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Old 12-14-2016, 08:10 PM
Status: "Gaining Stability." (set 6 days ago)
 
5,684 posts, read 5,928,269 times
Reputation: 4432

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It is official my status has changed. I will be able to contribute at least $560 per month towards my 401k. I do not know the details yet regarding getting a match. I will find out on Tuesday. I was going to wait until 1/19 to start contributing but something is better than nothing. I will take your advice. I think I can manage $100 per month to start for now. I will start contributing close to $600 per month starting 1/19. It will all depend on my premiums for my benefits. My primary focus over the next two years is paying off debt and building savings.

You guys have brought up some very important points. If my employer does not offer a match, how do I determine if I should contribute to a 401k or get a Roth?. I understand contributions are made after taxes for the Roth. I was told that the benefit of the 401k is that deductions are made before taxes. You benefit at retirement because you will be taxed at a lower rate. How does that work? What income is considered low enough to qualify for these tax benefits?

I understand that $1000 will be worth considerably less in 22 years due to inflation. It is a wild card. Social Security and my pension are fixed. I guess since I plan to continue working, I will make the market rate wage for that time period. I can only contribute what I can afford. I have to buy and payoff a condo in 22 years to reduce my expenses. I am little concerned about the purchase of a condo. My rent is reasonably low. My payment will nearly double when I purchase my condo. I am not sure how the numbers would work out over time if I continued renting. I don't know. I guess if I buy, I would have the equity in the home.

Is health care costs for seniors a big problem? The Medicare Advantage plans usually have low copays. I guess the problem could be prescriptions. I do not know. My friend is a senior and she is very happy with her healthcare. She does not complain about healthcare costs. I think the people under 65 are getting hit the hardest because of the high deductible plans employers are offering to their employees.

I am a girl.
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Old 12-15-2016, 04:37 AM
 
Location: Central Massachusetts
4,800 posts, read 4,842,106 times
Reputation: 6377
Quote:
Originally Posted by goodlife36 View Post
It is official my status has changed. I will be able to contribute at least $560 per month towards my 401k. I do not know the details yet regarding getting a match. I will find out on Tuesday. I was going to wait until 1/19 to start contributing but something is better than nothing. I will take your advice. I think I can manage $100 per month to start for now. I will start contributing close to $600 per month starting 1/19. It will all depend on my premiums for my benefits. My primary focus over the next two years is paying off debt and building savings.

That is awesome. If you can do not limit yourself to 560. If you have options do more unless your choices are not very good. A few factors are involved. First the choices you have for funds and second the costs associated with the investment are the most important.

You guys have brought up some very important points. If my employer does not offer a match, how do I determine if I should contribute to a 401k or get a Roth?. I understand contributions are made after taxes for the Roth. I was told that the benefit of the 401k is that deductions are made before taxes. You benefit at retirement because you will be taxed at a lower rate. How does that work? What income is considered low enough to qualify for these tax benefits?

Your future tax burden is the pretty much the same rate you are now. Income derived from the retirement accounts are taxed at regular income rates. What that means is you will be tax (Fed) based on your adjusted gross income (AGI). Your state may or may not tax your income from the retirement account. I believe you can count on no taxes to your SS so that will lower your AGI. So in reality if you are living on your small pension and a projected $1k per month your income tax rate burden will most likely be lower.

I understand that $1000 will be worth considerably less in 22 years due to inflation. It is a wild card. Social Security and my pension are fixed. I guess since I plan to continue working, I will make the market rate wage for that time period. I can only contribute what I can afford. I have to buy and payoff a condo in 22 years to reduce my expenses. I am little concerned about the purchase of a condo. My rent is reasonably low. My payment will nearly double when I purchase my condo. I am not sure how the numbers would work out over time if I continued renting. I don't know. I guess if I buy, I would have the equity in the home.

Excellent to keep your first line here in mind but do not dwell on the actual number. It will change over time. As far as planning on a condo in 20 years that is a plan but you may or may not do that in 20 years. That is a very long term idea. Nothing wrong with planning that far out but just understand that as that time approaches you will have a different situation and outlook.

Is health care costs for seniors a big problem? The Medicare Advantage plans usually have low copays. I guess the problem could be prescriptions. I do not know. My friend is a senior and she is very happy with her healthcare. She does not complain about healthcare costs. I think the people under 65 are getting hit the hardest because of the high deductible plans employers are offering to their employees.

I am a girl.
The last point here on health care in retirement is something to also keep tabs on but do not get too wrapped up in the weeds until you get closer to retirement. As in everything you are looking at the choices in the future will be different than they are now.

Welcome to the forum and do not be afraid to speak out. Girls are a blessing.

Last edited by oldsoldier1976; 12-15-2016 at 04:41 AM.. Reason: AGI information
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Old 12-15-2016, 05:36 AM
 
Location: Mount Airy, Maryland
10,457 posts, read 5,917,794 times
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I'm very happy to read that your work situation has improved for you goodlife. I was also blown away at how much you appear to have learned since your initial posts. As for traditional vs Roth it's a tough call, I do both. There are advantages to each, with the traditioinal as you said you withdraw at most likely a lower tax bracket and the higher weekly contributions result in more going in each paycheck. But these is also a lot to be said for tax free growth, keep in mind we all hope to live decades past retirement so the tax free growth of the Roth is appealing. And don't fprget without a big rezerve if you need to withdraw $20,000 for a car if it comes from your traditional 401 there will be a big tax bill.

I don't really have a handle on the medicare issue, hopefully others will help.
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Old 12-15-2016, 05:49 AM
 
29,764 posts, read 34,848,700 times
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Quote:
Originally Posted by DaveinMtAiry View Post
I'm very happy to read that your work situation has improved for you goodlife. I was also blown away at how much you appear to have learned since your initial posts. As for traditional vs Roth it's a tough call, I do both. There are advantages to each, with the traditioinal as you said you withdraw at most likely a lower tax bracket and the higher weekly contributions result in more going in each paycheck. But these is also a lot to be said for tax free growth, keep in mind we all hope to live decades past retirement so the tax free growth of the Roth is appealing. And don't fprget without a big rezerve if you need to withdraw $20,000 for a car if it comes from your traditional 401 there will be a big tax bill.

I don't really have a handle on the medicare issue, hopefully others will help.
Any large withdrawal from a tax deferred account will be a tax bill and quite probably a change in tax brackets. Creating a sizable after tax account as you go can help. Developing a plan on how to access your money in retirement might be almost as important as developing a plan to get there. Factoring pension income in along with SS is another topic not discussed much.
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Old 12-15-2016, 03:34 PM
 
Location: RVA
2,164 posts, read 1,264,175 times
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Congrats! That's good news.
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Old 12-15-2016, 06:16 PM
Status: "Gaining Stability." (set 6 days ago)
 
5,684 posts, read 5,928,269 times
Reputation: 4432
Thanks for all of your help.
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Old 12-17-2016, 02:43 PM
 
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Do a you tube search on being your own bank. Always consider going in and the cost coming out of any investments especially fees and potential taxes.
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Old 12-20-2016, 10:41 PM
 
6,604 posts, read 3,736,021 times
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Roth IRA vs. 401k:

*401k is funded by before-tax dollars. When you contribute $560, you would have paid $140 fed income tax on that, if you are in a 25% tax bracket. So you contribute $560, but your paycheck is only $420 less.

*401k grows over 20 years to $1,120 (I just picked a number). You withdraw $1,120 and pay $168 in fed income tax (15% tax bracket). You now have $952. But you would have paid the higher 25% rate if you had had to pay tax on the earnings as they occurred. Note that earnings in the form of dividends and capital gains WOULD have been owed at a 15% tax rate, but when you withdraw from your 401k, everything you withdraw is taxed at your ordinary income tax rate at the time of withdrawal. (Note that fees came out of your $560, but you won't know how much money in earnings were taken for those fees; you don't pay transaction fees, though.)

*Roth IRA is funded with after-tax dollars. When you contribute $560, your paycheck is $560 less.

*Roth IRA grows over 20 years to $1,200. (just picked a number; remember that you don't have to pay the 401k fees) You withdraw $1,200. You pay NO income tax on it, even the earnings. You now have $1,120.

FEES: You will have more fees in the 401k. You will have your company's fees for administrative costs, which are charged to the 401k plan, and the investment company's fees for handling the account. FEES FEES FEES. You will likely never know what those fees are. They are supposed to be stated, but they're hard to find and figure out,and that maynot be all of them. I found, for instance, that shares of my mutual funds would disappear. Just a share here and there....the investment co. would skim shares and sell in payment of their fees.

In a Roth IRA, you set up an account in an online brokerage, like Scottrade. They won't have an annual fee, hopefully. There will be NO FEES for the account. There will be fees in the mutual funds you select, and transaction fees. BUT, you will need to decide on your investments. There will be no investment account set up for you or anyone to advise you.

LIMITS ON CONTRIBUTIONS: The Roth IRA has a contribution limit of $5,500 under age 50; $6,500 if you are over 50. 401ks have a much higher limit. If you contribute $560/month, that's over the Roth IRA limit, so you'd have to use your 401k for the spillover.
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Old 12-21-2016, 01:42 AM
 
71,462 posts, read 71,629,249 times
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your comparison is not correct .

the problem with the comparison is you are paying the tax money on the roth 401k up front from money outside the roth .

but then you are taking the traditional 401k and paying the taxes with the deferred money . it is not apples to apples .

if you even them up then your 401k contributions should actually be higher with the traditional allowing for the fact you are laying out more money .

in other words it is not really the proper comparison .

assuming same tax brackets results will be equal once you make the dollars equal.

so lets say you took 6700 pretax dollars in the 25% tax bracket and put 5k in a roth 401k and 1700 went for taxes . if it doubled over time you would have 10k

to really equal that same pretax amount you would have to put 6700 in the traditional 401k not the same 5k since you still have the dollars you did not spend on the taxes yet , if that doubled you have 13,400 less taxes = the same 10k

Last edited by mathjak107; 12-21-2016 at 01:52 AM..
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Old 12-21-2016, 03:24 AM
 
71,462 posts, read 71,629,249 times
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Quote:
Originally Posted by TuborgP View Post
Any large withdrawal from a tax deferred account will be a tax bill and quite probably a change in tax brackets. Creating a sizable after tax account as you go can help. Developing a plan on how to access your money in retirement might be almost as important as developing a plan to get there. Factoring pension income in along with SS is another topic not discussed much.
the nice thing is for a couple delaying ss a 65 year old couple can pull out as much as 22k a year from their traditional plan and pay zero tax . as much as 40k can be pulled at under a 5% tax rate . that is a gift from the tax gods .

throw in some gains from a brokerage account in the zero capital gains bracket ,some roth income and some cash and you can see a 100k plus income in the early years before drawing ss if you have the resources with very little tax.

this is another reason most of the roth vs traditional comparisons are not correct in their assumption .

in fact just living in a high tax state while working and taking that deduction up front and moving to a no tax state at retirement greatly alters things .
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