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401k Question
Posted on 8/14/15 at 6:35 am
Posted on 8/14/15 at 6:35 am
I rate myself a B when it comes to investing knowledge and financial planning, however, I come to the MTB with a dumb question...
Is there any advantage to contributing to your 401k independently as opposed to buying funds on your own? e.g. taxes
My current accounts are: Roth IRA, Roll over 401k (old job), Current 401k (company), and various vanguard funds.
When I have extra money, I throw it into my various vanguard funds. Is there any reason I should be backfilling my rollover 401k? Are there any tax advantages? My hesitation has always been "If I need the money, I can pull from my funds at anytime and just pay tax on the gains, whereas if I pull from that 401k, I have to pay an additional 10% early withdrawal tax.
Am I wrong?
Is there any advantage to contributing to your 401k independently as opposed to buying funds on your own? e.g. taxes
My current accounts are: Roth IRA, Roll over 401k (old job), Current 401k (company), and various vanguard funds.
When I have extra money, I throw it into my various vanguard funds. Is there any reason I should be backfilling my rollover 401k? Are there any tax advantages? My hesitation has always been "If I need the money, I can pull from my funds at anytime and just pay tax on the gains, whereas if I pull from that 401k, I have to pay an additional 10% early withdrawal tax.
Am I wrong?
1
Posted on 8/14/15 at 7:07 am to Lsut81
401(k) contributions come out of your gross so they're not taxable income.
Is that what your asking?
Is that what your asking?
Posted on 8/14/15 at 8:13 am to southernelite
Are you asking if you should be adding funds to retirement accounts vs taxable investments?
Posted on 8/14/15 at 6:45 pm to Chris4x4gill2
quote:
Are you asking if you should be adding funds to retirement accounts vs taxable investments?
I have a company 401k that I contribute to...
I have an old 401k that was rolled over to an IRA...
I have a maxed Roth...
I have various vanguard admiral funds...
I have X amount of cash on hand, where is the most effective place to put it? I currently throw it into the admiral funds.
Posted on 8/14/15 at 7:04 pm to Lsut81
Depending if you need to reduce your taxable income, then max your 401k. If you don't, then you have better options investing through your admiral shares.
Hope that helps.
Hope that helps.
Posted on 8/14/15 at 7:11 pm to Lsut81
Do you have a sufficient emergency fund? Are you maxing the Roth contribution? Can you take a loan from your current 401k? Do you maximize your employer match?
If you have the emergency fund and will use this extra only in retirement, go current 401k up to maximum pre-tax contribution. This gives you the best tax treatment. If you don't like the choices available here, you have to determine if the tax cost in the admiral shares offset the performance of the choices in the 401k.
The Roth can be your first choice if a true big emergency happens rather than the 401k, but you lose the opportunity cost of those funds being removed.
If you have the emergency fund and will use this extra only in retirement, go current 401k up to maximum pre-tax contribution. This gives you the best tax treatment. If you don't like the choices available here, you have to determine if the tax cost in the admiral shares offset the performance of the choices in the 401k.
The Roth can be your first choice if a true big emergency happens rather than the 401k, but you lose the opportunity cost of those funds being removed.
Posted on 8/14/15 at 7:34 pm to LSUtigerME
quote:
Do you have a sufficient emergency fund? Are you maxing the Roth contribution? Can you take a loan from your current 401k? Do you maximize
Yes to all
quote:
If you have the emergency fund and will use this extra only in retirement, go current 401k up to maximum pre-tax contribution. This gives you the best tax treatment. If you don't like the choices available here, you have to determine if the tax cost in the admiral shares offset the performance of the choices in the 401k.
That's what I'm trying to determine. How is the tax on the 401k different from the tax on the admiral. I wouldn't pull the admiral until retirement, wouldn't the tax liability be the same as the deferred on the 401k?
Posted on 8/14/15 at 8:42 pm to Lsut81
quote:
I have X amount of cash on hand, where is the most effective place to put it?
For most people, you should allocate retirement savings like this:
1) 401k up to company match
2) Max Roth IRA
3) Max your 401k
4) Taxable accounts
If your 401k has terrible options (i.e. funds with high fees), maybe you skip #3. However, the ability to lower your tax bill now and let your investments grow pre-tax is huge.
Posted on 8/14/15 at 8:55 pm to Lsut81
quote:
That's what I'm trying to determine. How is the tax on the 401k different from the tax on the admiral. I wouldn't pull the admiral until retirement, wouldn't the tax liability be the same as the deferred on the 401k?
I assume your vanguard admiral funds are in a taxable account (i.e non 401k/ira).
If yes, then the tax on them would be different. When you take a distribution from your 401k or traditional ira; that will be taxed as if it is normal income.
When you sell something in your taxable account; it will be treated as capital gains. If you've held it more than a year then it will be taxed at the long term capital gain rate. That rate varies depending on your income. It could even be 0%!!
Basically it is a good idea to have retirement assets in both tax deferred/free and taxable accounts. Though some assets are better off in certain types of accounts.
https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States
https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
This post was edited on 8/14/15 at 8:58 pm
Posted on 8/14/15 at 9:02 pm to gpburdell
quote:
If yes, then the tax on them would be different. When you take a distribution from your 401k or traditional ira; that will be taxed as if it is normal income.
When you sell something in your taxable account; it will be treated as capital gains. If you've held it more than a year then it will be taxed at the long term capital gain rate. That rate varies depending on your income. It could even be 0%!!
Thanks for the info, makes sense.
Posted on 8/21/15 at 1:58 am to Lsut81
Does your employer offer a Roth 401k option?
Posted on 8/21/15 at 3:14 am to gpburdell
You guys are all advocating that you max out an after-tax 401k option before contributing to a traditional pre-tax 401k? My company does a 1:1 match up to 7%, so I'm currently contributing 8% and putting it all in pre-tax. I'm a single male with income in the third tax bracket and pretty much no deductions, so I figured I should take the guaranteed tax break now. Should I be at least contributing a portion through the after-tax route?
Posted on 8/21/15 at 8:37 am to LSUsuperfresh
Depending on your age, your income will only go up. The younger you are, the more it will go up. For many it makes sense to pay taxes on lower income while young so that if they are ballin in retirement, they aren't paying the higher tax rate.
Posted on 8/21/15 at 1:18 pm to LSUsuperfresh
quote:
You guys are all advocating that you max out an after-tax 401k option before contributing to a traditional pre-tax 401k?
If you mean a Roth 401k, I myself don't use it. Who knows what tax rates and laws will look like in 20 years.
I prefer to use a traditional 401k to get tax deductions now and to let the investments grow pre-tax (people tend to over look this). The 401k deduction combined with my mortgage interest deduction is pretty significant in reducing my taxes.
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