401K Question...

[58-4ever]

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?

[Moooo]

Originally Posted by ChiefsfaninPA

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.

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

[alnorth]

Originally Posted by ChiefsfaninPA

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.

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.

[luv]

Originally Posted by Moooo

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

Personal Accounting will be more about balance sheets and budgeting.

[Logical]

Originally Posted by 58-4ever

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?

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

[ChiefsfaninPA]

Originally Posted by luv

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

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.

[alnorth]

Originally Posted by Moooo

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

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.

[ChiefsfaninPA]

Originally Posted by alnorth

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.

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.

[Moooo]

Originally Posted by alnorth

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

IRA converion = 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 stax 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.

Thank you, sir...

Moooo

[Logical]

Originally Posted by jspchief

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.

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.

[ChiefsfaninPA]

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.

[luv]

Originally Posted by alnorth

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.

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.

[Moooo]

Originally Posted by ChiefsfaninPA

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.

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

[Moooo]

Originally Posted by luv

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.

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

Moooo

[alnorth]

Originally Posted by ChiefsfaninPA

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.

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.

[luv]

Originally Posted by Moooo

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

Moooo

Hmmm...

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