Will Biden’s 401(k) plan help you or hurt you?
invite response
2020 Sep 10, 5:09pm 3,204 views 66 comments
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41
Tenpoundbass
2020 Sep 14, 3:59pm
Tenpoundbass
2020 Sep 14, 3:59pm
Hircus 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..
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..
42
Hircus
2020 Sep 14, 4:12pm
Hircus
2020 Sep 14, 4:12pm
Ceffer says
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.
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It can wind up being from 30-40 percent of the lump sum withdrawn money, depending on tax bracket.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.
43
ignoreme
2020 Sep 14, 4:15pm
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.
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.
44
ignoreme
2020 Sep 14, 4:19pm
Tenpoundbass says
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?
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?
45
Tenpoundbass
2020 Sep 14, 4:27pm
Tenpoundbass
2020 Sep 14, 4:27pm
ignoreme says
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.
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.
46
Tenpoundbass
2020 Sep 14, 4:30pm
Tenpoundbass
2020 Sep 14, 4:30pm
ignoreme says
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.
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.
47
Tenpoundbass
2020 Sep 14, 4:36pm
Tenpoundbass
2020 Sep 14, 4:36pm
Patrick says
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.
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.
48
Hircus
2020 Sep 14, 4:39pm
Hircus
2020 Sep 14, 4:39pm
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.
http://www.moneychimp.com/features/market_cagr.htm
7% includes dips and rebounds.
49
mell
2020 Sep 14, 4:52pm
Patrick says
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.
Tenpoundbass saysHad 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.
50
Tenpoundbass
2020 Sep 14, 4:58pm
Tenpoundbass
2020 Sep 14, 4:58pm
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.
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.
51
mell
2020 Sep 14, 5:04pm
Tenpoundbass says
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.
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.
52
AD
2020 Sep 14, 6:32pm
AD
2020 Sep 14, 6:32pm
SunnyvaleCA says
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%.
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%.
53
Misc
2020 Sep 14, 6:38pm
Hircus 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.
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.
54
Hircus
2020 Sep 14, 8:29pm
Hircus
2020 Sep 14, 8:29pm
ignoreme says
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.
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.
55
Eric Holder
2020 Sep 14, 11:20pm
Eric Holder
2020 Sep 14, 11:20pm
ignoreme says
Still subject to geezer mandate, IIRC. As in must be 59.5 y.o. to get the money tax-free.
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.
57
HeadSet
2021 Feb 23, 2:49pm
HeadSet
2021 Feb 23, 2:49pm
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.
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.
58
clambo
2021 Feb 23, 3:44pm
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.
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.
59
Booger
2021 Feb 23, 3:48pm
Booger
2021 Feb 23, 3:48pm
clambo says
Are you retired and living in Caligulan splendor yet?
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?
60
clambo
2021 Feb 23, 5:12pm
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.
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.
61
Booger
2021 Feb 23, 5:22pm
Booger
2021 Feb 23, 5:22pm
clambo says
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’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.
62
Ceffer
2021 Feb 23, 5:30pm
Ceffer
2021 Feb 23, 5:30pm
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.
63
clambo
2021 Feb 23, 5:38pm
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.
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.
64
Patrick
2021 Feb 23, 6:54pm
Patrick
2021 Feb 23, 6:54pm
Misc says
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.
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.
65
clambo
2021 Feb 24, 2:31pm
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.
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.
66
HeadSet
2021 Feb 24, 2:45pm
HeadSet
2021 Feb 24, 2:45pm
clambo says
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.
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.
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The more tax you pay, the more this saves you. If you have to pay the top, 37% federal tax rate on every extra dollar you earn, deducting that money from your tax return saves you $7,215 in income taxes. But if you’re only paying 10% federal tax on each extra dollar you earn, deducting $19,500 would save you just $1,950.
The Biden-Harris proposal would change that. If elected, and if they got this through Congress, in future they would replace these deductions with a flat deduction available to everybody.
“The current tax benefits for retirement savings are based on the concept of deferral, whereby savers get to exclude their retirement contributions from tax, see their savings grow tax-free, and then pay taxes when they withdraw money from their account,” the campaign states. “This system provides upper-income families with a much stronger tax break for saving and a limited benefit for middle-class and other workers with lower earnings. The Biden Plan will equalize benefits across the income scale, so that low- and middle-income workers will also get a tax break when they put money away for retirement.”
The proposals are similar to those put forward some years ago by the Urban Institute, a Washington think-tank. Analysts’ best guess is that everyone would save the same percentage each year on their taxes: 20.5%, equal almost exactly to $4,000 for someone making the maximum annual contribution. And if your tax bill for the year is less than $4,000, Uncle Sam—meaning other taxpayers, actually—would chip in the money on your behalf.
Good news for anyone currently paying less than 20.5% federal tax on each extra dollar. Not so good for those earning more.
https://www.marketwatch.com/story/will-bidens-401k-plan-help-you-or-hurt-you-2020-09-09?siteid=yhoof2&yptr=yahoo