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there is a pretty big difference between a tax deferred account and a taxable account . in fact the roth has the same price of admission as the taxable account but one is never taxed and the other forever taxed .
im not sure what your savings rate has anything to do with what type of account you put the money in. the choice of 401k or not has nothing to do with the rate someone chooses to save.
There's an annual cap of around $18,000 that could be input into a 401K. For a highly-compensated employee who's a voracious saver, that $18K/year is a piddling amount. But for somebody making say $70K/year, that $18K is a big commitment, possibly crowding out all other savings. So, for lower-income earners, how to use a 401K, is a big commitment. For higher-income earners, or persons who could afford to save more, the issue is less pressing.
There's an annual cap of around $18,000 that could be input into a 401K.
For those under 50 that's the pre-tax + roth 401K total allowed.
Those 50+ can put another $6K catch-up in, making the total $24K/year.
But wait there's more!
Some 401K plans offer what's called an "after-tax 401K" option. What's that? Think of it as a deferred Roth. You put additional monies in, beyond the $18K or $24K limit mentioned above, up to the IRS maximum limit of all contribution monies including employer match: $54K. Either while still working at the company (if allowed) -or- upon leaving the company you can then take those after-tax monies and convert them/roll them over to a Roth bucket. You would have to pay regular income taxes on any gains of those monies, but going forward those monies would then grow tax free because they would then be Roth monies. Cool!
Obviously someone just starting out isn't going to be putting upwards of $54K into their 401K each year, but as time goes on, and as their compensation increases, it's a way to supersize and turbo-power those retirement contributions.
For those under 50 that's the pre-tax + roth 401K total allowed.
Those 50+ can put another $6K catch-up in, making the total $24K/year.
But wait there's more!
Some 401K plans offer what's called an "after-tax 401K" option. What's that? Think of it as a deferred Roth. You put additional monies in, beyond the $18K or $24K limit mentioned above, up to the IRS maximum limit of all contribution monies including employer match: $54K. Either while still working at the company (if allowed) -or- upon leaving the company you can then take those after-tax monies and convert them/roll them over to a Roth bucket. You would have to pay regular income taxes on any gains of those monies, but going forward those monies would then grow tax free because they would then be Roth monies. Cool!
Obviously someone just starting out isn't going to be putting upwards of $54K into their 401K each year, but as time goes on, and as their compensation increases, it's a way to supersize and turbo-power those retirement contributions.
This is huge but relatively unknown. One of the largest issue is that you can’t be considered a highly compensated employee by your employer which is 120k or more by default or your employer can elect top 20% if they wish. It’s hard for people making less than 120k to consider putting so much aside I’d tend to think.
My employer allows you to take the funds out immediately from the after tax bucket. I’d almost consider contributing to the pretax/roth 401k to the match and then just doing the after tax bucket with the rest
I'm not saying that getting out of the market in situations like the financial crisis is the right thing to do. It is just that I can understand why many people, given the level of constant fear that was coming from all directions, just couldn't take watching their assets in the market keep going down and bailed. Per Morningstar, even VBINX was down over 20% in 2008.
Yes, 20% isn't that bad. People need to get used to the idea that a drop that large is going to happen over the course of 30 years. It's normal.
It is a must for those in higher tax brackets, also you are essentially getting a free loan from the government by the tax deferral.. would you rather pay the tax now or 30 years from now while using that capital to invest? It's an absolute no brainer. The only exception would be if your 401k is crap and loaded with fees but all my employers have had decent to semi decent plans so...
I'm not sure what your savings rate has anything to do with what type of account you put the money in. the choice of 401k or not has nothing to do with the rate someone chooses to save.
You say it's a small benefit. I don't get that at all. My point was if you don't save much, it won't be of much benefit to you. If you save a lot, the 401k can be an excellent benefit, for tax purposes as well as asset accumulation. To say it has nothing to do with the rate someone chooses to save sounds like it's true FOR YOU. But you're a high income earner. Most of us aren't. It's definitely helped me save a higher percentage of my income because of the tax break.
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Originally Posted by CaptainNJ
I actually just ran an online calculator and the after tax difference between tax deferred and taxable accounts was greater than I expected. Still, I have a big problem with losing control of that money and giving government more control over it. that probably has a perceived cost to me that is greater than most other people.
I sort of understand the sentiment, but there's no predicting what the government will do no matter what you do with your money. Yes, there are restrictions with 401ks, but those are mostly a good thing. And there are ways of getting around them without paying the penalties if you really have enough money to quit your job before traditional retirement age (72t rule, etc.)
My employer allows you to take the funds out immediately from the after tax bucket. I’d almost consider contributing to the pretax/roth 401k to the match and then just doing the after tax bucket with the rest
My employer's plan limited after-tax contributions to no more than 20% of the gross salary. I still wanted all my buckets to be maximized, as I was on a seriously focused and intense financial mission to sock as much away as I could. I did have more in the pre-tax bucket than in the roth bucket, but the after-tax contribution/conversion to roth still made it a nice roth amount when all was said, done, and converted.
There's an annual cap of around $18,000 that could be input into a 401K. For a highly-compensated employee who's a voracious saver, that $18K/year is a piddling amount. But for somebody making say $70K/year, that $18K is a big commitment, possibly crowding out all other savings. So, for lower-income earners, how to use a 401K, is a big commitment. For higher-income earners, or persons who could afford to save more, the issue is less pressing.
true. i admit that a lot of my opinion comes from my own personal circumstances. its also impacted by my politics in a way because i have a complete lack of trust in government. i have no 401k option through work. i contribute to an IRA but it makes up a very small % of my total savings. so its not very important to me.
I'm very grateful to have had the 401k (403b) option: I started putting money into my accounts during my early thirties (after grad school), have increased my contributions incrementally since then (to over 25% of my income), and now in my early 50s I have a nice nest egg growing that I can work on and plan with. Given my financial habits 20+ years ago, I don't think I would have saved all of that money on my own. An added benefit: saving lots of money in the 403b has forced me to live below my means and prioritize my expenses. It's interesting to think that when I retire (age 62-65), my 403b, pension, and Social Security payments will put me at or above my current pre-tax and pre-savings income. I probably won't have to take a big lifestyle hit, and I probably won't have to sell the house and live on the proceeds if I don't want to.
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