401k vs Traditional IRA

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BigPrince
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401k vs Traditional IRA

Post by BigPrince » Thu Mar 29, 2018 7:37 pm

Suppose one has access to identical funds at the same costs inside their 401k plan and traditional IRA.

Suppose the most you could afford to place toward retirement 5,500.

Which investment vehicle would you pick and why?

Thanks.

tmcc
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Re: 401k vs Traditional IRA

Post by tmcc » Thu Mar 29, 2018 7:47 pm

they both have identical effective tax treatment provided you qualify for the full deduction to AGI

aredhel
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Re: 401k vs Traditional IRA

Post by aredhel » Thu Mar 29, 2018 7:56 pm

IRA, simply because it's 100% under my control.

02nz
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Re: 401k vs Traditional IRA

Post by 02nz » Thu Mar 29, 2018 7:58 pm

If there are no matching employer contributions in the 401k, and there's no difference in expenses, then I don't see any real difference - eventually the 401k would likely get rolled over into a tIRA anyway. The only thing I can think of would be if, despite only being able to put in $5500 before taxes, you want to leave the door open to the possibility of an additional retirement contribution. If you put in the money into the 401k, you can still make a contribution to a traditional or Roth IRA until the tax filing deadline the following year; the other way around doesn't work.

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flamesabers
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Re: 401k vs Traditional IRA

Post by flamesabers » Thu Mar 29, 2018 9:08 pm

I like contributing to an IRA because I can make my contribution on January 2nd and be done for the rest of the fiscal year. With 401k accounts on the other hand, you can only make a contribution via payroll deduction. However, with 401k contributions you get an immediate tax deduction versus having to wait until you file your taxes with an IRA.

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KlingKlang
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Re: 401k vs Traditional IRA

Post by KlingKlang » Thu Mar 29, 2018 9:21 pm

If you leave your job after you turn 55 you can make withdrawals from your 401(k) without the 10 percent early withdrawal penalty, whereas you have to wait until you are 59 1/2 for the Traditional IRA. I know that there are exceptions for the tIRA but you don't have to worry about them with the 401(k).

Depending on your state there may be different liability legal protections for 401(k)s and tIRAs.

Dottie57
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Re: 401k vs Traditional IRA

Post by Dottie57 » Thu Mar 29, 2018 9:30 pm

KlingKlang wrote:
Thu Mar 29, 2018 9:21 pm
If you leave your job after you turn 55 you can make withdrawals from your 401(k) without the 10 percent early withdrawal penalty, whereas you have to wait until you are 59 1/2 for the Traditional IRA. I know that there are exceptions for the tIRA but you don't have to worry about them with the 401(k).

Depending on your state there may be different liability legal protections for 401(k)s and tIRAs.
This.

jpsc
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Re: 401k vs Traditional IRA

Post by jpsc » Thu Mar 29, 2018 9:34 pm

Not all 401K supports withdraw at 55. I checked with my 401K at fidelity and they say no

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Watty
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Re: 401k vs Traditional IRA

Post by Watty » Thu Mar 29, 2018 9:42 pm

A huge advantage of the 401k is that the contributions are automatically done through payroll withholdings so they actually happen.

More than one person has intended to make an IRA contribution but for one reason or another it never do it.

PFInterest
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Re: 401k vs Traditional IRA

Post by PFInterest » Thu Mar 29, 2018 11:48 pm

BigPrince wrote:
Thu Mar 29, 2018 7:37 pm
Suppose one has access to identical funds at the same costs inside their 401k plan and traditional IRA.

Suppose the most you could afford to place toward retirement 5,500.

Which investment vehicle would you pick and why?

Thanks.
Why has no one mentioned 5500 isn't enough for retirement? Also 401k.

DSInvestor
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Re: 401k vs Traditional IRA

Post by DSInvestor » Fri Mar 30, 2018 12:00 am

If your 401k offers an employer match that requires your contribution, you should use the 401k.

If you're covered by an employer plan, you may not be able to deduct IRA contributions if your income exceeds certain limits. See IRS page on IRA deduction limits:
https://www.irs.gov/retirement-plans/ir ... ion-limits

In most states, assets in 401k plans are more protected from creditors than assets in IRA accounts.
Wiki

motorcyclesarecool
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Re: 401k vs Traditional IRA

Post by motorcyclesarecool » Fri Mar 30, 2018 5:10 am

§401(k) because
1. You can take a loan from it to avoid bankruptcy if you’re in a crisis.
2. If you receive a windfall you’ll have tax advantaged space ready-to-go, any time of the year. §401(k) contributions take longer and you’re limited by the size of your paycheck.
3. You don’t want to forego any employer match.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

cherijoh
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Re: 401k vs Traditional IRA

Post by cherijoh » Fri Mar 30, 2018 5:42 am

Duplicate post
Last edited by cherijoh on Fri Mar 30, 2018 4:53 pm, edited 1 time in total.

cherijoh
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Re: 401k vs Traditional IRA

Post by cherijoh » Fri Mar 30, 2018 6:12 am

jpsc wrote:
Thu Mar 29, 2018 9:34 pm
Not all 401K supports withdraw at 55. I checked with my 401K at fidelity and they say no
Plans do not have to allow in-service withdrawals, but that isn't what was being referenced in the post to which you responded.

The 55 exemption to early withdrawal penalty is an IRS rule. If you leave your job, you always have the option of withdrawing your money from your 401k (or rolling it over to an IRA). Your employer doesn't have to offer you the ability to do partial withdrawals, which negates most (all?) of the benefits of the exemption. But it is still an option.

overst33r
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Re: 401k vs Traditional IRA

Post by overst33r » Fri Mar 30, 2018 7:24 am

tmcc wrote:
Thu Mar 29, 2018 7:47 pm
they both have identical effective tax treatment provided you qualify for the full deduction to AGI
Can someone explain how this is true?
A 401k is not subject to FICA tax, while a tIRA is. That's a good chunk of difference in favor of the 401k.

peppers
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Re: 401k vs Traditional IRA

Post by peppers » Fri Mar 30, 2018 7:54 am

overst33r wrote:
Fri Mar 30, 2018 7:24 am
tmcc wrote:
Thu Mar 29, 2018 7:47 pm
they both have identical effective tax treatment provided you qualify for the full deduction to AGI
Can someone explain how this is true?
A 401k is not subject to FICA tax, while a tIRA is. That's a good chunk of difference in favor of the 401k.
Here you go....

https://www.irs.gov/retirement-plans/re ... income-tax
"..the cavalry ain't comin' kid, you're on your own..."

cherijoh
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Re: 401k vs Traditional IRA

Post by cherijoh » Fri Mar 30, 2018 8:00 am

overst33r wrote:
Fri Mar 30, 2018 7:24 am
tmcc wrote:
Thu Mar 29, 2018 7:47 pm
they both have identical effective tax treatment provided you qualify for the full deduction to AGI
Can someone explain how this is true?
A 401k is not subject to FICA tax, while a tIRA is. That's a good chunk of difference in favor of the 401k.
Huh? A 401k IS subject to FICA tax. Check your W-2 and you will see that your SS wage basis is higher than your Federal or State taxable earnings basis.

Edited to Add: I see peppers beat me to it.

LOLC2k
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Re: 401k vs Traditional IRA

Post by LOLC2k » Fri Mar 30, 2018 8:08 am

. If you only have 5,500 you can save, that's probably exactly the person who should do a roth IRA. Second choice is roth 401k. Third would be 401k.
Dead last is tIRA, unless you are SURE you will never want to use a backdoor roth. If you are sure of that, tIRA moves to third place. If you only have 5,500 for the year to save, your marginal tax rate should be really, really low. Like, 10% low. If your state has income taxes, most tend to tax roth and traditional the same way (most treat them like roths, you pay when it goes in regardless). Local is often the same. You really want to save just 10% in taxes?

Edit: What is your income? It would help me be SURE that's the right advice. Heck, if your low enough you may not even have a tax liability, in which case the tIRA is a real bad deal comparatively.

overst33r
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Re: 401k vs Traditional IRA

Post by overst33r » Fri Mar 30, 2018 8:10 am

peppers wrote:
Fri Mar 30, 2018 7:54 am
overst33r wrote:
Fri Mar 30, 2018 7:24 am
tmcc wrote:
Thu Mar 29, 2018 7:47 pm
they both have identical effective tax treatment provided you qualify for the full deduction to AGI
Can someone explain how this is true?
A 401k is not subject to FICA tax, while a tIRA is. That's a good chunk of difference in favor of the 401k.
Here you go....

https://www.irs.gov/retirement-plans/re ... income-tax
Thanks. My mistake.

retiredjg
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Re: 401k vs Traditional IRA

Post by retiredjg » Fri Mar 30, 2018 8:39 am

BigPrince wrote:
Thu Mar 29, 2018 7:37 pm
Which investment vehicle would you pick and why?
If were in a field that is subject to many lawsuits, I would probably choose the 401k because in some states, it might have more protection from creditors.

Other than that, IF the contribution to the IRA is deductible (that's a pretty big IF for many people), I don't think it matters much.

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Earl Lemongrab
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Re: 401k vs Traditional IRA

Post by Earl Lemongrab » Fri Mar 30, 2018 12:04 pm

cherijoh wrote:
Fri Mar 30, 2018 5:42 am
A company may not support in-service withdrawals prior to age 59.5.
For employee deferrals or Roth contributions no company is permitted to allow in-service distributions before age 59-1/2 for non-hardship cases.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

bling
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Re: 401k vs Traditional IRA

Post by bling » Fri Mar 30, 2018 1:08 pm

401k > IRA because it allows you to perform a backdoor roth contribution.

BigPrince
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Re: 401k vs Traditional IRA

Post by BigPrince » Fri Mar 30, 2018 1:55 pm

LOLC2k wrote:
Fri Mar 30, 2018 8:08 am
. If you only have 5,500 you can save, that's probably exactly the person who should do a roth IRA. Second choice is roth 401k. Third would be 401k.
Dead last is tIRA, unless you are SURE you will never want to use a backdoor roth. If you are sure of that, tIRA moves to third place. If you only have 5,500 for the year to save, your marginal tax rate should be really, really low. Like, 10% low. If your state has income taxes, most tend to tax roth and traditional the same way (most treat them like roths, you pay when it goes in regardless). Local is often the same. You really want to save just 10% in taxes?

Edit: What is your income? It would help me be SURE that's the right advice. Heck, if your low enough you may not even have a tax liability, in which case the tIRA is a real bad deal comparatively.
Thank you for the interest, I am more interested in this question as a thought experiment than to my specific circumstances.

I really appreciate the insights, particularly that 401ks may offer legal protections that Traditional IRA's may not have in some states and the possible option for hardship withdrawals in some 401k plans.

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KlingKlang
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Re: 401k vs Traditional IRA

Post by KlingKlang » Fri Mar 30, 2018 3:30 pm

cherijoh wrote:
Fri Mar 30, 2018 6:12 am
The 55 exemption to early withdrawal penalty is an IRS rule. If you leave your job, you always have the option of withdrawing your money from your 401k (or rolling it over to an IRA). Your employer doesn't have to offer you the ability to do partial withdrawals, which negates most (all?) of the benefits of the exemption. But it is still an option.
I didn't know that your ex-employer doesn't have to let you do partial 401(k) withdrawals.

If so, is there any reason why someone over the age of 55 can't withdraw their entire 401(k), keep out enough for living expenses until they turn 59 1/2 (and pay the tax on it), and roll over the balance into a tIRA inside of the 60 day limit?

BogleMelon
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Re: 401k vs Traditional IRA

Post by BogleMelon » Fri Mar 30, 2018 4:04 pm

flamesabers wrote:
Thu Mar 29, 2018 9:08 pm
However, with 401k contributions you get an immediate tax deduction versus having to wait until you file your taxes with an IRA.
Well, with IRA, you can still calculate your tax deduction in advance, and adjust your W4 accordingly and get a fatter paycheck.
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flamesabers
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Re: 401k vs Traditional IRA

Post by flamesabers » Fri Mar 30, 2018 4:29 pm

BogleMelon wrote:
Fri Mar 30, 2018 4:04 pm
flamesabers wrote:
Thu Mar 29, 2018 9:08 pm
However, with 401k contributions you get an immediate tax deduction versus having to wait until you file your taxes with an IRA.
Well, with IRA, you can still calculate your tax deduction in advance, and adjust your W4 accordingly and get a fatter paycheck.
This is true if you have a consistent/predictable source of income. If you get a variable bonus or work part-time jobs in addition to a full-time job, it can be much more difficult to make accurate W-4 adjustments.

cherijoh
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Re: 401k vs Traditional IRA

Post by cherijoh » Fri Mar 30, 2018 4:51 pm

KlingKlang wrote:
Fri Mar 30, 2018 3:30 pm
cherijoh wrote:
Fri Mar 30, 2018 6:12 am
The 55 exemption to early withdrawal penalty is an IRS rule. If you leave your job, you always have the option of withdrawing your money from your 401k (or rolling it over to an IRA). Your employer doesn't have to offer you the ability to do partial withdrawals, which negates most (all?) of the benefits of the exemption. But it is still an option.
I didn't know that your ex-employer doesn't have to let you do partial 401(k) withdrawals.

If so, is there any reason why someone over the age of 55 can't withdraw their entire 401(k), keep out enough for living expenses until they turn 59 1/2 (and pay the tax on it), and roll over the balance into a tIRA inside of the 60 day limit?
My current employer has a minimum "age + years of service" rule in place to define "retirement" - people that meet that definition have more options for how they withdraw money from the 401k including structured payments over a 5, 10, or 15 year term. Anyone who leaves the company but doesn't meet that minimum has only 3 options: (1) leave the money in the 401k after they quit, (2) roll it over into an IRA or (3) withdraw the entire balance.

This is all plan dependent, so read your plan documents! Lots of people assume that the IRS dictates the rules (like they do with IRAs) and that you are permitted to withdraw money at any time, for as much as you like, whenever you want with only a limited number of restrictions (e.g., early withdrawal penalty before 59.5, mandatory distributions at 70.5). Workplace plans are different!

FYI - if you take the distribution in cash and do a rollover within the 60 day limit, I believe there is 20% mandatory withholding on the entire amount withdrawn. (This isn't the case for trustee-to-trustee transfers). You would then get a tax refund on any excess taxes you paid for the part that you subsequently rolled over into an IRA. So I guess it depends on how much of the total you want to keep vs. roll over. If you were taking out 5 years of expenses, the refund you get next year could cover expenses for later so you might be able to make it work for you.

retiredjg
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Re: 401k vs Traditional IRA

Post by retiredjg » Fri Mar 30, 2018 6:13 pm

KlingKlang wrote:
Fri Mar 30, 2018 3:30 pm
If so, is there any reason why someone over the age of 55 can't withdraw their entire 401(k), keep out enough for living expenses until they turn 59 1/2 (and pay the tax on it), and roll over the balance into a tIRA inside of the 60 day limit?
I believe that would trigger a 10% penalty on the part that did not make it into the IRA.

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Earl Lemongrab
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Re: 401k vs Traditional IRA

Post by Earl Lemongrab » Sat Mar 31, 2018 9:33 am

retiredjg wrote:
Fri Mar 30, 2018 6:13 pm
KlingKlang wrote:
Fri Mar 30, 2018 3:30 pm
If so, is there any reason why someone over the age of 55 can't withdraw their entire 401(k), keep out enough for living expenses until they turn 59 1/2 (and pay the tax on it), and roll over the balance into a tIRA inside of the 60 day limit?
I believe that would trigger a 10% penalty on the part that did not make it into the IRA.
The age 55 rule would be in effect if they have left the employer.
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columbia
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Re: 401k vs Traditional IRA

Post by columbia » Sat Mar 31, 2018 9:39 am

Max 401k + max Roth

No one knows where taxes will be in the future.

retiredjg
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Re: 401k vs Traditional IRA

Post by retiredjg » Sat Mar 31, 2018 9:52 am

Earl Lemongrab wrote:
Sat Mar 31, 2018 9:33 am
retiredjg wrote:
Fri Mar 30, 2018 6:13 pm
KlingKlang wrote:
Fri Mar 30, 2018 3:30 pm
If so, is there any reason why someone over the age of 55 can't withdraw their entire 401(k), keep out enough for living expenses until they turn 59 1/2 (and pay the tax on it), and roll over the balance into a tIRA inside of the 60 day limit?
I believe that would trigger a 10% penalty on the part that did not make it into the IRA.
The age 55 rule would be in effect if they have left the employer.
Edited answer: It appears it would if I am understanding this link correctly (about half way down).

https://www.irs.gov/taxtopics/tc558


However, there would be a 20% mandatory withholding for federal taxes that would have to be made up if you want your 401k to stay the same size. That's a big chunk of change for a lot of people. I'm thinking a lot of people would not be able to manage it. I suppose there would not be a penalty on it and you would get the money back at tax time....but seems like a pretty big burden to me or it leaves your 401k with a lot less in it.

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FiveK
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Re: 401k vs Traditional IRA

Post by FiveK » Sat Mar 31, 2018 10:18 am

If one can afford only $5500, the income may be low enough to qualify for the earned income credit. In that case, the 401k reduces both Form 1040 line 7 and AGI, while the tIRA reduces only AGI, making the 401k better (or at least no worse) than the tIRA.

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willthrill81
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Re: 401k vs Traditional IRA

Post by willthrill81 » Sat Mar 31, 2018 10:52 am

Dottie57 wrote:
Thu Mar 29, 2018 9:30 pm
KlingKlang wrote:
Thu Mar 29, 2018 9:21 pm
If you leave your job after you turn 55 you can make withdrawals from your 401(k) without the 10 percent early withdrawal penalty, whereas you have to wait until you are 59 1/2 for the Traditional IRA. I know that there are exceptions for the tIRA but you don't have to worry about them with the 401(k).

Depending on your state there may be different liability legal protections for 401(k)s and tIRAs.
This.
A slight clarification: the 'age 55 rule' applies to the calendar year you turn 55, regardless of whether you have actually attained that age. For instance, if I turn 55 on Dec. 31st, I can separate from my employer on Jan. 1st of that same calendar year and take full advantage of the rule.
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teen persuasion
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Re: 401k vs Traditional IRA

Post by teen persuasion » Sat Mar 31, 2018 12:10 pm

FiveK wrote:
Sat Mar 31, 2018 10:18 am
If one can afford only $5500, the income may be low enough to qualify for the earned income credit. In that case, the 401k reduces both Form 1040 line 7 and AGI, while the tIRA reduces only AGI, making the 401k better (or at least no worse) than the tIRA.
This!

T401k is much more advantageous for us than tIRA, due to the EITC. The EITC phaseout rate is 21%, so $5500 in t401k would net us $1155 in federal refundable credits, plus another 30% of that for state match of EITC, $346. So > $1500 for using 401k instead of tIRA.

Putting funds in the 401k maximizes our refundable credits, which we turn around and use to fund our Roth IRAs, so we can save much more by using the 401k first.

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Earl Lemongrab
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Re: 401k vs Traditional IRA

Post by Earl Lemongrab » Sat Mar 31, 2018 12:44 pm

retiredjg wrote:
Sat Mar 31, 2018 9:52 am
However, there would be a 20% mandatory withholding for federal taxes that would have to be made up if you want your 401k to stay the same size. That's a big chunk of change for a lot of people. I'm thinking a lot of people would not be able to manage it. I suppose there would not be a penalty on it and you would get the money back at tax time....but seems like a pretty big burden to me or it leaves your 401k with a lot less in it.
If the entire distribution is cash to the employee, then there would be withholding. That would depend on the particular plan's rules. For instance, they might require a total distribution but split that into cash + direct rollover upon request. There wouldn't be any penalty.
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