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Old 12-21-2016, 04:41 AM
 
Location: Mount Airy, Maryland
10,460 posts, read 5,926,819 times
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Does that $22K tax free withdraw apply only because you are delaying SS?
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Old 12-21-2016, 05:25 AM
 
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no it apply's because your total income less deductions and exemptions make it zero . delaying makes it a bit more practical to be able to pull it off
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Old 12-21-2016, 05:45 AM
 
Location: Central Massachusetts
4,800 posts, read 4,846,832 times
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Quote:
Originally Posted by bpollen View Post
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.
1. No one only puts in a few deposits to only have a pitiful amount. I understand you are just trying to put some context to it but you should use realistic amounts.
2. In a 401k it is tax deferred growth and in a good index fund fees will hurt but not as bad as being able to only put in $5,500 annually.
3. I agree fees are huge in many 401ks but they are different across the board. Not every one has a high fee 401k to use.
4. Matching makes it even better. If you are one of those that have a match at minimum contribute to max on the match as a minimum.
5. mathjak and I disagreed a bit on this but I stand by my point. It isn't always about price share it is also about shares. Mutual funds are sold as shares. When you sell you are selling shares. Yes it is nicer to have a higher price per share but as you are growing your fund it is also advisable to have some shares bought at a lower price per share so that it will have a bigger impact.
6. Time is everything. Having the time to recover from ups and downs in the market makes all the difference. With a larger contribution limit a 401k can grow to very large sums. Yes so can a good Roth or tIRA but as I said you have 3 times the limit in a 401k. Notice I didn't say timing. Timing is a bad idea. Dollar cost averaging is a better choice. Systemic contributions are easier to dollar cost in funds. Having it taking out of paycheck makes it easier.
7. If the fees are high and you notice them you can talk to your employer about it. Maybe they did not see that and can negotiate a better deal. They control the funds and with so many financial products out there they can shop for a better deal if they know about it.
8. Many 401k plans offer Roth now. The rules allow you to put your money in the Roth while contributions in matching from employer are in the traditional pre-tax fund. That gives a good balance of tax free and tax deferred money to grow.
9. Too many people do not know how to nor are willing to start putting money into retirement accounts. A 401k at least in a minimal way sort of forces people to put some money away.
10. My final thought here is I would make it much more difficult to borrow from your 401k if not impossible. I understand the reasoning and the need but it is very disruptive on your savings and it will limit your final number no matter how little you take.

Oh by the way I understand some do not like 401k's. I can see the points they make but I also look at a bigger picture that covers those who are not quite as savvy. Nothing personal here. Just making some points you left out of your argument.
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Old 12-21-2016, 09:49 AM
 
Location: RVA
2,165 posts, read 1,265,978 times
Reputation: 4456
Rep for that over all reasoning. I think the percentage of people that can take advantage of a company match, far exceeds those that can take advantage of the higher limits. In reality, saving $5500 a year is more important that the upper limits as one income rises. It doesn't take a mental giant to know that those who make more money per year, in general, have more to invest, and are more cognizant of investing in general! They can make a more accurate informed decision as what they expect their tax rate to be in retirement, vs the average income American that saves what they CAN, vs what they WANT to or SHOULD. A young professional SHOULD takenout a Roth, after getting the company match in a 401k, as they know there is a much higher chance they will be in a higher bracket later in their career and probably in retirement. Its not efficient at all to defer taxes (avoid paying now) early in your carrer when in the mostly 15% bracket, so that you can pay them later at 25 or 28 or 33%! The Roth in that scenario is pure gold. Also, when young, take full advantage of an HSA if you can. What a deal those are!
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Old 12-21-2016, 11:21 AM
 
Location: Mount Airy, Maryland
10,460 posts, read 5,926,819 times
Reputation: 16156
Quote:
Originally Posted by Perryinva View Post
Rep for that over all reasoning. I think the percentage of people that can take advantage of a company match, far exceeds those that can take advantage of the higher limits. In reality, saving $5500 a year is more important that the upper limits as one income rises. It doesn't take a mental giant to know that those who make more money per year, in general, have more to invest, and are more cognizant of investing in general! They can make a more accurate informed decision as what they expect their tax rate to be in retirement, vs the average income American that saves what they CAN, vs what they WANT to or SHOULD. A young professional SHOULD takenout a Roth, after getting the company match in a 401k, as they know there is a much higher chance they will be in a higher bracket later in their career and probably in retirement. Its not efficient at all to defer taxes (avoid paying now) early in your carrer when in the mostly 15% bracket, so that you can pay them later at 25 or 28 or 33%! The Roth in that scenario is pure gold. Also, when young, take full advantage of an HSA if you can. What a deal those are!
Good post. Not only that a young person gets a bigger advantage of tax free growth for a longer period of time.
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Old 12-21-2016, 11:50 AM
 
6,620 posts, read 3,746,469 times
Reputation: 13687
Quote:
Originally Posted by bpollen View Post
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.
The bolded number above should read $1,200.
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Old 12-21-2016, 11:55 AM
 
6,620 posts, read 3,746,469 times
Reputation: 13687
Quote:
Originally Posted by golfingduo View Post
1. No one only puts in a few deposits to only have a pitiful amount. I understand you are just trying to put some context to it but you should use realistic amounts.
2. In a 401k it is tax deferred growth and in a good index fund fees will hurt but not as bad as being able to only put in $5,500 annually.
3. I agree fees are huge in many 401ks but they are different across the board. Not every one has a high fee 401k to use.
4. Matching makes it even better. If you are one of those that have a match at minimum contribute to max on the match as a minimum.
5. mathjak and I disagreed a bit on this but I stand by my point. It isn't always about price share it is also about shares. Mutual funds are sold as shares. When you sell you are selling shares. Yes it is nicer to have a higher price per share but as you are growing your fund it is also advisable to have some shares bought at a lower price per share so that it will have a bigger impact.
6. Time is everything. Having the time to recover from ups and downs in the market makes all the difference. With a larger contribution limit a 401k can grow to very large sums. Yes so can a good Roth or tIRA but as I said you have 3 times the limit in a 401k. Notice I didn't say timing. Timing is a bad idea. Dollar cost averaging is a better choice. Systemic contributions are easier to dollar cost in funds. Having it taking out of paycheck makes it easier.
7. If the fees are high and you notice them you can talk to your employer about it. Maybe they did not see that and can negotiate a better deal. They control the funds and with so many financial products out there they can shop for a better deal if they know about it.
8. Many 401k plans offer Roth now. The rules allow you to put your money in the Roth while contributions in matching from employer are in the traditional pre-tax fund. That gives a good balance of tax free and tax deferred money to grow.
9. Too many people do not know how to nor are willing to start putting money into retirement accounts. A 401k at least in a minimal way sort of forces people to put some money away.
10. My final thought here is I would make it much more difficult to borrow from your 401k if not impossible. I understand the reasoning and the need but it is very disruptive on your savings and it will limit your final number no matter how little you take.

Oh by the way I understand some do not like 401k's. I can see the points they make but I also look at a bigger picture that covers those who are not quite as savvy. Nothing personal here. Just making some points you left out of your argument.
The point was to show that for up to $5,500, the investor gets more money in the end. I used just one of her contributions (she will be contributing $560/month). So just multiply that by 12.
Next...contribute to 401k for the amount exceeding the Roth limit.

The OP does not have a match contribution from the employer for her 401k.

Fewer fees, and NO tax on ALL earnings = better than a 401k. (for the amounts you contribute) When the $560 doubles, the investor has gained $560 free and clear of FEES and TAXES. There are few better deals than that in the investment world.

I call to her attention the issue with the limit on contributions to the Roth. She would end up contributing $5,500 to a Roth, and the remainder to the 401k. She would use both, as most people would.

A Roth 401k is different from a Roth IRA. My post was about Roth IRAs...NOT a Roth 401k.

I agree about borrowing from a retirement account. Bad bad bad idea. But I would not make it harder, since sometimes it's necessary.
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Old 12-21-2016, 11:57 AM
 
71,550 posts, read 71,730,589 times
Reputation: 49156
it still is not comparing apples to apples . taking money from outside the roth to pay the taxes up front but not doing it for the traditional is flawed results .

with an ira you would have to put the difference in taxes on the roth in to a tax efficient fund in a brokerage account to even out the money since the limits are different .

you are spending more up front with the roth and not accounting for it
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Old 12-21-2016, 11:59 AM
 
6,620 posts, read 3,746,469 times
Reputation: 13687
Quote:
Originally Posted by Perryinva View Post
Rep for that over all reasoning. I think the percentage of people that can take advantage of a company match, far exceeds those that can take advantage of the higher limits. In reality, saving $5500 a year is more important that the upper limits as one income rises. It doesn't take a mental giant to know that those who make more money per year, in general, have more to invest, and are more cognizant of investing in general! They can make a more accurate informed decision as what they expect their tax rate to be in retirement, vs the average income American that saves what they CAN, vs what they WANT to or SHOULD. A young professional SHOULD takenout a Roth, after getting the company match in a 401k, as they know there is a much higher chance they will be in a higher bracket later in their career and probably in retirement. Its not efficient at all to defer taxes (avoid paying now) early in your carrer when in the mostly 15% bracket, so that you can pay them later at 25 or 28 or 33%! The Roth in that scenario is pure gold. Also, when young, take full advantage of an HSA if you can. What a deal those are!
The OP doesn't have an employer match. She would max out her Roth IRA, then contribute the small overage to her 401k.

NOTE: I WAS SPEAKING OF A ROTH IRA AND NOT A ROTH 401K, which is different and something I know little about, since my employer didn't provide that option.
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Old 12-21-2016, 12:05 PM
 
6,620 posts, read 3,746,469 times
Reputation: 13687
Quote:
Originally Posted by golfingduo View Post
1. No one only puts in a few deposits to only have a pitiful amount. I understand you are just trying to put some context to it but you should use realistic amounts.
2. In a 401k it is tax deferred growth and in a good index fund fees will hurt but not as bad as being able to only put in $5,500 annually.
3. I agree fees are huge in many 401ks but they are different across the board. Not every one has a high fee 401k to use.
4. Matching makes it even better. If you are one of those that have a match at minimum contribute to max on the match as a minimum.
5. mathjak and I disagreed a bit on this but I stand by my point. It isn't always about price share it is also about shares. Mutual funds are sold as shares. When you sell you are selling shares. Yes it is nicer to have a higher price per share but as you are growing your fund it is also advisable to have some shares bought at a lower price per share so that it will have a bigger impact.
6. Time is everything. Having the time to recover from ups and downs in the market makes all the difference. With a larger contribution limit a 401k can grow to very large sums. Yes so can a good Roth or tIRA but as I said you have 3 times the limit in a 401k. Notice I didn't say timing. Timing is a bad idea. Dollar cost averaging is a better choice. Systemic contributions are easier to dollar cost in funds. Having it taking out of paycheck makes it easier.
7. If the fees are high and you notice them you can talk to your employer about it. Maybe they did not see that and can negotiate a better deal. They control the funds and with so many financial products out there they can shop for a better deal if they know about it.
8. Many 401k plans offer Roth now. The rules allow you to put your money in the Roth while contributions in matching from employer are in the traditional pre-tax fund. That gives a good balance of tax free and tax deferred money to grow.
9. Too many people do not know how to nor are willing to start putting money into retirement accounts. A 401k at least in a minimal way sort of forces people to put some money away.
10. My final thought here is I would make it much more difficult to borrow from your 401k if not impossible. I understand the reasoning and the need but it is very disruptive on your savings and it will limit your final number no matter how little you take.

Oh by the way I understand some do not like 401k's. I can see the points they make but I also look at a bigger picture that covers those who are not quite as savvy. Nothing personal here. Just making some points you left out of your argument.
My post was for the OP. She will be contributing $6,720/year. She has no employer match in her 401k. She asked whether 401k or Roth IRA is better for her purposes. I posted merely a comparison of the two.

The Roth IRA is clearly better in the long run, since there would be NO INVESTMENT COMPANY fees (none) and NO TAXES ON EARNINGS (none). The only fees she would have are from whatever investments she selected, like mutual funds, and transaction fees ($17 transaction fee to buy or sell a mutual fund at Scottrade). There are typically no transaction fees in 401k accounts, but there are investment company fees.

If one isn't comfortable selecting his/her own mutual funds or other investments, then sticking with the 401k is better, since he probably has access to advisors at the investment company that handles the account, and there are models set up for employees to use, based on the assumption that they don't know how to invest.

The amount(s) I used in the examples were simply to show the difference. I could have used $10 or $1M dollars. Same thing.
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