Question about 401k

[Argo]

Your 401k contributions aren't taxed. However, from what I understand, you have to pay tax when you withdraw from 401k, even after you retire. If that's the case what's the difference between investing in 401k and your individual portfolio. Yeah, 401k isn't taxable when you contribute, but the tax is deducted when you withdraw, making the end result the same.

Can somebody explain this detail to me?

 

[bunker]

The benefit is when you retire and draw on that 401k, you're more than likely to be in a significantly lower tax bracket than the one your are in while contributing.

 

[Argo]

Originally posted by: bunker
The benefit is when you retire and draw on that 401k, you're more than likely to be in a significantly lower tax bracket than the one your are in while contributing.

Thanks. It's nasty outside, so I decided to come up with a investment strategy. Was deciding how to balance 401k/portfolio contributions.

 

[StageLeft]

It's not just that your tax bracket may be lower later, but also that your investment _grows tax free_. As it is now with a non retirement account you pay taxes on the capital gains (Ie, $100 at 10% for a year results in taxing $10). With a 401k it will grow tax free, so that $10 you made will not be taxed. You only pay taxes when you pull it out, whereas with a non retirement account it is being taxed every time it grows.

 

[FoBoT]

by deffering the tax, you get the interest/compounding effect on the entire amount, so even though you pay the tax when you withdraw the money later, you end up with more money (since the part that would have been taxed when you earned it was invested instead of paid to the govt)

it is good

the only better option is the Roth IRA where you meet the requirements for no tax now and no tax later

 

[bunker]

Originally posted by: Skoorb
It's not just that your tax bracket may be lower later, but also that your investment _grows tax free_. As it is now with a non retirement account you pay taxes on the capital gains (Ie, $100 at 10% for a year results in taxing $10). With a 401k it will grow tax free, so that $10 you made will not be taxed. You only pay taxes when you pull it out, whereas with a non retirement account it is being taxed every time it grows.

Well yeah, there's that too.

 

[RossMAN]

What is your employer's maximum 401k contribution limit?

How much do they match?

Don't forget to open a Roth IRA.

 

[StageLeft]

I need to get into IRA crap. I guess being from England originally I have something against the IRA (hee hee). In Canada there is nothing similar, so I jumped on the 401k bandwagon immediately (similar to a CAN RRSP), but I need to do an IRA, because I know it's money down the tube every year I don't!

 

[Argo]

Originally posted by: Skoorb
I need to get into IRA crap. I guess being from England originally I have something against the IRA (hee hee). In Canada there is nothing similar, so I jumped on the 401k bandwagon immediately (similar to a CAN RRSP), but I need to do an IRA, because I know it's money down the tube every year I don't!

2 problems with IRA.

1) Contribution limits are way lower than 401k ($3,000 vs. $13,000 this year)
2) In order to be elligible for Roth IRA (tax-free) you need to have your taxable income below certain value.

 

[StageLeft]

Originally posted by: Argo

Originally posted by: Skoorb
I need to get into IRA crap. I guess being from England originally I have something against the IRA (hee hee). In Canada there is nothing similar, so I jumped on the 401k bandwagon immediately (similar to a CAN RRSP), but I need to do an IRA, because I know it's money down the tube every year I don't!

2 problems with IRA.

1) Contribution limits are way lower than 401k ($3,000 vs. $13,000 this year)
2) In order to be elligible for Roth IRA (tax-free) you need to have your taxable income below certain value.

What are the basic requirements (such as that income level)? I cuoldn't find them on my quick scan

 

[Argo]

Originally posted by: Skoorb

Originally posted by: Argo

Originally posted by: Skoorb
I need to get into IRA crap. I guess being from England originally I have something against the IRA (hee hee). In Canada there is nothing similar, so I jumped on the 401k bandwagon immediately (similar to a CAN RRSP), but I need to do an IRA, because I know it's money down the tube every year I don't!

2 problems with IRA.

1) Contribution limits are way lower than 401k ($3,000 vs. $13,000 this year)
2) In order to be elligible for Roth IRA (tax-free) you need to have your taxable income below certain value.

What are the basic requirements (such as that income level)? I cuoldn't find them on my quick scan

From what I could find it's $150,000 for married couples, and $100,000 for single filers. One thing I don't understand is if you'll have to give up your IRA account as soon as your salary goes over that level (pretty likely for people in IT industry) or if you cannot contribute anymore.

 

[Argo]

tp

 

[Argo]

tp

 

[Svnla]

Other benefits of 401k are:

1) Because your pre tax income will be lower after you deduct your 401k, you will pay lesser income tax now.

2) Employer matching. Most of companies will match your 401k contribution. They could match from 50% to 100% of your contribution up to 6 or 7%. That means you get extra money, for free.

I strongly recommend guys/gals that are just starting out in the corporate world that you need to put in as much as possible for your 401k, especially if your companies will do matching.

 

[jeffrey]

A very valuable benefit from a 401k plan is the mindset that is carries. I have assets in both personal investment accounts and 401k/IRA accounts. I do not ever consider the retirement accounts as money that I could use (even though in some situations it is legal to do so before you turn 55.) The regular investments accounts I have withdrawn from for major purchases.

 

[rufruf44]

Personally, I think the order should be:
1) Max 401K up to company match
2) Max Roth IRA to annual limit
3) Max 401K to annual limit

 

[Jzero]

Originally posted by: Argo

Originally posted by: Skoorb

Originally posted by: Argo

Originally posted by: Skoorb
I need to get into IRA crap. I guess being from England originally I have something against the IRA (hee hee). In Canada there is nothing similar, so I jumped on the 401k bandwagon immediately (similar to a CAN RRSP), but I need to do an IRA, because I know it's money down the tube every year I don't!

2 problems with IRA.

1) Contribution limits are way lower than 401k ($3,000 vs. $13,000 this year)
2) In order to be elligible for Roth IRA (tax-free) you need to have your taxable income below certain value.

What are the basic requirements (such as that income level)? I cuoldn't find them on my quick scan

From what I could find it's $150,000 for married couples, and $100,000 for single filers. One thing I don't understand is if you'll have to give up your IRA account as soon as your salary goes over that level (pretty likely for people in IT industry) or if you cannot contribute anymore.

I think you just can't contribute during that year.

However, where do you live that it is pretty likely for people in the IT industry to get over $100k? B/c I'm working in IT and I know quite a few people who are, and while none of us are starving, I don't see any of us pullink 6 figs in the forseeable future.

 

[Hector13]

Originally posted by: Argo

Originally posted by: Skoorb

Originally posted by: Argo

Originally posted by: Skoorb
I need to get into IRA crap. I guess being from England originally I have something against the IRA (hee hee). In Canada there is nothing similar, so I jumped on the 401k bandwagon immediately (similar to a CAN RRSP), but I need to do an IRA, because I know it's money down the tube every year I don't!

2 problems with IRA.

1) Contribution limits are way lower than 401k ($3,000 vs. $13,000 this year)
2) In order to be elligible for Roth IRA (tax-free) you need to have your taxable income below certain value.

What are the basic requirements (such as that income level)? I cuoldn't find them on my quick scan

From what I could find it's $150,000 for married couples, and $100,000 for single filers. One thing I don't understand is if you'll have to give up your IRA account as soon as your salary goes over that level (pretty likely for people in IT industry) or if you cannot contribute anymore.

you don't have to give up your Roth IRA, you just can't contribute any more. And I think the limits are 160k and 110k now (though it may be a gradual decrease in the amount you can contribute when you make between 100-110k).

Also, these limits are for Roth IRAs only. For a traditional, if you company has a 401k, the limits are MUCH lower (like 35-45k). If your company has no 401k (or similar vehicle), I don't think traditionals have any limit.

Hopefully all of this will change with the new propsed lifetime savings accounts.

 

[Hector13]

Originally posted by: FoBoT
the only better option is the Roth IRA where you meet the requirements for no tax now and no tax later

is there such an option for no tax now for a roth ira (apart from obviously making too little to be taxed at all)?