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Author: Hauptstrasse94 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Is a 401k a bad choice for us? Date: 2/3/2004 9:57 AM
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I don't think a 401k is the best choice for us in this situation. Does anyone have experience/advice related to this?

I have always followed the advice repeated unfailingly to the newly employed. I started investing in my 401k right out of college without really knowing why, but now that I'm 32 I am quite glad I did. I opened a Roth IRA which I keep fully funded, and my husband does the same.

My husband just got a job that will require him to basically live in Kuwait for the next 12 months or so. This means he will be earning his first $80K free from federal taxes (with no local/foreign tax implications). We have discussed the idea of participating in his company's 401k but came to the conclusion that it makes no sense. Would that not just be saving money tax-free so we could pay taxes on it later? Since the money is already tax-free, why not invest it in something that does not require paying taxes on the principal upon withdrawal?

That also leads me to my next question- what types of investments are good to consider when we're not looking for a tax-advantaged savings account?

-Kristin
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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38908 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 10:16 AM
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Kristin,

How is your husband able to earn $80K free of federal taxes? I thought you had to pay US taxes on foreign income, though you could net out the foreign taxes paid.

If what you say is true, the 401k may still be a good deal. If the money you put in this year is truly tax free, it might be considered part of your tax basis in the account and would not be taxed at withdrawal. Once in the 401k, the money would compound tax free, though you wouldn't get preferential cap gains tax treatment on withdrawal.

But I don't really know what the rules are in your situation.

Nick

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Author: Hauptstrasse94 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38909 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 10:40 AM
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Nick,

the IRS allows a foreign earned income exclusion for up to $80,000 (IRS Form 2555). I think it's designed to help offset the burden of foreign taxes owed, regardless of the amount of foreign taxes paid.

We still haven't figured out all the rules for our situation yet. But thanks for the tip!

Kristin

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38910 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 10:52 AM
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I see, just checked out the form, thanks for the info.

I does look like you have to live there 330 days out of the year to qualify, which means you'd better move by tomorrow, unless you're there now.

Nick

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Author: Hauptstrasse94 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38911 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 11:02 AM
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We've been out of the US since October 2002 (working for the DoD) so we're covered there.

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Author: Ramsees Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38912 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 11:23 AM
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I know when I was serving in the Air Force in the Middle East, if we were there just 1 day, we would get our whole month's salary tax free. A lot of times if you were scheduled to come home near the end of the month, people would try to leave on the 1st or 2nd to get an extra month. Now maybe this doesn't apply to civilians, but i wanted to add my 2c.


Ramsees


((((((Loved serving overseas!!!))))))

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38915 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 11:53 AM
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My husband just got a job that will require him to basically live in Kuwait for the next 12 months or so. This means he will be earning his first $80K free from federal taxes (with no local/foreign tax implications). We have discussed the idea of participating in his company's 401k but came to the conclusion that it makes no sense. Would that not just be saving money tax-free so we could pay taxes on it later? Since the money is already tax-free, why not invest it in something that does not require paying taxes on the principal upon withdrawal?

IMHO, the situation is a wash.

Options.

Put money in 401k if company match. An advantage. The interest/dividends earned from that investment grow tax deffered. So that is an advantage. Can change investments/allocation without worrying about tax consequences. Another advantage.

Buy and hold a stock/index fund. No capital gains tax until sell, and most likely at a lower rate than income tax. Advantage. Dividends generated will be taxed at current income tax level. Potential disadvantage.

Personally, if you have a good index fund option in the 401k, I'd put money in up to the match. Then any other in a taxable account.

JLC



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Author: Rijer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38917 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 12:28 PM
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My husband just got a job that will require him to basically live in Kuwait for the next 12 months or so. This means he will be earning his first $80K free from federal taxes (with no local/foreign tax implications). We have discussed the idea of participating in his company's 401k but came to the conclusion that it makes no sense. Would that not just be saving money tax-free so we could pay taxes on it later? Since the money is already tax-free, why not invest it in something that does not require paying taxes on the principal upon withdrawal?</I?

Try and get your employer to provide a proforma income and tax statement. You may find that the $80,000 exclusion still leaves you with substantial taxable income. Depending on employment conditions, you may find that company provided housing, living, auto, home leave air fares, etc. all get counted as reportable income. Count all the actual pay as well; you may have international premium, area premium, hardship premium, sizable extra work week premium which can double your stateside pay basis. Also, if the employer puts you under a tax equalization program, the employer may end up with the benefit of the $80,000 exclusion. Also, if the employer is putting you under hypothetical tax, a 401K contribution will reduce your hypo tax cost.

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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38918 of 76418
Subject: Re: Is a 401k a bad choice for us? Date: 2/3/2004 1:11 PM
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Obviously you start with the $3k contribution to the Roth, then move from there. Since you are talking about a retail (non-retirement account), the goal is to reduce or eliminate the taxes on your earnings. So you may want to steer away from dividend paying stocks or funds (Roths are the best place to shoot for the dividend moon), and look for tax-free instruments that may have lower rates of return but are balanced by the tax free status.

Fuskie
Who knows nothing about tax free funds and is not afraid to say it...

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