Author Topic: Talk to me about 401ks  (Read 3920 times)

IowaStache

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Talk to me about 401ks
« on: July 18, 2014, 02:37:56 PM »
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« Last Edit: June 10, 2016, 09:01:49 AM by IowaStache »

brewer12345

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Re: Talk to me about 401ks
« Reply #1 on: July 18, 2014, 02:45:10 PM »
What is your all-in marginal tax rate?

matchewed

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Re: Talk to me about 401ks
« Reply #2 on: July 18, 2014, 02:46:40 PM »
Information you need to determine to make this call -

Your income and the taxes you pay. What the match really is, calling it 4 to 5 is meaningless. You need to get the actual language of the match. Is that 4%? % of what? Do they match your contribution or are they doing a percent of salary?

What funds are available in the 401k? What are their expense ratios?

Do you plan on FIREing? Do you know the options for accessing money in tax deferred accounts prior to 59.5 years of age?

matchewed

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Re: Talk to me about 401ks
« Reply #3 on: July 19, 2014, 06:56:24 AM »
At that income level you have no reason not to max out your 401k.

You still need to go through the funds and determine which ones meet your asset allocation while minimizing expense ratios.

matchewed

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Re: Talk to me about 401ks
« Reply #4 on: July 19, 2014, 07:35:33 AM »
At that income level you have no reason not to max out your 401k.

You still need to go through the funds and determine which ones meet your asset allocation while minimizing expense ratios.

Can you explain in more detail as to why?

If it doesn't have very good returns and less flexibility wouldn't there be value in not maxing it out if all other $ went into taxable investment accounts?  Also, to answer earlier questions, I know some about withdrawal abilities, but not much. My wife and I would like to be financial independent early - hopefully in our 30s. However, we have no idea right now whether we would want to retire early, step back or just keep working. The assurance is what's important to us, that if the business went under we could cover our expenses and more.

Refer back to my original post.

Information you need to determine to make this call -

Your income and the taxes you pay. What the match really is, calling it 4 to 5 is meaningless. You need to get the actual language of the match. Is that 4%? % of what? Do they match your contribution or are they doing a percent of salary?

What funds are available in the 401k? What are their expense ratios?

Do you plan on FIREing? Do you know the options for accessing money in tax deferred accounts prior to 59.5 years of age?

Right now you're just saying your 401k doesn't have good returns. That is a meaningless statement as the 401k in of itself is not the investment but the investment vehicle. And an investment vehicle that at your current income level (assuming you file jointly) will save 25% on that $17.5k in taxes as you don't pay taxes on that income. Or $4,375 in tax savings for simplicity sake. So like I said before you'll need to lay out the funds available to you within the 401k. But even putting the funds aside think of this scenario. Scenario 1): you can either invest $17.5k in something now with an inflation adjusted (crappy) return of 4% on average. Scenario 2): you could pay the taxes on that amount and invest $13,125 in an inflation adjusted (awesome) return of 7%. Which is better? Scenario 1) at the end of five years will have $98.5k, scenario 2) will have $80.7k. 10 years? Scenario 1) $218.5k and Scenario 2) $194k. The math works out. Having a higher savings rate, which a traditional 401k can offer you via tax savings, out weighs returns for a FI/FIRE goal.

To further elaborate on that read this post from madfientist.

As for withdrawal strategies; there is the Roth Pipeline, SEPP, and just taking the penalty as options. All of these depend on whether you decide to FIRE, what age, and what your projected expenses are. The idea is that you will have several different investment vehicles that treat taxes differently; Roth accounts, traditional IRA/401k accounts, and standard taxable accounts. Then come FI or FIRE you have all the tools necessary to pull it off.

I can understand wanting to be financially independent early. But I think you'll need to narrow down whether you want to work or not after that. How I'd approach each option would be slightly different.

ender

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Re: Talk to me about 401ks
« Reply #5 on: July 19, 2014, 07:36:30 AM »
Figure out what your marginal tax rate is.

Figure out how many years you need to work for the same employer for their expensive funds to come close to costing you that much.


This will be a good "back of napkin" question whether it's worthwhile. If you have a 40% marginal rate, your expense ratios are about 1%, and you are going to work for that company another 10 years, you basically still come out way ahead.

When you transition companies you can roll a 401k into an IRA where you have control.

Your main problem is you don't actually know your 401k expenses and funds. Figure these out, post them, and then people here can give better advice.

Joel

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Re: Talk to me about 401ks
« Reply #6 on: July 19, 2014, 09:57:27 AM »
Figure out what your marginal tax rate is.

Figure out how many years you need to work for the same employer for their expensive funds to come close to costing you that much.


This will be a good "back of napkin" question whether it's worthwhile. If you have a 40% marginal rate, your expense ratios are about 1%, and you are going to work for that company another 10 years, you basically still come out way ahead.

When you transition companies you can roll a 401k into an IRA where you have control.

Your main problem is you don't actually know your 401k expenses and funds. Figure these out, post them, and then people here can give better advice.

This.

Like said above, your best bet probably is the 401k.