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Old 06-05-2010, 02:57 PM   #21
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Not if it's a Roth IRA. (I think the Roth IRA deal may go away in the future but I don't expect it to include retroactively causing existing balances to be taxed on withdrawal.)
In a traditional IRA this may be true. This is why many people prefer to overweight their tax-deferred retirement portfolios (i.e. TIRAs, 401Ks, 403Bs) with fixed income and REITs, and do more stock investing in the taxable and Roth space -- so as not to convert long-term capital gains and dividend income into ordinary income.
As for the lowest rates last decade, that may well be true but if I have (say) $150K in income today but expect to have $50K (in today's dollars) of taxable income when I retire, even if taxes in general are higher you're still in a lower bracket (i.e. today's 15% versus today's 28%). Even if those brackets became 20% and 33% in the future you're still paying 20% later instead of 28% today.
Also keep in mind that many 401Ks receive "free money" in a company match. My employer matches dollar for dollar on the first 5% of salary, and that can overcome a lot of tax inefficiency.
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IMO, one of the big positives is the early withdrawal penalties. I think a lot of people find it an irresistible temptation to have a large sum of money sitting there whispering "spend me, spend me" in their ear all the time. Knowing they will have to pay full taxes plus a ten percent penalty if they listen to the voices is an incentive to leave the money alone so it will be there when needed later in life.
Not only is tax-deferred compounding a good deal, but with the right conversion planning a tax-deferred account can be cheaply converted to a tax-free account.

The only way to avoid (not evade) taxes in a taxable account is to be highly tax efficient. Some mutual funds can achieve that (at a price) but the only other real tax-efficient alternative would be holding stock shares for decades. Even that's not as assured as a tax-deferred account.

I really appreciate the ability to make the assets inconvenient (but not impossible) to access before 59.5. Can't do that with an annuity or a pension.

I'm willing to trade some political risk for lower expenses. Did I mention that the govt-sponsored TSP has the nation's lowest expense ratios?
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Old 06-05-2010, 03:02 PM   #22
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can someone please explain to me the benefit of pretax saving? pretax 401k, ira, 403b, etc...

the negatives seem to outweigh the positives imo.
I have trouble seeing the negatives.

What I see is avoid (defer) paying early on, pay (maybe) later on. What's so bad about that?

I guess the negative for those who believe money in the bank is money wasted, is early on that money is invested in a 401K, etc. instead of burning a hole in the pocket and being spent
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Old 06-05-2010, 03:03 PM   #23
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a huge negative for me is the 55 or 59.5 age requirement on pretax accounts. the 72t is of little value as long as the fed maintains the ridiculously low interest rates.

at least in a roth you can withdraw contributions without being a member of aarp.

we have a roth 401k at my work - so far that looks pretty good - my contribution money is roth, the company match is pretax.
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Old 06-05-2010, 03:05 PM   #24
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Not only is tax-deferred compounding a good deal, but with the right conversion planning a tax-deferred account can be cheaply converted to a tax-free account.

The only way to avoid (not evade) taxes in a taxable account is to be highly tax efficient. Some mutual funds can achieve that (at a price) but the only other real tax-efficient alternative would be holding stock shares for decades. Even that's not as assured as a tax-deferred account.

I really appreciate the ability to make the assets inconvenient (but not impossible) to access before 59.5. Can't do that with an annuity or a pension.

I'm willing to trade some political risk for lower expenses. Did I mention that the govt-sponsored TSP has the nation's lowest expense ratios?
i think my plan's expense ratios might give you a run for your money. i'm assuming you have index funds? ours makes vanguard's look expensive.
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Old 06-05-2010, 03:11 PM   #25
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the tax bill is compounding too. this leads a lot of people to think they have more money than they do. and they head back to work after this slaps them in the face. i've seen quite a few boomerang retirements at my workplace.
Seems like you are focusing on the amount of tax you pay when what really matters is what you have left after taxes. If you start with $1 in tax deferred account and grow it to $1M and pay 30% in taxes, you end up with 700K.
If you pay the 30% upfront, and start w/ 0.70, in an ideal situation (no taxes) you would grow the 0.70 to 700K. However you would owe taxes on the 700K growth (either at the end or along the way), so although you would pay less in taxes, you would also end up with less than in the tax deferred case.
Looks like a win-win (you, Uncle) or a lose-lose......but you're in the same boat.
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Old 06-05-2010, 03:12 PM   #26
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a huge negative for me is the 55 or 59.5 age requirement on pretax accounts. the 72t is of little value as long as the fed maintains the ridiculously low interest rates.
Depends on how much you have in the account and how much you need.

For June 2010 the maximum rate for ESPP is 3.45%. On a $500K TIRA that could bring in as much as $1,900 a month at age 50. Granted that's not going to be enough for most folks to live on, but it might be enough combined with a part-time j*b, or enough to let one spouse stop working and deal with the homefront while the other brings in the paycheck and the health insurance, or to allow someone to leave a job they hate in order to take one they'd prefer to have that pays less.
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Old 06-05-2010, 03:26 PM   #27
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the tax bill is compounding too. this leads a lot of people to think they have more money than they do. and they head back to work after this slaps them in the face. i've seen quite a few boomerang retirements at my workplace.
Yes, you are gambling with the government, but it's a fair gamble. You hopefully see it as a tremendous tax shelter when you're doing well (or even when you aren't), and also as a long term tax sheltered savings plan. It is protected from creditors (remember OJ Simpson). Add this together with the free money match from your employer and you can't lose. The goal is to beat the system by drawing it all off at a lower tax bracket before (both of) you depart. Even your named beneficiaries (avoids probate) may enjoy this benefit if the scenario is applicable. It was pretty much concocted to encourage people to save for retirement (Americans aren't very good at this).
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Old 06-05-2010, 04:17 PM   #28
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I'm personally a great fan of Roth IRAs and after tax investments. But I still have a ton of my money in pre-tax vehicles. When I took my pension as a cash balance it was put into a pre-tax IRA. Plus my 401k converted to a pre-tax IRA. And don't tell me you can't see the advantage of a 401k with company match. That's a no brainer. But still, I like the idea of having a good portion of my money in after tax investments for some of the same reasons the OP mentions.

I had always intended to be in the same or higher tax bracket after I retired. But surprisingly, even though my withdrawal is higher than my old salary, I'm now in the 15% bracket as opposed to the 28%. It's amazing what a little tax management can do. So with this additional piece of knowledge I have to admit that the pre-tax plan isn't such a bad idea. Of course, I can't draw from those plans for another 5 years, and it's conceivable that tax increases will push me maybe back up to a break even level. But I can't see it going too much higher, or the revolution probably WILL be televised.
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Old 06-05-2010, 04:35 PM   #29
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we have a roth 401k at my work - so far that looks pretty good
Glad it works for you, but when I ran the numbers I am much better off with a regular 401k then converting to ROTH after I am retired. It was a pretty big difference.
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Old 06-05-2010, 04:49 PM   #30
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I've wrestled with...and analyzed...this issue for nearly 20 years. Though I don't claim to be a finance expert, or an economist, math IS my strong suit. I have come to see the benefit of tax deferred investing for MOST people. Personally though I invest in both tax deferred and taxable accounts. Because of our income we are not eligible for Roths and trad IRAs for us are not deductible. My wife has a govt pension plan at work, I have a plan that is like a 403b but I am required to put a fixed % (7%) of income in and my employer matches it. I have no choice so the decision is moot. All our other investing is in taxable accounts.

I don't see why speculating about future tax rates is political. The fact is that in the US we have had historically low tax rates for about 2 decades and we are low compared to most developed countries. I don't think the party in power (politics) is going to matter. I think we will see higher tax rates in the future. I don't think we are doomed economically or anything of the sort. I just think we are going to see a reversion to the mean in taxes. If that is somehow interpreted as a political statement I apologize.

Here are my reasons for keeping a good fraction of investments outside of deferred plans:
1. The money is unemcumbered. We can take it out or do whatever we want with it without constraints:
a. We can take our money and leave the US with all of it if we want
b. We can pledge it as collateral on a dream home if we wish
c. We can take it out at any age without permission (we plan to retire before 59.5)
d. We can use it to pay for our niece's Harvard education if she turns out to be a genius and would benefit from that...or any other worthy reason
2. We expect higher tax rates in the future, especially if we are successful in accumulating significant assets.
3. We are effectively able to avoid taxes on our taxable accounts by offsetting income against depreciation in a rental property that we can probably defer until death. Combined with investing mostly in index funds that are extremely tax efficient this makes the tax issue almost a wash.
4. We can make investments in foreign securities and not throw away the foreign taxes I pay.
5. We will pay tax on IRA withdrawals at ordinary income rates which are almost certainly going to be higher that CG rates (economic reasons, not political)

If we were eligible for Roths then we would probably do that. We do in fact have about 1/2 our money in tax deferred accounts due mostly to past jobs and simply growth. Bit I do not think choosing only tax deffered investing is a no-brainer and I don't think one has to appeal to politics or doom-and-gloom to make a case to support having both taxable and pretax accounts.
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Old 06-05-2010, 04:56 PM   #31
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I can't draw from those plans for another 5 years, and it's conceivable that tax increases will push me maybe back up to a break even level. But I can't see it going too much higher, or the revolution probably WILL be televised.
Can't you start doing some conversions to Roth's starting this year? DW took her pension as a cash balance and we rolled it and her 401(k) into an IRA and now we are converting some to a Roth IRA and plan on doing so each year until things change. (I'll roll my 401(k) in January).
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Old 06-05-2010, 06:49 PM   #32
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Can't you start doing some conversions to Roth's starting this year? DW took her pension as a cash balance and we rolled it and her 401(k) into an IRA and now we are converting some to a Roth IRA and plan on doing so each year until things change. (I'll roll my 401(k) in January).
Absolutely. And I intend to. Actually, by careful asset and tax management I was planning to start last year, but had a small unintended windfall that put us over the $100K limit by ~$700. So I had to recharacterize.

But starting this year and for however long they leave us the option I'll be converting however much I can without getting pushed into a higher tax bracket. I hope to be in the 15% bracket again this year, but I may go ahead and convert to the top of the 25% bracket since I suspect the brackets will be changing soon (and not for the better).
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Old 06-05-2010, 06:57 PM   #33
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What I see is avoid (defer) paying early on, pay (maybe) later on. What's so bad about that?
How about pay a known amount now or an unknown amount later that you may have little control over. I'll take the certainty.
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Old 06-05-2010, 07:00 PM   #34
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How about pay a known amount now or an unknown amount later that you may have little control over. I'll take the certainty.
good point. and your business partner is spending money like a drunken sailor with a coke addiction
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Old 06-05-2010, 07:01 PM   #35
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i think my plan's expense ratios might give you a run for your money. i'm assuming you have index funds? ours makes vanguard's look expensive.
http://www.tsp.gov/rates/tsp-expense-ratio.pdf
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Old 06-05-2010, 09:01 PM   #36
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thanks for the link.

the sp 500 expense ratio - mine blows it away - less than half of the govt rate

not that it matters - both are rock bottom
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Old 06-06-2010, 09:28 AM   #37
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You have a SP Index fund with an expense ratio of less than 0.028% ?
I am surprised and skeptical. Can you tell me which fund, as I would be very interested.
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Old 06-06-2010, 09:49 AM   #38
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It's not tax savings, but tax delay. It is smart, IMO, for most people to take part in saving for their retirement where they get a match, some tax deferrment, and so on.
The gov't is not your partner. It has the constitutional power to tax, and does that. Nothing stays the same, populations are growing, most want their handout to expand. Taxes will go up to provide more handouts.
Everyone I know in retirement is in a lower tax bracket.
Your decisions are your own. If you want to save post-tax, it is your choice.
Low 401(k) expense ratios are what I have. The company does not add much expense, and the funds are institutional type funds, with low e/r. So, these things exist, but an individual can't get into the fund.
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