PBS Frontline : The Retirement Gamble, sorta Must See (1 Viewer)

[humpback]

That's not an apples-to-apples comparison though.

Sure it is- I'm accounting for the extra $3K in tax savings in that example.

I don't think he is getting the basic principle of before tax vs after tax dollars for investing.

I don't think you are getting the basic principle of tax free vs. tax deferred vs. taxable accounts for investing.

 

[lumpy19]

That's not an apples-to-apples comparison though.

Sure it is- I'm accounting for the extra $3K in tax savings in that example.

> I don't think he is getting the basic principle of before tax vs after tax dollars for investing.

I don't think you are getting the basic principle of tax free vs. tax deferred vs. taxable accounts for investing.

He's retired and in his mid 40's...I'm going to guess his knowledge of how to handle his money is better than yours.

 

[acarey50]

humpback, on 08 May 2013 - 11:07, said:

wilked, on 07 May 2013 - 22:19, said:Hump, yes, assuming same investments, you will always make more in Traditional if your tax rate is lower at retirement.DD suggested his would be lower, so I recommended Traditional.I am not quite sure myself, so I do a little of both, max Traditional 401K, max Roth. That leaves more in Traditional, but that is ok with me. We are fairly high earners, so my guess is that we will reduce our tax rate upon retirement.

No, you won't- if you use the assumptions you are using, primarily that you are starting with less money in the Roth than in the traditional, then that would be the case. Using other assumptions, you can end up being better off with a Roth even if your tax rate is somewhat lower at retirement.You recommended that he diversify and put some in his 401K and some in a Roth IRA, but not the Roth 401K for some reason. That's what I'm questioning- why the Roth IRA but not the Roth 401K?

See, thats the thing you are missing. You start with less money in the Roth, because its after tax money (you get 10K, pay taxes 3K, invest 7K). The traditional starts bigger (the full 10K because it is invested before it is taxed) but you pay taxes when you withdraw (using the same rate as the above would be 3K).All else equal, if your rate at retirement is >30% (used above) the Roth wins because you already paid taxes, if your rate at retirement is <30% the traditional wins because your rate is now lower than when you invested the money.

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

 

[guru_007]

You guys that are assuming your tax rates will be lower at retirement are making an awfully bold leap of faith, imho.

Why don't you take a look at historical U.S. tax charts. Check out marginal tax rates before the 1990's.

Anyone happen to see what our current national debt is as a percentage of GDP?

Also, to the guy that asked about the 529 plans - although I'm not a big fan, they have their advantages. Particular in high income state tax states. Also, don't put the plan in your name or your children's name - try a grandparent if you can.

 

[humpback]

That's not an apples-to-apples comparison though.

Sure it is- I'm accounting for the extra $3K in tax savings in that example.

> I don't think he is getting the basic principle of before tax vs after tax dollars for inve

sting.

I don't think you are getting the basic principle of tax free vs. tax deferred vs. taxable accounts for investing.

He's retired and in his mid 40's...I'm going to guess his knowledge of how to handle his money is better than yours.

It's a solid guess based on the odds, but you'd be wrong.

 

[wilked]

hump, you are on an island here... no one sees your point. Sorry man.

As for the whole 'what will tax rates be at retirement'... Who knows honestly? It is pretty simple to me:

1) Max Roth IRA since it is a lot better than a traditional IRA. That's a no-brainer.

2) Since I have $5.5k in my Roth, I will put at least that into a traditional 401K (call it $8K since it is pre-tax money), just to be diversified with pre and post-tax investments and since I have no clue what my tax rate will be at retirement compared to now. If you then wanted to put some percentage into a Roth 401K, go for it, but it is adding a level of complication that I would personally avoid.

Someone else said it above, but I don't think it will matter too much in the end. Choosing low-cost index funds >>>> important than this question.

 

[culdeus]

You guys that are assuming your tax rates will be lower at retirement are making an awfully bold leap of faith, imho.Why don't you take a look at historical U.S. tax charts. Check out marginal tax rates before the 1990's.Anyone happen to see what our current national debt is as a percentage of GDP?Also, to the guy that asked about the 529 plans - although I'm not a big fan, they have their advantages. Particular in high income state tax states. Also, don't put the plan in your name or your children's name - try a grandparent if you can.

Why

 

[Sand]

You guys that are assuming your tax rates will be lower at retirement are making an awfully bold leap of faith, imho.Why don't you take a look at historical U.S. tax charts. Check out marginal tax rates before the 1990's.Anyone happen to see what our current national debt is as a percentage of GDP?Also, to the guy that asked about the 529 plans - although I'm not a big fan, they have their advantages. Particular in high income state tax states. Also, don't put the plan in your name or your children's name - try a grandparent if you can.

Why

So when it comes time to ask for financial aid it doesn't come into the equation.

 

[humpback]

humpback, on 08 May 2013 - 11:07, said:

wilked, on 07 May 2013 - 22:19, said:Hump, yes, assuming same investments, you will always make more in Traditional if your tax rate is lower at retirement.DD suggested his would be lower, so I recommended Traditional.I am not quite sure myself, so I do a little of both, max Traditional 401K, max Roth. That leaves more in Traditional, but that is ok with me. We are fairly high earners, so my guess is that we will reduce our tax rate upon retirement.

No, you won't- if you use the assumptions you are using, primarily that you are starting with less money in the Roth than in the traditional, then that would be the case. Using other assumptions, you can end up being better off with a Roth even if your tax rate is somewhat lower at retirement.You recommended that he diversify and put some in his 401K and some in a Roth IRA, but not the Roth 401K for some reason. That's what I'm questioning- why the Roth IRA but not the Roth 401K?

See, thats the thing you are missing. You start with less money in the Roth, because its after tax money (you get 10K, pay taxes 3K, invest 7K). The traditional starts bigger (the full 10K because it is invested before it is taxed) but you pay taxes when you withdraw (using the same rate as the above would be 3K).All else equal, if your rate at retirement is >30% (used above) the Roth wins because you already paid taxes, if your rate at retirement is <30% the traditional wins because your rate is now lower than when you invested the money.

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

Now imagine you pulled the $3K difference from savings instead of out of your Roth.

You could have $10K to invest in the Roth that will grow tax free, or $10K to invest in the traditional growing tax deferred and $3K in a taxable account.

 

[Random]

humpback, on 08 May 2013 - 11:07, said:

wilked, on 07 May 2013 - 22:19, said:Hump, yes, assuming same investments, you will always make more in Traditional if your tax rate is lower at retirement.DD suggested his would be lower, so I recommended Traditional.I am not quite sure myself, so I do a little of both, max Traditional 401K, max Roth. That leaves more in Traditional, but that is ok with me. We are fairly high earners, so my guess is that we will reduce our tax rate upon retirement.

No, you won't- if you use the assumptions you are using, primarily that you are starting with less money in the Roth than in the traditional, then that would be the case. Using other assumptions, you can end up being better off with a Roth even if your tax rate is somewhat lower at retirement.You recommended that he diversify and put some in his 401K and some in a Roth IRA, but not the Roth 401K for some reason. That's what I'm questioning- why the Roth IRA but not the Roth 401K?

See, thats the thing you are missing. You start with less money in the Roth, because its after tax money (you get 10K, pay taxes 3K, invest 7K). The traditional starts bigger (the full 10K because it is invested before it is taxed) but you pay taxes when you withdraw (using the same rate as the above would be 3K).All else equal, if your rate at retirement is >30% (used above) the Roth wins because you already paid taxes, if your rate at retirement is <30% the traditional wins because your rate is now lower than when you invested the money.

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

Now imagine you pulled the $3K difference from savings instead of out of your Roth.

You could have $10K to invest in the Roth that will grow tax free, or $10K to invest in the traditional growing tax deferred and $3K in a taxable account.

Then you would be paying taxes twice on the Traditional money. I believe you are taxed on the entire withdrawal from a traditional IRA.

 

[humpback]

See, thats the thing you are missing. You start with less money in the Roth, because its after tax money (you get 10K, pay taxes 3K, invest 7K). The traditional starts bigger (the full 10K because it is invested before it is taxed) but you pay taxes when you withdraw (using the same rate as the above would be 3K).All else equal, if your rate at retirement is >30% (used above) the Roth wins because you already paid taxes, if your rate at retirement is <30% the traditional wins because your rate is now lower than when you invested the money.

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

Now imagine you pulled the $3K difference from savings instead of out of your Roth.

You could have $10K to invest in the Roth that will grow tax free, or $10K to invest in the traditional growing tax deferred and $3K in a taxable account.

Then you would be paying taxes twice on the Traditional money. I believe you are taxed on the entire withdrawal from a traditional IRA.

How are you paying taxes twice? You get a deduction when you put in the $10K, that's where the $3K comes from. You don't pay until you withdraw it.

 

[acarey50]

humpback, on 08 May 2013 - 11:07, said:

wilked, on 07 May 2013 - 22:19, said:Hump, yes, assuming same investments, you will always make more in Traditional if your tax rate is lower at retirement.DD suggested his would be lower, so I recommended Traditional.I am not quite sure myself, so I do a little of both, max Traditional 401K, max Roth. That leaves more in Traditional, but that is ok with me. We are fairly high earners, so my guess is that we will reduce our tax rate upon retirement.

No, you won't- if you use the assumptions you are using, primarily that you are starting with less money in the Roth than in the traditional, then that would be the case. Using other assumptions, you can end up being better off with a Roth even if your tax rate is somewhat lower at retirement.You recommended that he diversify and put some in his 401K and some in a Roth IRA, but not the Roth 401K for some reason. That's what I'm questioning- why the Roth IRA but not the Roth 401K?

See, thats the thing you are missing. You start with less money in the Roth, because its after tax money (you get 10K, pay taxes 3K, invest 7K). The traditional starts bigger (the full 10K because it is invested before it is taxed) but you pay taxes when you withdraw (using the same rate as the above would be 3K).All else equal, if your rate at retirement is >30% (used above) the Roth wins because you already paid taxes, if your rate at retirement is <30% the traditional wins because your rate is now lower than when you invested the money.

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

Now imagine you pulled the $3K difference from savings instead of out of your Roth.

You could have $10K to invest in the Roth that will grow tax free, or $10K to invest in the traditional growing tax deferred and $3K in a taxable account.

If I did that, then I am not making a fair comparison between the two options. That $3K difference was earned and taxed at some point. If we work with the 30% tax on that, it started as about $4,286 pretax.

Let's simplify to illustrate the point. You have $10K in pretax money that you can put away towards retirement. You have no other savings with which to draw on. You are taxed 30% currently. So, for these purposes, that $10K is all you have. You can either put the full $10K into a traditional retirement account, forgoing paying taxes now, but paying in the future, or, you can pay the taxes now and put $7K into a ROTH account. This creates the apples to apples comparison.

 

[Dentist]

i might be able to retire by the end of the year if i keep making $500-1000 a day in the stock market.

Sheesh.. this is crazEEE

 

[17seconds]

Does anyone making over $200K even do IRAs?

You can't even do a Roth at that income level.

For traditional the tax benefit phases out at about the same levels, so why lock it up until retirement? Just put it in a regular mutual fund.

http://www.nerdwallet.com/blog/investing/2013/backdoor-roth-ira-high-income-how-to-guide/

nice

 

[17seconds]

Does anyone making over $200K even do IRAs? You can't even do a Roth at that income level. For traditional the tax benefit phases out at about the same levels, so why lock it up until retirement? Just put it in a regular mutual fund.

I think you are confusing tax deductions and tax deferrel (two different items).All the gains in a traditional ira grow tax deferred no matter how much you make.Also, if you leave your job, most people move their 401k into a roll over ira (which for some means rolling it into a traditional ira). I did this a few times over the years as I switched jobs.

I am confused by this. You don't get taxed on gains until you sell it, so if you have a mutual fund you keep until 60 it would be the same. Or do you mean dividends? I suppose you can reinvest dividends in an IRA with taxes deferred but when it is a unsheltered mutual fund you are reinvesting and reporting that.

BTW the vast majority of my retirement is in a rollover traditional IRA from 3 previous 401Ks, so I'm familiar with that. But I never add to it, I only do 401K at work.

 

[azgroover]

i might be able to retire by the end of the year if i keep making $500-1000 a day in the stock market.

Sheesh.. this is crazEEE

Hope so. Until a pair of socks starts setting us back $73.

 

[wilked]

Does anyone making over $200K even do IRAs? You can't even do a Roth at that income level. For traditional the tax benefit phases out at about the same levels, so why lock it up until retirement? Just put it in a regular mutual fund.

I think you are confusing tax deductions and tax deferrel (two different items).All the gains in a traditional ira grow tax deferred no matter how much you make.Also, if you leave your job, most people move their 401k into a roll over ira (which for some means rolling it into a traditional ira). I did this a few times over the years as I switched jobs.

I am confused by this. You don't get taxed on gains until you sell it, so if you have a mutual fund you keep until 60 it would be the same. Or do you mean dividends? I suppose you can reinvest dividends in an IRA with taxes deferred but when it is a unsheltered mutual fund you are reinvesting and reporting that.

BTW the vast majority of my retirement is in a rollover traditional IRA from 3 previous 401Ks, so I'm familiar with that. But I never add to it, I only do 401K at work.

17secs

I think many would recommend you max your Roth space each year, either via the straightforward approach or via the backdoor. If you max out your tax advantaged space (Roth and 401K) then at that point investing in a taxable acct is a great idea

 

[NajehHejan]

This thread has been very helpful. I rebalanced my 401K into lower cost index funds. I also opened a Roth IRA through Ameritrade. I’m perplexed now though at all of the 529 bashing. My PA 529 is state tax deductible and the earnings, once withdrawn, will be free of federal or state taxes, assuming the funds are used for college expenses. Of course the downfall is if either of my kids bags college, I’m paying taxes on the earnings, when that money could have gone into a tax free retirement account. I don’t want my kids saddled with a lot of college debt (I want them to have some, so they learn responsibility) but at the same time I’m now wondering if I’m setting my retirement back by funding this 529 instead of funding me and my wife.

 

[Dentist]

i might be able to retire by the end of the year if i keep making $500-1000 a day in the stock market.

Sheesh.. this is crazEEE

Hope so. Until a pair of socks starts setting us back $73.

i'll start hoarding them now then.. learn to grow my own food... get my house paid for... off myself if i get an expensive health condition like cancer... done.

 

[BeTheMatch]

i might be able to retire by the end of the year if i keep making $500-1000 a day in the stock market.

Sheesh.. this is crazEEE

Hope so. Until a pair of socks starts setting us back $73.

i'll start hoarding them now then.. learn to grow my own food... get my house paid for... off myself if i get an expensive health condition like cancer... done.

SILVER!!!!

 

[NewlyRetired]

This thread has been very helpful. I rebalanced my 401K into lower cost index funds. I also opened a Roth IRA through Ameritrade. I’m perplexed now though at all of the 529 bashing. My PA 529 is state tax deductible and the earnings, once withdrawn, will be free of federal or state taxes, assuming the funds are used for college expenses. Of course the downfall is if either of my kids bags college, I’m paying taxes on the earnings, when that money could have gone into a tax free retirement account. I don’t want my kids saddled with a lot of college debt (I want them to have some, so they learn responsibility) but at the same time I’m now wondering if I’m setting my retirement back by funding this 529 instead of funding me and my wife.

Regarding the bolded, this was mentioned earlier that might help guide youA VERY VERY rough rule of thumb is the 20% rule. That being if you are saving ~20% of your gross income towards retirement, then you are probably safe to start funding a child's college education plan. Depending on your combined gross income that may mean investing outside of retirement umbrella's.If you have real estate holdings and/or will be receiving a significant pension, and/or live well well below your means, this 20% number can obviously be smaller.

 

[NewlyRetired]

Does anyone making over $200K even do IRAs? You can't even do a Roth at that income level. For traditional the tax benefit phases out at about the same levels, so why lock it up until retirement? Just put it in a regular mutual fund.

I think you are confusing tax deductions and tax deferrel (two different items).All the gains in a traditional ira grow tax deferred no matter how much you make.Also, if you leave your job, most people move their 401k into a roll over ira (which for some means rolling it into a traditional ira). I did this a few times over the years as I switched jobs.

I am confused by this. You don't get taxed on gains until you sell it, so if you have a mutual fund you keep until 60 it would be the same. Or do you mean dividends? I suppose you can reinvest dividends in an IRA with taxes deferred but when it is a unsheltered mutual fund you are reinvesting and reporting that..

1) you can buy and sell at will in a traditional ira without tax implications. This is important if you are investing over a long time period. You likely will want the flexibility to move around as the decades go by and certain funds go out of favor2) you are correct in that even if you decide to keep a mutual fund forever, you still have to handle all taxes on distributions (capital gains and dividends that come every year for most funds). In an ira, all of those distributions are sheltered.

 

[NewlyRetired]

Does anyone making over $200K even do IRAs? You can't even do a Roth at that income level. For traditional the tax benefit phases out at about the same levels, so why lock it up until retirement? Just put it in a regular mutual fund.

I think you are confusing tax deductions and tax deferrel (two different items).All the gains in a traditional ira grow tax deferred no matter how much you make.Also, if you leave your job, most people move their 401k into a roll over ira (which for some means rolling it into a traditional ira). I did this a few times over the years as I switched jobs.

I am confused by this. You don't get taxed on gains until you sell it, so if you have a mutual fund you keep until 60 it would be the same. Or do you mean dividends? I suppose you can reinvest dividends in an IRA with taxes deferred but when it is a unsheltered mutual fund you are reinvesting and reporting that. BTW the vast majority of my retirement is in a rollover traditional IRA from 3 previous 401Ks, so I'm familiar with that. But I never add to it, I only do 401K at work.

17secs I think many would recommend you max your Roth space each year, either via the straightforward approach or via the backdoor. If you max out your tax advantaged space (Roth and 401K) then at that point investing in a taxable acct is a great idea

Unless the money is earmarked for something other than retirement, this is very good advice for most people.

 

[humpback]

Does anyone making over $200K even do IRAs? You can't even do a Roth at that income level. For traditional the tax benefit phases out at about the same levels, so why lock it up until retirement? Just put it in a regular mutual fund.

I think you are confusing tax deductions and tax deferrel (two different items).All the gains in a traditional ira grow tax deferred no matter how much you make.Also, if you leave your job, most people move their 401k into a roll over ira (which for some means rolling it into a traditional ira). I did this a few times over the years as I switched jobs.

I am confused by this. You don't get taxed on gains until you sell it, so if you have a mutual fund you keep until 60 it would be the same. Or do you mean dividends? I suppose you can reinvest dividends in an IRA with taxes deferred but when it is a unsheltered mutual fund you are reinvesting and reporting that.

BTW the vast majority of my retirement is in a rollover traditional IRA from 3 previous 401Ks, so I'm familiar with that. But I never add to it, I only do 401K at work.

Dividends, plus even if you don't sell your fund(s) at all, the fund itself is buying and selling stocks, and they distribute any gains to the shareholders. Some funds are pretty tax efficient, others are terrible- it's possible to owe taxes on a fund that you are actually down money on because of capital gains distributions.

 

[humpback]

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

Now imagine you pulled the $3K difference from savings instead of out of your Roth.

You could have $10K to invest in the Roth that will grow tax free, or $10K to invest in the traditional growing tax deferred and $3K in a taxable account.

If I did that, then I am not making a fair comparison between the two options. That $3K difference was earned and taxed at some point. If we work with the 30% tax on that, it started as about $4,286 pretax.

Let's simplify to illustrate the point. You have $10K in pretax money that you can put away towards retirement. You have no other savings with which to draw on. You are taxed 30% currently. So, for these purposes, that $10K is all you have. You can either put the full $10K into a traditional retirement account, forgoing paying taxes now, but paying in the future, or, you can pay the taxes now and put $7K into a ROTH account. This creates the apples to apples comparison.

It doesn't matter if you paid taxes on the $3K or not, but it doesn't have to have been earned. If it makes you feel better, think of it as coming from an inheritance, you found it in your couch, or from the deduction from contributing to the traditional IRA where you didn't pay taxes on it.

Like I said before, under the assumptions you are making above, you are correct. However, If you assume that the person has $3K in other savings to draw on and can choose to either put $10K into a Roth and pay $3K in taxes or $10K into a traditional and $3K into a taxable account, how is that not an apples to apples comparison?

 

[17seconds]

I'm a big fan of covering college costs for my kids. My folks did it for me, my grandparents did it for them, it's a long tradition of paying it forward, so to speak. It's a tremendous advantage to enter the workforce without being burdened with all of that debt. I was able to buy a house 2 years after graduation and am now in a position to be done with mortgages by the time I'm 53 (had I not moved to SC, I would have had that house completely paid off by the age of 40). Besides that, I was able to fully fund my 401(k) and Roth IRA between the ages of 23 and 32, which is a pretty good lump of money and will make life easier for me down the road.

Of course, my degree and eventual job was in engineering - something that we all know means (relatively) stable employment. I'm obviously not ok with paying for my daughters to get degrees in womans studies or something like that.

ETA: I know that this isn't what the financial advisors would say. This is important to me though, and I am on track with being able to retire even with funding this.

Put another way...

I am a big fan of the student covering his/her college costs. My folks paid their EFC, but I took out the difference in loans, paying it off the loans 5 years early. It's a tremendous advantage for them to not have to sacrifice their retirement savings to support my college, and I was proud to not be a burden on them.

That is my story... I think each of our stories have good merit, and are great examples of there being different ways to get to a comfortable place for everyone. In my case my parents never took a vacation (ever) until we all were out of college, and I am glad they didn't delay any longer than that. If they had my loans to pay off that might not have been the case.

My point above was that parents should at least let their child believe they will owe the $$ as it will give incentive for them to finish on time and with good grades. If you make it clear from the start that they have no skin in the game, you may as well budget for that 5th year now.

You both make great points.

Another slight hijack...the biggest lesson that I think anyone starting college should have is that they need to understand what degrees pay off when they graduate. I'm not talking about shooting holes in anyone's dreams...but if someone told me that I could make close to 6 figures right out of college with an engineering degree in the high tech; I would be all over that.

Typical starting salary for an engineer with a bachelor's is $50K-$70K, depending on degree and location. I've never heard of a person out of school starting above $65K although I'm sure it happens in Silicon Valley.

 

[17seconds]

This thread has been very helpful. I rebalanced my 401K into lower cost index funds. I also opened a Roth IRA through Ameritrade. I’m perplexed now though at all of the 529 bashing. My PA 529 is state tax deductible and the earnings, once withdrawn, will be free of federal or state taxes, assuming the funds are used for college expenses. Of course the downfall is if either of my kids bags college, I’m paying taxes on the earnings, when that money could have gone into a tax free retirement account. I don’t want my kids saddled with a lot of college debt (I want them to have some, so they learn responsibility) but at the same time I’m now wondering if I’m setting my retirement back by funding this 529 instead of funding me and my wife.

Hedge it like me and don't save for all of their college. I'm trying to pay for maybe half of it and let them earn/payoff the rest themselves. Complete free ride kind of bothers me - I don't want them to be spoiled.

 

[Chadstroma]

Thanks for talking this out guys, appreciate the help. I think for now I'll stick with traditional and keep funding my Roth with whatever I can, but I will look at the Roth 401k options if/when my circumstances change.

One idea to chew on is that on your next pay increase to use that (all or some) to fund the Roth 401K options you have.

I am a big fan of having a mix of traditional and Roth for most people.

 

[Random]

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

Now imagine you pulled the $3K difference from savings instead of out of your Roth.

You could have $10K to invest in the Roth that will grow tax free, or $10K to invest in the traditional growing tax deferred and $3K in a taxable account.

If I did that, then I am not making a fair comparison between the two options. That $3K difference was earned and taxed at some point. If we work with the 30% tax on that, it started as about $4,286 pretax.

Let's simplify to illustrate the point. You have $10K in pretax money that you can put away towards retirement. You have no other savings with which to draw on. You are taxed 30% currently. So, for these purposes, that $10K is all you have. You can either put the full $10K into a traditional retirement account, forgoing paying taxes now, but paying in the future, or, you can pay the taxes now and put $7K into a ROTH account. This creates the apples to apples comparison.

It doesn't matter if you paid taxes on the $3K or not, but it doesn't have to have been earned. If it makes you feel better, think of it as coming from an inheritance, you found it in your couch, or from the deduction from contributing to the traditional IRA where you didn't pay taxes on it.

Like I said before, under the assumptions you are making above, you are correct. However, If you assume that the person has $3K in other savings to draw on and can choose to either put $10K into a Roth and pay $3K in taxes or $10K into a traditional and $3K into a taxable account, how is that not an apples to apples comparison?

Why don't you just run the numbers for us. Maybe that will clear things up.

 

[humpback]

Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.

But then in your example you are not starting from the same point. With a 30% tax rate now, as in the previous example, you have either 10K to invest pretax, or 7K to invest post tax.

To make a comparison by showing numbers based on 10K pretax and 10K post tax is not a valid comparison, as they are not equal amounts.

Now imagine you pulled the $3K difference from savings instead of out of your Roth.

You could have $10K to invest in the Roth that will grow tax free, or $10K to invest in the traditional growing tax deferred and $3K in a taxable account.

If I did that, then I am not making a fair comparison between the two options. That $3K difference was earned and taxed at some point. If we work with the 30% tax on that, it started as about $4,286 pretax.

Let's simplify to illustrate the point. You have $10K in pretax money that you can put away towards retirement. You have no other savings with which to draw on. You are taxed 30% currently. So, for these purposes, that $10K is all you have. You can either put the full $10K into a traditional retirement account, forgoing paying taxes now, but paying in the future, or, you can pay the taxes now and put $7K into a ROTH account. This creates the apples to apples comparison.

It doesn't matter if you paid taxes on the $3K or not, but it doesn't have to have been earned. If it makes you feel better, think of it as coming from an inheritance, you found it in your couch, or from the deduction from contributing to the traditional IRA where you didn't pay taxes on it.

Like I said before, under the assumptions you are making above, you are correct. However, If you assume that the person has $3K in other savings to draw on and can choose to either put $10K into a Roth and pay $3K in taxes or $10K into a traditional and $3K into a taxable account, how is that not an apples to apples comparison?

Why don't you just run the numbers for us. Maybe that will clear things up.

I would if you guys agreed with the premise. The numbers are meaningless if you don't.

 

[Random]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

 

[humpback]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

 

[Random]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

I think the bolded should be $2100? But continue.

 

[NewlyRetired]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

I think the bolded should be $2100? But continue.

also, if we are sticking with the 30% rule shouldn't #1 be more like?

1- put $9.1K into a Roth account and send $3.9K to the IRS

 

[humpback]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

I think the bolded should be $2100? But continue.

This would actually skew the numbers more in favor of the Roth, but why?

also, if we are sticking with the 30% rule shouldn't #1 be more like?

1- put $9.1K into a Roth account and send $3.9K to the IRS

Why?

 

[NewlyRetired]

also, if we are sticking with the 30% rule shouldn't #1 be more like?

1- put $9.1K into a Roth account and send $3.9K to the IRS

Why?

Assuming the 30% tax rate that was listed earlier in the thread

13,000 * .3 = $3,900

If that 30% variable has been changed and I missed it, please ignore.

 

[culdeus]

Lets go back to MLPs for a moment.

Real world example.

I want to sink 20k in my 401k in AMJ. What am I looking at if in a year I sell it?

 

[NewlyRetired]

Lets go back to MLPs for a moment.

Real world example.

I want to sink 20k in my 401k in AMJ. What am I looking at if in a year I sell it?

Are you asking people to predict your exact rate of return? No one can do that with any level of certainty.

 

[Random]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

I think the bolded should be $2100? But continue.

This would actually skew the numbers more in favor of the Roth, but why?

>also, if we are sticking with the 30% rule shouldn't #1 be more like?

1- put $9.1K into a Roth account and send $3.9K to the IRS

Why?

You're not making it easy to believe you understand pretax vs after tax here.

 

[culdeus]

Lets go back to MLPs for a moment.

Real world example.

I want to sink 20k in my 401k in AMJ. What am I looking at if in a year I sell it?

Are you asking people to predict your exact rate of return? No one can do that with any level of certainty.

no, what tax consequences I would have vs. holding in an outside account

 

[NewlyRetired]

Dr D, I would diversify with both pretax and posttax accounts (traditional 401K and Roth IRA). I personally would only do Roth 401K if I was confident that my tax bracket would climb at retirement. Given you are not, I would stick with what you have.

Why?

If your tax rate is lower upon retirement, you should pay the taxes then, not now (do the math yourself if you are not convinced)

This discussion is going no where fast. Lets go back to what kicked it all off and start over again.

Wilked, is there a minimum % difference needed between before and after retirement to make the math work (like does there need to be at least a 5% lowering of tax rate in retirement)?

 

[humpback]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

I think the bolded should be $2100? But continue.

This would actually skew the numbers more in favor of the Roth, but why?

>also, if we are sticking with the 30% rule shouldn't #1 be more like?

1- put $9.1K into a Roth account and send $3.9K to t

he IRS

Why?

You're not making it easy to believe you understand pretax vs after tax here.

And you wonder why I don't want to waste more time running numbers for you guys? Snarky and wrong, great combo.

 

[NewlyRetired]

Lets go back to MLPs for a moment.

Real world example.

I want to sink 20k in my 401k in AMJ. What am I looking at if in a year I sell it?

Are you asking people to predict your exact rate of return? No one can do that with any level of certainty.

no, what tax consequences I would have vs. holding in an outside account

ok gotcha.

Assuming you don't get covered under one of these to avoid the penalty

• If you are totally and permanently disabled, and are receiving disability payments from your insurance company or Social Security.
• If you just need enough to pay unreimbursed medical bills that amount to at least 7.5% of your adjusted gross income.
• If you die and your 401k funds are dispersed to your next of kin, though this isn’t true in all cases.
• You are forced to pay up in the event of a divorce and you need to tap your 401k to do so.

You will have to do the following

1) Pay a 10% penalty on the exact amount you withdraw

2) Pay taxes on the amount you withdraw (in most cases this will be considered ordinary income).

 

[culdeus]

Lets go back to MLPs for a moment.

Real world example.

I want to sink 20k in my 401k in AMJ. What am I looking at if in a year I sell it?

Are you asking people to predict your exact rate of return? No one can do that with any level of certainty.

no, what tax consequences I would have vs. holding in an outside account

ok gotcha.

Assuming you don't get covered under one of these to avoid the penalty

• If you are totally and permanently disabled, and are receiving disability payments from your insurance company or Social Security.
• If you just need enough to pay unreimbursed medical bills that amount to at least 7.5% of your adjusted gross income.
• If you die and your 401k funds are dispersed to your next of kin, though this isn’t true in all cases.
• You are forced to pay up in the event of a divorce and you need to tap your 401k to do so.

You will have to do the following

1) Pay a 10% penalty on the exact amount you withdraw

2) Pay taxes on the amount you withdraw (in most cases this will be considered ordinary income).

what penalty? I'm not withdrawing anything.

 

[NewlyRetired]

Lets go back to MLPs for a moment.

Real world example.

I want to sink 20k in my 401k in AMJ. What am I looking at if in a year I sell it?

Are you asking people to predict your exact rate of return? No one can do that with any level of certainty.

no, what tax consequences I would have vs. holding in an outside account

ok gotcha.

Assuming you don't get covered under one of these to avoid the penalty

• If you are totally and permanently disabled, and are receiving disability payments from your insurance company or Social Security.
• If you just need enough to pay unreimbursed medical bills that amount to at least 7.5% of your adjusted gross income.
• If you die and your 401k funds are dispersed to your next of kin, though this isn’t true in all cases.
• You are forced to pay up in the event of a divorce and you need to tap your 401k to do so.

You will have to do the following

1) Pay a 10% penalty on the exact amount you withdraw

2) Pay taxes on the amount you withdraw (in most cases this will be considered ordinary income).

what penalty? I'm not withdrawing anything.

Wait, what are you asking? Are you just wondering what tax consequences there are when buying and selling in your 401k?

There are none. When you retire and withdraw the money you will be taxed at an income rate. The idea of capital gains taxes does not really exist in a 401k shelter.

 

[MechEng]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

I think the bolded should be $2100? But continue.

The $3,000 into a taxable account is going to be taxed before it goes in. Hence the $2,100.

 

[NewlyRetired]

Here is quick run of numbers I did based on some of the items listed in the thread.

Start with $13k

Scenario #1: $9100 to Roth, $3900 to IRS

Scenario #2: $10,000 to 401k, $2100 to taxable account, $900 to IRS

Assumptions

Tax Rate Before Retirement: 30%

Tax Rate After Retirement: 20%

Capital Gain Tax rate: 15%

Growth in every account: 5%

Time period: 30 years

No dividend assumed in taxable account

After 30 years:

Roth grows to: $37,457

401K grows to: $41,161

Taxable Account Grows to: $8,644

After Taxes:

Final Roth: $37,457 (no tax implications)

Final 401k After Withdrawal: $32,929 = 41,161 * .8

Final Taxable Account after selling: $7347 = 8,644 * .85

Final Count:

Scenario 1: $37,457

Scenario 2: $40,276

I did this pretty quickly so if anyone sees a mistake let me know and I can adjust the numbers.

 

[humpback]

Assuming the 30% tax rate that was listed earlier in the thread

13,000 * .3 = $3,900

If that 30% variable has been changed and I missed it, please ignore.

The $3K isn't taxed here.

The $3,000 into a taxable account is going to be taxed before it goes in. Hence the $2,100.

No, it isn't- you don't pay a tax to put money into a normal brokerage account.

 

[Random]

Assuming the 30% tax rate that was listed earlier in the thread

13,000 * .3 = $3,900

If that 30% variable has been changed and I missed it, please ignore.

The $3K isn't taxed here.

>The $3,000 into a taxable account is going to be taxed before it goes in. Hence the $2,100.

No, it isn't- you don't pay a tax to put money into a normal brokerage account.

I really have no clue what you are trying to prove or disprove here, but at some point the 3,000 you are pulling from your savings was earned and taxed.

 

[17seconds]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts):

1- put $10K into a Roth account and send $3K to the IRS

or

2- put $10K into a traditional retirement account and $3K into a taxable account.

If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

In both cases you are assuming a $13K gross (I think).

In 2), you only put $10K of gross into a retirement account. How were you able to get that $3K of gross into a non-retirement account without being taxed?