Retirement and 401k strategies

[COEngineer]

30 years later- you take out that 8 dollars and the 2 dollars that it made you.

$2 gain on $8 investment over 30 yrs?!?!? That would be an annual gain of about 0.75% You almost cannot get that low of a return unless it's sitting in a savings account. I'm hoping for something closer to 8%.

 

[Mallardsx2]

It was simply easy math. You know, for surveyor minded people. Not technical engineers...

 

[BuckRut]

One thing to keep in mind if you are putting all your money in a ROTH is that when you start drawing that money out you are likely to be in a much lower tax bracket than you are now so you may be paying more in taxes paying them now than if you pay them when you take the money out.

 

[COEngineer]

It was simply easy math. You know, for surveyor minded people. Not technical engineers...

The point is that numbers matter. Redo your examples with 4, 6, and 8% annual returns and see if they still make sense.

 

[Mallardsx2]

The point is that your trying to make a point against something that was meant to be simple.

I love dealing with Engineers. I do it daily. Pretty bad when I cant even get along with one I dont know. lol I love it.

 

[VikingsGuy]

The point is that your trying to make a point against something that was meant to be simple.

I love dealing with Engineers. I do it daily. Pretty bad when I cant even get along with one I dont know. lol I love it.

You started with a reasonable consideration but simplified it (and made an error) that results in the message being inaccurate/misleading. In addition to COEngineeer and BuckRut’s points, you have more to invest in 401k pre-tax for the same “out of pocket” so, examples 1 & 2 should have approx $11 for your starting investment not 8 in both cases. Which is better depends on many variables including current tax rate, future tax rate, investment return, tax law changes, etc. But in many scenarios, the benefit of pre-tax investing is you get the compounding value of the dollars that would have been take by tax on day 1 that will exceed the future tax concern (plus BuckRuts consideration). Situations vary, but your simiplification would lead many to the wrong answer.

 

[Mallardsx2]

Error or not. I think the message I am trying to get across is dont trust the government on how they will tax us in 30 years.

 

[Irrelevant]

Error or not. I think the message I am trying to get across is dont trust the government on how they will tax us in 30 years.

Might as well pay gold while your at it.

 

[Pelican]

One piece of advice I was given some years ago is to make your contributions as earlier in the year as you can. That is, if your plan is to contribute $12,000 throughout the year, contribute $2000 from Jan. through June instead of $1000 per month so all of your money is working for you longer.

One of those pieces of information I should have thought of, but didn't until someone mentioned it.

 

[npaden]

One piece of advice I was given some years ago is to make your contributions as earlier in the year as you can. That is, if your plan is to contribute $12,000 throughout the year, contribute $2000 from Jan. through June instead of $1000 per month so all of your money is working for you longer.

One of those pieces of information I should have thought of, but didn't until someone mentioned it.

That can actually bite you in the butt if you aren't careful. A lot of the plans that I audit have a pure matching requirement. They match up to X percent.

If you are contributing 20% for the first six months of the year they just match the 6% (or whatever they match) for the time you are contributing. So you would get 6% of your income matched for the first 6 months while you are contributing then they wouldn't match anything in the last 6 months because you weren't contributing anything so they can't match it. Always make sure you are contributing at least the minimum amount to get the match for the entire year. This happens on some highly compensated people every year it seems like where they set their contribution % too high and they hit the maximum contribution amount in October or November and so they don't get any matching for the last couple months of the year.

 

[Pelican]

That can actually bite you in the butt if you aren't careful. A lot of the plans that I audit have a pure matching requirement. They match up to X percent.

If you are contributing 20% for the first six months of the year they just match the 6% (or whatever they match) for the time you are contributing. So you would get 6% of your income matched for the first 6 months while you are contributing then they wouldn't match anything in the last 6 months because you weren't contributing anything so they can't match it. Always make sure you are contributing at least the minimum amount to get the match for the entire year. This happens on some highly compensated people every year it seems like where they set their contribution % too high and they hit the maximum contribution amount in October or November and so they don't get any matching for the last couple months of the year.

Yep, i know and was trying to be brief. I should have specified only front loading contributions in excess of what is matched by your employer and without exceeding limits.

 

[Frenchy]

The point is that numbers matter. Redo your examples with 4, 6, and 8% annual returns and see if they still make sense.

Also need to account for the fact that those $8 Pre-Tax contribution is equal to $8 of earnings. Whereas those 8$ of Post tax contributions cost you $12 of earnings. Numbers do matter, and simple math does not equate to accurate math.

respectfully,
Technical Engineer


And I see Vickings Guy beat me to the punch as i was typing.

 

[Beaneater]

Here's another question Money Gurus. I'm quitting my job to move to a better state for retirement. I will retire fully in 4 years. Is it possible to move 401k money (employers money I'm vested) to a Roth (my money) or just leave it. I do have a pension that I'm drawing on now.

 

[Frenchy]

Yes it is possible to rollover a 401k from a previous employer to a personal IRA/Roth IRA. To move it to a roth you would have to pay the taxes on any traditional money that you would want converted to Roth. Roth 401K to Roth IRA is a simple Rollover.

 

[jabber]

Error or not. I think the message I am trying to get across is dont trust the government on how they will tax us in 30 years.

You are also assuming that in 30 years they won't want to take another dip out of all of the money, not just the gains.

 

[Pucky Freak]

You are also assuming that in 30 years they won't want to take another dip out of all of the money, not just the gains.

Or they can just print more money and steal from everyone.

Or they can just deduct/steal a % from everyone's account.

Or they can institute a VAT or jack the sales tax, or jack inheritance or gift tax.

Or we can elect AOC to be president in 9 years and then watch the economy tank.

I keep an eye on tax news and adjust my investments and finances accordingly, but the bottom line is the government has a host of tools to extract our hard earned money from us, and there is only so much we can do to keep it out of their hands.

 

[Brandon270]

One thing to keep in mind if you are putting all your money in a ROTH is that when you start drawing that money out you are likely to be in a much lower tax bracket than you are now so you may be paying more in taxes paying them now than if you pay them when you take the money out.

But you won't be taxed on all the interest earned over the years when you start taking money out during retirement. I'd rather pay taxes on the 250k I put in to the account than the 2million + I'm pulling out during retirement.

 

[VikingsGuy]

Or we can elect AOC to be president in 9 years and then watch the economy tank.

If AOC is running the country this whole thread is pointless as you don’t pay taxes when your 401k/Roth account is worth $0 due to catastrophic financial collapse and the dollar has no value (see, Venezuela before and after Bolivarian approach - AOC’s world view).

 

[VikingsGuy]

But you won't be taxed on all the interest earned over the years when you start taking money out during retirement. I'd rather pay taxes on the 250k I put in to the account than the 2million + I'm pulling out during retirement.

This is true under some scenarios but false in many scenarios - avoid the oversimplification on this question.

 

[KY264WIN]

It’s not taxable but that doesn’t mean it is not considered income. Don’t know how that plays with the ACA. Never worried about it. The main problem with a Roth is the $6k limit. My advice is to fill the Roth first and put what additional you can afford into a standard IRA. That’s assuming you don’t have an employer matched 401k. In that case fill the 401k up to the match, then the Roth and finally an IRA up to your limits.

Roth IRA is different than a Roth 401k