I was wondering if anyone here saw the Jan Consumer Reports article on retirement touting ESPlanner software as a credible tool. One of the conclusions they reported from using the software to look at various scenarios is that maxing out contributions to tax-sheletered retirement accounts may actually hurt someone financially. The reason was there would be higher taxes on social security distributions due to higher withdrawals from the tax-sheltered accounts.Depending upon individual estimations of future tax rates one might prefer a Roth to a 401k if one has a choice - but to make a statement indicating contributions to tax sheltered accounts may be unwise just seemed unjustifiableI'm wondering if I'm missing something.Tom in Congo
Well, I'd go as far as to say that as far as I am concerned, I think you are missing something, but how much depends in part on how old you are. That something is "What will tax rates be in the future? Will they be much higher than now? If they are, then the advantages of a 401(k) or traditional IRA are lessened." I believe that the rates will be higher because I've read "The coming generational storm" by L.J.Kotlikoff and S. Burns. You should read it too. A summary of the beginning of the book is: "What do you see in 2030? You see a country whose collective population is older than in Florida today. You see a country where walkers outnumber strollers. You see a country with twice as many retirees but only 18% more workers to support them. ........ You see a government in desperate trouble. It's rasing taxes sky high, drastically cutting retirement and health benefits, slashing defense, education and other critical spending and borrowing far beyond its capacity to repay. It's also printing tons of money to "meet" its bills........" and "Lots of people, particularly those running for reelection, would say that things can't get that bad......and various reasons are offered but.... there will be 77 million baby boomers with outstretched hands" The book gives very specific reasons for these statements. Kotlikoof is a very good economist. Tax rates are low right now. If I were you, I'd fund your Roth. As for me, I'm now taking as much as I can out of my tax deferred accounts and not messing about with minimum required distributions.
Depending upon individual estimations of future tax rates one might prefer a Roth to a 401k if one has a choice - but to make a statement indicating contributions to tax sheltered accounts may be unwise just seemed unjustifiableI'm wondering if I'm missing something.Tom in CongoYou've somehow changed "maxing out contributions ... may actually hurt" to "a statement indicating contributions to tax sheltered accounts may be unwise".Hopefully, the TheBadger will weigh in to give you expert advise, but consider that traditional IRAs have Minimum Required Distributions beginning at age 70-1/2 that could put you into the highest tax bracket regardless of means tested SS. Paying higher taxes in retirement than you would have paid during your career is not desirable. Getting the maximum matching from your employer and then deciding on tax-deferred or Roth contributions based on your personal model is conventional wisdom.1HF
Hi Tomthe tas deffered accounts such as Traditional IRA, 401k, and 403b are taxed as NORMAL INCOME when distributed at retirement. This means that the distributions are subject to the 'income tax rules' of the day.Because I expect to have a retirement income that exceeds the top tax bracket - I personally would NOT max one of these accounts.my priorities1. max my ROTH IRA - every year - because the ROTH is 'tax free' on distribution2. look at tax implications of my current income - WILL I BE HIT with the AMT??? - so far no AMT, but it's getting closer3. Put as much money into equities as possible - LONG TERM capital gains tax is 15% - this is less than the upper tax brackets :-)this strategy, max Roth IRA and cash account brokerage, limits my future taxable income. This strategy contains assumptions about the futureYour results may vary :-)ralph
the tas deffered accounts such as Traditional IRA, 401k, and 403b are taxed as NORMAL INCOME when distributed at retirement. This means that the distributions are subject to the 'income tax rules' of the day.Because I expect to have a retirement income that exceeds the top tax bracket - I personally would NOT max one of these accounts.ralph,I'm reading the book "The Coming Generational Storm" by Kotlikoff and Burns. They talk about the potential of 401Ks becoming tax traps for some people. From what I can gather, they recommend paying taxes now because they feel that marginal tax rates will be much higher in the future. This reinforces what I've personally been doing with my 401K contributions.Unlike when I was younger and contributed 16% of my gross salary to my 401K account, I now only contribute 6% of my gross salary to my 401K account. This amount is the minimum 401K contribution that allows me to obtain the maximum employee match (3% of gross salary). I fully fund my Roth IRA and place the rest of my savings into taxable accounts.With my luck, when I start taking money out of my Roth IRA, the future government will start taxing Roth IRA withdrawals. <g>
Wow - this is an eye-opener. Because I too expect taxes to be higher later than now I converted all of my traditional IRAs to Roths. But I never considered that I'd want to start contributing less to my 401k and put the money in taxable accounts. Figuring that the money growing tax free had to be a better deal than paying taxes on the gains now was just a given in my mind...but if I converted because I believed taxes would be higher later...why not use the same logic...This discussion also makes me stop to consider the wisdom of funding my health savings account beyond what I anticipate I'll need year to year...As a fed my 401k is the TSP with an unbeatable expense ratio...so my instinct is that I should still be maxing out my contributions..but I'll need to think this all through some more in light of the eye-opening comments you all have provided - thanks!
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