401K Question...
 

my employer offers matching funds up to 5 percent of my total income. Should I have them do this with pre-tax money or post-tax money?

Are you sure you understand that correctly? Usually it's something like matching your contributuions up to 5%.

Other than that, I'm not sure I understand your question. Are you asking if they should match your gross or your net? Obviously gross will be a bigger number, so x% will be more.

They'll match your money with post-tax money? If I understand that right, it seems like it'd be nice to have them pay the taxes. In essence, it'd really be more like an 8 percent match.

Yes, they will match my contributions up to 5 percent of my annual income. However, I was curious to find out if there were any tax benefits to having them do this pre or post tax. Forgive me for my ignorance, as this is the first job I've had that doesn't involve getting paid every day, watching TV, and getting people drunk.

This is what I was wondering too. I assumed he meant gross vs. net pay.

Yes.

Then it really has nothing to do with your income. It has to do with your contributions. How much do you contribute to your 401k?

Yes, but my question was referring to the fact that maybe they would take less taxes from my gross income if some of it were placed into a 401K account. My guess would be no, but there was wishful thinking.

Our insurance is taken out pre-tax. It ultimately helps you save money. They deduct the amount of your insurance premium from your gross pay, then figure taxes on the new total.

I would recommend pretax to anyone. I'm just not sure how it would work in this case.

I am skeptical.

Many employers are beginning to offer the Roth 401k where you can choose to contribute after tax money (In my situation it didnt make sense, the deduction now is worth more than tax-free later when I'll probably retire at a lower bracket.) However, my employer and every similar plan I've heard of will have the employer contribute pre-tax money, even if you decide to contribute post-tax for your share.

Maybe your different, anyway it depends on your income and this is a relevant question for your own contributions anyway.

<b>MY OPINION</b> is the following: If you are currently in the 25% bracket, it makes more sense to contribute pre-tax money until you deduct yourself into the 15% bracket, then switch to the post-tax contribution.

If your deep into the 25% bracket or worse, put it all in pre-tax and get the deduction now. If your in the 15% bracket, pay the tax now. If your barely in the 25% bracket, do both, first the pre tax till you knock yourself down a bracket, then post-tax.

Wow, I don't know how you guys keep track of all of this.

Is this what I have to look forward to? If so I need to take a finance class now while I'm still in school :)

Moooo

If you contribute pre-tax, then it is deferred income that will not be taxed this year, and your overall witholding should decrease since your taxable income will decrease.

If you contribute post-tax, its treated as normal pay and will be withheld and taxed this year like normal. If you do both, the portion that goes in pre-tax is not taxable and should reduce the withholding, while the portion thats post-tax is taxable and wont change the withholding.

Well, I'm an Actuary. I dont know what everyone else's excuse is. ;)

Pre-Tax. Lowers your tax bracket at the end of the year.

It becomes a part of life, unfortunately. You're at a stage in life where you're planning for what you want to do and be. Once you get into a career, you start to plan for what you want to do/be able to afford to do once you retire. That, and I'm horrible at saving money. This helps.

All 401k's I've been in are pre-tax and the employers matching is pre-tax.

The last place I worked the people are no longer getting a match from the company, cheap bastards that they are.

Uh oh. Someone made the mistake of picking the wrong user name again ...

The company I work for just got aqcuired by another company. I used to get 25% matched up to 4% of my pay. Now, nothing. I never used it, but we were also able to borrow against our 401k (dad has always told me to NEVER borrow against my retirement). The new company does not give you that option. They do have other options that are good. Or will be once I have kids.

The 401k may not be as great, but our insurance premiums will be going waaay down (like 50%) with better benefits!

The ONLY way I would do post tax is if it means the money isn't taxed when it comes out at your retirement.

You're expecting? CONGRATULATIONS!

HEY! EVERYONE! LUV IS PREGGERS!

Let the rumors begin. :evil:

Let's hope it looks more like me than it does you!

If the rumors are gonna fly, might as well make them REALLY juicy!


ROFL ROFL ROFL

I suggest you contribute the max in your 401K that your budget will allow despite how much the employer contributes. 401K is entirely pre-tax.

Benefits are twofold:

1) It will reduce your taxable income
2) Allows you to save without paying taxes on your earnings (unless you pull out any $ for emergencies.

Many employers are now offering a Roth 401(k) this differs from a traditional 401(k) in that contributions are made after tax making the distributions at retirement tax-free. In a traditional 401(k) contributions are taken before taxes but when you take distributions at retirement they are taxable at your income tax rate.

There is no right answer as to which one is better for a given person's situation because it relies on factors that we don't know. Such as what will the income tax rate be when you retire?? (sounds like you are rather young and there is no telling what the tax rates will be 10 years from now, let alone 30 or 40.) Will the roth always be completely tax-free?

If you are young (under 40) the roth really makes sense because your money is going to double at least twice before you retire. Would you rather pay tax on $100 now, or $400 later? But being that so much is uncertain, I would recommend doing what I do;split it up half and half. And remember just because your employer only matches up to 5% doesn't mean that you can't contribute more. The limit this year is 15k. The more you put in now; the better off you will be for the future.

if you need money, do it the old fashion way...ROB A BANK

Personally I think 401 k's are a terrible investment, the match will be eaten up in fees you will be charged every single year. Save your money and invest it yourself.

Real Estate is the best investment over time-hands down-if you are looking for property-pm me.

wHAT nAME wOULD yOU pREFER?

cHIEFS eXPRESS?

aREA 51?

r8ER_h8ER?

cHIEFS mINOR sATELLITE?

yOU dECIDE.

Any growth is taxed when you take it out.

Your other options are to invest in the market if you feel brave enough to get into that game. Some do well, others bottom out.

A 401k is a retirement account, but it is not one that will keep you from sinking if you don't know how to handle your money.

ROFL Oh, they will.

Umm, no. If it was, no one would ever use it.

The decision on traditional vs Roth is basically a bet on whether your tax rate will be higher or lower when you retire. If you are currently in the 25% marginal rate and retire in the 15 or lower, then the traditional IRA/401k is the smart move, and the Roth would be foolish. IF your currently in the 15 and retire into the 25 (right now thats mostly only older government or auto workers with huge pensions) then the traditional would have been a foolish choice and the Roth would be the smart move. If your tax is the same its a wash and it doesnt matter which way you go.

Now, many people look at this and think "well, OBVIOUSLY I'll retire in a higher bracket." I'm not so sure, especially when you pencil it out.

The amount of income you need to qualify for each bracket increases every year and will continue to do so. If you earn say 50,000 now and plan to earn about that much in taxable money when you retire since you have fewer expenses (kids are gone, home paid for, etc) then your overall tax bill actually decreased because less of your money is taxed with the ratcheting up of the brackets. Finally, even if your in the 25% now and 25% when you retire, the traditional may still be better since after the cutoff point between 15 and 25 increases every year for decades, there's a good chance that less of your money will be in that bracket than now. A lot of people overestimate how much money and taxes they will receive and pay when they retire.

The only way a Roth makes sense is if: 1) You pay next to nothing in taxes now, or 2) Your going to have a HUGE increase in income and/or have generous pension plans supplementing social security and savings when you retire with an income increase far and above the annual increase of the tax brackets, or 3) Youve already contributed as much pre-tax as you can under the law.

Little strategic advice, if your situation is that you have both tax deferred and tax free retirement investments, I would put your riskier investments into the tax-free portion. That way, if you hit the ball out of the park, those gains are tax free while your safer investments with lower gains in the deferred part produce fewer tax liabilities.

You can buy no load index funds with microscopic fees less than half a percent. 5 or 6 index funds to cover all major sectors and you are diversified with hundreds of stocks while paying almost no fees. If someone wants to pay a point or two for an active money manager, some of those guys are smart enough to beat those fees and the index combined.

Real estate returns do not grow to the sky, eventually the economic conditions of the country as well as supply and demand will hammer you as much as everyone else, though the capital gain exemption is nice.

Everyone has to live somewhere, but outside of personal residence, these days it is getting very hard to find real estate that will bring in enough rent to beat the returns from CD's, assuming its not just a wash or losing money. If your counting on appreciation, youll eventually get some, but how much? Nothing is guaranteed here as anyone from the coasts are now finding out. I'd prefer to be diversified into a market that has historically returned 8-10% over the long haul.

That's ridiculous. You must be in the worst 401k program in the universe if you're paying so many fees that the match is negated. 100% match of 5% is a lot of free money before the money even gets put to work through investments.

401ks are great investments for the average Joe. For starters, your contribution gets taken before you ever see the check, eliminating the discipline hurdle that most people can't get over. Second, most are run through comapnies that are experts at picking funds, eliminating the stock market ignorance that the average person faces.

As for real estate, sure it's a great investment if you have a pile of cash sitting around. But taking $50 per week from your paycheck is going to take a hella long time to get enough to invest in real estate. Time that your money could have spent earning more.

Telling a young person that doesn't even understand a 401k to invest in real estate instead might be the worst advice ever given on this website.

This is a great post. My dad is a real-estate proponent... The biggest gain to real-estate is that there's only so much of it. Plus, its tangible. I wouldn't buy real estate to never use or see. If you're gonna rent it out, use it as a vacation property, or something of the like, its really a great thing. Its a FAIRLY low risk investment that has adequate returns and the potential to be a LOT of fun.

Moooo

What I like about my 401k is that I basically just have to tell them how aggressive I want to be. I currently have 25% in a lower yield (security blanket), and I'm very aggressive with the other 75%.

[QUOTE=Halfcan]Personally I think 401 k's are a terrible investment, the match will be eaten up in fees you will be charged every single year. Save your money and invest it yourself.

QUOTE]

Who told you that fees will eat up your investment? You were totally given bad information. They are all different. Mine costs me less very, very, little and that is only by my choice.

You are telling someone something that is absolutely not true.

I can see it now, aggressive luv talking to her people at work... :)

luv: GRRRR!!! PUT 75% IN A HIGH-YIELD!!! DAMN THE SAFETY NETS!

An aggressive luv... something like this? :#

Moooo

You might want to put a link up on that. Every 401 I've been tells you up front that uncle sam is going to get the taxes when you take the money out of the account. Any interest earned is on non taxed funds therefore taxable.

ROFL

Yep. That's me, alright. To a tee.

:)

I didn't think it was taxable unless you take it out early...

But I'm really clueless and only know what my grandpa tells me about his :)

Moooo

Now that I think about it, if you work for a very small employer with only a few employees and they put in a 401k plan, the custodian may demand that you only choose funds with higher fees, since your company isnt giving them enough money for it to be worth it otherwise.

I do know that there are a few small employers out there where the only choices the employees have all have these obscene front-end loads, in which case they are stuck with it and need to figure out if its worth it to participate beyond the match. (If not, I'd still do self-directed IRA's on your own where you do have the ability to choose good funds.)

For the vast majority of people in 401k plans, there are several choices which have reasonably low fees.

If you put it in pre-tax, then you will pay taxes on it when you take it out. Uncle Sam always gets his share. Don't think he'll overlook that. Along with taxes, you pay penalties for taking it out if you take it out early.

This is what I responded to:

shortbuskid referred to post tax money, which means Roth IRA's or Roth 401k's. A post-tax retirement plan is tax-free when you take the money out, assuming no penalty for early withdrawal, etc

Ohhhhhh! I was thinking of penalties. Cause he would always talk about how he could only get so much until he was something like 75 then he got to have it all...

Boy I'm learnng all sorts of stuff. I'm gonna have to reread all of this!

Moooo

401k's through TRP are only pre-tax as are many others. I had post tax money in one on a catchup and when I changed jobs the post tax money came back to me and I was informed that only pre-tax monies could be invested.

Now I'll confuse you even more. Your grandpa was talking about minimum required distributions. When your really old and crusty (somewhere in the 70's, dont remember) and you still have money, the government gets impatient and requires that you start withdrawing a minimum amount of money every year which is based on your life expectancy in an effort to spend that puppy down and give uncle sam his deferred money before you die.

If an older person with a big IRA or 401k fails to take the minimum required distribution out, there's a mega-nasty penalty that the IRS whacks them with.

Knowing us, I'm sure everyone on this board will probably be dead before they have to worry about it. ;)

k, then shortbuskid may have been confused, because Roth 401k's do exist, though they are so new that many employers do not yet offer them.

The point I was making is that if you contribute to a Roth 401k or Roth IRA, you pay tax now and pay nothing when you retire unless you take money out early.

To help you better I want to explain two things off the bat. One I have a B.A. in accounting so I know a little something about this and two I do all of our retirement benefits for the State so I deal with this daily. If you are investing in a 401k it is ALWAYS pre-tax. That is how the IRS defines it in Section 401 of the tax laws. Now in the last year Congress has approved the use of a Roth 401k which works the same as the 401k EXCEPT your contributions are taxed first. That way when you do retire and make withdrawals (which on a Roth of any type, whether 401k or a regular Roth) you do not pay taxes. The only benefit to the Roth IRA or Roth 401k, besides having tax free withdrawals, you also do not have a minimum you must withdrawal yearly. A 401k has a certain amount you must take out yearly when you reach a certain age (70 1/2). Another factor is your income. To participate in the Roth 401k and Roth IRA there are income limits. Those limits have been increased but if you earn six figures, you more than likely make too much for the Roth. In a regular 401k you can contribute up to 14k a year and your employer can match up to 14k. I have never seen a 100% match but that doesn't mean it doesn't exist. So to take advantage of the free money your employer is giving you you should at least invest what they will match at the very least and never, ever, ever until you retire touch it. Now every financial situation is different and you should always consult with a pro for the best advice. Their is way too much for me to put in this post before you stop reading (if you already haven't) so PM and I would be more than glad to explain more or tell you better options.

This sounds like a good idea... But it all will depend on the tax rates at the times of deposit and withdrawl (I don't know if that's what you call it). It would be nice cause you'd have a better idea of what you really have saved up.

I wanna know who this Roth guy is, and how he got this named after him...

Moooo

ChiefsfaninPA, your post is pretty good and is 100% consistent with how I understand tax law.

To make things even more confusing, our greedy cash-starved government has passed a law which will allow anyone to do Roth conversions in 2010 (I think thats the year), regardless of income.

The only people who should be making these conversions and contributions are those who already qualify to do so, and even then a lot of those people probably shouldnt. If someone has a huge IRA worth several hundred thousand, makes over 150,000 per year, and decides to convert it to a Roth, then that person is an idiot, with a few rare obscure exceptions for estate planning strategy for heirs, and that would only apply to millionaires.

The government is counting on a few stupid people voluntarily accelerating a 35% tax hit now, and I'm sure theyll get plenty.

Whatever you do, at least contribute what the company will match. There are some people where I work that think 401k's are stupid so they do not take part. They are totally giving up the matching funds! Where are you going to be able to make that???

I guess they need that extra $100 to make the monthly payment on the new Mustang they can "afford" because the payments are only $600. (with 10% financing amortised over 72 months)

In 2010 there are going to be a lot of smart rich people making this conversion on untaxed money (old 401ks, 403b, 457b and traditional IRA's)to the Roth and NEVER EVER pay any taxes on this money. I have a traditional with some coin in them that I am going to convert myself for this reason. If people really understood money, they would be shocked at the way the tax laws and savings accounts and savings rates are set up. Like for instance most people invest in stocks or mutual funds. But the elite invest in hybrid mutual funds which almost guarantee a return on their money and government bonds at a huge discount. And it is all legal and written in the tax law.

Those Mustangs ARE nice, though... :)

Moooo

Are you a CPA? You said you have a degree and you seem very knowledgeable...

Do you cover this stuff in finance or accounting?

Moooo

Chiefs Minor Satellite is already taken. It's the unfortunate product of the last person that tried to sign up as chiefsplanet. I'm hoping Bob Dole takes a peek in here. I can't wait to see what he comes up with.

PS - Your cap lock is installed backwards.

I didn't learn anything about this in accounting, but I didn't take it in college either. I know that CPA's have to be aware of the tax side of things. Otherwise, my guess would be finance.

No I am not a CPA, that shit is real boring. I work for PA's Employee Retirement Fund. I have a degree in accounting with a minor in economics, but I am currently taking classes to get my advanced degree in economics. I love the economy and money. I have been studying this stuff since I was like 12 (I am now 25). And yes, if you take a basic finance course they should cover all of these type of accounts and how they work. Also a tax class wouldn't hurt either. Taxes are not hard. Just complicated looking through all of the loopholes that you can use legally.

So I'm a little confused, are companies not allowed to match on the Roth IRAs?

I say this because people are making it sound like this is the case.

Also, I don't know why you would, but in 2010, if someone was so inclined could they keep their old 401k and just start putting their new money in a new Roth 401k? I'm pretty sure you can have only one...

Boy this stuff is fun to learn about! :) I"m such a nerd!

Moooo

It was dreamed up by the late Senator William Roth (R-DE). I dont think he didnt call it a Roth 401k, but when it started, I guess the financial planners needed a convenient name for it to describe how it works to their clients.

And tax laws are constantly changing. Gotta be on top of your game.

They have a class at my college called something to the effect of "Finance for the personal investor" I think that would be what I took if I did. I think they hav ea "Personal Accounting" course too...

Moooo

ok, we've got a disconnect here. If you have an IRA and you make a Roth conversion, you pay tax at ordinary income rates during the year of the conversion.

If you pay no taxes or are in a low 10% or 15% bracket, this would make sense untill you run into the higher marginal brackets, or if you are retired and have only passive income this would be brilliant strategy for SOME of the money each year, but not all of it in one year.

My point is if you are in the highest of high income tax brackets now, and you have a huge IRA, why would you ever convert it? Your better off letting your kids inherit at a tax rate thats likely lower. If your Bill Gates and your children grandchildren and great-grandchildren will always be wealthy, then sure what the heck since the tax will never go away, but thats not most people.

Personal Accounting will be more about balance sheets and budgeting.

As long as you plan to not use it until you retire then definitely pre tax money.

That is sort of true. When they change a tax law all they do is take the old law and void it with the new one. So the whole tax structure doesn't change just that section of law. And the IRS is nice enough to send us bulletins and reminders everytime they change them. They also send us case laws after people challenge the law so we can see the interpretation on what the law really means. A lot of tax preparers and CPA's BS like the stuff is hard. It really isn't. Now business taxes are complicated but this has nothing to do with tax laws. It mostly has to do with the way the business is structured and the deductions or writeoffs for the year.

IRA = you and the mutual fund company or bank, no employer involved.

IRA rollover = you quit your job and want to roll your 401k into your own IRA where you control it more directly.

Roth IRA conversion = you have an IRA and want to pay tax on some of it now to transform a portion into a tax-free Roth IRA

401k = employer

403b = government, city, something like that.

If its a 401k, the employer can match a portion of your contribution if they want, but its not required. They do it mainly to convince you that they are a cool place to work for instead of the competition.

True, but in 2010 the tax rate on a conversion is 0%. That is the same year there is not death tax. Congress is sneaky and snuck this provision into the extension of the Tax Act. So if you have a traditional and want to convert it for the whole year the conversion rate is 0%. But only for that year.

Thank you, sir...

Moooo

Actually I think he means whether his money is taxed before his contribution or not. If it is not then he derives deferred tax benefits but would have to pay severe penalties along with the taxes if he withdrew it before he retired. At least that is the standard options. I agree that they are only likely to match 5% of total pre or post tax.

Another thing that throws more confusion into the matter is when you choose which investment vehicle to use you are basically guessing what your future tax rate will be. That is always hard to calculate because the tax laws and tax rates change so much that you really can't forcast what to expect when you will need this money. That is why you should always invest pretax to cut your tax rate right now. If you are in a postion to also invest additionally, then use a Roth as well because never paying taxes on the principle and interest is too good to pass up.

I have seen so many people quit (or get fired) who decide to take their 401k out to live off of until they can find another job. It floors me that people don't realize that it's their future that they are choosing to live on for now. If I were to ever get fired (I'd never quit without having another job and giving notice), then I would work fast food or telemarketing if I had to in order not to take out of my retirement. Roll that thing over into an IRA.

This stuff is kind of tough to absorb for someone who didn't know anything about it before tonight...

I'm gonna cruise the internet so I can figure this out, then come back and see if I can't learn even more...

Moooo

Can you roll at a lower penalty rate than the 35% or whatever?

Moooo

Ah, thats where your going. A Roth conversion is ordinary income, not long-term capital gains.

The rates for long-term capital gains will be reduced to 0% for lower wage earners and remain at 15% for wealthier people, but that has nothing to do with ordinary income tax rates. The only change in the tax attributable to the conversion is they will let you pay it out over 2 years instead of 1 year, which I am not impressed with. Too much money in taxes foolishly paid spread out over 2 years instead of 1 year is still too much money paid in taxes.

Of those people who currently cant do a Roth conversion, virtually none of them should do it even if they could.

Hmmm...

I'll wait for an answer to that question myself, too.

:D

I'm off to About.com to see if I can't learn more...

Moooo

Theres no penalty for a rollover, in fact it would be wise to do so since your choices are restricted in a 401k, and you have more freedom in an IRA.

If you decide to take some of that money yourself instead of rolling it over, your hammered with penalties and taxes.

It sounds like the IRA and the 401/403 (whichever you can get) are like brothers. They kinda do the same thing but come from different sources.

This is fun. Jeez I'm a nerd! :)

Moooo

Without reading all of the posts, I'll offer some comments since this is my line of work. I'm a Compliance Officer with a broker-dealer and I deal with this every day.

First, whether in a traditional 401k or IRA...realize that you are in a long-term investment geared for retirement....ie. don't think about touching the money...or else it would be pretty useless to invest in the first place if you are just going to take out large chunks and get whacked with the penalty for early withdrawal. This is the biggest way people mis-manage their retirement money...It flat defeats the purpose....You want it to continue to grow tax-free.

Second, as was mentioned by someone else....traditional 401k= pre-tax....the brand new Roth 401k (following the Roth IRA) = after tax....the Roth 401k also has a sunset for federal tax provisions after 2010, so there is a chance that current federal tax treatment may not be renewed by congress. It's up to the consumer but advantages of the Roth is that you are taxed upfront but can withdraw your contributed money at any time..at retirement you withdraw everything tax-free provided you have been in the plan for at least 5 years and are 59 1/2. In a pre-tax plan (traditional 401k) your compounded tax money can help to significantly boost your bottom line at your retirement. That's money continuing to grow that would have otherwise gone to uncle sam early.

Plenty of companies do offer 100% match up to a specified % (4% in your case)and it is wise to take advantage. Free money for you....when/if you change jobs, you can roll over your 401k to another plan, an annuity or an IRA.

That's what I was thinking. You're rolling over, you're not taking it out. And then, once you get another job, you can roll that money over into that 401k plan, correct?