401Ks were based on the premise that our tax rate in retirement would be lower than in our working years.
For some on this forum with significant balances it may not be true because of RMDs, dividends from after tax accounts, social security, pension, increased rates when single, potential future rate increases etc.
is that premise still true?
by investing in 401K did we not lose out on lower capital gains tax on sale and cost basis adjustment for inheritance?
Was 401K indeed better than post tax growth oriented investment?
PS: in order to simplify, I am keeping 401K-Roth out of the discussion. They were not around when I started working in the 80s.
On where to retire. I have one HS classmate that now lives in a University city (flagship for that state) after living his career life in Chicago. One friend (a Lutheran pastor and W) will retire in a specific town community near a seminary and near spouseâs family (also near college where both his W and son attended UG college). Important to know what you want. I do like being around family and reconnecting with distant friends. I would like to have a small motor home (actually pull along) to do more visiting w/o imposing but H is adamant no.
Some people in our geographic area have a lake house S of us or are on the water N of us in TN. However the large lake area has very slow internet and H couldnât do his work from there.
SIL has weekend Army Reserves a weekend in Aug - my next âinfusionâ of Gkidsâ love.
My H officially retired a few years ago but continued to work one day a week whenever we are home. We did not find that our tax rate is lower because we are getting investment income, capital gains etc and we havenât touched our 401k yet which has grown into a substantial amount. We will probably donate a majority of our 401k disbursements. We stopped qualifying for Roth after a couple years. I am not complaining.
We utilize a backdoor Roth conversion yearly. We can afford to pay the taxes now and donât see lower taxable income w/ other investments in the future. YMMV
Really depends on what your marginal tax bracket was then and is now. (Of course, the tax brackets have moved several times over the past few decades.) I have one kid making bank in NYC, so he's better putting money in his 401k pretax. My D remains a starving grad student so she is better with the Roth.
2 & 3. See #1.
That said, if you retire before claiming SS, you might have a chance â with a lower tax bracket â to roll your 401k into a IRA and then convert that into a Roth. (and pay the taxes since it is considered a IRA withdrawal.)
On hindsight, given the tax rates, cost basis adjustment at inheritance, capital gains tax rate: âWas 401K over last 35 years a better investment than post-tax investment?â
Depends on what you invest in and how often you churn your investments and pay the taxes as you go along.
If you are starting off 40+% down due to taxes and paying capital gains every few years, itâs hard to see how that could be better than 40 years of tax deferred growth, even if you pay higher taxes on the back side.
It isnât only about marginal tax rates at the beginning and end of the time period, since the 401(k) or IRA does not pay yearly taxes on each yearâs realized investment income or gains, allowing the money that would otherwise be used to pay yearly taxes to continue compounding. Of course, this difference affects some types of investments more than others, depending on whether their investment income or gains is realized yearly to be taxed when not in a retirement account.
Without the company match, I think it is close. I did a quick calculation once with tIRA. I didnât see any pronounced advantage.with tax deferred earning on tIRA.
The advantage for us was we were saving for retirement and had more available cash income for current expenses because the retirement savings were tax deferred. At the time, this was something that benefited us quite a lot.
I would love to be closer to my ds, but I have no desire to live in California. Itâs a great place to visit but an expensive place to live. He attended college there and has worked there since his graduation two years ago. Time will tell if he stays there long-term. He loves it.
Historically, I would have said I would not move to be near an adult child for fear of job change/move by adult child. However, I do wonder how COVID is going to impact the frequency of relocations for job changes going forward. Depending on the permanency of WFH, people may be able to live wherever they choose for certain industries. I predict there is going to be a lot of initial shifting out of urban areas to suburbs and/or to more tax friendly states. But, I do wonder if people will become more stable and less likely to move frequently (even with job changes) because of WFH once the dust settles. However, we only have one ds, so Idk how being close to family/adult children works with more than one kid.
IF ds moved somewhere less expensive than CA, and IF I felt he was âsettled,â and IF he marries and has children, I might want to have a small place close by, but I donât know. It would depend on how far away he was and the cost to get there and how often I wanted to visit. And, also how often he wanted ME to visit. We spent dsâs growing up years living three hours from my in-laws and usually saw them six or seven times per year. It was honestly too much for my preferences, and I would have gone insane had they lived in our same town. I think much depends on oneâs own familial experience as to what the ânorm,â is about having grandparents close by. That wasnât my norm as I was growing up.
Right now, we are far more driven by COL in retirement than proximity to ds. That could certainly change in the future.
We encourage all of our employees, not all of whom are financially sophisticated, to participate in our company 401k, both for the benefit of the match and to create a mechanism for forced savings. I think too many people tend to spend what is in the bank (or worse yet, what their credit card will allow), especially when they are young. The slide we like to show is the one that shows the power of compound growth over long periods of time. The 401k provides automatic savings discipline through a solid long term investment averaging strategy.
^ For vast majority of people this is absolutely correct advice. I would add using Roth IRA in earlier years (depending on marginal rate).
My questions have been directed to the significant majority of forum participants who are financially sophisticated and closer to financially successful retirement
@BmacNJ - do your adult children share this information with you? Do you ask them about it?
We tried to provide ds with good financial advice as he was growing up. We have always lived below our means and are extremely debt-averse. I know what his initial starting salary was two years ago, but I do not know his current salary. I have an idea knowing industry norms. However, I have no idea how much he has in savings, investments, retirement accounts - anything. I know he has these things, but I would never ask him any of them, and he would not volunteer that information. Do you kids just tell you these things? Do you ask? That is a lot of detail. Iâm not trying to sound judge-y. All families are different, and your children have done a remarkable job - well done! But, I am curious as to how and why you have this much detail. I certainly understand on the 17-year-old DD.
No one can calculate this in its entirety. It involves primarily the performance of your portfolios, 401K vs private investment accounts. I aim for maximal gain and taxes are secondary because I am already in the highest tax rate. Itâs best to max out your 401K first before other investment accounts.