Author Topic: impacts to 401k plans  (Read 1135 times)

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Re: impacts to 401k plans
« Reply #15 on: October 26, 2017, 12:45:23 PM »

Online Surferdad

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I love my 401k, but I feel like so few people use it, and I would bet only a small percentage of those who do use it are taking full advantage of it.  I doubt most even know there is a limit or what the limit is.  A simple google search produces several articles talking about what a failure the 401k is. 

CNBC article from 2015:
Quote
You need to know this number: $18,433.

That's the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.

So is cutting the limit really going to do much?   Essentially a $4k-$5k tax increase for the few people actually maxing out their 401k, which are likely already upper middle class and above.  Or do you guys think more than that are really taking advantage of it?

Figure the triple tax advantage HSA would be an easier target (though even less take advantage of that, so less revenue to be had).  Upset about this 401k change, are you maxing that out first?

So I guess my taxes will go up a little and I'll just shift my investments somewhere else.  At least in my general brokerage account I have unlimited investment options and no restrictions, and some 401k's have terrible options anyway.


Yes the majority of people don't use their 401K's and it is a shame.  Especially when you consider the overwhelming debt the american people currently have between, consumer, car loans and student loans there is going to be a huge population of broke people in their retirement barely able to survive.
Either that or many 60-80 year olds who can't afford to retire trying to find jobs or keep their jobs in the face of younger, cheaper and sometimes more talented workers.

Re: impacts to 401k plans
« Reply #16 on: October 26, 2017, 12:48:03 PM »

Offline slamtheking

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What an absolutely horrible idea.  Who's brilliant idea was it to decimate pre-tax limits to cover up a revenue shortfall brought on by these tax cuts? 

So many people rely on these plans to build a large chunk of their retirements.  I hope those people who are blindly partisan realize how badly this could affect them.

To be honest its better for citizens in the long run to be pushed towards roth 401K's.  This is incredibly shortsighted for the government though, wanting taxes on 300K of income on the front end rather than 6,000,000 on the back end.
The 18k limit referenced being reduced applies to both Roth and Traditional 401ks in aggregate.

So yeah....

Source on this impacting Roth?  all i see is pre-tax referenced.
Its the same limit currently and I assumed they were cutting both based on the the first few arcticles I read that didn't have any details on roth accounts.

Just found an article I just read seemed to indicate this change would create a separate limit. Which makes this change even weirder and more short sighted.

Roth isnt pre-tax, the only thing i have seen is related to pretax.  I also see several articles validating my point that this helps millenials and basically anybody under 60 saving for retirement if we usher people towards roth accounts. 
help out a financial novice if you can on this --> what's the advantage of saving post-tax as opposed to pre-tax? 

my 401K contributions come right off the top of my earnings.  it's saved before I even see it.  it also helps to lower my taxable income figures for both federal and state taxes.  I'm not seeing the advantage to saving that same money (I couldn't save that same pre-tax amount as post-tax) post-tax.

as for having a majority(?) of people with so little in a 401K account, my question would be how much are they earning annually and how long have they been saving?  Also, what has that person been earning on that 401K account as a average rate of return?  the figures just don't seem right.

example:  Person makes $25,000 annually.  it's not a big salary.  Say they set aside 3% of their income pre-tax.  again, not a high percentage set aside but for someone making that much annually it's probably a lot to them.
-->annual amount put into 401K = $750.
every retirement advisor I've dealt with (both through my company and personally) has stated the stock market mutual funds typically return about 10% annually on average.  This is the typical figure they quote when trying to get people to invest more in their 401K than a savings account, CD or financial account of that sort.
--> projected return on investment = $75
--> total in 401K account after 1 year= $825
person continues to add at the same rate and get the same rate of return.  by year 2, they're up to $1732.50.  At that rate of progression, it would take only 9 years for that person to accrue over $10,000 in savings.  In 12 years they're just shy of that $18,000 figure.
==>granted the actual daily calculations based on daily market performance as well as the pay period contributions (as opposed to the annual approach I calculated with) will provide a different figure but this is a decent measuring stick.  This doesn't take into account any raises in salary, any raises in % of contributions from salary nor any potential money-matching offered by an employer.

If anyone could shed some light on why post-tax savings would be a better approach that the Reps seem to be pushing people to move to AND/OR provide clarification/information on how realistic those figures used by the Reps to justify this pre-tax reduction, I'd appreciate it.

also, as for helping millenials and people under 60, it doesn't.  I'm under 60 with likely another 15-18 years of work ahead of me before I can retire (should I live that long).  This doesn't help me whatsoever.

Re: impacts to 401k plans
« Reply #17 on: October 26, 2017, 12:49:21 PM »

Offline littleteapot

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Re: impacts to 401k plans
« Reply #18 on: October 26, 2017, 12:57:40 PM »

Offline Fafnir

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Pre-tax/Post-tax depends a lot on what you think tax rates will be for you will be when you take distributions from your 401k compared to what they are for you now.

Its a pretty complicated question requiring a lot of personal information because the scenarios are pretty sensitive of your income, tax assumptions, and investment rate of return.

Re: impacts to 401k plans
« Reply #19 on: October 26, 2017, 12:59:01 PM »

Offline slamtheking

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I am less than 5 years from retirement and have a pretty nice nest-egg built up, but I need to continue to save as much as possible in these last 5 years.  So, this is an issue that hits home for me. I AM READY TO MARCH IN THE STREETS TO OPPOSE THIS PLAN.


...Would really like to have Trump put his returns out there for everyone to see so they can analyze how much his tax situation improves based upon the changes he supports.
What a perfect opportunity to bring this up again!  That said, Orangeman is so "tone-deaf" he probably won't see the hypocrisy of hiding his taxes while proposing a new tax plan.
be sure to march where there's a Republican in Congress.  Marching where there's a Dem in office won't change a vote on this since they're supposedly blocking it

Anyone thinking Trump's doing anyone a service on taxes other than himself is a true example of the saying "a fool and his money are soon parted".  Any changes to the tax code coming from or endorsed by Trump should be held up until his tax returns have been made public so that everyone (his supporters and detractors alike) can see whether these changes actually are detrimental to Trump as he's stated.  I for one will not give him the benefit of the doubt on this.

Re: impacts to 401k plans
« Reply #20 on: October 26, 2017, 01:03:01 PM »

Offline mmmmm

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I love my 401k, but I feel like so few people use it, and I would bet only a small percentage of those who do use it are taking full advantage of it.  I doubt most even know there is a limit or what the limit is.  A simple google search produces several articles talking about what a failure the 401k is. 

CNBC article from 2015:
Quote
You need to know this number: $18,433.

That's the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.

So is cutting the limit really going to do much?   Essentially a $4k-$5k tax increase for the few people actually maxing out their 401k, which are likely already upper middle class and above.  Or do you guys think more than that are really taking advantage of it?

Figure the triple tax advantage HSA would be an easier target (though even less take advantage of that, so less revenue to be had).  Upset about this 401k change, are you maxing that out first?

So I guess my taxes will go up a little and I'll just shift my investments somewhere else.  At least in my general brokerage account I have unlimited investment options and no restrictions, and some 401k's have terrible options anyway.


Yes the majority of people don't use their 401K's and it is a shame.  Especially when you consider the overwhelming debt the american people currently have between, consumer, car loans and student loans there is going to be a huge population of broke people in their retirement barely able to survive.

The problem is, the majority of people simply don't have the spare change to put anything of significance in their 401Ks (or savings in general).

The problem is raging and growing wealth and income inequality.




Note that the latter chart is only through 2015.  Even though it shows a reversal in percentage of persons covered by health insurance in the rightmost graph, that will very likely flip back to the prior disastrous trend if the dismantling of the ACA continues.
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Re: impacts to 401k plans
« Reply #21 on: October 26, 2017, 01:05:21 PM »

Offline Donoghus

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As with seemingly every other tax related question, the answer to the whole pre v. post tax  is "It depends".

A lot of it comes down to playing the tax rate game, what other sources of income you'll have come retirement, what tax rates will be once you retire, etc....

It's a rather complex question with no real definitive answer.


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Re: impacts to 401k plans
« Reply #22 on: October 26, 2017, 01:09:06 PM »

Offline Rondo2287

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Pre-tax/Post-tax depends a lot on what you think tax rates will be for you will be when you take distributions from your 401k compared to what they are for you now.

Its a pretty complicated question requiring a lot of personal information because the scenarios are pretty sensitive of your income, tax assumptions, and investment rate of return.

Not really, taxes on withdrawals from a roth 401K are tax free, its a huge benefit since most of the money you are withdrawing are not from your contributions.
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Re: impacts to 401k plans
« Reply #23 on: October 26, 2017, 01:14:58 PM »

Offline Fafnir

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Pre-tax/Post-tax depends a lot on what you think tax rates will be for you will be when you take distributions from your 401k compared to what they are for you now.

Its a pretty complicated question requiring a lot of personal information because the scenarios are pretty sensitive of your income, tax assumptions, and investment rate of return.

Not really, taxes on withdrawals from a roth 401K are tax free, its a huge benefit since most of the money you are withdrawing are not from your contributions.
I suggest you read up on personal finance and run some scenarios with different assumptions if you think its a slam dunk for Roth's .

The reduction of your principal that can grow and the difference between your tax rate during prime earning years and your retirement makes it a "it depends" question as Dons says.

Re: impacts to 401k plans
« Reply #24 on: October 26, 2017, 01:22:01 PM »

Offline mmmmm

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help out a financial novice if you can on this --> what's the advantage of saving post-tax as opposed to pre-tax? 

my 401K contributions come right off the top of my earnings.  it's saved before I even see it.  it also helps to lower my taxable income figures for both federal and state taxes.  I'm not seeing the advantage to saving that same money (I couldn't save that same pre-tax amount as post-tax) post-tax.

The idea behind pre-tax retirement savings is that, as you noted, you (a) reduce your current tax costs and (b) earn compounded growth on not just the the saved principle, but also the tax savings on the principle & interest/dividends.   Whether that is the best strategy though, depends on your expected tax rate when you take the money out.  If you take it out at a high rate and income tax rates went up such that you took the money out subject to a higher tax rate than you would have paid on it when you earned it, then the benefit may not be so great.

The operating theory for most is that they maybe won't need to take out the money at a high rate, hoping their required income when they are in retirement will be low enough so they stay in a modest or lower tax bracket.  And, if lucky, maybe their home is paid off by then.

But note, the latter can have a reverse effect because early on in a mortgage you tend to have a much larger mortgage tax deduction that may be small or gone when you are in retirement.   Also, if you or someone you care for has health issues in your elder years, you can end up needing a lot more annual income than you may anticipate.

Money dropped in a post-tax savings plan like a Roth IRA or some cash-value-type life insurance plans require you to pay all or some of the tax now but then benefit from reduced or no tax upon withdrawal.

For the government, the benefit of tax-payers using post-tax retirement savings is straightforward:  They get the tax revenues now, rather than later.
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Re: impacts to 401k plans
« Reply #25 on: October 26, 2017, 01:26:49 PM »

Offline Rondo2287

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Pre-tax/Post-tax depends a lot on what you think tax rates will be for you will be when you take distributions from your 401k compared to what they are for you now.

Its a pretty complicated question requiring a lot of personal information because the scenarios are pretty sensitive of your income, tax assumptions, and investment rate of return.

Not really, taxes on withdrawals from a roth 401K are tax free, its a huge benefit since most of the money you are withdrawing are not from your contributions.
I suggest you read up on personal finance and run some scenarios with different assumptions if you think its a slam dunk for Roth's .

The reduction of your principal that can grow and the difference between your tax rate during prime earning years and your retirement makes it a "it depends" question as Dons says.

Trust me, i have done the research the math etc.  If you have somebody worried about not being able to max out their pretax 401K because of the GOP changes, they should move over to Roth. 
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Re: impacts to 401k plans
« Reply #26 on: October 26, 2017, 02:05:51 PM »

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How many low and middle class people are contributing $1500 per month to their IRA?

I donít know anything about the plan, the off-sets, etc., to have an opinion on the overall plan. $2400 per year sounds too low, but Iím not married to a $18k limit, either.


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Re: impacts to 401k plans
« Reply #27 on: October 26, 2017, 02:09:27 PM »

Online Surferdad

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help out a financial novice if you can on this --> what's the advantage of saving post-tax as opposed to pre-tax? 

my 401K contributions come right off the top of my earnings.  it's saved before I even see it.  it also helps to lower my taxable income figures for both federal and state taxes.  I'm not seeing the advantage to saving that same money (I couldn't save that same pre-tax amount as post-tax) post-tax.

The idea behind pre-tax retirement savings is that, as you noted, you (a) reduce your current tax costs and (b) earn compounded growth on not just the the saved principle, but also the tax savings on the principle & interest/dividends.   Whether that is the best strategy though, depends on your expected tax rate when you take the money out.  If you take it out at a high rate and income tax rates went up such that you took the money out subject to a higher tax rate than you would have paid on it when you earned it, then the benefit may not be so great.

The operating theory for most is that they maybe won't need to take out the money at a high rate, hoping their required income when they are in retirement will be low enough so they stay in a modest or lower tax bracket.  And, if lucky, maybe their home is paid off by then.

But note, the latter can have a reverse effect because early on in a mortgage you tend to have a much larger mortgage tax deduction that may be small or gone when you are in retirement.   Also, if you or someone you care for has health issues in your elder years, you can end up needing a lot more annual income than you may anticipate.

Money dropped in a post-tax savings plan like a Roth IRA or some cash-value-type life insurance plans require you to pay all or some of the tax now but then benefit from reduced or no tax upon withdrawal.

For the government, the benefit of tax-payers using post-tax retirement savings is straightforward:  They get the tax revenues now, rather than later.
Well, that just about summarizes the Reps perspective.  They don't care about later, on any issue.

Re: impacts to 401k plans
« Reply #28 on: October 26, 2017, 02:16:22 PM »

Offline Rondo2287

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if you start with nothing, invest 1000 a month for 35 years pretax you will have approximately $4.5M (11% rate of return)

when you take taxes on that with your required minimum distributions will be approximtely $165K per year.  This puts somebody in the 28% tax bracket today.  This minimum distribution puts you at 71.5 years old.  Based on current actuarial tables this personal will likely live another 15 years.  so you are talking about

693K alone in taxes over the 15 years assuming somebody leave the money alone and only pulls out what they have to however i think its fairly safe to assume approximately 1/3 of the $4.5M will be taxed at some point which leaves you with approximately $3M. 


Assume that same person puts in 700 post tax for 35 years they will have paid $126K in taxes on the inputs (300*12*35) and will have 3.2M completely tax free.
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Re: impacts to 401k plans
« Reply #29 on: October 26, 2017, 02:44:03 PM »

Offline KGs Knee

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How many low and middle class people are contributing $1500 per month to their IRA?


Probably less than 5%

Seriously, do people not realize how much money that is to a blue collar worker making 20$/hr? That's like 50% of their gross monthly income.

Most companies I've seen usually only match up to 6% these days, although you can put in more of your own money if you want. For the person making $20/hr that a measly $48/wk, less than $200/mn. The thing is though, most of these people cannot afford to put in more than that into their 401k or IRA.

For these people, unless you are near retirement age, you are so better off putting this money in post-tax. You probably won't even end up paying taxes on you contributions anyways, since at that income level, all it takes is a mortgage payment or a couple of kids and boom....zero tax liability.


I haven't read anything about Trump's plan here, so I won't comment on it, but for most people a Roth 401k or IRA is almost always the better option.