Home Forums Hunting & Shooting Hunter's Campfire Invest, or pound the 401?

Finance Guru's, of the 2 choices here lets talk pro's and con's of each.

Main focus here is tax breaks and growth of capital. Capital or any funds in a 401 shouldn't be needed for at least 10 years.

We can invest in the market, possibly average 7% for the next 10 years and hope the world doesn't end taking the market with it,

or we can hammer the 401, lets say 15k a year. Drop 15 into a 401 and immediately benefit from the pretax break. If I drop my taxable income by 15k a year at the 25 percent tax bracket, didn't I just realize about a 3-4k savings in taxes just to start,

and now as time goes on, that tax deferred 15k accumulating interest plus the 4k in tax breaks just seems to make alot sense.

I understand the markets and 401's are closely tied together, the real difference being the vast amount of opportunitys available when not tied to certain retirement vehicles.

401k, unless you foresee any need for the liquid money within the decade or so until the 401k is mature.

Why not both.

Contribute to your 401k, and choose market based investments withing the 401k.

You know the wise answer....you're just looking for permission to be aggressive. 😉

If you're not actively managing the 401k with market based returns within, you've already missed the boat.

yes, there is that.

The 401 with safe harbor employer match would be satisified, and then start an additional 401. Tax breaks would be the same i believe.

the wise answer seems obvious, but you wonder.

One fly in the ointment about the 401 tax deferment now is that the money will be taxed as income when you take it out later - your contributions plus any investment income on those - and will be taxed at the current rate when the money is withdrawn. That's where Roth IRA's come in, you have already paid the taxes on the income you stash away.

Not saying it's a deal breaker but something you have to think about and try to predict your situation when you withdraw the money.

For instance, suppose if you're making $100K now and after you retire you only withdraw $50K per year so your "annual income" is $50K, your tax rate may be less. On the other hand, with the national debt rising and rising, do you think income tax rates will be higher or lower than they are now? That's the big unknown.

So - current value of the tax break versus possible increased penalties (taxes) later? Not trying to make a definitive statement toward or against any one thing, just throwing another variable in there to look at.

After considerable research, involving great amounts of time and energy,

I devised a fool proof way to pick Roth or non-Roth,

Flip a coin.

Hey, that's my investment strategy! I should charge a royalty...

10 years is kinda on the edge for Roth vs. traditional IRA.

You CAN invest outside of the IRA structure and be almost tax exempt by using low turnover funds -- and most index funds are low turnover. Capital gains are taxed only as they are realized, so in a low turnover fund, very little taxes will be due.

When you do pull the funds out, they are taxed as capital gains, not as income.

This has two effects: one, you are taxed at the lower capital gains, while a draw from an IRA is added to your AGI and taxed as income.

Second, by taking a portion of your income as untaxable income (the portion you have saved and invested outside of the IRA tax sturcture), you lower your AGI, and therefore your income tax RATE. This way, you can reduce the amount of taxes due on the portion of your retirement you pull from your IRA's.

If you taxable income is low (10% bracket, say), then paying income tax on your 401k/IRA disbursements is no big deal.

So, I think, the answer is "BOTH".

A 401 k is nice but my wives 401 k is not a very good investment tool when it comes to returns. My friend has the same one and he is not happy that is took till 2 yrs ago to make up what was lost in 09. My wives is a ho hum , broad market investment fund. It does not seem to be managed . It is much like a huge index fund. Not bad but I have been doing better, , , , although I watch it like a cat stares down a mouse and that can get tiring. I imagine, if you dont fill your ROTH that may be the first place to start, , and hope the Feds dont raid it someday. 401 k is next . Now I am in the process of moving my high dividend REITs and oil stocks in my ROTHS and other tax deferred accounts. I am looking to slowly moving all my taxable accounts into tax efficient ETF's, index funds and low / no dividend stocks that I think are appropriate for a taxable account to keep the 1099 DIV. real low come tax time. It is not just what the return is, but the return after taxes can vary like crazy. Morningster has a tax comparison table that tells what mutual funds have for a tax rate. It is astounding how high the tax rate is on some mutual funds and how low of a tax rate some others have. Just a question. If ya buy a stock that has no dividends, isn't the tax rate the same as a 401k? Ya just get taxed when ya sell, right? SO far I bough BCEI and may buy Biogen or Gilead Science stock. One is a no Dividend stock and should have no tax liability until I sell.

Isn't a fundamental question whether or not your employer matches your 401(k) contributions?

if directed toward me, yes they match up to 5%.

if directed toward'hook, I somewhat understand what he's saying. Company sponsored plans are often very limited in choices. Maybe no more than several different funds including the bore me to death target date funds.

That"s what this thread was about, a company sponsored plan that matches contributions and automatically withholds a set amount of pretax income.

but yet I'm looking for something else to add additional funds to mainly offset taxes. According to my tax preparer I lost several deductions this year and my tax return this year (or lack of) reflected that.

Seems I need to just start an additional IRA and then find a way to make scheduled contributions to that account.

Absolutely. You almost always take the match. Even if the selection of funds is poor, chances are you are not going to be in that job long enough for the investment choices to under perform enough to negate the match.

Exceptions would be if the 401K is in heavily front loaded funds, if the vesting period is unusually long, or the match is in company stock, then it might be a toss up or a no-go.

401K is your best tax shelter. A Roth IRA is good if you think you will be in a high tax bracket when you retire.

Another less known shelter is the "health savings account" or HSA. The money is not taxed and you can take it with you when you leave your company.

that it's not even close. Retirement plan all the way!
Non taxed money grows much bigger in the end. Now then, next it really depends on where you are in regard to your earning, next it depends on what type of retirement plan your employer purchased, next what choices your employer paid for to have as investment choices inside your plan.
Best choices in order, the younger you are, the more these choices pertain to you.
1) ROTH inside your company plan, unless you make to much money to qualify, and if you make to much money.
Reason, our country is so broke they are willing to take the small amount of taxation they get currently, then waiting for the bigger payday later in your life.
2) Regular 401k account.
The single biggest reason 401k make money? Dollar cost averaging, why? Because you put your money in the capital markets every 2 weeks, or monthly regardless of whether the markets are going higher or lower. Emotion has no place in investing. If I were to call you when the markets have been down and they were making the news every night, and tell you it was a excellent time to buy, for example Emerson Electric, and I say they were paying a 3.5% dividend and trading at a forward p/e lower than the market, most people would ask what is their 12 month trading range, and I say high of $99 and low of $56 and they are currently at $63. Most people would say heck no, they are sucking pond water right now. And they would be right, but that's when you buy, when everyone is running the other way. If you want to make the same return as the herd makes, stay with the herd, the people that have been doing their homework buy, and then wait for the herd to figure out Emerson Electric is doing fine and just raised their dividend for the 24 year in a row.
If you eat Tuna, and it regularly sells for $3.75 per can, and you walk in the store and it's on sale , 2 cans for $4.00 wouldn't you buy more than you normally would, I do, high quality company's should be looked at in the same way.
Someone mentioned buying non dividend paying in a regular account to save on taxes, simply incredible. Why would I even consider buying a stock in a company that doesn't share it's earnings, meaning they don't pay a dividend, that's like owning half a company and not getting paid. Who's taking the risk, I give them my money and they get salarys, perks and insurance and I get squat. No thank you, I've been to that rodeo. It is ALL about cash flow .
There are only 2 ways to make money in capital markets, time and risk. Time has worked very well for most people, precious few come out of their fight with risk with more than they went in with.
Index Funds and ETF's can make money for sure, but they can't touch a actively managed Fund over time. Why, because they HAVE to own stocks they don't like. The only period of time Index Funds have a chance to outperform is when the entire market is going higher, and that comes about once every 23 years.

Dave Ramsey recommends one become totally debt-free (except for a mortgage) before investing. ([color:#3333FF]See Dave's 7 Baby Steps[/color].)


The 7 Baby Steps
Step 1: Save $1,000
Step 2: Pay Off Debt
Step 3: 3-6 Month Fund
Step 4: Invest 15%
Step 5: College
Step 6: Pay Off Home
Step 7: Give


Step 4: Invest 15% of Household Income Into Retirement

"Now it's time to get serious about retirement. With no payments and a full emergency fund, put 15% toward the retirement of your dreams. Between your 401(k), Roth IRA, and Traditional IRA, you have a lot of options. Find the fit that is right for you. The money you were using to attack debt can now help build your future.

"This step is all about building long-term wealth. Take 15% of your gross household income and invest it first into matching company 401(k) plans and then Roth IRAs. If your company doesn't offer a retirement plan or match your contributions, then go straight to the Roth. Spread the money across four types of mutual funds: growth, aggressive growth, growth and income, and international. Even a couple hundred dollars a month invested now can make you a multi-millionaire."

[video:youtube]dqVJZJ86jwE[/video]

Chris Hogan on Retirement Investing

Not any kind of expert, but it seems to me that if your company matches your 401k contributions to any considerable extent, that's free money that just might exceed what you'd gain in ordinary investments, at least at first.

A lot depends on what investment options your company offers in their plan. I knew some guys that lost big time because their company's plan stuck them with investing in company stock that fell from over $100 to less than a buck.

I may have confused some people,

I'm already in the company sponsored 401, with employer match. I was I/you can contribute up to 24,000 per year with the same pretax benefits.

I can add to that 401, or start another IRA.

Are there any real major differences between these two regarding tax breaks?

Our representative was in last week and stated you could contribute up to 24k per year in to the 401, everything I see says 6500 per year.

I believe the IRA max is 6500 also?