Author Topic: 401k vs taxible accounts  (Read 6035 times)

G. Thomas

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401k vs taxible accounts
« on: November 17, 2014, 04:24:51 PM »
Should I put as much into my work 401k to limit taxes vs putting the money into a Vanguard account? I am looking at around 20k.
Work has a ZERO % match for 401k, currently am putting 5% in (thoughts on this)?

About me:
-75% saving rate
-Already maxed out traditional roth
-no debts/mortgage
-Doesn't look like I will be able to drop into lower tax bracket
-I have emergency funds and insurances in place

MDM

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Re: 401k vs taxible accounts
« Reply #1 on: November 17, 2014, 04:31:54 PM »
Unless there are extraordinarily high fees for your 401k options, for the sake of growing your stash it is usually better to use the 401k instead of taxable accounts. 

You can contribute only $17,500 (in 2014 if you are under 50 years old) to the 401k, but if your cash flow will allow it, why not?

hexdexorex

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Re: 401k vs taxible accounts
« Reply #2 on: November 17, 2014, 05:56:35 PM »
One way you are taxed going in and out...the other way you are only taxed coming out.

Def max out the 401k....if it is matched all the way up or not.

G. Thomas

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Re: 401k vs taxible accounts
« Reply #3 on: November 17, 2014, 07:03:37 PM »
Now if had the option would you go with a traditional 401k or a Roth 401k (or a % combination of both)? 

johnny847

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Re: 401k vs taxible accounts
« Reply #4 on: November 17, 2014, 07:07:36 PM »
As others have said, max out the 401k. One exception being if your 401k has ridiculous fees, then it's harder to make that decision.

To truly answer Roth vs Traditional, we'd have to know your tax bracket now vs how much you expect to withdraw in retirement. I'd wager though that at a 75% saving rate, you're making good money---just based on the information given, I'd say traditional to lower your taxes now vs later. I'm thinking you're in 25% or higher bracket, yes? Not that it's impossible to be saving that much while making only in the 15% bracket, but I'm just looking at probabilities here.

MDM

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Re: 401k vs taxible accounts
« Reply #5 on: November 17, 2014, 07:16:40 PM »
Now if had the option would you go with a traditional 401k or a Roth 401k (or a % combination of both)?

Not enough information available to give an informed answer. 

Need to know
  - current gross income and filing status to determine in what federal tax bracket(s) your 401k deductions will occur
  - expected federal tax bracket when you will withdraw from the 401k, and whether the 401k withdrawals will be your only income or will be on top of other income (and how much other income).  Need this last part to understand if the withdrawals will be taxed at your marginal rate or at some averaged rate.
  - any expected difference in state income taxes (e.g. moving between states with high vs. no income taxes).




G. Thomas

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Re: 401k vs taxible accounts
« Reply #6 on: November 17, 2014, 07:23:16 PM »
That is correct, 25%. I expect to withdraw (in current terms) in the 15% bracket.  I am searching for fee information but I don't think it is out of the ordinary for an employer sponsored plan.

-Single, 70k + bonus
-Don't expect the 401k to be the only source of income upon FIRE
-hard to say at this time for state to state taxes

MDM

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Re: 401k vs taxible accounts
« Reply #7 on: November 17, 2014, 07:26:45 PM »
Then it's easy (assuming you don't need access to the funds prior to retirement): traditional.

Save 25%, pay 15%.

G. Thomas

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Re: 401k vs taxible accounts
« Reply #8 on: November 17, 2014, 07:40:24 PM »
I must be missing something.  If put $17,500 into the 401k my gross would still be above the 15% cutoff ($36,900).  Is that correct that I would stay in the same bracket?

MDM

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Re: 401k vs taxible accounts
« Reply #9 on: November 17, 2014, 08:06:22 PM »
I must be missing something.  If put $17,500 into the 401k my gross would still be above the 15% cutoff ($36,900).  Is that correct that I would stay in the same bracket?
You are correct.  Taxable income anywhere between $36,900 and $89,350 for a single taxpayer in 2014 puts you "in the 25% bracket."

When you deduct the $17,500 you avoid paying $17,500 * 25% = $4,375.

When you withdraw the $17,500 in retirement, you pay $17,500 * 15% = $2,625.

Thus saving $1,750.

Does that help?

G. Thomas

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Re: 401k vs taxible accounts
« Reply #10 on: November 17, 2014, 08:12:08 PM »
That does.  Thank you.

ImCheap

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Re: 401k vs taxible accounts
« Reply #11 on: November 18, 2014, 02:51:58 PM »
That is correct, 25%. I expect to withdraw (in current terms) in the 15% bracket.  I am searching for fee information but I don't think it is out of the ordinary for an employer sponsored plan.

No brainer to use tax differed if going 25% in 15% out.

Don't be to content in thinking your employer sponsored plan is not a dog in fees, I have seen some bad ones for sure 1%+er's  + another 1% fee plan etc.

If you are not sure of the plan fees how hard did you look at your AA?

GGNoob

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Re: 401k vs taxible accounts
« Reply #12 on: November 18, 2014, 02:59:10 PM »
If you only contribute 5% to your 401k currently but have a 75% savings rate, where are you currently saving all of your money?

I'm with the others here, max out the Traditional 401k. If, in 2015, you can get your MAGI below $61,000 and are still in the 25% tax bracket, you could also contribute to a Traditional IRA and take the tax deduction if you choose.

Here's the 2015 Traditional IRA deduction limits.

G. Thomas

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Re: 401k vs taxible accounts
« Reply #13 on: November 19, 2014, 09:21:55 AM »
-ImCheap, I appreciate the pushback and I looked up the fees (below).  What are your thoughts?
-Logan T, I max out Roth and planned to drop the rest into Vanguard/other taxable accounts.  Currently I have the entire amount in my bank account (woof) ready to reallocate.   I was introduced to MMM a in August and have soundly taken to the lifestyle.  Thank you for the info about MAGI, I have never heard of this and still trying to digest it.

ADP fees:
-Final Distribution: $50 per distribution
-Withdrawal: $50 per withdrawal
-Buy/Sell Investments
---Net Expense Ratio: 1.26%
---Net per $1000: $12.60
---Gross Expense Ratio: 1.26%
---Gross per $1000: $12.60

kevinb421

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Re: 401k vs taxible accounts
« Reply #14 on: November 19, 2014, 09:48:53 AM »
http://www.madfientist.com/retire-even-earlier/

this is an article that shows that even with shitty 401k options and fees its still almost always the better choice.

Mighty-Dollar

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Re: 401k vs taxible accounts
« Reply #15 on: November 20, 2014, 01:58:46 AM »
Just keep in mind that tax deferred accounts (like annuities) will eventually be taxed at a higher rate (assuming tax laws don't change)...

johnny847

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Re: 401k vs taxible accounts
« Reply #16 on: November 20, 2014, 07:09:56 AM »
-ImCheap, I appreciate the pushback and I looked up the fees (below).  What are your thoughts?
-Logan T, I max out Roth and planned to drop the rest into Vanguard/other taxable accounts.  Currently I have the entire amount in my bank account (woof) ready to reallocate.   I was introduced to MMM a in August and have soundly taken to the lifestyle.  Thank you for the info about MAGI, I have never heard of this and still trying to digest it.

ADP fees:
-Final Distribution: $50 per distribution
-Withdrawal: $50 per withdrawal
-Buy/Sell Investments
---Net Expense Ratio: 1.26%
---Net per $1000: $12.60
---Gross Expense Ratio: 1.26%
---Gross per $1000: $12.60
Hmm usually 401ks list the expense ratio per fund, as different funds have different expense ratios. I have seen plans that charge an expense ratio across all investments, and also an expense ratio in each fund. Is that what that 1.26% refers to?

G. Thomas

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Re: 401k vs taxible accounts
« Reply #17 on: November 20, 2014, 09:57:03 AM »
Those expenses are all that I found. 

Can one retroactively put money into a 401k or another tax advantaged account? Coming up to the end of the year I realize I have not put enough into paycheck withdraws resulting in being way short of maxing it out.  I have upped my contribution to the max (86%) for the remaining 3 pay periods.

Roth is already maxed.

johnny847

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Re: 401k vs taxible accounts
« Reply #18 on: November 20, 2014, 10:02:22 AM »
Can one retroactively put money into a 401k or another tax advantaged account? Coming up to the end of the year I realize I have not put enough into paycheck withdraws resulting in being way short of maxing it out.  I have upped my contribution to the max (86%) for the remaining 3 pay periods.
Not to workplace retirement plans - only way is via paychecks.
If your HR is nice and clever, they may be able to do some accounting trickery.....but I wouldn't count on that. It's worth asking though.

Some 401ks let you make after-tax contributions to 401ks up to the 52k limit (and I mean after-tax, not Traditional or Roth contributions), not out of your paycheck. But it won't help with your taxes.