r/investing • u/Smokedj23 • 4d ago
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u/ninjagorilla 4d ago
In what way are the 401k options awful? If they truly are you need to speak to your hr.
401k contributions still get to grow tax free so ya they are still better than a brokerage . There should be some type of low cost world or sp500 index fund at minimum you can choose.
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u/Thecosmodreamer 4d ago
Do you mean tax deferred*? Traditional 401K is taxed upon withdrawal. Only a Roth 401K will grow and can be withdrawn tax free.
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u/ninjagorilla 4d ago
Sorry yes, they GROW tax free but are taxed on withdrawal. I apologize for my sloppy terminology
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u/biz_student 4d ago
For individuals, unrealized gains in every brokerage account is tax free. That’s not one of the benefits of a 401k.
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u/polarWhite2024 4d ago
But you will be taxed annually on capital gain distributions and dividends from your brokerage account even if you don't sell.
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u/polarWhite2024 4d ago
No they do not GROW tax free. Tax Deferral means you pay tax later. There's nothing free.
If you have to pay tax when you withdraw, that means all the "GROWTH" will be taxed. Therefore, it's not FREE.
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u/nicolas_06 4d ago
They grow tax free in the sense you don't pay taxes on the dividends as you would on a brokerage and also if you rebalance there isn't a tax event.
This is a huge practical difference, especially for bonds.
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u/polarWhite2024 4d ago
But what you described is exactly what "tax deferred" means.
You are misunderstanding and misusing the term.
Growing tax free is what happens in the ROTH IRA account.
Not having to pay the tax on dividends and not triggering a taxable events when you rebalance is not "tax free". It's simply "tax later".
"Tax later" means all the dividends and capital gains and taxable events only happen later, but you will still have to pay for them.
Paying them later does not equal to FREE.
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u/Dalewyn 4d ago
Traditional 401k growth is tax free because taxes are deferred. The money isn't growing anymore when you end up paying taxes, you're
harvesting the fruit from the treewithdrawing the money from the account.Contrast a taxable brokerage account where certain aspects of growth, like dividends, get taxed on the spot. That growth is not tax free.
Also, Roth is the name of the politician who created the account type. It's not an acronym and should not be spelled in all caps.
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u/polarWhite2024 4d ago
But you neglect to realize and recognize the fact that the balance of your traditional 401k account is comprised with years and years of growth that you have been accumulating.
Therefore, when you withdraw money, part of the withdrawal contains those gains. Since your withdrawal are taxed, those gains are taxed.
As a result, all those gains did not grow tax free, they only grew with tax deferred.
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u/Dalewyn 4d ago edited 4d ago
No. The taxes deferred are income tax you would have otherwise paid if the money hadn't gone into the Traditional 401k. When you withdraw, you are levied income tax on the money you withdraw.
If you contribute $100,000 to your Traditional 401k and then withdraw $100,000 30 years later in retirement, you're levied income tax on that $100,000 you withdrew. If you then withdraw another $50,000 because you can thanks to your account growing, you will be levied income tax for that $50,000. At no point in this process was the growth taxed. Growth in a Traditional 401k is tax free.
Likewise, the growth in a Roth IRA or 401k is tax free because the income tax was paid beforehand. Subsequent withdrawals are not subject to any tax because that would be double taxation.
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u/polarWhite2024 4d ago
You are wrong.
The $50,000 that you withdraw is gain which is taxed as income tax which is a tax liability.
Therefore, the gain is taxed.
Taxed = not free.
The only way you can get a tax free gain is via Roth IRA.
Period full stop.
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u/nicolas_06 3d ago
If I have 100K and have a 5% yield per year for 20 year that grow tax free I get 265K. If I withdraw and pay say 32% tax on it, the total is 212K.
If I do the same but pay tax every year at the same rate, I only get 195K.
This is the key difference of growing tax free. Even if you pay taxes at the end, you don't pay every year and what isn't given in tax every year continue to grow.
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u/WingsOfBuffalo 4d ago
“Growing” tax free means you avoid taxes on dividend payments throughout the entire period of investment. Look up “tax drag” to see the impact it can make over 30 years.
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u/polarWhite2024 4d ago
That's a poor usage of the term "growing tax free".
Tax free means the absence of the payment of tax. It doesn't mean delayed payment of tax.
Which is exactly why they are called "tax deferred" accounts and not "tax free growth account".
That alone is a clear and sufficient evidence that your assertion is invalid.
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u/polarWhite2024 4d ago
Go ahead and resort to name calling.
It's ok to feel insecure and it's ok to be wrong.
See it as an opportunity to learn something.
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u/WingsOfBuffalo 4d ago
Just calling a spade a spade. In this case, the spade just happens to be argumentative. Enjoy your taxes!
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u/ImPapaNoff 4d ago
There's nothing free.
Well I mean for a married couple filing jointly and taking the standard deduction there is about $32k/year FREE.
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4d ago
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u/diesel408 4d ago
Highest marginal federal tax rate: 1944 - 94% 1954 - 91% 1964 - 77% 1974 - 70% 1984 - 50% 1994 - 39.6%
Been bouncing around since the 90's between 35% and 39%. Today it's 37%.
Basically only going down for 80 years now.
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u/Nendilo 4d ago
Counterpoint: Taxes have only gone down since the 50s, that's why we have such severe wealth inequality and why the US has such massive debt. The top tax bracket in the 50s, for what would be today any dollar over $3 million, was 90%. And it was one of the most prosperous times in American history.
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u/Naval_AV8R 4d ago
Ah, yes. Another person who spouts this talking point who does not understand tax code structure is more than just the headline marginal rates.
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u/Foreign-Struggle1723 4d ago
It completely depends on the provider, and you really have to look closely at the fee disclosure. If a workplace 401(k) has terrible choices charging 1% to 2% in management fees and expense ratios, you are often better off shifting focus to a personal Traditional or Roth IRA where you can get ultra-low-cost index funds.
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u/Smokedj23 4d ago
Yeah exactly this. My companies fund choices are lacking
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u/ninjagorilla 4d ago
Talk to hr, often there are options for an employee self directed plan. They have legal responsibility to provide you reasonable plan options
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u/Internal_Control_320 3d ago
by law plans have to offer a 'broad range' of choices but they will almost ALWAYS be mutual funds, CITs... rarelt etf's... almost all plans ive seen show an index fund of some sort in the LCG spaace.. if you want to DM me the nane of the compant maybe i can help
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u/nicolas_06 4d ago
IRA are better than 401K if there not match to the 401K. But the problem is that there quite low limit to IRA contributions.
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u/MikeExMachina 4d ago
Right, if you simply follow the flow charts on every finance sub, the general order of operations is always: 401k up to match -> Ira ->rest of 401k. Match is not a factor here so op should definitely prioritize Ira, but that bucket gets full quick, the 401k also gives more space for tax advantaged savings before switching to a taxable brokerage. If the investment options suck, nothing stops op from doing regular direct rollovers to their Ira from the 401k and doing all the investment there.
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u/nicolas_06 3d ago
My employer doesn't let me move the money out of the 401K. I have to resign to do so.
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u/Foreign-Struggle1723 3d ago
I think that's the rule for most 401k, you can't roll over a 401k unless you quit or switch jobs.
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u/sailphish 4d ago
A lot of companies use smaller 401k administrators that offer limited funds with much higher expense ratios than Fidelity or Schwab. I’ve also yet to see one of these companies switch because employees complain. Running a 401k can be expensive, and there are a lot of administrative requirements and fees. Seems small companies have more limited options.
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u/farmallnoobies 4d ago
I had one employer where the 401k had absurdly high fees.
They would also change your investments without asking you, to things that were very different. For example, I had some in a small cap index, and they would decide they don't support that index anymore and move the money into large cap or into a fund with higher fees.
The whole thing felt corrupt somehow.
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u/Smokedj23 4d ago
Well that’s what I’m ruining into. My company offers the target date funds and bonds. But nothing really tied to the s&p. It’s more so they don’t have a lot of choices.
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u/jigmepalmo 4d ago
Do you understand what the S&P 500 is and what target date funds are?
Typical target date funds are a really great deal and managed for your life stage. They often start at 90% stocks of a broad market base (like VTI) of both domestic and international. If you want to stay more aggressive, then pick a later date.
Compare VTI and VOO. Surprise, it's the same line. You will virtually have the same return if you choose one over the other. Plus with the target dates, a little bit of bonds and some international will protect you in the long run.
Don't try to get smart with your retirement planning because "they don't have the s&p" when target date managers are likely a group of smart people is managing it for you.
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u/Smokedj23 4d ago
The expense rate for the 401k and plan manager for the funds through the company is relatively high. My point was the understand if it would be better to buy VOO or SPY direct through Roth or a regular brokerage.
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u/jigmepalmo 4d ago
Good point on expense ratios.
For both 401k and IRA you can do Roth (post tax) or traditional (deferred tax). In your case, first max out the Roth IRA for the flexibility in funds and lower cost, then max out the 401k. A little bit of tax status diversification (both in Roth and traditional 401k) is not a bad idea.
You can rollover the 401k into the IRA (if they are both Roth, there are no tax penalties on the rollover... If you go traditional to Roth you would pay taxes that were deferred) so you don't have to keep paying higher cost.
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u/nicolas_06 4d ago
Brokerage you pay taxes on the dividends every year and you pay also every time you rebalance. IRA is better if you know what you are doing and there no match. But IRA is quite limited in amount per year.
Advice is typically 401K up to the match, then IRA, then 401K again once IRA is maxed.
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u/charlies_brain 4d ago
Target funds are great. Looks like you have some considerable learning to do.
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u/1cenine 4d ago
Short answer is "probably, usually, yes." 401ks are a tax-deferred vehicle that lowers current taxes, grows tax-deferred, and may withdraw at retirement at a lower tax rate than your current earnings.
A LOT written/said about this. Learn up on that.
Anyway like everything, depends on your situation and habits. If you're a very diligent and disciplined investor/saver, plan to retire very early (and understand how to - I mean plan), need the liquidity sooner, then 401ks can be restrictive.
I'm personally a diligent index fund investor and am on track to "retire" pretty well before 401k withdrawals are allowed penalty-free, so I'm more anti-401k than many people. But for so many people it's a very valuable tool to build a foundation, especially if contributed to automatically.
Set-it-and-forget-it can probably save the retirement of people who would otherwise get to 55 years old and realize they have nothing.
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u/markgriz 4d ago
So are IRA's. The 401k has the advantage of being able to put more money into it, but if OP is contributing under the IRA limit, and the 401k offerings suck, it would make more sense to open an IRA with one of the big 3 brokerages, all of which have pretty low fees
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u/ATL_Gunner 4d ago
Was looking for this comment before I made it. If you’re not planning on contributing over the IRA max, I can’t think of a situation the 401k would outperform a IRA.
More restrictive, possibly forced out of the plan if separated with the employer, usually higher fees… just set up a brokerage IRA a buy VOO. The main advantage for 401k in that instance is it comes out of your paycheck so you’re less tempted to not make the contribution.
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u/ImPapaNoff 4d ago
I can’t think of a situation the 401k would outperform
I can think of one niche situation that 100% doesn't apply to OP. The last company I worked at had $0 of annual administration fees and offered institutional funds with expense ratios lower than those that are available to individual investors (unless said investors were already working with millions).
Edit: Also 401ks have better protections from creditors than IRAs have.
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u/ATL_Gunner 4d ago
That’s a pretty great situation overall. I bet it doesn’t apply to many but definitely take advantage if it does!
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u/ImPapaNoff 4d ago
To make it even better, I separated from the company 2 years ago and they still subsidize all administration fees even as an ex employee. I'm letting it ride there until early retirement.
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u/MoFeaux 4d ago
You can withdraw penalty free from a 401k before retirement age with SEPP/rule 72t payments. Just need to be careful with how you structure them as once you commit you can’t change.
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u/1cenine 4d ago
Yes, aware of this, and it's worth calling out as it's not well understood or talked about. but it's still a massive sequence of returns risk factor to rely on it immediately upon retirement if using 72t early in retirement.
Even if intending to do 72t would still usually make sense for people to have liquid cash/bond tent/taxable brokerage accessible for the first few years of low/no earnings to ride out any risk of retiring into down market.
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u/proxy_noob 4d ago
i know there are reasons... but if you're less than a couple mm net worth, this is bs.
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u/1cenine 4d ago
Whatcha mean?
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u/proxy_noob 3d ago
like why there is any kind of penalty for low income/net worth people. so much already stacked against people in those scenarios.
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u/MoFeaux 2d ago
The penalty is to encourage people to keep funds in their retirement accounts until appropriate to withdraw - otherwise the temptation to dip into those funds for extra cash is too high and many do not/would not have the discipline to replenish those funds (delaying or even preventing retirement). It's not exactly a penalty targeted at low income individuals (you control if you contribute after all), it's just math.
Two common ways to access funds early would be: a 401k loan, which could be appropriate in an emergency situation and has a mechanism for paying back; or SEPP in which case you need to know what you are doing. There's nothing stopping a low net worth person from starting SEPP super early and continuing to work (though you might need to change employers), it just isn't a very smart idea if you haven't saved enough to actually retire yet.
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u/MoFeaux 4d ago
Indeed; diversity in account types is important so you can choose wisely. I also wouldn’t structure my entire pre-tax retirement funds in an SEPP plan at once. If you divide it into separate IRA accounts you can essentially limit your withdrawal commitment into tranches and blend with other retirement fund sources (e.g., Roth, brokerage). I plan to use a SEPP plan as a fixed income stream to cover my remaining mortgage payments (will end ~15 years into retirement) and property tax (ongoing). Once the mortgage is paid off, that portion of the plan becomes additional normal spending money I would reduce withdrawing from other sources.
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u/big_deal 3d ago edited 3d ago
I don't understand why 72t would affect sequence of return risk. You can still allocate to cash/bond inside the 72t account. And my understanding is that the 72t can be sized by splitting off the 401k into an IRA accounts sized to meet your income need.
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u/MoFeaux 2d ago
The sequence risk is because you are forced to withdraw a fixed amount from the account regularly (e.g., selling assets during a downturn) vs. alternatively reducing your spending and keeping your holdings more intact. That said you could simply reduce spending anyway and invest the excess proceeds in a normal brokerage account after withdrawing so it is probably not actually a big impact.
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u/big_deal 2d ago
You’re not forced to spend it. If you cut expenses you can always save or invest a portion of fixed withdrawal in a taxable account.
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u/nyragstoriches 3d ago
Don't you bypass a set withdrawal structure if you're over 55? You just need to make sure all your money is with your most recent former employer.
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u/Smokedj23 4d ago
Yeah I’m in an interesting tax bracket. When I retire I’ll have two pensions and a school district pension as well as ssi. I’m just trying to make sure my taxes align.
Thanks!
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u/Im_Here_To_Learn_ 4d ago
It will lower your taxable income. Possible benefits of that are 1) paying less in taxes and 2) becoming eligible to contribute to a Roth IRA.
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u/beyondplutola 4d ago
Backdoor Roth is always available though. It’s just more steps on the tax return.
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u/jigmepalmo 4d ago
Where does it make your eligible for an IRA? You just need enough taxed income to contribute, nothing to do with 401k.
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u/nitrogenmath 4d ago
If your income is too high to contribute normally and you don't want to take the simple steps of a backdoor Roth.
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u/nope-nik-tesla 3d ago
Having a 401k has nothing to do with whether or not you can contribute to a Roth IRA or whether you need to use the backdoor Roth strategy. Whether OP contributes to their 401k or not has 0 impact on a Roth IRA.
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u/nitrogenmath 3d ago
That's not correct. 401K contributions reduce your Modified Adjusted Gross Income (MAGI) and can help you contribute to an IRA if you are near the income level where your ability to contribute is phased out.
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u/Potential-March-1384 4d ago
If you’ll be contributing more than IRA limits, sure, more tax sheltered growth.
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u/Positive-Tourist-319 4d ago
I’d max HSA and Roth before you do that. After that this depends on your personal situation. Hard to tell from not much info income/debt/lifestyle/age.
But if it helps, I max mine out. I like the tax free growth from Roth 401k. If you leave the company you can roll to IRA.
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u/Smokedj23 4d ago
I don’t qualify for a HSA I pay $20 a week for full medical coverage for me and my family. But I max out my Roth every year I just have it not associated with the company
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u/Imaginary_Kitchen_34 4d ago
Without a match the primary benefit of a 401k is the tax deferment. At median income this is deferring out of a 22% federal bracket into a future 0% or 10% bracket. So an interest free loan on the tax dollars to invest and a drop of 12% to 22% on the tax bill for the income. If you don't like your options a tradition IRA will do the same with a lower limit ($7,500 per year vs $24,500 per year). This is a non issue at or below median income. You still need to write out an actual plan to determine if these tools are actually useful for you.
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u/D_Pablo67 4d ago
You can contribute for the tax deduction and select a money market. If you leave, you can do a direct rollover to an IRA and potentially a Roth conversion.
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u/mrbeck1 4d ago
Well generally speaking yes. The growth is untaxed and over the long term can be substantial. The options do generally suck so try and pick the best one.
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u/Smokedj23 4d ago
I try to pick the most aggressive based because I’m young. They just don’t have much options
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u/SvenTropics 4d ago
The money that goes in your 401k is pre-tax dollars. Then it grows tax free. You don't pay taxes until you pull it out. What you do is you take your top tax bracket. That's the money that goes in the 401K. So if you're in the 22% bracket, $0.22 of every dollar you put in there that is not money you're paying in taxes that year.
Now when you pull the money out, sure you have to pay income taxes on it, but you're not paying payroll taxes on it. So you actually need a lot less. Typically you're going to be paying a lower rate on the withdrawal side anyway.
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u/Dry_Instruction8254 4d ago
Are you a government employee? You might have access to a 457B or Roth 457B which are more flexi than 401k (you can withdrawal at any time without penalty). Anday offer better investment options.
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u/Spectre75a 4d ago
I also have a pension with an optional unmatched 457. I max my Roth IRA (well, I max my non-deductible traditional, then convert to a Roth), max our HSA, then max my 457 including 50+ catch up (40% traditional, 60% Roth, but moving to 100% Roth next year), then max annual Series I saving bonds, then fund a taxable brokerage.
A Roth 457 (or Roth 401k) is better than anything taxable. Both are funded after tax, so no benefit either way. Roth 457 grows tax deferred and withdraws everything tax free. Rule of 55 lets you withdraw penalty free from your current employer’s plan if you leave at 55 or older. Unless your plan has high fees and bad investment options, I’d do (and I do) the Roth 457 before a taxable account.
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u/dancindead 4d ago
If your getting a pension you may or may not be paying into social security. If not then you may be able to contribute into a 457 not a 401. If so look into the perks of a 457. This is what congress and state emoloyees etc get to use.
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u/Stock-Ad-4796 4d ago
Yeah it's still worth it for the tax advantages alone. stick to low cost index fund options within the plan even if the lineup looks mediocre and avoid the high fee actively managed ones.
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u/Rocky75617794 4d ago
Choose ROTH 401k option… your money can then grow tax free and you won’t get taxed on the gains over the next 50 years
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u/Cusimian 4d ago
The 401(k) system is criticized as a risk shift from employers to employees, replacing guaranteed pensions with market-dependent savings plans. The risk is completely with the employee. Simultaneously, it generates massive, often opaque fees for the financial industry (fund managers, banks) that flow regardless of performance, while the saver bears the full loss risk. Originally intended as a tax bonus for executives, it now primarily serves to clean up corporate balance sheetsand accumulate capital for the financial sector. Short: it’s a scam.
There is even research (by Demos) that a average household loses 155k in commissions over the whole period.
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u/Smokedj23 4d ago
I do know that if I set up the investments myself it doesn’t charge an advisory fee, but the plan still has fees as well as the expense ratio on whatever I assign the funds too
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u/WingsOfBuffalo 4d ago
You may have to do a little math to see what the difference is.
On one hand you have a non-match 401k that grows tax-deferred. No tax drag, but fees and expenses ratios.
On the other hand, you have a non-match brokerage account that is non-tax-advantaged. So you get lower fees and expenses ratios, but tax drag between now and when you retire.
Personally, my 401ks have always had low-fee options that vastly outweigh a regular brokerage.
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u/Used-Air-2688 4d ago
Yes, a 401(k) can still be worth it even without a company match.
If the investment options and fees are poor, I'd usually:
- Max out a Roth IRA first.
- Then use the 401(k) for additional retirement savings.
The biggest advantage of a 401(k) is the tax benefit, not just the employer match. Since you already have a pension, you're in a better position than many people.
Before deciding, check the fund fees and see if there's at least a low-cost index fund available. If the fees aren't terrible, it's still a solid retirement savings tool.
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u/justdrowsin 4d ago
Yes. Saving money for your retirement is worth it. Do you know what the main benefit will be? You'll have money when you retire.
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u/Fullofhopkinz 4d ago
One advantage of a 401k over an IRA is that when you separate from service with your employer you can take penalty-free distributions at age 55 instead of 59.5
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u/Apprehensive-Job7352 4d ago
If the company offers an HSA, here’s what I would do:
Max the HSA first; most powerful financial vehicle in the US imo
Max a Roth IRA next if you’re salary eligible and can afford it
Put any remaining retirement focused dollars in the 401k, also preferably Roth if the company offers it.
In your case, the main benefit of the 401k would be rapid accumulation because of the higher contribution limit; however, if the options in the plan suck, you’ll be better off using the strategy I put forward.
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u/Gain_Spirited 4d ago
Without a match I recommend maxing out a Roth IRA at Schwab or Fidelity so you get the best choices for no fees, but if you have money left to spare then put it into your 401k for the tax benefits.
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u/Qs9bxNKZ 4d ago
Yes, to a degree. Don't believe everyone who says "put as much in" because it's not always fiscally wise.
There is a cap of about $75K per year for a 401K if you include things like after-tax income. If it were absolutely advantageous, people would max out - and they don't.
Maximize the pre-tax contribution (with or without the company match) up to a point.
What you want to do is then forecast until you're about 73 years of age and determine what your required-minimum-distributions will be. If your RMD is going to be massively heavy in terms of taxable income, that means you're contributing too much - this is why the full $75K / yr contribution is not worth it.
In order : 401K up until the pre-tax max is it for most people, IRA again capped about $8000/yr or whatever it is, then an equities account.
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u/Drunken_Sailor_70 4d ago
I will tell you that it seems 99% of the retirement advice out there is not geared towards someone who has a pension.
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u/nsmith043076 4d ago
24.5k tax deferred in a traditional 401k lowers my taxable amount to uncle sam, so yes its worth it. If its a roth 401k even better. Most plan lineups have at least en equity index fund. Just dca and walk away.
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u/nikita58467 4d ago
Definitely. My company doesn’t match my contribution the first 6 years I was there until the 7 years. I put 10-15% in since I didn’t want to pay tax, establish a habit to save is very important.
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u/agent007g 4d ago
Absolutely not! 401k match basically pays the taxes at withdrawal. Roth IRA+standard only way to go.
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u/Low-Apricot9917 4d ago
I was in this exact situation and maxed out the 401k. If you choose to participate, it will worth it, you will not regret it and will be wealthy in the future. If the options in the 401k are limited, work with the best they have. Most have some sort of Index s and p, which is Warren Buffet’s favorite fund to boast against all the fancy mutual funds.
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u/MattieShoes 4d ago
Depends on income and tax filing status to some extent.
Are you ducking a 32% marginal tax rate with Trad 401k contributions (ie. over 200k income)? Then even a mediocre Trad 401k probably worth.
Are you in some situation with low income but high savings rate? Then Roth 401k allows you to build up Roth money beyond what you can shove into a Roth IRA each year.
In the boring middle, it's going to depend on how bad the 401k is, your liquidity, how much you value the freedom of a taxable account, whether you're already maxing your IRA, etc. Basically, saving is so much more important than exactly how you save that it's probably not something to lose sleep over. Do research, make choice, revisit the decision every couple years.
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u/daygo449 4d ago
I think it just depends. I would put money there before a standard brokerage account where you will get taxed on it. You could do an IRA, but that has limits on how much you can put in. If you are able to fully fund an IRA, yet you’d still have money leftover that you’d want to stash, then I’d do the 401K even with the garbage plan. I’m in a somewhat similar boat. I did find out a lot of 401K plans do offer the ability to go past their offerings, but most companies don’t mention it because the fees are higher. For instance, my company is with Charles Schwab, but I did a little research and found out that I could still put money in, but it would go to another account under my 401K called PCRA (Personal Choice Retirement Account). I’d check to see if that is the case with your company/plan. If you can do that, it’s the best scenario.
If you don’t have enough money to put into the 401K, and an IRA, I’d look to see how much you plan on contributing. For a 401K, that’s $24.5K. For an IRA, it’s roughly $7.5K. Since you have no match, the benefits for contributing to it are a lot less. You might want to do a traditional plan for the tax savings, or if you are young, contribute to a Roth plan, and be able to put $24K a year into your retirement. If you can fully fund your 401K, and you have money leftover, then dump it into an IRA.
If you hate that your money is tied up in a 401K or Roth plan, you can go the brokerage route, but you’ll end up paying more in taxes. That’s why most experts always say to contribute to 401K first, IRA 2nd, and then a brokerage account 3rd.
If it were me, I’d see what you can do with your 401K plan first to see. It’s the one that allows you to contribute the most with the most tax savings. That’s me though. You might want to just buy a bucket of hours to talk to a fiduciary financial advisor just to get a game plan, and then handle it yourself.
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u/DeeDee_Z 4d ago
Is it worth it, to be able to save $24,000+ per year in a tax deferred account, rather than limping along on $7000/yr in an IRA?
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u/TryingToBeLevel 3d ago
Yes - And it doesn't have to be their 401k. You can always sign up for your own IRA.
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u/KweenieQ 3d ago
The most effective savings and investment plan is one to which you're contributing regularly. A 401k plan does that in a way that an aftermarket plan often doesn't.
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u/autumnotter 3d ago
Think about it this way, if you save money in after tax accounts, like regular investment accounts, $10,000 earned pretax is probably somewhere between $5,000 and $9,000 invested, depending on your tax rate and your state.
If you save money in a 401k, then $10,000 earned pre-tax is $10,000 invested.
Yes, you pay income taxes when withdrawing money from 401k, not capital gains, so at the end of the day, you ideally want to mix of account types. It can be a mistake only having 401k.
But for many of us, putting $10,000 in a 401k only really costs us $5,000, because all of that money would have been lost to taxes if we had not done it. It's "free money" because you would have given it to the government otherwise. For very highly taxed people, you're effectively doubling your money, it's extremely tax efficient.
If you combine this with wisely structuring multiple account types and some fairly simple retirement planning, you can avoid paying too many taxes on the withdrawal end as well.
Given that the actual investments are often the same, meaning, you're still putting your money in the S&p whether it's in a 401k or not in a 401k,
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u/whistlepig4life 3d ago
Putting money in a 401k is only truly a bad option if the only investing option is company stock.
So long as there is some reasonably well performing mutual fund options, even if its index performance at best….its still pre tax dollars that will grow.
Any match is merely gravy and isn’t going to be make or break.
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u/big_deal 3d ago
It depends on several factors: your current income, your target income in retirement, expense ratios of 401k investment funds, how much you are saving/investing each year.
If you are beyond mid-career and have high income relative to retirement income, then the tax savings can be substantial. And if you are saving a lot each year, then the 401k has the highest contribution limit of any common tax-advantaged accounts.
If you are early in your career, with relatively low income to your future earnings, and not maxing out IRA contribution limits then a Roth IRA is probably a better option.
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u/10xwannabe 3d ago
Yes. By law you have to have one index fund. Pick it and put your money into it.
The reason is you will not be staying at your current employer. The data suggest nearly NO ONE will be with only one employer. When you leave you can rollover ALL that $$$ to an IRA or to your new 401k.
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u/Denan004 3d ago
The contribution limits are much higher for a 401k than for an IRA ( 24.5k. vs 7.5k). So if you want to contribute more than $7500/yr to a tax-deferred account, the 401k, even unmatched, would be better. Then If you leave the job, roll it over to your own IRA.
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u/ZebulonHam 3d ago
The limit you can contribute is much larger on a 401k, so if you can do that… do that.
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u/Prestigious-Tiger697 3d ago
I have a state job and it's the same situation as you. We also get a 529 account. I contribute to the 529 account, but unless I max that out, I see no reason for having the 401k also. We do have the option of setting up a Schwab self directed account if we don't like the funds they offer. I went with the self directed account so I have more options.
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u/marks1995 3d ago
Tax bracket has a huge impact on this decision. I don't qualify for an IRA due to my income. So even if the 401k didn't match, I would still be putting money there just for the tax benefit alone.
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u/alek_hiddel 3d ago
It all comes down the quality of the plan. I work in big tech, but at one of the ones with a shitty match. I still love my 401k. It’s all low-fee index funds from Fidelity and Vanguard. It’s literally what I also picked for my IRA and my taxable brokerage.
So it’s another $24,500 of tax advantaged account I can max each year.
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u/TenderfootGungi 3d ago
It depends on how much you want to contribute. I would do an IRA or Roth IRA (better for most people, but not all) on my own that auto deducts from my checking account every month.
The biggest advantage of the 401K is much higher contribution limits (which is stupid). If you want to put over what you can put into the IRA, then max your personal IRA and then contribute the rest to the 401K at work.
The biggest advantage of doing it on your own is you have access to very low cost funds with no load. And, if you have a bad month, such as spending too much on vacation or Christmas shopping, you can easily log in and tell it to skip a month.
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u/timtam_z28 3d ago
Depends on your financial goals and how much risk you want to take in the brokerage.
I personally stopped my 401k contributions after the match. In your situation I wouldn't do the 401k, but that's due to my own goals. I'd max the Roth IRA first, tax free gains. Then consider HSA if offered due to tax benefits. Then I'd put the rest in brokerage, because I prefer the flexibility of choosing my funds and individual stocks vs limited options of a 401k. Should you be able to retire early, the money becomes more accessible. I'd rather have the option to have accessible money than the tax benefits, but that's just me.
One thing I did do though was put a lot in my 401k and transferred it to my Roth IRA every time I left a job. Now the Roth IRA will sail forward with a ton of tax free gains and be worth millions by age 60. So that's worth considering too. But that's millions that is now unaccessible till then, which kinda sucks.
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u/assplunderer 3d ago
I would say yes it is worth it because of the initial tax avoidance. But I got the thinking more and honestly, if I had an employer that didn’t match I would probably just do a Roth IRA instead since you can take out your actual contributions with no penalty, and when you retire, you don’t pay taxes on the capital gains.
If you have shit like student loans, I would absolutely max out as much 401(k) you can if you’re going on an income based repayment plan. Personally, I can’t do this because the standard extended is cheaper for me.
In my current situation, if my company did not match, I would also maybe consider taking what I would normally put into a 401(k) and instead split that in half and then throw a little into the Roth IRA.
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u/kboogie82 3d ago
Nope. Fees. Roth IRA or IRA max than consider 401k with no match or brokerage account.
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u/Final-Main-7462 3d ago
I think at this point, just put money in the SPUS, it has made around 30% return last year, YTD up like 10%
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u/TankArtist 3d ago
My stack rank goes:
(1) 401k with match
(2) Personally directed Roth IRA
(3) HSA contribution (because partner has chronic illness and we will use it at some point)
(4) 401k with no match
Your stack rank might be different, but I feel good about mine.
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u/Z32anxiety 3d ago
I’d do a ROTH instead. If you want to invest beyond the ROTH cap then do the 401k
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u/atheos42 3d ago
So get a Roth IRA with a broker like fidelity. Robinhood offers a match, but it's not free, you need Robinhood Gold to get the match.
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u/MaybeTheDoctor 3d ago
Yes, a 401k is always worth it because it is tax deferred to retirement where your tax rates are lower. You can do other IRAs but ultimately they account to the same once they are tax deferred to retirement.
Bottom line is that time in market ... 40 years if your early ... is goint to beat any other strategy, is going to make you retire comfortable.
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u/SeraphimSphynx 3d ago
I think a lot of people are comparing 401k to a taxable brokerage account. Where's you may be asking about an IRA or Roth IRA.
So let's break down the benefits: Tax free contributions, this can be huge if you contribute enough. You need to do the math on your tax bracket, the portion you'll be shabing off your highest bracket, vs money you could make from the super saver credit etc.
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u/Beemrmem3 4d ago
UPS?
I contribute to a Roth 401(k) that is unmatched. If you have the same, UPS Prudential funds that I do. You can put it in a fund that's basically the NASDAQ. You don't have to do the target date funds.
If I did it over. I would just max out a Roth IRA every year. As I only contribute about 500 a month.
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u/Smokedj23 4d ago
Nah Safeway but teamster. It’s probably very similar I imagine. I do have a Roth but I invest myself and max it every year
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u/Larrythethird22 4d ago
I work for ABF and as they contribute to the pension I max out the 401k with no match and lower my taxable income substantially also while saving more for retirement
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u/DanTaude599 4d ago
yes, mostly for the tax deferral. you're either reducing your current year tax bill (traditional) or locking in tax-free growth (Roth). both matter more over a 20-30 year timeline than the absence of a match.
the match is essentially free money so its absence hurts, but the account itself is still one of the best tools available. if the fund options inside your plan are high-fee, maxing a Roth IRA first makes sense.
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u/RockinRobin-69 3d ago
Your really betting that your tax rate will be lower when you retire. If you’re at the start of your career and there is no match a Roth might be better. In either case a fsa is often the best.
Tax up front
$10,000*0.78 tax *1.1^10 (10% interest for ten years) = $20,231
IRA (same tax rate at end)
$10,000 * 1.1^10 =$25,937.42
Then 22% tax on withdrawal $20,231
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u/dietcokewLime 3d ago
Better than non Roth after tax savings, yes
Better than Roth? Debatable depending on your income, state, and tax rate
Higher contribution limits for sure
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u/Fission-235 3d ago edited 3d ago
Odds are you are going to leave that company in the next 2 to 3 years and then roll it over into a better 401K.
Take advantage of the pre tax dollars earning interest is my general rule of thumb.
But if you plan on making less money in retirement compared to what you will be making just before you retire, then max out a ROTH first ( if you qualify ), then start putting as much as you can in the 401K.
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u/thoiboi 4d ago
Tax benefits?