The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Miss Piggy on November 26, 2016, 03:30:18 PM
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My nephew (25 years old) is really proud of himself for contributing a little bit of money (about 3% of his $60,000 salary) to a Betterment account.
I asked if he was already maxing out his 401k, and he said he doesn't contribute to it at all because there's no company match. So then I mentioned the tax advantage of the 401k contributions. He looked at me like I'm a complete idiot and said "but you have to pay taxes on that money later when you use it." Well, yeah...but...and I had nothing. Am I the idiot here? Please give me something to say to him that would encourage him to see the situation differently. Or let me know if he's right.
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At $60K salary he's probably paying 25% marginal federal rate, plus whatever state and local. Even with 0% state tax, if he invests $9000 in Betterment it cost him $12000 pre-tax. He then pays tax on the annual dividends and any capital gains.
If he invested in the 401k, he invests the entire $12K and pays no tax on the annual dividends and capital gains while still in the 401k. If in retirement he withdraws while in the 15% bracket, he pays only 15% instead of the 25% it cost for the Betterment investment.
See To 401k or not to 401k? That is the question (http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/) and Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for more.
Stick to your guns - you are giving good advice!
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Perfect - thank you, MDM.
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What MMM said plus this: since you're working with gross dollars, not net, you are deploying more little green soldiers sooner. More money in, more money out on the other end.