Financial Question

[KillerCharlie]

So I just started my first fulltime job and here's the retirement savings plan: you can give up to 20% and the employer matches 75% of the first 8%. I've already picked which funds I want to invest in and how much I'm putting in..

Now here's the question: should I invest on a pre-tax or after-tax basis?

I mostly understand the difference between the two. Usually if you expect to stay in the same tax bracket or drop to a lower one when you retire, pre-tax is better since you'll be taxed in that lower bracket when you take the money. After-tax is typically better if you expect to be in a higher tax bracket since when you withdraw the money it'll be tax free.

I'm an engineer on an average engineer's salary.

Anyone know what might be better or have resources that'd help?

 

[alrocky]

Roth vs Traditional IRA

Why not invest toward retirement in both pre-tax and after-tax basis? If feasible do the company 20%, take the match, and max out this year's ROTH IRA @ $4,000. If you still have money to invest open a taxable account. What funds are you looking at to invest in?

 

[KillerCharlie]

Originally posted by: alrocky
Roth vs Traditional IRA

Why not invest toward retirement in both pre-tax and after-tax basis? If feasible do the company 20%, take the match, and max out this year's ROTH IRA @ $4,000. If you still have money to invest open a taxable account. What funds are you looking at to invest in?

I'm pretty clueluess when it comes to this stuff. I've read about Roth IRA, 401k, and Roth 401k, but I'm not sure exactly how it applies to me. The savings plan through work uses none of these words.

They have a ton of funds, stocks, and bonds to invest in. However, I'll be investing in one of their managed "lifecycle" funds that starts out aggressive then becomes more conservative as you approach retirement.

 

[alrocky]

What mutual fund company(s) are available thru your company plan? What is the 5 letter ticker of the lifecycle mutual fund you're getting?

You may wish to read Eric Tyson's Mutual Funds for Dummies and perhaps the suggested reading list at Morningstar.com. Consider investing as much money toward retirement as you can. The sooner and the more you contribute the better for you in the long run.

Did you have any questions?

 

[axelfox]

Do both, but only do up to 8% of your IRA with your employer match. Free money FTW.

 

[vi edit]

Now when you say pre-tax vs. post tax, are you being offered the chance to do a traditional 401k(pre-tax) or the new Roth 401k(post-tax)?

If you are young, I really say that it's heavily in your favor to do it post-tax, especially if you are heavily investing into it. The advantage to the post tax Roth just has a snowball effect the younger you start on it and the more you add to it.

The tax savings of doing a Roth 401k over a traditional 401k when you go to take your distributions are MASSIVE.

Yes, you lose the initial tax break up front, but on the back end you just can't match the power of a Roth with 40 years of compounded appreciation.

You might be paying taxes on $55,000 in income right now, but by the time you retire, you could be pulling yearly distributions in the neighborhood of 3x-5x that. You'll be in a higher bracket then, than now.

 

[vi edit]

http://americanfundsretirement.retire.a...ds.com/tools/calculators/roth-401k.htm

There's a better analyzer comparing a Roth 401k to a traditional 401k. As you ramp up your contributions the Roth plan knocks the crap out of the traditional.

 

[OS]

Originally posted by: KillerCharlie
So I just started my first fulltime job and here's the retirement savings plan: you can give up to 20% and the employer matches 75% of the first 8%. I've already picked which funds I want to invest in and how much I'm putting in..

Now here's the question: should I invest on a pre-tax or after-tax basis?

I mostly understand the difference between the two. Usually if you expect to stay in the same tax bracket or drop to a lower one when you retire, pre-tax is better since you'll be taxed in that lower bracket when you take the money. After-tax is typically better if you expect to be in a higher tax bracket since when you withdraw the money it'll be tax free.

I'm an engineer on an average engineer's salary.

Anyone know what might be better or have resources that'd help?

i suspect you work for a certain big name aerospace corp just from the numbers

 

[OS]

Originally posted by: vi_edit
http://americanfundsretirement.retire.a...ds.com/tools/calculators/roth-401k.htm

There's a better analyzer comparing a Roth 401k to a traditional 401k. As you ramp up your contributions the Roth plan knocks the crap out of the traditional.

If you note at the end of the analysis and the last chart, it's pretty close to a wash if you invest the upfront tax savings of a traditional 401K.

 

[da loser]

there's a roth 401k? is this offered everywhere? or some special deal?

 

[vi edit]

Originally posted by: OS

Originally posted by: vi_edit
http://americanfundsretirement.retire.a...ds.com/tools/calculators/roth-401k.htm

There's a better analyzer comparing a Roth 401k to a traditional 401k. As you ramp up your contributions the Roth plan knocks the crap out of the traditional.

If you note at the end of the analysis and the last chart, it's pretty close to a wash if you invest the upfront tax savings of a traditional 401K.

It depends upon your values.

- I put in 15,000 for my contributions
- 40 years till retirement
- 20 year payout
- currently at 28% tax bracket
- 9% appreciation till retirement
- 6% appreciation after retirement
- 35% retirement bracket (since the income would warrant that)

The difference was over $100,000 per year in the favor of the Roth.

And that's just for *my* contributions. If my wife were to contribute similarly, we'd have an extra $200,000+ per year laying around with the Roth plans.

 

[OS]

Originally posted by: vi_edit

Originally posted by: OS

Originally posted by: vi_edit
http://americanfundsretirement.retire.a...ds.com/tools/calculators/roth-401k.htm

There's a better analyzer comparing a Roth 401k to a traditional 401k. As you ramp up your contributions the Roth plan knocks the crap out of the traditional.

If you note at the end of the analysis and the last chart, it's pretty close to a wash if you invest the upfront tax savings of a traditional 401K.

It depends upon your values.

- I put in 15,000 for my contributions
- 40 years till retirement
- 20 year payout
- currently at 28% tax bracket
- 9% appreciation till retirement
- 6% appreciation after retirement
- 35% retirement bracket (since the income would warrant that)

The difference was over $100,000 per year in the favor of the Roth.

And that's just for *my* contributions. If my wife were to contribute similarly, we'd have an extra $200,000+ per year laying around with the Roth plans.

ok, after playing with this just now, the key difference is you're using 9% return, I was using between 5-6%.

the reason then with that assumption why roth has the advantage is because you've accumulated so much money over that time, the distributions will be heavily taxed.

do you really think you can average 9% return over 40 years? That seems quite optimistic.

then, this calls into question whether the tax brackets will be adjusted in 40 years. This is quite a crap shoot.

 

[OS]

btw, assuming you're just around 30, do you really expect to be working until 70? That's a long ass time to be working.

 

[vi edit]

Originally posted by: OS
btw, assuming you're just around 30, do you really expect to be working until 70? That's a long ass time to be working.

My wife turns 26 this month. I used her as a baseline. She could quite easily be working at least *part time* until she is 65-70 in her profession.

As for the rate, historical returns for the US market index is around 10%-11%. I don't think that 9% is unrealistic at all.

 

[vi edit]

Even if I bump the retirement timeframe down to 30 from 40, and my disbursement period from 20 to 30, I still save about $40,000 a year in taxes in the Roth plan.

I know that as a single plan, the yearly disbursement wouldn't be enough to bump me into the 35% bracket, but I'm assuming both of us are still alive and have similar sized plans that would bump into that bracket.

So when you add it up, it still works out to be almost $80,000 a year between the two. As far as brackets go, I honestly can't see them go anywhere but up. The baby boomers are going to leave a void in tax revenue and just end up racking up the national debt even more. We'll have to fill the holes in Social Security and Medicare somehow.

 

[OS]

Originally posted by: vi_edit

Originally posted by: OS
btw, assuming you're just around 30, do you really expect to be working until 70? That's a long ass time to be working.

My wife turns 26 this month. I used her as a baseline. She could quite easily be working at least *part time* until she is 65-70 in her profession.

As for the rate, historical returns for the US market index is around 10%-11%. I don't think that 9% is unrealistic at all.

I think 10-11% is high, the article as follows suggests 7% for the dow, over 100 years.

source


But no one person invests for 100 years. In fact there are periods of decades, where the stock market went nowhere, up to 40 yrs according to the following.

source

in a worst case scenario for your wife, she could be investing 40 yrs and see basically nothing for returns.

I prefer not to be so pessimistic, but this is why i suggest 5-6% as realistic for 25+ yrs average return.

As for your wife working to 65+, doubtful. There are lots of articles and studies now that say the average retirement age has fallen and continues to fall.

 

[vi edit]

And as far as actually being able to contribute that much, well my wife and I both make very good salaries and live in a very innexpensive part of the country. We bought a very nice home that's a smidge over 1.5x our yearly income. Property taxes are very reasonable, state income tax is low, and many other things (insurance, vehicle registration, ect) are all very modest compared to other parts of the country.

 

[OS]

15K a year is not that much in contribution, i do that now and I'm only 27 just starting as a professional.

 

[vi edit]

Those mainly relied on the Dow. S&P 500 which is a much more indexed pool (500 stocks vs 30 stocks) and has much closer to the 10% that i was talking about.

Here's the last 50 of the S&P 500:
http://www.mutualofamerica.com/articles/CapMan/October03/SandP500.htm

 

[OS]

Originally posted by: vi_edit
As far as brackets go, I honestly can't see them go anywhere but up. The baby boomers are going to leave a void in tax revenue and just end up racking up the national debt even more. We'll have to fill the holes in Social Security and Medicare somehow.

That is probably going to happen soon, while we're working though, when pretax contributions help you dodge more tax. By the time we retire in 30 years, the situation will probably have stabilized.

And when i say brackets, I mean the dollar values will likely be inflation adjusted. 50K/yr is an ok amount of money today but that'll be how much a kid cutting a lawn will make in 30 years.

 

[bennylong]

$15k a year is all that you can contribute in most 401k plan

 

[vi edit]

As far as the income brackets changing, I think they'll stay pretty even because contribution allowances continue to go up each year as well. So that's pretty much a wash I think.

 

[KillerCharlie]

Originally posted by: OS
i suspect you work for a certain big name aerospace corp just from the numbers

uhhh... what are you talking about

 

[sygyzy]

I think the most confusing part about deciding between pre and post tax, is figuring out what your bracket will be when you retire. Eveyone says, "I will be retired so I won't make any money." Not true. You get to decide your tax bracket by deciding what your yearly withdrawl will be. So do you think you can live on $35K a year? What about $70K a year? Two different brackets.

 

[KillerCharlie]

I'm still not sure which to do... although I can always switch later. I was also thinking about doing 4% of each.

The only thing I enter when I enroll in this is what percent I contribute to pre-tax and what percent I want to contribute to after-tax, then I enter what funds I put it in. That's it.