[Marc]

Hi guys,

I just started contributing to my 401k, I only contribute 3% which is what my company matches 100% … i think they also match 50% of the next 2 or 3%

based on some reading i have done that seems to be extremely low! I do have a family and we try to live comfortably but really have no saving activity going on! “sole breadwinner” making around 60k.

I was wondering how everyone else plans for retirement.

Passed And got my license too ..

[Anonymous]

@Corporette Yes! When I used to work in taxes, I'd have people call and say “I got this notice from the IRS, but I thought you didn't have to file taxes after you turned 65” or call and ask what age you stop paying taxes at etc. People don't realize that taxes apply to the elderly as well as the young. Had to try to explain to my grandfather-in-law over the last couple years why drawing money out of his IRA was going to cost him taxes, even though there wasn't any penalty.

[Anonymous]

Yes the penalty completely throws people off. There is no education on the withdrawal of funds from an IRA or 401k, just tons of info on the importance of saving. People tell me all the time that they have are “insert age over 65 here” and they dont pay taxes anymore.

[juuustin]

2% in your employer's retirement plan? What?

Maybe you just have the world's worst 401(k) and that is skewing your judgment. Normal 401(k)'s allow you to invest in the exact same investment that you are considering in another vehicle, just at a significant tax savings.

Your math is simply incorrect on the tax situation. The benefit of tax deferment is that it allows you to purchase more of the investment with the same amount of pre-tax earnings. The compounding of gains on the marginal amount of investment that you were able to purchase upfront (because it is pre-tax) is where you come out ahead.

With $100 pretax you can purchase 10 shares of $10 stock. With $100 after tax, let's say you can purchase 7.5 shares. You don't touch the account after this. In 40 years let's say this stock is now worth $100. Here are the calculations, keeping in mind earnings of $100 was required in both scenarios:

401(k):

10 shares @ $10 = $100 principal in Year 0

10 shares @ $100 = $1000 principal in Year 40

$1000 * .25 (assumed tax rate) = $250 in tax

After-tax earnings = $750

Taxable vehicle:

7.5 shares @ $10 = $75 principal in Year 0 ($25 tax already assessed)

7.5 shares @ $100 = $750 principal in Year 40

$675 gains * .25 = $168.75 + $25 (year 0) = $193.75 in tax (YAY YOU SAVED MONEY… not)

After-tax earnings = $581.25

Please feel free to question the investments available in your particular retirement plan, but please do not make broad generalizations that 401(k)'s and tax deferment in general is a bad deal. You are simply incorrect, as shown above.

MD Candidate: 10/1/14

FAR - 87 (11/23/14)
REG - 87 (1/30/15)
BEC - 89 (4/19/15)
AUD - 98 (5/30/15)

Ethics - 100

Experience - In Progress!

[mw798]

Go for a Roth 401k if your employer offers it. Pay the tax now and you won't have to pay any taxes on your capital gains later when you withdraw.

[Anonymous]

I said from the start that in my experience they hadn't been good – I never said all of them were bad. I just advised people to investigate their options. Don't invest into something that has terrible returns just cause it's offered through work. That's not bad advice. I don't make a living out of evaluating different company's retirement offerings, so can't speak to any other than the ones I've dealt with. I'm not sure why people got the idea I was a company-retirement-hater – I'm not, I just advise caution. That's all.

[ScarletKnightCPA]

I was going to provide the mathematics step by step proof showing that putting into a 401K results in more savings than just buying stocks but I think Justin already laid it out pretty clearly.

The same concept applies to a roth 401k but opposite. You pay taxes up front and then it grows tax free… but in the end, assuming the same tax rate, a roth 401k and a traditional 401k ends up with the same balance after tax. I think the roth actually more clearly shows this concept.

In a roth 401k you pay up front and all gains at the end is tax free. In contrast, in a regular investment account, you would pay taxes up front and then pay taxes when you are withdrawing. This means that even if your still in the same tax rate, assuming the same expenses and returns, you are always better off investing in a traditional/roth 401K than in a regular investment account.

Well that 4% would depend on the company I suppose. Right now my companies 401Ks broad market index funds are outperforming vanguard's broad market index fund. The US broad market and small market fund are pretty similar but the international funds are handily beating vanguard fund.

Far: 76 (Wiley Test Bank)
Aud: 77 (Wiley Test Bank)
Reg: 61, 76 (Wiley book, Wiley Test Bank)
Bec: 86 (Wiley Test Bank)

MBA in progress

[Author]

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