bracket in retirement is unpleasantly higher than while working, plus it's more than just the bracket because of AMT et al.

I would recommend starting to use Roths much earlier if you can forecast you might end up with a big 401k/403b. I found once we were in a 28% bracket I couldn't face switching to the Roth.
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livesoft
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Re: 401(k)s are not the best way to save for retirement?

Post by livesoft » Wed Jun 08, 2016 11:44 am

The Wizard wrote:In my case, I stayed in the 25% marginal tax bracket all though my full-time employment due to maximal 403(B) pre-tax contributions.
I'm now in the 28% bracket in retirement and always will be, subject to tax law changes, obviously.
I was recently talking to a professor who retired at age 77. He was complaining about the horrendous taxes on his 403(b) RMDs. :)

Maybe avoiding taxes is one reason professors just keeping working until they die?

As for the article, the author missed a very good solution: Max 401(k) / 403(b) and then retire early to avoid all the taxes from contributing too much and thus bumping yourself into a higher tax bracket in retirement.
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Re: 401k(s) are not the best way to save for retirement?

Post by itstoomuch » Wed Jun 08, 2016 12:01 pm

We went from 10% bracket (0% effective) to 25% bracket plus SS Hump within a year, forever more. About 2 years earlier than I had planned. Trying to get money out of trad IRA into taxables in an orderly fashion to minimize RMD affect. Will not do conversions into Roth because I still have the taxation and risk a loss in a future market. Taxables I can get into efficient Indexes and qualified dividends. TLH is tactical for our portfolio.

Article is correct in our experience. The cravat is that one needs to plan years in advance, do some market timing, and understand taxation. I call this the Quakt (QUalified Account acK Tax) :annoyed

disclaimer: 66/69, LTCi, 4 buckets, can live on 2. Discretionary is 86% in cash.

YMMV
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Re: 401k(s) are not the best way to save for retirement?

Post by oldcomputerguy » Wed Jun 08, 2016 12:01 pm

From the article:
Think about it. Do you want to retire with a lower standard of living? You save for 30 years, and if you do a good job, you get to retire into the SAME standard of living. This means you will have about the same amount of income, which means the same tax rate. But now your home is paid for, your children are gone, and your tax deductions have vanished.
What the author neglects to mention is that the related expenses have also vanished, so one can maintain the lifestyle with less income.
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Re: 410k(s) are not the best way to save for retirement?

Post by Da5id » Wed Jun 08, 2016 12:03 pm

bigred77 wrote:I thought the article was ridiculous at best.

Even if you are in the same tax bracket in retirement as you were in your working years, your deferring 100% of your 401k contributions at your marginal (or sometimes the step above) tax bracket. When you withdraw, your money(excluding SS for now) is taxed at your effective tax rate. The vast majority of retiree's would still come out ahead by utilizing 401k's instead of taxable savings. The vast majority of retiree's in the same tax bracket (or lower) in retirement would still come out ahead by utilizing 401k's instead of Roth 401ks (all else equal).
I thought the article wasn't bad, and the choices are not nearly so obvious as you present.

Money in a 401k is taxed as ordinary income on withdrawal on a RMD schedule out of your control. Money in a tax efficient index fund throws off small qualified dividends (taxed yearly at capital gains rates). When you sell the taxable index fund at the time of your choosing (and with lots of your choosing), the gains are LT capital gains. The distinction is less clear than you are stating. And your ability to TLH the taxable funds as you go is a nice bonus, and for some the ability to donate appreciated shares (or step up the basis on death of the owner) can be significant too.

Not opposed to 401ks, I max mine. But there are clearly trade-offs here that you are not acknowledging, and real value to having some of your money in Roths, some in 401ks, some in taxable...

[EDIT - the above was ill considered by me, and wrong, leaving it as is because it was quoted]
Last edited by Da5id on Thu Jun 09, 2016 10:05 am, edited 1 time in total.

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Re: 401(k)s are not the best way to save for retirement?

Post by The Wizard » Wed Jun 08, 2016 12:14 pm

livesoft wrote:
The Wizard wrote:In my case, I stayed in the 25% marginal tax bracket all though my full-time employment due to maximal 403(B) pre-tax contributions.
I'm now in the 28% bracket in retirement and always will be, subject to tax law changes, obviously.
I was recently talking to a professor who retired at age 77. He was complaining about the horrendous taxes on his 403(b) RMDs. :)

Maybe avoiding taxes is one reason professors just keeping working until they die?...
Well, it's working for Jack Bogle so far as I understand it, since he's still employed by Vanguard to some degree and thus not required to take RMDs...
Last edited by The Wizard on Wed Jun 08, 2016 12:56 pm, edited 1 time in total.
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livesoft
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Re: 401k(s) are not the best way to save for retirement?

Post by livesoft » Wed Jun 08, 2016 12:21 pm

^Hmmm, that solo 401(k) of mine is looking more valuable all the time. ;)
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Re: 401k(s) are not the best way to save for retirement?

Post by Johnnie » Wed Jun 08, 2016 12:29 pm

I'm in the 25 percent bracket now, and with social security will probably be that after 70 too.

However, there may be 2-3 years between full retirement and age 70 when I can work part time, so I've given thought to how to play that - keep making 403b contributions even though I would be in a lower bracket, or just pay the tax and be done, or max the 403b and make some Roth conversion moves from a rollover IRA, paying at the 15 percent rate.

Turns out it doesn't make a life changing difference in taxes, but hey - if we're posting on this site that means we're the type to scrap for every nickel, right? Especially if it's between me and Uncle Sugar who gets that nickel.
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Re: 401k(s) are not the best way to save for retirement?

Post by alaskantraveler » Wed Jun 08, 2016 12:58 pm

The right answer doesn't seem so simple. The right choice is likely dependent on each individuals situation. My wife and I gross about $110k per year total income. We max out one 401k and two TIRAs for a total of about $29k per year into tax advantage accounts. We are able to keep ourselves out of the 25% tax bracket and are only ever in the 15% tax bracket. We plan on always being in the 15% tax bracket after deductions and at this point plan to be in the 15% tax bracket when we retire, hopefully early (current age 31/34). I am not currently contributing to a ROTH, and not sure if I will anytime soon. If I were to start contributing to a Roth my AGI might push us into the 25% tax bracket.

My reasoning would be this for those in the 15% or 25% tax brackets:

Current TB_______TB After____________Expected TB_____Right Choice
______________TIRA Contributions_______in Retirement
25%_______________15%_______________15%___________TIRA
25%_______________15%_______________25%___________TIRA
25%_______________25%_______________15%___________TIRA
25%_______________25%_______________25%___________ROTH?
15%_______________15%_______________15%___________ROTH
15%_______________15%_______________25%___________ROTH
Last edited by alaskantraveler on Wed Jun 08, 2016 1:06 pm, edited 2 times in total.

avalpert
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Re: 410k(s) are not the best way to save for retirement?

Post by avalpert » Wed Jun 08, 2016 1:03 pm

Da5id wrote:
bigred77 wrote:I thought the article was ridiculous at best.

Even if you are in the same tax bracket in retirement as you were in your working years, your deferring 100% of your 401k contributions at your marginal (or sometimes the step above) tax bracket. When you withdraw, your money(excluding SS for now) is taxed at your effective tax rate. The vast majority of retiree's would still come out ahead by utilizing 401k's instead of taxable savings. The vast majority of retiree's in the same tax bracket (or lower) in retirement would still come out ahead by utilizing 401k's instead of Roth 401ks (all else equal).
I thought the article wasn't bad, and the choices are not nearly so obvious as you present.

Money in a 401k is taxed as ordinary income on withdrawal on a RMD schedule out of your control. Money in a tax efficient index fund throws off small qualified dividends (taxed yearly at capital gains rates). When you sell the taxable index fund at the time of your choosing (and with lots of your choosing), the gains are LT capital gains. The distinction is less clear than you are stating. And your ability to TLH the taxable funds as you go is a nice bonus, and for some the ability to donate appreciated shares (or step up the basis on death of the owner) can be significant too.

Not opposed to 401ks, I max mine. But there are clearly trade-offs here that you are not acknowledging, and real value to having some of your money in Roths, some in 401ks, some in taxable...
Even if you never realize any gains or receive any dividends on the taxable money - the only way it can end up better off than having been put in the 401k pre-tax is if the tax rate on the 401k withdrawals is higher than it was on the original income. And again, that is the marginal rate that is the effective rate.

I'm sure there are situations where that is the case, I would also think they are the rare exception.

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Re: 401k(s) are not the best way to save for retirement?

Post by avalpert » Wed Jun 08, 2016 1:05 pm

alaskantraveler wrote:The right answer doesn't seem so simple. The right choice is likely dependent on each individuals situation. My wife and I gross about $110k per year total income. We max out one 401k and two TIRAs for a total of about $29k per year into tax advantage accounts. We are able to keep ourselves out of the 25% tax bracket and are only ever in the 15% tax bracket. We plan on always being in the 15% tax bracket after deductions and at this point plan to be in the 15% tax bracket when we retire, hopefully early (current age 31/34). I am not currently contributing to a ROTH, and not sure if I will anytime soon. If I were to start contributing to a Roth my AGI might push us into the 25% tax bracket.

My reasoning would be this for those in the 15% or 25% tax brackets:

Current TB_______TB After____________Expected TB_____Right Choice
______________TIRA Contributions_______in Retirement
25%_______________15%_______________15%___________TIRA
25%_______________25%_______________15%___________TIRA
25%_______________25%_______________25%___________ROTH?
15%_______________15%_______________15%___________ROTH
15%_______________15%_______________25%___________ROTH

What is your reason for suggesting a Roth when the tax brackets are the same in retirement as upon contribution?

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Re: 401k(s) are not the best way to save for retirement?

Post by dk240t » Wed Jun 08, 2016 1:12 pm

The key thing the article leaves out - pointed out above - your money you elect to save in taxable now instead of 401k is all taxed at your HIGHEST bracket (25%, 28%, 33%, 35%, 39.6%).

In retirement, it is NOT all taxed at the highest bracket. Some is taxed at the lowest bracket (10%), some at the first bracket (15%), some at the next, etc.

That is a huge difference.

Add on top that you won't be paying taxes on savings if you do what he suggests and yes, you will be spending less in retirement than you earned when working (and that neglects that you could have paid off house, no kids on payroll or in college, etc. lowering your retirement spending even more than when you worked even with the same lifestyle).

Anyways, I don't know what politicians will do in the future - but if I have to speculate on it monetarily, I'm going to give them less of my money NOW (ie use up tax deferred space as much as possible). A bird in the hand (or dollar in the pocket) is worth 2 in the bush.

I KNOW I'm not going to get money back in the future that I give them now. I DON'T know what they're going to try to take from me in the future.

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Re: 401k(s) are not the best way to save for retirement?

Post by kd2008 » Wed Jun 08, 2016 1:14 pm

Most comprehensive posts you want to read and understand are the ones below, everything else, I mean everything is hot gas and baloney!

https://thefinancebuff.com/case-against-roth-401k.html

https://thefinancebuff.com/roth-401k-fo ... e-max.html

viewtopic.php?t=14166

If you have access to 401k at work, max it out! The advice cannot be any simpler!

If you are government employee, read this:

https://thefinancebuff.com/most-tsp-par ... h-tsp.html

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Re: 401k(s) are not the best way to save for retirement?

Post by alaskantraveler » Wed Jun 08, 2016 1:29 pm

avalpert wrote:

What is your reason for suggesting a Roth when the tax brackets are the same in retirement as upon contribution?
After your question, I did a few simulations. 3 scenarios.

Scenarios. 30 years, 6% return, $10k TIRA, $8500 ROTH, or $7500 Roth contribution per year. 4% withdrawal/yr after 30years.
If you are in the same tax bracket now as when you retire, all scenarios are a wash. Meaning the TIRA scenario equals the ROTH scenarios after taking out taxes on the withdrawal at 15% or 25%.

This would lead me to think that the only time it is worth it to contribute to a ROTH is if you believe your Tax bracket after retirement will be higher than your current tax bracket.

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Re: 401k(s) are not the best way to save for retirement?

Post by barnaclebob » Wed Jun 08, 2016 1:40 pm

alaskantraveler wrote:
avalpert wrote:

What is your reason for suggesting a Roth when the tax brackets are the same in retirement as upon contribution?
After your question, I did a few simulations. 3 scenarios.

Scenarios. 30 years, 6% return, $10k TIRA, $8500 ROTH, or $7500 Roth contribution per year. 4% withdrawal/yr after 30years.
If you are in the same tax bracket now as when you retire, all scenarios are a wash. Meaning the TIRA scenario equals the ROTH scenarios after taking out taxes on the withdrawal at 15% or 25%.

This would lead me to think that the only time it is worth it to contribute to a ROTH is if you believe your Tax bracket after retirement will be higher than your current tax bracket.
Did you factor in the marginal vs effective tax rate effect mentioned in posts above?

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Re: 401k(s) are not the best way to save for retirement?

Post by bigred77 » Wed Jun 08, 2016 1:50 pm

dk240t wrote:The key thing the article leaves out - pointed out above - your money you elect to save in taxable now instead of 401k is all taxed at your HIGHEST bracket (25%, 28%, 33%, 35%, 39.6%).

In retirement, it is NOT all taxed at the highest bracket. Some is taxed at the lowest bracket (10%), some at the first bracket (15%), some at the next, etc.

That is a huge difference.
Bingo.

This is why I would continue to max out my 401k first even if I expect to be in the same marginal tax bracket in retirement. I might even do it first if I expect to be in the next highest marginal bracket in retirement. Unless I planned to retire close to 70 and was concerned my realized income was going to start making my Social Security taxable, I would strongly favor a 401k to Roth 401k in most situations.

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Re: 401k(s) are not the best way to save for retirement?

Post by avalpert » Wed Jun 08, 2016 1:53 pm

alaskantraveler wrote:
avalpert wrote:

What is your reason for suggesting a Roth when the tax brackets are the same in retirement as upon contribution?
After your question, I did a few simulations. 3 scenarios.

Scenarios. 30 years, 6% return, $10k TIRA, $8500 ROTH, or $7500 Roth contribution per year. 4% withdrawal/yr after 30years.
If you are in the same tax bracket now as when you retire, all scenarios are a wash. Meaning the TIRA scenario equals the ROTH scenarios after taking out taxes on the withdrawal at 15% or 25%.

This would lead me to think that the only time it is worth it to contribute to a ROTH is if you believe your Tax bracket after retirement will be higher than your current tax bracket.
Precisely.

I would add in it is worth contributing to a ROTH when the alternative is no tax-advantaged account. This is the case for people whose income makes them ineligible for deductible IRA contributions but can take advantage of backdoor ROTH contributions without creating significant taxes (i.e. they don't have other IRA balances than the new contribution).

markcoop
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Re: 401k(s) are not the best way to save for retirement?

Post by markcoop » Wed Jun 08, 2016 2:46 pm

The thing is it depends. Even if it makes sense to contribute to a t401K based on reasons above, there's always something that you may not be considering. There was a conversation a couple of weeks ago about the impact of a t401K on financial aid - viewtopic.php?t=191086 . They did change their opinion a bit in that conversation, but the bottom line is you get less financial aid when you contribute to a t401K instead of a Roth. Maybe not enough to sway someone to do a Roth or maybe enough when you factor in other things.
Mark

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Re: 401k(s) are not the best way to save for retirement?

Post by Grogs » Wed Jun 08, 2016 5:08 pm

I've done some scenarios on this. Right now, my 401k money is coming mostly from the 28% bracket, with a small bit in the 25%. It's possible that I'll withdraw some of that money in the 28% bracket pre-SS, but only if I've earned a pretty large pension and I'm leading a pretty luxurious lifestyle in retirement. My thought is that I should be so lucky as to have a problem like that. :-) If things don't work out quite as well, I'll be better off using the traditional 401k option assuming tax rates don't change. Because of that, I'm sticking with the traditional.

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Re: 401k(s) are not the best way to save for retirement?

Post by JW-Retired » Wed Jun 08, 2016 5:55 pm

Grogs wrote:I've done some scenarios on this. Right now, my 401k money is coming mostly from the 28% bracket, with a small bit in the 25%. It's possible that I'll withdraw some of that money in the 28% bracket pre-SS, but only if I've earned a pretty large pension and I'm leading a pretty luxurious lifestyle in retirement.
Did you really mean pre-SS here? If you did, you should instead be worrying about post-SS. Moderate pension + delayed SS + hefty RMDs gets to 28% and above quickly.
JW
Retired at Last

dh
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Re: 401(k)s are not the best way to save for retirement?

Post by dh » Wed Jun 08, 2016 6:16 pm

The Wizard wrote:401, not 410, but not that bad an article.
I've written on this before, that it's good to get your 401/403 tax deferred balance up to a certain level and then start pre paying taxes and do Roth 401/403 contributions if possible.

In my case, I stayed in the 25% marginal tax bracket all though my full-time employment due to maximal 403(B) pre-tax contributions.
I'm now in the 28% bracket in retirement and always will be, subject to tax law changes, obviously.

I figure that somewhere around $1.5M balance in my 403(B), I should have began putting half of my contributions into the Roth 403(B) option that was available to me. Oh, well.

Thing is, the majority of workers, if you believe the newspapers, do NOT max out their tax deferred contributions, and thus will likely not exceed $1M accumulation by age 65, adjusted for inflation. Those folks can ignore that article...
Excellent points, Wizard! "Managing" taxes across one's lifespan to the degree possible makes a great deal of sense. We can hide from taxes by keeping current rates "artificially" low, but the tax man is like a university alumni officer -- they will always find you! Thanks for sharing your thoughtful comments. :sharebeer

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Re: 401k(s) are not the best way to save for retirement?

Post by TomCat96 » Wed Jun 08, 2016 6:59 pm

This is my breakdown.

His suggestions are ultimately 3:

1. Employer Match.
2. Backdoor Roth
3. Buy Insurance as an alternative.

I think people here already agree with #1 and #2. #3 is probably what he's hawking, but he's ambiguous about it. The crux of his argument is a fear of taxes. His argument isn't stupid, but I think his fear of taxes a little irrational. The way he posits his case is this:

"your 401k is sitting duck just waiting for government to sink their teeth into it. Why would you let that happen, and you're all fools if you keep it in govt crosshairs..."

His argument is one of fear. It's one of speculation. It's a fancy. The government is immoral and irresponsible and is on the verge of taking your money away.


The problem with letting fear drive a facially rational line of thought is that fear can be mixed with anything. I can just as easily come up with a concoction on the other side. Fear mixed with reason can and will infect all possible sides of an argument. For that reason, that alone is not a sufficient argument. Why can't the government come after your roth IRA? Because they said so? Are we to get fear to drive us to move money out of our 401k, but proclaim that this same government, looking to sink their teeth into your money, wont go after roths?...that they wont go after insurance?

Fear doesn't pick sides. It is simply a tool. I can just as easily argue that this mans fear doesn't go far enough.--- No! Are you crazy? You're naive as hell if you think congress can't and wont pass a law to levy taxes or penalties or roths or insurance at some point before you retire!!

That's the same argument. I just chose to draw the line at a different point. Nobody debates that Congress after all has the power to levy taxes, or create additional fees or penalties, even on money that has already been taxed already.

His argument fails. His position however--that 401ks are not the best way to save for retirement--is a question that we merely evaluate every year objectively without emotional deference to any particular vehicle. Truth does not become false simply because one man fails to make the case for it.

However in this case, as of the current tax laws, his position is untrue for a vast majority of individuals.

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Re: 401k(s) are not the best way to save for retirement?

Post by Grogs » Wed Jun 08, 2016 7:29 pm

JW-Retired wrote:
Grogs wrote:I've done some scenarios on this. Right now, my 401k money is coming mostly from the 28% bracket, with a small bit in the 25%. It's possible that I'll withdraw some of that money in the 28% bracket pre-SS, but only if I've earned a pretty large pension and I'm leading a pretty luxurious lifestyle in retirement.
Did you really mean pre-SS here? If you did, you should instead be worrying about post-SS. Moderate pension + delayed SS + hefty RMDs gets to 28% and above quickly.
JW
Yeah, pre-SS. I'm hoping to retire somewhere between 55 and 60 (which is still a long way off). That should give me quite a while to mitigate the effects of RMDs before SS becomes an issue - delay the pension until 62 (there's a 5% / yr penalty before then) and withdraw to the top of the 25% bracket for example. IF I make it to 70, and IF I still owe a big RMD, and IF SS is mostly still there then, like I said, it's a pretty good problem to have. At least compared to the alternative of not having enough.

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Re: 401k(s) are not the best way to save for retirement?

Post by JW-Retired » Wed Jun 08, 2016 7:39 pm

Grogs wrote:
JW-Retired wrote:
Grogs wrote:I've done some scenarios on this. Right now, my 401k money is coming mostly from the 28% bracket, with a small bit in the 25%. It's possible that I'll withdraw some of that money in the 28% bracket pre-SS, but only if I've earned a pretty large pension and I'm leading a pretty luxurious lifestyle in retirement.
Did you really mean pre-SS here? If you did, you should instead be worrying about post-SS. Moderate pension + delayed SS + hefty RMDs gets to 28% and above quickly.
JW
Yeah, pre-SS. I'm hoping to retire somewhere between 55 and 60 (which is still a long way off). That should give me quite a while to mitigate the effects of RMDs before SS becomes an issue - delay the pension until 62 (there's a 5% / yr penalty before then) and withdraw to the top of the 25% bracket for example. IF I make it to 70, and IF I still owe a big RMD, and IF SS is mostly still there then, like I said, it's a pretty good problem to have. At least compared to the alternative of not having enough.
OK, early retirement should take care of most everything I was worried about. :beer
JW
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Re: 401k(s) are not the best way to save for retirement?

Post by Johnnie » Wed Jun 08, 2016 7:41 pm

JW-Retired wrote:
Grogs wrote:I've done some scenarios on this. Right now, my 401k money is coming mostly from the 28% bracket, with a small bit in the 25%. It's possible that I'll withdraw some of that money in the 28% bracket pre-SS, but only if I've earned a pretty large pension and I'm leading a pretty luxurious lifestyle in retirement.
Did you really mean pre-SS here? If you did, you should instead be worrying about post-SS. Moderate pension + delayed SS + hefty RMDs gets to 28% and above quickly.
JW
Roger that. If you don't have a handle on the TAXES part of your delayed SS, small pension and super-saver RMDs, you are in for a shock and a scaling back of those Tahiti winters you have planned. (Or Naples FL ones.)
"I know nothing."

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Re: 401k(s) are not the best way to save for retirement?

Post by frugalecon » Wed Jun 08, 2016 7:57 pm

All of my contributions come from income that would otherwise be taxed at the 28% rate, plus an 8.5% state tax rate. Based on my analysis, much of the withdrawal will be taxed at 25%, and none at the 33% level unless stock gains are quite favorable, in which case I will be quite well off. Plus, I always have the opportunity to relocate to a lower tax jurisdiction, from a state tax pov. In a nutshell, I am very pleased to take the tax reduction today.

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Re: 401k(s) are not the best way to save for retirement?

Post by Toons » Wed Jun 08, 2016 8:03 pm

I'm counting my blessings I had the foresight to invest in a 401k for decades.
Taxes.
I will pay them.
It is what it is.
Tax deferred or tax free compounding,,,is
an extraordinary component of wealth creation. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: 410k(s) are not the best way to save for retirement?

Post by cherijoh » Wed Jun 08, 2016 9:04 pm

markcoop wrote: I do believe you probably want a decent amount in t401k/IRAs, but putting some in ROTH IRAs gives you more options. I hope to do some conversions as well, but don't want to be limited by the amount of conversions available to me in retirement in low tax brackets. Having said that, the article is extreme in going the other way (put all in ROTH). To me, you should put money in both buckets. I think approaching retirement with 75% t401k/IRA and 25% ROTH seems like a good place to be.
Mark, it all depends on how far along towards retirement you are - some of us started investing a decade or more before the Roth came into play in 1997. :happy So I'm happy to be at 63% traditional/13% Roth/24% taxable. I was able to boost my Roth through some opportunistic conversions in 2008/09 when my income AND fund prices were down. I also plan to do some additional Roth conversions in the next few years once I retire.

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Re: 410k(s) are not the best way to save for retirement?

Post by randomguy » Wed Jun 08, 2016 11:26 pm

KlangFool wrote:
markcoop wrote:
KlangFool wrote:In my opinion, you should have money in all 3 buckets. And, you could have that if you contribute more to Trad. 401K and put the tax savings into taxable account. Why that is not a good option?
KlangFool
I don't think we disagree. I have maxed out my t401K and Roth IRAs for many years. But that worked for me because I was maxing out both accounts. How you get money into the different buckets may be different for different people. For example, perhaps a younger person in the 15% bracket should put 100% into Roth accounts.
markcoop,

I agreed. At 15%, it is a gray area. Either Roth 401K or Trad. 401K is fine. But, the bias should be towards Roth 401K. At 25% and above, Trad. 401K should be the choice for 99+% of people.

KlangFool
Bias should be towards traditional. I am a big fan of putting off taxes:) People like to talk about 15% versus 25% but in reality that only matters if you expect to change brackets in the future (or the brackets to change). If you are a couple earning 80k/year and don't every expect to go up, then doing the roth might not make sense given that when you retire you could very well be laregely 10% bracket. Or maybe you pick up 5k of ACA credit and 500 bucks of savers credit by dropping your income from 80k to 50k. Obviously trying to predict future tax and income situation is about as easy is predicting the stock market:) In the end the traditional versus ROTH just doesn't matter much. It takes odd situations to get huge (more than 10% or so) differences in outcomes. Most of the time you are just shuffling when you pay the taxes around. Of course that is why that debate will never be settled.

Down in the 0% and 10% range I find it hard to justify traditional though.:)

Da5id
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Re: 401k(s) are not the best way to save for retirement?

Post by Da5id » Thu Jun 09, 2016 10:07 am

My post above was weak, not clear what I was thinking (maybe of nondeductable IRA vs efficient taxable fund, not sure). Edited it to indicate that. Interesting roast of the article here:
https://earlyretirementnow.com/2016/06/ ... m-the-web/

[edit to fix wrong link]
Last edited by Da5id on Fri Jun 10, 2016 6:47 am, edited 1 time in total.

KlangFool
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Re: 410k(s) are not the best way to save for retirement?

Post by KlangFool » Thu Jun 09, 2016 10:27 am

randomguy wrote:
KlangFool wrote:
markcoop wrote:
KlangFool wrote:In my opinion, you should have money in all 3 buckets. And, you could have that if you contribute more to Trad. 401K and put the tax savings into taxable account. Why that is not a good option?
KlangFool
I don't think we disagree. I have maxed out my t401K and Roth IRAs for many years. But that worked for me because I was maxing out both accounts. How you get money into the different buckets may be different for different people. For example, perhaps a younger person in the 15% bracket should put 100% into Roth accounts.
markcoop,

I agreed. At 15%, it is a gray area. Either Roth 401K or Trad. 401K is fine. But, the bias should be towards Roth 401K. At 25% and above, Trad. 401K should be the choice for 99+% of people.

KlangFool
Bias should be towards traditional. I am a big fan of putting off taxes:) People like to talk about 15% versus 25% but in reality that only matters if you expect to change brackets in the future (or the brackets to change). If you are a couple earning 80k/year and don't every expect to go up, then doing the roth might not make sense given that when you retire you could very well be laregely 10% bracket. Or maybe you pick up 5k of ACA credit and 500 bucks of savers credit by dropping your income from 80k to 50k. Obviously trying to predict future tax and income situation is about as easy is predicting the stock market:) In the end the traditional versus ROTH just doesn't matter much. It takes odd situations to get huge (more than 10% or so) differences in outcomes. Most of the time you are just shuffling when you pay the taxes around. Of course that is why that debate will never be settled.

Down in the 0% and 10% range I find it hard to justify traditional though.:)
randomguy,

<<In the end the traditional versus ROTH just doesn't matter much. >>

Yes and no.

Yes, if a person can reach the retirement age with full employment and no serious financial emergency, it does not matter.

No. If a person face long period of unemployment in early accumulation stage of their lives, having more money in 401K account could be a matter of survival. Trad. 401K account is the final buffer and emergency fund. A person could withdraw the money out with 10% penalty. And, if a person is in serious financial trouble, the income level should be low enough that even after paying 10% penalty, the total tax burden should be less than 25%.

I have both the fortunate and unfortunate circumstances of not having any form of job security. And, the kind of circumstances are very bad.

A) Unfortunate,

Houston Oil Bust, Texas Saving and Loan Crisis, Asian Currency Crisis, Telecom boom and bust, Real Estate Boom and Bust. We are back to Oil Bust again.

B) Fortunate

I survive in spite of all those crises. My best time is facing annual laid off of my employer. My worst time is quarterly laid off. It gets to the point that I assume my job will only last a few months. This had been the same for the last 10+ years.

KlangFool

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Re: 410k(s) are not the best way to save for retirement?

Post by ND Fan 1 » Thu Jun 09, 2016 11:46 am

markcoop wrote:
KlangFool wrote:In my opinion, you should have money in all 3 buckets. And, you could have that if you contribute more to Trad. 401K and put the tax savings into taxable account. Why that is not a good option?
KlangFool
I don't think we disagree. I have maxed out my t401K and Roth IRAs for many years. But that worked for me because I was maxing out both accounts. How you get money into the different buckets may be different for different people. For example, perhaps a younger person in the 15% bracket should put 100% into Roth accounts.
This is where I'm at right now, 31 years old and in the 15% tax bracket, helps having 3 children worth of deductions. I'm also a Federal employee, working towards a pension. I have been doing the Roth 401K (TSP) since it came out in 2012 and have been Roth IRAs since 2008. My salary will slowly go up and will start being on the 15/25% border in about 5-7 years. Then I plan on switching to Trad 401k to stay in the 15% bracket as long as possible. The other variable is my wife's income, right she works 1 day a week as a nurse so she can care for our children, if she ever went back full time, we would shoot out of the 15% bracket pretty quick, then I would do Trad 401k to get back down.

Right now I estimate my pension to be around $60K in today dollars, so that plus SS for both my wife and I and I might be pushing the 25% bracket in retirement, esp without the dependent deductions. I feel pretty confident in sticking with Roth 401k or maybe doing 75% Roth and 25% Trad 401k and then remain doing the Roth IRA.

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Re: 401k(s) are not the best way to save for retirement?

Post by ND Fan 1 » Thu Jun 09, 2016 11:53 am

kd2008 wrote:Most comprehensive posts you want to read and understand are the ones below, everything else, I mean everything is hot gas and baloney!

https://thefinancebuff.com/case-against-roth-401k.html

https://thefinancebuff.com/roth-401k-fo ... e-max.html

viewtopic.php?t=14166

If you have access to 401k at work, max it out! The advice cannot be any simpler!

If you are government employee, read this:

https://thefinancebuff.com/most-tsp-par ... h-tsp.html
Some good articles, thank you. As a military/gov't employees, Reaffirms some of what I was thinking in my post above. With a decent pension and currently in the 15% bracket, the majority of my TSP contributions will be Roth

EarlyRetirementNow
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Re: 401k(s) are not the best way to save for retirement?

Post by EarlyRetirementNow » Thu Jun 09, 2016 3:02 pm

Da5id wrote:My post above was weak, not clear what I was thinking (maybe of nondeductable IRA vs efficient taxable fund, not sure). Edited it to indicate that. Interesting roast of the article here:

https://earlyretirementnow.com/2016/06/ ... -roth-ira/
Hi, thanks for quoting me and my post. Actually, the "roast" of the Kiplinger article is here:
https://earlyretirementnow.com/2016/06/ ... m-the-web/
Quite appalling what they post these days on Kiplinger.

The other post is our proposal for creating a synthetic Roth IRA in a taxable account (through the correct level of leverage). This would not be subject to any size restrictions, unlike the Roth with its annual contribution limits:
https://earlyretirementnow.com/2016/06/ ... -roth-ira/

Da5id
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Re: 401k(s) are not the best way to save for retirement?

Post by Da5id » Fri Jun 10, 2016 6:46 am

EarlyRetirementNow wrote:
Da5id wrote:My post above was weak, not clear what I was thinking (maybe of nondeductable IRA vs efficient taxable fund, not sure). Edited it to indicate that. Interesting roast of the article here:

https://earlyretirementnow.com/2016/06/ ... -roth-ira/
Hi, thanks for quoting me and my post. Actually, the "roast" of the Kiplinger article is here:
https://earlyretirementnow.com/2016/06/ ... m-the-web/
Quite appalling what they post these days on Kiplinger.

The other post is our proposal for creating a synthetic Roth IRA in a taxable account (through the correct level of leverage). This would not be subject to any size restrictions, unlike the Roth with its annual contribution limits:
https://earlyretirementnow.com/2016/06/ ... -roth-ira/
Sigh. I'll fix my post. Post in haste, repent at leisure.

EarlyRetirementNow
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Re: 410k(s) are not the best way to save for retirement?

Post by EarlyRetirementNow » Fri Jun 10, 2016 12:01 pm

ND Fan 1 wrote: Right now I estimate my pension to be around $60K in today dollars, so that plus SS for both my wife and I and I might be pushing the 25% bracket in retirement, esp without the dependent deductions. I feel pretty confident in sticking with Roth 401k or maybe doing 75% Roth and 25% Trad 401k and then remain doing the Roth IRA.
You are obviously the prime example for someone who wants the Roth 401k. Congrats, a lot of pension income in retirement is a good problem to have :happy
But for most people it's the other way around and for the rest of us the regular 401k is the best choice.

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Re: 401k(s) are not the best way to save for retirement?

Post by BogleBoogie » Fri Jun 10, 2016 3:58 pm

Good article!

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Watty
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Re: 401k(s) are not the best way to save for retirement?

Post by Watty » Fri Jun 10, 2016 5:48 pm

One thing to keep in mind is that most people that have enough to be in a high retirement tax bracket will leave a large estate and whoever inherits it might be in a lower, or zero, tax bracket when they eventually spend it. It very well could make sense to pay higher taxes for ten years so that your kids,grand-kids, or a charity could spend the inheritance in a lower tax bracket for decades to come.

Bypassing the 401k because you might be in a high tax bracket in retirement also has the risk that something will happen before you actually retire that will result in you being in a lower than hoped for tax bracket. I have seen lots of people run into health, career, or life setbacks in their 40s and 50s that greatly reduced their planned retirement budget.
The Wizard wrote:In my case, I stayed in the 25% marginal tax bracket all though my full-time employment due to maximal 403(B) pre-tax contributions.
I'm now in the 28% bracket in retirement and always will be, subject to tax law changes, obviously.
Being able to defer the taxes for decades and let the investments grow tax deferred is worth a lot. I didn't try to do the math but I suspect that the decades of tax deferral is worth a lot more than the 3% extra in taxes.

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Re: 401k(s) are not the best way to save for retirement?

Post by The Wizard » Fri Jun 10, 2016 6:19 pm

Watty wrote: ...Being able to defer the taxes for decades and let the investments grow tax deferred is worth a lot. I didn't try to do the math but I suspect that the decades of tax deferral is worth a lot more than the 3% extra in taxes.
Correct.
And it takes a least two or three decades for most people to accumulate enough to retire on.
So at some point people start running projected numbers in their 50s. At that point, if their projected retirement income is large enough, consider putting a portion of 401k or 403b new money into the Roth side instead of all on the traditional side.

In my case, I had close to $50,000 per year going into my 403b the last five years of full-time work, including employer "matching" funds. I feel I should have diverted a portion of my contributions into the Roth 403b option those last 4-5 years.
But it's not a huge deal...
Attempted new signature...

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