I once heard someone state that 401K isn't great because you get taxed upon retrieval, and would you rather pay taxes now, or taxes later when taxes are inevitably higher.  However, I do believe that compounded returns will come out better than the slightly higher tax rate.

I only have 401K and stocks (about 75% 401K and 25% stocks - mostly railroads).  Curious for input.
I'm 44, and recently divorced, which set back my retirement plans quite a bit. I am currently dumping about $1,000/mo into my 401K, plus company match (which isn't a ton).

I have two thoughts on tax at withdrawal vs tax at deposit.

1. The government can always decide to change the rules and tax your withdrawals even if the current rules say they cannot.
2. If your withdrawal is taxed, the assumption is that you are going to be at a lower tax rate after retirement than you are at now.

Get both? I have a 401(k), 457, and Roth IRA.

that's where I am headed... all eggs not in one basket

OP I think your ideas are sound

I have my TSP/401Ks but I also have my what "if funds".

My 401k is called the Thrift Savings Plan and it is much better to be taxed later because you have more upfront money to grow now. You get taxed the same way later. Would you rather get taxed now and have less money to grow? More money growing with interest over the long haul as opposed to less money.

If your tax bracket it the same in retirement as it is now, the math works out to be exactly the same. One benefit if deferring in a 401k is that some states do not tax retirement distributions. So if you live in a state with high income tax now, and plan moving to a state that doesn't tax distributions, you can come out significantly ahead.

This.

  interesting thought.

401K contributions reduce your AGI and your company will usually match up to a certain percentage.

I personally max out my 401K ($18k/year) and contribute to a ROTH if I have any discretionary funds available after making the 401K contributions.


Dollar Cost Averaging (large periodic purchases when the market is down and buying less when it is higher) into an S&P 500 fund will serve you well over the long term.

This depends on what is limiting your input.  The taxes don't have to (and shouldn't) be paid by the investment itself.  If you are limited by the total amount of funds available, then taxes may result in fewer dollars invested.  If you are limited by limits on how much you are allowed to put in, then paying the taxes up front doesn't affect the amount invested and you are better off having tax free growth and tax free withdrawals later.

You also have to decide (well, guess) whether you can expect to have a higher or lower income (and tax bracket) when you are making withdrawals.  If you expect to have a second career or otherwise be making a significant amount, then the amount of taxes you pay on withdrawal can be significantly higher than what you made when you put it in, even accounting for compound interest.  Of course, the tax rates and rules for withdrawals could change anyway, so it is a risk either way.

Mike

You can make ROTH contributions to a 401k if you prefer to pay income tax now.

Personally I started with a ROTH IRA because I expected taxes to increase quite a bit by the time I retire. They still haven't raised taxes to fund entitlements but it is bound to happen before I retire. I now have a 401k that I make traditional contributions to as well. Having both will allow me to manipulate my withdrawals for tax purposes. I also invest in a taxable account because I expect to retire before I can make qualified distributions from the retirement accounts.

401K is the way to go.

/

I fund the 401k first. Take the tax savings from that and fund a Roth IRA. My plan is to take the money from the Roth IRA to pay the taxes on the 401k.

That's the smart thing to do.  I have a 401K and Roth IRA.  My wife has her own Roth, so that is already one thing we don't have to quibble over if we ever get divorced.

No one can predict the future so it's good to hedge either way.

That's the funniest thing I've read all...ever.

I fund the 401-k to the match with 50% regular 401-k and 50% Roth 401-k.

Then I max out the Roth IRAs for wife and I.

Then I go back to the 401-k to the max which I can afford to contribute.

Middle funding the Roth like this keeps me from maxing out on my max % contribution in my company's plan.

1/2 of every raise and promotion goes to increasing my contributions.

I never understood some with a similar mindset to this.  I don't want to have more upfront money to grow now. So I never try and have that thought process. I hope when I'm older and ready to retire I have way more money and income. This means I would be in a higher tax bracket then.  It just depends on how you think about these scenarios.  

In my experience if you plan on having less money and income when you retire its guaranteed to work out that way.  If you set a goal of having more money and income when you retire - who knows maybe life will surprise you...

Get a financial education.

What is the difference between currency and money and what role does the US dollar play in this?

Your income is taxed as earned income, so there is FICA attached to that. Income that triggers a 1099-R is not taxed as earned income, no FICA.

Also when you retire it means you stopped working.

401k's and tax deferral in general have three benefits:

1. More money to grow up front
2. Your income (and therefore tax bracket) /) should be lower in retirement so you pay a lower rate.
3. Money contributed reduces your income.


If your company gives a match and you're not taking full advantage you are missing out on free money (literally).

If you can afford to max out your 401k you will find you right retirement funds grow pretty quick.

Otherwise it's generally wise to contribute as much as you can afford to, every dollar helps.

I find that every dollar I contribute reduces my take home by less than a dollar due to the reduction in income/taxes.

Many companies are now offering Roth 401k's. At your age I'd be very tempted to go that route.
If not availabe, do normal Roth up to match, switch over to Roth IRA and max it out.  Any further retirement savings go back and try to max out the 401k.
Unless the Fed Gov gets its shit together I figure in the long term tax rates will likely be higher so better to get as much into Roth vehicles as possible.

In retirement you should be in a lower tax bracket as your income needs would be lower (paid off house, not paying for kids).  True they could raise the rates but they could also tax your Roth. So that's a wash

Also. If you are younger you really want tax free 401K since that allows the whole dollar to go in and make money for 20-40 years versus .60-.85 on the dollar earning money if you pay tax now. That extra .15-40 doubles to quadruples over that much time.

I think you should generally max out your 401K before any other options, especially if, even after maxing out, you are still at least part or on the border of the 25% tax bracket since otherwise your Roth is going in .75 on the dollar. this is even more favorable if you are staring at or close to other cutoffs (AMT, deductions, credits) that you need to keep your AGI down to avoid.

Now, if you are not out of the 15% tax bracket BEFORE any 401k, you might re consider

That said. I seriously doubt that anyone who invests in a 401k 15% or more of their income (preferably maxing it out) for their entire 40 year working life is going to be hurting for retirement.  The catch is actually doing this and not fucking with it in downturns or cashing/loaning it out.

If you don't like thinking. Invest in target retirement funds that change your stock/bond mix according to your age. That and look for mostly lowest cost index funds and maybe some managed stuff

Can't go wrong with a 401k and a ROTH. Try to max out both and put the rest in funds with the lowest fees and taxes possible.

But, I think in the end most people will get fucked anyway.

My dad never made a lot of money, but he retired on a company pension that netted him $65k/year in 1991 (after 37 years at the same company.) With social security added he did well. They say one should have a three-legged stool for retirement: 401k or pension, social security, and personal savings. My dad never made enough to have any meaningful personal savings, but his pension was enough to make up for it. FYI, I remember he told me in 1982 or so that the company was switching to 401ks for the new employees, and even with the company match, the new employees would never net as much as the pensioned employees, even if they put in 40 years. This is why companies love 401ks. Their total retirement liability was slashed to virtually nothing.

As far as having enough to live well, given the dotcom bust and the housing crisis, how well has the stock market done overall? Can one still count on the old 8% return over time rule? I don't think so.

And how much money does one need to have in a 401k to live off the returns alone without having to tap into the principal?

I think at one time I calculated that I would need $1.2 million in my 401k to reach the $65k/year net return that my father received from his pension.

How many people will end up with anywhere near $1 million when they retire? Even $500k? With the stock market the way it is today, I don't know if $500k in the 401k is anywhere near enough to retire, with social security or not. And what shape with social security be in when those is their 30's and 40's today retire 30-40 years from now?

The housing market turned to shit in 2008, but we're almost up to the 2006 peak prices today (I think 10% under.)

Maybe it's a better idea to invest that money into income property? Aside from your primary residence, maybe purchase a couple of small homes near a college?

A 4 bedroom home with one room reserved for a caretaker and 3 rooms for rent to foreign college students can net one over $3k/month in rent from the student exchange program. In California, at least. I don't know about other states. Even with a mortgage, taxes and upkeep, that could pay off a lot more money than a 401k could ever hope to return.

Just sayin'.

worked for me. 

Roth 401k with 500% company match here.

OP, I have money in a couple 401k's but recently stopped contributing.  I think Social Security is eventually going to be means tested.  So if you have much retirement income then (from pensions, 401k, etc.) then your Social Security would be reduced in the name of 'fairness' and 'need'.  I have a couple pensions so I am worried about means testing.  I calculated and found that I only pay 15% tax on the money now.  So I decided I would rather take the tax hit up front and have 85% with no restrictions.  And the money won't count as income in the future.  Do the calculations and decide if the risk is worth it.

Has everyone here figured out what the tax hit would be now?  How much % taxes do you expect to pay in the future?  And consequently, what percent are you saving and how high would taxes have to go in the future to wipe out your tax advantage?  I think most people just go for the 401k because it is accepted as a great deal.  I'd be interested to hear from other people who have done an actual cost benefit analysis.

Does your plan have a Roth option?

Some things to think about.

Taxes are currently the lowest they have been in a long time and chances are that they may increase by the time you retire.

If you have a pension or any other income, the 401k adds to that and will put you in a higher tax bracket.

If your home is paid off and your children have moved on, those deductions will be gone.  Once again putting you into a higher tax bracket.

The 401k cannot be easily accessed without penalty before 59 1/2.  You then have 11 years until age 70 1/2 before you have to start taking required minimum distributions.  Once again, unless this is planned for the taxes will be higher.


Considering these I have been looking at ways to move out of my 401k.  Currently the best option seems to be switching it to an IRA, then converting it to a Roth.  It will be subject to taxation upon conversion but as long as it sits in the Roth for 5 years it will not get the 10% withdrawal penalty.  This Roth conversion is not affected by the $5500 annual Roth contribution limitation.

ETA  It will only take Uncle Sam 5 years to get back the 20 or so years that were tax deferred.

Yes and no, depending on whether you're talking about contributions or earnings.

If your Roth account has been in existence for at least 5 years:

1.  Your Roth contributions may be be withdrawn at anytime without penalty.
2.  Earnings (from your contributions) cannot be withdrawn without penalty until age 59-½.

All right!

That's...one in a row.