Case against maxing 401k (pre-tax)

[Singuy]

I did a calculation and here's a copy and paste from another post with certain assumptions.

"Lets just say you invest the same index fund with pretax dollars or post tax dollars...assuming a 30% tax rate

You invest 1000/month pre tax or 700/month post tax.

Your money grow faster at 1000/month, making you 1.1million after 30 years@6.5% return.

The 700/month camp yield you 774k@6.5% after 30 years.

But then you have to deal with capital gaines tax at 15-2%(or whatever it'll be in 30 years)..on the growth in the post tax account. Also you paid taxes on all dividend throughout the 30 years @ your tax bracket %. In the pre-tax account, all dividend were reinvested tax free for the time being. Your growth is 520k out of the 774k in the post tax account, which will be subjected to capital gaines tax if you decide to sell the index funds.

So lets say you decided to take a lump sum of 1.1 mil out of your sep at age 59(which is the least efficient way to do so), you'll end up with 716k (single tax filer..you get more if you are married).
In the post tax camp, you'll end up with 696k.

I did not do the dividend tax advantage for the sep but it's another win for tax efficient account.

So at the end of the day, your tax efficient account(like a sep ira) is much better numbers wise even though you have to pay taxes when you start using it at a later date. "

[TexasHusker]

I did a calculation and here's a copy and paste from another post with certain assumptions.

"Lets just say you invest the same index fund with pretax dollars or post tax dollars...assuming a 30% tax rate

You invest 1000/month pre tax or 700/month post tax.

Your money grow faster at 1000/month, making you 1.1million after 30 years@6.5% return.

The 700/month camp yield you 774k@6.5% after 30 years.

But then you have to deal with capital gaines tax at 15-2%(or whatever it'll be in 30 years)..on the growth in the post tax account. Also you paid taxes on all dividend throughout the 30 years @ your tax bracket %. In the pre-tax account, all dividend were reinvested tax free for the time being. Your growth is 520k out of the 774k in the post tax account, which will be subjected to capital gaines tax if you decide to sell the index funds.

So lets say you decided to take a lump sum of 1.1 mil out of your sep at age 59(which is the least efficient way to do so), you'll end up with 716k (single tax filer..you get more if you are married).
In the post tax camp, you'll end up with 696k.

I did not do the dividend tax advantage for the sep but it's another win for tax efficient account.

So at the end of the day, your tax efficient account(like a sep ira) is much better numbers wise even though you have to pay taxes when you start using it at a later date. "

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[corn18]

For me to have a 401K sufficient to supply me my current income, at a 4% draw rate, I would have needed it to grow to $8 million by age 46. Good luck.

Why do you have to be such a jerk about other points of view?

[TexasHusker]

Why do you have to be such a jerk about other points of view?

My goodness I didn't mean to be a jerk, sorry it came off that way. In no way do I advocate my decisions for everyone. It was quite risky and could have easily gone very south.

[sblatner]

I think it is important to save in lots of different kinds of buckets. We are in our 50s and have 401ks, Roths and taxable savings. We used to try to put everything we could into a 401k but then realized we really had no other money. We are trying to save outside our 401ks now so that when we are of retirement age, we can postpone taking social security as long as we can.

I think it is smart to keep a balanced portfolio/net worth.

It sounds like your match varies from year to year based on your sales. Is it not tied to how much you contribute? If no, you could cut back on your contributions and save those in a Roth or in a taxable account. Or, you could decide to max it out now and then cut back later on. Nothing is written in stone so you can vary it year to year.

[AJ444]

With your current income/savings rate you are well on the road to early retirement, starting a business is a huge risk that could really derail your goals, according to this article half of all businesses don't make it to their 5th birthday and two thirds don't make it to their 10th:

https://www.google.com/amp/s/www.fool.com/amp/careers/2017/05/03/what-percentage-of-businesses-fail-in-their-first.aspx

I am glad there are people who take the risk and I certainly wouldn't discourage anyone who was following their passion but I also know many people that were in good financial standing that threw it all away starting their own business and failing.

[TexasHusker]

With your current income/savings rate you are well on the road to early retirement, starting a business is a huge risk that could really derail your goals, according to this article half of all businesses don't make it to their 5th birthday and two thirds don't make it to their 10th:

https://www.google.com/amp/s/www.fool.com/amp/careers/2017/05/03/what-percentage-of-businesses-fail-in-their-first.aspx

I am glad there are people who take the risk and I certainly wouldn't discourage anyone who was following their passion but I also know many people that were in good financial standing that threw it all away starting their own business and failing.

Agreed, but most businesses fail due to owner ineptitude or under-capitalization.

[element926]

Good insight on the business, I have a rental property and I treat that like my own side business (beach house weekly rental/winter monthly rental).

[TexasHusker]

Good insight on the business, I have a rental property and I treat that like my own side business (beach house weekly rental/winter monthly rental).

Not a bad place to start! I did the same with a vacation rental in TN in 2005 and through the years it morphed into a management company managing about 30 properties today!

CabinsNearGatlinburg.com

[Captain Save]

I recently watched a video where a guy was totally against retirement accounts. Basically, the idea was that 401k plans are a scam designed to keep the middle class in the middle. It locks your money away for decades and prevents you from being able to have access to capital to make investments today. His argument was that rich people don't have 401k plans. They are rich today not 40 years from now, and they have much more control over their money than the middle class does. Some would call this view point extreme. The point is, I don't totally max out my 401k. I do like having access to my money in the present should an opportunity arises. It's your call how to approach. I'd say, at least contribute to the match. You can switch to taxable accounts after that if you want.

I'm against absolutes... I have posted plenty of times about how a 401k is overused .. but it has its use.. and certain people in certain situations should use a 401k more than others. Certain people should not use it at all .

I haven't seen the video but a 401k but yes a 401k is a retirement account not a means to get rich .. Rich people tend to get rich by being entrepremeurs ... and the 401k is typically not the best option for entrepreneur because it's not flexible and it's not a liquid asset. You more than likely need cash to capitalize on opportunities... typically when a great deal come along ..everything else being equal.. the guy with the cash gets the deal.. and Rich people somewhere down the line have taken advantage of an opportunity.. whether it's a great real estate deal.. or Re-investing in their own business. ..

but the 401k is not a scam.. it's just overused because people like absolutes.. without looking into the person's specific situation

[disneysteve]

You don't hear much about the cons of using GESRV plans, because virtually everyone is participating and it just seems like the right thing to do.

Actually, that isn't true at all. 401k plan participation rates are not great and even among those who do participate, the contribution rates are very low. Even with automatic enrollment, the contribution is usually set at 2 or 3% of income and many workers never change that.

For most people, the comparison isn't 401k vs. some other more entrepreneurial pursuit, it's 401k vs. saving nothing at all. Given those choices, it's tough to argue that the 401k isn't the better option.

[TexasHusker]

Actually, that isn't true at all. 401k plan participation rates are not great and even among those who do participate, the contribution rates are very low. Even with automatic enrollment, the contribution is usually set at 2 or 3% of income and many workers never change that.

For most people, the comparison isn't 401k vs. some other more entrepreneurial pursuit, it's 401k vs. saving nothing at all. Given those choices, it's tough to argue that the 401k isn't the better option.

Agreed.

[TexasHusker]

I'm against absolutes... I have posted plenty of times about how a 401k is overused .. but it has its use.. and certain people in certain situations should use a 401k more than others. Certain people should not use it at all .

I haven't seen the video but a 401k but yes a 401k is a retirement account not a means to get rich .. Rich people tend to get rich by being entrepremeurs ... and the 401k is typically not the best option for entrepreneur because it's not flexible and it's not a liquid asset. You more than likely need cash to capitalize on opportunities... typically when a great deal come along ..everything else being equal.. the guy with the cash gets the deal.. and Rich people somewhere down the line have taken advantage of an opportunity.. whether it's a great real estate deal.. or Re-investing in their own business. ..

Well stated.

[Singuy]

I don't even know why there's a battle between 401k retirement savings vs post tax savings.

The guy is in the 33% tax bracket and he's only 26yo. If he decides to live like a college student on rice and beans, he can have a net worth of 3-4 million in 10 years, and hit 10 million by 45. Even if his 10 million are in boring index funds, he'll still end up making between 500-800k/year on returns.

Putting a lot of his money into a 401k doesn't prevent him from becoming rich....

[AJ444]

At the end of the day our tax system has become friggin complicated and the average person has a difficult time navigating their best options. If I were King I would get rid of the 401k and allow everyone to have an IRA to which they could contribute up to the same limit. Employers could still offer a match, you would simply connect the IRA account like you do a checking account for direct deposit.