76.8% Return on 401K

[Richard]

Don’t forget that by paying taxes on the front end, let’s say it’s 20%, you get 20% less seed to plant, meaning your harvest gets cut by a whopping 20% as well. So really the question would be “do you want an 80% harvest that is tax free, or do you want a 100% harvest that is taxed?” Whether one is better than the other mostly just depends on what your top bracket is today vs what you think it will be come harvest time.

I thought I hit quote for this for my above comment.... I didn't. This is what I was responding to. Where's my coffee....

 

[Macinnis]

Pre COVID, I had to commute an hour one way for my job, which sucked. But I took the job based on the benefits. 100% 401k match up to the max.

I Tuen 50 this year, so I get to participate in the CATCH UP and they will match that as well.

yes, indeed, the stock market has grown a lot in the past 4 years.

 

[Richard]

The respective accounts though, would have the same amount of capital put into them. If they're invested the same, the end results would be the same however, 100% of the Roth account would be tax free and 100% of the taxable account.....would be taxable.

To change the perspective a bit....you put $1,000 into a retirement account. You do "your best" to grow that $1,000 into $10,000.

You managed to do just that.

The IRS has no sticks in that fire. If your $1,000 goes to zero, they don't care. YOU do, but they don't. If however, you do managed to grow it to $10,000 you are putting that energy into growing it so that you can still give them "their portion" (even though they took none of the risk). So they took none of the risk yet still get a portion of the winnings.

In the Roth account, you get 100% of the reward.

Side comment: Over my career, I've had umpteen people come to talk with me and ask me "what can I (they) do???" Then the story unfolds....

They might have a pension. The have no debts, they've invested well so today, they have say, a million dollars in their (taxable) 401K and are able to live off their social security & other savings. They don't need their 401K yet, they are now (when this happened) 70 1/2 (which today has moved to 72) and they are REQUIRED to take their RMD (Required Minimum Distribution....which by the way, does not apply to a Roth account)

Anyway, so now, they have to take maybe $40,000 out of their retirement account and are going to get crushed on taxes... and Richard...."how can I avoid that???"

Upshot is they can't unless they might want to give it to a charity but they spent 40 years growing the monster and now it's biting them in the ankle.

Had they done a Roth option when it started, then their taxable impact would have been mitigated and they wouldn't have been talking to me about how to avoid the impact of their RMD.

 

[fried1765]

I'd suggest that's not accurate.

If someone puts $5,000 into an IRA, they get a $5,000 reduction on their income and might pay less tax 'today'.

If that same person puts $5,000 into a Roth IRA (or 401K) then the account is STILL receiving $5,000 BUT now their take home pay will be reduced....by the amount of the tax.

The respective accounts though, would have the same amount of capital put into them. If they're invested the same, the end results would be the same however, 100% of the Roth account would be tax free and 100% of the taxable account.....would be taxable.

The real difference is during their contributory years, their "take home/spendable" funds would be lower.....by the amount of the tax that they paid on the seed.

And the "real" question is: Will the ROTH withdrawals ACTUALLY be tax free, when your time arrives to withdraw funds?
I am a big time pessimist on this particular issue.
My pessimism is based on my my 80 year history of living through government tax actions!
As my ex-wife spoke so eloquently, when I learned she had multiple affairs: "There are no guarantees in life".

 

[Richard]

Will the ROTH withdrawals ACTUALLY be tax free

I have to admit that's a fair question and not one that has escaped me. I would (hope to) think that if (WHEN) they see this pool of money as a taxable opportunity they might think twice and if they did decide to attack it, grandfather those who might have their 5 years in.

Point being, I would think it would be political suicide for someone to vote to tax something that will impact each individual so directly. I would (want) to think that they'd hold back fearing the repercussions of such an idiotic move....but alas, they are politicians.

 

[Snobdds]

The assumption all along is you want pre tax dollars to work for you and withdraw at a time when your tax bracket is not as high as your working years.

The tricky part is, you have more tax write offs usually during your working years with the mortgage deduction.

They get it one way or the other...

 

[truckdiagnostics]

Albert Einstein is reputed to have said, 'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it. ' If you invest a sum of money at 10 per cent for five years, you will multiply your wealth by 1.6 times.

may have been said but worth repeating

 

[JethroB]

I use the Rule of 72 frequently in my head for quick calculations of compounding:

$ x % rate = years to double
or
72/12% = 8 years to double at 12%

$100 x 7.2% = 10 years (roughly). Let it ‘ride’ for forty years = $1600

Actually 69 is more accurate but 72 is easier to mentally work with.
Compounding is a wonderful thing. Now where can I lock in at 7.2% ?

 

[MossRoad]

The assumption all along is you want pre tax dollars to work for you and withdraw at a time when your tax bracket is not as high as your working years.

The tricky part is, you have more tax write offs usually during your working years with the mortgage deduction.

They get it one way or the other...

Yes, they do.

For example, my wife and I, who have itemized every year and never been able to beat the standard tax deduction, and are in the 12% tax bracket. When we retire and are forced to take the RMD, we'll be in the 24% bracket. They're gonna be taking a lot more from us VS had that money been taxed up front. We've been putting money in the 401Ks up to the match, and then putting money in the ROTH IRAs. My wife's 401k contributions for the past couple years have been going to a ROTH 401K. That option isn't available for me yet.

 

[MossRoad]

I use the Rule of 72 frequently in my head for quick calculations of compounding:

$ x % rate = years to double

Yes, we've always figured 8 years to double, but it's averaged less than 7 over our lifetime. For example, as I mentioned before, back in 2008 it dropped 30%, came back to even in 2 years, then doubled in 2 more. So despite the 30% drop, it doubled in 4 years. Crazy.