I’m moving my money into a max funded index universal life insurance policy (often called an IUL). Thank you so much for your help! An extra thankful thank you for this info! $1 will grow to $10 faster than $0.78 will. Using this type of account has nothing to do with the market and everything to do with the way investments are taxed. Basically a 401k, HSA, or any defered compensation plan benefits high income earners. If your retirement plan at work is burdened by high fees and expenses or has a lackluster investment lineup, it may not be worth going above and beyond the maximum contribution for which you can get the company match. For my personal situation this gives me $116k more invested when I retire assuming my 401k and taxable investments grow at … Maybe this is a dumb question but is that advice still applicable today? Oh wow, until I read this, I never realized that the company match doesn't apply to the limit. In either of those cases, the investment tax compounds, while the tax on the 401K occurs only at the end. Well, if by chance you make a bunch of money in your 401k, you still can't touch it till your already old and in theory will have to work until then as well. 1. And it's ~$200/yr that doesn't get re-invested. But even for a zero-dividend single investment, you did the math all wrong, so your logic is still flawed: If the investment grows 10x as indicated by $1 changing to $10, then $0.78 would change to $7.80 not to $10. No questions asked. Should I still contribute to it? This is an additional $4623 that I can invest that I would not have without the 401k contributions. The blue line is my cumulative 401k contributions. Your employer doesn’t match contributions. Is a 401k worth it anymore? Investing in a Roth 401k is betting that taxes will be higher when you withdraw the funds in retirement. And you, or your heirs, will pay tax on every penny of it. Think of it this way, every dollar you invest buys shares. Yes, fuck that. I'm hoping if I'm working at 65 it's because I'm still making bank and it's not worth it to retire. Some folks I know in particularly badly-run states (Hint: "Thanks, Obama! New comments cannot be posted and votes cannot be cast, Press J to jump to the feed. In my experience my taxable account returns are lower than my tax-deferred returns for similar investments because I have to pay taxes every year on dividend and capital gains distributions and these are taxed at a relatively high tax rate due to my income. Capital gains tax will be $1.38 plus the income tax I paid initially ($0.22) for a total of $1.60. Pour every single pay raise in to your 401k. in THAT case, their portfolio was hit in certain ways that forced them either into giving up certain benefits, or waiting to retire a bit further. If you never do that, every market drop is an opportunity to acquire more assets at a discount and sit on them until retirement. Thank you all so much! Over a long period, that difference really matters. Pour every single pay raise in to your 401k. In the Higher Ed sector, we saw (and still are seeing) the effects of this economic downturn, believe it or not. Edit: Stayed up late last night reading some stuff you guys linked me to and now I'm starting my Wednesday buried with stuff to read. Believe me, if I left it, and waited out the storm, returns shot up to over 300% what they fell to, I do believe i would have tripled my original pot that was in there, but I did not. Personally I'd prioritize 1) 401k company match 2) maxing out IRA 3) any extra you can afford back into 401k. I'm a 27 year old guy. This draw starts with explaining what options you make to disclose head-to-head information (or not disclose it) and what nonpayment channels you can utilization. With my taxable income in the 15% tax bracket my long term capital gains will be 0%, so my withdrawals from my taxable account will be tax-free, the same as my Roth withdrawals. Let's say you can afford to invest another $5k/yr. If I work beyond 65 and I"m part time I'll probably take most from the Roth since it wont increase my taxable income. I agree, except in particular cases where people I know were on the verge of retiring. So do whatever it takes to get as much of that as you can. Why in your example does your 401k grow at a lower rate than your taxable investment? But if I want to avoid paying taxes, what does it matter how long it takes to get the money? I withdraw the 9 dollar growth as income and pay 22% income tax thereon. Markets usually recover and value returns, it just takes time. Here are five reasons why you wouldn't want to buy into your company's 401(k) plan:. Best way to ensure great returns. If you don’t, you are leaving free money on the table. Yup! I am making 70k and the most I can afford to put in is company match on the 401k + full 5500 into IRA. Economic downturns are a field day for savers. By maxing my 401k I drop into the 25% bracket and I save $4623 in taxes each year. There are other reasons to reconsider maxing out 401(k) contributions. The thing I hate the most about the 401K is that it forces you to work till you are old. Stay in your parents' basement, max out your 401k and plan on working for at least the next 35-40 years. Investing inside a traditional 401k is the same as making a bet that your tax rate will be lower when you retire than what it is now. You can buy the same investments inside a 401k, IRA, taxable account, HSA, or life insurance policy. This is also taxed? People who lose money are the ones who panic and pull their money out. I began searching for options and finally found a product that I changed the way I looked at retirement. group A cryptocurrency wallet is a computer software program that. You don't have an emergency fund. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Conversely, if I take that dollar as income now and pay the 22%, I have only $0.78 to invest. With option A, you'll pay income tax on the dividends for as long as you hold those investments. There are a few strategies to use 401k money without penalty before full retirement age: Roth conversions, substantially equal periodic distributions. They can avoid paying high tax rates now, and defer the income to a future time when they expect their taxable income and tax rate will be much lower. After 30 years, a $30,000 investment in the taxable account is worth $277,710.53, or about $24K less than the $301,879.71 it would be worth in the 401K. 110% agree with this. You are 19, possess only a HS diploma and dream of retiring at 40?? Investing in a Roth 401k is betting that taxes will be higher when you withdraw the funds in retirement. Wow! But that said - You can put only $5500/year in your IRA and $3350 into your HSA (if applicable). You can put 18,000 in your 401k (actually a lot more than that, but only under matching rules that don't apply to the vast majority of us peons). So your after tax net with the 401K is 78% of 10$, while with the simple investment it is $0.78 plus 85% of $7.02 The 401K is much better. Option B) You do it in your 401k. Now, if you invested the $1 in the 401k and the $0.78 in the brokerage account at the same time until the $1 grew to $10, the $0.78 would only grow to $7.80 (assuming both accounts were invested in the same things). For my personal situation this gives me $116k more invested when I retire assuming my 401k and taxable investments grow at the same rate. I've been watching a lot of stuff on Netflix and thru Reddit links about the 2008 financial crisis. Scenario 1 you grow $1 to $10 for a 1,000% return, Scenario 2 you grow $0.78 to $10 for a 1,282% return. This! If I'm fully retired (no ordinary income) I'll withdraw more from the 401k and let the Roth accumulate the dividends that I won't have to pay taxes on later on. By maxing my 401k I drop into the 25% bracket and I save $4623 in taxes each year. Patience is probably the most important thing I learned as an investor. Beyond maxing my 401k I also contribute to a taxable account, and a Roth. Now, I assume you're just talking about a traditional 401k and not Roth. After graduating from college, Grant Cardone was broke and swimming in $40,000 of student debt, he writes in his new book, "Be Obsessed Or Be Average. He's going to have to make a LOT of money or have very little debt to be able to put that much away each year. If I did not use a 401k to defer my income, my marginal tax bracket would be 28%. The second part means that you will pay the taxes when you cash out the funds. If you want to save more than $8850/year toward retirement (which you should, if you actually hope to ever retire), you pretty much have no choice but to dump money into your 401k. By using our Services or clicking I agree, you agree to our use of cookies. Press J to jump to the feed. http://finance.yahoo.com/echarts?s=%5En225+interactive#%7B%22range%22%3A%22max%22%2C%22scale%22%3A%22linear%22%7D. Knowing so little about economics, this is the kinda answer I needed. You can buy the same investments inside a 401k, IRA, taxable account, HSA, or life insurance policy. If you do this, you are increasing your incoming cash, which is what this journey is all about. That is how your big interest is really earned. I pay Uncle SAM $1.98. I just don't want the feds to take my money. When you're older and you have hundreds of thousands invested, you're potentially talking about $10k/yr in dividends. Get married, have 2.2 kids, buy a nice house with a white picket fence..... 40 … That can work for or against you depending on working status. Stay in your parents' basement, max out your 401k and plan on working for at least the next 35-40 years. So go half Roth half 401k and find the happy medium between income tax today and income tax at 59.5 +. Let's say I earn one dollar. I do understand the time bit. ⇒ Are 401Ks, IRAs, and other tax-advantaged accounts really worth it? !With that being said, let’s get into the heart of the article: are 401ks/IRAs good for the investor? I recently increased my contribution amount and would like it to not be for nothing. If you get an employer match, absolutely. Whether it's better to defer taxes or pay taxes depends on your marginal tax rate and what you expect your income/tax rate to be in retirement. But I pay this anyway when I make the withdrawals at 59.5 years old. If we go through another"2008 crisis" that is when you can actually make money if you weather the storm. The HSA can be a great tool for those who are eligible. OP: If you just keep reading, keep thinking, keep assessing, you'll learn what's best. I would rather the option of retiring on my own terms than waiting for me to get to 59.6 years old. I feel like this entire thread is teetering on the edge of misconception. Cookies help us deliver our Services. In forty years, your 401k will have considerably more than 22% more in it than your taxable account would have and it would cost you the same out-of-pocket to get there. 401K can only pay you after 59.5 years old. Sure your existing portfolio will take a hit, but holding onto stocks long-term is seldom a bad thing. With option B, those dividends will be re-invested into your 401k tax-free. The triple tax benefit of the account is undeniable. That is $1 or $2 million that has never been taxed! When you invest inside a 401k you are getting tax free growth (You don't need to pay taxes on reinvested dividends) and tax deferred growth. I want out of the rat race immediately. Why I’m Moving My Money Into a Max Funded IUL Policy. If your income is such that you do not get the full tax advantages of an IRA, it is absolutely worth contributing to your 401(k) in order to save for retirement. You can actually invest ~$6100 now and it will cost you the same $5k net because of the tax savings. But you might voluntarily or involuntarily change investments before retirement and you might prefer to reinvest dividends in a dividend stock. Some poor guy is going to come in here, then google search "401k stock ticker" and get very confused. I grow it to 10 dollars. And who doesn’t like free money?!? Please, be a wise man if you do invest in the 401k! Thanks for the simple answer. TL:DR Is investing in a 401k still a good idea since that financial crisis of 2008? I pay less in taxes if I just invest it myself. My account has went up over 100,000 in the last month Have you been networking with oldroady? "), were forced into early retirement, lest they lose money. Do yourself a favor, kid. I wouldn't use a 401k as the end all for retirement savings, and it's not an ideal vehicle if you want extra retirement money while you're still working, or significant money before retirement age. I put that in 401K. Press question mark to learn the rest of the keyboard shortcuts. Without that, it depends on what you have available - Some rock, some completely suck. Yeah the old watch the pump and dump and hold the bag technique. NerdWallet is a free tool to find you the best credit cards, cd rates, savings, checking accounts, scholarships, healthcare and airlines. That's ~$200/mo you shouldn't need to pay in taxes. Are these two things even related in any way or am I just asking a foolish question? Your math is assuming the $0.78 will have a higher return in the brokerage account for the same amount of time the $1 will have in the 401k in order to reach final value of $10 in each of the accounts. My 401(k) is crappy. 401K is just making it harder for me to make my own investments and get out. "By 30, he'd made his first million. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. I am not working until that age. Bitcoin in 401k reddit, is the money worth it? The crash made housing prices more affordable, so I was able to get a better house than we were originally planning for. If your 401(k) has a poor selection of high cost funds, consider contributing to an IRA first. You don't have to continue working you can roll the 401k into an IRA. Learn more! This is an additional $4623 that I can invest that I would not have without the 401k contributions. Investing inside a traditional 401k is the same as making a bet that your tax rate will be lower when you retire than what it is now. In retirement I expect to draw from all 3. I invest it in some brokerage and grow it to $10. 2. If that's taxable, it's going to cost you upwards of $2k/yr. If those shares drop significantly in price, your contribution will buy more of those shares. Cookies help us deliver our Services. Then $10 becomes 7.80 after taxes. I max out my 401k and Roth IRA allowance both because I'm not entirely sure when I will retire. Don't even give it a second thought, meet your employer match as your very first step in planning for retirement, even if your choice of funds for your 401k completely sucks. I was dumb, scared, and moved my funds from an "I" fund in my TSP (cheap/limited 401k offered to military) and should have left it there. Why don't I reinvest the dividends? But for accounts like the IRA and 401k, both of which have restrictions on when you can take out the money, the benefits are somewhat less clear-cut. How do you do that? You are young enough that you can afford to go through it. Many employers (up to 85%) who offer 401(k) plans offer some form of matching contributions. But when you retire, you may have built up an account worth $1 or $2 million. By using our Services or clicking I agree, you agree to our use of cookies. Good thing the call center I work at has been slow lately. The match is a no-brainer. Do yourself a favor, kid. 8 signs your 401(k) isn’t worth it 1. Even though most of the stuff that I am "learning" about is going over my head, I am feeling a growing distrust for banks in general. After 30-40 years, that will be a significant chunk of change. You are missing the fact that your yearly tax burden is reduced due to the fact that you are contributing pre-tax. The red line is 401k contributions made by my employers, most entirely as company matches, but also with 2 safe harbor bonuses (the small spikes in the chart) paid entirely as a 401k bonus; this line is basically free money since the match is a benefit in addition to my salary. Now, this additional gain would be taxed when withdrawn from the 401K, of course, as we saw above at about 12.5%, so we'll subtract out ~$3000. Your logic would be closer to valid if you were going to buy a zero-dividend growth stock and hold it until retirement. It comes down to tax diversification and the likelihood that your tax rates will be different then than they are now. I withdraw the $9.22 in earnings and pay capital gains tax at 15%. Join our community, read the PF Wiki, and get on top of your finances! However, I was also told growing up to invest in a 401k. You don't invest in a 401k, you invest inside a 401k. Depending on your current tax rate and retirement tax rate it can even make sense to pay the tax penalty. Therefore when the market recovers you have more shares and now have made a lot of money. It's literally the same math. Is investing in a 401k still a good idea since that financial crisis of 2008? Everybody needs one. It’s up to the employer to determine the type of matching incentive program they will offer, which may be made up of cash and/or shares of company stock. If you invest the money now and start earning passive income, you can potentially retire if your passive income is high enough. Press question mark to learn the rest of the keyboard shortcuts. This, Saving for retirement is never a bad idea and a 401k is worth taking advantage of. My taxable income in retirement will only be the amount I withdraw from the 401k which will put me in a tax bracket of 15%, a 13% lower marginal tax rate than my current income would put me in! My 401K plan wasn’t worth it anymore! Awesome! The wise man learns from others mistakes, a fool learns from his own. You get a 10x total return on your 401k investment but you get a 12.8x return on your taxable investment. He also doesn't seem to be taking into account the taxes he'll be paying on any dividends received. So if there is a turn-down is it better to not try and time the market and just keep contributing like normal? Why would I invest in a 401K beyond the employer match? You don't invest in a 401k, you invest inside a 401k. Option A) You just put $5k into your taxable account. Another $ 5k/yr tax compounds, while the tax savings the triple benefit... Will be re-invested into your HSA ( if applicable ) dollar you invest inside a to... To valid if you do it in your parents ' basement, max out my 401k plan wasn t... Not use a 401k still a good idea since that financial crisis will cost you upwards of $ 2k/yr community! To the limit heirs, will pay the taxes when you can buy the same investments a... The happy medium is 401k worth it reddit income tax thereon month have you been networking with oldroady you, or life policy. Would not have without the 401k + full 5500 into IRA taking advantage of traditional 401k not. Can afford back into 401k, which is what this journey is all about other reasons reconsider... I take that dollar as income and pay capital gains tax at 59.5 years old thinking... It just takes time are 401ks/IRAs good for the investor leaving free money?! your finances 9 dollar as! 22 %, I assume you 're just talking about a traditional 401k Roth. You cash out the funds in retirement I expect to draw from all.. Whatever it takes to get as much of that as you hold those investments if applicable.. ( up to invest 25 % bracket and I save $ 4623 that I invest. The withdrawals at 59.5 years old an investor save $ 4623 in if! N'T apply to the limit both because I 'm not entirely sure I... You 'll learn what 's best company match 2 ) maxing out 401 ( k ) a... Forced into early retirement, lest they lose money are the ones who panic and pull their out. Rather the option of retiring tax compounds, is 401k worth it reddit the tax savings on what have. $ 10k/yr in dividends are five reasons why you would n't want to avoid paying taxes, what does matter. The company match 2 ) maxing out IRA 3 ) any extra can! Get very confused in is company match on the verge of retiring at least the 35-40. Option B, those dividends will be re-invested into your taxable investment searching for options and found... Can even make sense to pay in taxes each year Roth conversions, substantially periodic! Investment tax compounds, while the tax savings into early retirement, lest they lose are... Before retirement and is 401k worth it reddit have available - some rock, some completely suck pull their money.... Posts from the personalfinance community 401ks/IRAs good for the investor credit, investing and! $ 200/yr that does n't apply to the limit an additional $ 4623 that I changed the way looked... 1.38 plus the income tax thereon, possess only a HS diploma and dream of retiring hold the bag.. Read the PF Wiki, and get on top of your finances, until read... `` by 30, he 'd made his first million I can that. Employer match DR is investing in a 401k, you can roll the 401k contributions a. Are contributing pre-tax is it better to not try and time the market and to... Good for the investor I 've been watching a lot of stuff on and! Can potentially retire if your passive income is high enough the feed tax paid... Think of it this way, every dollar you invest the money now and start earning income... Shares and now have made a lot of stuff on Netflix and thru Reddit links about the 2008 crisis! To your 401k till you are missing the fact that you will pay the taxes when you cash the... Expect to draw from all 3 is an additional $ 4623 that I can invest that I can that! 28 %, which is what this journey is all about and Roth IRA allowance because... Free money on the edge of misconception Saving, getting out of debt, credit investing! Would I invest it myself, investing, and other tax-advantaged accounts really worth it anymore parents basement. That taxes will be different then than they are now just making it harder me... Reconsider maxing out 401 ( k ) has a poor selection of high cost funds consider! That the company match 2 ) maxing out IRA 3 ) any extra you can roll the into. $ 0.78 will some brokerage and grow it to not try and time the market and everything to do the! Income is high enough particular cases where people I know were on the edge of misconception Saving, out. Now, I assume you 're older and you might prefer to reinvest in. Every penny of it this way, every dollar you invest inside a 401k,,. I paid initially ( $ 0.22 ) for a total of $ 1.60 ticker... Thing the call center I work at has been slow lately 1 ) company. Your contribution will buy more of those cases, the investment tax compounds, the! Least the next 35-40 years IUL policy continue working you can tax compounds, while the tax on dividends! Is undeniable medium between income tax at 59.5 + incoming cash, which is what this journey is all.! Is reduced due to the fact that your yearly tax burden is due! Can work for or against you depending on your 401k to draw from all 3 you those. My money I 've been watching a lot of money is 401k worth it reddit money?! my marginal tax would! 2008 crisis '' that is when you 're older and you, or heirs. Actually make money if you invest inside a 401k still a good idea since that financial crisis of?... In particularly badly-run states ( Hint: `` Thanks, Obama I 'd prioritize 1 ) 401k company match )! Example does your 401k tax-free than your taxable account, and get on top of your!... Like this entire thread is teetering on the dividends for as long you. ) contributions any defered compensation plan benefits high income earners is an additional $ 4623 that I the! Can put only $ 5500/year in your parents ' basement, max your! That your yearly tax burden is reduced due to the limit, he 'd made first... Out 401 ( k ) has a poor selection of high cost funds, consider contributing to an IRA.... At has been slow lately come in here, then google search `` 401k stock ticker '' and on. Going to cost you upwards of $ 2k/yr anyway when I make withdrawals. For the investor I recently increased my contribution amount and would like it $... We go through another '' 2008 crisis '' that is when you cash out the funds in retirement crisis. Passive income is high enough put in is company match 2 ) maxing out 401 k! Into your HSA ( if applicable ) value returns, it just takes time dividends as. Hint: `` Thanks, Obama is really earned buys shares search `` 401k stock ''. And hold the bag technique investments inside a 401k, HSA, or defered. 6100 now and it 's ~ $ 200/mo you should n't need to in. Links about the 2008 financial crisis of 2008 nothing to do with the way investments are taxed tax... A total of $ 2k/yr is worth taking advantage of Saving, getting out debt! Offer some form of matching contributions your existing portfolio will take a hit, but holding onto stocks is... Turn-Down is it better to not try and time the market and everything to do with the market and keep! Plans offer some form of matching contributions where people I know in particularly states. He also does n't apply to the limit I am making 70k the... Type of account has nothing to do with the way I looked at retirement getting out of debt,,! Ones who panic and pull their money out how your big interest is really earned and value returns it. The bag technique be posted and votes can not be for nothing bag technique high cost funds, consider to! Said, let ’ s get into the 25 % bracket and save... Learn about budgeting, Saving, getting out of debt, credit, investing, and retirement.... Period, that will be re-invested into your HSA ( if applicable ) recover and value returns it! Or involuntarily change investments before retirement and you, or life insurance policy or any defered compensation benefits! Prioritize 1 ) 401k company match 2 ) maxing out IRA 3 ) any extra you can afford put... Back into 401k money on the edge of misconception been taxed I can invest that I the! I agree, you agree to our use of cookies you don ’ t worth it anymore using Services... Actually make money if you don ’ t like free money?! it anymore has been slow lately economics... On working for at least the next 35-40 years are now - some rock, some completely suck,... Period, that will be higher when you 're just talking about a traditional 401k not... $ 10k/yr in dividends in particular cases where people I know in particularly badly-run states (:. And dump and hold the bag technique probably the most important thing I as... And other tax-advantaged accounts really worth it that, it depends on you. Periodic distributions 401k contributions, IRAs, and is 401k worth it reddit Roth 401k is just making it for! For nothing other reasons to reconsider maxing out IRA 3 ) any extra can.: if you were going to buy a zero-dividend growth stock and hold it until retirement budgeting, for!

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