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What is a good reason to NOT max out a 401k?

Discussion in 'Business, Careers & Education' started by Troll2, May 26, 2012.

  1. otc

    otc Senior member

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    Half roth/half regular would basically just be sort of a hedge. Since the limits on 401k stuff are usually based on pre-tax traditional contributions (and since they are a smaller hit to your paycheck due to their pre-tax nature) I was thinking you could get your full employer contribution in pre-tax funds and then throw an extra 5k into a Roth while you are still eligible.

    Maybe I am not quite understanding your situation here but basically your priorities for investing should be:
    1: 401k up to employer match limit (I suppose this can be roth or trad...as long as you are getting the max match)
    2: Roth IRA if eligible (otherwise traditional) up to the 5K annual maximum.
    3: 401k to the legal limit.
    4: Regular taxable investments.
     
  2. gettoasty

    gettoasty Senior member

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    Well to answer your edited question, out of curiousity, the internet yielded this:
    I also thought so as well so you can take it FWIW. Such deferrals is more in part to timing in when to elect so.
     
    Last edited: Sep 17, 2012
  3. gettoasty

    gettoasty Senior member

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    And I feel like a lot of the advice given is more so to the idea of maximizing your investment e.g. gains in the short term rather than actual tax benefits and long term gains.

    I'm curious whether there is adequate education in terms of what options you actually have outside of your typical commercial bank. I guess my POV is a bit skewed coming from the producer side of things.
     
    Last edited: Sep 17, 2012
  4. mkarim

    mkarim Senior member

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    Yes the majority of the investment community is geared towards short-term benefits since it is commission-driven.
     
  5. gettoasty

    gettoasty Senior member

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    I thought we were looking at it from the perspective of the participants. In that case I am not sure why you would want to be rolling 401k so much and eating the fees.

    From a producers viewpoint, sure "roll it over to me : )"
     
    Last edited: Sep 18, 2012
  6. Eason

    Eason Senior member

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    Why not to: You are young and poor and have a low amount of money to save each month

    or

    You might move to another country.

    Both true in my case
     
    Last edited: Sep 19, 2012
  7. gettoasty

    gettoasty Senior member

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    You have a point there in both cases. I guess in my case I am taking the more "traditional" route 1-3 year at first job before making a change.

    FWIW I do not defer to my SIMPLE-IRA plan option because I think it sucks. 2 year wait before you are allowed to move. Although I was told that there are 6-7% annual return (net of fees?)
     
  8. Liquidus

    Liquidus Senior member

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    Can someone explain to me, intuitively, what is the benefit of investing in a 401k vs a taxable brokerage account? Assume no match, same tax rates both when contributing and withdrawing, and no early withdraws from the brokerage account. I've read this blog post and it seems that there are two reasons:

    401k investments are only taxed once, at your income tax rate, on withdraws.
    Taxable accounts use post-tax dollars and realized gains are taxed again at a capital gains rate at withdraw.
     
  9. otc

    otc Senior member

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    You seem to have explained it already.

    401k, you only pay at withdrawl.
    Roth IRA/401k, you only pay at deposit.
    Trad IRA, you pay at both ends if you are over the income limit, otherwise you pay at withdrawl.

    Normal trading account: You pay on your income. Then you pay on any dividends. Then you pay full tax rate on REIT dividends. Then you pay on realized gains (and thus you pay on trading churn). You keep paying all of these taxes until you want the money, at which point you sell and again pay taxes on appreciation.

    That's why the Trad IRA is probably worth its annual max even if you are over the income limit...all the dividends and realized gains in the middle can really add up.
     

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