Unless you strike it big, then you may retire in a higher tax bracket. I'm in a high tax bracket today, and I truly hope I can manage to be in the same bracket when I'm retired, lol.

To me, the primary advantage of retirement accounts is that the investments grow without paying taxes on the intermediate gains. A big deal if you have short term capital gains, or invest in tax-inefficient mutual funds. In a taxable account, you really have to consider short term vs. long term capital gains, and consider tax strategies in how you trade and invest. Giving 1/3 of your gains to uncle sam each year makes a huge difference in the growth of your accounts over 20-30 years.

 

Can anyone add any input on the proposed 401k reform? I don't know the first thing about investing for my retirement. All I read about is people losing 20% of there 401k plan over one year. I turned 21 in January and I am now eligible for a 401k plan with my company and enrollment is approaching quickly. I don't make much but my living expenses are small and I am comfortable investing a small percentage. My company does match whatever I put in although I don't remember exactly what the percentage is.

 

Not aware of any particular reform that would affect you. The only reform I've heard about would affect those who have millions stashed in a 401k, and the chances of it passing are slim to none because it would be very difficult to implement and enforce.

Contribute as much as you to your 401k, you won't regret it!

 

At the least, put in what your company matches.

 

Yes, this is pretty much free money

 

I agree with the roth ira. I would only put in what the company matches for the 401k. With that said, you want 15% in retirement but I would clear my immediate debts except for home prior to the contribution suggested.

 

I used to be a big advocate of maxing out your 401(k), but over the last year my perspective on 401k's and trad. IRA's has dimmed considerably. I'd encourage all of you to visit http://www.401kaos.com/ and download/read the free book - it's an eye-opener.

Why don't I like 401k's: * means also applies to trad. IRA's
- limited investment choices
- mostly mutual funds, which I'll never again invest in unless not given a choice (I invest just enough in my company's current 401k to get the full match)
- fees layered upon other fees. 401k's are great for the financial services industry.
- * can't easily access your funds w/o taking a tax penalty
- * capital gains are taxed as ordinary income
- * I expect tax rates have only one way to go over my retirement horizon, and it isn't down.

My wife and I still contribute $5,500/yr to our Roth IRA's, no real downside to accumulating money in those accounts.

I've also adopted a different perspective w/ regards to retirement planning via my real estate investment group. The traditional goal is to sock away as much money as you can, and hope you die before you run out of money. Now, the focus is to buy income-producing assets, and being able to retire when my passive income comfortably exceeds my expenses. I invested $50K in an apartment complex in June, and am in the process of investing $150-200K in 3-4 other complexes by the end of the year. These properties typically generate cash-on-cash yields in the 10%-20% range, plus the prospect of doubling your money (or more) in 2-5 years. W/ every liquidation, my goal will be to execute a 1031 exchange to step up to a much bigger property while deferring the gain for tax purposes. Late this year or early next year, my wife and I will start 72t distributions on our trad IRA's to accelerate the buildup of our multi-family portfolio (and possibly single family rentals should the MF deal flow run dry). I expect this approach will build wealth much faster than maxing out my 401k's.

 

Let me clarify this for others that may read it.

Traditional IRAs are funded with pre-tax dollars. Roth IRA's are funded with after-tax dollars. The typical thought process goes like this;

If you are working and contributing to a Traditional IRA (pre-tax dollars), you are betting that when you retire, your tax bracket is going to be lower than your tax bracking during your working years when you contribute. Typically this is true, since once you retire you aren't going to be clocking in somewhere. You'll be living off your retirement distributions, whatever social security might be left, and any other income sources (usually low). Once you reach 59.5, you can make any qualified dirstributions and it will only be taxed as ordinary income for that calendar year.

If you are working and contributing to a Roth IRA (post-tax dollars), you are betting that your tax bracket during the contribution years will be lower than when you retire. This is typically not that case, as your income levels during your working years will be higher, as will the taxes paid on the contributions. Albeit true that once you reach 59.5 and make a qualified distribution, it's not classified as ordinary income for that calendar year. Roth IRAs also don't have an RMD (required minimum distributions) requirement, since taxes have already been paid when the contribution occurred.

Statistics show that for the average person, Tradtional IRA (Trad 401k plan for example) contributions should be maxed before contributing to another retirement plan for the reasons listed above.

Granted there will be some clients that have more substantial income during retirement, and the above scenarios wouldn't apply, I.E. Chris S. who posted above. This is all the more reason why financial plans are so important for clients.

 

This is one of those places where YMMV - significantly. My plan has a good mix of about a dozen funds. Many are ETFs tracking major indices, and have extremely low expense ratios (fraction of a %). No fees at all, even when I move money between funds (company pays the overhead). Then there's the company match, which is free money - hard to find that in many other investments. Tax rates now vs. taxes rates in the future we could argue till the cows come home. But as I'm already solidly in the 33% bracket today, I think it's a decent hedge to siphon off pre-tax money today. Might feel different at 15%...

RE investment can be effective, I have some friends who have done extremely well in it. But you really need to have some serious positive cash flow on your RE positions, otherwise you can take a serious hit when a major calamity strikes - think reroofing an apartment building, or similar.

 

Let me clarify this for others that may read it.

Traditional IRAs are funded with pre-tax dollars. Roth IRA's are funded with after-tax dollars. The typical thought process goes like this;

If you are working and contributing to a Traditional IRA (pre-tax dollars), you are betting that when you retire, your tax bracket is going to be lower than your tax bracking during your working years when you contribute. Typically this is true, since once you retire you aren't going to be clocking in somewhere. You'll be living off your retirement distributions, whatever social security might be left, and any other income sources (usually low). Once you reach 59.5, you can make any qualified dirstributions and it will only be taxed as ordinary income for that calendar year.

If you are working and contributing to a Roth IRA (post-tax dollars), you are betting that your tax bracket during the contribution years will be lower than when you retire. This is typically not that case, as your income levels during your working years will be higher, as will the taxes paid on the contributions. Albeit true that once you reach 59.5 and make a qualified distribution, it's not classified as ordinary income for that calendar year. Roth IRAs also don't have an RMD (required minimum distributions) requirement, since taxes have already been paid when the contribution occurred.

Statistics show that for the average person, Tradtional IRA (Trad 401k plan for example) contributions should be maxed before contributing to another retirement plan for the reasons listed above.

Granted there will be some clients that have more substantial income during retirement, and the above scenarios wouldn't apply, I.E. Chris S. who posted above. This is all the more reason why financial plans are so important for clients.
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What you're leaving out of your analysis is that Trad. IRA/401k capital gains/dividends on your investments will be taxed as ordinary income, losing out on preferential tax treatment otherwise available in those classes of assets. Also, given our country's debt, current deficit, and shrinking workforce, I'm expecting tax rates to be higher during retirement than they are today.