Based on everything you've written I'd say you already know what the benefits are. I think you're just using that topic as a way to introduce the topic of higher future income taxes into a thread.
Given your obvious distrust of the government and its willingness to uphold its end of the deal, very little.back to the topic - what are the benefits?
Given your obvious distrust of the government and its willingness to uphold its end of the deal, very little.
People with less distrust may find there to be benefit if they believe they will have considerably lower incomes (and tax rates) when they start withdrawing in retirement. Of course, that assumes you don't think we are so doomed that tax rates at all income levels will skyrocket in the decades ahead. But that starts becoming a political discussion.
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.)also, pretax accounts are a great way to convert qualified dividend income to regular income rates. no bueno.
pretax accounts are a great way to convert qualified dividend income to regular income rates. no bueno.
2 reasons I like pretax savings:
1) I am currently in the 35% (soon to be 39.6%) tax bracket and I save a lot of money on taxes by contributing to a 401K (can't contribute to IRAs anymore). It is very unlikely that my tax rate will be anywhere near 40% in retirement, even if income tax rates go up dramatically form here, so I should see a net positive.
2) Asset protection. Most tax-deferred accounts enjoy some form of creditor protection at the federal or state level.
can someone please explain to me the benefit of pretax saving? pretax 401k, ira, 403b, etc...
the negatives seem to outweigh the positives imo.
But if you invested after tax you only had $0.70 to invest, because you had to pay tax first, and the $0.7 grows to $700K. So it's pay now or pay later.thanks for the many great replies.
a pretax account with a roth account seems ideal. that way you can manage your withdrawals with respect to tax bracket issues - hopefully only withdrawing enough pretax to be in the zero or lowest bracket.
the fact that i have a partner inside the account bothers me. and that partner has the power to change their take.
if i put $1 pretax into a pretax account - and then grow it to $1 million, my partner's share has grown from 30 cents to $300,000 - on the blood sweat and tears of my investment efforts. it just doesnt feel right. i guess it would be much the same if i had it in a taxable account.
seems the positives are #1 assumption of lower tax bracket and #2 creditor protection.
the negatives - penalty for withdrawals, the low 72t calculations, and the potential for the partner to increase his take
2 reasons I like pretax savings:
1) I am currently in the 35% (soon to be 39.6%) tax bracket and I save a lot of money on taxes by contributing to a 401K (can't contribute to IRAs anymore). It is very unlikely that my tax rate will be anywhere near 40% in retirement, even if income tax rates go up dramatically form here, so I should see a net positive.
2) Asset protection. Most tax-deferred accounts enjoy some form of creditor protection at the federal or state level.
can someone please explain to me the benefit of pretax saving? pretax 401k, ira, 403b, etc...
the negatives seem to outweigh the positives imo.
thanks for the many great replies.
a pretax account with a roth account seems ideal. that way you can manage your withdrawals with respect to tax bracket issues - hopefully only withdrawing enough pretax to be in the zero or lowest bracket.
the fact that i have a partner inside the account bothers me. and that partner has the power to change their take.
if i put $1 pretax into a pretax account - and then grow it to $1 million, my partner's share has grown from 30 cents to $300,000 - on the blood sweat and tears of my investment efforts. it just doesnt feel right. i guess it would be much the same if i had it in a taxable account.
seems the positives are #1 assumption of lower tax bracket and #2 creditor protection.
the negatives - penalty for withdrawals, the low 72t calculations, and the potential for the partner to increase his take
I think it is actually pretty simple... the beauty of COMPOUNDING.
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.
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.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.
can someone please explain to me the benefit of pretax saving? pretax 401k, ira, 403b, etc...
the negatives seem to outweigh the positives imo.
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?
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.