patrick.net

Mathematically, over the long run, the vast majority of people must lose value on their financial investments.

IRA accounts either Roth or Traditional do not allow for losses to be written off against income.

People with substantial financial investments always assume the value will increase for them even though they realize that for most people the value will decrease.

401K is the Retirement plan for Losers.

Had everyone's 401K been an actual interest baring Savings account, most people with 500K in their 401K now, would have over 1.5 million dollars in a savings account.
Everyone has lost the bulk of their 401K three times, since Alan Greenspan sabotaged the Tech market in early 2000 upon Bush taking office.
More over that 1.5 million would be all yours, already taxed when you earned it. Everyone thinks 401K is tax free money. But they couldn't be more wrong.
If they invested it post tax, they would only pay 15% tax on that money. but in retirement when they need it the most, they'll be paying 30% tax on every cent they withdraw.

Don't be a sucker and put your money in 401K, it's a shit financial vehicle. Hostage finances and nothing more.

Tenpoundbass says

If they actually invested it post tax, they would only pay 15% tax on that money.

Okay I see your good point.

1) If one would just invest in a non-retirement account a hyper-growth "tech" company like Amazon and hold onto it for at least 1 year then all they would end up paying 0%, 15%, or 20% capital gains tax.

If you make less than $40,000 (single) or $80,000 (couple) then you pay 0%. I wonder if Biden would change that.
reference:https://www.bankrate.com/investing/long-term-capital-gains-tax/

2) Whereas if they invest in a hyper-growth company in a 401k (i.e., pre-tax money) then your withdrawal is taxed as ordinary income at the rate for your tax bracket in the year you make the withdrawal. So you would end up paying at least 10%.

That is why I only invest in mutual funds with high turnover (capital gains) and dividends for my traditional (ie.. roll over) IRA account. I did the same for my 401K before I rolled it over into my traditional IRA. You want to be in a 30% stock/70% bond or 50% stock/50% bond fund for your traditional IRA. That way the dividends and capital gains accumulate while you pay no taxes until withdrawal.

.

Also I don't think the bad economic downturns the last 20 years, were purely organic.

These greedy bastards intentionally sabotage the economy, when a large swath of the workforce is slated to retire and drag their value down with them.
So crash the economy, the value of the stocks fall hard, those not fully vested gets shit canned, and those that are, are forced into an early retirement with over 40% of their nest egg totally evaporated. Since the companies they invested in are the rocks, and rumored to go under. The then move that money to something else. And those original companies all end up rebounding a few years later. While the retirees never recovered their nest egg.

I know about 4 people in the last 20 years that's happened to. As well as countless workers that took hits on their 401K that moved it out of those failing businesses, only to realize had they stayed it would have rebounded.

ad says

2) Whereas if they invest in a hyper-growth company in a 401k (i.e., pre-tax money) then your withdrawal is taxed as ordinary income at the rate for your tax bracket in the year you make the withdrawal. So you would end up paying at least 10%.

As opposed to paying at least trice that now.

ad says

. That way the dividends and capital gains accumulate while you pay no taxes until withdrawal.

Personally I would like to have a savings account earning 30 or 40K a year, and then just writing a check for the 10K or so, at the end of the year for taxes and be done with it.
If I want to pull out 500K to make a purchase or large investment, it's then nobodies business but my own.

Hurt. Duh.

Tenpoundbass says

Had everyone's 401K been an actual interest baring Savings account, most people with 500K in their 401K now, would have over 1.5 million dollars in a savings account.

Not so, for two reasons:

1. interest rates are about zero and have been for years
2. you would get paid your interest each year and then the government would tax it

With a 401k, you get interest on the accumulated untaxed interest.

Similarly, if you trade stocks in a 401k rollover (where you are in control of investment choices instead of your former employer) you'd be able to take profits without tax and re-invest in other stocks until you retire. The compounding effect can put you way ahead of a taxable account.

It's a huge difference.

I have a few different accounts but the bulk is in a Roth 401(k).

To quite my tax guy "plan based on as the laws are not as you expect them to be down the road"

I pay the tax now at a known rate and (unless something changes) take that money out in 30 years with NO TAX.

I'm diversified enough and have a long enough time horizon that I should be fine.

That said how much will I need in retirement? Probably less than I do now, so long as I'm healthy. Not only will the mortgage be paid off but I won't need to fund retirement anymore which frees up the almost $20k a year im putting in currently.

Ideally I'll travel, golf, be involved in local affairs and charitable causes. Mabey even adopt the Rin life and get up to Montreal every once in a while.

But I can't help but assume that Bidens Plan will hurt rather than help. I have yet to see a Democrst who was for lower taxes for those earning more than the national median.

FuckCCP89 says

mell says

People who think a Roth is worse forget that the money is not yours until you pay taxes and penalties. What's stopping them from changing taxes and penalties on traditional 401ks tomorrow?

How's Roth immune from that? At least with 401k you have already received your tax benefit every year you contributed. If they decide to renege on Roth no-tax promise the holder will be taxed AGAIN.

It's harder to confiscate your money once it has been released as truly yours but there is no guarantee.

mell says

FuckCCP89 says

mell says

People who think a Roth is worse forget that the money is not yours until you pay taxes and penalties. What's stopping them from changing taxes and penalties on traditional 401ks tomorrow?

How's Roth immune from that? At least with 401k you have already received your tax benefit every year you contributed. If they decide to renege on Roth no-tax promise the holder will be taxed AGAIN.

It's harder to confiscate your money once it has been released as truly yours but there is no guarantee.

Herein lies the rub: they won't be released as truly yours until you reach the required geezer age.

Eric Holder says

Herein lies the rub: they won't be released as truly yours until you reach the required geezer age.

With the penalties AND the taxes, early withdrawal becomes a tax windfall for the GOV.

It can wind up being from 30-40 percent of the lump sum withdrawn money, depending on tax bracket. Oddly, that does not prevent a lot of people from withdrawing the money, anyway, for various short term goals.

Hircus says

•The ability to change investments without triggering capital gains tax is a major benefit of both 401k and IRAs.

Yup. That's why I refer to my self-directed 401k as my "gambling account." That's where I do the short-term speculative trading. The non-401k is buy-and-hold style so as to minimize capital gains taxes (at least until I flee California).

Tenpoundbass says

Had everyone's 401K been an actual interest baring Savings account, most people with 500K in their 401K now, would have over 1.5 million dollars in a savings account.
Everyone has lost the bulk of their 401K three times, since Alan Greenspan sabotaged the Tech market in early 2000 upon Bush taking office.
More over that 1.5 million would be all yours, already taxed when you earned it. Everyone thinks 401K is tax free money. But they couldn't be more wrong.
If they invested it post tax, they would only pay 15% tax on that money. but in retirement when they need it the most, they'll be paying 30% tax on every cent they withdraw.

I don't understand your 1.5 million greenspan statement.

re 401k

I think at some point it gets futile to make blanket statements about whats best because people's lives and tax situations are pretty unique. There's trade offs to most choices. A hobby of mine over the past decade is writing financial simulation calculators that attempt to crunch some of these very complex investment+tax scenarios, and I've learned how complicated they can sometimes be, and how sometimes small lifestyle/retirement changes can greatly affect the optimal choices regarding investment and tax strategies.

Anyway, with a 401k you also save money right now because its contributed pre-tax, which lowers both your AGI and MAGI, which may help you qualify for things that are only afforded to mid and lower-income folks, such as a roth ira and various other govt handout/tax breaks etc... But most importantly, this pre-tax contribution shaves a chunk of income off what would otherwise be taxed at your very highest federal and state marginal rates.

I think most people will have much higher income during working years, than in retirement. This means its likely they will pay lower income tax rates in retirement, and for some, much lower. While taxes generally go up over time, your income generally goes down in retirement, making your marginal tax rates go down too, and some people may even retire to locations with significantly lower, or no, state income tax rates.

For example, someone currently earning $125k ish might have a top marginal rate of 24% federal, and 9% CA income. So if they put 20k into a 401k, thats 4800 + 1800 = $6600 in tax saved now (in other words, if they contributed post-tax to a normal trading account, their 20k would only would only work out to $13,400 after tax). If in retirement, they had taxable income of 40-60k due to 401k withdrawals and any residual income sources, and moved to a no income tax state, they might only pay something like 12 to 20% federal.

401k result
($20,000 x 30yrs compounded at 7%) = $152,245
- 20% federal income tax upon withdrawal = $121,796

vs post-tax investment result (assumes no cap gains on withdrawal, although you may have 15% depending on retirement income, which = $13,290 in tax)
($13,400 x 30yrs compounded at 7%) = $102,004

I know this is a lower income example, and includes fleeing CA for a place like TX/FL, but it is valid for many people. Some lower income in retirement ppl wont even pay 20% federal, but maybe 12% if their taxable income is under 40k, making the difference even wider.

Even higher income folks will have similar, although less polar results. The big point is that most people will have lower tax rates, due to lower income, in retirement. The 401k route would need to pay about 33% tax on withdrawal to get beat by the post-tax no cap gains example, or 42% with cap gains.

I'm not including tax increases / changes, mostly because it's hard to speculate how they will transpire. Sometimes I feel its best to just calculate the differences, and then one can look at the result and ask yourself "how much would taxes need to rise to make this scenario no longer hold an advantage?"

Hircus says

401k result
($20,000 x 30yrs compounded at 7%) = $152,245
- 20% federal income tax upon withdrawal = $121,796

That's where you're wrong, unlike savings left along to ride out 30 years. That 401K will take hits every 5 to 7 years and lose much of its value.
People say, oh it rebounded. Well the savers, not only did they not lose anything on the downturn, the rebound was pure rapid growth gravy. While those 401K'ers needed that Boom just to get back to where they were pre bust..

Ceffer says

With the penalties AND the taxes, early withdrawal becomes a tax windfall for the GOV.

It can wind up being from 30-40 percent of the lump sum withdrawn money, depending on tax bracket. Oddly, that does not prevent a lot of people from withdrawing the money, anyway, for various short term goals.

A coworker mentioned him and his wife looted their 401ks and paid the penalties to finance a kitchen and bath remodel that really wasnt needed. I suppose they've never thought about the math behind such a decision, and so dont realize how expensive that remodel really was when considering the penalty and change to their retirement funds.

I know you can borrow from your 401k for certain reasons, and I know a home down payment, certain home improvements, and medical bills are included. They didn't mention a loan though.

Same guy complains about having to work his dreary job for another 20+ yrs to retire.

This guy wrote an interesting article a while back and I really liked it. His blog has a lot of good info too.

https://www.gocurrycracker.com/never-pay-taxes-again/

Anyways, the basic idea is to put enough into pre tax so your RMD is never greater then the standard deduction. Quit your job and every year roll over the standard deduction to a Roth. Rest of your income would come from regular brokerage at 0%. After 5 years you can start taking tax free distributions from your Roth.

It’s extreme, but the point is, don’t put so much into pre tax 401k so that the RMD kills you.

For instance if you retired with 3 million in a 401k at 65. If you don’t start aggressively rolling it over to a Roth your going to be looking at 10 million in the account by the time you’re 90 (inflation adjusted) and a 10% RMD so have fun paying taxes on your million a year income.

Tenpoundbass says

That's where you're wrong, unlike savings left along to ride out 30 years. That 401K will take hits every 5 to 7 years and lose much of its value.
People say, oh it rebounded. Well the savers, not only did they not lose anything on the downturn, the rebound was pure rapid growth gravy. While those 401K'ers needed that Boom just to get back to where they were pre bust..

7% is a fair number to use for average growth of equities over long periods of time including downturns.

What are you investing in that doesn’t have risk of downturn but then gives you rapid growth gravy?

ignoreme says

What are you investing in that doesn’t have risk of downturn but then gives you rapid growth gravy?

Of course we do not have a Savings and Loan institution, but before H.W. Bush era dismantled it with the S&L crisis of the late 80's early 90's.
The Bank was paying you little less than the going Fed interest rates. The bad part about inflation back then, it meant people got laid off. But people with savings accounts were seeing as high as 12% during the recessions.

I have been championing bringing back the S&L institutions and end the Fed printing money to give away at the overnight window, for as long as I've been on Patnet.

Companies used to borrow the workers money to grow, those workers put their money in the S&L and got a piece of the action. Now the Fed gives them free cheap money.
There's no more upward mobile growth for the middle class. Our jobs getting out sourced has less to do with the declining middle class than the S&L destruction.

Everyone used to have a nest egg, only people who knew what they were doing fucked with the markets. Everyone just saved and bought hard assets to accumulate wealth.

ignoreme says

7% is a fair number to use for average growth of equities over long periods of time including downturns.

That's easy when there's a Donald Trump following up two disastrous two term Presidents, that had that growth barley at 3%. What happens when Trump is out of office, and the mental midgets get back in charge and destroys all of the markets again.
If every President got Trump's result we would be saying 12% is the norm.

You're claiming Trump's 7%, that's not the norm nor the reality when you have couple of fuck faces like Bush and Obama in there.

Patrick says

Not so, for two reasons:

1. interest rates are about zero and have been for years
2. you would get paid your interest each year and then the government would tax it

Yes it has for reasons I mentioned above, I'm championing paying savers again. People need to realize how fucked up the rigged 401K employer based racket really is.
Sure some are more savvier than others, but most people take a beating every market downturn. Then act happy when they recoup 2 to 4 years later.

You get taxed on the interest you earn, not the balance of your account.

7% is a long term (100+ yr) CAGR average of the s&p which includes inflation adjustments and dividend reinvestment.

http://www.moneychimp.com/features/market_cagr.htm

7% includes dips and rebounds.

Patrick says

Tenpoundbass says

Had everyone's 401K been an actual interest baring Savings account, most people with 500K in their 401K now, would have over 1.5 million dollars in a savings account.

Not so, for two reasons:

1. interest rates are about zero and have been for years
2. you would get paid your interest each year and then the government would tax it

With a 401k, you get interest on the accumulated untaxed interest.

Similarly, if you trade stocks in a 401k rollover (where you are in control of investment choices instead of your former employer) you'd be able to take profits without tax and re-invest in other stocks until you retire. The compounding effect can put you way ahead of a taxable account.

It's a huge difference.

Moreso if you're stock savvy and take the time to do some deep research on the sectors of your choice you can avg. far more than 8%. My averaged yearly return over the past 10-15 years is somewhere between 25%-45%. Would need to do some more precise math for all accounts but that I can say for sure.

OK I'm not saying a thriving S&L Institution should be the only option, I'm saying it should be an option.

It's a great way to accumulate safe cash relatively quickly, to realize more lucrative financial goals. Like financing business ventures, or buying hard assets.

If I have to study the market so I don't lose my ass. I would just as soon study the breeders manual and racing forms and follow the horses. It's just as stable as financial bubbles. As long as you know what you are studying and looking for.

Tenpoundbass says

OK I'm not saying a thriving S&L Institution should be the only option, I'm saying it should be an option.

It's a great way to accumulate safe cash relatively quickly, to realize more lucrative financial goals. Like financing business ventures, or buying hard assets.

If I have to study the market so I don't lose my ass. I would just as soon study the breeders manual and racing forms and follow the horses. It's just as stable as financial bubbles. As long as you know what you are studying and looking for.

I agree but the savings rate should be far higher. Its a shame what the Fed has done to it but that's why you have to hold assets as well.

SunnyvaleCA says

Yup. That's why I refer to my self-directed 401k as my "gambling account." That's where I do the short-term speculative trading.

If you don't have a 40% bond 60% stock mutual fund, then just load up on BND and VTI and write covered calls for them within your 401k (or your IRA). That is what I do. Writing covered calls add an annual ROI of 2% to 3%.

Hircus says

7% is a long term (100+ yr) CAGR average of the s&p which includes inflation adjustments and dividend reinvestment.

http://www.moneychimp.com/features/market_cagr.htm

7% includes dips and rebounds.

When you run the financial numbers at a compound growth rate for a short period, like 100 years, you end up with a palatable result. Example $100 @ 7% for 100 years is $87k. That is a number that you can wrap your head around, but try for a longer period...say 1000 years. You realize that compound growth is a mirage.

ignoreme says

This guy wrote an interesting article a while back and I really liked it. His blog has a lot of good info too.

https://www.gocurrycracker.com/never-pay-taxes-again/

Nice article.

I've read a decent number of articles from people in the FIRE community and they really seem to come up with some creative strategies. Some of them (like this one) achieve awesome synergy and take great advantage of all the tax breaks and benefits afforded to lower income households.

One of the principles that seems so powerful, yet for some reason I have to keep reminding myself of it, is that by controlling when you take your income, you can potentially save a lot of money. For example, be somewhat "poor" for 5 years, allowing you to take advantage of 5 yrs of free/subsidized things that you get when your annual income is below a threshold. Then, have an occasional money year, where you pay yourself and/or execute any tax events you need to get out of the way and establish some reserves. Harder to do if you're not retired, but it definitely makes early retirement seem much more feasible.

ignoreme says

After 5 years you can start taking tax free distributions from your Roth.

Still subject to geezer mandate, IIRC. As in must be 59.5 y.o. to get the money tax-free.

https://www.youtube.com/watch?v=c6Vzh0VRa50

Hmm, lots of spoiled rich guy syndrome here. No offense, but the opinions on IRAs here seemed skewed by affluence.

Consider the Joe with a moderate income and no defined benefit government pension. He makes enough working to have a taxable income, but when he retires and quits working, his only money is SS and his accumulated savings. His tax bracket at that time will be zero. His best bet is to take a Traditionally IRA and lower his taxes now. During his working life, he pays off his house and also retires with no car loan. His post retirement income is just SS and his IRA withdrawals. SS is not taxable unless you hit a certain threshold, and since his IRA withdrawals are unlikely to hit that threshold, he essentially pays no income tax anyway, as if it were a Roth.

My mom is in that situation. She has a paid-for house and no car loan. She has about $200k in the bank, and her only income is SS and RMD from Traditional IRAs. Her state and federal income taxes are zero. She has enough money to keep active in church and in local politics, plus takes a trip to England every year.

The Biden plan is stupid, but typical class warfare bullshit.
I have a lot of money in my investments.
I started saving 500/month in 1982.
My first mutual fund was high yield bonds, I got 5 grand from grandma's will.
After 1992 I went "all in" stock funds.
I started an IRA and a SEP-IRA.
The limits were low so I got a Vanguard Variable Annuity. Then I got a Roth IRA.
Then, I got a HSA at Fidelity and bought stock mutual funds for it.
I have other funds which are in non-retirement accounts.
I rolled the dice and bought AAPL a couple splits ago.
My shit has gone up like crazy, and I tell everyone to get some.
Half of the people won't do it.
Too bad for them.

clambo says

The Biden plan is stupid, but typical class warfare bullshit.
I have a lot of money in my investments.
I started saving 500/month in 1982.
My first mutual fund was high yield bonds, I got 5 grand from grandma's will.
After 1992 I went "all in" stock funds.
I started an IRA and a SEP-IRA.
The limits were low so I got a Vanguard Variable Annuity. Then I got a Roth IRA.
Then, I got a HSA at Fidelity and bought stock mutual funds for it.
I have other funds which are in non-retirement accounts.
I rolled the dice and bought AAPL a couple splits ago.
My shit has gone up like crazy, and I tell everyone to get some.
Half of the people won't do it.
Too bad for them.

Are you retired and living in Caligulan splendor yet?

I’m not living in Caligulan splendor yet.
I’m living with a male friend in a nice condo but I’m not that active socially.
I’m constantly amazed at the hot brown girls working as cashiers, waitresses, etc everywhere in Palm Beach County.
It’s really something to see.
I saw an interesting project in Jupiter; a ship offshore dredging sand and pumping it through large steel pipes to rebuild the beach. I think they made the beach 200 feet wider for a few miles.

clambo says

I’m constantly amazed at the hot brown girls working as cashiers, waitresses, etc everywhere in Palm Beach County.

If I am already thinking of moving to Florida, are you suggesting that I relocate to that part of Florida, instead of Northeast Florida, which is where I am currently thinking about?

If it matters, I can probably get a job in Florida in Tampa or Pensacola and not wait until I actually retire.

I might be helped, I might be hurt by the plan, but if it's Biden's, I won't remember it in two minutes anyway.

Booger,
I don’t know what you are used to, but I don’t like Florida south of PGA Boulevard in Palm Beach County.

Unfortunately I don’t know what it’s like around the state, I haven’t traveled much.

From Ft Lauderdale (shitty airport) I can fly pretty easily to South America. I’m interested in Peru and Colombia.

Palm Beach County has good scuba diving and fishing, and proximity to the Bahamas.

Misc says

When you run the financial numbers at a compound growth rate for a short period, like 100 years, you end up with a palatable result. Example $100 @ 7% for 100 years is $87k. That is a number that you can wrap your head around, but try for a longer period...say 1000 years. You realize that compound growth is a mirage.

I don't think it's a mirage over the last 100 years. The growth in stocks reflects the reality of US economic growth, more or less.

But I agree this rate of return cannot continue for 1000 years.

I'm not spoiled. I don't have a syndrome.
My take home after taxes was $950 every month, and I saved 500/month.
500/month invested for 33 years is a million bucks.
I of course have much more because I went all in and balls to the wall when I started making money.

clambo says

I'm not spoiled. I don't have a syndrome.
My take home after taxes was $950 every month, and I saved 500/month.
500/month invested for 33 years is a million bucks.
I of course have much more because I went all in and balls to the wall when I started making money.

Do not get me wrong, I am not implying that anyone with wealth at retirement is a spoiled trust fund baby. Just saying that quite a few working class people, who despite living frugally can only manage to save the allowed IRA contribution and pay of the mortgage before retiring. These people would not benefit from a Roth IRA since they will have only the RMD and the SS after retirement, and then would not have enough income to have to pay State and Federal taxes anyway.