Good Investments Vol. $5,ooo (Goal orientated need to read)

[dirtylicious]

the tax bracket difference now and when you are 59. Surely, your tax bracket will be much lower at 59. and the $1.9M in capital gains? That will be taxed at the lower capital gain rate of 15%. So you are basically deferring your taxes to a period in your life where your bracket is much lower
yes.. there will be a difference in the tax bracket...but look at the actual numbers... you're saving a few thousand just to gain a taxbracket advantage?...

while in theory your thinking makes sense...but the numbers just prove otherwise.
it's like someone who has cash to pay off their house...but keeps a house payment just so that they can keep the tax benefit...instead of just paying itall off

Put it this way, the $2K you are saving now with a 401K tax shield by investing $5K a year, that you are benefiting from NOW while you are young and need capital, can be reinvested in the stock market/property/whatever you want while you are STILL YOUNG.
but really...how much of that 2K is really going to make that big of a impact on your portfolio?...not much.

and there is a huge economic opportunity cost you incurr with that.
eh...I disagree... you can invest in both your 401k and a Roth...and still have plenty of bucks to play around with.....5K a year really isn'tthat much.

I don't disagree that a 401k is a great investment...esp if your employer matches....but for me...the Roth is just a better investment overall.

really...just look at the numbers

 

[wjun15]

like someone said, what book do u recommend to learn about these stuff?

 

[dunknforce]

Originally Posted by WJuN15

like someone said, what books do u recommend to learn about this stuff?

 

[dc sounds]

Put it this way, the $2K you are saving now with a 401K tax shield by investing $5K a year, that you are benefiting from NOW while you are young and need capital, can be reinvested in the stock market/property/whatever you want while you are STILL YOUNG.

but really...how much of that 2K is really going to make that big of a impact on your portfolio?...not much.

and there is a huge economic opportunity cost you incurr with that.

eh...I disagree... you can invest in both your 401k and a Roth...and still have plenty of bucks to play around with.....5K a year really isn't that much.


really? so you think that an extra $2K annually, presuming you ONLY invest $5K a year, its not a huge factor?

$2K a year, starting in your young 20's, considering the economic cost in atime span of 40 years (59 years old), is a pretty big economic cost factor. $2K can do a lot in 40 years, this is $2K every year here. You really can'tjust say look at the numbers, it depends on the persons financial situation, how the person chooses to invest his income, and how important cash liquidity isto the person. Invest $2K in a fund with a return of 9% compounded over 40 years? That's a pretty significant factor to consider, in addition, this isevery year here.

Also, would you not agree that $1 in your 20's is a lot more valuable/powerful than $1 in your 60's, regarding the potential investment power of $1? Imean it's common sense, when you are young, invest aggressively, when you are old, get then shy away from risk/high gain, so IMO, I'd rather have thetax savings now, for the potential return value on $1 in my 20's than in my 60's.

 

[dirtylicious]

you know...I was more than willing to engage in discourse about differing investment strategies.....but if you're going to sit there and try to belittle myopinions by laughing at them...then I'm done..

as a last bit...lets redo the #'s say a person only invests 1K per year... since the 5K is such a significant amount in your eyes.

1K for 42 year = 42K
after 42 yrs @ 9% = ~590K. that's ~545K of tax free growth...while if you had stashed that away in your 401... you're looking at 545K of taxablegrowth.

since the opportunity cost is significantyntly reduced....I'm still ahead with my Roth. vs your 401K.

I just don't see how you see that a 401k's taxable growth > than a Roths's tax free growth

but hey...you keep investing how you want...I'll keep investing how I want.... I'm good...I'm not trying to convince anyone who has the betteropinion...I put out my views and #'s and leave it that.

ps. DunkNForce.
yes...In my mind the best strategy is to invest in both... especially if your employer offers a 401k and matches.

 

[jordanfiend85]

i understand what DC Sounds is saying and its horrible advice...close to criminal actually. He sounds like he has been reading a stupid yahoo article I saw.

 

[dc sounds]

Originally Posted by Dirtylicious

you know...I was more than willing to engage in discourse about differing investment strategies.....but if you're going to sit there and try to belittle my opinions by laughing at them...then I'm done..

as a last bit...lets redo the #'s say a person only invests 1K per year... since the 5K is such a significant amount in your eyes.

1K for 42 year = 42K
after 42 yrs @ 9% = ~590K. that's ~545K of tax free growth...while if you had stashed that away in your 401... you're looking at 545K of taxable growth.

since the opportunity cost is significantyntly reduced....I'm still ahead with my Roth. vs your 401K.

I just don't see how you see that a 401k's taxable growth > than a Roths's tax free growth

but hey...you keep investing how you want...I'll keep investing how I want.... I'm good...I'm not trying to convince anyone who has the better opinion...I put out my views and #'s and leave it that.

ps. DunkNForce.
yes...In my mind the best strategy is to invest in both... especially if your employer offers a 401k and matches.

$1K invested every year.

401K Scenario

$1K every year. Thats $42K in the long run. At 9% its $590K. $1K contributions that reduces your taxable income by $1K every year which saves you $300 everyyear.

Now you turn 60 years old, lets assume we are retired and married.

Tax bracket at that age will be less than 15% for the entire $42K. The capital gains of the remaining $545K will be taxed at the capital gain rate of 15%.Thekey point here is, these tax brackets, are a lot lower than what you are getting taxed at today with your higher annual taxable income (30% ala Roth)

To keep it simple, lets say the entire tax bracket is %15, $590K x 15% = $88K you pay in taxes when you withdraw with the 401K at age 60

With the Roth, at that age, you pay no taxes, the gains accumulate and are withdrawn tax free. Sounds better than the 401K.

Here's where the Roth falls short.

Every year, for those 42 years, you will pay, assuming you are middle class, you will pay 30% taxes on your Roth contributions on your annual taxable income,wheras with the 401K, your contributions act as a tax shield because they decrease yoru taxable income.

Sticking with $1,000, that's $300 a year. So $300 x 42 = $12,600 you paid in taxes in total with the Roth, where with the 401K, you don't pay.

So, as you can see, so far, the Roth looks better still.

But let's say, with the 401K, since you are receiving that tax benefit now, every year, when you receive that $300 tax shield, you go ahead and take that$300 you saved every year by lowering your taxable income with your 401K contributions and reinvest that $300, every year, lets say at thesame return of 9%.<---- This is the lost economic opportunity with the Roth.

$300 invested every year for 42 years compounded at 9% = $131,953. after tax is (131,952 x 85%) = $112,159.

So lets add up the 401K

590K - 401K balance at retirement
-89K - taxes you have to pay on both the contributions and growth (@ 15%)
=501K Net balance
+112K Economic opportunity taken from reinvesting the $300 you saved every year from 401K tax shield at 9% net of tax.
=$613K Final balance.

Lets add up the Roth

590K 401K balance at retirement
-13K Taxes you paid throughout the 42 years of Roth contributions. (@30%)
=$577K Final Balance.

Dirtys numbers were very unrealistic as well. $1000 contributions is very small. $3000 - $5000 is a more realistic annual contritbution, and the economic costof getting taxed at that higher bracket, foregoing the 401K tax shield, gets magnified even more.

Finally, 401K is a lot better in my eyes because you are hedging the risk of death/health at the age of 60. People tend to only look at the numbers, but howmany of you think you will live past 70? Past 60? A Roth fund places all the benefit until you turn 60, while the 401K provides the tax benefit throughout yourlife. Much better in my eyes.

At the end of the day, the nail in the coffin is the employer matching contributions (basically free money) that make the 401K the smartest choice.

Dirty, I respect your outlook but this is how I see it.

 

[dirtylicious]

$1K contributions that reduces your taxable income by $1K every year which saves you $300 every year.

how do you figure that?...take a look at the tax tables for 2007..... the difference between a 65K and 66K income, for example, is $250.

so then your numbers should be $250 per year for 42 years @ 9%...that's 77K over 42 years....not 112K

so lets redo this all...I miscalculated my numbers in my previous post...

5K initial investment... adding 1k per year...

555K - 401K balance at retirement
-83K - taxes you have to pay on both the contributions and growth (@ 15%)
=472K Net balance in 401k
+72K Economic opportunity taken from reinvesting the $250you saved every year from 401K tax shield at 9% net of tax.
-11K in taxes on that reinvested income. (since it is taxable)
=533K net balance

Lets add up the Roth
555K balance at retirement
-12K Taxes you paid throughout the 42 years of Roth contributions. (@30%).
although I don't see how you get this number.... if you're factoring the opp cost on the 401k side...then you can't double dip and subtract it fromthe Roth balance sheet.

Roth still ends up with a greater balance with either 555K or 543K

At the end of the day, the nail in the coffin is the employer matching contributions (basically free money) that make the 401K the smartest choice.

I never said that one shouldn't contribute to a 401k...but for me...I'm contributing to my 401k first...up to the amount my employer matches...thendumping everything into my Roth after that. I think relying on soley a 401k is going to end up hurting a lot of people's portfolios.

but hell...good luck with your strategy...I'll stick to mine though.


one last thing.....you have to factor in that if you're re-investing all of this...your tax bracket at retirement age may not be at the low 15% thatyou're tauting...and if you suppose SS is still solvent by the time you retire... you could easily be looking at the 25 or 28% tax bracket anyway...notmuch difference from that 33%.

 

[lazyj10]

Tax bracket at that age will be less than 15% for the entire $42K. The capital gains of the remaining $545K will be taxed at the capital gain rate of 15%.The key point here is, these tax brackets, are a lot lower than what you are getting taxed at today with your higher annual taxable income (30% a la Roth)
So what if the Capital Gains tax advantage is reset back to pre-2003 levels like has been proposed?

 

[benballer]

with today's shaky and unstable economy, I would never get into a 401k, but the roth seems like a great idea.
also I'm old and hella skeptical about 401k's since I had one for like 10 years and I listened to other people and really didn't come out thatgreat.

 

[newbs24]

I was also thinking of investing some money both for the short term and the long term. I have around $10k at the moment and was planning on buying a home inthe Spring of 2009. My future wifey and I are saving everything we can to put down a nice lump on a home but I really want this money to get more than sittingin a measley savings account that earns only .55%. I am not going to need this money until them and want to put more into it over this year but I have no cluewhat the best idea would be. I was thinking of a 12-month CD, but the rates are so low right now I am skeptical. I would also like to possibly split it up andpossibly throw some into a Roth IRA from reading all of this info, it seems harmless and a good investment. I am 24 and have a decent job that I will more thanlikely have for the rest of my life, but it is killing me knowing that my little bit of money is sitting around not earning what it could. Let me know fellaswhat would be best for both short term and long term.

 

[lazyj10]

For what you need, and when you need it, your safest (and most likely best) option is just going with a high yield savings account.
ITs not worth risking your down payment on a home on riskier investments.

I say since you about a year you calculate what you plan on buying and see what % you want to put down - i.e 5, 10, 15% etc. From there, with whatever you haveleft, plan on using that differently but keep the main portion you want as the down payment in something safe.

 

[newbs24]

Originally Posted by LazyJ10

For what you need, and when you need it, your safest (and most likely best) option is just going with a high yield savings account.
ITs not worth risking your down payment on a home on riskier investments.

I say since you about a year you calculate what you plan on buying and see what % you want to put down - i.e 5, 10, 15% etc. From there, with whatever you have left, plan on using that differently but keep the main portion you want as the down payment in something safe.

Thanks. Any suggestions on who is good to go with on a high yield savings account?I have heard ING direct is pretty good but I am not too savvy in thistype of stuff. I will more than likely continue to add to this over the year quite a bit since my car payment isn't that much and my other expenditures arevery low.

This thread is a godsend for where I am right now. You guys are most helpful.

 

[jordanfiend85]

Originally Posted by DC SOUNDS

Originally Posted by Dirtylicious

you know...I was more than willing to engage in discourse about differing investment strategies.....but if you're going to sit there and try to belittle my opinions by laughing at them...then I'm done..

as a last bit...lets redo the #'s say a person only invests 1K per year... since the 5K is such a significant amount in your eyes.

1K for 42 year = 42K
after 42 yrs @ 9% = ~590K. that's ~545K of tax free growth...while if you had stashed that away in your 401... you're looking at 545K of taxable growth.

since the opportunity cost is significantyntly reduced....I'm still ahead with my Roth. vs your 401K.

I just don't see how you see that a 401k's taxable growth > than a Roths's tax free growth

but hey...you keep investing how you want...I'll keep investing how I want.... I'm good...I'm not trying to convince anyone who has the better opinion...I put out my views and #'s and leave it that.

ps. DunkNForce.
yes...In my mind the best strategy is to invest in both... especially if your employer offers a 401k and matches.

$1K invested every year.

401K Scenario

$1K every year. Thats $42K in the long run. At 9% its $590K. $1K contributions that reduces your taxable income by $1K every year which saves you $300 every year.

Now you turn 60 years old, lets assume we are retired and married.

Tax bracket at that age will be less than 15% for the entire $42K. The capital gains of the remaining $545K will be taxed at the capital gain rate of 15%.The key point here is, these tax brackets, are a lot lower than what you are getting taxed at today with your higher annual taxable income (30% a la Roth)

To keep it simple, lets say the entire tax bracket is %15, $590K x 15% = $88K you pay in taxes when you withdraw with the 401K at age 60

With the Roth, at that age, you pay no taxes, the gains accumulate and are withdrawn tax free. Sounds better than the 401K.

Here's where the Roth falls short.

Every year, for those 42 years, you will pay, assuming you are middle class, you will pay 30% taxes on your Roth contributions on your annual taxable income, wheras with the 401K, your contributions act as a tax shield because they decrease yoru taxable income.

Sticking with $1,000, that's $300 a year. So $300 x 42 = $12,600 you paid in taxes in total with the Roth, where with the 401K, you don't pay.

So, as you can see, so far, the Roth looks better still.

But let's say, with the 401K, since you are receiving that tax benefit now, every year, when you receive that $300 tax shield, you go ahead and take that $300 you saved every year by lowering your taxable income with your 401K contributions and reinvest that $300, every year, lets say at the same return of 9%.<---- This is the lost economic opportunity with the Roth.

$300 invested every year for 42 years compounded at 9% = $131,953. after tax is (131,952 x 85%) = $112,159.

So lets add up the 401K

590K - 401K balance at retirement
-89K - taxes you have to pay on both the contributions and growth (@ 15%)
=501K Net balance
+112K Economic opportunity taken from reinvesting the $300 you saved every year from 401K tax shield at 9% net of tax.
=$613K Final balance.

Lets add up the Roth

590K 401K balance at retirement
-13K Taxes you paid throughout the 42 years of Roth contributions. (@30%)
=$577K Final Balance.

Dirtys numbers were very unrealistic as well. $1000 contributions is very small. $3000 - $5000 is a more realistic annual contritbution, and the economic cost of getting taxed at that higher bracket, foregoing the 401K tax shield, gets magnified even more.

Finally, 401K is a lot better in my eyes because you are hedging the risk of death/health at the age of 60. People tend to only look at the numbers, but how many of you think you will live past 70? Past 60? A Roth fund places all the benefit until you turn 60, while the 401K provides the tax benefit throughout your life. Much better in my eyes.

At the end of the day, the nail in the coffin is the employer matching contributions (basically free money) that make the 401K the smartest choice.

Dirty, I respect your outlook but this is how I see it.

Why are you expecting tax rates to stay the same. Thats why your whole argument is flawed. Anyone who does this for a living or knows tax policy willtell you tax rates will be a lot higher in the future than they are now.

 

[jordanfiend85]

Originally Posted by LazyJ10

Tax bracket at that age will be less than 15% for the entire $42K. The capital gains of the remaining $545K will be taxed at the capital gain rate of 15%.The key point here is, these tax brackets, are a lot lower than what you are getting taxed at today with your higher annual taxable income (30% a la Roth)

So what if the Capital Gains tax advantage is reset back to pre-2003 levels like has been proposed?


Thank you

even if you account for tax rate staying the same he is still wrong. Nobody gets taxed at a 15% rate. How do you plan on living. If you wan tto live a littleabove the poverty line but if you want to live comfortably one has to assume a 25-30% tax bracket.

 

[jordanfiend85]

Originally Posted by BENBALLER

with today's shaky and unstable economy, I would never get into a 401k, but the roth seems like a great idea.
also I'm old and hella skeptical about 401k's since I had one for like 10 years and I listened to other people and really didn't come out that great.

I think you're misunderstanding...what a ROTH IRA or a 401K are. They are both equally risky depending on your portfolio.

Someone with you net worth should probably have a financial advisor...people who make a lot less than what you appear to own, have one.

 

[jordanfiend85]

Originally Posted by BENBALLER

with today's shaky and unstable economy, I would never get into a 401k, but the roth seems like a great idea.
also I'm old and hella skeptical about 401k's since I had one for like 10 years and I listened to other people and really didn't come out that great.

I think you're misunderstanding...what a ROTH IRA or a 401K are. They are both equally risky depending on your portfolio.

Someone with you net worth should probably have a financial advisor...people who make a lot less than what you appear to own, have one. How did you have a 401karent you self employed?

 

[peari jam]

dirty, do you hold either CPA or CFA certification?

 

[meldr]

as a banker I would put it into a ROTH IRA once the funds are in the IRA you can choose from a money market or a CD the CDs pay higher but they are locked upwhich for younger ppl thats not a big deal since you dont want to access it yet anyway. Saving for the future is very smart, if you dont have a 401k an IRA isyour best bet.

 

[purplehazze96]

a

 

[dc sounds]

There are so many variables in this, that you could come up with a million different numbers. Dirty used a 25% tax bracket for the entire computation, in myhonest opinion, that is not realistic, for most respectable middle class (I'm from Cali) married couples filing jointly, you are looking at a 28% to 33%tax bracket for the majority of your working life.

To those saying 15% of a bracket is too low at age 60, that is assuming when you pull out the 401K you are retired, meaning no income, and there's notelling if SS will pay at all at that age.

Finally, those saying that tax rates will go up, which makes my 15% unrealistic, wouldn't that hurt the Roth as well? Considering that the Rothcontributions are taxed and the 401K reduces your taxable income.
At the end of the day, and I'm positive Dirty will agree with me on this too, if your employer offers the benefit/incentive of matching 401K contributions,I would first, before considering a Roth, invest at an amount that maxes out your employers contributions. For example, my employer offers to match anycontributions I make up to 5% of my income, so at the least, I would contribute 5% of my income to my 401K, in which my employer would match, before eventhinking about a Roth.

Then afterwards, its really up to you. All the variables, (tax rates, projected income, projected return) all come into play that could either make the Rothbetter or the 401K.

But definately, hit up the 401K first if your employer is gonna make matching contributions.

 

[yeahitsrust]

Wow, I am shocked at the amount of knowledge I have gained by reading the past 6 pages. Im extremely interested in keeping this thread going and keeping myknowledge of both 401s and ROTHs growing. Thanks for all the insight guys.

 

[gingersaintbad]

Roth IRA FTW

 

[dunknforce]

I see this is helping more then myself and I am going to keep this alive with more questions....
What do you guys consider the best companys out there for this investment? Where should people like Newbs head to...

I've heard : ING Vanguard ? forgot the other one, brain fart...

My sister I found out has a Roth already started... she does payments of like $5/wk i guess, she's also a single mother at the time. She uses Primerica,part of CITI My uncle is her financial advisor.... and he is my mentor, he influnenced me to read, educate myself independently yadda yadda, I most likely willgo with my uncle to build a portfolio/Roth IRA.


I want some company names out there for people looking to get started? Dirty? Lazy J? anyone?

 

[dirtylicious]

Originally Posted by DC SOUNDS

At the end of the day, and I'm positive Dirty will agree with me on this too, if your employer offers the benefit/incentive of matching 401K contributions, I would first, before considering a Roth, invest at an amount that maxes out your employers contributions. For example, my employer offers to match any contributions I make up to 5% of my income, so at the least, I would contribute 5% of my income to my 401K, in which my employer would match, before even thinking about a Roth.

Indeed.

For those wanting to start a Roth - http://www.getrichslowly.org/blog/2007/06/07/how-to-start-a-roth-ira-and-where-to-do-it/

I know some of you have PMed me.. sorry...but I just haven't had the time to write out a lengthy response. Will try to do so this weekend...weathersucks....so I'll be snowed in.