By Dr. James M. Dahle, WCI Founder
There seems to be a wide misunderstanding among investors and their advisers alike about the merits of saving for retirement using a plain old 401(k). I hear too many statements like “Tax rates are going up, look at the national debt. Why pay taxes later when you can pay them at today's rate?” This misconception causes too many people to make bad decisions, such as contributing to a Roth account preferentially in their peak earning years or worse, not maxing out a 401(k) in order to invest in a taxable account or cash value life insurance. Investing in a 401(k) is like getting a match from Uncle Sam. There are three ways that contributing to a 401(k) lowers your taxes.
#1 Up-Front Tax Deduction
The most significant way that a 401(k) saves you taxes is the upfront tax deduction you get in the year you make the contribution. For example, if my marginal tax rate were 32%, and I contributed $10K, I would save $3,200 on my taxes that year. Critics of the 401(k) argue that you're just delaying the taxes. Even if that were true (it usually isn't as we'll see shortly), that delay on paying taxes is still valuable.
There is a concept called “the time value of money” which basically says that money now is worth more than money later. This is especially true when you consider how our financial lives work. When did you really need some extra cash?
- In your 20s, when you had big tuition bills and needed a car.
- In your 30s, when you needed money for a downpayment, some furniture, student loans, and a bigger car.
- Perhaps even in your 40s, when the kids start into college.
The fact is that a relatively small amount of money early in life can often be far more valuable than more money later in life. Plus, if the US Government collapses, at least you enjoyed your 401(k) tax break before it did!
#2 Tax-Protected Growth in a 401(k)
In a taxable account, the dividends and capital gains distributions that your investments kick out each year are taxed. When you sell an investment with gains you also have to pay taxes. Dividends and capital gains are generally taxed at a rate lower than your marginal tax rate, but the drag on your returns can still be significant. For example, an investment that gains 8% with a yield of 2% taxed at 15% only grows at 7.7%. On a $100K investment that drag totals $26K after 20 years. In a 401(k) that tax drag is eliminated, allowing faster accumulation of your nest egg.
#3 Tax Rate Arbitrage
When you contribute to a 401(k), you save taxes at your marginal rate, for example, 32%. This is the rate at which the last dollar you make is taxed. However, when you withdraw money from your 401(k), especially if you don't have a pension or other taxable income and haven't started taking Social Security, the money will be taxed at a far lower rate. It is taxed at your “effective” tax rate.
- The first $24,800 you pull out of your 401(k) comes out tax-free (due to 2020 standard deduction).
- The next $19,750 is taxed at 10%.
- The next $60,500 is taxed at 12%.
So you can actually pull $105,050 out of your 401(k) that year and you only have to pay $9,235 in taxes, for an effective tax rate of less than 9%. Saving taxes at 32% and paying them decades later at 9% is a winning formula. Even if you needed more income from your 401(k), the next $90,800 you pull out is taxed at 22%. The effective tax rate of withdrawing a total of $195,850 ($105,050 + $90,800) is just less than 15%.
The bottom line? If you're in your peak earning years, most of the time you should max out every tax-deferred account available to you, including 401(k)s, 403Bs, 457s, HSAs, SEP-IRAs, Solo 401(k)s, profit-sharing plans, defined benefit plans, etc. You can still get tax diversification by using a personal and spousal backdoor Roth IRA rather than the Roth option in your 401(k) or 403B and perhaps by doing a few Roth conversions in low-income years just before or after your retirement date.
What do you think? Are you using a 401(k)-like account to save for retirement? Why or why not?
How about the avoidance of payroll taxes on the withheld amount.
7.65% saved off the top (actual percentage goes down after hitting $117k in 2014 due to social security limit).
Sorry, but your 401k employee deferred contributions face medicare and soc sec payroll taxes.
That’s correct. The only way to avoid payroll taxes is to have the pay come to you as an S Corp dividend. For most docs, that means a savings of at most 2.9% of the amount paid as dividend. S Corp dividends can’t be used to calculate your income for retirement account contribution purposes, so you really need quite a high income to really save much using that technique. I think I could probably save $2-3K a year, not counting the time, hassle, and money required to incorporate. Probably worth it at $400-500K+ a year. If you made $500K, and could justify 50% of it being dividend, then you’d still have enough income to max out your Solo 401K, and save 2.9%*250K= $7250 per year in Medicare taxes.
Don’t solo 401k plans permit employer contributions instead or as well as employee deferrals, and are such employer contributions subject to the same income requirements and payroll taxes?
Another benefit of the tax deduction is present tense avoidance of state income tax, for those who live in a state with a state income tax, that is.
As for the supposed lower tax rates in retirement, I am somewhat skeptical of these, because they are subject to the whim of Congress (e.g., overall tax rates could rise and seem presently to be headed in that direction, or some sort of means testing formula may be added in the future to determine the applicable tax rate on withdrawals). Also, the likelihood that I will have zero taxable income in retirment probably isn’t great.
Actually, the income requirements are higher for “employer” contributions. You can basically only pay 18-19% of what you make as an employer contribution, whereas you can contribute 100% of what you make up to $17,500 as an employee contribution. But yea, you’ve got to pay payroll taxes on all of it. You’re right that you defer state income tax too, and avoid it if you move to Florida, Texas, or another income tax free state in retirement.
Remember it isn’t about lower marginal tax rates in retirement, it’s about a lower effective tax rate. We already have a “means testing formula” in place on 401K withdrawals, it’s called a progressive tax code. I’m sure you won’t have zero taxable income in retirement. That isn’t the goal anyway. You want to minimize the overall tax rate paid. You can do so by having at least some of the money you’re making now being taxed in retirement, at the 0%, 10%, and 15% brackets. It is very unlikely that a typical physician deferring money in his peak earning years at his marginal tax rate will actually end up paying a higher effective tax rate on that money in retirement. If you are in some unique situation where that will be the case with you, use Roth options and do Roth conversions as much as possible.
“However, when you withdraw money from your 401K, especially if you don’t have a pension or other taxable income and haven’t started taking Social Security, the money will be taxed at a far lower rate.”
So assuming you have a pension how does this change your recommendation? In my case if I stay with my current medical group for my entire career I will be able to “retire” at 62 with a pension that equals 50% of my highest earned annual income for the rest of my life. Also my wife works for the same group and would have the same retirement benefit so we would likely be getting a large chunk of taxable income in retirement. Our financial advisor is trying to advise us to not put too much into tax deferred accounts now, but we have a match for our employer 401k so not maxing those retirement accounts will have our match/bonus taxes at the bonus rate if we don’t put it into the 401k accounts.
A taxable pension doesn’t necessarily change the recommendation to use a 401K, but it certainly decreases the advantage because you have less of the tax bracket arbitrage working in your favor. Your pension may “fill up” the 0%, 10%, and 15% brackets, so your entire 401K withdrawal may be at 25 or 28%. If your marginal rate were 28 or 33% when you contributed, you may still be saving a little in taxes there, but it isn’t nearly as dramatic. Certainly, if you’re expecting a huge pension, you would want to do more Roth contributions and conversions than you otherwise would. I wouldn’t skip the 401K though, especially the portion that is matched.
In the process of avoiding taxes, we sometimes overlook the larger picture. Although the HSA is triple tax advantaged, you really have to assess what is being offered to you. Not all high deductible plans work the same. We get our health insurance through my employer (my husband is a physician, not me). The investment options on my employer’s HSA stink with e/r’s in the 1-1.5% range. The premiums are the same for both the high deductible and traditional plans and the out-of-pocket costs are sometimes worse for the high deductible. So yes, we could lower our tax bill each year by contributing to a HSA, but I’m not sure the “net” gain is better.
Unlike a 401K, you’re not stuck with an employer’s HSA indefinitely. You can roll the money away each year to a better HSA, such as HSA Bank/TD Ameritrade. I don’t even contribute to my employer’s HSA. I just use my own. Unless they’re providing a match, I see no reason for you to contribute to it at all. The requirement is that you use an HDHP. There is no requirement that you use any specific HSA.
Didn’t know that, thanks for the clarification. My employer does contribute a small amount to the HSA. I’ll need to look into what sort of fees will be incurred by transferring money out of this HSA into another one. My employer’s chosen plan administrator is especially fee-happy. Thanks for the recommendations.
There are no fees if you do a rollover, which you are allowed to do once every rolling 365 days. I have to do this with my employer HSA. I withdraw the balance on the HSA to my checking account and then immediately contribute this amount into a separate HSA. My work HSA does not charge for this distribution, but will charge a fee if I transfer the money to another custodian.
Interesting work around.
What about roth 401(k) vs standard? Assuming that most that read this are contributing the max
I recently wrote about that here:
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
401k contributions can be doubly useful when your AGI reaches phaseouts for various tax credits such as AOTC (160K) or Lifetime Learning Credits (120K). Those of us paying tuition need all the help we can get.
This was great info! I use http://www.mutualfundstore.com/ for my planning, do you think it is good to have more than one advisor?
It depends on what you mean by advisor. There is some benefit to having an estate planning attorney, a CPA, an asset protection attorney, an asset manager, and a financial planner. The more of that you can do competently yourself, the fewer advisors you need.
I think the harder decision for me lies once you’ve maxed out your 401k v. 403b and whether to invest in a ROTH v. a 457(b) plan for a 501(c)(3). Do you diversify and go with the ROTH? Assume the risks of a 457? Especially 1) if you don’t start out fully vested in your 457 plan and 2) aren’t sure if you can max out a 403(b), a 457, and your backdoor ROTHs.
I definitely think it makes sense to max out your 401k/403b, especially because I’m going to be in a state with an income tax (added benefit). But I’m going not going to be making as much as many physicians as a psychiatrist, so maxing out all 3 accounts (401k, 457, and ROTH IRA) and taking care of student loans and other expenses is a bit more of a stretch.
457 vs Roth as an attending….Tough call. It’s tough to give up that tax break now at your peak marginal bracket, but the tax diversification, better investments, lower costs, and no 457 risk all argue for Roth.
Am I missing something or did you forget about the personal exemptions? For the married couple in your example that would be $3900*2 so with the standard deduction you would actually have $20,000 taxed at 0%.
Good catch, I blew it. I usually include that. I’ll get the figures fixed and update the post.
‘However, when you withdraw money from your 401K, especially if you don’t have a pension or other taxable income and haven’t started taking Social Security, the money will be taxed at a far lower rate.
It is taxed at your “effective” tax rate. For example, if you’re retired at 60, married, taking the standard deduction, and have no taxable income, then the first $12,200 you pull out of your 401K comes out tax-free. The next $17,850 is taxed at just 10%. The next $54,650 is taxed at just 15%. So you can actually pull $92,500 out of your 401K that year and you only have to pay $9983 in taxes, for an effective tax rate of less than 11%. Saving taxes at 33% and paying them decades later at 11% is a winning formula. Even if you needed more income, you could pull out over $300,000 more before you’d be paying taxes at a higher rate than the rate at which you saved taxes with your contribution.’
Who from the WCI readership will (even at 59.5 years will) have zero income or other taxable income will this example apply to? There’s almost no way I could invest all of my yearly wages without having ‘some other table income’ at 59.5y. I’m by no means a financial expert but I’m trying to start to figure out how I should invest for retirement, etc etc as I’m starting my first job after fellowship next year. I don’t see how your example is realistic for physicians and the like? I found this website showing what current rates are now… would this be more representative (http://www.bankrate.com/finance/taxes/how-are-401k-withdrawals-taxed.aspx)?
No mention of removal of state income tax?
I have read that employer’s take out 20% for taxes, as well?
For my own knowledge, could you give me an example what my ‘effective tax rate’ would be after including an average state income tax (ie I may end up in a state without state income tax but would like to know anyways if possible), employee withdrawal in terms of having other taxable income (unless your example holds for someone with taxable income)?
Thanks
Matt
I’m having trouble figuring out what you’re asking. You seem to be citing an example of a person who is in the withdrawal phase and asking about how their earned income will affect that. Then asking about state taxes and employers taking out taxes. But you lost me in there somewhere.
I think what you’re asking is how having other taxable income in retirement will affect your 401(k) withdrawal tax rates. Correct me if I’m wrong.
The answer is that it increases them. For example, if you fill up the 0%, 10%, and 15% brackets with other taxable income, then your 401(k) withdrawals will start being taxed at 25%. If you have a 5% state tax, make that 30%. But even with that, if you saved 33%+5%=38% when you put the money in, and you’re taking it out at 30%, you’re still winning.
Now, if you expect $400K in taxable income (not at capital gains/dividend rates) then you may want to favor Roth accounts instead of tax-deferred accounts. But for most docs, tax-deferred during peak earnings years is the way to go.
That’s exactly what I was wondering. Thanks for clarifying.
thanks for the great article. I’m pretty new to all of this (just finished residency). I thought I had read somewhere that employer contributions were not subject to social security and medicare taxes (is SS and Medicare tax what you refer to as “payroll” taxes? ). I think my problem is that I don’t know when general advice I read online is referring to the more common setting when people have just a w2 or not.
Like many people on this website, I will receive a 1099 for a part time job ( I also receive a w2 for another job) at a hospital and through this job, I contribute to a 401k, for this contribution, part (about 1/3) of my contribution is labeled as 401k (I assume this is considered employee contribution) and about 2/3 is labeled 401KMAT (I assume this is considered the employer match). Do I have to pay SS and Medicare taxes on both of these amounts, or is the employer match exempt? Also, it seems they have limited my contribution to 20% of my earnings (ie match + employer is limited at cumulative 20%), is this by law? You may have answered this above, but I really appreciate your help with my understanding since I am having difficulty seeing how it all applies directly to me.
Finally, if (sadly not yet however….) my income is above 118,500, would that mean that 401k contributions made from money earned over this limit are exempt from SS and medicare taxes , ie if my income is 200k , does that mean that all 401k contributions are exempt from SS and Medicare tax because its from money above the 118.5K limit?
If you are in my situation and receive a w2 and 1099 , does the 118.5K limit apply to the sum of both incomes, for instance , if I make 100k on a w2 and 100k on a 1099, how does the SS and Medicare tax breakdown here? Is there any limit past which the employer portion does not need to be paid?
this website is invaluable for people in our relatively complicated situation, thanks so much for your help.
James
AFAIK- Employer contributions are just as subject to payroll taxes (SS and Medicare) as employee contributions and other earnings. The employer does get an income tax deduction for them, of course.
The $118.5K limit applies to the sum of both incomes but only for SS tax. You have to pay Medicare tax on all income. In your hypothetical situation with a $100K W-2 income, you would pay the employee half of SS and Medicare tax on all $100K and your employer would pay their half on all $100K. On your $100K of self-employment income, you would pay SS tax (employee and employer) on the first $18.5K and would pay Medicare tax (both employee and employer halves) on all $100K, including what you put into your employer’s 401(k) or your own individual 401(k) whether it represents the employee or employer contribution.
Hope that helps.
great, thank you , and i think the answer to this is obvious, but just to complete my thought: if my income is 200k , the 401k contribution is essentially from $182,000- 200,000 so there is no SS tax on that 401k contribution since it exceeds the 118.5k, correct? Thank you!
James
Correct. But you would pay Medicare tax.
For the 401k withdraw in retirement, when is the tax due? Is it due immediately, estimated quarterly, or when you file your annual tax return? If pull the money out in say January, but don’t have to pay taxes until April 15th of the next year, that is a pretty good loan from the government.
Depends. Same as a lump sum you earn on the side now. If you have enough withheld elsewhere (SS or pension or something) then you don’t have to do quarterlies. If not, then you do.
If your employer doesn’t match your 401K, what would be the benefit of opening one with them?
Tax protected growth, asset protection, tax arbitrage. Big tax break in the year you contribute. Easier estate planning. Should I go on? 🙂 I’ve never had a match but always max mine out.
Thanks, I think you’ve made your point lol
Hi James,
I really enjoy reading your blog. Just wanted to say your book and blog have taught me everything I know about saving and investing.
I am a first year fellow and currently almost max out a Roth 401k. I know the general advice is to favor Roth during your years of training, but I live and work in NYC and my gross salary is approximately 80k. I also have a relatively high tax rate of 22% federal, 6% state and 3.5% local NYC tax. I may not retire here, as we are looking to move to states with low or no taxes for my first job. Do you still think it makes sense to contribute to a Roth in this case?
The way I see it, If I save enough and achieve financial independence at, say 55, my income would dramatically reduce at retirement. I would have to make 80k a year from investment dividend, interests and withdrawal income alone to make doing a Roth worthwhile.
Thank you for your help,
Sairaman
I’d still do Roth. But it’s not like tax-deferred contributions are a bad thing. If you really think you’ll take that money out at less than 31.5% total, then go for it.
Thank you!
WCI thanks for the article. Here is a question I am trying to figure out even after reading the linked Supersaver and the roth vs taxable . I am currently going to be in marginal 37% federal and 5.75% state tax bracket. I have a side business as an IC for which I receive 1099 misc about 50-60k per year. I set up a non prototype solo 401k that allows after tax non roth conversions to roth 401k, in addition to pretax/PSP. It turns out that every $1 I contribute to Pretax PSP, it lowers total contribution $2. I am trying to decide between having total of $39,464 contributions with 9,866 being pretax PSP and $29,598 MBDR conversion vs $49,330 contributions all MBDR conversion. If it were dollar for dollar the tax deferred/PSP would be a no brainer and that is what I did for 2019, but given the profit-sharing contribution reduces compensation by a factor of 2X the profit-sharing number, it is less straight forward. Just not sure how to approach this decision.
Background: mid 30’s 2 physician couple
taxable account is around 50% of net worth,
pretax 401k about 28% of net worth
Roth IRA 15% of net worth
Plan to work until at least 55, but likely will have some opportunity to take advantage of roth conversions in a semi early retirement. Thanks for any help.
Why would every $1 you contribute pre-tax lower total contribution by $2? You mean the opposite?
At any rate, if your goal is to maximize how much is in there and you don’t care as much whether it’s pre-tax or post-tax, then just go MBDR. In my situation, that’s what I would do but most docs aren’t in my situation.
Sorry meant to reply this here
Per Harry Sit:
“From the business’s point of view, after it makes the profit sharing contribution, the rest is paid to the owner as compensation. The rule says the total contribution of all types (elective deferral + profit sharing + after-tax) can’t exceed the compensation. Because profit sharing is on both sides of the equation, $1 in profit sharing reduces after-tax contribution by $2.”
Harry isn’t wrong very often, so I always do a double take on stuff like this. You didn’t provide a link to your citation, so I’m guessing a bit at what he is referring to. He seems to be referring to a rule that I am not familiar with:
“the total contribution of all types (elective deferral + profit sharing + after-tax) can’t exceed the compensation.”
I’d like to see a source/citation for that rule. I wouldn’t be surprised if it exists, but I am surprised I haven’t run into it before.
I guess that would apply at very low compensation amounts or when your income is very close to your total contribution.
Let’s do some math here.
Let’s say someone makes $60K. $19.5K as an employee contribution and $12K as a profit sharing contribution. The total compensation is $48K. The total contribution so far is $31.5K. So under this rule, you could only contribute $16.5K instead of $57K- $19.5K – $12K = $25.5K as an after-tax contribution. Now let’s say you skipped the profit-sharing contribution. So now compensation is $60K. $19.5K goes in as an employee contribution. That leaves $57K – $19.5K = $35.5K that can go in as an after-tax contribution. Total contribution in the first case is $19.5K + $12K + $16.5K = $48K and in the second case is $19.5K + $35K = $54.5K. $6.5K more.
I still can’t come up with the relationship you cite that $1 in profit-sharing reduces the after-tax contribution by precisely $2. It certainly does reduce it though, but it would appear to me that it reduces it by < $2. A $12K increase in profit-sharing = an $18.5K decrease in after-tax. Maybe at some dollar amount it is precisely $2. At any rate, I'd like to see a citation. It seems like a reasonable rule, but I haven't seen it before. As I Google around I see a similar reference to employer + employee contributions not being able to exceed compensation, so that makes sense I suppose.
Thank you for taking the time to respond.
https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html
If you go to the very bottom of the comments you can see his response to my question. His calculator can be found here
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
if you wanted to play with the numbers. This is of course a situation where I am not able to make enough with my 1099 misc side business income to max out PSP, if I could I would do that. I originally thought getting the max amount in PSP/pretax was the way to go, but now I am reconsidering
Thanks for sharing.
That technique (preferentially doing MBDR) is also useful in an S Corp situation where you want to keep your salary low.
Per Harry Sit:
“From the business’s point of view, after it makes the profit sharing contribution, the rest is paid to the owner as compensation. The rule says the total contribution of all types (elective deferral + profit sharing + after-tax) can’t exceed the compensation. Because profit sharing is on both sides of the equation, $1 in profit sharing reduces after-tax contribution by $2.”
Point #3 is super important and super misunderstood. Mainly because most people still don’t understand that tax rates are progressive. High income earners should almost always aim to max out tax deferred accounts instead of a Roth. I guess backdoor Roth’s are just more sexier than a plain old 401k.
I think Point #3 is actually on pretty shaky ground.
Current tax rates are at historic lows. The marginal rate was 90% when my dad was young and 70% when I was younger. Despite a very high income (even for a physician) my effective federal rate last for 2018 was 19%. I expect it to be lower for 2019.
When I withdrawal that money from a traditional IRA or 401K I’m betting the tax rates will be higher. Plus I don’t plan to be poor when older. My wealth and income continue to grow. Even without considering the budget deficit and national debt and progressive political movements paying your tax now rather than later can make a lot of sense.
Neither you nor your dad likely ever paid taxes at a marginal rate of 70-90%.
It isn’t about whether tax rates go up and down in general. It’s about whether YOUR marginal tax rate goes up or down. And in the case of most docs who are not supersavers, it will go down due to much lower taxable income in retirement. Even if the 12% bracket becomes the 16% bracket, if you’re going from the 35% to the 12%/16% bracket, you’re still winning.
Although I share Wealthy Doc’s concerns about future tax rates, the tax deferred option is a bird in the hand. One can speculate that tax rates may go up but it is certain that money paid in taxes is gone forever.
As for those astronomical marginal rates, they were accompanied by many deductions, exclusions and tax shelters. If anyone actually paid at those rates it was on a small portion of what today would be classified as taxable income.
With a high.earned income it would be hard to get the effective date down to 19%. That would require even larger income from tax favored investments, counting things that do not show up on tax returns such as unrealized gains, or massive deductions. Some types of real estate investing can produce low taxes, but that has nothing to do with being a high income doc.
Most high income physicians will be in the top tax bracket on earned income alone and large portions of their earned income would be above that threshold. The lower brackets have far lower rates but the range of income covered is small. One can get a low rate, but only on a small amount of money.
If one has tax favored investment income that is more than earned income it is possible to get the effective date down but only by counting cash flows that are not usually considered income, dividends inside a retirement account, for example.
Do you run a hedge fund on the side? If you have high income from tax favored investments that should continue after retirement and keep your tax bracket low. If your high earned income is only a small portion of total income them you will be in the same low rate after retirement. Lower still since the earned income will have gone away. Not sure someone in that position would be better off paying taxes now, while their earned income is taxed at the top rate, rather than later, when RMDs might be taxed at a rate that high. Or maybe not.
No brainer to contribute the MAX to your retirement plans
As a retiree in Florida my effective tax rate on 300k is 18%
Think what you were paying when employed; SS Federal, State and possibly City
The area I get caught on when it comes to a 403b or it’s Roth counterpart is the tax rate of the gains when withdrawing money in retirement. It would seem the Roth option would be preferential early in our career even if we are at a high income level and tax rate given the 20+ years to accrue gains. I realize both options grow tax free, but my understanding is taxes will eventually be owed on the gains in the traditional account but will not be owed on the Roth version. This should be a substantial value over that time frame. Am I missing a small detail that makes my thoughts faulty?
Yes. All you need to do is compare tax rates. Just work through the math once and you’ll understand. Consider someone who has $10K they just made and they have a 25% tax rate now and a 25% tax rate later.
So option 1 is put $10K into a traditional 401(k). It grows over a few decades to $100K. Now you take it out and pay $25K in taxes. You’re left with $75K.
Option 2 is to pay taxes on the earnings ($2500) and put what is left into a Roth 401(k). It grows over a few decades to $75K. Now you take it out and pay no taxes. You’re left with $75K.
See how it doesn’t matter if tax rates are the same on both ends? So it’s really all about the tax rates.
Hope that helps.
I have a question about comparing two offers
Option A
Salary; 240000/ annum
Private so only 401 K
Health insurance for family is not paid by employer ( employer side) so premium is high
although I can go HSA.
Option B
Salary: $225000/ annum
University: 403b and 457
Teacher retirement : 8% of base salary which will have employer 8 % match from day 1.
Health insurance for family is covered( employer part is paid) although will go with HSA.
Assuming cost of living and state tax are comparabl
All else being equal except what you mention, offer B is clearly superior. Do you have any idea what health insurance alone costs? Our is over $1k a month for our family.
Appreciate your replying to my question, it will make the decision easier. I was debating between 403b/457/teacher retirement vs post tax index funds.
Health insurance cost for option A is $1200/month, as employer is only paying for employee not for family.
Health insurance cost for option B will cost $200-$600 depending upon which option I select but employer is paying for family. Although I want to go for HSA as we donot see doctor that often..
Add up the value of all of the benefits and compare apples to apples.
Thanks to your website learning the basics but still need hand holding for making decisions. Is there any discussion in the forum or earlier post, which compares 401k/403b/457 vs post tax index funds? pros and cons
So you’re asking if you are better off investing in good, low-cost, broadly diversified index funds inside a tax-protected account or in a fully taxable account? Is that right?
If I phrase it that way is the answer more obvious?
Are you asking if you’re better off in crummy investments in a tax-protected account or good investments in a taxable account? That answer isn’t so obvious, but most of the time, the tax-protected account still wins.
Or are you asking if when you have a tax protected account and a taxable account if you should preferentially put your broadly diversified stock index funds in the taxable account and save the tax protected account for the less tax efficient asset classes? In that case, index funds in the taxable account may be the right move.
Hope that clarifies things, whatever your question may be.
My question is tax protected VS taxable account. You are saying tax protected is still better than broadly diversified index funds in taxable account.
In private job (no partnership) only 401K, so more money in taxable account.
In academic Job: 403b, 457, teacher retirement(8% with match): More money in tax differed account and less money in taxable account (if I max all of them).
I hope my question is clear.
Are you asking me what job you should take? Are you really basing that off the retirement account options available? Are you sure the private practice 401(k) doesn’t allow you to self match up to $57K?
Because if the question is just “should I invest in a taxable account or a tax protected account” the answer is obvious, I hope.
Clarify your question and perhaps I can help more.
My wife and I both make around $60,000 each and pay around $5,000 each in federal taxes. We both contribute 8% of our earnings in our 401K which comes out to be $4500. If we contribute more into our 401k will this aide us in lowering our federal taxes. I am just trying to figure out how we can we can pay less taxes and build up our 401k.
Yes. Contributing more will lower your taxes and build up your 401K. And increase your asset protection. And facilitate estate planning. Maxing out retirement accounts is a great move in many ways.