rollergrrl
Recycles dryer sheets
- Joined
- May 19, 2017
- Messages
- 69
Is the 401k millionaire goal the best route for young investors?
Now many on this forum saved tax-deferred thinking that their marginal tax rate in retirement would be lower than their marginal tax rate when they deferred that money but as it turns out they either were wrong in that thinking or ended up being more successful that they thought they would be financially and it ends up that their marginal tax rate in retirement is actually higher than their tax rate when they were working. Either was a nice problem to have.
I am sorry,but i disagree. When your savings grow tax deferred, there is the power of compounding, as you do not pay tax every year. That can be proved mathematically.That's all there is to it. Some people will say that the money grows tax-deferred, but if the tax rate is the same then there are no savings... it can be proven mathematically.
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Yes. Tax deferred savings make no sense if your expect to be in a higher tax bracket when you withdraw.
One thing I have learned here is the value of having your savings spread among a variety of pre- and post-tax vehicles.
IMHO
I am sorry,but i disagree. When your savings grow tax deferred, there is the power of compounding, as you do not pay tax every year. That can be proved mathematically.
I always encourage a 401K contribution that maxes the employer match as a minimum. Pick up the free dough first. Do whatever next.
I concede the point... but there are situations where what I wrote is true. If there is tax on the income that the after tax money is invested in then you are correct. But if there is no tax on the income of the taxable account then it would be a push... for example, if the subject invested the money in equities either way and the dividends and LTCG were not taxed (0% preferenced rate) then there would be no difference.
Would your advice change with a Government 457 account vs a 401k when it comes to FIRE regarding maxing it out? The 457 would give access to the funds before 591/2 so in theory you would have more years to take out the money, keeping your taxes lower.
If it is a government 457, it is quite unlikely that there is an employer match, so I wouldn't bother at the very low tax brackets I posited. I would just max the Roth and save the rest after tax. However, if our hypothetical young person is successful, they will soon move up to the 24% bracket. At that point I would contribute to the 457 as necessary to stay in the 22% bracket, but not more.
... Actually, I think early retirement is best served by having a wad of after tax money on hand when you retire.
By having my Spouse and I max out tax Deferred accounts we can lower are taxes from 22% to 12%. Is that worth putting that much in a tax deferred account special with not having a match? Is lowering to 12% bracket worth it? The fees in the accounts are not that bad.
By having my Spouse and I max out tax Deferred accounts we can lower are taxes from 22% to 12%. Is that worth putting that much in a tax deferred account special with not having a match? Is lowering to 12% bracket worth it? The fees in the accounts are not that bad.
OTOH, if you think that you'll be in the 12% tax bracket in retirement... less than $105k of income in 2020... then you are avoiding 22% now to pay 12% later so you would want to defer... at least until you pull your income down into the 12% tax bracket.
Note also that all the gains in a 457 are taxed as ordinary income when they are taken out.
If it is a government 457, it is quite unlikely that there is an employer match, so I wouldn't bother at the very low tax brackets I posited. I would just max the Roth and save the rest after tax. However, if our hypothetical young person is successful, they will soon move up to the 24% bracket. At that point I would contribute to the 457 as necessary to stay in the 22% bracket, but not more.
I also don't believe there is any difference between the 457 and the 401k categorically that would preclude the Rule of 55 withdrawal. It is up to the individual plan. Actually, I think early retirement is best served by having a wad of after tax money on hand when you retire.
I always encourage a 401K contribution that maxes the employer match as a minimum. Pick up the free dough first. Do whatever next.
My recollection of governmental 457 plans is that because it is deferred compensation, you can take money out before age 59.5 without penalty. I left my money in the plan when I retired at age 53, but did not take distributions. At some point I moved everything into the stable value fund, which paid around 3 percent consistently through the downturn. I moved it into IRA's in stages after turning 59.5 when the 10 percent penalty became moot.