I find it interesting that people are saying in this post tax rates at retirement should be lower when they retire but the entire time I've been on MM the general theme has been people expect to pay a higher tax rate which is why MM tends to want people to max out Roths before maxing out pretax retirement accounts.
I find it interesting that people are saying in this post tax rates at retirement should be lower when they retire but the entire time I've been on MM the general theme has been people expect to pay a higher tax rate which is why MM tends to want people to max out Roths before maxing out pretax retirement accounts.
All I know is I'm really confused.
But the max-out-your-Roths push is only for people who are eligible to contribute to Roth IRAs, who tend to be in lower tax brackets (or at least lower than 35%). Those aren't the people we're talking about here.
I don't think anyone would push someone in the 35% tax bracket to put all of their 401(k) money on the Roth side, right?
I don't see how it's a disadvantage. And the claim that they turn capital gains into ordinary income does not make sense at all.
It is saying if you invested in a stock and didn't pay taxes on it until you sold, the taxes are at 15%.
However, if you put that money into a traditional IRA or traditional 401(k), when the money is distributed, its taxed as regular income. However, this doesn't apply for ROTH IRAs/401K-- just traditional.
But V's comments about double taxation are valid-- If you don't put money into a retirement account, but rather into a stock-- you are using post-tax income, then you are taxed on the income again when you sell the stock.
This article does make me think that putting my non-retirement money into a mutual fund may not be the best idea-- but it feels so much less risky than investing in individual stocks.
I wonder what volenti's thoughts are, I'm going to forward this to her.
Non-retirement mutual funds are taxed at capital gains rates, not income rates. So what's your concern about mutual funds?
Be careful of letting the tax tail wag the investment dog. Mutual funds are still a better way to go for most investors than individual stocks given the diversity factor.
I agree that MF's are better for the diversity, I had just never really considered the tax implications and how that would hide the true cost of owning MF's. Owning individual stocks does give you some interesting options for writing off losses in years that you have higher capital gains, but I wouldn't want to go down that path unless I had a CPA to give me more guidance.
Our financial advisor told us that once we had a certain level of net worth, we should stop focussing on our tax deferred accounts. If you are going to be at the same tax bracket at retirement as you are today, the benefits are just not worth it. We are not there yet.
Our financial advisor told us that once we had a certain level if income& net worth, we should stop focussing on our tax deferred accounts. If you are going to be at the same tax bracket at retirement as you are today, the benefits are just not worth it. We are not there yet.
But don't d0ri's calculations on the first page debunk that? They were done based on being in the same tax bracket now and later, but the person who deferred taxes was way better off because she invested more money.
I agree that MF's are better for the diversity, I had just never really considered the tax implications and how that would hide the true cost of owning MF's. Owning individual stocks does give you some interesting options for writing off losses in years that you have higher capital gains, but I wouldn't want to go down that path unless I had a CPA to give me more guidance.
You can write off losses on mutual funds, too.
I'm not convinced that the dividends on most mutual funds are significant enough for this to really be an issue.
How do ETFs work compared to stocks and mutual funds from a tax/dividends perspective?
I agree that MF's are better for the diversity, I had just never really considered the tax implications and how that would hide the true cost of owning MF's. Owning individual stocks does give you some interesting options for writing off losses in years that you have higher capital gains, but I wouldn't want to go down that path unless I had a CPA to give me more guidance.
You can write off losses on mutual funds, too.
I'm not convinced that the dividends on most mutual funds are significant enough for this to really be an issue.
Agreed. Plus I think a lot of "good" mutual fund managers offset those gains with losses, so you shouldn't be getting a huge tax bill often if ever. If you are, invest in different mutual funds!
(psst -- do kid deductions really phase out? I never knew that)
Yes. The only tax thing we take advantage of is the dependent care FSA but that's only limited to $5000 per year total, doesn't matter how many kids. With daycare cost of $1000/mo, that's nothing.
I find it interesting that people are saying in this post tax rates at retirement should be lower when they retire but the entire time I've been on MM the general theme has been people expect to pay a higher tax rate which is why MM tends to want people to max out Roths before maxing out pretax retirement accounts.
All I know is I'm really confused.
But the max-out-your-Roths push is only for people who are eligible to contribute to Roth IRAs, who tend to be in lower tax brackets (or at least lower than 35%). Those aren't the people we're talking about here.
I don't think anyone would push someone in the 35% tax bracket to put all of their 401(k) money on the Roth side, right?
V, there are some folks that are eligible for Roth 401ks with no income limits. As Rock-n-Voll suggested, those folks might opt for the Roth to hedge. I contribute to my Roth option at work as well as the deferred comp option. DH came home the other day asking if we wanted to switch his retirement contributions to the Roth option (he's at a new job, so this is new to us). I think 17k post-tax is enough hedging so I said no.
I'm not convinced that the dividends on most mutual funds are significant enough for this to really be an issue.
How do ETFs work compared to stocks and mutual funds from a tax/dividends perspective?
My understanding is the same as stocks, so you would pay tax on dividends the way you normally would. However, you would not be subject to capital gains when individual ETF assets are sold the way you are with mutual funds.
Our financial advisor told us that once we had a certain level if income& net worth, we should stop focussing on our tax deferred accounts. If you are going to be at the same tax bracket at retirement as you are today, the benefits are just not worth it. We are not there yet.
But don't d0ri's calculations on the first page debunk that? They were done based on being in the same tax bracket now and later, but the person who deferred taxes was way better off because she invested more money.
This may be specific to Canadians. Not sure. There are a number of programs for seniors that are phased out a higher income levels. But investment income isn't included. I never questioned her on it since she said it would be a few years before we had to worry about it.
Post by 80sjunkie on Sept 27, 2012 13:41:04 GMT -5
BTW I love the financial discussions, but my work productivity doesn't. At least I get to start drinking at 5pm (reception) with a dinner afterwards. Good food and drinks, 0 dollars.
But the max-out-your-Roths push is only for people who are eligible to contribute to Roth IRAs, who tend to be in lower tax brackets (or at least lower than 35%). Those aren't the people we're talking about here.
I don't think anyone would push someone in the 35% tax bracket to put all of their 401(k) money on the Roth side, right?
V, there are some folks that are eligible for Roth 401ks with no income limits. As Rock-n-Voll suggested, those folks might opt for the Roth to hedge. I contribute to my Roth option at work as well as the deferred comp option. DH came home the other day asking if we wanted to switch his retirement contributions to the Roth option (he's at a new job, so this is new to us). I think 17k post-tax is enough hedging so I said no.
Oh, I know -- I am one of them and in some years I have taken advantage of that option as a hedge. I was responding to the comment about all of this being contrary to MM's typical advice (contribute to your 401(k) up to the employee match, then max out your Roth IRA, then go back to 401(k) contributions). That advice is for people who are eligible for Roth IRA contributions (and who won't max out both 401(k)s and IRAs in a given year and therefore have to figure out how to split up their retirement funds between the two options). The people we're talking about here are not those people, which is why the advice is different.
V, there are some folks that are eligible for Roth 401ks with no income limits. As Rock-n-Voll suggested, those folks might opt for the Roth to hedge. I contribute to my Roth option at work as well as the deferred comp option. DH came home the other day asking if we wanted to switch his retirement contributions to the Roth option (he's at a new job, so this is new to us). I think 17k post-tax is enough hedging so I said no.
Oh, I know -- I am one of them and in some years I have taken advantage of that option as a hedge. I was responding to the comment about all of this being contrary to MM's typical advice (contribute to your 401(k) up to the employee match, then max out your Roth IRA, then go back to 401(k) contributions). That advice is for people who are eligible for Roth IRA contributions (and who won't max out both 401(k)s and IRAs in a given year and therefore have to figure out how to split up their retirement funds between the two options). The people we're talking about here are not those people, which is why the advice is different.
Aw, ok, I was trying to look at it from a middle-income perspective since that's what the author mentioned in the article which would still have Roth people.
I thought I was reasonably money-savy until trying to figure out this post. Now I am going to have to come back to it later when I can really puzzle through some of the discussion points. However, it does make me thankful for the board!
Aw, ok, I was trying to look at it from a middle-income perspective since that's what the author mentioned in the article which would still have Roth people.
I don't like the article. It just doesn't make sense.
Post by 80sjunkie on Sept 27, 2012 15:45:48 GMT -5
d0ri, it doesn't make sense for everyone (like some of the other general statements made on MM) but the article did bring up an interesting point that can be relevant for some high income households.
d0ri, it doesn't make sense for everyone (like some of the other general statements made on MM) but the article did bring up an interesting point that can be relevant for some high income households.
I'm talking about the attempt to compare regular investment to pretax retirement investment account. I just don't think they are comparable at all. They are totally different.
ETA: The article seems to be saying that one should heavily invest more in regular accounts than 401k because of the low capital gains tax rate. It doesn't sound right at all.