Suzie Orman comment - can I afford it? (married, opinion, generation)
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When I was getting my finances together I took what Suze said to the bank. Now that I am getting things together I am doing better and realize that somethings is just off base and overboard IMHO.
I always keep my vacation/sick leave balance at 4-5 months minimum - six to eight is probably right on what it should be as a minimum. It surprises me how many people do not maintain a balance and then ask others to donate time to them when they have a crisis.
I try to do the same. That 4-5 months can translate into living expenses for 6-10 months assuming you cut back where you can. Assuming I don't take more time off just prior to retirement, I figure it can cover moving expenses if we decide to relocate.
It's a common misconception, but she really ought to know better. I've always thought that her schtick was basically spoon-feeding financial pablum to the masses, but even I thought she was better informed than that.
Is it possible she is saying that the money you use to pay it back will already have been taxed and once you have paid it back years later when retired and you draw it out it will be taxed again and that is double taxation? The original contribution is before taxes but the pay back isn't is it?
nah, all loans are paid with after tax dollars and you are spending untaxed money to buy something with the loan...all your actually doing is replacing the money you took out...think of it as no more complex than taking a 401k loan then the next day going on 2nd thought i dont need the money and replace it back in the 401k....
whether you take the 401k money itself and put it back or you keep the the 401k money and put your after tax paycheck back in it makes no difference at no point do you pay 1 penny more in tax.
only the interest you pay is taxed 2x... never the principal
Last edited by mathjak107; 03-09-2010 at 04:49 PM..
I spent a lot of time at the local library looking for good books related to money management and retirement. Some were very good; others were anecdotal stories and thin on specifics. I did not bother with any of the Suze O books. They seemed heavy on the side of selling books and light on the side of being useful.
Is it possible she is saying that the money you use to pay it back will already have been taxed and once you have paid it back years later when retired and you draw it out it will be taxed again and that is double taxation? The original contribution is before taxes but the pay back isn't is it?
Quote:
Originally Posted by loveautumn
Yes, I believe that's what she meant. The loan is paid back with after tax dollars, and then you're taxed again when you take distribution.
Yes, that is what she is saying and that is what is completely incorrect. The example I use to try to explain to people why this is wrong is very similar to the one Mathjak used. Say you took a $20,000 loan out of your 401(k) and instead of spending it you just put it in a dresser drawer in your bedroom. When it is time to pay back the loan, you just open the desk drawer and take out the money you received earlier. It is still the same pre-tax money that you are using to pay back the loan. It makes no difference if you stick it in the drawer or actually use it and then pay the loan back with other money. Nothing has been taxed during the course of this transaction.
What's really scary is that if the so-called financial guru Suze Orman can't get this elementary concept correct, you have to wonder what other incorrect answers and advice she's giving out.
Yes, that is what she is saying and that is what is completely incorrect. The example I use to try to explain to people why this is wrong is very similar to the one Mathjak used. Say you took a $20,000 loan out of your 401(k) and instead of spending it you just put it in a dresser drawer in your bedroom. When it is time to pay back the loan, you just open the desk drawer and take out the money you received earlier. It is still the same pre-tax money that you are using to pay back the loan. It makes no difference if you stick it in the drawer or actually use it and then pay the loan back with other money. Nothing has been taxed during the course of this transaction.
What's really scary is that if the so-called financial guru Suze Orman can't get this elementary concept correct, you have to wonder what other incorrect answers and advice she's giving out.
Ok, I respect what you think but here is what I need clarified. The money went into my 401/403 pre tax and tax free. If I withdraw 20k I do so tax free. If I put that 20k back I do so tax free and that money has never been taxed. If I replace it with 20k pretax dollars I do so tax free and what you say is clear. However if I dip into my savings account that was built on post tax dollars I will have paid tax on that money when my employer paid me and again when I take it out as disbursement at some point in the future. Yes? I know you will say why did you take it out of your 401 if you had the money elsewhere and that makes all the sense in the world. However it does seem like one way of making sense of what she said.
Ok, I respect what you think but here is what I need clarified. The money went into my 401/403 pre tax and tax free. If I withdraw 20k I do so tax free. If I put that 20k back I do so tax free and that money has never been taxed. If I replace it with 20k pretax dollars I do so tax free and what you say is clear. However if I dip into my savings account that was built on post tax dollars I will have paid tax on that money when my employer paid me and again when I take it out as disbursement at some point in the future. Yes? I know you will say why did you take it out of your 401 if you had the money elsewhere and that makes all the sense in the world. However it does seem like one way of making sense of what she said.
No, Tuborg, I'm sorry, but you're making the same mistake she did. You're taking out $20k and then you're replacing it. It doesn't matter whether you pay it back from the physical money sitting in your desk drawer or from money in your savings account. The physical dollar bills sitting in your desk drawer aren't magically "pre-tax" whereas the money sitting in your savings account is post-tax. It doesn't matter where the money is sitting. You're still just replacing pre-tax money.
Let me try to explain it again by building on your own example. You seem to understand that if you take the money from the 401(k), put it in a desk drawer, and then subsequently pay it back, it is all pre-tax money. Let's add a step there. Say that you take the $20k, put it in a desk drawer, then take it out of the desk drawer and deposit it in your savings account, thereby mixing it in with all your post-tax dollars. Is it still pre-tax money? Of course.
Now you want to do some home improvements, so you withdraw $20K and give it to your contractor. Have you given him pre-tax or post-tax money? (trick question)
Let's say it's time to pay the 401(k) loan back and you take $20k out of your savings account to do so. Are you using pre-tax or post-tax money? Do you need to reverse your steps and take the money out of the savings account and put it back in your desk drawer to make it "pre-tax" again before paying the loan back? Of course not.
It doesn't matter where you get the money from to pay back the loan. You're taking out $20k pre-tax and you're putting back $20k pre-tax.
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