I rarely even bother, ride it out as they say...
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The Retirement Planning/ Investment/ Savings Thread (4 Viewers)
- Thread starter inca911
- Start date
I rarely even bother, ride it out as they say...
DrStrange
4 of a Kind
One of the important things to know is your social security earnings will be taxed. Yes, yes there are plenty of people who don't get taxed on their benefits but anyone debating Roth vs traditional IRA is going to be taxed.
Why does this matter? Because income from a traditional IRA acts to increase the tax rate you will pay on your social security. Roth distributions don't count as taxable.
For married couples - once you hit $32,000 in taxable income (plus income from tax free bonds) then you must add half of your social security benefit as taxable income. By the time you hit $44,000, 85% of your social security income is subject to your ordinary tax rate. PLEASE NOTE - you don't lose 85% of your benefit, you just have to pay taxes on it at your normal rate of taxation.
State income and local taxes tend to follow along with federal taxes, so you can get hit with a triple whammy.
Bottom line, the ROTH option is likely the best for almost everyone with substantial retirement income. Also note you can convert a traditional retirement account into a ROTH account in many cases, but you will have a significant tax bill to pay.
I am not a tax professional. While my opinions might be interesting to me, they are not a substitute for professional guidance. -=- DrStrange
Why does this matter? Because income from a traditional IRA acts to increase the tax rate you will pay on your social security. Roth distributions don't count as taxable.
For married couples - once you hit $32,000 in taxable income (plus income from tax free bonds) then you must add half of your social security benefit as taxable income. By the time you hit $44,000, 85% of your social security income is subject to your ordinary tax rate. PLEASE NOTE - you don't lose 85% of your benefit, you just have to pay taxes on it at your normal rate of taxation.
State income and local taxes tend to follow along with federal taxes, so you can get hit with a triple whammy.
Bottom line, the ROTH option is likely the best for almost everyone with substantial retirement income. Also note you can convert a traditional retirement account into a ROTH account in many cases, but you will have a significant tax bill to pay.
I am not a tax professional. While my opinions might be interesting to me, they are not a substitute for professional guidance. -=- DrStrange
Sparty
Flush
Great Thread. Don't know why i just saw it until now. A couple of my thoughts after reading everything here -(remember free advice isn't always good! 
):
1) starting this year (2019), IRA contributions limits have been raised by $500; from $5,500 for individuals under 50 to $6,000 and an additional $1,000(like last year) "catch up" contribution opportunity for anyone 50 or older.
2) starting this year (2019), 401k contribution limits have also been raised by $500; from $18,500/yr for individuals under 50 to $19,000 and an additional $6000 (like last year) "catch up" contribution opportunity for anyone 50 and older.
3) Back Door Roth. this was only mentioned a couple times. This can be a VERY VERY beneficial (fairly unknown) opportunity for young savers. Basically, if you make too much income to qualify for a Roth IRA, simply open up a Traditional IRA after you've paid taxes on it and convert it within a few days to a Roth. This means that ALL of the investment growth that is generated from the Roth IRA will never be taxed (you might have to pay a couple pennies of tax on the growth for the few days that it might have made a little $$ while it was still a Traditional before you made the conversion). But that's it; never pay any taxes on it. If you kept it in a Traditional for decades, your taxes on this will be SIGNIFICANT as almost all the money in the account will likely be from investment income generated. I'm 48 years old and have been doing the $5,500 deposit to Traditional and conversion to Roth every year for a while now and plan to continue to do it every year until retirement.
4) Generally, i think the Roth 401k is a better choice for most if it's available from your employer - (unless you see yourself in a MUCH lower tax bracket AFTER retirement). Also, there is no guarantee that the government will not raise tax rates in the future (seems like taxes are always more likely to be higher in the future instead of lower). If you are maxing out your 401k up to the $19,000 government limit then i definitely recommend using the Roth 401k as it is actually allowing you to save a little more (you are limited to saving $19,000 either way, but if it's Roth (after tax) you are actually saving $19,000 of your own money (not $19,000 where 20-30% of it is GOVERNMENT money). In other words, would you rather have $19,000 (NOT TAXABLE) in your retirement account or $14,250 in your retirement account with another $4,750 sitting there for the government to take some day)?
NOTE: your company's match (by law) cannot be in Roth 401k it will continue to build within the traditional 401k.
NOTE #2: the $19,000 contribution is the max that YOU can contribute to 401k/yr. Your employer match can be in ADDITION to that amount.
5) In my opinion, all of the investments above should be invested in good growth stock mutual funds (this diversifies it for you somewhat). Find some funds that have a +10-year history of beating the S&P index. The S&P has had average returns over the past few decades of over 11%/year. Some years are bad, but stick with it for the long haul. This means that your saved retirement money could potentially double about every 8 years.
6) Read Dave Ramsey's "Total Money Makeover". 7 easy to understand baby-steps; and/or listen to his podcasts. (Don't use debt, except maybe for a house).
7) Try, try, try not to spend all your retirement savings on Moar Chips!
):1) starting this year (2019), IRA contributions limits have been raised by $500; from $5,500 for individuals under 50 to $6,000 and an additional $1,000(like last year) "catch up" contribution opportunity for anyone 50 or older.
2) starting this year (2019), 401k contribution limits have also been raised by $500; from $18,500/yr for individuals under 50 to $19,000 and an additional $6000 (like last year) "catch up" contribution opportunity for anyone 50 and older.
3) Back Door Roth. this was only mentioned a couple times. This can be a VERY VERY beneficial (fairly unknown) opportunity for young savers. Basically, if you make too much income to qualify for a Roth IRA, simply open up a Traditional IRA after you've paid taxes on it and convert it within a few days to a Roth. This means that ALL of the investment growth that is generated from the Roth IRA will never be taxed (you might have to pay a couple pennies of tax on the growth for the few days that it might have made a little $$ while it was still a Traditional before you made the conversion). But that's it; never pay any taxes on it. If you kept it in a Traditional for decades, your taxes on this will be SIGNIFICANT as almost all the money in the account will likely be from investment income generated. I'm 48 years old and have been doing the $5,500 deposit to Traditional and conversion to Roth every year for a while now and plan to continue to do it every year until retirement.
4) Generally, i think the Roth 401k is a better choice for most if it's available from your employer - (unless you see yourself in a MUCH lower tax bracket AFTER retirement). Also, there is no guarantee that the government will not raise tax rates in the future (seems like taxes are always more likely to be higher in the future instead of lower). If you are maxing out your 401k up to the $19,000 government limit then i definitely recommend using the Roth 401k as it is actually allowing you to save a little more (you are limited to saving $19,000 either way, but if it's Roth (after tax) you are actually saving $19,000 of your own money (not $19,000 where 20-30% of it is GOVERNMENT money). In other words, would you rather have $19,000 (NOT TAXABLE) in your retirement account or $14,250 in your retirement account with another $4,750 sitting there for the government to take some day)?
NOTE: your company's match (by law) cannot be in Roth 401k it will continue to build within the traditional 401k.
NOTE #2: the $19,000 contribution is the max that YOU can contribute to 401k/yr. Your employer match can be in ADDITION to that amount.
5) In my opinion, all of the investments above should be invested in good growth stock mutual funds (this diversifies it for you somewhat). Find some funds that have a +10-year history of beating the S&P index. The S&P has had average returns over the past few decades of over 11%/year. Some years are bad, but stick with it for the long haul. This means that your saved retirement money could potentially double about every 8 years.
6) Read Dave Ramsey's "Total Money Makeover". 7 easy to understand baby-steps; and/or listen to his podcasts. (Don't use debt, except maybe for a house).
7) Try, try, try not to spend all your retirement savings on Moar Chips!
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Is there any way to calculate or estimate the amount of tax that would be owed on a 401k to Roth 401k transfer?
Also, what do people think about taking 401k loans out or withdrawing from Roth accounts to pay down higher interest debt?
Also, what do people think about taking 401k loans out or withdrawing from Roth accounts to pay down higher interest debt?
Sparty
Flush
1) I'd ask a tax adviser about your taxes for a 401k to a Roth 401k transfer. I'd only do that after you are completely out of debt and have your house paid off and are maxing out your annual retirement contributions. But you can ask your employer to start immediately making your monthly contributions into Roth instead of traditional. That will start building the Roth.
2) I would NEVER withdraw money from a retirement account (unless it's to avoid bankruptcy or to avoid a home foreclosure). They penalize you something like 10% PLUS your tax rate (20-30%??) on a traditional IRA or traditional 401k - that's like borrowing money at 30-40% interest. Obviously, they wouldn't tax you on the Roth withdrawal, not sure if there would be any penalty. But I would do anything i could to avoid taking out any loan on any of my retirement accounts. When you pay back the loan on a traditional 401k, you'd be paying the loan back with After-tax money into a pre-taxed account, so when you pulled the money out again in retirement, you'd actually end up paying taxes TWICE on the amount of the loan by the time you got it out in retirement.
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From what I understand is you will pay the tax at whatever your tax rate currently is.
I would not touch any of the investments to pay off loans. Attack them with your income or pay out of savings.
I do not think they penalize you for a valid loan. Only if you withdraw the amount. You will pay the loan back with some interest so in effect you are paying interest and also losing some interest on your investment.
Also if you pull from a 401k and change jobs you will have to pay the full amount back or pay penalties
I looked at mine and same thing! Definitely not as bad as 2008 when I lost a Sh$^ ton of money! It all came back plus some so just stay calm and stay in it for the long haul!I know nothing about stocks, but have a fully funded Roth IRA and normal retirement with 5% matched at 200% (so 5%+10% total), and I am still relatively young, but graphs like these* are not fun to watch when you're losing tens of thousands of dollars.......
View attachment 233225
*Not a real graph, just for illustrative purposes, you get the idea.....
Sparty
Flush
Hmm, I was under the assumption that in the long run, transferring my 401k monies into a Roth 401k would be advantageous. If we assume I'm paying less taxes at this point in my life than I ever will be in the future, isn't that true? For reference I'm in my early 30s, married, single income, with lots of deductions (kids, mortgage, student loans, etc.) Maybe it's a poor assumption that my tax burden will only increase over the years?
As for paying off my house and maxing out my retirement income... seems like a pipe dream at this point, lol.
I have taken 401k loans in the past, I don't believe they penalize you, you essentially pay it back plus interest, but the interest you pay also goes into your account. Essentially you are paying yourself interest, but you do lose out on potential gains. Might actually save money, if you can take the loan out during a down market?
Sparty
Flush
Good questions.
IMO - Since you are so young, it might be worth the conversion to Roth 401k; i guess I'd ask an advisor if you can handle the tax implications. (Itemized deductions are not as much of a factor in 2018 and beyond with the new tax codes). And/or would the cost of those tax implications be better spent on paying down some debt at this point? Difficult to say without having someone run the numbers, but your age does make a case for some significant benefits. But I'd focus on getting the debt paid off personally.
Not sure, but I'm thinking that when you've taken out 401k loans in the past, you've paid it back with dollars that had already been taxed? if that's the case, they'll be taxed again when you pull them out in retirement - meaning that you will have paid taxes twice on the loan amount by the time you pull it out (once at payroll time since your are likely using after tax dollars and once again in retirement (or when you convert it to a Roth)).
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Sparty
Flush
I guess if you are using the 401k loan to pay off another debt, you'd be using post tax dollars to pay off that loan anyway, so in essence perhaps the tax implications are a wash.
bentax1978
4 of a Kind
You’re actually not being double taxed on the loan because the money you took out was never taxed, nor did you have to pay tax to withdraw it. That (untaxed) money is what you’re technically putting back. I suppose the interest you pay back into your account is in a sense double taxed, but generally the interest rate on a 401k loan is low and the loans are typically paid back pretty quickly.
Sparty
Flush
My double tax comment came from my thinking that (1) you will use already-taxed dollars to repay the 401k loan and (2) you WILL have to pay taxes again on the non-Roth 401k at some point in retirement when you withdraw it. But as stated in my last post, whatever "thing" you are using the untaxed 401k money on would have to be paid with taxed money anyway if you didn't take out the loan in the first place. So in essence, i think it is a wash from a tax standpoint.
note...i don't think you can pay a 401k loan back with pretax money.
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bentax1978
4 of a Kind
Effectively a wash, correct.
That is correct, you definitely cannot pay back a 401k loan with pretax money.
DrStrange
4 of a Kind
I will try to emphasize why people need to get professional advice about making big financial moves.
Almost no one has "lots of deductions" anymore. The Republican tax act eliminated or greatly impaired the whole concept of deductions in exchange for a higher standard deduction. Some of us will prosper under the new tax code, others will suffer. The significant majority will benefit from 2018 - 2025 and then suffer from 2025 on out - as intended in the construction of the act. Someone thinking like this is an excellent sign they need professional tax assistance because it means they don't have a foundational understanding about how things work now - it isn't 2017 anymore.
Borrowing against your retirement account is completely different from taking an early withdrawal. You can borrow against the value of some types of retirement accounts if you meet selected criteria. This is limited in scope and avoids triggering penalties and taxation if you pay the loan back. Borrowing is generally better than an early distribution, but each person needs to consider their own circumstances. ( watch for big fees to take out a small loan. )
An early withdrawal comes with a 10% penalty if you are younger than 59 1/2 on top of the income tax owed on the balance. Some portion of a withdrawal from a ROTH is subject to the 10% tax penalty for people younger than 59 1/2. This can be quite complex and depend on decade+ old records.
Converting a taxable retirement account to a ROTH is "easy" to do. Figuring the tax owed on the conversion is not easy. You will need records from the date of inception of your accounts. For an older person, they could need records stretching back to the 1970's ( for me I needed records from 1981 ).
This is not a do-it yourself project for most people. Perhaps your financial advisor will be sufficiently skilled, if you are using a full service firm. Perhaps not. Certainly not if you are using a discount firm. Don't rely on advice from your employer in most cases.
There are times when we can be our own lawyer, or accountant, or doctor, or mechanic. Some of us have particular skills that give us greater range in what can be done on our own. But there comes a time when it is worth paying for professional expertise. In my opinion, these types of "big" decision regarding the tax treatment of your life savings is one of those times. The cost of mistakes is high relative to the cost of professional advice.
DrStrange
PS I'd be remiss not to add that claiming strategies for social security is another such "big" decisions for most people. You really, REALLY need competent, up-to-date professional advice. The best way to claim your benefit(s) is often obscure, even arcane.
Almost no one has "lots of deductions" anymore. The Republican tax act eliminated or greatly impaired the whole concept of deductions in exchange for a higher standard deduction. Some of us will prosper under the new tax code, others will suffer. The significant majority will benefit from 2018 - 2025 and then suffer from 2025 on out - as intended in the construction of the act. Someone thinking like this is an excellent sign they need professional tax assistance because it means they don't have a foundational understanding about how things work now - it isn't 2017 anymore.
Borrowing against your retirement account is completely different from taking an early withdrawal. You can borrow against the value of some types of retirement accounts if you meet selected criteria. This is limited in scope and avoids triggering penalties and taxation if you pay the loan back. Borrowing is generally better than an early distribution, but each person needs to consider their own circumstances. ( watch for big fees to take out a small loan. )
An early withdrawal comes with a 10% penalty if you are younger than 59 1/2 on top of the income tax owed on the balance. Some portion of a withdrawal from a ROTH is subject to the 10% tax penalty for people younger than 59 1/2. This can be quite complex and depend on decade+ old records.
Converting a taxable retirement account to a ROTH is "easy" to do. Figuring the tax owed on the conversion is not easy. You will need records from the date of inception of your accounts. For an older person, they could need records stretching back to the 1970's ( for me I needed records from 1981 ).
This is not a do-it yourself project for most people. Perhaps your financial advisor will be sufficiently skilled, if you are using a full service firm. Perhaps not. Certainly not if you are using a discount firm. Don't rely on advice from your employer in most cases.
There are times when we can be our own lawyer, or accountant, or doctor, or mechanic. Some of us have particular skills that give us greater range in what can be done on our own. But there comes a time when it is worth paying for professional expertise. In my opinion, these types of "big" decision regarding the tax treatment of your life savings is one of those times. The cost of mistakes is high relative to the cost of professional advice.
DrStrange
PS I'd be remiss not to add that claiming strategies for social security is another such "big" decisions for most people. You really, REALLY need competent, up-to-date professional advice. The best way to claim your benefit(s) is often obscure, even arcane.
Personal experience, not investment advice.
Long term, you rode the roller coaster up the hill, it is (probably) going down more, then up again. Seems like every 10 years we get one of these drops, and 4 years later it is right back. So current money in less risky to ride it down, then rebalance to market based funds to ride it back up.
2001 I lost a set of chips in value, 2008 I lost a new car in value. 2018 a much nicer new car in value or maybe a RV, but overall I am still up in my 401k for the 20 year period. Plus all the employer contributions. Your results may vary.
Long term, you rode the roller coaster up the hill, it is (probably) going down more, then up again. Seems like every 10 years we get one of these drops, and 4 years later it is right back. So current money in less risky to ride it down, then rebalance to market based funds to ride it back up.
2001 I lost a set of chips in value, 2008 I lost a new car in value. 2018 a much nicer new car in value or maybe a RV, but overall I am still up in my 401k for the 20 year period. Plus all the employer contributions. Your results may vary.
Also, roth conversion does not require basis, the amount converted from pre to post tax is the taxable income in the year of conversion. And you could choose the amount to convert to fit your situation. Converting back to pretax is another story...
Using a calculator to determine if a Roth is better will produce a financial conclusion that will entirely depend on the assumptions as to future unknown variables like tax rates, Income levels, returns, etc. However, not paying any taxes on the growth of money is a great deal for us. It is also an example of the government being short sighted and promising you a great deal in the future for a little more tax revenue now.
I like the idea of using Roth for personal 401(k) contributions (and use it in my own account) because the company contributions must be the traditional deductible and thus the Roth provides diversification of taxation methods in the future to hedge against the unknown variables of income and taxation in the future.
Also, it is worthwhile to point out that there is a risk with Roth. The current Roth taxation rules are just that...current. People not paying their fair share of taxes is/was a ralying cry of liberal/progressive/socialist politicians and the taxation or no taxation of Roth in the future is subject to government policy at the time you are withdrawing your money.
I like the idea of using Roth for personal 401(k) contributions (and use it in my own account) because the company contributions must be the traditional deductible and thus the Roth provides diversification of taxation methods in the future to hedge against the unknown variables of income and taxation in the future.
Also, it is worthwhile to point out that there is a risk with Roth. The current Roth taxation rules are just that...current. People not paying their fair share of taxes is/was a ralying cry of liberal/progressive/socialist politicians and the taxation or no taxation of Roth in the future is subject to government policy at the time you are withdrawing your money.
bentax1978
4 of a Kind
That's been one of my concerns (albeit a very small concern) about Roth vs traditional. I think it's highly unlikely that they (the government) would change the rules without grandfathering in existing accounts, but you never know. It's a moot point for us as we can't contribute to a Roth at this point, nor can we take advantage of a backdoor conversation for other reasons. So all of my retirement savings goes in pretax and I'll just have to deal with the tax situation down the road and "pay the man his money".
I agree about the likelihood of grandfathering given other precedents (pre-‘87 after tax money rules for example), but means testing is also a rational/strong contender if the government can get over the moral problem of totally hosing us over. I think you have to plan based on the rules as they are and any proposals on the table. I use Roth, so I hope/trust the gov’t. sticks to the deal.
Thanks everybody, after crunching some numbers I went with the Roth 401k option. I will let you know in 20 years if I made the right decision.
+1 for getting professional advice. I am a CPA and yet I have a really good tx accountant and financial advisor who handles this for me. I don't do it myself because the cost of mistakes is so high.
OP
OP
Friendly reminder to fund your Roth IRA for the CY2018 tax year before the 15Apr2019 deadline for filing CY2018 tax returns. I've already taken care of funding the traditional IRA for CY2019, and will convert it to a Roth IRA next week. The backdoor Roth is easy, if you happen to be above the cutoff earning limit.
bivey
Full House
Boo. No IRA to convert. Just traditional accounts and a 401k.
Posted this in another thread and then saw this one.
I hope no one minds me necroing this thread. I have really tried to dive into personal finance after unfortunately not thinking strategically enough when I was taking out loans as a student.
I don’t think I have a ton of specific question at this point, but would like to keep an open dialogue about some stuff. Especially because the last post here was about 2 years ago.
Both my wife and I have been making contributions to a Roth IRA managed by NW mutual....it’s hard for me to even find how I’m paying my advisor for that account (I’m assuming it’s some fee that I can’t find). Also looked into the IRA more for the first time really (sad I know) and saw that a lot of the individual mutual funds were actively managed - not a huge fan of that as I know they have higher %ages so I’d rather be investing in index funds. How do I go about the process of managing the fund myself....do I just make an account on Vanguard and then roll over my current Roth IRA? Sorry if that doesn't make sense
I hope no one minds me necroing this thread. I have really tried to dive into personal finance after unfortunately not thinking strategically enough when I was taking out loans as a student.
I don’t think I have a ton of specific question at this point, but would like to keep an open dialogue about some stuff. Especially because the last post here was about 2 years ago.
Both my wife and I have been making contributions to a Roth IRA managed by NW mutual....it’s hard for me to even find how I’m paying my advisor for that account (I’m assuming it’s some fee that I can’t find). Also looked into the IRA more for the first time really (sad I know) and saw that a lot of the individual mutual funds were actively managed - not a huge fan of that as I know they have higher %ages so I’d rather be investing in index funds. How do I go about the process of managing the fund myself....do I just make an account on Vanguard and then roll over my current Roth IRA? Sorry if that doesn't make sense
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You could start an account at Vanguard quite easily, or Fidelity or others I’m sure. I happen to use Vanguard and I have rolled another IRA and an old 401k in there over the years. I would highly recommend Vanguard and have been a boring index fund guy most of my investing life. I’m 53 and I think it has served us pretty well. I won’t come out on top of the investing heap, but we sure ain’t at the bottom either.
gopherblue
Straight Flush
^^^ this. Absolutely move (rollover) your accounts to someplace that doesn’t charge crazy fees (either to the account or through the available fund offerings). Vanguard is fine if you only want Vanguard funds. I actually recommend choosing a discount broker that doesn’t charge any account fees, like E*Trade. That way you can also invest in ETFs and individual stocks. If you go the discount broker route, most of your money should be in indexes. To me, the best option are not Vanguard index mutual funds, but Vanguard index ETFs. Why? Because most of their ETFs (you need to confirm on an ETF by ETF basis, since some have different fees) are actually equivalent to the Vanguard “Admiral” mutual fund share classes, which have super low fees but typically require a $10,000 or more investment. Except in the ETF, there is no minimum, and you can buy/sell any time.
Thanks guys. Yeah - for sure Vanguard ETF. So if I were to move my accounts, is it pretty easy to set up asset allocation?
Just for example let's say I want my portfolio to look like this:
-30% US stocks, 30% international stocks, 40% US Bonds (this is purely an example)
Are there cookie-cutter plans that have that ratio or would I just allocate x% of the account to a different ETF?
Just for example let's say I want my portfolio to look like this:
-30% US stocks, 30% international stocks, 40% US Bonds (this is purely an example)
Are there cookie-cutter plans that have that ratio or would I just allocate x% of the account to a different ETF?
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