Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Should I max out my 401K?

TNK
edited December 2013 in Fund Discussions
I am trying to see what makes most sense, tax wise:

- I am 30, not concerned at all about retirement
- not an US citizen, one day I might have to cash out and leave
- last year my effective federal tax rate was 18.76%, and state rate was 5.51%, this year a little bit higher
- I already get the most out of my employer: 4% when I contribute 5%
- I can easily add more to my 401k, I invest most of my income anyway

Is it better to use pre-tax money to fund my 401k and not have easy access to them for 30 years, or save/invest with after-tax money?

Basically: "possibility of lower taxes 30 years from now" vs. "taxes and penalty if I decide to cash out"!

Comments

  • Hi TNK. Do you own a house?
  • Reply to @Charles: Nope.
  • Since you are in a fairly low tax bracket, consider a Roth IRA (after maxing out employer match). Non-citizens can have Roth IRAs.
  • edited December 2013
    Mozart325 said >>>Since you are in a fairly low tax bracket, consider a Roth IRA (after maxing out employer match). Non-citizens can have Roth IRAs.<<<


    You can't get any better advice than the above. The greatest wealth creating tool is the tax free compounding of capital over time. The best move I ever made as a trader/investor was to open an IRA. The dumbest move I ever made was to not covert my IRA (because I did not want to pay the tax obligation) to a Roth when they became available in the late 90s.
  • Reply to @MOZART325: "For singles: The phase-out has gone up $2,000. The new phase-out range for 2013 is $112,000 to $127,000, up from $110,000 to $125,000 in 2012."

    My income is right in there, how do I know how much I can contribute? What happens if I contribute more than I should?
  • edited December 2013
    Reply to @Charles: A home mortgage is one of few tax subsidies remaining, as government continues to allow write-off of mortgage interest.

    Hear, hear Junkster and rest of board:
    The greatest wealth creating tool is the tax free compounding of capital over time.
    Just great that you are taking advantage! That said, consider finding way to purchase a house as well, especially on any "excess" you mention below.

    Good luck.
  • Reply to @TNK: For penalties on excess contributions read here:

    http://www.irs.gov/publications/p590/ch02.html

    FWIW, I echo the sentiments of Mozart & Junkster. In addition to the tax-free compounding the opportunity to access the money in certain cases after 5-years is compelling.
  • Either others or I are misreading your tax situation. A single taxpayer in the Roth phaseout range is likely in the 28% tax bracket. (For example, the tax on $120K gross taxable income - with $11K of that in cap gains/qualified divs, using standard deduction and one personal exemption - is $22,547.75, or 18.79% of gross income.)

    A 28% marginal tax bracket does not strike me as low.

    For a US citizen, I would say that if you are maxing out all your tax shelters, then go post-tax, because that lets you get more money sheltered. That's because you're putting in post-tax dollars, worth 1/3 more (a pre-tax dollar being worth only 75c upon withdrawal and taxes). By post-tax, I mean Roth 401K and/or Roth IRA.

    Even if one wound up paying 28% now vs. 25% later, the additional amount you get to shelter makes this worthwhile. But I haven't checked the taxation of nonresident foreigners, so I don't know those calculations.

    If one is not maxing out, then contributing pre-tax can come out better (if one assumes a lower tax rate upon withdrawal). For example, if you contribute $1 pre-tax, and take it out at 25% tax bracket, you've contributed 75c post-tax value. If you take that same dollar now, pay 28% tax on it, then you contribute only 72c to a Roth. (This assumes you don't have extra cash to contribute another 28c, which is where the "maxing out" assumption comes in.)

    As to cashing out when you leave - it seems you should be able to transfer the 401k money to an IRA (based on the statement above that foreigners can own Roth IRAs).

    Note that contributing pre-tax to the 401K might reduce your AGI enough that you could contribute the full amount to a Roth IRA.

    As to what happens if you contribute too much, see Fairmark. Short answer - pull the excess (including earnings) before your taxes are due, otherwise penalties are harsh. Easy to correct.

  • Reply to @Mark: As well as acessing the principle (your contributions) at anytime regardless of holding period or age makes a Roth account sort of a quasi emergency fund. I don't reccommend raiding a Roth account early, but it has features no other IRAs have...like penalty free withdrawals of principle at any time.
  • Thank you all for your comments, they are much appreciated. It was a very good starting point for trying to understand the way IRS is working. I am used to work with numbers and it seems to be really complicated, no wonder so many people are burned when it comes to retirement savings.
  • edited December 2013
    Yes, you should max it out. The investment/tax reasons are fuzzy, but the real reason is behavioral. Presumably, you would like to retire one day, which will cost millions of dollars. This is much easier to save if you can't touch the money.
  • Correct me if I'm wrong. You can touch your $$$s. Take a loan if need be.

    Stay warm, Derf
  • You can, but it's a barrier.
  • TNK
    edited December 2013
    I am trying calculate how much I can contribute in a Roth IRA based on my income. I know that my contributions to my 401k is deducted from my total income.

    But I don't exactly know what my income is. Other than my salary I have my money in funds. I haven't sold any of my funds, but I have received dividends and capital gains that were directly reinvested. Are those considered as income when calculating the Roth IRA limit?
  • TNK: I personally invest 18% into my 401K ( I invest 10% and my employer 8% ) For some reason I'm stuck on that 10% of every penny for the long term.

    Don't forget that 401K's/company pensions/in many States, IRA's provide legal protections against creditors that taxable accounts do not. OJ Simpson knows all about that for sure.
Sign In or Register to comment.