401k Advice

[DHK]

I might be nitpicking (if so I apologize), but you mentioned a "cheap term" and continue to contribute to the 401k. When I hear "cheap term", I think of companies like Banner life that have little to no good conversion options. Just my opinion.

I would recommend a quality term with good conversion provisions and contribute to the permanent life when they can, instead of the 401k.

 

[VolAgent]

DHK, only one problem there.

If you have a $1 million account WITH employer match, you are unlikely to have that same account WITHOUT employer match.

 

[DHK]

Its about spendable income... not accumulated assets.

 

[VolAgent]

Its about spendable income... not accumulated assets.

Yes, but the assets generate the income. If you want to make the comparison you have to use fair numbers.

If you have the same exact account balance when making the same contribution with an employer match as without, then something went wrong.

 

[LGilmore]

"Its about spendable income... not accumulated assets. "

Sorry I am not getting your point. A dollar for dollar match is an 100% return on your money "before" any investment choice is made. Let's say you make 5% that year in your 401k. The employer match and earnings generate at least a 105% return (or 110% return, because the 100% match ears 5% too).

When you withdraw from your 401k, it will be taxed at whatever tax bracket you fall into. All of the money is taxable at that rate, but honestly is that tax going to be greater than the match and gains? I think not.

I'm just not following your concept that you've tossed out there. And I just question financial advise that says ignore a 100% match to contributions cause you can do better in a WL. And I love WL as a product and part of a financial plan..... But I would never tell somebody to skip a 100% match. Contribute up to, then decide what to do or where to place remaining funds.

 

[DHK]

The $1 million comparison example is in how the IRS will treat your distributions and how those distributions will affect the taxation of your social security income.

If you want to compare accumulation strategies, we need to look more at investor behavior and what most people are doing with their "accumulated" wealth... and their "transferred wealth".

The Banker's Secret to Permanent Family Wealth

There really is no real comparison.

 

[VolAgent]

The $1 million comparison example is in how the IRS will treat your distributions and how those distributions will affect the taxation of your social security income.

If you want to compare accumulation strategies, we need to look more at investor behavior and what most people are doing with their "accumulated" wealth... and their "transferred wealth".

The Banker's Secret to Permanent Family Wealth

There really is no real comparison.

Sorry, but you have to cut the after-tax account in half. This is assuming the 100% match that you use for the pre-tax account example. Then the numbers get a lot different.

 

[DHK]

Anyone can manipulate any numbers any way they want.

We can "assume" that the after-tax account included a bunch of penny stocks (that are not available in a 401k plan due to fiduciary standards). We can "assume" anything else.

You can cut all the balances in half and ELIMINATE the company match... the principle of how an $80,000 retirement income will be taxed remains the same.

The question ends up being: Where would you rather have the majority of your retirement assets?

 

[LGilmore]

"Let's assume that a plan participant contributes $3,000/year into their 401k.

Company matches the contribution $ for $ and adds an additional $3,000/year to the plan participants 401k.

Total contribution: $6,000 - of which, the participant put in $3,000 of their own money, and the plan contributed a company-tax-deductible contribution of $3,000."

So you've made 100% on your money Before any investment is chosen.


"Fast forward to retirement.
- House is (ideally) paid off, so no mortgage interest deduction.
- No additional qualified plan contributions to reduce current year taxation.
- Children are (ideally) up and grown, so no child tax credits or deductions there"

So, you use the standard deduction, why is this even a statement AS it has nothing to do with the issue?.

"You withdraw the money for income purposes. How much is taxed?"

100% of it

" Well, that depends on many factors."

No, it doesn't. 100% of the money withdrawn from a qualified plan is taxable.
The exception would be if you contributed qualified and non qualified funds in the mix.

" But since you put in 50% of the contribution, and your employer put in the other 50%... would it be safe to say that your employer's contribution would be MOSTLY eaten up in taxes?"

No, not really unless you go into retirement in a 50% tax bracket or greater. You've received a 100% match which earned the same return as your. Your employer contributions really are GAINs you've made by having an account open and contributing to it.

" (Remember, it was deductible to the company at THEIR corporate tax bracketthat made the contribution... now it'll be taxed at your tax bracket when you pull it out. The government gets the money either way, don't they?)"

Always have, yet if you're getting a 100% match that earns returns alongside "your " contributions, how is that a bad thing?

"Wouldn't that mean that your own principal contribution was taken out TAX-FREE, but still subject to be included in your gross taxable income calculation for social security eligibility purposes?"

from a quick google...Withdrawals from 401(k) plans are not considered earned income and do not impact the level of social security payments that you receive.

Contributions to a qualified plan, reduce income as it is taken prior to taxes being applied.... so you're actually gaining the taxable part of the contribution as "todays" income. So uncle sam is giving you money upfront.


So... what "company match" are we talking about here? TANSTAAFL (They're ain't no such thing as a free lunch.)

"If you're going to be in a less than 50% tax bracket in retirement... then I guess it MAY be worth the hassle and having all your distributions subject to taxation during retirement. "

There's a hassle? Really? And isn't everybody already below a 50% tax bracket now? Couldn't you conceivably "adjust" the "income" taken from your 401 to possibly be in just about any tax bracket you wish?

" If you want to plan to be poor in retirement and with plenty of government regulation over YOUR retirement savings, then use a qualified plan and invest in mutual funds in that plan. Now you can add market volatility to your ever changing tax-bracket calculation."

You realize with a stroke of a pen, your entire concept blows up, right? I would NEVER advise anybody of what will and won't be taxable or tax free down the road.

" It may depend on what you feel that government spending is going to be doing to the income taxation brackets, and how you feel about having your social security benefits being taxed. "

Again not a solid argument against contributing to a qualified plan with 100% match.

Sorry, you just don't make logical sense with this argument. I've heard variations of this before, but honestly there really isn't an argument against somebody giving you a 100% return on your money before you decide where it goes.

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"40,000 basis (tax-free) + $40,000 taxable growth (20% cap gains) = $80,000

Of this $80,000, only $40,000 is subject to taxation... at capital gains rates of 20% (or $8,000). You have $72,000 spendable income, and only $40,000 reportable. "

No, no, no.... YOU have already paid taxes on your basis going in. It is not tax free, it is tax first. So the original 40k comes from a larger amount because of taxes paid on that money to create the 40k.

Every dollar here is subject to taxation, some at the beginning and some at the end.

"These are reasons why an overfunded permanent life insurance contract can really make a huge difference in someone's retirement planning. Add to the fact that you can borrow against it with no questions and no limits (except what's available) and tax-free access prior to age 59.5... and you've got a GREAT contract."

100% agreement

"If you have $1 million in a properly designed life insurance contract... and you want to pull out 8% or $80,000...
$0 is subject to income taxation (until you exceed your cost basis in the contract). None of your social security benefits are included in your income taxes. You can qualify for food stamps!"

How much money and how long before you hit one million in cash value in a normal policy with a current dividend schedule? Please base it on standard rate.

Compare it with a qualified mf using the same contribution levels.

 

[DHK]

Benefits Planner: Income Taxes And Your Social Security Benefits

Yes, your payment remains the same. How much of that payment is included in your taxable income?

None of the other things you mention negates the fact that the IRS has a lien upon your retirement savings... and you get to figure out how to minimize your tax liability and maximize your cash flow. Yes, you can pull out less... but if you don't have to, why should you?