Author Topic: impacts to 401k plans  (Read 1151 times)

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Re: impacts to 401k plans
« Reply #30 on: October 26, 2017, 03:01:06 PM »

Online BitterJim

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

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

Do you mean 401k? Because no one is putting $1500/month into their IRA for more than 3 months (since the annual limit is $5500)

Edit: Also, the question in this case should be "who is putting in more than the $200/month they would be limited to", not "who is putting in the full max"
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Re: impacts to 401k plans
« Reply #31 on: October 26, 2017, 03:24:22 PM »

Offline JSD

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edit - Wrong Topic

Re: impacts to 401k plans
« Reply #32 on: October 26, 2017, 03:27:26 PM »

Offline saltlover

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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.

1) I assume you mean $1500 to their 401k, not IRA (as IRA has a $5500 limit).

2) It depends as to whether employer matching contributions count toward this new limit (which I believe it does).  Back when I was making $25k, I contributed 5% and my small-business employer matched, so that was $2500 a year (in 2008).  Heck, even if youíre making $50k and have an average match (according to Vanguard) of 50 cents per dollar you contribute, up to 3% of your salary, youíd be at $4500.

Now, it may not apply to Rothís, but my current employer is the first one Iíve had to offer a Roth option, and Iím sure my past employers were not unique, meaning a lot of people would be in fact hurt.  And employer matches can only go into traditional 401ks, because otherwise neither the contribution nor capital gains would ever be taxed in a Roth.  So that would cap employer matches at $2400 a year, which feels like itíd directly take money directly away from millions of workers.

The nation already has a looming retirement savings crisis ó any policy that reduces incentives for long-term Savings, without introducing a better incentive, is a poor one.  Thereís a lot of good arguments about the problems of 401ks, but this addresses none of them.

Re: impacts to 401k plans
« Reply #33 on: October 26, 2017, 04:00:03 PM »

Offline Rondo2287

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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.

1) I assume you mean $1500 to their 401k, not IRA (as IRA has a $5500 limit).

2) It depends as to whether employer matching contributions count toward this new limit (which I believe it does).  Back when I was making $25k, I contributed 5% and my small-business employer matched, so that was $2500 a year (in 2008).  Heck, even if youíre making $50k and have an average match (according to Vanguard) of 50 cents per dollar you contribute, up to 3% of your salary, youíd be at $4500.

Now, it may not apply to Rothís, but my current employer is the first one Iíve had to offer a Roth option, and Iím sure my past employers were not unique, meaning a lot of people would be in fact hurt.  And employer matches can only go into traditional 401ks, because otherwise neither the contribution nor capital gains would ever be taxed in a Roth.  So that would cap employer matches at $2400 a year, which feels like itíd directly take money directly away from millions of workers.

The nation already has a looming retirement savings crisis ó any policy that reduces incentives for long-term Savings, without introducing a better incentive, is a poor one.  Thereís a lot of good arguments about the problems of 401ks, but this addresses none of them.

I have worked at 5 company's over the last 8 years and all of them offer roth 401K's for what its worth. 
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Re: impacts to 401k plans
« Reply #34 on: October 26, 2017, 05:42:46 PM »

Offline slamtheking

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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.
TP for the feedback MMMMM -- much appreciated

Re: impacts to 401k plans
« Reply #35 on: October 26, 2017, 10:03:00 PM »

Offline Rondo2287

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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.
TP for the feedback MMMMM -- much appreciated

Roth 401K/IRA= great
Cash value/universal/whole life insurance = horrendous
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Re: impacts to 401k plans
« Reply #36 on: October 26, 2017, 11:02:03 PM »

Offline More Banners

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Dang. With all the sharp ladies and gents on the blog, I'm surprised nobody mentioned what a trap 401 and IRA's can be for the middle class.

Pretax vehicles tax distributions at the income tax rate. Since most of the accumulated wealth would likely be in the form of long term capital gains, a regular old non-retirement account would be taxed at the lower long term capital gains rate. The gains can be offset by losses (even paper losses or losses from prior years). This is how the wealthy avoid taxes altogether (like Trump in many years).  the middle class is shown the shiny thing and told repeatedly to put most of their wealth in these vehicles.

The ROTH is pretty cool for the tax-free withdrawals, ability to withdraw contributions before retirement tax and penalty free if needed (unlike traditional IRA's).  And no required distributions (and taxes) at 70 or nwhatever.  It gives the middle class a genuine opportunity to build generational wealth.

Free (and worth every penny) advice for those of y'all with sizable 401 or IRA balances:  consider partial ROTH conversions if you're allowed to diversify tax risk and keep options open for withdrawals or estate purposes, a little each year to avoid a huge tax bill.

Re: impacts to 401k plans
« Reply #37 on: October 27, 2017, 11:56:48 AM »

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.
TP for the feedback MMMMM -- much appreciated

Roth 401K/IRA= great
Cash value/universal/whole life insurance = horrendous

Depends on your situation.  You can deposit a much larger amount into a variable universal than you are allowed to put in a 401K.
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Re: impacts to 401k plans
« Reply #38 on: October 27, 2017, 12:09:00 PM »

Offline saltlover

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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.
TP for the feedback MMMMM -- much appreciated

Roth 401K/IRA= great
Cash value/universal/whole life insurance = horrendous

Depends on your situation.  You can deposit a much larger amount into a variable universal than you are allowed to put in a 401K.

VUL is a great way for upper income earners to get around IRA and 401k limits.  Theyíre also a fine way to avoid estate taxes.

Re: impacts to 401k plans
« Reply #39 on: November 02, 2017, 10:33:01 AM »

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