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    Thread: My old 401K account

    1. Senior Member jnm2.0t's Avatar
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      03-23-2012 11:25 AM #26
      Quote Originally Posted by dunhamjr View Post
      ok. things might work out that nice and tidy. but its possible they will not.

      there is the potential that you pay 10% tax now, but in retirement you may have to pay 15%. so then the advantage is shifted to the roth.

      the main thing is that everyone should be saving. some savings methods do not appeal to everyone. so we have choices. i prefer to contribute to both traditional and roth accounts. just like i prefer to own safe, moderate and risky investments.... stocks, bonds and mutual funds. not keeping all my eggs in a single basket, so to speak.
      Well thats absolutely true and I think people do rush into Roths that should probably avoid them. The idea behind a Roth isn't to fully fund your retirement with it but it is to give you an option to control your tax brackets.

      For the average person in the 25% federal bracket their 401(k) contributions avoid this rate. When using it in retirement you need to go through whatever the prevailing marginal rates are at the time. As you do this you likely reap a benefit, I just don't see the lower levels of income being taxed at 25% or higher. The issue becomes what happens if the next bracket you're about to enter isn't 25% anymore. What if it is 30%, or 35%. Then you would like the flexibility to halt your 401(k) usage right at the marginal rate and start using the Roth instead.

      It makes sense for a lot of people to have some Roth, retirement is likely to be a very long time and you could see many different tax regimes in place over the course.
      I'm just a regular Joe, with a regular job. I'm your average white, suburbanite slob.

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      03-23-2012 11:58 AM #27
      You have a funny definition of tax free growth. Earnings that are taxed when withdrawn most certainly are not tax free. If you want to look at it like that be my guest.

      I have never seen anyone refer to trad Ira earnings as tax free growth.

      Roth earning are truly tax fee. Ant the size of the doesn't matter if tax rates are equal. I anticipate higher rates in the future, especially on larger distributions which you may be forced to make with a trad Ira.

    3. Member barry2952's Avatar
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      03-23-2012 12:02 PM #28
      Duh, I never said it wan't ever taxed.
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    4. Senior Member dunhamjr's Avatar
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      03-23-2012 12:12 PM #29
      Quote Originally Posted by barry2952 View Post
      Duh, I never said it wan't ever taxed.
      no you didn't but saying that a trad ira account grows tax free is an odd way to say it.

      because yes, you are not taxed to put the money in... or to grow it. but you are taxed on the end amount.

      with that logic. the roth ira grows tax free as well. its taxed when it goes in. but then grows tax free. and it stays tax free when you withdraw.

      no one way is right.

      wasn't this topic about whether or not there were any pro's/con's to leaving an old 401k with a company you no longer work for?

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      03-23-2012 12:17 PM #30
      Quote Originally Posted by dunhamjr View Post
      no you didn't but saying that a trad ira account grows tax free is an odd way to say it.

      because yes, you are not taxed to put the money in... or to grow it. but you are taxed on the end amount.

      with that logic. the roth ira grows tax free as well. its taxed when it goes in. but then grows tax free. and it stays tax free when you withdraw.

      no one way is right.

      wasn't this topic about whether or not there were any pro's/con's to leaving an old 401k with a company you no longer work for?

      None of you have factored in that a non-Roth lowers your taxable income NOW because you are reducing your taxable income by that amount. A Roth is funded with after-tax dollars, making it a bad deal.
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    6. Senior Member dunhamjr's Avatar
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      03-23-2012 12:21 PM #31
      Quote Originally Posted by barry2952 View Post
      None of you have factored in that a non-Roth lowers your taxable income NOW because you are reducing your taxable income by that amount. A Roth is funded with after-tax dollars, making it a bad deal.
      i didnt factor it in to this discussion. but i do absolutely consider it in my own tax planning.

      and actually because of this i have increased my 401k contribution, instead of my Roth... because i am missing out on writing off the maximum amount for my rental property losses. doh!

      need to get my MAGI a little lower, and the easiest way to do that is to have lower taxable income.
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    7. Member barry2952's Avatar
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      03-23-2012 12:25 PM #32
      Quote Originally Posted by dunhamjr View Post
      i didnt factor it in to this discussion. but i do absolutely consider it in my own tax planning.

      and actually because of this i have increased my 401k contribution, instead of my Roth... because i am missing out on writing off the maximum amount for my rental property losses. doh!

      need to get my MAGI a little lower, and the easiest way to do that is to have lower taxable income.
      Now people should understand my position. This NEEDS to be factored into the discussion. Any way you look at it you end up with higher taxes now and a smaller pile later on with a Roth. See my point?
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      03-23-2012 12:26 PM #33
      Quote Originally Posted by twilk View Post
      You have a funny definition of tax free growth. Earnings that are taxed when withdrawn most certainly are not tax free. If you want to look at it like that be my guest.

      I have never seen anyone refer to trad Ira earnings as tax free growth.
      Thats the pretty well accepted. The term tax free growth is usually used in reference to the fact you do not pay taxes each year on gains as you would in a standard brokerage account.
      I'm just a regular Joe, with a regular job. I'm your average white, suburbanite slob.

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      03-23-2012 12:28 PM #34
      Quote Originally Posted by barry2952 View Post
      A Roth is funded with after-tax dollars, making it a bad deal.
      Can't make broad statements like that, sorry. A bad deal for some people/situations? Maybe. But you cannot decry them as an all-around bad investment vehicle. Maybe if you had started a Roth when you were a teenager + a qualified pre-tax plan you would feel better?

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      03-23-2012 12:30 PM #35
      Quote Originally Posted by barry2952 View Post
      None of you have factored in that a non-Roth lowers your taxable income NOW because you are reducing your taxable income by that amount. A Roth is funded with after-tax dollars, making it a bad deal.
      Only makes it a bad deal if your tax rates are lower in retirement. What makes you think it hasn't been factored in?

      The roth distributions lower your taxable income later, did you factor that in?

      I use both, at the maximum level I can. I don't see tax rates going lower in the future though.

    11. Senior Member dunhamjr's Avatar
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      03-23-2012 12:32 PM #36
      Quote Originally Posted by barry2952 View Post
      Now people should understand my position. This NEEDS to be factored into the discussion. Any way you look at it you end up with higher taxes now and a smaller pile later on with a Roth. See my point?
      yes and no.

      it needs to be accounted for.
      but people have differing views on where taxes are headed and people have different sources of income, in working and retirement life.

      Roth allows you to fund retirement with more variables known then a Traditional account does.
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      03-23-2012 12:34 PM #37
      Quote Originally Posted by jnm2.0t View Post
      Thats the pretty well accepted. The term tax free growth is usually used in reference to the fact you do not pay taxes each year on gains as you would in a standard brokerage account.
      with that definition that term applies to both traditional and roth. not just traditional.
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      03-23-2012 12:36 PM #38
      Quote Originally Posted by jnm2.0t View Post
      Thats the pretty well accepted. The term tax free growth is usually used in reference to the fact you do not pay taxes each year on gains as you would in a standard brokerage account.
      http://retireplan.about.com/od/glossary/g/taxfree.htm

      you are confusing tax deferred, and tax free
      Last edited by twilk; 03-23-2012 at 12:40 PM.

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      03-23-2012 12:38 PM #39
      this is what i think of when people talk about tax free.
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      03-23-2012 12:39 PM #40
      I'm sure my view is skewed by my age. I have been contributing to an IRA since 1981. By the time Roth came along in 1998 I already had a substantial pile. I would have been knocked back by 25%, at a minimum, had I switched over, leaving me with a smaller pile to work from.

      A Roth makes no sense to ME at this point in my life.
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      03-23-2012 12:42 PM #41
      'Tax Free' as the title isn't accurate anyhow, none of this really is tax free, you have to pay something at some point. The point Barry and I are making is that tax free growth and tax free withdrawals are different concepts.
      I'm just a regular Joe, with a regular job. I'm your average white, suburbanite slob.

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      03-23-2012 12:44 PM #42
      Quote Originally Posted by jnm2.0t View Post
      'Tax Free' as the title isn't accurate anyhow, none of this really is tax free, you have to pay something at some point. The point Barry and I are making is that tax free growth and tax free withdrawals are different concepts.
      Thank you!
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      03-23-2012 12:58 PM #43
      Quote Originally Posted by barry2952 View Post

      A Roth makes no sense to ME at this point in my life.
      Pretty sure this is what it boils down to. Just don't poo-poo the Roth to everyone else.
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      03-23-2012 01:12 PM #44
      Quote Originally Posted by jnm2.0t View Post
      'Tax Free' as the title isn't accurate anyhow, none of this really is tax free, you have to pay something at some point. The point Barry and I are making is that tax free growth and tax free withdrawals are different concepts.
      Hence the difference between tax free growth, and tax deferred. Roth growth is tax free, 401k growth is tax deferred. To say that the growth in a 401k is tax free is completely misleading. It is impossible to access that money without paying taxes on it.

      Using a Roth vs a 401k is a hedge against higher taxes in the future. I anticipate my income to increase in retirement at my current savings/growth rates. A Roth totally makes sense in that scenario.

      As far as the size of the "pile" as Barry likes to refer to it. I know how much of the Roth pile is available to me to use after age 59.5. I don't know how much of the 401k pile is, since the tax situation is variable. It could work out the same, it could work out to be less. It all depends on what income tax rates are at the time of withdrawal. My guess is those rates will be higher based on current US gov spending levels. It is unsustainable at current rates in my opinion.

      I understand exactly what you are saying, but the terms being used are misleading.

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      03-24-2012 02:00 PM #45
      Quote Originally Posted by twilk View Post
      Hence the difference between tax free growth, and tax deferred. Roth growth is tax free, 401k growth is tax deferred. To say that the growth in a 401k is tax free is completely misleading. It is impossible to access that money without paying taxes on it.
      You are combing two concepts, annual taxes and withdrawal taxes, into one word to try and explain the situation but that doesn't tell the true story, they really are distinct things. If you have an account like a standard brokerage you could be subject to anything from short & long term gains to dividends, etc. Saying that you are deferring taxes infers you are going to one day pay these which is incorrect. You may one day pay income tax (if its a 401(k) etc) but you will not pay those taxes. You have avoided those taxes, i.e. are free of them, i.e. tax free growth. Anything from a Roth to traditional to 401(k) avoid these taxes and grow tax free. The back end may or may not be taxable but that is not relevant to the annual taxes along the way.
      Last edited by jnm2.0t; 03-24-2012 at 02:02 PM.
      I'm just a regular Joe, with a regular job. I'm your average white, suburbanite slob.

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      03-24-2012 02:48 PM #46
      No, i'm not doing that at all. All monies in a 401k are taxable. Just not until they are withdrawn. The discussion was about retirement fund, and has nothing to do with capital gains taxes on a brokerage account. It's a totally different animal. The money in a 401k will be taxed as income, not as capital gains so the comparison doesn't make much sense. I can hold a stock for multiple years ant not be taxed on the gains, that doesn't make it tax free. It is taxed when sold for a gain.

      If you want to use the brokerage comparison i suppose there is similarity in that you are taxed on capital gains when you realize the gain, i.e. sell the stock. You don't "realize" the gains from a 401k until you withdraw and you pay the tax at that time.

      These aren't my definitions either. I didn't label 401k's as tax deferred investments, the financial community did.
      http://www.nationwide.com/tax-deferred-investments.jsp
      http://www.investorwords.com/4892/tax_deferral.html

      Tax free is exactly that, no taxes due, ever. That is a Roth.

      The only way it really makes a difference which vehicle you use is if your tax rates change when you withdraw. If you expect a lower tax rate the 401k is better, expect a higher rate the Roth is better. If the rate is the same it doesn't matter.

      The size of the pile doesn't matter until the effective tax rate is known. The math was shown for that earlier.

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      03-24-2012 02:54 PM #47
      Quote Originally Posted by twilk View Post
      Tax free is exactly that, no taxes due, ever. That is a Roth.
      That's nonsense. You're funding it with after-tax dollars, so how is it tax-free?

      At least with a 401K you deduct your contribution from your taxable income saving you money TODAY instead of 40 years out.
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      03-24-2012 03:26 PM #48
      Yes, it is funded with after tax dollars, but the money in the account will never agin be taxed. The money in a 401k will be taxed. Once again, mathematically it's a wash assuming the same tax rate. To say that the growth in a 401k is tax free is simply wrong. It is all taxable upon withdrawal.

      And these rant my definitions. Fidelity, or any other institution will say the same. 401k earnings are tax deferred and Roth earnings are tax free.

      You believe your rates will be lower in retirement and therefore think the tax deferred plan is better for you. I think we are in for some significant hikes in the future, especially if the size of the pile is large.

      I take full advantage of both and get the tax savings on my income each year as a result of the pre tax deposit. But that may or may not work in my favor in the long run. All depends on future rates.

      I do like knowing that a size able portion of the pile is exactly what the balance show. No guessing what the taxes on it will be, and it won't add to my taxable income when withdrawn, which adds a certain amount of flexibility to retirement financial planning.
      Last edited by twilk; 03-24-2012 at 03:28 PM.

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      03-24-2012 03:34 PM #49
      How can you keep ignoring that your plan is front-loaded? How do you know you'll live to retirement? Do you have a crystal ball as to what tax rates and your needs will be?

      I think most people would rather save tax dollars today instead of guessing what the tax rates will be in the future. Do you understand the opportunity costs of money? Paying it in taxes up front completely negates opportunity gains for a good chunk of your money. That makes no sense to me. Your money is lining the Treasury while mine is working for me.
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      03-24-2012 03:47 PM #50
      Who is ignoring it? And using your logic, why save for retirement at all? You don't know if you will live right?

      I have stated at least twice now that I take advantage of BOTH vehicles. I happen to believe that tax rates are going up in the future. The fact that I will have both taxable and non taxable money available to use to adjust my income in retirement is a plus for me.

      It is clear that you aren't comfortable with a Roth for your situation. That's fine, but don't try to say that 401k earnings are tax free when they aren't.

      Roth contributions are also available to use without penalty at any time. I have no other tax deferred option available, so sticking my money in a Roth IRA, earning money tax free, and having access to the initial deposit amount in case of emergency (with 0 penalty) really has no down side.

      The money I put in the Roth cannot be put in any other tax sheltered investment, I am maxed out for tax deferred contributions, so it's getting taxed now anyway. Setting it up as a self directed Roth can open up several other avenues for investing that are not available in a typical 401k plan.

      Not every situation is the same as yours, and many financial planners will recommend a Roth over a traditional IRA.

      You also understand that assuming the same tax rates that your money isn't working any harder than that in a Roth. The math shows that.
      Last edited by twilk; 03-24-2012 at 03:50 PM.

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