Alternatives to 401k

[kannon]

Afternoon. Like to give advise to my two kids who while making a good income, their job positions do not offer 401k plans. Are there alternatives for tax deferred saving for retirement? I'm starting to investigate annuities but fearful of high fees. Any other strategies?

Thanks.

 

[SevenUp]

If they are self-employed, a Solo 401(k) plan could be useful.

If they receive W-2s but the employer doesn't offer a 401k, they can at least deduct a traditional IRA contribution.

See Investment Order for one overview.

 

[RunningBum]

Open a traditional IRA.

Don't automatically think that tax deferred savings is best. If they pile everything into tax deferred, they may wind up still in a high tax bracket as they withdraw from it. If they retire early, they will have to find a way to bridge to age 59.5 when they can start withdrawals.

A Roth IRA offers a lot of benefits, such as any gains being tax free, being able to withdraw contributions if needed, and other special circumstances under which they can withdraw.

Even just investing in a taxable account has some benefits, especially accessibility to the money anytime.

 

[CRLLS]

Consider funding an HSA with your employer if available.

Another benefit for a Roth IRA is they have no RMD's.

 

[kannon]

Roth IRAs are maxed out.

Thought tax deferred growth always advantageous over taxable accounts.

Life insurance provide tax deferred growth? Annuities?

 

[SevenUp]

Life insurance provide tax deferred growth? Annuities?

Any life insurance other than term life provides great returns for the insurance salesperson.

Annuities other than Single Premium Immediate (or Deferred) Annuities also provide great returns for the annuity salesperson.

The cost of the tax deferral for those products exceeds the benefit to the purchaser.

 

[RunningBum]

Thought tax deferred growth always advantageous over taxable accounts.

Not always.

Let's say they are in the 22% bracket now. They put away so much that they are in the same bracket in retirement, only now the recent tax cuts have expired and they are now paying 25% on the withdrawals on the whole amount, both contribution and gains.

Had they instead put the money into a total stock index fund, they wouldn't get the tax credit, but as long as they held it over a year, they'd usually only pay 15% LTCGs. They'd also pay 15% on dividends along the way.

Plug numbers into a spreadsheet and see which comes out with more money.

There are a lot of assumptions here. Maybe they'll have a window in early retirement to convert some of the deferred savings at a lower rate. Maybe they are at a much income tax rate now then they will be in retirement. So deferring taxable income might be the right choice, but definitely not always.

 

[jazz4cash]

The tax deferral of 401k /IRA is not that big of a deal. The main attraction to 401k is a company match. Stashing as much as possible is the main thing. Don’t let limits on contributions or deductions keep one from saving more if they can afford to.

 

[kannon]

Not always.

Let's say they are in the 22% bracket now. They put away so much that they are in the same bracket in retirement, only now the recent tax cuts have expired and they are now paying 25% on the withdrawals on the whole amount, both contribution and gains.

Had they instead put the money into a total stock index fund, they wouldn't get the tax credit, but as long as they held it over a year, they'd usually only pay 15% LTCGs. They'd also pay 15% on dividends along the way.

Plug numbers into a spreadsheet and see which comes out with more money.

There are a lot of assumptions here. Maybe they'll have a window in early retirement to convert some of the deferred savings at a lower rate. Maybe they are at a much income tax rate now then they will be in retirement. So deferring taxable income might be the right choice, but definitely not always.

Good info. Thanks
Withdraw from IRAs and 401k are ordinary income.
If invest in taxable index fund withdraws are LTCG??

 

[pb4uski]

Roth IRAs are maxed out.

Thought tax deferred growth always advantageous over taxable accounts.

Life insurance provide tax deferred growth? Annuities?

No, don't go there (life insurance and annuities).

Depending on their income and tax bracket, deductible IRAs may be better than Roth IRAs.

If they are in the 0% preferenced tax bracket (less than $52,200 for a single and $104,400 for a MFJ couple) then domestic equities in a taxable account are arguably better than a Roth... tax-free growth but with no restrictions on withdrawal or early withdrawal penalties.

 

[AreWeThereYet0]

All of these suggestions sound great. Question - Do these kids have emergency funds? If not, they sound set those up ASAP.

 

[RunningBum]

Good info. Thanks
Withdraw from IRAs and 401k are ordinary income.
If invest in taxable index fund withdraws are LTCG??

I guess I don't think of the concept of a withdrawal from a taxable account, so I may not be certain of what you are asking.

If you sell a stock or index fund in a taxable account, you will pay LTCG on the gains if you've held for at least a year. It doesn't matter if you buy something else or take the cash and spend it, that sale is the taxable event. That's why I hesitate to talk of a withdrawal in a taxable account.

 

[pb4uski]

... If invest in taxable index fund withdraws are LTCG??

No tax on withdrawals in taxable index fund, but taxes on dividends and on gains on sale.

Some dividends are not taxable and some are taxed as ordinary income (for example, bond fund dividends).... short-term gains are taxed like ordinary income and long-term gains are taxed at preferential rates (generally 0% and 15% depending on your income).

 

[COcheesehead]

Deferred annuities.
Fidelity offers them for a .25% annual fee and no commission. Investments grow tax deferred. Just like a 401k. You can take your money out at any time. Not like a 401k. Dozens of investment options. There are NO RMD’s so you can keep all your money in at 72.5. Not like a 401k. If you have no other options, a deferred annuity isn’t bad, if bought correctly.

https://www.fidelity.com/annuities/FPRA-variable-annuity/overview

 

[pb4uski]

One thing to keep in mind with non-qualified deferred annuities... withdrawals are earnings first and then principal... so if you invest $100k and it grows over a few years to $125k and you withdraw $15k, the entire $15k is taxable income... as is the next $10k.

 

[pb4uski]

Deferred annuities.
Fidelity offers them for a .25% annual fee and no commission.

To be clear though, 0.25% on top of the fund fees.

The other thing that I'm not keen on about these products is that if you invest in domestic equities it effectively converts qualified dividends and long-term capital gains to ordinary income... deferred ordinary income, but still ordiinary income. If used for bond funds then it doesn't result in that problem... it just defers the ordinary income.

 

[Animorph]

If they plan to retire before 59.5 they'll probably need a taxable account to tide them over. Though the Roth IRA contributions could be used as well. Nothing wrong with a taxable account with a tax-efficient equity mutual fund in it if you've run out of tax-advantaged accounts to use.

 

[Stormy Kromer]

I have all of the products mentioned and I ER'd at 50. I've got a pile in a VA and it has performed poorly. I also have a VUL that has actually performed very well, but now I don't need the death benefit and the mortality expense creeps up each year. I don't know how to get at the money without canceling the policy and taking a huge tax bite with all the ordinary income from the gains. Bottom line is I wouldn't do either one of these investments again.


There is nothing wrong with putting money in a plain old account at Vanguard and investing in low cost index funds. I would still max out an IRA, and HSA, then put the rest in a self directed Vanguard account. I like either Total Stock Index and/or Capital Appreciation Fund. Returns are similar and taxes low.


If I knew future LTCG taxes are going to remain as favorable as they are now I would put as much as possible in an after tax account like this. LTCG income is a lot better than ordinary income come tax time.

 

[kannon]

badly worded for sure. Meant to say the gains on the taxable account that you have to pay taxes on. Thanks