Retirement and 401k strategies

[NEWHunter]

Unfortunately @schmalts, like most of the posters so far, I am not in a position to comment on the income and ACA portion of your post. Isn’t there some big time hunter/accountant around here that can comment . . .

I have however given quite a bit of thought to the whole pre and post tax (without the health insurance modifier) retirement account thing. I have been maxing out my 401k to get the company match whenever offered and then funding a traditional IRA, with the remainder going in a regular Ameritrade account.

My thought process is this if you have $6K (2019 limits) for an IRA : I’d rather invest $6K in a traditional IRA every year and compound that over 30 years than pay taxes and invest say $5K in a Roth every year and compound those balances for 30 years. I have the power of compound interest on my side and I’ll take my chances with future tax rates on the larger balance in the traditional IRA. Of course none of this ever occurs in a vacuum and if something appears on the horizon, like a major change in the tax laws, I’ll adjust and consider maxing out a Roth if need be. If you can do both a traditional and a Roth, all the better as it diversified your tax strategy.

Although with historically low tax rates, now is a relatively good time to pay taxes.

 

[schmalts]

My 401k allows me to put the max in all roth. 19k and 6k catch up. I will put in 25k in my roth, and NO it don't count as taxable income when withdrawn towards the ACA. This is correct, it's already been verified and is legit. My concern is financial advisors not letting you know about it because most don't know about it. I have been maxing out roth for a decade and if ACA is still around I should benefit well by living off the roth until 65 years old. Bottom line, if your advisors tell you not to go with roth, question them why. The big advantage is the ACA thing. Food for thought

 

[schmalts]

I used to do 50-50 regular and roth until ACA came out. I figured if it stays afloat it's more reason to go all roth. I'd max out anyway, so while it's more of a hit on your current take home pay, it's savings in the end. It's considered savings because you already paid taxes on it so that's why it will not count as income when you draw in it.

 

[schmalts]

So, can anyone find a way to see what the difference in ACA cost would be? Example, 80k a year income from pension and IRA and 401 vs zero income when pulling 80k out of a roth?

 

[pointingdogsrule]

Which is better for any particular individual varies on many things such as current personal tax rate, future personal tax rate, types/returns of invested funds, income mix at retirement, state income tax now, state income tax at retirement, etc There is not one universally correct answer, but the HTers above have raised a lot of good food for thought.

Also add to that list... "age at which you are contributing"

 

[RobG]

So, can anyone find a way to see what the difference in ACA cost would be? Example, 80k a year income from pension and IRA and 401 vs zero income when pulling 80k out of a roth?

Is this calculator what you are looking for?

Health Insurance Marketplace Calculator | KFF

The Health Insurance Marketplace Calculator, updated with 2024 premium data, provides estimates of health insurance premiums and subsidies for people purchasing insurance on their own in health insurance exchanges (or “Marketplaces”) created by the Affordable Care Act (ACA).

www.kff.org

BTW you can make a pretty good income (too high imo) and still get a 100% subsidy. Your MAGI is what should be put in the calculator.

 

[Lostinthewoods]

I max out my Roth IRA each year and contribute 8% to my Roth TSP.
Trying to bump it more and more each year so I can get that Roth TSP maxed out each year.....

Turns out hunting is counter-productive to investing more

 

[MThuntr]

Most commenters so far apparently don't know that there is such a thing as a Roth 401k (I split my contributions 50/50 between Roth and regular 401k), which has the same limit as regular 401k ($19,000 in 2019).

Reporting the Roth 401k distribution on your 1040 follows these rules (if you can follow this logic you are smarter than me):
"Exception 2. If any of the following apply,
enter the total distribution on line 4a
and see Form 8606 and its instructions
to figure the amount to enter on line 4b.
...
2. You received a distribution from
a Roth IRA. But if either (a) or (b) below
applies, enter -0- on line 4b; you
don’t have to see Form 8606 or its instructions.
a. Distribution code T is shown in
box 7 of Form 1099-R and you made a
contribution (including a conversion) to
a Roth IRA for 2013 or an earlier year.
b. Distribution code Q is shown in
box 7 of Form 1099-R.

I do this

 

[SAJ-99]

You guys are driving me crazy making me do math on a Friday.
Let me see if I got this right. What matters is your current tax rate versus your assumed future tax rate. 401(K) - pre tax. Roth - after tax. These are not equal dollars in most normal scenarios. If you put $6000 in a Roth, that is $8000 in 401(k) equivalent dollars assuming a tax rate of 25% on income today (just used as an example). The assumed return on those two things would be equal so if your future self has a tax rate of 25% then it doesn't matter. If your future taxes are higher, hopefully unlikely, better to be taxed now than later.
The entire thing is assumptions stacked on assumptions. When you add in the ACA insurance element it is even worse. You would only use ACA until you turned 65 when Medicare kicks in, so you need to know the savings on 5 years worth of insurance premiums (which adjust every year so is unknowable).
I guess you can pay the man now or you can pay him later, but you will pay.

 

[LaSportsman]

I'm 50/50 on my balances because the ROTH 401k/403b wasn't available for much of the time I was investing but I've also never understood the math used to point folks to tax deferred. The logic of higher tax bracket comparison breaks down because you are paying tax on the investment today with a ROTH but getting all capital gains and dividends tax free. Say someone is in the 35% bracket at 40 years old investing $25,000 in a ROTH 401k and IRA, at 65 that $25k at 8% annual return would be over $140,000. Taxes today would be $8,750. Suppose that you could withdraw all $140k in one year and be in the 15% bracket. The tax would be $21,000. If you miscalculate and are in a higher bracket, the penalty is even worse.

I understand the logic that a tax deferred is better if the tax savings allows you to invest more but if one is maxing contributions either way, I'll pay the tax today. Younger than 40 and the math favors Roth even more. The math starts to favor deferred as you approach retirement age because you don't have decades of compound returns.

 

[RobG]

LaSportsman - while the future earnings in a Roth are tax free, your initial investment was reduced by taxes so your earnings are scaled accordingly. As SAJ was alluding to, the way it pencils out is that it doesn't matter if you pay the tax before (Roth) or after (401k) if the tax rate is the same. However, even if tax rates are increased, the total tax you pay on withdrawals is almost always lower in retirement because we have a progressive tax.

To see how this plays out consider this: when you take money out of a 401k (or Trad IRA) the first portion is taxed at 0% until you take enough to move you up to the next tax bracket (say 10%). Then you pay 10% on the money until you take enough out to move you into the next bracket (say 15%). Etc... Even if you take enough to wind up in a high tax bracket (say 50%) the amount of taxes you paid is much less than 50%. On the other hand, the taxes you saved by contributing to a 401k were at your highest tax bracket.

There's always exceptions, and the Roth has other advantages, but that's how it plays out in my world.

 

[LaSportsman]

RobG, that's why I noted that it makes more sense if the tax savings allow more savings. Most calculators assume this. If someone will max allowable contributions either way, then it's different math.

Good point on marginal tax bracket and varying levels of taxation. The savings upon investment will always be at the marginal rate but returns won't necessarily. Situations will vary based on other income in retirement (pensions, rental income, etc.).

 

[txco]

Another reason to invest in a roth is that it is not subject to a required minimum distribution which as noted earlier, is counted as taxable income. This could then affect the value of your social security payments as well as they would be taxed higher if youre forced to withdraw more money that you thought you would need.

Additionally, company matches in a 401k are treated as traditional/taxable. So if you contribute to a roth 401k, youre getting matched on the traditional side and thus have some tax diversification whether you wanted it or not.

 

[NDGuy]

Additionally, company matches in a 401k are treated as traditional/taxable. So if you contribute to a roth 401k, youre getting matched on the traditional side and thus have some tax diversification whether you wanted it or not.

This is what I do. I contribute at least 6% to get my full company 6% match. My contributions are 100% roth and the match is traditional..guess I will be able to play around with it and have more options down the road.

 

[Jmnhunter]

i want to retire by the age of 35 (next year), but i dont think the standard contribution to my company 401k will cut it...
but seriously, I just do my company match and alot more adding every year, but maybe i need to do more, I dont know, its all foreign to me and I just follow the herd

 

[fmnjr]

It took me a long time, a lifetime in fact, to get to where I thought I knew enough about the financial/investment world to be comfortable with it.

Don't give a hoot for what any "adviser" says as they make their money off who?

That's right, you, so that fact scews everything they tell you.

1) Find great companies to invest your hard-earned cash in and you won't be disappointed over the long haul.

2) Repeat the principles used in #2 with other investment ideas outside the world of finance (real estate, your own business, etc).

If you have trouble with the concepts above, there are plenty of examples of others who have employed them which you can follow.

 

[Irrelevant]

Historically if you start saving early, put more than 12% of your pay in the stock market, and have at least 5 years of flexibility on retirement timing, and can keep you post retirement spending in-line with your pre-retirement standard of living, you're gonna do just fine, and likely get to retire early.

Everyone is looking for a "hack", it's called not spending your money.

 

[Dave N]

Everyone is looking for a "hack", it's called not spending your money.

Bing. Go.

 

[NDGuy]

Everyone is looking for a "hack", it's called not spending your money.

And here we all are on hunttalk in love with a hobby that is PISS POOR for the saving money department LOL

 

[Mallardsx2]

I invest my money after taxes. Meaning I take mine out post tax. By the time I retire the liberal socialists will have some idea to help themselves to my 401K and potentially atx withdrawls at a higher rate. Basically what it boils down to is that I dont trust the govt. You shouldn't either.

If they are going to tax my withdrawals on my 401K they will only tax my interest gains and not my original investment.

For easy math consider the following.

1st situation
Today- you put in 8 dollars into a 401K pre-tax.
30 years later- you take out that 8 dollars and the 2 dollars that it made you.
You are taxed on the 10.
Govt takes 30%
Leaves you with $7 in your pocket.

2nd situation:
Today- you put in 8 dollars into a 401K pre-tax.
30 years later- you take out that 8 dollars and the 2 dollars that it made you.
You are taxed on the 10.
Govt decides it need more money and decides to take 50%
Leaves you with $5 in your pocket.

3rd situation (What I do):
Today you put in 8 dollars post tax (After taxes are taken out and it is free and clear $)
30 years later- you take out that 8 dollars and the 2 dollars that it made you.
You are taxed on the 2 dollars.
Govt takes 30% of the $2 and cant touch the $8 because they already dinged you for that 30 years ago...
Leaves you with ~ $9.40 in your pocket.


4th situation:
Today you put in 8 dollars post tax (After taxes are taken out and it is free and clear $)
30 years later- you take out that 8 dollars and the 2 dollars that it made you.
You are taxed on the 2 dollars.
Govt takes 50% of the $2 and cant touch the $8 because they already dinged you for that 30 years ago...
Leaves you with ~ $9.00 in your pocket. Yes it still stinks that the govt stabbed you in the back and raises the taxes on your gains....BUT at least they cant touch your original investment.


DId you make or loose more money by not contributing pre-tax? The argument can be made either way. BUT if you decide to trust the govt that the taxation rates wont increase in 30 years you have lost your mind.

My advice -Pay the tax now while you can. So you know exactly how much you will have later on (Pending the markets of course) and hopefully there will not be any surprises.