Do you max out your 401k?

VegasBella said:

We usually "max out" our retirement savings as much as possible. But we did a recent calculation and it's not going to be nearly enough so we are looking into other investment options for retirement rather than simple savings.

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I turned all my IRA into Deferred Annuities which start paying when I turn 60. It provides guaranteed growth and eliminates market uncertainty. I calculated that the deferred annuities grow at about 6+ percent compounded each year and provides more income (growth + principal) than straight withdrawal. I also bought at the right time as the same annuities that I bought earlier this year are paying 25-50% less if purchased now.

As interest rates tick up (which many financial gurus predict), annuity rates will increase..

sptung said:

I turned all my IRA into Deferred Annuities which start paying when I turn 60. It provides guaranteed growth and eliminates market uncertainty. I calculated that the deferred annuities grow at about 6+ percent compounded each year and provides more income (growth + principal) than straight withdrawal. I also bought at the right time as the same annuities that I bought earlier this year are paying 25-50% less if purchased now.

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lizap said:

As interest rates tick up (which many financial gurus predict), annuity rates will increase..

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Deferred annuities is affected less by current interest rates than immediate annuities.

SMHarman said:

I have never understood this logic.

IMHO it is better to pay taxes later when your marginal rate is likely to be lower than pay today.

Also, if they mess with rules at least you got a certain break today.

Finally why invest 750 today after tax instead of 1000 pre tax. That 750 has to work so much harder over the cycle.

Additionally the first retirement vehicle should be an HSA. Triple tax free. In, growth and out (for relevant expenses and in retirement you will have relevant expenses. Sock away the first 6400 there.

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This misses the main advantage of the Roth. Yes, you pay taxes on the amount put away, but ALL the earnings are TAX FREE. This is huge. If you put away $5500/year (the limit for IRA contributions) starting at age 30, at age 72.5, you could easily have around $3.5 million in that account. You would have paid taxes on $227,000 of it. The rest is tax free. That example assumes a 10% return (the stock market average over the last 50+ years). However, lowering that interest rate to 5% still gives a total of almost $800,000. With a regular IRA, you didn't pay tax on that 227K, but will pay taxes on the entire 800K later. With a Roth, you pay taxes on the 227K but have 573K (or up to 3.2 million) not taxed later.

At age 72.5, the required minimum distribution kicks in. That means you CAN'T control how much you pull out (and pay taxes on) each year. For the smaller amount (800K), the RMD is a little over 32K per year. Add that to your social security/pension etc and you can very easily be pushed out of the 15% tax bracket. For singles, that level is a little under $40K. Once you are out of the 15% bracket, cap gains are no longer taxed at 0%. As a result, you can end up paying a higher tax rate for more of your money. With a Roth, since the money is not taxed when you pull it out, it avoids that issue.

The key here is to save as much as you can starting as early as you can. That gives you as much flexibility as possible. Utilize as much of any tax break as you can. If your 401K is a regular one, than do a Roth IRA on your own. If your 401K is a Roth, then look at a regular IRA on your own, especially if that deduction will drop you into a lower tax rate. Running the numbers for your particular situation is important whether you do it yourself or hire somebody to help.
Keep an eye on the power of compounding. The earlier you can start, no matter how much, the better. And the earlier you can start, the more should be in a Roth.

Sue

sptung said:

Deferred annuities is affected less by current interest rates than immediate annuities.

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What happens to the left over money if you die early?

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raygo123 said:

What happens to the left over money if you die early?

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I bought 2 term deferred income annuities where my beneficiaries continue to receive the payments for the remainder of the term if/when I pass before end of the term.

sue1947 said:

This misses the main advantage of the Roth. Yes, you pay taxes on the amount put away, but ALL the earnings are TAX FREE. This is huge. If you put away $5500/year (the limit for IRA contributions) starting at age 30, at age 72.5, you could easily have around $3.5 million in that account. You would have paid taxes on $227,000 of it. The rest is tax free. That example assumes a 10% return (the stock market average over the last 50+ years). However, lowering that interest rate to 5% still gives a total of almost $800,000. With a regular IRA, you didn't pay tax on that 227K, but will pay taxes on the entire 800K later. With a Roth, you pay taxes on the 227K but have 573K (or up to 3.2 million) not taxed later.

At age 72.5, the required minimum distribution kicks in. That means you CAN'T control how much you pull out (and pay taxes on) each year. For the smaller amount (800K), the RMD is a little over 32K per year. Add that to your social security/pension etc and you can very easily be pushed out of the 15% tax bracket. For singles, that level is a little under $40K. Once you are out of the 15% bracket, cap gains are no longer taxed at 0%. As a result, you can end up paying a higher tax rate for more of your money. With a Roth, since the money is not taxed when you pull it out, it avoids that issue.

Sue

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But let's compare apples to apples.

You put $5500 into the Roth that's exactly the same as putting $7333 into their traditional 401k.

Now those 7333s grow at the same rate as the 5500s so you end up with more in the fund at the back end.

Finally you may be pushed into the next band but remember that is the marginal rate. The last couple of thousand in your example would be at 25 put so an extra 100 dollars per thousand on the margin. Not the total. And the best news is the fund is bigger.

SMHarman said:

But let's compare apples to apples.

You put $5500 into the Roth that's exactly the same as putting $7333 into their 401k.

Now those 7333s grow at the same rate as the 5500s so you end up with more in the fund at the back end.

Finally you may be pushed into the next band but remember that is the marginal rate. The last couple of thousand in your example would be at 25 put so an extra 100 dollars per thousand on the margin. Not the total. And the best news is the fund is bigger.

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Just so you don't confuse anyone here, a 401K could be a Roth or non-Roth. And as far as which is better, a Roth or traditional, the answer comes down to one question - at what time will you be in a higher tax bracket - now or when you pull the money out? Answer that and you'll know which is better. If you're unsure, split your investment money into both types. Just don't wait!

ace2000 said:

Just so you don't confuse anyone here, a 401K could be a Roth or non-Roth. And as far as which is better, a Roth or traditional, the answer comes down to one question - at what time will you be in a higher tax bracket - now or when you pull the money out? Answer that and you'll know which is better. If you're unsure, split your investment money into both types. Just don't wait!

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I added the word traditional to my post.

You are correct. There is also the question of what rates are now and later. That said most are in a lower band in retirement. Homes paid. No kids in college the income needed is lower.

Well said. I agree it's best to have funds in both Roth and non-Roth accounts.

ace2000 said:

Just so you don't confuse anyone here, a 401K could be a Roth or non-Roth. And as far as which is better, a Roth or traditional, the answer comes down to one question - at what time will you be in a higher tax bracket - now or when you pull the money out? Answer that and you'll know which is better. If you're unsure, split your investment money into both types. Just don't wait!

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Max out no, but we were very smart to start young and certainly always made sure to contribute at least enough, often more, to get the company match.

We've also been lucky that for 23 years I've worked for companies with pension plans as well as a 401k so over that time my employer has been contributing 5% of my annual salary to the pension plan.

At 52 we're hoping that if I can get lucky and stay employed at my salary level for the next ten years that we could retire at 62. It won't be easy because my company is moving a lot of people to NC.

I would definitely relocate to NC so we'll see but I've been so lucky for the last 24 years that I'm expecting some adversity soon even though none is apparent but hopefully we can stay on our plan to retire at 62.

lizap said:

Well said. I agree it's best to have funds in both Roth and non-Roth accounts.

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Though if you compare a Roth IRA and a Roth 401k. The Roth 401k is probably a better option, as the contribution limits are the same as a regular 401k, which is much higher than a Roth IRA.

SmithOp said:

I agree with what Sue said, max out your Roth before the 401k.


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If your company has a match for your 401k, the best thing to do is to put in at least the maximum to get the full match. It's free money. Also, there are limits on your income to be eligible for a Roth IRA. Check out the rules if you are a moderately high income individual, otherwise you'll take a financial hit.

Getting back to the first question...

I always tell anyone who wants to talk money and retirement to max out their 401k as soon as they can. Sometimes that means starting out with getting the full match and upping it every year with your raise to get to the max.

Seriously, it's important to save, and it can be difficult for many to save if you read the statistics. And, putting as much into a 401k not only gets you automatically saving, but it lets you bring home more money each year you contribute due to lower income tax. This is important for many people who are struggling to save at all.

I started maxing out 401ks when I was in my late 30s. Before that I couldn't put the max in. After that I also saved all my raises pretty much with the exception of the years I paid college tuition for my son. I was able to retire at 58 as the compounded savings and stock market did its magic.

It's hard to tell anyone else how to invest as each of our circumstances are different. For some people a Roth may not be the best choice. However, it's important to save and 401ks are a great vehicle for saving.

Can someone please help me understand something. I don't see how a Roth IRA makes any sense for the vast majority of people.

Am I missing something? Don't most have a lower tax rate when they retire than when they're make peak salary?

When I retire my salary is going to drop like a rock and isn't then when I should look to have my profits taxed?

Yes. I contributed the max for my 457(b) for 21 years until I retired almost four years ago at 55. My husband and I have both maxed out our Roth IRAs for 15 years and we are still contributing the max in retirement/semi-retirement. Save what you can, payoff what you can, and spend less.

My husband is a General Contractor who worked hard for a lot of years and we rarely over extended our finances. Although, I admit there were times (when times were really good) that we did spend a whole lot of money on a whole lot of stuff. After this last recession we simplified, downsized and it made life a whole lot easier. We have my pension with medical, three rental properties, retirement accounts, savings, my husband’s semi-retirement income and no debt. And, we are still SCUBA diving, snow skiing, kitesurfing, SUPing, timeshare traveling and RV camping a lot. Life is good.

MOXJO7282 said:

Can someone please help me understand something. I don't see how a Roth IRA makes any sense for the vast majority of people.

Am I missing something? Don't most have a lower tax rate when they retire than when they're make peak salary?

When I retire my salary is going to drop like a rock and isn't then when I should look to have my profits taxed?

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Look up the median income of a family of 4 in the USA and the tax rate applied to that income.



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^^^^ how is this not political commentary ? ^^^^
This is opinion... I could easily write converse of this, but will refrain as it would get deleted anyway.

If I were to listen to the naysayers from 2009 - we would have missed doubling our retirement funds over this time period.

Bottom line is that Fed and State current and future tax rates have to be considered - and this goes for Roth and non-Roth. As well as potential for gains and losses based on investment risk.

Should one max their 401k? Yes.

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I like the thought of the Roth and I max out my Roth too. But I will never have the amount of money in the Roth that will make a dent in my taxes or lifestyle. When I was married we rarely qualified for the Roth. Now that I am single and approaching 50 time is running out. At 6k a year it just isn't enough. The 24 k I can contribute in my 401k is making a dent.

My house will be paid for in 4 years if I can keep paying at my current rate which is 1k more a month than my actual payment. I have pretty lofty goals and a nurses salary only goes so far. Thank goodness I live in California and make a living wage. I considered myself blessed but I have to admit I am stretched this year. Saving outside my 401k and Roth is unrealistic for me. I consider the extra $$ I put toward my house to be the savings I can't touch or see!

falmouth3 said:

If your company has a match for your 401k, the best thing to do is to put in at least the maximum to get the full match. It's free money. Also, there are limits on your income to be eligible for a Roth IRA. Check out the rules if you are a moderately high income individual, otherwise you'll take a financial hit.

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This is where big company modern 401ks allowing the mega back door Roth come in.

I have not yet made it to max'ing 401k. I'm single with a mortgage, so I contribute up to match, then feed Roth, and plow as much as possible into paying off mortgage and fixing the place. I plan to stay in the house during at least the early years of retirement and maybe decades.

I don't get too bunched up about taxes, I hold accounts of various taxation to have as many options as possible. The pre-tax 401k is helpful in the here and now so I can keep as much income as possible. I'll max it a soon as I'm able, when the mortgage is retired. I will fully fund Roth first, since I got started late. I have no plans to convert 401k/IRA to Roth. What I would pay in taxes to do that I would rather invest and deal with RMD when it comes. Plenty of time to age 70 to tap IRA to not have too much RMD, although I don't consider having to take too much out to be a terrible thing. Getting pushed into another tax bracket is not a big deal to me, since it's only dollars past that level that apply to new level. I guess I'm not too worried about having too much income. It's instead a problem I aspire to have.

dioxide45 said:

Though if you compare a Roth IRA and a Roth 401k. The Roth 401k is probably a better option, as the contribution limits are the same as a regular 401k, which is much higher than a Roth IRA.

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Not necessarily. With a Roth 401k you are required to take distributions at age 70 1/2. Not so with a Roth IRA.

http://www.bankrate.com/finance/retirement/roth-ira-401-k-what-s-the-difference.aspx

Kel said:

Yes. I contributed the max for my 457(b) for 21 years until I retired almost four years ago at 55. My husband and I have both maxed out our Roth IRAs for 15 years and we are still contributing the max in retirement/semi-retirement. Save what you can, payoff what you can, and spend less.

My husband is a General Contractor who worked hard for a lot of years and we rarely over extended our finances. Although, I admit there were times (when times were really good) that we did spend a whole lot of money on a whole lot of stuff. After this last recession we simplified, downsized and it made life a whole lot easier. We have my pension with medical, three rental properties, retirement accounts, savings, my husband’s semi-retirement income and no debt. And, we are still SCUBA diving, snow skiing, kitesurfing, SUPing, timeshare traveling and RV camping a lot. Life is good.

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This is fabulous! The key, though, is you have a pension with medical. If we had that we would have been retired long ago also. Instead, many of us have to wait for Medicare and Social Security to kick in.