Roth IRA Vs 401k

[Reducto]

Here are my priorities:
1) Contribute enough to my 401k to max out employer matching
2) Contribute the max to an IRA every year I can. You have until tax day to contribute for the previous year so do your taxes and look at the numbers and decide if you want to do traditional or roth.
3) Contribute as much as I can to my 401k. I wasn't aware there was a limit on tax deferred deposits as I've never gone that high but I would stop if I hit that.

401k accounts often come with high fees and limited fund selection so it's better to do an IRA first if there's no matching.

 

[mpruet]

401k accounts often come with high fees and limited fund selection so it's better to do an IRA first if there's no matching.

You can fund a much larger amount in a 401K than an IRA.  You could consider funding the 401K and then using a ‘back door’ rollover into an IRA.  Once in an IRA, you could also do a conversion to a ROTH.  This technique would allow you to fund a much larger amount in a ROTH than if you directly funded it. 

You also might want to do a model projection to see how much a basic Index Fund would grow in a 401K vrs.  a basic IRA with an annual 8% expected annual growth.  The increased funding limit would let you end up with a much larger nest egg upon retirement.   I think that a direct funding limit for an IRA is still limited to $6000 per year while the 401K is more like $19,500.  Also once you reach 55, you can increase the funding during the ‘catch up’ periods by $6500.  The IRA is limited to $6000.

 

[tx2sturgis]

One thing to be aware of:

Employer managed retirement plans (thru an investment company) can have some substantial 'hidden' fees.

Often, the percentages of these fees can sound very low, like .03% here, .51% there, but over time, it adds up.

Be sure to look into the fine print, and the fees.

 

[Reducto]

You can fund a much larger amount in a 401K than an IRA.

I may not have been clear - I was advocating doing all 3 things when possible. Max out match, then max out IRA, then max out 401K.

I don't really understand the backdoor IRA thing, I'll have to look into it for next year.

 

[MG1912]

For casual observers of this thread, note that the strategies being discussed are not even a consideration for the vast majority of workers.

To "max out" your tax-advantaged accounts means to put $19,500 in your 401(k) and $6,000 in your Roth IRA. So it means to save $25,500 each year. I know many people who do not make that much each year. Here in the desert, I have met a few travelers who live on the $190 or so you get from food stamps and a few bucks a stranger gives them here and there.

In other words, these strategies are very good, but you have to have a high income (or very, very low expenses) to even consider them.

 

[barleyguy]

I think you might be forgetting that you already paid taxes on the funds in your taxable account, i.e. you bought shares for a taxable brokerage account from money in your bank account, i.e. money for which you have already paid marginal tax rates.  THEN the funds are taxed again, a second time, in the form of capital gains.
 

Only the GROWTH of the money is taxed by capital gains. The basis (the money you originally invested) is not. So no money is getting double taxed. With a tax deferred account, you pay taxes at the OI rate on the entire amount, basis and growth.

I refuse to call 401K "tax advantaged". It's only tax deferred. Because of all the extra things you might pay by having taxable income in retirement, it might not be an advantage at all.

 

[barleyguy]

You speculated in your post that tax rates will go up in the future.  Do you know how much income you will have in the future, i.e. when you are retired?  Maybe you do, but the vast majority of people don't know what they'll have for income decades from now... and most who guess probably get it wrong.  We do know, however, that we can get a significant tax savings now with a 401(k) plan.

I do actually know how much taxable investment income I'll have during retirement. It will be very close to zero. I'm planning to have all of my assets in either Roth or already taxed by then, and the taxable part will probably be in qualified dividends. So unless I keep a part time job or something, my taxable income should be really close to nothing. I'm paying the taxes now instead of after I retire.

 

[barleyguy]

For anybody who is curious, here's an explanation of how Social Security benefits are taxed:

https://www.aarp.org/retirement/social-security/questions-answers/how-is-ss-taxed/

Essentially, if you have no other taxable income, they aren't taxed at all. But if you have other taxable income, up to 85% of Social Security will be taxed. So that income is essentially double taxed, because you pay it once on the income, and again on the Social Security.

By deferring taxes, you are creating a tax bomb for you future self for the benefit of your present self. And you probably aren't saving taxes overall, if you calculate the additional SS taxes and the Medicare premiums. I've already made it pretty clear what my side of this is. I'm trying to be tax free in retirement rather than taking the immediate gratification.

 

[tx2sturgis]

Just a bit of hindsight here:

Planning to withdraw from your nest-egg funds (during retirement) in small enough amounts to avoid a big tax bill from the IRS works, until it doesn't.

If you are like me, those were my plans also, but life gets in the way.

I withdrew from my IRA to purchase a few big-ticket items...hey it happens.

And those withdrawals are taxed...but not only that, they can put you in higher tax brackets...costing even more. And in many cases those big ticket items will also be taxable, like vehicles, or real estate. 

Its been said that you cant avoid death OR taxes.....believe it!

 

[MG1912]

Very insightful, especially the last line.  barleyguy would be wise to take heed based on your experience.  I'm sure my experience will also echo yours eventually in that there will be taxes.

On the subject of barleyguy and taxes, I was getting a very weird vibe from your posts, barleyguy.  You throw a lot of little terms and phrases in that are non-standard and frankly confusing… so much so that I was tempted to refute them point by point, such as “extra things you might pay,” “creating a tax bomb,” etc.  Plus, I did not understand your plan to pay no taxes in retirement. 

By that, I mean I did not understand both A) some of the details of your plan, and B) the point.  Why are you trying so hard to avoid all taxes in retirement?  The point, in my view, isn’t so much how much taxes you pay now or later, but how much money you end up having to live on in retirement.  How you get to Rome matters less than getting there…. and the vast majority of people will end up with more money for retirement if they take advantage of their 401(k) at work.

As I usually do when someone posts things that just seem off to me, I went back and read through your posting history to see if you have dropped any clues regarding the motivation behind your comments.  And sure enough…

“As far as a ‘new law about travel’ I recommend doing a Google search on ‘constitutional right to travel’. Generally speaking, any law that restricts free travel would be unconstitutional, and case law has backed that up in the past. (IANAL)”

(from Lisa Bee’s “Hi All!” intro thread:  https://vanlivingforum.com/showthread.php?tid=39710&pid=487654#pid487654)

In the very same thread, you later attempted to convince members that any quarantine efforts by the state directed at the general population were illegal.  Okay… so you’re a “constitutionalist” or a “sovereign citizen” or such... 

If fellow forumites follow your advice and wind up on sovereign citizen manifesto websites -- I assume that is what is meant by “I recommend doing a Google search on ‘constitutional right to travel’” -- it could lead to them getting arrested, shot, etc.  Just do a YouTube search for “Sovereign Citizen.”  Careful… if you enjoy that sort of thing, you could be on YouTube for hours laughing at “sovereigns” getting tazed in court for shouting down judges, etc.  I’m guilty.  You will also be sad when you see the videos of “sovereigns” getting their children (rightfully) taken from them by CPS because of their “sovereign” beliefs.

Not to turn this thread into a sovereign flame thread (which happens often when sovereign citizens are involved -- and which may be unavoidable now that I’ve let the cat out of the bag), but I think it’s important that readers here understand why barleyguy writes the way he does about taxes, driving, etc. 

Why do I think it is important?  Because now you know that his attempt to avoid all taxes in retirement has nothing to do with practical matters (that apply to you) and is purely an ideology he is pursuing (that has nothing to do with you).  Well, more power to him.

I had a bunch of other follow up question, barleyguy, such as how you are a private entrepreneur who makes money on the internet… and yet you know exactly how much money you’ll be living off of in 10 years upon early retirement?  Hell, I had a regular, predictable, salaried government position for most of my career, and I couldn’t have told you three years ago how much money I’d have to live off in early retirement today.

I had other questions, many questions -- but they don’t matter… because I’m arguing on the internet with someone who believes that the federal government is illegitimate and that states have no right to require drivers licenses... and who is advising members here to “look into” flouting state driving laws and official pandemic quarantines.

 

[barleyguy]

I never said anything about states not requiring drivers licenses. Not sure where you got that from my posting history.
I did say that we have the constitutional right to travel, which is well established and has a stack of case law. And that quarantining healthy people is a violation of due process. That's got a stack of case law as well. Though I doubt fighting that fight would do you much good in the current situation. It's likely that a state supreme court would deny the case, and the federal supreme court would too.

I'm not an entrepreneur, BTW. I have a salaried position. It just happens to be 100% remote, so I can work from wherever I want with good internet.

My plan to not pay taxes in retirement is to pay all of them now. Pay most of it as it goes into a Roth, and pay more as I sell ETFs and go to qualified dividends. If all of my money is in Roths and qualified dividends when I'm retired, I'll likely have a taxable income below the standard deduction, so my tax bill will be zero.

I'm not getting out of any taxes by doing that, just paying them now instead of later. Which to me is preferable. Might not be to you.

Hope that makes sense.

Cheers,

Harley.

 

[B and C]

I'm just glad I make enough in retirement to pay taxes. Remember that taxes you pay in the future will be with inflated dollars. You are now losing that extra bit of gains over the years by paying in today's dollars as well as any investment gains on it. Every tax professional I talked to said max out your company's 401K before investing in anything else. YMMV.

 

[barleyguy]

MG1912,

This is completely off topic for this thread, but you brought it up. Moderators, feel free to delete this post along with the post that I'm replying to, if you see fit.

Here's a Cornell University legal analysis of the Constitutional Right to Travel:

https://www.law.cornell.edu/constit...-14/section-1/the-right-to-travel#fn2082amd14

And here's former Judge Napolitano analyzing quarantine needing due process:

https://www.heraldextra.com/news/op...cle_ca3e796b-c983-5c30-ae2b-fa5f7d3f2c05.html

Both of these are people within the legal sphere, not nutjob sovereigns. You don't have to be a nutjob to feel that our constitutional rights are being violated. A clear analysis of the situation and our established constitutional rights can also lead you to that conclusion.

Again, this is off topic and I encourage going back to the original point of the thread, which is whether a 401K or a Roth is a better idea.

Cheers,

Harley.

 

[mpruet]

Right now if you rebalance a brokerage account, you can realize a bunch of capital losses which can offset any distribution that you might take from a retirement account.  And that would significantly reduce your AGI and taxes next year.

 

[barleyguy]

Agreed, totally. Tax loss harvesting is a valid strategy, as long as you get back into equivalent investments before things go back up.

You can't invest in the exact same fund or stock within 30 days. That's a "wash sale" and cancels out the loss. But you can go from one fund to a very similar fund. There are so many almost identical ETFs nowadays, that it's pretty easy to find something very similar to what you're selling.

You can do a rebalance between asset classes as well, but again, you have to be careful of wash sales. Anything you buy that's identical within 30 days isn't considered a loss.

https://www.investopedia.com/terms/w/washsale.asp

 

[MG1912]

I never said anything about states not requiring drivers licenses. Not sure where you got that from my posting history.
I did say that we have the constitutional right to travel, which is well established and has a stack of case law.

Have I understood correctly that this means you believe the 50 states have the right to require operators of motor vehicles (including cars, trucks, and vans) to hold a valid driver's license while operating motor vehicles/automobiles on public roads and highways?

 

[barleyguy]

Sure. I never said otherwise, nor was this ever a topic I argued.

The "constitutional right to travel" means that a state can't keep you from leaving, or from traveling in general, without due process. There have been many cases involving the method of travel, such as whether you're allowed to drive or whether you're allowed to fly on a plane without ID. Those cases haven't been successful that I know of. But if for example, you are a passenger in somebody else's car, riding on a bus, or driving with a legal license, you have a constitutional right to do so, and that right can't be taken away without due process, which means a trial and a court order.

 

[mpruet]

Agreed, totally. Tax loss harvesting is a valid strategy, as long as you get back into equivalent investments before things go back up.

You don’t have to go into equivalent investments.  Part of my rebalance was to sell some Comcast and use those proceeds to buy Exxon-Mobile.   

The key thing is to keep the time between the sell and the buy very short - hopefully within the same 5 minutes.  Otherwise you can lose a lot of value in a volatile market.

 

[barleyguy]

Makes sense. On most of the modern stock trading platforms you can execute a double trade, like "sell something and buy something else". I use TD Ameritrade, and they have that feature. If you do that, the sell and buy happen within a couple seconds of each other.

 

[mpruet]

I am also, but they moved me into an institutional class managed by Mercer. So I get to pretend that I’m Capt. Picard and just say ‘Make it so’...   ;-)