Investment questions – Employer Match & BT, AT, Roth

[Meractik]

Okay everyone, hold onto your seats this is going to be rather long-winded.

I know there are some very financially savvy individuals here as I lurk and have read through some pretty enlightening threads and I am seeking some advice, any information you choose to reply with is greatly appreciated.
I am at the beginnings of a career were for the first time my employer offers the “employer match” percentage of my investment vehicle. I can choose either Employee Pretax, Post 86 After-tax, or Roth 401(k).

I already have a Roth 401(k) and it was a military TSP that I rolled over into Roth, I paid the taxes on the roll-over up front and now I just set it and forget it and know that I am good come retirement when I withdraw. I LOVE this!
Currently I am very tight with the management of my taxes out of my payroll for state and federal (I am not paying more than I need to, nor am I paying to little) I like to pay just what I need and when tax time comes and I get my refund I choose to manually turn around and invest that money as I choose. Therefore I do not want to take advantage of the Employee Pretax investment vehicle.

[FONT=&quot]Currently I am investing in the Post 86 After-tax with the thought that I could pay taxes as I go and be better in the long run then paying all the taxes in the end on the big sum of money (especially considering I am maximizing the employer match %) – but I am wondering whether I would be better off doing the Roth 401(k) vehicle rather than the Post 86 After-tax method… anyone experienced or knowledgeable about both these vehicles and maybe could shine some light on the differences? For me I already have another Roth as mentioned but If having two is more beneficial than using the After-Tax method I am all for it…..

I am currently young and I like the idea of "set it and forget it" investments as I can utilize other funds at my discretion to do stock management (I am very risk averse)
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[drebo]

IMO, assuming that the government will leave your retirement investments tax free when you withdraw them (because you paid taxes on them already) is a bit naïve.

 

[jaedaliu]

I'm not familiar with the post 86.

Are you able to get your full company match from all 3 options?

I personally like the tax discount I get now by investing pre-tax dollars into my retirement account. But, I probably shouldn't because i'm not a top tier income tax payer, and strive to be one when I retire.

Regardless, Roth-IRA typically gives you the most investment options. I would go that way if you can get your company match, as it gives you your post-tax investment, your match (if you can get it there) and the entire stock market to choose from.

I also don't think there's truly a set it and forget it option for investment. You need to periodically check on your funds.

 

[Scarpozzi]

1. Max anything that can be matched by employer...typically 401ks will have a match up to whatever. Through my employer it's $50/month....so I at least put that much in. (yeah...don't ask) Some places do a percentage.

2. After you do the match, look into a ROTH IRA. This takes you saving or deducting payroll to invest on your own....around $5000 a year is the max you can invest in this.

3. Go back to your 401k and do what you can there to go up to your maximum there. Anything you invest in your 401k will decrease your taxable income.

4. Leftovers go to stocks and bonds



1 = FREE money when matched by employer
2 = No Tax on earnings in a ROTH....if you put enough money in here over the long haul, this won't hurt your taxable income when you're in retirement to draw from it. Huge benefit if you invest enough. So if you put $5000 for 30 years and earn $2-3M, you'll be able to take that out tax free...think about it!
3 = Tax savings now by investing in 401k
4 = Flexibility of investments if you need to pull anything out of the market before retirement....but keep it in at least a year or pay more than the capital gains tax.

 

[HardcoreRobot]

There is NO POINT in doing post 86 contributions. You don't get any tax benefit. Its after tax money that goes in (so no tax benefit on the front end by reducing income), and any growth is taxed as well (no tax benefit on the back end).

You may as use a personal account for this, its just normal investing.

Since you are young, you probably will benefit more from Roth contributions in the long run. So you should be doing Roth 401k.

Your military Roth should have been rolled over into a Roth IRA, not 401(k).

Companies usually match Roth 401k contributions just as they would pre-tax. Their contributions will count as pre-tax (but doesn't affect your income since it comes directly from them). Their pretax contribution you will have to pay taxes on gains. Your post-tax roth contribs you will not have to pay taxes on gains.

Based on what I am hearing. You should invest in Roth 401(k) up to company match. Then invest in your rolled over, individually managed Roth IRA up to the annual limit. Then any extra money should go back to Roth 401(k).

 

[skimple]

One thing to keep in mind is that the government can change the rules at any time. So, even though those investments are supposed to be "tax-free" in the future, there are all sorts of laws that congress can pass between now and when you retire to get their "fair-share".

For example, a means-test on Social Security which includes the value of Roth IRAs could cause you to lose or reduce your Social Security benefit. That isn't a "tax", but it will result in a loss of cash to you.

There is something to be said about taking the tax benefit now, rather than assuming that you will get a tax benefit 40 years from now. Think about the national debt and ask yourself how will that play out over the next 40 years.

I am not a doom-sayer, but money in your pocket today is real money. Money that you may or may not have in the future is speculation.

 

[s0me0nesmind1]

One thing to keep in mind is that the government can change the rules at any time. So, even though those investments are supposed to be "tax-free" in the future, there are all sorts of laws that congress can pass between now and when you retire to get their "fair-share".

For example, a means-test on Social Security which includes the value of Roth IRAs could cause you to lose or reduce your Social Security benefit. That isn't a "tax", but it will result in a loss of cash to you.

There is something to be said about taking the tax benefit now, rather than assuming that you will get a tax benefit 40 years from now. Think about the national debt and ask yourself how will that play out over the next 40 years.

I am not a doom-sayer, but money in your pocket today is real money. Money that you may or may not have in the future is speculation.

Which is more likely to happen:

1) Income Tax Bracket increases *cough* progressive hipsters taking over *cough* in which you will have to pay on your traditional 401/IRA

or...

2) Tax overhauls to somehow pull from retirement accounts that have already been taxed in full.

 

[Meractik]

IMO, assuming that the government will leave your retirement investments tax free when you withdraw them (because you paid taxes on them already) is a bit naïve.

Naive? Is this not how a Roth works? I've already paid taxes on it when it rolled over... If I am naive and incorrect how about more then a "three-liner" and you show me up?

 

[Meractik]

I'm not familiar with the post 86.

Are you able to get your full company match from all 3 options?

I personally like the tax discount I get now by investing pre-tax dollars into my retirement account. But, I probably shouldn't because i'm not a top tier income tax payer, and strive to be one when I retire.

Regardless, Roth-IRA typically gives you the most investment options. I would go that way if you can get your company match, as it gives you your post-tax investment, your match (if you can get it there) and the entire stock market to choose from.

I also don't think there's truly a set it and forget it option for investment. You need to periodically check on your funds.

All three offer company match option. "Set it and forget it" option was a bit silly to say, I realize I should review but do not have the time to review as often as perhaps others.... that was all I was trying to say, maybe quarterly.... MAYBE... lol

 

[Meractik]

There is NO POINT in doing post 86 contributions. You don't get any tax benefit. Its after tax money that goes in (so no tax benefit on the front end by reducing income), and any growth is taxed as well (no tax benefit on the back end).

You may as use a personal account for this, its just normal investing.

Since you are young, you probably will benefit more from Roth contributions in the long run. So you should be doing Roth 401k.

Your military Roth should have been rolled over into a Roth IRA, not 401(k).

Companies usually match Roth 401k contributions just as they would pre-tax. Their contributions will count as pre-tax (but doesn't affect your income since it comes directly from them). Their pretax contribution you will have to pay taxes on gains. Your post-tax roth contribs you will not have to pay taxes on gains.

Based on what I am hearing. You should invest in Roth 401(k) up to company match. Then invest in your rolled over, individually managed Roth IRA up to the annual limit. Then any extra money should go back to Roth 401(k).

OOoooops... the military TSP was rolled into Roth IRA, sorry I mixed up the terminology there... Now I am evaluation a different vehicle for post-tax, pre-tax, roth 401(k)

 

[Meractik]

Which is more likely to happen:

1) Income Tax Bracket increases *cough* progressive hipsters taking over *cough* in which you will have to pay on your traditional 401/IRA

or...

2) Tax overhauls to somehow pull from retirement accounts that have already been taxed in full.

Sarcasm? Number 1? (I think.....)

You mentioned traditional IRA, in my case were talking about ROTH options.... different....

 

[Meractik]

There is NO POINT in doing post 86 contributions. You don't get any tax benefit. Its after tax money that goes in (so no tax benefit on the front end by reducing income), and any growth is taxed as well (no tax benefit on the back end).

You may as use a personal account for this, its just normal investing.

Since you are young, you probably will benefit more from Roth contributions in the long run. So you should be doing Roth 401k.

Your military Roth should have been rolled over into a Roth IRA, not 401(k).

Companies usually match Roth 401k contributions just as they would pre-tax. Their contributions will count as pre-tax (but doesn't affect your income since it comes directly from them). Their pretax contribution you will have to pay taxes on gains. Your post-tax roth contribs you will not have to pay taxes on gains.

Based on what I am hearing. You should invest in Roth 401(k) up to company match. Then invest in your rolled over, individually managed Roth IRA up to the annual limit. Then any extra money should go back to Roth 401(k).

I didn’t think of the Post-86 that way, makes sense when you break it down, really no benefit at all unless you invest so much at a time that current tax rates are lower than what you’d pay otherwise. Not the case with me….

Thank you for your input, can you clarify more the info about 401(k) – basically I should be placing in just enough % to meet the company match (and no more?) since that is really the only reason I am investing is to get the company match….. (I play it safe&#8230 and utilize other NET INCOME to maximize with 1 time deposits as desired for IRA annual limit?

 

[Schfifty Five]

Naive? Is this not how a Roth works? I've already paid taxes on it when it rolled over... If I am naive and incorrect how about more then a "three-liner" and you show me up?

I think you may have misunderstood his post. You are correct in your thinking of how ROTH works. Drebo was just pointing out that while it is tax-free now for ROTH, the gov't can change those rules at anytime and make you lose your tax-free status/benefits. That's all he was saying I believe.

 

[Meractik]

I think you may have misunderstood his post. You are correct in your thinking of how ROTH works. Drebo was just pointing out that while it is tax-free now for ROTH, the gov't can change those rules at anytime and make you lose your tax-free status/benefits. That's all he was saying I believe.

Wouldn't I be exempt from that happening? Sort of like "hey I signed this contract at this time for these rules, therefore grandfathered in under them?" (unless you attempted to open a new account at the current time under the new rules.....)

If that is not the case that would be down-right evil!

 

[Schfifty Five]

Wouldn't I be exempt from that happening? Sort of like "hey I signed this contract at this time for these rules, therefore grandfathered in under them?" (unless you attempted to open a new account at the current time under the new rules.....)

If that is not the case that would be down-right evil!

I have no idea, all I was trying to do was point out the miscommunication between your and drebos post.

In regards to this post...I hope so. It sure would suck if, for all these years we were under the notion that our ROTH investments would be tax-free, and then poof, we end up owing taxes on it b/c of some regulation change.

 

[skimple]

"hey I signed this contract at this time for these rules, therefore grandfathered in under them?"

This is the government that we're talking about. The definition of what's fair is what they say it is.

No one is saying that the there are plans to tax your Roth IRA in the works. But you cannot speculate on what the government will legislate over the next 40 years.

There are two types of people:

1 - Those that save money for retirement
2 - Those that do not save money for retirement

In order to pay for group 2, the money has to come from group 1. Today, it comes from the kids of both groups. And it's not enough. So where else will it come from?

 

[Meractik]

This is the government that we're talking about. The definition of what's fair is what they say it is.

No one is saying that the there are plans to tax your Roth IRA in the works. But you cannot speculate on what the government will legislate over the next 40 years.

There are two types of people:

1 - Those that save money for retirement
2 - Those that do not save money for retirement

In order to pay for group 2, the money has to come from group 1. Today, it comes from the kids of both groups. And it's not enough. So where else will it come from?

IMO, the problem exists with belief that those in group 2 need to have someone else take care of their retirement due to the fact they failed to do so, you failed to save, you made your bed - lay in it. If that means you eat P.B. and J sandwiches everyday at 65.5 yrs old until you die, thats your fault.

 

[s0me0nesmind1]

IMO, the problem exists with belief that those in group 2 need to have someone else take care of their retirement due to the fact they failed to do so, you failed to save, you made your bed - lay in it. If that means you eat P.B. and J sandwiches everyday at 65.5 yrs old until you die, thats your fault.

NO! It's NOT FAIR!

I know they didn't take responsibility. I know they couldn't maanage to put $5 in the savings jar every week, but it's TOO HARD TO DO THAT! :whiste:

Fuck man, I will probably be crying by the time I retire with all the shit that is going to come for my retirement funds

 

[Meractik]

NO! It's NOT FAIR!

I know they didn't take responsibility. I know they couldn't maanage to put $5 in the savings jar every week, but it's TOO HARD TO DO THAT! :whiste:

Fuck man, I will probably be crying by the time I retire with all the shit that is going to come for my retirement funds

Guess we should re-evaluate occasionally with a trusted CFP/CPA and look at off-shore banking/saving if it comes to that... (they want to play that game, ill remove all funds and give them as little as possible *they (the gov) might get some, but not as much as they would of hoped*)

Heck, maybe even move in retirement all together to not only move investments but also live abroad too... If the hit was that ridiculous (as you speculate) I would honestly consider this option.

 

[s0me0nesmind1]

Guess we should re-evaluate occasionally with a trusted CFP/CPA and look at off-shore banking/saving if it comes to that... (they want to play that game, ill remove all funds and give them as little as possible *they (the gov) might get some, but not as much as they would of hoped*)

Heck, maybe even move in retirement all together to not only move investments but also live abroad too... If the hit was that ridiculous (as you speculate) I would honestly consider this option.

T'is true. There is always a way around things - especially new things. I will definitely have my funds with a knowledgeable broker after I gather enough funds.

 

[skimple]

Whether or not its fair or right - its reality and we each have to decide how to manage our money to benefit ourselves and our families as much as possible.

For me, any money that I can keep out of the government's hands now is good money. The government's "promise" that the won't take more of my money 20 or 40 years from now is not worth anything.

 

[s0me0nesmind1]

Whether or not its fair or right - its reality and we each have to decide how to manage our money to benefit ourselves and our families as much as possible.

For me, any money that I can keep out of the government's hands now is good money. The government's "promise" that the won't take more of my money 20 or 40 years from now is not worth anything.

Heh, in that case your only safe bet is under the mattress

 

[stlc8tr]

Wouldn't I be exempt from that happening? Sort of like "hey I signed this contract at this time for these rules, therefore grandfathered in under them?" (unless you attempted to open a new account at the current time under the new rules.....)

If that is not the case that would be down-right evil!

IMO, there's no chance the government will renege and start subjecting Roth accounts to income tax.

What is much more likely is a number of consumption taxes.

 

[jagec]

I like to hedge and contribute to traditional and Roth retirement accounts more or less equally. That way I am better covered no matter how tax laws change in the future.

To summarize the differences:
1)Retirement at a higher tax rate than you're paying today (increase in rates and/or falling into a higher bracket): Advantage Roth
2)Retirement at a lower tax rate than you're paying today: Advantage traditional
3)Early retirement or emergency cash needs: Advantage Roth (Withdrawal of contributions without penalty or tax, SEPP option to withdraw entire balance without penalty or tax)
4)Donation of retirement accounts to charity: Advantage traditional

Currently the total amount of US retirement funds held in Roths vs other types of tax-advantaged accounts is fairly low, which makes them unlikely candidates for taxation, although this could change.

Remember that most people just use the default option and like to "save money now" on taxes, and that Roths are fairly new (1997 for IRAs, 2006 for 401ks)

 

[Elbryn]

I like to hedge and contribute to traditional and Roth retirement accounts more or less equally. That way I am better covered no matter how tax laws change in the future.

To summarize the differences:
1)Retirement at a higher tax rate than you're paying today (increase in rates and/or falling into a higher bracket): Advantage Roth
2)Retirement at a lower tax rate than you're paying today: Advantage traditional
3)Early retirement or emergency cash needs: Advantage Roth (Withdrawal of contributions without penalty or tax, SEPP option to withdraw entire balance without penalty or tax)
4)Donation of retirement accounts to charity: Advantage traditional

Currently the total amount of US retirement funds held in Roths vs other types of tax-advantaged accounts is fairly low, which makes them unlikely candidates for taxation, although this could change.

Remember that most people just use the default option and like to "save money now" on taxes, and that Roths are fairly new (1997 for IRAs, 2006 for 401ks)

i subscribe to this theory as well but i'd add a third option taxable. there are various ways of gaming the system, but with no idea on what the system will look like in the future, the best bet (just like in asset allocation) is to have a piece of it all. in that way you can line up withdraws from different places for your situation. ideally you withdraw from the taxable side up to say the 15% tax bracket. rest comes from taxable or roth as you see fit. ssn fits somewhere in there as does a pension.

you can thank Obama for proposing a tax on retirement assets above 3 million. so you can see already the government wheels are turning on figuring out how to tax savers. almost enough to make one start funding deferred annuities or anything else that doesn't count, 529's, hsa's. whatever doesn't count and is essentially tax deferred or future income generating.