Why not post-tax investment in US for people from Home Country - India

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James1907
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Why not post-tax investment in US for people from Home Country - India

Post by James1907 » Tue Jul 09, 2019 10:35 pm

Why not just invest post tax money in a three fund portfolio instead of putting in 401k, Roth401k etc., If the retiree doesn't work after 59 1/2 his/her ordinary/taxable income will be 0$ and when the portfolio is sold he/she might get taxed based on long term investments? or can someone share some kind of calculator to find out the actual returns for it.
Last edited by James1907 on Thu Jul 11, 2019 6:02 pm, edited 2 times in total.

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White Coat Investor
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Re: Why not post-tax investment?

Post by White Coat Investor » Tue Jul 09, 2019 11:14 pm

If your retirement income will be low enough that you'll be in the 0% capital gains bracket in retirement, you will almost surely be better off using a tax-deferred account now and taking money out in the very low tax brackets. If your income really isn't all that high now, I'd still do a Roth account if it were available before a taxable account, just to save the tax drag while working. You get asset protection in the retirement accounts too.
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Re: Why not post-tax investment?

Post by mighty72 » Tue Jul 09, 2019 11:42 pm

There are a few reasons that I can think of.
1. Don't undersell your potential. Maybe your income in 30-40 years will be a lot higher that you think, even in retirement
2. 401K provides asset protection in event of lawsuits, etc
3. You will have to pay taxes on any dividends that you get during the 30-40 years of your investing life
4. Re-balancing in taxable account is harder w/o incurring tax liability as you mostly will be selling the asset class which has gained the most & buying the asset class which has the most losses.
5. You save taxes in today's dollars which will be worth lot less in 30-40 years unless we have deflation.

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James1907
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Re: Why not post-tax investment?

Post by James1907 » Wed Jul 10, 2019 7:41 am

Wow that’s good points especially the lawsuit one

get_g0ing
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Re: Why not post-tax investment?

Post by get_g0ing » Wed Jul 10, 2019 7:44 am

White Coat Investor wrote:
Tue Jul 09, 2019 11:14 pm
You get asset protection in the retirement accounts too.
Hi, can you please explain this a bit more please?

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Re: Why not post-tax investment?

Post by MotoTrojan » Wed Jul 10, 2019 8:28 am

Would you rather pay 15% tax on $0.75 or 25% tax on $1?

wolf359
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Re: Why not post-tax investment?

Post by wolf359 » Wed Jul 10, 2019 8:41 am

get_g0ing wrote:
Wed Jul 10, 2019 7:44 am
White Coat Investor wrote:
Tue Jul 09, 2019 11:14 pm
You get asset protection in the retirement accounts too.
Hi, can you please explain this a bit more please?
https://www.investopedia.com/articles/p ... ditors.asp

retiredjg
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Re: Why not post-tax investment?

Post by retiredjg » Wed Jul 10, 2019 8:45 am

James1907 wrote:
Tue Jul 09, 2019 10:35 pm
Why not just invest post tax money in a three fund portfolio instead of putting in 401k, Roth401k etc., If the retiree doesn't work after 59 1/2 his/her ordinary/taxable income will be 0$ and when the portfolio is sold he/she might get taxed based on long term investments? or can someone share some kind of calculator to find out the actual returns for it.
I like to think of it this way.

1) The whole point of deferring tax is that it is often possible to pay tax later at a lower rate. It makes no sense to pay 22% to 37% tax now when you could pay 12% or 22% later. You end up with more money when you pay at a lower rate later. That is why people need to use tax-deferred 401k, 403b, 457b, SEP, and SIMPLE IRA plans while working - to put off the tax on some of their income till later.

2) A smaller benefit is the fact that there is no "tax drag" inside those tax-deferred accounts. When you put money in a taxable account, you lose a little bit of it to taxes each year because there is taxable income from dividends and capital gains distributions. Taxes nibble each year on the total of a taxable account. This is called "tax drag". Over decades, it makes a difference. An account with tax drag will be smaller than an account without tax drag.

get_g0ing
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Re: Why not post-tax investment?

Post by get_g0ing » Wed Jul 10, 2019 9:08 am

wolf359 wrote:
Wed Jul 10, 2019 8:41 am
get_g0ing wrote:
Wed Jul 10, 2019 7:44 am
White Coat Investor wrote:
Tue Jul 09, 2019 11:14 pm
You get asset protection in the retirement accounts too.
Hi, can you please explain this a bit more please?
https://www.investopedia.com/articles/p ... ditors.asp
Thank you sir :happy

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Re: Why not post-tax investment?

Post by Vanguard Fan 1367 » Wed Jul 10, 2019 9:31 am

I have a lecture saying that "no one" calculates the glories of a 401K if you look at the after tax returns after paying taxes on the income in retirement. For a few years I listened to that lecturer and skipped my 401 contributions. I guess the calculations would be rather complex but if you put a lot away in a 401K which this speaker would probably be thinking about it would be interesting to see given certain scenarios whether skipping the 401K and putting a lot of money money away after tax would be better financially.

I have enjoyed the benefits of tax free accounting in IRA and 401K accounts. I can see that

I do like the asset protection of the tax deferred accounts, that particular area is pretty complex and varies state to state.

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unclescrooge
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Re: Why not post-tax investment?

Post by unclescrooge » Wed Jul 10, 2019 10:33 am

MotoTrojan wrote:
Wed Jul 10, 2019 8:28 am
Would you rather pay 15% tax on $0.75 or 25% tax on $1?
👍

lakpr
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Re: Why not post-tax investment?

Post by lakpr » Wed Jul 10, 2019 11:12 am

unclescrooge wrote:
Wed Jul 10, 2019 10:33 am
MotoTrojan wrote:
Wed Jul 10, 2019 8:28 am
Would you rather pay 15% tax on $0.75 or 25% tax on $1?
👍
Call me confused, but this does not make sense/quite translate. I can see that growth in a tax deferred account gets taxed as ordinary income, so I get the “25% tax on $1”. But, if we are talking about after tax investment, you have 0.75 initial investment, you don’t get taxed another 15% on it again.

Assuming a 20% growth in however many years it takes in both vehicles, in the tax deferred scenario it is a tax bite of 25% on $1.20, or $0.30. In the after-tax scenario, it is 15% tax on $0.15, or $0.023. The end result is $0.90 after tax if using tax deferred, or $0.75+$0.15-$0.023 = $0.88 after taxes in post-tax world.

You still end up with a worse case end result with after-tax investments, even with lower tax rate.

I do heavily recommend maximizing all pre-tax /tax-deferred investments before even thinking about investing post-tax. I am just picking nits about MotoTrojan’s post, just saying it does not quite that succinctly capture the tax intricacies in a single sound bite.

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Re: Why not post-tax investment?

Post by MathWizard » Wed Jul 10, 2019 12:10 pm

You do have income in retirement, unless you just have cash in a mattress.

A CD earning 3% on a 2 million dollar portfolio of post tax investment generates $60K in income.
That $60K gets taxed.

If you could have that same in a ROTH, still a post tax investment, that generates $0 income.

Now deferring taxes is helpful, because it is like the govt. gives you a 0% loan on the money you would have paid taxes with
and you get to invest that. You'll pay taxes later on the original contributions, and on the money you make on that "loaned money",
but you have made money.

For simplicity, let's assume you get 10% return annually compounded in a tax deferred vehicle like 401K or trad IRA
Tax deferred
Year Cont Balance beginning of year Interest (end of year) Tax on earnings Balance end of year Value after taxes on withdrawal
1 10K 10K 1K 0 11K 8.25K
2 10K 21K 2.1K 0 23.1K 17.325K
3 10K 33.1K 3.31K 0 36.2K 27.15K

Taxable (after tax) assume 25% bracket, taxes taken out of $10K first

Year Cont Balance beginning of year Interest (end of year) Tax on earnings Balance end of year
1 7.5K 7.5K 0.75K 0.1875K 8.0625K 8.0625K
2 7.5K 15.5625K 1.55625K 0.389062K 16.7297K 16.7297K
3 7.5K 24.2297K 2.42297K 0.605743K 26.0469K 26.0469K


So after 3 years, you are a little over 1K ahead after a 25% tax on withdrawals.
It only grows faster after that.

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unclescrooge
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Re: Why not post-tax investment?

Post by unclescrooge » Wed Jul 10, 2019 12:13 pm

lakpr wrote:
Wed Jul 10, 2019 11:12 am
unclescrooge wrote:
Wed Jul 10, 2019 10:33 am
MotoTrojan wrote:
Wed Jul 10, 2019 8:28 am
Would you rather pay 15% tax on $0.75 or 25% tax on $1?
👍
Call me confused, but this does not make sense/quite translate. I can see that growth in a tax deferred account gets taxed as ordinary income, so I get the “25% tax on $1”. But, if we are talking about after tax investment, you have 0.75 initial investment, you don’t get taxed another 15% on it again.

Assuming a 20% growth in however many years it takes in both vehicles, in the tax deferred scenario it is a tax bite of 25% on $1.20, or $0.30. In the after-tax scenario, it is 15% tax on $0.15, or $0.023. The end result is $0.90 after tax if using tax deferred, or $0.75+$0.15-$0.023 = $0.88 after taxes in post-tax world.

You still end up with a worse case end result with after-tax investments, even with lower tax rate.

I do heavily recommend maximizing all pre-tax /tax-deferred investments before even thinking about investing post-tax. I am just picking nits about MotoTrojan’s post, just saying it does not quite that succinctly capture the tax intricacies in a single sound bite.
Very true, it is more nuanced than the one line suggests.

To make it more complicated, in your high income saving years, you are likely to be married. But in your withdrawal years, you are likely to be widowed thus lowering your tax brackets while increasing your RMDs.

TravelforFun
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Re: Why not post-tax investment?

Post by TravelforFun » Wed Jul 10, 2019 1:26 pm

retiredjg wrote:
Wed Jul 10, 2019 8:45 am

1) The whole point of deferring tax is that it is often possible to pay tax later at a lower rate. It makes no sense to pay 22% to 37% tax now when you could pay 12% or 22% later. You end up with more money when you pay at a lower rate later. That is why people need to use tax-deferred 401k, 403b, 457b, SEP, and SIMPLE IRA plans while working - to put off the tax on some of their income till later.
Some people who are retired but still have income including social security benefits, rental income, dividends, RMD, etc find their tax rates going up during their retirment. They wish they had contributed more to their Roth and taxable.

TravelforFun

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Re: Why not post-tax investment?

Post by MotoTrojan » Wed Jul 10, 2019 1:37 pm

lakpr wrote:
Wed Jul 10, 2019 11:12 am
unclescrooge wrote:
Wed Jul 10, 2019 10:33 am
MotoTrojan wrote:
Wed Jul 10, 2019 8:28 am
Would you rather pay 15% tax on $0.75 or 25% tax on $1?
👍
Call me confused, but this does not make sense/quite translate. I can see that growth in a tax deferred account gets taxed as ordinary income, so I get the “25% tax on $1”. But, if we are talking about after tax investment, you have 0.75 initial investment, you don’t get taxed another 15% on it again.

Assuming a 20% growth in however many years it takes in both vehicles, in the tax deferred scenario it is a tax bite of 25% on $1.20, or $0.30. In the after-tax scenario, it is 15% tax on $0.15, or $0.023. The end result is $0.90 after tax if using tax deferred, or $0.75+$0.15-$0.023 = $0.88 after taxes in post-tax world.

You still end up with a worse case end result with after-tax investments, even with lower tax rate.

I do heavily recommend maximizing all pre-tax /tax-deferred investments before even thinking about investing post-tax. I am just picking nits about MotoTrojan’s post, just saying it does not quite that succinctly capture the tax intricacies in a single sound bite.
Gains are taxed at 15% in my example, still often loses even without factoring for tax-drag over the years.

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Re: Why not post-tax investment?

Post by MotoTrojan » Wed Jul 10, 2019 1:38 pm

MathWizard wrote:
Wed Jul 10, 2019 12:10 pm
You do have income in retirement, unless you just have cash in a mattress.

A CD earning 3% on a 2 million dollar portfolio of post tax investment generates $60K in income.
That $60K gets taxed.

If you could have that same in a ROTH, still a post tax investment, that generates $0 income.

Now deferring taxes is helpful, because it is like the govt. gives you a 0% loan on the money you would have paid taxes with
and you get to invest that. You'll pay taxes later on the original contributions, and on the money you make on that "loaned money",
but you have made money.

For simplicity, let's assume you get 10% return annually compounded in a tax deferred vehicle like 401K or trad IRA
Tax deferred
Year Cont Balance beginning of year Interest (end of year) Tax on earnings Balance end of year Value after taxes on withdrawal
1 10K 10K 1K 0 11K 8.25K
2 10K 21K 2.1K 0 23.1K 17.325K
3 10K 33.1K 3.31K 0 36.2K 27.15K

Taxable (after tax) assume 25% bracket, taxes taken out of $10K first

Year Cont Balance beginning of year Interest (end of year) Tax on earnings Balance end of year
1 7.5K 7.5K 0.75K 0.1875K 8.0625K 8.0625K
2 7.5K 15.5625K 1.55625K 0.389062K 16.7297K 16.7297K
3 7.5K 24.2297K 2.42297K 0.605743K 26.0469K 26.0469K


So after 3 years, you are a little over 1K ahead after a 25% tax on withdrawals.
It only grows faster after that.
Important point here. Proper comparison requires accounting for the extra contributions/gains from tax savings.

robertmcd
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Re: Why not post-tax investment?

Post by robertmcd » Wed Jul 10, 2019 1:41 pm

TravelforFun wrote:
Wed Jul 10, 2019 1:26 pm
retiredjg wrote:
Wed Jul 10, 2019 8:45 am

1) The whole point of deferring tax is that it is often possible to pay tax later at a lower rate. It makes no sense to pay 22% to 37% tax now when you could pay 12% or 22% later. You end up with more money when you pay at a lower rate later. That is why people need to use tax-deferred 401k, 403b, 457b, SEP, and SIMPLE IRA plans while working - to put off the tax on some of their income till later.
Some people who are retired but still have income including social security benefits, rental income, dividends, RMD, etc find their tax rates going up during their retirment. They wish they had contributed more to their Roth and taxable.

TravelforFun
True, but this usually falls into the good problem to have category. But nonetheless you need to constantly look at where you think you will end up, but putting money into tax deferred for the worst case scenario where you are low income in retirement is rarely a bad idea.

retiredjg
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Re: Why not post-tax investment?

Post by retiredjg » Wed Jul 10, 2019 2:29 pm

TravelforFun wrote:
Wed Jul 10, 2019 1:26 pm
retiredjg wrote:
Wed Jul 10, 2019 8:45 am

1) The whole point of deferring tax is that it is often possible to pay tax later at a lower rate. It makes no sense to pay 22% to 37% tax now when you could pay 12% or 22% later. You end up with more money when you pay at a lower rate later. That is why people need to use tax-deferred 401k, 403b, 457b, SEP, and SIMPLE IRA plans while working - to put off the tax on some of their income till later.
Some people who are retired but still have income including social security benefits, rental income, dividends, RMD, etc find their tax rates going up during their retirment. They wish they had contributed more to their Roth and taxable.
I agree. But so far, I don't think we've gotten reports like that from people who just fill 1 tax-deferred plan per person. I still think most folks should use these plans, just not several of them at one time. :happy

lakpr
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Re: Why not post-tax investment?

Post by lakpr » Wed Jul 10, 2019 3:01 pm

MotoTrojan wrote:
Wed Jul 10, 2019 1:37 pm
MotoTrojan wrote:
Wed Jul 10, 2019 8:28 am
Would you rather pay 15% tax on $0.75 or 25% tax on $1?
Gains are taxed at 15% in my example, still often loses even without factoring for tax-drag over the years.
The 0.75 is not a gain, it is the after tax equivalent of $1 in tax deferred.

MotoTrojan
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Re: Why not post-tax investment?

Post by MotoTrojan » Wed Jul 10, 2019 3:16 pm

lakpr wrote:
Wed Jul 10, 2019 3:01 pm
MotoTrojan wrote:
Wed Jul 10, 2019 1:37 pm
MotoTrojan wrote:
Wed Jul 10, 2019 8:28 am
Would you rather pay 15% tax on $0.75 or 25% tax on $1?
Gains are taxed at 15% in my example, still often loses even without factoring for tax-drag over the years.
The 0.75 is not a gain, it is the after tax equivalent of $1 in tax deferred.
Understood. My example was poorly phrased.

You put $1 in tax-deferred or $0.75 in taxable. It doubles. Would you rather pay 25% tax on $2 or 15% tax on $0.75 plus get your $0.75 back.

lakpr
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Re: Why not post-tax investment?

Post by lakpr » Wed Jul 10, 2019 3:24 pm

MotoTrojan wrote:
Wed Jul 10, 2019 3:16 pm
lakpr wrote:
Wed Jul 10, 2019 3:01 pm
MotoTrojan wrote:
Wed Jul 10, 2019 1:37 pm
MotoTrojan wrote:
Wed Jul 10, 2019 8:28 am
Would you rather pay 15% tax on $0.75 or 25% tax on $1?
Gains are taxed at 15% in my example, still often loses even without factoring for tax-drag over the years.
The 0.75 is not a gain, it is the after tax equivalent of $1 in tax deferred.
Understood. My example was poorly phrased.

You put $1 in tax-deferred or $0.75 in taxable. It doubles. Would you rather pay 25% tax on $2 or 15% tax on $0.75 plus get your $0.75 back.
:)

This revision I agree with completely, which is all I was trying to say in my previous (very long) post.

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James1907
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Re: Why not post-tax investment?

Post by James1907 » Thu Jul 11, 2019 6:09 am

Thanks everyone for the nice explanation

Nowizard
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Re: Why not post-tax investment?

Post by Nowizard » Thu Jul 11, 2019 6:43 am

I may have missed it, but the primary reason to put money in retirement accounts over many years is to gain the benefit of compounding at a tax free level, along with simplification of tax returns during the accumulation period. If one anticipates a lower tax level during retirement, then this will also lower taxes during pre-retirement years. It also allows greater control over finances during retirement to the extent that there are choices on whether to withdraw from traditional or Roth accounts to obtain post retirement income needed for expenses. For many of us, it also results in taxable investment of excess amounts withdrawn once minimum withdrawal requirements begin.

Tim

stan1
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Re: Why not post-tax investment?

Post by stan1 » Thu Jul 11, 2019 7:41 am

There are a lot of tax advantages for investing in general right now:
- tax deferment through Traditional IRA contributions
- no tax on capital gains and dividends for Roth accounts
- tax deferral and tax timing through Roth conversions
- no tax on qualified charitable distributions from Traditional retirement accounts
- stepped up cost basis, qualified dividends, and preferential long term gain rates including 0% rate for taxable accounts
- ability to offset ordinary income by $3K/year of realized losses
- tax efficient ETF structure [for the most part eliminates capital gains distributions and defers realized gains until time of sale or death]
- retirement from high tax states to states with low or no income tax
- HSAs, 529s

These advantages have not always existed and could change in the future.

It's overall a good problem to have but in 20 years there will be a lot of hand wringing about taxes owed on large RMDs from multi-million dollar Traditional retirement accounts and heirs who have to withdraw from multi million dollar Inherited Traditional accounts.

At some point I think asset location diversification makes a lot of sense especially if you get to the point where you are investing for your heirs so you can take advantage of all of the above list of benefits. It's a subjective number but once that Traditional IRA crosses $1M in today's dollars taxable starts to offer a lot of benefits. Stepped up cost basis in a taxable account is a huge benefit for transferring wealth to heirs. Paying your heirs taxes for them by leaving them a Roth account is a nice gift too.

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Re: Why not post-tax investment?

Post by tibbitts » Thu Jul 11, 2019 7:50 am

I believe the calculation is going to be imprecise due to unknowns in tax policy, and unknowns in your own future tax filing status, no matter what you do. However I'll guess that some of us will look back and regret some degree of overcontribution to deferred accounts vs. taxable or Roth.

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Re: Why not post-tax investment?

Post by ruralavalon » Thu Jul 11, 2019 8:59 am

James1907 wrote:
Tue Jul 09, 2019 10:35 pm
Why not just invest post tax money in a three fund portfolio instead of putting in 401k, Roth401k etc., If the retiree doesn't work after 59 1/2 his/her ordinary/taxable income will be 0$ and when the portfolio is sold he/she might get taxed based on long term investments? or can someone share some kind of calculator to find out the actual returns for it.
I suggest contributing to available tax-advantaged accounts (IRAs, 401k, etc) as priority ahead of a taxable brokerage account.

All types of tax-advantaged accounts (traditional or Roth) leave your dividends and capital gains untaxed and compounding for the 30-40 years of your working life. That is a huge benefit.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

cncm
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Re: Why not post-tax investment?

Post by cncm » Thu Jul 11, 2019 9:24 am

If you sell your after-tax investments (in a brokerage account) once you retire early (say at 50), when you have zero income...do your long term capital gains get taxed at zero?

retiredjg
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Re: Why not post-tax investment?

Post by retiredjg » Thu Jul 11, 2019 9:29 am

cncm wrote:
Thu Jul 11, 2019 9:24 am
If you sell your after-tax investments (in a brokerage account) once you retire early (say at 50), when you have zero income...do your long term capital gains get taxed at zero?
Yes, up to a certain limit. The limit is $39,375 (taxable income after deductions) for a single person. I think it is about $78,750 for a MFJ couple.

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James1907
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Re: Why not post-tax investment?

Post by James1907 » Thu Jul 11, 2019 11:36 am

Since I’m not a US citizen and being a legal immigrant authorized to work temporarily, there is a 50-50 chance I will be living in US during my retirement. In that case, what’s the right course of action because I don’t think I want to hold the 401k till my retirement because if I move back to my home country there is double taxation. Also in my home country there isn’t any good retirement vehicle. I’m in a spot where it’s really difficult to make a solid decision/plan and stuck with it.

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ruralavalon
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Re: Why not post-tax investment?

Post by ruralavalon » Thu Jul 11, 2019 11:52 am

James1907 wrote:
Thu Jul 11, 2019 11:36 am
Since I’m not a US citizen and being a legal immigrant authorized to work temporarily, there is a 50-50 chance I will be living in US during my retirement. In that case, what’s the right course of action because I don’t think I want to hold the 401k till my retirement because if I move back to my home country there is double taxation. Also in my home country there isn’t any good retirement vehicle. I’m in a spot where it’s really difficult to make a solid decision/plan and stuck with it.
You might edit the title of your post to identify your home country.

Perhaps someone also from your home country has solved this problem, and will respond.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: Why not post-tax investment?

Post by retiredjg » Thu Jul 11, 2019 1:00 pm

James1907 wrote:
Thu Jul 11, 2019 11:36 am
Since I’m not a US citizen and being a legal immigrant authorized to work temporarily, there is a 50-50 chance I will be living in US during my retirement. In that case, what’s the right course of action because I don’t think I want to hold the 401k till my retirement because if I move back to my home country there is double taxation. Also in my home country there isn’t any good retirement vehicle. I’m in a spot where it’s really difficult to make a solid decision/plan and stuck with it.
You should know that all the answers you have gotten so far assumed you are a US citizen who will retire in the US. Most of us have no idea how your 401k (if you use one) will be taxed here or there if you go back to your home country.

miket29
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Re: Why not post-tax investment?

Post by miket29 » Thu Jul 11, 2019 3:04 pm

James1907 wrote:
Tue Jul 09, 2019 10:35 pm
Why not just invest post tax money in a three fund portfolio instead of putting in 401k, Roth401k etc., If the retiree doesn't work after 59 1/2 his/her ordinary/taxable income will be 0$ and when the portfolio is sold he/she might get taxed based on long term investments? or can someone share some kind of calculator to find out the actual returns for it.
For the Roth401K vs a brokerage account, this one is simple. Both are funded with after-tax dollars so the dollars invested are the same. But the Roth401K will never pay another penny in taxes. The brokerage account will pay taxes on distributions over the years and capital gains when the funds are sold.

You can't invest post-tax money in a 401K. If you are asking whether its better to pay the taxes now and invest in a brokerage account instead of deferring the taxes and putting the pre-tax amount into a 401K, it depends on your assumptions about tax rates now and in the future. In an ideal scenario you might be at a 40+% or more marginal tax rate (including both Federal and State) if you live in a high-tax state. If on retirement you are in a lower tax bracket then you took dollars that would have been taxed at 40+% and moved them to a time when they are taxed at something hopefully significantly lower.

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James1907
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Re: Why not post-tax investment?

Post by James1907 » Thu Jul 11, 2019 6:23 pm

retiredjg wrote:
Thu Jul 11, 2019 1:00 pm
James1907 wrote:
Thu Jul 11, 2019 11:36 am
Since I’m not a US citizen and being a legal immigrant authorized to work temporarily, there is a 50-50 chance I will be living in US during my retirement. In that case, what’s the right course of action because I don’t think I want to hold the 401k till my retirement because if I move back to my home country there is double taxation. Also in my home country there isn’t any good retirement vehicle. I’m in a spot where it’s really difficult to make a solid decision/plan and stuck with it.
You should know that all the answers you have gotten so far assumed you are a US citizen who will retire in the US. Most of us have no idea how your 401k (if you use one) will be taxed here or there if you go back to your home country.
My question is very simple. A person is living in US and earning in USD. The company which he/she works offers 401k/Roth 401k and does 4% match. Falls in 22% tax bracket currently and might end up in 25% or more in future and filing taxes jointly and no kids. The person is not a US citizen. The person has 50-50 chance of getting a citizenship/green card in US so that he/she can retire in US(which would be very nice if it happens). The person might end up back in home country like India or may migrate to Canada(No idea). Please assume that both India and Canada is going to double tax the retirement funds, if the retirement funds were left till retirement age and withdrawn after retirement age. And on the other hand, if the person withdraws early we know that there is going to be taxes/penalty. So, considering all this confusion and uncertainty, For this person what does bogleheads advice?

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Why not post-tax investment in US for people from Home Country - India

Post by lakpr » Thu Jul 11, 2019 6:47 pm

As a general observation: countries enter into double taxation avoidance treaties, if there is one. Fortunately both India and Canada do have such a treaty with the US. I don’t know exact details if either treaty, nor am I a taxation expert, BUT: the way it usually works is that, for US sourced income, US taxes are withheld at source (30% flat rate for non residents) and only the rest of the money distributed to the recipient. In the home country, then, the person will claim foreign tax credit for this tax withheld.

Assume you are age 59.5 or older, or otherwise meet the exempt requirements, just so we can ignore penalties. Say you withdraw $1000 from the 401k plan. The custodian will send $300 to IRS, and $700 to you in India (or Canada). You claim $300 equivalent credit on your home country tax return.

A disadvantage that I see here is that, should your home country’s tax obligation for that year does not exceed $300, you are SOL. I am not aware of any country that would allow the unused foreign tax credits to be carried forward.

Hope that helps.

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