Are you Pro or Against 401(k)?

197 Replies

Thanks @Scott Trench  !

I was looking forward to seeing some of the classic caddy's.  Pink Mary Kay Caddy's are less my style :-)

Yes @Jon Klaus   a good market.  Did they put in the new train station yet?  They were building a new rail line when I was investing in Plano in 2011 (no longer buying in this market).

According to a 2011 blog post, the following Cadillac collection (junkyard) was for sale.  I checked out the website for it and it doesn't appear to have been sold.  No reference to it still being for sale, but the owner is 74 and "slowing down a bit."  @Tony Baczynski  you should add to your collection.

http://www.cadillacville.com/

I'm pretty sure there's a '59 in this fleet from Amarillo. If you had a self directed 401(k), you could invest in something like this. How's that for bringing it back on topic?

IMO for most people a 401 K is a adequate choice.  That is for most people.  The obvious reasons have been stated.  However, sub par investment designs, high administration costs and minimal investment options tend to reduce my favor with 401 K platforms.  

Another issue is being a highly compensated employee. Reduced contributions detracts from using a 401 K to its full advantage. Tools such as a Roth, Traditional IRA... also go out the window.


Originally posted by @David C. :

@Walt Payne you are thinking exactly how the government wants you to think.

I firmly believe the first 50,000 of income will be taxed very low for a long time to come.  With no pensions, and minimal(or zero) social security due to means testing, most of my never-taxed 401k contributions will be taxed at near zero when they come back out.

I will never volunteer to pay a tax today that I can avoid or defer.  We can only be 100% certain about what today's tax policy is.

If you want to settle for that $50K of income, welcome to it. I plan on having that just from my 401k, and a whole lot more than that in taxable income. Not expecting to see a whole lot of SS income, if any. 

My willingness to use the Roth option may be partly colored by how close I am to retirement, and that makes it less likely that changes will happen soon enough to effect me.

@Walt Payne  nice twist there Walt!  'settle for 50k of income'  haha.

I said 'first 50k' is essentially never taxed at all - not taxed when I saved it, barely taxed on the way out.  50k/year of my retirement free on both ends.

Have you done the math? I'll be honest, I haven't.  And I do both Roth and 401(k), to bet a little bit against myself being wrong.

If you are close to retirement, you really think that your retirement income will be higher than your current income?  Is that because you see yourself running out of depreciation expense as you age and keep properties? or fewer interest deductions?

Or do you expect a bump in the top tax rates in the next 5 years?  So you think: today I'm in the top bracket, and when I retire, I'll still be in the top bracket, and the top bracket will go up between now and then?  So you see the 39% bracket jumping to what?  and my g-d that only kicks in after 457,000/year for married filers.  We are in a different world if you are suffering that tax rate now, and expect to in the future!

@Walt Payne  , clever: 'settle for that $50k'.

Not settling, just pointing out the very favorable tax treatment of the first 50k, but I'll have to admit, what 50k is first is really an exercise in mental accounting.  

I'd say there's a tipping point.  If you are in a low tax bracket today, definitely Roth.  Married under 73k(15%)?  definitely Roth, Married under 148k(25%)?  probably Roth.  Over 148k(28%+)  I'd at least do a mix to avoid some of that 28% tax.  Unless you are at 200k now and expect to be at 500k(39%) when retired.  If that's your plan, I have no opinion, I've spent no time thinking about that.

My goals are modest by comparison.  If I have a retirement income around 120,000, that's more than enough for me.  Today that would put me in a 25% tax bracket on the marginal dollars.  The tax I'm avoiding is 28% some years, 33% in good years.  So for me, taking the tax deduction now makes the most sense.  I don't see the 'eat the rich' 'wealth gap' arguments really pushing up those lower brackets.  If you expect to land in the 35% or 39% brackets when its time to pull from a 401k - then I think you are right on to go for the Roth, those are the rates I could see going up dramatically.  Unless you are in those brackets today.  I think I'd still take a 39% tax savings today over a 'hoped for' 39% or even 55% tax savings later.  39% is a lot of taxes to pay voluntarily.  What if your plans don't work out and you are in the measly 33% bracket later?  and you volunteered to pay 39% today?  that would burn.

I'd swear my first response did not post!! so I typed it up again, now I have idiot double post.  I hope I did not contradict myself!! haha.

Originally posted by @David C. :

@Walt Payne nice twist there Walt!  'settle for 50k of income'  haha.

I said 'first 50k' is essentially never taxed at all - not taxed when I saved it, barely taxed on the way out.  50k/year of my retirement free on both ends.

Have you done the math? I'll be honest, I haven't.  And I do both Roth and 401(k), to bet a little bit against myself being wrong.

If you are close to retirement, you really think that your retirement income will be higher than your current income?  Is that because you see yourself running out of depreciation expense as you age and keep properties? or fewer interest deductions?

Or do you expect a bump in the top tax rates in the next 5 years?  So you think: today I'm in the top bracket, and when I retire, I'll still be in the top bracket, and the top bracket will go up between now and then?  So you see the 39% bracket jumping to what?  and my g-d that only kicks in after 457,000/year for married filers.  We are in a different world if you are suffering that tax rate now, and expect to in the future!

Ahhh, but you see that "first 50k" is really the TOP 50k of your income when you take it out because if you get it out tax free you have $50k less taxable income. So (if taxable) the 401K money is essentially paying taxes of at least the amount you are paying for the highest dollar amount you make that year, even if it doesn't kick you up a bracket.

Do I think I will be in a higher tax bracket? I would love to be. But if not, I will not be in a lower one. I have significant seed money for my investments from years of saving and investing in more than just the stock market, and I am well on my way. That will fund my semi-retirement into full time REI, while still getting significant income from my current employer as a 1099 contractor.

From there, I will make enough to create a truly passive portfolio and retire. My plan is to take that money (which could currently match my income) and get to a point of at least doubling my current income. And that is not including anything from Social Security. As for the $457K/yr ... not yet, but if I get there I want as much of that as possible to be tax free. Even at 30% taxes that is a significant chunk. 

The other thing to consider is that if the IRS or congress changes the rules/laws on Roth accounts, or if you wanted to use the money elsewhere, you can withdraw the full principle amount with no taxes or penalties once the account is 5 yrs. old since you have paid taxes on that money already. Only the earnings need remain in the account until age 59 1/2.

@Walt Payne  - I'm with you.  If you are planning a very high-income retirement, then the Roth is the way to go.

I expect much of my income to be from selling investments, which already have a cost basis, so there should be a low income, but a high enough cash flow to pay expenses.

If I sell $70k of stock in a taxable account that cost me $30k, I have 40k in long term gains and no income.  So my $70k RMD from my 401k is my only income that year, and I have $140,000 to spend on a nice lifestyle.

I don't anticipate a high income retirement, so for me, the 401k makes sense.

Do you agree?  You've clearly thought this through and have a plan.

@Walt Payne  

Here's my take on the "high-income retirement" argument.  I think that everyone should plan on a high income (or in your case strong lifestyle/cashflow) retirement. Why would you not try to be not well off?  That said, life is LONG.  Your life could go a remarkable number of ways, and a lot of them will end up in something besides a high-income retirement.  Why would you forgo an immediate boost to your net worth today by deferring taxes now? 

You are welcome to save additional funds and invest those in Real Estate and other investments, but the 401(k) is such an easy, instant return on your investments that its a no brainer for the first chunk of my savings!  It will also provide me a ton of safety and flexibility if you do decide to chase that high-income retirement and have a solo 401(k).  

Everything else I can put towards Real Estate or alternative investments to chase that high income future - that's a function of my income and savings rate though.  If you can't find a way to put away enough resources to max out a 401(k), plus more, then I'd argue that you aren't going to have a high income retirement in the first place!  You'd have to be one hell of an investor!

I agree 100% with @Paul Granneman. Get your company match and lower your losses due to fees with Index funds. They preform just as well, if not better, than the market average (DJIA, NYSE, etc). Even Warren Buffet suggest Index Funds. Also, if your employer offers it, make ROTH (post-tax) contributions so that when you retire, those funds and any earnings on those funds will be tax free.

@Scott Trench  with liberal 401k rules for the self employed and those over 50?(55?) - A 401k can really suck up tons of your income.

Owning my own company with my wife as an employee, we could legally put over $80,000 per year into a 401k.  It may even be higher now.  I know we actually pulled of a $77,000 year a while back when we both had busy years.

The active real estate investors here cringe at that amount of money being dumped into index funds and not being available for down payments, etc... where they may likely produce much higher returns.

With that much piling into a 401k, the Roth vs. Traditional gets squirrely as well.

Originally posted by @David C. :

@Scott Trench with liberal 401k rules for the self employed and those over 50?(55?) - A 401k can really suck up tons of your income.

Owning my own company with my wife as an employee, we could legally put over $80,000 per year into a 401k.  It may even be higher now.  I know we actually pulled of a $77,000 year a while back when we both had busy years.

The active real estate investors here cringe at that amount of money being dumped into index funds and not being available for down payments, etc... where they may likely produce much higher returns.

With that much piling into a 401k, the Roth vs. Traditional gets squirrely as well.

 David,

I'm learning all the time here.  I had no idea that you could put in that kind of money to a 401(k).  I think you are right that if you get to $80,000 per year, that might be too much to put in a traditional 401(k).  Thanks for your comment.  I'd still personally try to contribute quite a bit more than I personally am capped at if I was allowed to - perhaps up to $25,000 or so per year.  But yes, I would not be putting $80,000 into a 401(k) - there needs to be something left over for life today!

@Scott Trench thanks for coming up with this topic.

I believe in getting a really good financial education, learning about money.  The danger today is too many people are ignorant as a good financial education is not provided in school.  It is up to us individually to improve our own financial education.

Depending upon how one uses your 401(k) plan it could be really beneficial (what I mean by this is maximizing the $52,0000/year self employed individual 401(k) and buy discounted notes with the money) and lower your taxable income, or it could just be a savings plan that makes the institutional account holders rich that distribute your income among various mutual funds.

For those seriously interested, I highly suggest reading the book '401(k)aos' by Andy Tanner.    I have learned a lot about the deception and ignorance one should realistically expect from 401(k) plans.  401(k) plans are savings plans, not investment plans.  The plan operators lie to the saver by claiming it is your fault you can't retire because YOU didn't put enough money away for retirement.  Well, suppose you maximize your plan or may that may be true - you did not maximize your investment money, however the real question is the 401(k) plan the right vehicle. 

Now it takes no skill or financial education to put money into an 401(k) plan;  you put it away and forget about it.   Let me put it to you this way, in Las Vegas you can chose to gamble on many different slot machines, all of which the casino keeps a percentage of every dollar poured into the machine.  Everyone knows there is more money going in than is coming out.

Just like the slot machines, the 401(k) system is a very simple machine.  It' a machine that consistently transfers money from your account to a financial institution that sponsors the plan in which you are enrolled.  Like the slot machine, this plan is completely legal.

Also, in a 401(k) plan the saver is financially dependent upon on an institution to provide financial security.  401(k) plans have created an entire generation of people who think they are 'investing' without any understanding.  It is good to have financial advisers and other trusted experts in your life, I do have a CFP and they have a place in my overall plan, however, when one hands over decision-making power we are handing over our financial independence.  The individual needs to be the ultimate decision-makers.

How many peoples 401(k) were wiped out during the 2000 dot-com bubble, or cut in half?  Who was told they were diversified?  From this point on, I'm against mutual fund investments, it's not for me as I understand how vulnerable we really are in mutual funds.  All while fund managers pushed to invest in their mutual funds to help manage risk and diversify to prevent big losses, when clearly the opposite was true.  Why does this happen then?  The simple answer is money; there is A LOT of money in the 401(k) mutual fund business.

This is another reason I have chosen real estate & not RE through self-directed 401(k) investments either.  There are so many benefits of owning real estate.  We know it's a tangible valuable asset.  When I buy real estate I buy insurance for to protect it.  Now ask your financial adviser if you can buy insurance to protect your 401(k) investment and they'll think your nuts.   

Man, this is a long post, but worth it;  

Let me give you one last example:  Page 119-120 from "401(k)aos" by Andy Tanner.  "Age 20 investor with 45yrs to go to accumulate retirement, and then another 20 years to go before death mercifully brings an end to his or her own life.   So this is 65yrs of investing putting $1000 at the begining of that time earning 8%.  That $1000 will grow to $140,000 in a 65yr period.   Now, enter the financial system (the mutual fund system)  they will take 2.5% out of that return so you will ha gross return of 8%, but a net return of 5.5%, and over the same time period your $1000 will grow to $30,000.   In other words, $110,000 goes to the financial institution system, and $30,000 to you, the 'investor'.  Think about that."

Originally posted by @Scott Trench :

@Walt Payne 

Here's my take on the "high-income retirement" argument.  I think that everyone should plan on a high income (or in your case strong lifestyle/cashflow) retirement. Why would you not try to be not well off?  That said, life is LONG.  Your life could go a remarkable number of ways, and a lot of them will end up in something besides a high-income retirement.  Why would you forgo an immediate boost to your net worth today by deferring taxes now? 

You are welcome to save additional funds and invest those in Real Estate and other investments, but the 401(k) is such an easy, instant return on your investments that its a no brainer for the first chunk of my savings!  It will also provide me a ton of safety and flexibility if you do decide to chase that high-income retirement and have a solo 401(k).  

Everything else I can put towards Real Estate or alternative investments to chase that high income future - that's a function of my income and savings rate though.  If you can't find a way to put away enough resources to max out a 401(k), plus more, then I'd argue that you aren't going to have a high income retirement in the first place!  You'd have to be one hell of an investor!

You do realize that you can have a Roth component within a solo 401k, which is what I was referring to. That can also be used to invest in real estate or whatever you want. I am not arguing against a 401k, just saying that paying taxes now on some of it in a Roth account makes sense. That way that money and all of it's earnings are tax free later.

The max for ONE 401k would be $55k, though I know the limit goes up a bit next year. But in theory if you have a 401k with different employers you could theoretically have $110k. Not likely because your personal contribution is the same total, but the company contributions could theoretically max out the amounts. And none of that includes spousal income.

Personally I can contribute the max to my employer's simple IRA ($22k? including catch-up), then transfer that plus employer contributions out to my solo 401k, plus my REI company can contribute $55k to my solo 401k, part Roth and part traditional. So for me I am contributing $77k this year to my tax deferred accounts. I am maxing out my 401k, my company simple IRA, plus making other investments. Does that make sense yet?

Originally posted by @Vince Beusan :

@Scott Trench thanks for coming up with this topic.

I believe in getting a really good financial education, learning about money.  The danger today is too many people are ignorant as a good financial education is not provided in school.  It is up to us individually to improve our own financial education.

Depending upon how one uses your 401(k) plan it could be really beneficial (what I mean by this is maximizing the $52,0000/year self employed individual 401(k) and buy discounted notes with the money) and lower your taxable income, or it could just be a savings plan that makes the institutional account holders rich that distribute your income among various mutual funds.

For those seriously interested, I highly suggest reading the book '401(k)aos' by Andy Tanner.    I have learned a lot about the deception and ignorance one should realistically expect from 401(k) plans.  401(k) plans are savings plans, not investment plans.  The plan operators lie to the saver by claiming it is your fault you can't retire because YOU didn't put enough money away for retirement.  Well, suppose you maximize your plan or may that may be true - you did not maximize your investment money, however the real question is the 401(k) plan the right vehicle. 

Now it takes no skill or financial education to put money into an 401(k) plan;  you put it away and forget about it.   Let me put it to you this way, in Las Vegas you can chose to gamble on many different slot machines, all of which the casino keeps a percentage of every dollar poured into the machine.  Everyone knows there is more money going in than is coming out.

Just like the slot machines, the 401(k) system is a very simple machine.  It' a machine that consistently transfers money from your account to a financial institution that sponsors the plan in which you are enrolled.  Like the slot machine, this plan is completely legal.

Also, in a 401(k) plan the saver is financially dependent upon on an institution to provide financial security.  401(k) plans have created an entire generation of people who think they are 'investing' without any understanding.  It is good to have financial advisers and other trusted experts in your life, I do have a CFP and they have a place in my overall plan, however, when one hands over decision-making power we are handing over our financial independence.  The individual needs to be the ultimate decision-makers.

How many peoples 401(k) were wiped out during the 2000 dot-com bubble, or cut in half?  Who was told they were diversified?  From this point on, I'm against mutual fund investments, it's not for me as I understand how vulnerable we really are in mutual funds.  All while fund managers pushed to invest in their mutual funds to help manage risk and diversify to prevent big losses, when clearly the opposite was true.  Why does this happen then?  The simple answer is money; there is A LOT of money in the 401(k) mutual fund business.

This is another reason I have chosen real estate & not RE through self-directed 401(k) investments either.  There are so many benefits of owning real estate.  We know it's a tangible valuable asset.  When I buy real estate I buy insurance for to protect it.  Now ask your financial adviser if you can buy insurance to protect your 401(k) investment and they'll think your nuts.   

Man, this is a long post, but worth it;  

Let me give you one last example:  Page 119-120 from "401(k)aos" by Andy Tanner.  "Age 20 investor with 45yrs to go to accumulate retirement, and then another 20 years to go before death mercifully brings an end to his or her own life.   So this is 65yrs of investing putting $1000 at the begining of that time earning 8%.  That $1000 will grow to $140,000 in a 65yr period.   Now, enter the financial system (the mutual fund system)  they will take 2.5% out of that return so you will ha gross return of 8%, but a net return of 5.5%, and over the same time period your $1000 will grow to $30,000.   In other words, $110,000 goes to the financial institution system, and $30,000 to you, the 'investor'.  Think about that."

 Vince,

Thank you for your reply.  I'm very passionate about the subject of financial education in this country and I think you've given me an idea for my next blog post!  

I think that you are right with regards to mutual funds.  It is a real shame that fancy fund managers are able to gyp investors out of millions (or billions) over long time periods, with most investors getting below market returns.  However, I also believe that many plans offer index funds with low fees to avoid those massive costs, and investing in an index fund is not necessarily more risky than investing in Real Estate - how many REIs were wiped out in 2008-2009?

I'm certainly not suggesting putting all of your eggs into the 401(k) basket - I just happen to believe that it's where I put my FIRST eggs - because I believe that reducing my taxable income allows me to grow my net worth more rapidly right now than many other investment strategies - though that may come at the cost of usable cashflow today.

Look forward to hearing your perspective on more topics in the Personal Finance Discussion!

@Scott Trench  

I also like the idea that 'using a deductible 401k allows me to avoid taxes and grow my net worth faster' - but I think we are both buying into a little 'funny accounting'.

And I think @Walt Payne will really agree with this one!

If we avoid piles of taxes now, and build up a 1,000,000 tax-deferred 401k, and someone else pays their taxes now and uses a Roth, and builds up a 1,000,000 Roth - their million is bigger than our million - because we must pay taxes to access ours.

Now - assuming identical returns, it will take them 'more money' to build their Million Dollar Roth, because to make the same contributions, they must also pay taxes.  But!  as we pat ourselves on the back for getting to a Million using tax-deferral, they are shaking their heads saying: you don't really have a million if you can't use it without giving a chunk to Uncle Sam.

Of course this applies in many areas.  Two guys who both own 1,000,000 in real estate could be in much different financial positions, if one has fully depreciated his, then when he sells, he must pay taxes on every penny, while another guy who owns 1,000,000 in real estate may only have depreciated 10,000 of it, so he could sell out with a much lower tax bill.

Net Worth is a tricky calculation if you start trying to account for future taxes - so everyone I know closes their eyes and ignores it - and it makes the tax deferral people like us feel like we are really knocking it out of the park.

@Scott Trench    Thanks for the reply.  I agree with @Jon Strishak and his approach.

Let me expand upon my previous example and share with you what most people should learn about the 401(k) plan.  Investors that invest for capital gains are taxed at 15% when holding an investment for 1yr & 1day and/or longer.  401(k) plans are savings plans NOT investment plans.  When the money is withdrawn upon, the 'bait & switch' being sold by the government is the 40l(k) is an investment vehicle;  401(k) plans are taxed at ordinary income (35%), not 15% as would be an investor who is investing for capital gains.

I'll expand upon my example below;  

Let me give you one last example: Page 119-120 from "401(k)aos" by Andy Tanner. "Age 20 investor with 45yrs to go to accumulate retirement, and then another 20 years to go before death mercifully brings an end to his or her own life. So this is 65yrs of investing putting $1000 at the begining of that time earning 8%. That $1000 will grow to $140,000 in a 65yr period. Now, enter the financial system (the mutual fund system) they will take 2.5% out of that return so you will ha gross return of 8%, but a net return of 5.5%, and over the same time period your $1000 will grow to $30,000. In other words, $110,000 goes to the financial institution system, and $30,000 to you, the 'investor'. Think about that."

Now, after you get past the shock that you have only $30,000 in your account after 65 years of investing $1000 per year; it's time to draw it out.  

$30,000 x 35% (ordinary income tax rate) = $10,500 paid in taxes.   The saver is allowed to keep $19,500.

However, if the same money was taxed as a capital gain increase the 401(k) profit would look like this: 

($1,000 initial investment x 35%) + ($29,000 x 15%) = $4,500 paid in taxes.  The investor in this scenario would keep $25,300.

To summarize, in an effort to defer $350 in tax today on an investment of $1000, this investor will wind up paying $5,800 more than needed on the original $1,000 put into that 401(k) account.

You can pay up to 20% more in taxes on your 401(k) money than you will on regular investment capital gains.

There is more, and this is a great topic of discussion.

Originally posted by @Shane Casad :

*Disclaimer* I am only 21, 

 Shane - you pretty much nailed it. While in the 10-15% bracket, it's Roth all the way. If you can convert the matched deposits to Roth and stay 15%, do that too. Deposit to get the match, then use IRAs/Roth IRAs. The Roth wasn't there when I started, but it would have saved me a lot of tax if it was. 

Some personal thoughts re 401 k and other tax deferred/tax free retirement plans , in particular for high income folks(? >250 k/yr). Thoughts based on some comments in the thread. Disclaimer: Not related to/in financial industry.

After retirement tax bracket/income is most likely going to be less than current tax bracket/income, though have far more net worth. Our tax law favors having less income (figuratively) and more net worth. Also after retirement expenses most likely less than current expenses as children flown coop, no need to put money away for retirement purposes etc. High income non real estate folks are looking for passive income- not interested in another real estate job like wholesaling, flipping etc. Other real estate investments that provide passive income are more attractive.

Lot of folks here with bias against investing in the financial markets. Understandably so , because majority americans lose money in stock market investing. However this is because of lack of financial knowledge. Several studies have shown active investing lags behind passive investing in returns. But still people think they/their financial advisor can beat the market. Not consistently after deducting the expenses of active management.

Google warren buffet and hedge fund bet. Again index investing doesn’t mean investing in S&P500.There is more to investing than expenses- asset allocation, diversification etc.

folks have lots of options.
Vanilla 401k/403b – 17.5 k contribution limit for employee, total 52k

Other 401ks including solo 401k have higher limits.

Also 457 if applicable

But again this is per job you hold. If you have more than one job/employer , the 401k limit aint 52k.

Read the new irs law re after tax 401k and roth ira for more options.

Income levels were not a barrier to Roth iras, even before the new law.

Then the triple benefit HSA(using it for retirement purposes); 529 based on your state laws; other options…

Highly compensated employee contributions depend on the type of employer safe harbor 401k. Savvy employers have better options.

There’s tax strategies in minimizing your taxes from these accounts on retirement. Lots of finance blogs based on passive investing cover those details – too long for one post.

Investing in Real estate and the finance industry (tax advantaged accounts), provides one with the benefits of both worlds, as one chooses.

Welcome back to BiggerPockets, Brandy.  Yes, there are many option and nuances in retirement investments and it's worth digging in to learn more. 

Thanks Jon,

Never left BP; Just was learning from all the info here re RE. ; )

Originally posted by @Vince Beusan:

   Now, enter the financial system (the mutual fund system)  they will take 2.5% out of that return so you will have a gross return of 8%, but a net return of 5.5%.........."

 Really? I'm aware of bad 401(k)s, but one should simply not deposit to one that charges 2.5%. Better to invest in a regular account, and use an ETF. If the S&P returns 8% (low, but let's stay with that number), 2% or so being dividends, you'll have a bit of tax along the way, and the chance for long term gain treatment, losing 1.2% or so to taxes. But the ETF expense itself shouldn't exceed .05%/yr. 

@Vince Beusan  

Do you have any references supporting the 2.5% expense ratio in your example?  Personally, my 401k expense ratio is 0.0%!!!  My employer pays ALL FEES associated with the Index Funds offered in the plan.  I contribute to 4 different Index Funds within the plan, and thanks to the 0% expense ratio I routinely beat the activtely managed funds offered in the plan. 

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