BreadWithS...[at]fractious.net wrote:
- quote -

I don't manage to get many buy and hold stocks (30%), so I get 2-3%
less compound growth out of a non-sheltered account than out of an IRA,
so in aboout 8 years, the difference in the taxes is made up. So, as
one approaches retirement, a non-deductible IRA doesn't make sense.

--
Ron

jIM wrote:
- quote -

I was thinking that since an IRA has greater investment flexibility
than a 401k, a higher rate of return can be accomplished. If a person
is only going to invest in mutual funds that are available in the 401k,
then the better options on distribution might work. In my case, I will
roll my 401k over to my IRA when I retire to take advantage of
investment flexibility.

--
Ron

1. Max out employer contribution in 401k.
2. Max out Roth IRA.
3. Max out deductible IRA.
4. Max out 401k.
5. Max out non-deductible IRA.
6. Put the rest in a conventional account.


Why max out "deductable IRA" before maxing out 401k? 401k does not
have the distribution rules of a deductable IRA, correct? Of course
one would not be eligible for both, would they?

If someone has the time to post "withdraw rules and guidelines" for
401k, 403b, IRA (deduct and non deduct), Roth IRA and "taxable
accounts", I think there is some valid discussion on which investment
to choose based on rules of withdrawing/ getting access to money. To
me the appeal of a Roth IRA appears to be the less stringest withdraw
rules than the other account types (with exception of taxable accounts).

"Ron Peterson" <ron[at]shell.core.com> writes:

- quote -

For the purpose of making life simple, I actually lean
towards maxing out the 401k completely before worrying
about Roth or deductible IRAs.

The main reason I can see for putting the Roth ahead
of (4), I'd think, would be that one may, if necessary,
take one's contributions back out without penalty.
I'd hate for folks to actually do that short of major
emergencies.

- quote -

I still go back and forth on this - whether non-deductible
contributions to an IRA make all that much sense. I've
made them for a couple of years and it's *very* long
term money, so the tax deferred growth is valuable, as is
the fact that the sheltered money is protected from some
other things, too (ie. lawsuits, not counted towards college
aid for kids, etc). But as I demonstrated in the calculations
previously (and with the added issues that Tad brought up),
non-deductible IRA contributions are far from the no-brainer
that, say, 401k w/employer-match contributions are.

Anyway, these account-type details are only one dimension of
this - there is still the original issue that was brought up -
that of asset allocation.

The next question which might be worth a little discussion,
is if one has both taxable and tax-deferred (and Roth)
accounts, which asset classes make most sense to put into
which types of accounts.

ie. equities intended to be held long-term and/or which
throw off dividends - may make more sense to keep in the
taxable account, while leaving bonds in the retirement
accounts.

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anoop wrote:
- quote -

After looking at BreadWithS and other replies and assuming that there
is a good emergency fund, I think that the order would be:

1. Max out employer contribution in 401k.
2. Max out Roth IRA.
3. Max out deductible IRA.
4. Max out 401k.
5. Max out non-deductible IRA.
6. Put the rest in a conventional account.

--
Ron

BreadWithSpam[at]fractious.net wrote:
- quote -


Not to nit pick here...you're right, tax deferral has a huge benefit and
especially for early dollars saved the qualified accounts will have a
big benefit. But many on this board are beyond that, and I have seen
cases where someone specifically avoids putting dollars into qualified
accounts to save taxes. There are some common scenarios where the
taxable account is going to win, vs the IRA/401k (though not the Roth).

If you're married and you live in a community property state (like CA),
the basis of your community stocks and mutual funds will be stepped up
when the first spouse passes away. So the resulting tax rate on the
unrealized gains up to that point is 0%.

And to the extent assets will be inherited, no matter what state you
live in, there's the same step-up in basis, and the same 0% tax rate on
unrealized gains, for those who inherit.

This doesn't happen in qualified accounts...the taxes on investment
gains are unavoidable, because there's no step-up. And it's all taxed at
ordinary income rates.

These may sound like scenarios only for the wealthy but I don't think
that's the case. Most people who are doing long-term saving don't plan
to deplete their assets quickly during retirement. There's usually going
to be some money preserved for the surviving spouse, and some left to
heirs. And a lot of people don't seem willing to tap out their IRAs,
taking a conservative withdrawal approach.

So if you eyeball your overall plans and the expectation is that the
money you're about to save is going to either be passed to your spouse
(in a CP state), or inherited, you might plan for dollars to go into a
taxable account to make use of the step-up tax benefits, even though you
have an IRA/401k alternative available to you.

The other thing, which is a scenario only for higher-wealth people, is
being hit with effective tax rates in the 45%+ realm (federal + state +
phase-outs) on distributions from IRAs & QPs. Both the original account
holder and a non-spouse heir who might be tacking this income onto a
decent earned income. There, of course, you'd prefer the lower capital
gains rates, and the tax deferral along the way has a tough time
overcoming that kind of end of the pipe tax hit.

-Tad

"Bucky" <uw_badgers[at]email.com> writes:
- quote -

Quite right. Sorry about the misattribution. It was Ron
suggesting that there was some kind of added value in the
lower cap-gains rate which would lead one to putting
investments into taxable accounts instead of a 401k or Roth.
(in Message-ID: <1115648398.856447.67820[at]f14g2000cwb.googlegroups.com> )


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BreadWithS...[at]fractious.net wrote:
- quote -

Not me, I'm the one agreeing with you.

Rich Carreiro wrote:
- quote -

The *net result* is that capital gains are not taxed (relative to
ordinary account).

- quote -

You have to compare apples to apples. In a taxable account, the $1000
would only be worth $750. You could look at it as the gains have
already been taxed at 25%, plus the additional 15% capital gains tax.
See this Excel sheet:

http://buckyspage.com/401k_gains.php

Michael Siemon wrote:
- quote -

Yes, I agree. The key word to my statement is "net result". I posted an
Excel sheet to compare some examples:

http://buckyspage.com/401k_gains.php

Rich Carreiro <rlcarr[at]animato.arlington.ma.us> writes:
- quote -

Well, technically, it's not a tax on capital gains...

- quote -

Now lets pop in some marginal tax rates for fun here.

Take $1000 out of salary, pre-tax, invest in 401k, let grow 10x
to $10,000, take the whole thing out, end up with $7500.

Take $1000 from salary - pay income taxes of 25%, leaving
one with $750 to invest. Let it grow that same 10x (assume
otherwise identical investment which somehow grows with
pure cap gains - say, perhaps, a very tax efficient index-like
fund). Now you've got $7500, with a cost basis of $750.
Sell it. You end up with $750 original investment, plus a
capital gain of $6750. Pay 15% taxes on that, and you are
left with an ending, spendable amoung of $750 + $5735.50
or $6487.50.

You're *way* better off putting that investment into the 401k.

Now, try doing it outside of the 401k, but in a Roth IRA:
$1000 salary. Pay taxes, leaving $750 to invest.
Let it grow 10x. Now it's worth $7500. Sell it off to
get spendable cash: Still $7500 - since it's a Roth IRA
and distributions are tax free. End result - identical
to 401k. Also identical to traditional deductible IRA
in the case where the full $1000 is invested.

Now, let's try one more case. Suppose our intrepid
investor has already maxed out his 401k and due to his
high income, he cannot use a Roth IRA. All that's left
(outside of insurance products, which I won't address)
is regular taxable account (discussed above, netting $6488)
or a *non*deductible IRA.

$1000 salary. Pay taxes and invest $750 in IRA (since the
contribution is nondeductible, he's got to pay taxes on
that $1000 and we are assuming no other outside money
besides that $1000 of salary is involved here). Let it
gro 10x. Now he's got an IRA worth $7500 *with a cost
basis* (as tracked on IRS forms 8606) of $750. In order
for the numbers to work here, we have to assume that
that is the *entirety* of his IRA, but that's okay - we
are trying to keep this in isolation anyway. Now he
cashes out that whole $7500 IRA. This time, it's not a
very pretty picture: He's got $750 basis and the rest
of it - $6750 - is taxable *as income* at our assumed
25% marginal tax rate. He end up with
( 6750 * 0.75 ) + 750 == $5812.50

There are a raft of assumptions necessary for the
non-deductible IRA to work out to be worse than investing
outside of the IRA - gains are 100% pure cap gains, he
never rebalances or switches investments, etc. etc.

Anyway, one needs to walk all the way through the scenarios
to come up with numbers and even then, there are a variety
of relatively unrealistic assumptions that need to get made
along the way. If, for example, the gains were not pure
cap-gains, but were a combination of dividends, annually-
realized cap-gains, as well as fully deferred cap-gains,
it's possible for the non-deductible IRA to still beat
the fully taxable account - given some *time* for those
realized but as-yet-untaxed gains/distributions to grow.

Bottom line, though, is that 401k, fully-deductible IRA,
and Roth IRA all beat taxable accounts even if one could
find an investment which generates pure 100% unrealized
cap-gains over the lifetime of the investment - contrary
to what Bucky suggested.


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"Bucky" <uw_badgers[at]email.com> writes:

- quote -

How do you figure that?

I put $1,000 into a 401(k). It grows, via capital gains in
the account, to $10,000. I withdraw the full $10,000 and I
have to pay tax, *at ordinary income rates* on the full $10,000.

So just how were those $9,000 of capital gains "not tax[ed] at all"

Especially since by comparision in a taxable account, I would have
only been taxed at ordinary rates on the original $1,000 and at the
significantly lower capital gain rates on the other $9,000.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

In article <1115764701.282396.323340[at]o13g2000cwo.googlegroups.com> ,
"Bucky" <uw_badgers[at]email.com> wrote:

- quote -

Excuse me? Every dollar distributed from the 401K is taxed at your
standard marginal tax rate[*]. That most definitely includes any
amounts derived from selling assets with a capital gain. Maybe
I'm misunderstanding what you intend here? The "only" advantage
(it can be major) is that you are not taxed on any capital gains
taken along the way -- until they are distributed. If you hold
equity A in both tax-deferred and non-deferred accounts, you of
course pay capital gains taxes on any sale in the regular account
(modulo losses, carry-overs, etc.) on an annual basis; in the
401K, you pay _when_ you withdraw; so any non-distributed gains
have a chance to grow further before you get a tax bill on them
-- but the bill is there in the end. For really huge capital
gains, it seems to me that the advantage lies outside the tax-
deferred area.
--[*] ignoring for this purpose accounting for your basis if you
have non-deductible contributions to the 401K

Ron Peterson wrote:
- quote -

No, that is a fallacy. It's easy to think that 401K taxes at full rate
for all withdrawals (including long term capital gains), whereas a
regular unshielded account taxes at 15% for long term capital gains.
But if you remember that 401K is pretax contributions, then the net
result is that 401K does not tax at all for capital gains.

"Looks good to me. Are you contributing max to Roth IRA? The general
advice is to:

1. max out employer contribution in 401k (4% in your case)
2. max out Roth IRA ($4000)
3. put any additional in 401k"

Very good advice, I agree with the above (depending on your tax
situation). However, are you saving for emergencies? If you are socking
all your disposable income into a long-term retirement account, are you
protecting yourself against short-term needs? If you aren't, I'd dedicate
a few dollars per month and stash it away into an ING Orange Savings
Account. Make sure you're zeroing out your tax refund by raising your
exemptions on your W-4 (don't do too many, though). This will free up more
money to save for yourself instead of sending it to Uncle Sam for his use
and profit. This will help you avoid having to dip into your long-term
retirement accounts and credit cards should you have an emegency cash
need.

Bucky wrote:
- quote -

What are the recommendations for after that? :-)

Anoop

I'd consider moving part or all of the Mid Cap Growth into an Emerging
Markets Fund

"Joe" <joe[at]noone.com> wrote in message
news:f9ofe.9364$7F4.7276[at]newsread2.news.atl.earthlink.net...
- quote -

Bucky wrote:
- quote -

Good advice. But one might want to maintain some unshielded investments
to allow penalty free withdrawal. Another advantage of unshielded
accounts is the ability to invest in individual companies (OK, you can
do that in an IRA, but you are limited to how much your can put in an
IRA). In an unshielded account, long term capital gains are taxed at a
lower rate.

--
Ron

Looks good to me. Are you contributing max to Roth IRA? The general
advice is to:

1. max out employer contribution in 401k (4% in your case)
2. max out Roth IRA ($4000)
3. put any additional in 401k

- quote -

100% equities. This looks great for someone your age. At first glance,
the funds you have chosen are good ones, too. Stick with it through
thick and thin and you're on your way.

Dave