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In 35 years, a 2% annual fee wipes out a 100% employer match:
(1+(100%/100%))(1-(2%/100%))^35 = 0.986
which is 98.6 cents per dollar of employee contribution!
Thank you so much for doing the math that I was way too dumb/lazy to do.
Someone's going to say that no 401(k) funds have a 2% fee, but I assure you that many of the popular funds of funds are at least 2%, once you include the main expense ratio, and the expense ratio from every index fund included within (none of which will be listed in your 401(k) documentation).
In 35 years, a 2% annual fee wipes out a 100% employer match:
(1+(100%/100%))(1-(2%/100%))^35 = 0.986
which is 98.6 cents per dollar of employee contribution!*
(However, if you leave that employer earlier, you can roll to an IRA to escape the fees before they have wiped out all employer matching...)
* plus the corresponding investment earnings (which would have accrued wither way)
It will take longer. Investing costs elsewhere are not zero, and the employer match is in the account too.
Edit: Also, you have ignored the fact that if you participate in that 401k plan for 35 years, only the first year's contribution is subject to 35 years of fees.
In 35 years, a 2% annual fee wipes out a 100% employer match:
(1+(100%/100%))(1-(2%/100%))^35 = 0.986
which means the fund's value after 35 years is 98.6 cents per dollar of employee contribution!*
(However, if you leave that employer earlier, you can roll to an IRA to escape the fees before they have wiped out all employer matching...)
* plus the corresponding investment earnings (which would have accrued either way)
Which means, of course, that if you stay with the employer, you should invest independently in an IRA and leave the 401K alone until 35 years before retirement, at which point you contribute to 401K to the match and invest the rest elsewhere.
They are a perfectly good idea if you retire before age 59.5.
Depending as noted above on the situation. It would of course be preferable to wait until age 70½ to begin withdrawals at all. More tax-deferred earnings are better than fewer. Earlier withdrawals in any case reduce the amounts available for later withdrawals. And as the label "72(t)" might suggest, there are a number of other provisions for tax-free, penalty-free withdrawals that do not place one under the substantially equal payments provision. Those can be a perfectly good idea as well, depending on the situation.
Quote:
Originally Posted by Petunia 100
Borrowing from an IRA is not allowed.
60-day rollovers are free of tax and penalty consequences. You can only do one in any 365-day period, however, and you absolutely must complete the rollover (i.e., repay the loan) within 60 days.
Quote:
Originally Posted by Petunia 100
Borrowing from your 401k if you are already retired is usually not allowed.
That's probably true, but like pre-retirement borrowing, it's a plan-based variable. The plan terms set by any particular employer do not bind the plans of another employer.
Quote:
Originally Posted by Petunia 100
Just don't make a mistake. It's not hard, and it's what calculators are for.
Calculators are useless in defense against user-error. Professionals typically do a much better job. Peanuts in exchange for peace of mind.
How common is 2%+ fees? And isn't your wipeout assumption based on the fact that the employer match doesn't grow?
No, everything is expressed as cents per dollar plus growth. So it's already accounted for since the fees also are on the current account value, not the contribution.
It is a simple result of the commutative property of multiplication that as long as each year's ROI and fees are separately assessed on the current account value which has been changed by all previous year's fees and ROI, it does not matter in what order those things happen. Assuming you get the same underlying ROI, the net effect of the 100% employer match is wiped out by 35 years of 2% annual fees.
(to be precise, 2% more than in the alternative investment, which, for a mutual fund with a 0.15% expense ratio, would be 2.15%)
It will take longer. Investing costs elsewhere are not zero, and the employer match is in the account too.
Edit: Also, you have ignored the fact that if you participate in that 401k plan for 35 years, only the first year's contribution is subject to 35 years of fees.
Yes, but it still means if you have 2% more annual ER than you could get in IRA, every dollar put in more than 35 years before retirement should go to the IRA, not the 401k, unless a rollover can be performed.
No, that's what "those who are able to itemize" means.
The point is that there is only an added tax benefit for the dollars about the standard deduction otherwise you'd get the benefit of the standard deduction. If you pay 13000 in interest and taxes a year you don't get much more benefit than a married couple who spent zero on interest and taxes
No, that's what "those who are able to itemize" means.
In your example:
If it's just owning versus renting, you'd have to add real estate taxes in along with mortgage interest. In the 33% bracket (starts at $223K for married filing jointly), the two would have to total $18,182 to net a $6,000 tax reduction. In the 28% bracket (starts at $146K), they'd have to come to $21,429. Particularly the latter sounds a little high, but the $6,000 number may have been rounded up as well. All in all, the point remains that home ownership provides very nice tax deductions to those who are able to itemize.
In order for someone (MFJ) in the 33% bracket to realize a 6k reduction due to mortgage interest and property taxes, they would need to have paid 18,182 + 12,400 = $30,582.00.
Not clear. Depends on what the word "It" meant, but under a favorable interpretation of the post, the focus on rent-vs-own would seem to invite inclusion of taxes as well as interest. The numbers become at least plausible in that case.
Quote:
Originally Posted by Lowexpectations
Not to mention the significant reduction in taxes comes from a much larger expense and that's if you can itemize. Bottom line is that it's not just money saved
Clearly not "free money" falling from the skies. But that's not what's suggested. What is suggested is that the tax breaks that are available to owners -- but not to renters -- can make a big difference in the relative bottom-line costs of owning versus renting. People however always have to know their own conditions and circumstances and make decisions based on those, not on some pop-culture bromide or folk-wisdom rule of thumb.
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