401k tax strategy.

The issue is nobody knows what the future tax rates will be. I know someone that retired 9 years ago and he makes more in retirement than he ever would’ve guessed investing in various businesses. He has a very sizable RMD to take every year but just chalks it up as a good problem to have.
Well said.
I err on the conservative side and postpone paying taxes as long as possible.
I love the "good problem to have" point of view. I love paying taxes as it simply means I am making money.

I also believe in diversification, even though I am terrible at it.
  • Housing - ya gotta have a place to live, regardless
  • Retirement accounts - fairly conservative so $$ will be there
  • More risky investment - mostly index funds, a few individual stocks
  • CA double tax free municipal tax bond fund - smaller but stable return and helps offset tax burden
  • Cash - cash is king
  • Invest in yourself - learn learn learn
  • Invest in others - put a kid through college or help someone less lucky than you
 
The best "401k" fund now is actually called a Roth IRA. You pay taxes now so in the future they grow tax free and collect tax free!

The reality is the fact you are doing something in your 30's you'll be well off especially more. I was lucky to start small in my 20's(age 21), like $150/month and now nearly 50 I don't worry about retirement. I have only risen the $150 to $200/month :)
 
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The best "401k" fund now is actually called a Roth IRA. You pay taxes now so in the future they grow tax free and collect tax free!

The reality is the fact you are doing something in your 30's you'll be well off especially more. I was lucky to start small in my 20's(age 21), like $150/month and now nearly 50 I don't worry about retirement. I have only risen the $150 to $200/month :)
Good on you for long term investing. That's the key.
But your Roth point is not necessarily true. It depends on future tax rates and, most importantly, the long term gains of the Roth taxes paid will never be realized. In a way, your logic is contradictory.

Again, kudos for getting the early start. You win!
 
I didn't read all the posts so forgive me if this has been mentioned but, a couple other things to keep in mind about a Roth is that if the funds aren't needed at retirement you're never required to withdraw them and when they are withdrawn whether by you or whoever inherits the account 100% of the proceeds are non taxable meaning that the investment could have made thousands in earnings over all these years and there's no tax to be paid on the earnings. With a traditional IRA you're required to start making withdrawals between the ages of 59 1/2 and 72 whether you need the money for living expenses or not and are required to pay tax on 100% of the proceeds.
 
Well said.
I err on the conservative side and postpone paying taxes as long as possible.
I love the "good problem to have" point of view. I love paying taxes as it simply means I am making money.

I also believe in diversification, even though I am terrible at it.
  • Housing - ya gotta have a place to live, regardless
  • Retirement accounts - fairly conservative so $$ will be there
  • More risky investment - mostly index funds, a few individual stocks
  • CA double tax free municipal tax bond fund - smaller but stable return and helps offset tax burden
  • Cash - cash is king
  • Invest in yourself - learn learn learn
  • Invest in others - put a kid through college or help someone less lucky than you
This had to be reposted !! diversification diversification diversification.
 
Here is a pretty good pre vs post tax retirement calculator. Play with the numbers to see the difference. I believe it demonstrates that both methods can yield similar results and the most important factor is to start saving when you are young and contribute as much as you can, regardless of which method you choose.


Yep, run the numbers and see which one is more beneficial to the both of you.

Good to see you are taking retirement planning very seriously. (y)
 
1. You have defined benefit plans.
2. You will be getting significant Social Security payments (85% of which will be taxed).
3. You will have close to (if you choose to not FIRE) 25 years of contributions and investment earnings in any account (401k, IRA, ordinary account or Roth).
4. All 401k and IRA distributions will be taxed as ordinary income, even distributions that are the result of capital gains in those accounts.
5. Not getting political here, but would you bet on tax rates being higher or lower in the future for a high income couple like yourselves?

At your income levels (which I assume will continue to improve), an account where all your earnings are not taxed is huge! But don't listen to me. I'm just a simple unfrozen cave man engineer, not a financial advisor. Find a paid financial advisor who has a fiduciary responsibility to you for advice. A few bucks spent on one now may make over a million bucks difference later.

I've been retired for 5 years and wish I had the knowledge to invest in a rollover Roth IRA earlier in my career.
 
But don't listen to me. I'm just a simple unfrozen cave man engineer, not a financial advisor. Find a paid financial advisor who has a fiduciary responsibility to you for advice. A few bucks spent on one now may make over a million bucks difference later.
Listen to these words.
While I have not followed all the advice of Fidelity and Schwab, they have offered me sound advice. Especially Schwab.
 
This had to be reposted !! diversification diversification diversification.
The goal of diversification is to minimize risk without being overly cautious.
Ay my age, 68, investments need to be risk adversive, depending.
Good luck.

I am still overly risky; what do I know? Schwab Private Client yells at me all the time...
Too bad what they say, right?
 
Schwab private client, as well as Vanguard, caution me about my approach, too. I’m way too risky, and heavily in volatile tech stocks.

Both make that assessment looking only at the assets they have in their respective institutions.

They fail to consider the tremendous fixed income portion of my portfolio - two USN pensions, with a third government pension when my wife retires in a couple years. I can be risky, because those checks roll in each month and I don’t need the portfolio to eat, or keep a roof over my head.

My financial adviser is much more balanced. At our last meeting, he laughed out loud when I said, we were wondering if we could afford a house of roughly double the value of our present house. Dude! You guys are so far ahead of where you need to be!

Which was gratifying to hear.

Let me share one small piece of that success: my IRA experience from 30 years ago.

30 years ago, there were no Roths. As a USN officer, there was no 401(k). IRA contributions were maxed at $2,000/year. They were not deductible if your W-2, like mine, had the “pension” box checked.

So, I did the only thing I could - I invested $166/month, and added $8 during tax time, all after tax, to meet the max allowable IRA contribution. Couldn’t do any more.

I split the amount between T. Rowe Price and Vanguard.

I did that for seven years. Not a lot of money in today’s dollars, but a big hit for a young family with kids at home on a modest military paycheck. Over the next few decades, they grew. Some years saw big losses. Some years, big gains. I let them ride.

The current balance on those two IRAs, together, is about twenty time what I put in back then. Enough to buy my first house three times over.

It‘s not the plan, or investment option, per se, that was important, it was getting in early, as best I could, and staying the course. I had no other option but a $2,000 non-deductible IRA. So that’s what I did. The gains are the result of doing it when I was young.
 
The gains are the result of doing it when I was young.
I just happen to have a degree in economics. What Astro said is mathematically described below and

FV = PV x [ 1 + (i / n) ] ↑(n x t)

Where

  • FV = Future value of money
  • PV = Present value of money
  • i = interest rate
  • n = number of compounding periods per year
  • t = number of years
Compounding is what makes a modest investment while you are young, give you a comfortable retirement. If you start when you are 30 or 40, the time value of money formula is not in your favor.
 
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Things about Roth IRA I don't like, is that you cannot be for sure if the tax policy won't change. Look what happen to SALT tax and mortgage deduction, we never thought it would change but it did, so I wouldn't count on it never be taxed, maybe a bit less than traditional IRA or 401k but it is not a guarantee, nothing is a guarantee. The other thing about it that I don't like is you are locking yourself up in the capital and you may not have access to it before retirement. If I need it for an investment or some other plan I cannot just take it out like that. Maybe I can if I am in distress but not as flexible.

Traditional 401k and IRA at least it is pre-tax money and compound growth pre-tax. It is "borrow your tax money" to invest against inflation like mortgage, despite you having to pay ordinary income tax on it when you withdraw (it was ordinary pre-tax income you contribute to begin with). So it is "more predictable".
 
At your age, I would do a mix of pre and post tax.

Knowing you from BITOG over the years, either way, you're on the right track.
Totally agree. The best situation is a mix of TIRA/401k, RIRA and taxable. This allows for portfolio wide asset location and tax management.
 
Things about Roth IRA I don't like, is that you cannot be for sure if the tax policy won't change. Look what happen to SALT tax and mortgage deduction, we never thought it would change but it did, so I wouldn't count on it never be taxed, maybe a bit less than traditional IRA or 401k but it is not a guarantee, nothing is a guarantee. The other thing about it that I don't like is you are locking yourself up in the capital and you may not have access to it before retirement. If I need it for an investment or some other plan I cannot just take it out like that. Maybe I can if I am in distress but not as flexible.

Traditional 401k and IRA at least it is pre-tax money and compound growth pre-tax. It is "borrow your tax money" to invest against inflation like mortgage, despite you having to pay ordinary income tax on it when you withdraw (it was ordinary pre-tax income you contribute to begin with). So it is "more predictable".
While that's true, I think if tax policy changed, it would probably be so that if you have a Roth, you could keep it and they would just stop new contributions to it. There's no talk of stopping it now and they want them to be better not worse so it will probably be a while before anything changes the other way. Also I guess it depends how close to the margins you live. I never felt I was locking up the money by putting it in a Roth, never missed it. At this point I wonder why I even bother as others have said, I started mine back in the 90's and it's grown quite well over the years, some years the returns make my annual contributions look like a drop in the bucket. Plus I've had mine for so long that I'm past the 5 year mark. I have a mix of all 3 though, Roth IRA, traditional IRA and regular investments plus real estate investments so I think I'm pretty diversified.
 
Schwab private client, as well as Vanguard, caution me about my approach, too. I’m way too risky, and heavily in volatile tech stocks.

Both make that assessment looking only at the assets they have in their respective institutions.

They fail to consider the tremendous fixed income portion of my portfolio - two USN pensions, with a third government pension when my wife retires in a couple years. I can be risky, because those checks roll in each month and I don’t need the portfolio to eat, or keep a roof over my head.
My Private Advisor Rep is different. She knows everything, including the Silicon Valley properties and the Fidelity holdings.
We have an agreement; I manage my ex-company's stock options and grants (SEMI), as well as my very few stock purchases (like TSLA).
The ex-company stock is 10K shares (remaining) started over 30 years ago.
Let's just say advisors have wanted me to sell, "Too much in 1 stock." I wish I had never sold any.
They were wrong and I was right. I don't think computers are going away anytime soon.

So Schwab gave up and let me manage that stuff and I let them manage the Private Client stuff.
We don't include my stuff in analysis recommendations, but we do discuss.
 
I played with wwilson's calculator, even changing my current age to 20 years younger. The only way I could make the Roth 401K a better choice was if I changed my retirement tax bracket higher than my current tax bracket. Otherwise, it was a wash.

Am I missing something?

Also, I'll ask again. If my spouse dies during retirement and I then file as single, it seems that I will automatically go to the next higher tax bracket. Is this what happens? In this case, the Roth seems to be a no brainer.
 
Jeff,

I thought you were much younger.

Ive heard good things about Schwab Private Client service(s).
Dave, you have to remember, I did everything wrong in my life. I joined AA at 33 and got my 1st degree at 40. Now I have 3.
You might say I am a late bloomer.
AA saved my life and California's promise of low cost high quality college and tremendous opportunity gave me a chance...
Trust me, I know the other side of life.
Plus I am a cheap skate.

Oh yeah, my wife is in charge of world wide computer operations at a $10B Silicon Valley company.
 
While that's true, I think if tax policy changed, it would probably be so that if you have a Roth, you could keep it and they would just stop new contributions to it. There's no talk of stopping it now and they want them to be better not worse so it will probably be a while before anything changes the other way. Also I guess it depends how close to the margins you live. I never felt I was locking up the money by putting it in a Roth, never missed it. At this point I wonder why I even bother as others have said, I started mine back in the 90's and it's grown quite well over the years, some years the returns make my annual contributions look like a drop in the bucket. Plus I've had mine for so long that I'm past the 5 year mark. I have a mix of all 3 though, Roth IRA, traditional IRA and regular investments plus real estate investments so I think I'm pretty diversified.
Maybe, maybe not. It is impossible to predict the future.

What I can control now, and what I realize a lot of people do right, is to know what you are good at and control what you can control. At the moment I just paid off my debt so I have a predictable future expense, with health care being the only uncertainty. I am thinking about contribution into child education funds soon, and once that's settled maybe start buying a home for my children.

Will I make more money in stock? Maybe, maybe not. Will I have children's future uncertainty more certain if I buy them homes early? Probably. It is really hard to say but if I can lock in prop 13 20 years early that could make a huge difference, plus the possibility of never having to pay inheritance tax if I just buy them home and help pay a huge part of them off. Whatever I loss may be a gain of my children, nobody knows, but it is a path more predictable.

I am also starting to realize if you don't have to spend the overhead chasing numbers, you don't need to pay a lot of people indirectly to chase the number for you (in risk and expense), you also don't need to manage as many things if you don't need to realize those gains and not as much gain to tax. That's how I look at things in the long term (beyond my lifetime).
 
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