gmac17 Posted November 17, 2004 Posted November 17, 2004 I think some of these basic principles of investing / money should be a required course for high school seniors, or at least college freshman. I am constantly amazed at some of my "smart" friends who don't understand the wonder of compound interest, or the basics of a mortgage. anybody agree?
bills_fan Posted November 17, 2004 Posted November 17, 2004 KD, I have a Roth question for you. Isn't a regular 401k, simply deferring your tax liability, thereby allowing your $$ to work for you over 30+ years. Then why do the Roth, because then you are paying taxes now and your money never works for you compounding multiple interest over years. Sure its tax free at the end, but that ignores the off-chance that legislation will be passed by the baby boomer generation allowing for lower tax rates on 401 k withdrawals (wait till they see what they have to pay, and they have the voting power to get it done). Maybe that doesn't happen but at least with my 401k, I'm still in the game if it does happen, the Roth guys have already paid taxes and are out of it.
gmac17 Posted November 17, 2004 Posted November 17, 2004 KD, I have a Roth question for you. Isn't a regular 401k, simply deferring your tax liability, thereby allowing your $$ to work for you over 30+ years. Then why do the Roth, because then you are paying taxes now and your money never works for you compounding multiple interest over years. Sure its tax free at the end, but that ignores the off-chance that legislation will be passed by the baby boomer generation allowing for lower tax rates on 401 k withdrawals (wait till they see what they have to pay, and they have the voting power to get it done). Maybe that doesn't happen but at least with my 401k, I'm still in the game if it does happen, the Roth guys have already paid taxes and are out of it. I wouldn't make my decision based on what may or may not happen with the tax code. In most scenarios, especially if you are young the Roth works out better.
Mike32282 Posted November 17, 2004 Posted November 17, 2004 The Roth IRA is a fantastic deal. Anyone who is within the income limits should have one, no question about it. 121986[/snapback] What exactly is it and what are the limits?
Mike32282 Posted November 17, 2004 Posted November 17, 2004 BTW...at Wegmans, I signed up right when I was eligible for my 401k. Wegmans matches up to 6%, so I put in 6%.
bills_fan Posted November 17, 2004 Posted November 17, 2004 But how does it work out better, even without the potential tax code scenario? 401k - Put in money tax-free, let it work for you for 30 years then pay taxes on the way out. Roth - Put in money after taxes let it work for you for 30 years then pay nothing on the way out. Wouldn't you want the most money working for you as you could have, even if you have to pay taxes on that money. Thats the Time Value of Money principle is it not??? Am I missing something here?
The Avenger Posted November 17, 2004 Posted November 17, 2004 But how does it work out better, even without the potential tax code scenario? 401k - Put in money tax-free, let it work for you for 30 years then pay taxes on the way out. Roth - Put in money after taxes let it work for you for 30 years then pay nothing on the way out. Wouldn't you want the most money working for you as you could have, even if you have to pay taxes on that money. Thats the Time Value of Money principle is it not??? Am I missing something here? 122078[/snapback] You have to look at what's growing and what's being taxed. In a 401k you are putting in tax free money and investing over a good deal of time (presumably you aren't doing this for just a couple of years before retirement). In a Roth you're starting with after tax dollars and letting them grow over time. Assuming you're investing for 20+ years, most of the money you get on the way out will be on the growth or your investment, not the dollars you're actually putting in (remember - compounding interest). It's far more advantageous to not be taxed on the growth (Roth) than it is to not be taxed on the dollars you put in (401k) if the money in the end is mostly from growth. That's why a Roth is great. The 401k is great because you have matching contributions from employers (free money) and it may put you into a lower tax bracket for your income taxes.
bills_fan Posted November 17, 2004 Posted November 17, 2004 Assuming you're investing for 20+ years, most of the money you get on the way out will be on the growth or your investment, not the dollars you're actually putting in (remember - compounding interest). OK. It's far more advantageous to not be taxed on the growth (Roth) than it is to not be taxed on the dollars you put in (401k) if the money in the end is mostly from growth. But, paying taxes in the Roth, I pay at a bracket of 30+%. Paying taxes on the growth in a 401k, is taxed at the long term capital gains rate, 20%. So how is that better, as you are paying a smaller % in the 401k versus the Roth.
taterhill Posted November 17, 2004 Posted November 17, 2004 OK.But, paying taxes in the Roth, I pay at a bracket of 30+%. Paying taxes on the growth in a 401k, is taxed at the long term capital gains rate, 20%. So how is that better, as you are paying a smaller % in the 401k versus the Roth. 122097[/snapback] that is incorrect, 401k distributons...are taxed at a regular income rate....
Steven in MD Posted November 17, 2004 Posted November 17, 2004 that is incorrect, 401k distributons...are taxed at a regular income rate.... 122119[/snapback] Roth IRAs are excellent if you are in the income bands. I would suggest that contributing too much money into a 401K is a bad idea because it is money that you cannot access should you need it (first time home buyers excluded). I would suggest you talk to a financial advisor about variable annuties or whole life policies to find alternative methods to saving for retirement.
gantrules Posted November 17, 2004 Posted November 17, 2004 I am constantly amazed at some of my "smart" friends who don't understand the wonder of compound interest, or the basics of a mortgage. ---------------------- Agreed. But, being that I write mortgages for a living, most people don't care even if you attempt to explain it to them. They just want to know what the rate is, what the term is and what the costs are. Guess it's just part of life. I've had people refinance even if I told them it wasn't worth it just b/c their neighbor's rate was lower than theirs.
bills_fan Posted November 17, 2004 Posted November 17, 2004 that is incorrect, 401k distributons...are taxed at a regular income rate.... I didn't know that. That may be an area for the changes in the tax code, and I'm sure it will eventually change. How are the Roth distributions taxed, OI or CG?
KD in CA Posted November 17, 2004 Posted November 17, 2004 I didn't know that. That may be an area for the changes in the tax code, and I'm sure it will eventually change. How are the Roth distributions taxed, OI or CG? 122165[/snapback] As I understand it, they are not taxed at all. That's what makes it such a great benefit. Unfortunately I don't qualify to have one. Also, as to your other post, why wouldn't your investments in a Roth earn money?
bills_fan Posted November 17, 2004 Posted November 17, 2004 Also, as to your other post, why wouldn't your investments in a Roth earn money? They would, just not as much as in a 401k, as there is less to work with in the aggregate. Maybe same % but not same $$ amount. As to the Roth, you'd be taxed going in as OI, so your current marginal tax rate that you pay income tax on.
Pete Posted November 17, 2004 Posted November 17, 2004 I max out my 401 at 11% and my employer matches 5% and I also put away $2000 in a Roth every year.
Stussy109 Posted November 17, 2004 Posted November 17, 2004 Fez...consider a Roth IRA..after tax dollars, but tax free dist'n come retirement time..this will give you a tax free nest egg, which may come in handy if you are approaching a higher tax bracket when you are taking a dist'n off of your taxable 401(k).... 121759[/snapback] I agree.... a Roth IRA is a great way to make it big later on. You can still contribute up to 3k for 2004, and it goes up to 3500 for 2005. You can invest in stocks, mutual funds bonds etc. All the money, including the compound interest is tax free provided you wit until you are 59.5 yrs old. Can't beat it, the govt is giving you a chance to save for your retirement. I personally like the idea of paying taxes on 3g's now, and letting it make 8-12%/year for the next 20-30years, and taking the principle and profit tax free. Scottrade is the best company, 7$ trades, look into it. Just my opinion... For those of you who contribute above and beyond what your company matches in your 401k, make sure you max out your Roth IRA contribution b4 you invest beyond the company match. Can't beat the tax free growth.
PJBrown Posted November 17, 2004 Posted November 17, 2004 KD, I have a Roth question for you. Isn't a regular 401k, simply deferring your tax liability, thereby allowing your $$ to work for you over 30+ years. Then why do the Roth, because then you are paying taxes now and your money never works for you compounding multiple interest over years. Sure its tax free at the end, but that ignores the off-chance that legislation will be passed by the baby boomer generation allowing for lower tax rates on 401 k withdrawals (wait till they see what they have to pay, and they have the voting power to get it done). Maybe that doesn't happen but at least with my 401k, I'm still in the game if it does happen, the Roth guys have already paid taxes and are out of it. 122035[/snapback] You want to have your money at retirement in more than one income stream. If you have all your retirement income coming from tax deferred (401k, Traditional IRA, etc) then 100% will be taxable....who here thinks they will be in a lower tax bracket later in life? By having a nnestegg in a tax free pool, you can manage your tax liability much better. Basic advice: 1) 401k up to company match 2)max Roth IRA 3)go back and max 401k 4) utilize cash value life insurance (VUL, Universal) 5) taxable instruments such as mutual funds Me, I invest all my money in beer and Bills attire...
MRW Posted November 17, 2004 Posted November 17, 2004 But how does it work out better, even without the potential tax code scenario? 401k - Put in money tax-free, let it work for you for 30 years then pay taxes on the way out. Roth - Put in money after taxes let it work for you for 30 years then pay nothing on the way out. Wouldn't you want the most money working for you as you could have, even if you have to pay taxes on that money. Thats the Time Value of Money principle is it not??? Am I missing something here? 122078[/snapback] Actually if tax brackets stay the same and you're in the same marginal bracket when you retire as you are now, the 401k and Roth would work out to be the same. Taxed up front, taxed at the end, it doesn't make a difference mathematically. If you knew you would be in a lower tax bracket at retirement, 401k would be the way to go, 100%. On the other hand, if you're pretty sure you'll be in a higher bracket, the Roth is what you want. And of course, it's not a bad idea to hedge your bets and have taxable and untaxable income. The reason I prefer the Roth is my 401k investment choices suck, and the Roth gives you complete freedom as to where to invest it.
Guest Guest Posted November 17, 2004 Posted November 17, 2004 0% because there are very few employers out there who are hiring that offer such a plan. the economy is improving.... my ass
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