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401k Investment, is this a silly opinion?
Old 08-22-2012, 02:16 PM   #1
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401k Investment, is this a silly opinion?

We (DW and Self) at my recommendation quit putting money into our 401ks 10 years ago. Figured that we would need after tax money during retirement more than pre-tax and we have a fair stash already in pre-tax funds. I thought and still think that taxes will not stay this low for much longer so we may as well pay low taxes while we can.

Does this make sense to anyone else?

Obviously this theory does not apply to Roths.
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Old 08-22-2012, 02:25 PM   #2
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You would be best suited putting as much as possible into ROTH under that theory (which I tend to agree with)...

The benefit of retirement accounts is tax free growth... you get it with both the 401K and the ROTH. One you pay the tax up front and none later... the other you get to pay no tax on the front, but pay it later.

Opting not to use one, or better yet a combination, of those retirement vehicles to instead save the money in a taxable account doesn't make much sense (if the money is definitely earmarked for retirement). Right now you are paying taxes up front when you make the money... AND then you're paying taxes every year on the growth. If you put it into the ROTH, you'd pay the same tax now on the money you make, but absolutely none on the growth from that point on.

Quote:
I thought and still think that taxes will not stay this low for much longer so we may as well pay low taxes while we can.
You're thinking about this wrong. With a ROTH you essentially get the choice to pay no taxes ever. Why pay low taxes now, when you don't have to pay them at all in a Roth? Taxable money that ends up in a roth or taxable account all comes from the same place and you pay the same tax on it up front.

I'd recommend starting to put away the max ROTH contribution for both you and your wife.
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Old 08-22-2012, 02:29 PM   #3
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To a degree. It does complicate getting to your money when you need it. And tax laws are subject to change so you may not be in the low bracket when retired. Then you have start planning withdrawals to minimize the tax impact etc.

However if you had employer matching of contributions and did not take advantage of that, I think would be throwing away free money. I put in up to limit match, other savings went to taxable accounts.
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Old 08-22-2012, 02:33 PM   #4
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Are you looking to have a big portion of your nest egg to bridge between retirement date and age 59.5 when you can start pulling from Roth/IRA/401k?

If that's your goal - then I see some value in what you're doing. But I'm not sure it's an either/or situation. Can you save some in retirement accounts and some more in taxable accounts? That's the best of all worlds.

We max out retirement accounts - and then put money in taxable accounts to generate that bridge money.

If you've got pensions you can tap, or some other income stream you can tap between retirement and 59.5... then I don't see the point of giving up the tax benefits of tax advantaged accounts.

Since you haven't been contributing to 401ks for 10 years... hopefully you've got a nice nest egg of taxable money already built up.
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Old 08-22-2012, 02:39 PM   #5
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We do not get company matching.
We seem to have more than enough in both taxable and pre-tax according to things like FireCalc etc.

The ratio between Post and Pre Taxed Accounts is about 10:8
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Old 08-22-2012, 02:44 PM   #6
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I see the edit you put above about not having to do with Roths (or maybe I missed it the first time I read your post)

Still... a 401K is going to give you a way better result in the long run than paying taxes the whole time.

Here is an example to demonstrate:

Lets make some assumptions (please feel free to give your real numbers if they are far off from these). Lets assume your top tax rate is 25% and lets assume you want to set aside $5,000 every year. Lets also assume that the market will return an average of 10% a year for the next 40 years.

If you invested that $5,000 every year into a 401K you'd end up with $2,233,535 (today's dollars mind you) but if you invested it the exact same way in a taxable account you'd end up with $1,142,577 in today's dollars (because you're paying 25% tax on the compounding growth)

So the fact that you gave up the tax free growth cut the retirement funds in half.

Lets assume from that point on that you were going to draw 4% a year from your 2 million 401K account... that comes out to about $100,000 a year. Taxes would need to be well north of 50% on average for the $0-$100,000 income level to make that look less appealing than the smaller taxable account.

What is more... is that the 401K account continues to grow tax free, meaning if you're still getting a 10% return you are paying no taxes on the growth of the large account... while the $1.1 million taxable account that you're trying to use in its place is being taxed every year at the presumed higher rates in the future (greater than 50%?). So the higher taxes in the future are screwing you whether the money is in 401K or not.

Hope that helps.

IMO, the only possible way a taxable account would be better is if the funds you are stuck with in your 401K are horrible and have very high expenses (typically not the case), and you think your growth will be greatly reduced by investing your money there.

Paying no taxes on growth is a freebee from the government that no one should give up voluntarily.
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Old 08-22-2012, 03:16 PM   #7
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I guess I should have also said I am 59 now. I would not recommend stopping tax deferral unless one was near retirement.
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Old 08-22-2012, 03:42 PM   #8
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It's is only silly if you paid taxes on money for the past 10 years that you could have paid no taxes on then and in the future. So I consider the idea extremely silly and foolhardy. It also shows a lack of understanding of how to pay no taxes with some very easy methods.

I won't apologize for being blunt.
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Old 08-22-2012, 03:59 PM   #9
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I'm surprised your working tax rates today are lower than you think retirement income rates will be in the future even if overall rates are higher.
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Old 08-22-2012, 04:26 PM   #10
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I put my 401k into a roth 401k and then put another $10K into CDs to help fund my first 4 or 5 years of retirement (only been doing CDs for 3 years, and have 4 to retire). I have heard some pundits say 1) Contribute enough to get max match in 401k - $0 for you, 2) fund your roth IRA (or regular IRA then convert to roth), 3) others. So I would say you should be doing $12K in your roth IRAs, you still pay taxes before you contribute but none after that.

After you do your roth IRAs then I could agree with you putting some into after tax. Frees you from what ever changes come to taxes on earned income or retirement (1099-R) income. Also you can draw what ever you want, from $0 to $1M when you want without any restrictions. Since you have tax deferred and taxable, this gives you options when you decide which to live off.

I'm trying to figure how to take my non-roth 401K and IRA out so I don't have a big jump when I'm required to take the RMD. My projections show I won't need any of the IRA when I'm 70, as I have a pension and will get some SS. Those will more than meet my spending unless I get a boat L)
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Old 08-23-2012, 04:14 PM   #11
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Definitely Roth's should come ahead of taxable accounts. A Roth 401k would be great. It will simplify your taxes if nothing else. But the best way to get into a non-401k Roth may be to use your pre-tax 401k now and convert to Roth when your income is lowest. You have to run the numbers for yourself, but you won't know until you do. CG rates are set to increase along with income tax rates, so a taxable portfolio may get hit just as hard as income.
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Old 08-23-2012, 04:34 PM   #12
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Quote:
Originally Posted by ShokWaveRider View Post
We do not get company matching.
We seem to have more than enough in both taxable and pre-tax according to things like FireCalc etc.

The ratio between Post and Pre Taxed Accounts is about 10:8
If you have enough then it is a rather moot point. However I would go the Roth route since you indicate you now have enough.
I can see your reasoning to a point. My DW and I have plowed every available dollar into our 401k's at the expense of after tax investments. Likewise we max out the Roths each year. Now I am planning on retiring at age 58 and scrambling to get enough savings together to bridge us until 59 1/2.
Of course if that's the worst of our problems I'll consider us fortunate.
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