Talking stocks, trading, and investing in general

[imatlas]

I’ve literally heard financial planners pitch a strategy of only putting enough in the 401(k) to take adavantage it an employer match because tax rates are almost certain to rise, so it is a claim that is frequently made.

 

[Piobaire]

I’ve literally heard financial planners pitch a strategy of only putting enough in the 401(k) to take adavantage it an employer match because tax rates are almost certain to rise, so it is a claim that is frequently made.

They don't get any fees on your money in a company fund so makes sense they'd argue you put everything you can with them.

I'm sure this will be met with derision but one of my major retirement concerns is that SS and Medicare will get means tested in the next decade. I'm not saying it's wrong policy wise just saying once again some of us that have made plans based on existing rules will get fucked.

 

[otc]

I'm still pretty jelly of whomever locked in 30 year bonds at 12% or so. Can you imagine the harsh wake up when they ran out though?

It isn't really that different from any other investment though. Those bonds are now trading at more than you paid for them. You could sell them today, use all of the proceeds to buy 4% bonds at market price, and you'd be in exactly the same position.

Well not exactly since you probably now hold a bond that is far from maturity rather than a bond that is maturing soon...but given you can trade them at any point, that distinction doesn't really matter.

 

[imatlas]

They don't get any fees on your money in a company fund so makes sense they'd argue you put everything you can with them.

I'm sure this will be met with derision but one of my major retirement concerns is that SS and Medicare will get means tested in the next decade. I'm not saying it's wrong policy wise just saying once again some of us that have made plans based on existing rules will get fucked.

You’re assuming that I’m speaking about that kind of commission driven financial planner, which would be an incorrect assumption.

 

[patrickBOOTH]

I’ve literally heard financial planners pitch a strategy of only putting enough in the 401(k) to take adavantage it an employer match because tax rates are almost certain to rise, so it is a claim that is frequently made.

This doesn't make sense to me. If taxes are to rise in the future you would want to pay them now, not later.

 

[otc]

I’ve literally heard financial planners pitch a strategy of only putting enough in the 401(k) to take adavantage it an employer match because tax rates are almost certain to rise, so it is a claim that is frequently made.

That doesn't really make sense in the long run. Maybe as a distinction between Roth and Traditional. For example a lot of advisers do suggest something like filling 401k to the employer match level and then moving contributions to a Roth IRA. You would only return to the 401k after maxing out the Roth IRA which the average client probably doesn't do (figure they are already putting 3-6% of their income into the 401k for the match...another 6k into a Roth starts to be a lot for the median wage earner).

Roth is better if future tax rates are high (either because gov't raises them, or because you expect to be in a higher bracket). Traditional is better if future rates are lower than today.

But *BOTH* are still better than no-tax advantage. With no 401k, you pay tax today, then you pay tax on any churn/distributions (funds pass along their churn even if you just buy-and-hold them), and then you pay tax again on withdrawal.

With a traditional 401k, you pay no tax today, no tax on churn/dividends, and then you only pay tax on the withdrawal. For this to be worse, tax rates in the future would have to be significantly higher than they are now. Keep in mind that you benefit from the traditional treatment by having more money in your pocket today. That extra money today combined with the lack of interim taxes is worth a lot in present value terms (and the taxes you pay in retirement are worth little in present value).

Roth you pay income tax today, but then no future taxes. That is strictly better than non-advantaged accounts since you are paying those taxes either way, but a non-advantaged investment will also owe future taxes.

 

[imatlas]

Exactly.

By not maxing out your 401(k), you are paying the taxes on that portion now rather than later.

 

[Piobaire]

It isn't really that different from any other investment though. Those bonds are now trading at more than you paid for them. You could sell them today, use all of the proceeds to buy 4% bonds at market price, and you'd be in exactly the same position.

Well not exactly since you probably now hold a bond that is far from maturity rather than a bond that is maturing soon...but given you can trade them at any point, that distinction doesn't really matter.

I don't think that math is quite correct. It's been a long time since my fixed income securities class but doesn't the length of time until maturity impact the yield garnered for the remaining term and that's figured in the pricing too? Meaning even if the interest rate is over current rates the fact the bond comes due in X months will lower the premium even though the coupon vs. current rates delta will indeed yield a premium over par. And with a 30 year bond I would imagine that markedly moves the price in the final years of it.

 

[Piobaire]

Should have checked Investopedia vs. my fading memories: https://www.investopedia.com/university/advancedbond/advancedbond3.asp


Yes, yield to maturity. You're not going to get enough premium to move a 30 year bond five years from maturity to replace that investment on a 1:1 basis.

 

[patrickBOOTH]

Exactly.

By not maxing out your 401(k), you are paying the taxes on that portion now rather than later.

Which is better if taxes are higher in the future, which is the opposite of what you originally stated.

 

[Piobaire]

Also needed in this 401k scenario is the fact returns can easily trigger taxes during the accumulation phase. So as annual taxes are paid those tax payments cannot incur further growth over the years of accumulation as they do in a sheltered fund.

 

[otc]

You're not going to get enough premium to move a 30 year bond five years from maturity to replace that investment on a 1:1 basis.

In an efficient market you should...

PV of bond A should equal PV of bond B, otherwise there will be arbitrage.

 

[Piobaire]

In an efficient market you should...

PV of bond A should equal PV of bond B, otherwise there will be arbitrage.

I'm hesitant to argue with you as a) you're smarter than me and b) you're probably taking this right now in school...

PV includes number of periods. As a large number of the periodic pays have been used up in that 30 year bond selling at a premium, the PV is not equivalent to the PV 30 years ago, meaning that you're not selling that set to expire bond for another 30 year bond and getting the same cash flow.

 

[Omega Male]

Japan in 1992 looked eerily like China in 2019.

 

[venividivicibj]

This doesn't make sense to me. If taxes are to rise in the future you would want to pay them now, not later.

this ignores the compounding that you get on the non taxed part of income though, which can be significant- might be enough to net out the higher tax rate.