If you’re over 50, starting next year, your 401k catch up contributions must be in a Roth 401k.
ugh - not sure my company offers one. I’ll look - but i’ve been thinking about doing catch up for four years and never got around to it so it won’t matter.
good to know though - i should look into it.
I believe this may only be true for high income taxpayers.
2 Likes
I should have clarified that. Yes, over $145,000.
3 Likes
Even if we went to a flat tax or simplified the system as many call for - it’s still be insane.
I mean, who comes up with all these things?
If they simplified the tax code, it might blow up - you miss the # by a tenth or two tenths of where it should be, maybe the well runs dry.
They have so many iterations of every little thing from individual to corporate to god knows what - it’s a puzzle no one could ever truly understand.
well some of you seem to…much better than i am capable of.
It also depends on how the appreciation of your home compares to the appreciation of where you’d invest downpayment and other funds in place of the home. In the thread title topic, this is investment gain on 401k. It’s a straightforward calculation if you have all the inputs. The problem is many of the inputs are not well known and vary with the specific individual.
For example, nobody can reliably say whether we are at the peak of a housing or stock market bubble, with sharp declines coming in the next few years, or whether the appreciation will continue at faster than historical averages. Nobody knows for sure whether the federal funds rate will continue to increase higher or will soon have a large drop, allowing for refinancing at a lower mortgage rate. Even home expenses can have expensive surprises. One can reduce risk with a good inspection, but there are still possibilities of things like slow leak + mold not covered by insurance, termite damage, need to replace roof earlier than expected, etc.
The spreadsheet from the original post supports inputs for all of the above. Some examples of how results change with different inputs are below (assumes sell in 10 years):
5% Home Appreciation, 8% 401k Return, 5% Mortgage with 20% Down
With x% of home value on tax/expenses, Break even is (x+2.5)% of home value on rent
4.5% Home Appreciation, 9.5% 401k Return, 6% Mortgage with 20% Down
With x% of home value on tax/expenses, Break even is (x+4)% of home value on rent
4.5% Home Appreciation, 9.5% 401k Return, 6% Mortgage with 3% Down + 1% PMI
With x% of home value on tax/expenses, Break even is (x+4)% of home value on rent
It is politically difficult to simplify the income tax system (or other things like Medicare) because each complexity adding aspect (deduction, credit, special rate, special treatment of something, etc.) has a constituency which will lobby hard to retain it (just like they lobbied hard to add it).
3 Likes
My '22 grad is working and renting an apartment in a high income area. He lives with his girlfriend, but she’s finishing up an accelerated nursing masters program. She isn’t working, so he’s covering almost all of the expenses. His job offers a pension, a traditional deferred compensation plan with match, and he also opened a Roth he contributes to. Somehow he’s still managing to bank money as well. When his girlfriend graduates in December they will combine to earn a very nice “household” income for 23-year-olds. That’s when they’ll begin to save aggressively for a down payment. Because it is a high SES area, my son’s job also offers a 1st time homebuyer program, with a 10 year commitment, that will subsidize a mortgage payment.
2 Likes
Most retirees will be in a low federal marginal tax bracket at retirement.
If you’re a married couple with $3 million in assets and have taxable income of $120k in retirement per year, your effective tax rate is relatively low.
$120k - $27,700 standard deduction = $92,300, a very small amount will be in the 22% tax rate while the majority will be in the 12%. Your effective tax rate is probably close to only 12%.
1 Like
This is why I’m not sold on a Roth…especially if you have tax free income.
But the “experts” all say young kids should have a Roth.
Something else to consider:
People say we’re at historically low tax rates and it’s generally true. While the government may raise taxes in the future, most politicians will avoid raising taxes at the lowest brackets. Republicans are against tax increases. Democrats want a “fairer” tax system (whatever that means). In other words, no one is out there banging the drum on raising taxes for people making less than $100k and most retirees will fall into this camp.
And since most retirees’ assets will dwindle as they get older, tax increases will hit them harder than working individuals. Tax increases at lower brackets will be widely unpopular.
1 Like
It is important to note that if you take the funds out of the Roth to help pay for a house, , you’re no longer getting the tax free earnings that you could have received for decades on the amount you choose to take out.
One thing about a home - you have to take the financial aspect out. You live there. How do you value that?
I’m probably a double in 17 years - so rule of 72, not a great return. My previous home was a double in 5 years - that was a great return.
Now - take out likely real estate commissions and all the money I’ve spent on blinds and landscaping and new air conditioners and a new dishwasher. At 17, I’m one of the few homes to yet replace my roof, etc.
I could have done much better just investing the money.
But a home has so many non financial values to it.
6 Likes
I agree, I haven’t been lucky with real estate purchases doubling or anything like that.
1 Like
California in the early 2000s.
I look at the house now I sold that doubled and it’s up 60% over 17 years. My house in TN doubled - but of course it started at a lower price. The CA homes were just nutty expensive.
Possibly…or, one could fully fund a 401K for 40 years and end up with a $200K RMD at age 75. Assume the other spouse also worked and funded the 401K, then double the RMD to $400K. That’s the 32% marginal rate at today’s levels.
I am assuming that this high-earning couple will also have a sizable taxable balance that will produce some dividend income in addition to the IRA RMDs.
Many unknowns here.
This is what I posted above:
"When discussing this with my son, I just assumed $22K contribution/year for 40 years and compounding growth rates ranging from 4% to 7%. The 401K contribution limit will most likely increase during this 40 year period , but assuming it remains constant, the account balance at 65 could range from more than $2 million to more than $4.6 million. RMD could be nearly $200K at age 75.
I am guessing that the RMD table will change as the required RMD age ticks up through 2033.
I also assumed no employer match, just to keep things simple.
Again, so many assumptions. I am not firm in my belief of fully funding the Roth 401K–just laying out the inputs I considered and looking for discussion and/or someone to poke holes in my theorizing!
He is 24 with many years of work ahead of him. At the moment, he does not have any use for the money, but would he be better off using the tax savings of 401K contributions and investing in a brokerage account and paying a 15% LTCG rate? He has no interest in actively managing investments so I don’t think he would be able to take advantage of capital gains.
The non financial value of homeowner versus renter is a personal subjective determination for each person, and should be considered in relation to the financial differences. I.e. does it eventually cost $___ more or less to buy versus rent, and do you prefer to buy versus rent? Obviously, if your preferred scenario is the cheaper one, go for it, but if your preferred scenario is the more expensive one, then it becomes a matter of whether the extra cost is worth paying for what you consider to be a better scenario.
1 Like
The general rule of thumb is you contribute to a 401k to get the match. After that, if you’re in the 12% marginal tax bracket, the deductible 401k will not benefit you as much vs people in much higher tax brackets. This is also true for HSA accounts and anything that is tax deductible. It’s why many people consider the Roth option for younger workers who are in lower tax brackets.
Roth IRA/401k are attractive options for many lower income workers whose income will be much higher later. But there are many variables involved and these decisions depend on individual circumstances. And Roth accounts may not be as liquid as taxable accounts from a liquidity/tax consequence if you need to tap into the gains.
When you invest in a non qualified brokerage account, depending on your investments, they may spin off unwanted taxes (short term and/or long term).
The biggest potential benefit of LTCG assets vs IRD assets is the potential step up basis at death, especially since they revised the stretch IRA rules. Of course tax law could change (step up basis is one of those items that get debated quite a bit).
Also remember that federal LTCG can range from 0 (if youre in the 12% marginal bracket) up to 23.8% due to the NIIT.
1 Like
Always get the match - unless it’s like 25%.
Or you’re a short termer.
Otherwise it’d be crazy not to. It’s free money.
It sounds like the calculation assumes no withdrawals prior to maximum (future) RMD age of 75. Most choose to withdraw from their 401k before this 75, which seems reasonable considering that the average life expectancy for men in the US is ~73. Most persons in the US also don’t max out their 401k every year, particularly when younger. Vanguard lists a median 401k balance of $10k for persons ~30 and a balance of ~$70k for persons aged 65. It’s great that your son is doing far better than most.
There are also a variety of options to reduce tax burden, besides doing a simple withdrawal from 401k. For example, one could do a partial Roth conversion in any year of lower tax bracket (including start of retirement), choosing a conversion amount such that you remain at a relatively lower tax rate during the year of conversion
1 Like