I think I might have read something on this in another thread, but I couldn't think of any decent search terms that wouldn't return a ton of threads to wade through.

Would it be a better idea, especially now with the new $700B debt-load, to reduce contributions to the 401k and max out contributions to a Roth? I'm thinking two things: one, get the tax paid now, because it's going to start sucking soon for everyone. Two (related to the first), there's a plausible theory that the government has its eyes on the large 401k savings pool and will hike tax rates to coincide with the timing of withdrawal. Kind of like a robber outside your bedroom door saying "You gotta come out sometime", except every day, he changes out his gun for a bigger one.

I'm probably a bit late on this idea and I'm sure a lot of you more savvy people are doing this already. I just checked and found that my Janus Roth IRA now supports payroll deduction. There goes my last argument for simplicity.

 

does your company match your 401k contributions?

if so, i'd at least keep contributing up to the maximum that your company matches.

 

I'm going to keep my eye on this

 

Yes, something like 4%, and I'm doing 15%, so I have some room to work.

 

At my previous employer who matched up to 6%, I put 6% in my 401K in order to get their "free" money, then put the rest towards maxing out my Roth. Current employer does not match 401k as we are a very small company. Unless your employer's 401K has a vast array of funds you can choose from, you have more flexibility and greater chance at a higher return with a Roth, IMHO.

 

My employer matches 50% of the first 6% of your contribution so I'm just deferring the min amount to get the free money.

 

I just changed my contributions to zero. At least till January. I also re-allocated all my investments to a stable value fund. It's a constant positive gain each quarter. It's not a lot but it's better then watching my 401K loose money. Even with the match, I was still loosing money.

 

i've kept my 401k as it is.

at this point, i've ridden the down market, and i can only hope that we're near the bottom.

actually, the only thing i change in my 401k is i'm no longer keeping any money in my company stock. banks ftl.

 

The only time you lose money is when you cash out. But if you're disciplined enough to hold on to that money unti the turnaround and can buy at the bottom, great. That's better than riding it down, then back up.

Me, I'm a hands-off investor (which conventional wisdom says is not a great thing). As long as I don't see it, I won't spend it. That's why I don't want to hassle with splitting my paycheck into two bank accounts, then having the Roth IRA deduct from the other account.

Just to clarify, it's not that if I see it I'll blow it on nonsense, I'd use it to pay down long-term debt. I've said in a much-older thread that I prefer to pay debt off at the expense of having available cash.

 

But you're 32. You and I aren't going to cash out for another 35 years so it is irrelevant how the market sits now. Moving money around makes no sense unless you can do it for free, and I know there's nothing that is "free" about moving my money around.

Not to rail on you specifically, but the people doing exactly what you are doing now are to blame for the Dow, Nasdaq, and S&P crashing down right now.

 

+1, i've been watching it just because I think what the market has been doing is crazy. I got at least 30 years left to work, am I happy that I am down ~26% YTD, hell no, but I'm not going to sell at the low and lose all that. Dollar cost averaging FTW. The swings that the market had today make me think that we might have seen the bottom I got the time to recover what I have lost. Ride it out.

 

No.... That's the idiots who thought they could buy a 200K house making 30K/year, & the banks & brokers who misled them into loans.

What I'm doing I have a set of short term reason you don't know about.

I work for a trading firm.

 

Im part of lifefund 2050. Pretty slow right now.. ive lost about 40/50$ that ive invested since I started at my new job a couple months ago.

I've still got shares though... and whats important I guess is that I keep earning shares and that I'm getting them for much cheaper these days. hopefully when this market rebounds and stabalizes I'll be much better off having left my money where it is.

 

more power to you market timers I'll stick with what I know ....diverisification and dollar cost averaging.

 

oh, and I mean LIFEPATH 2050.


Anyone familiar with it? Is it a commonly-invested-in fund?

edit: Nevermind...


...Each fund is a broadly diversified portfolio, tailored to the investment horizon of the fund. The name of each fund (e.g., BGI LifePath® 2050) represents the year during which the investor will most likely begin to draw interest and/or principal out of his or her investment portfolio. The investment model used analyzes asset class market data including risk, correlations and expected returns and provides portfolio recommendations among broad asset classes. The allocations are constantly monitored and rebalanced in an effort to maximize expected return for a given level of risk. These funds are subject to the volatility of the financial markets in the U.S. and abroad and may be subject to the additional risks associated with investing in high yield, small cap and foreign securities. Unit price and return will vary.

huh, another fun fact - it's managed by Barclays.

 

bottom line, you take the free money from your company match and as I've mentioned in another thread about 6-9 months ago but received alot of heat on from other members here, with each tax dollar being absorbed more and more by medicare and social security, and with the dems possibly winning the office & control of congress, likelihood that taxes will raise.

So, if you plan on making more money down the road and with good chance of taxes raising in the future, it's best to take the tax hit now and devote a portion of your savings to tax deferred / tax-free withdrawal investments.

Your options:
1. Roth IRA - but if you're a high income earner or joint income of you & your spouse is above the limits, then you may no longer qualify for roth contributions

2. Whole Life Insurance with a AAA rated brick-and-mortar institution. You shop around for milk, juice, and cookies......you don't skimp on the insurance company that you need to still be around for the next 60 years

3. Muni-bonds......albeit not completely tax-free

But what do I know.....I just do this for a living. Good luck!

 

You need to start posting in the Obama/McCain for president thread.

 

Well, I'm most of the way there in my plan. Reduced my 401k to 10% and restructured my direct deposit to put the difference in a savings account that Janus can pull from.

Then I started doing research and I found a lot of articles that seem really down on Roth accounts, specifically Roth 401ks. In contrast, there's a lot of advice here that says to max out your Roth IRA each year.

These other articles' primary argument is to reduce your taxable income NOW, which puts you in a lower tax bracket NOW. The logic must be that you're not going to withdraw from your 401k during retirement like a regular paycheck and you're be in a lower tax bracket THEN.

I haven't really done the math to see if I'm going to need that much per year during retirement. Do I need to? And why does there seem to be such a different view on the Roth accounts between what I read here (and I trust as real-world advice) and what I see on supposedly expert websites?

 

I think you are on the right track. If you are single, earn a good enough buck to put you in a high tax bracket, then Roth is probably not the best option right now. That's because you will most likely be in a lower bracket when you retire.

Now someone like me, who is the single income of a large family with lots of deductions, a Roth is great because I'm in the lowest bracket now.

 

QFT. When i was a med student and resident, i maxed out my roth ira. Now that i'm in private practice, it makes more financial sense to do a 401k/safe harbour from a tax standpoint.

 

I did a bit of checking, and my income is pretty borderline on tax brackets. I'm not sure 5k is going to make it swing one way or the other though. I think I'm going to keep going ahead with it to have the additional option in retirement. It's kind of a gamble. I hope it pays off someday when we need it.

God, it sucks that you have to plan the rest of life around taxes.

 

House Democrats contemplate abolishing 401(k) tax breaks
Mandatory contributions from workers considered

By Sara Hansard
October 12, 2008

Powerful House Democrats are eyeing proposals to overhaul the nation's $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.

A plan by Teresa Ghilarducci, professor of economic-policy analysis at The New School for Social Research in New York, contains elements that are being considered. She testified last week before Mr. Miller's Education and Labor Committee on her proposal.

George Miller: Looking at redirecting tax breaks to a new system of guaranteed retirement accounts.
At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.

Under Ms. Ghilarducci's plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3% a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

"I want to stop the federal subsidy of 401(k)s," Ms. Ghilarducci said in an interview. "401(k)s can continue to exist, but they won't have the benefit of the subsidy of the tax break."

Under the current 401(k) system, investors are charged relatively high retail fees, Ms. Ghilarducci said.

"I want to spend our nation's dollar for retirement security better. Everybody would now be covered" if the plan were adopted, Ms. Ghilarducci said.

She has been in contact with Mr. Miller and Mr. McDermott about her plan, and they are interested in pursuing it, she said.

"This [plan] certainly is intriguing," said Mike DeCesare, press secretary for Mr. McDermott.

"That is part of the discussion," he said.

While Mr. Miller stopped short of calling for Ms. Ghilarducci's plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.

SAVINGS RATE
John Belluardo: "If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets."
"The savings rate isn't going up for the investment of $80 billion," he said. "We have to start to think about ... whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should."

"From where I sit that's just crazy," said John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, N.Y. "A lot of people contribute to their 401(k)s because of the match of the em-ployer," he said.Mr. Belluardo's firm does not manage assets directly.

Higher-income employers provide matching funds to employee plans so that they can qualify for tax benefits for their own defined contribution plans, he said.

"If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets," Mr. Belluardo said.

"This is a battle between liberalism and conservatism," said Christopher Van Slyke, a partner in the La Jolla, Calif., advisory firm Trovena LLC, which manages $400 million. "People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny," he said.

The Profit Sharing/ 401(k) Council of America in Chicago, which represents employers that sponsor defined contribution plans, is "staunchly committed to keeping the employee benefit system in American voluntary," said Ed Ferrigno, vice president in the Washington office.

"Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system," he said.

No legislative proposals have been introduced and Congress is out of session until next year.

However, most political observers believe that Democrats are poised to gain seats in both the House and the Senate, so comments made by the mostly Democratic members who attended the hearing could be a harbinger of things to come.

ADVICE AT ISSUE
In addition to tax breaks for 401(k)s, the issue of allowing investment advisers to provide advice for 401(k) plans was also addressed at the hearing.

Rep. Robert Andrews, D-N.J., was critical of Department of Labor proposals made in August that would allow advisers to give individual advice if the advice was generated using a computer model.

Mr. Andrews characterized the proposals as "loopholes" and said that investment advice should not be given by advisers who have a direct interest in the sale of financial products.

The Pension Protection Act of 2006 contains provisions making it easier for investment advisers to give individualized counseling to 401(k) holders.

"In retrospect that doesn't seem like such a good idea to me," Mr. Andrews said. "This is an issue I think we have to revisit. I frankly think that the compromise we struck in 2006 is not terribly workable or wise," he said.

Last Thursday, the Department of Labor hastily scheduled a public hearing on the issue in Washington for Oct. 21.

The agency does not frequently hold public hearings on its proposals.

E-mail Sara Hansard at shansard@investmentnews.com.



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^ Basically more socialist crap, aka wealth redistribution.

 

Explain this theory please.

 

Roth involves aftertax dollars. The capital appreciation you gain over the lifetime investment of your roth will not be subject to tax when you liquidate your roth in the future. Traditional IRAs are pretax dollars. Although you may deduct your allocations to a traditional ira when you invest, you will pay income tax on this type of IRA when you liquidate in the future.

Scenario #1. You just finished school, you're 25 yrs. and your income is <30K/year. You are in a 20% taxbracket (arbitrary figure). It makes sense to go with the roth ira because you are currently in a lower taxbracket. You may need to liquidate your roth ira when you purchase your first home at the age of 35 yrs. When you liquidate your ira in the future, there is a good chance your taxbracket will be >20%.

Scenario #2 So assume you're ballin and making >250K/year and in a 40% taxbracket now. It makes sense to use a traditional IRA since the investment is tax-deferred. When you are 59 or 65 or whatever and you cash out your IRA, you hopefully will either be retired, or not making as much income so in a lower tax bracket (say if you're working part-time), and thus your tax penalty will be lower than the current 40%.

 

It's my money and I want it NOW!

 

-I haven't checked the AGI (Adjusted Gross Income) limits for tax deduction allowance fir Traditional IRA in a while, but l believe the tax deduction is gradually phased out at incomes over 150k or so. (Check IRS website Publication 590). Perhaps it's the 401k with the higher 250k income limit for tax deduction allowance. I'm too lazy to check, so please check IRS website if you want to verify.

Surfer Rick had good points. I would add the following:

-I don't think one would want to cash out all of their IRA balance once an indivdidual retires. That might result in a huge tax bill. You'd probably want to only take out money that you need in a given year and let the rest of the IRA balance continue to grow tax deferred.
-Personally, I think it's good idea to hedge and contribute to both tax deferred (traditional IRA and/or 401k) retirement accounts and tax free distribution (Roth IRA and/or Roth 401k) accounts in case:
1) Allow flexibility to suit your personal financial circumstances
2) Your prediction about future tax rates are not realized

Another strategy might be to withdrawal from your Roth account first and allow your tax deductabile retirements accounts to continue to grow. When you've finished withdrawaing from the Roth, then start withdrawaing from tax deductible accounts.

 

Sorry, those numbers i quoted where just arbitrary "for example." Anyhoo, good points

 

Now I feel like a fucking genius. My first paycheck after the change, my 401k contribution was reduced by $160 and my paycheck went down by $30. $30 extra in Federal tax because my taxable income went up by $160.

Damn.

 

What did you think was going to happen?

 

Five, ten, fifteen dollars, maybe. I guess I know my tax bracket now. It is a sobering reminder of only being worth 75% of your salary.