Who is playing with my 401k money

Is 401k as good as it sounds considering how it's taxed?

Most of all, I see that nobody mentioned the one thing about 401 (k) accounts that is just magical - the matching deposit. In 2015, 42% of companies offered a dollar-for-dollar match for deposits. Can't beat that. (Note - To respond to Xalorous's comment, the $ 18,000 OP deposits can be almost any percentage of his income. The typical match is up to 6% of gross income. In this case, the deposits are 401 (k) But let's say he's making $ 100,000. Depositing $ 18,000 results in a $ 6,000 match. This adds complexity to the answer, which I wanted to avoid, as I did at all no correspondence and no change in tax brackets shows only the deferment shows the investor the value.)

Go to main answer -

Let's pull out a table -

We'll start with $ 10,000 and assume 25%. This gives a choice of $ 10,000 in the 401 (k) or $ 7,500 in the taxable account. Let 20 years go by next with a 10% annual return. The 401 (k) sees the full 10% and $ 67,000 after 20 years. The taxable account holder waits for the 15% cap win rate to be achieved and adjusts the portfolio so that an 8.5% return is achieved each year and no ongoing profits are made. After 20 years with an 8.5% return, he has $ 38,000 net. The 401 (k) owner pays the 25% tax on withdrawal and has $ 50,000, still more than 25% more money than the taxable account. Because all transactions within the account have been tax delimited.

EDIT - Regarding Davmp's comment, I'll offer the other extreme -

In his comment, he complained (rightly) that I chose to trade every year despite assigning the long-term cap gain rate of 15%. He felt that the annual trade was my attempt to play the analysis. Above I am offering its extreme case, a 10% return per year, no trade, no dividend. Just a cap win at the end. The 401 (k) is still winning. I also left the tax (on the 401 (k)) on withdrawals at 25%, although in fact much, if not everything, is taxed at 15% or less, which would be net at $ 57,000, or 30% above the final withholding tax Payout.

The next problem I want to address is that the 401 (k) is taken out at the highest (marginal) tax rate, e.g. B. A single applicant with taxable income greater than $ 37,650 (in 2016) would save 25% on the 401 (k). Deduction. Of course, if the deduction pulls you below that line, I'd go Roth or Taxable. However, withdrawals start from zero. Today, a single retiree has a standard ($ 4050) exemption and an exemption ($ 6300) for a total of $ 10,350 in "zero brackets" with the next $ 9,275 taxed at 10%. This suggests that you need $ 500,000 in pre-tax accounts before withdrawals cross the 10% class each year. (This comes from the suggestion to use 4% as the annual payout rate).

Finally - the tax discussion naturally has two important points in time: deposits and withdrawals. But the answers here ignore all the time in between.

In between, you see that you're going to drop from 25% to 15% this year for a number of reasons. This is the time to convert some cash into Roth and top up the 15% bracket. This can happen due to job loss, marriage to a new spouse who is either not working or has a lower income, newborn baby, buying a house, etc.

Or in between, a disability has made you unemployed. That way, you can take out money with no penalty and little chance of paying even the 25% that you paid. From personal experience with a family member, a 401 (k) was funded with 28% money. Then divorced and disabled, able to use the $ 10,000 / year to supplement the employee's (non-taxed) income.


You mentioned the game but ran the numbers without it.

JoeTaxpayer ♦

Multiply column 401 (k) by the impact on the match. If $ 18,000 was 6% of OP income, the match would literally double that column. When I looked at our last testimony, 1/3 of our balance was due to company matches. Adding this to the table adds complexity and requires knowing the percentage that actually matches. Mention of the game should be anecdotal as no one else mentioned it


Sorry, but I'm not going to buy your Speadsheet. There is no reason why a taxable account should suffer a 1.5% earnings penalty of 20 years every year. For example, I could pick a basket of single growth stocks and not receive a Divi and Hold for 20 years. With a 10% return, I'd get a portfolio value of $ 50,456.25 at the end of 20 years - just like the 401,000. I agree I would pay cap winnings for it, but I'm not limited by any government restrictions on how much I can put away. While the 401k could only start at 18,000, I could put more than that into the taxpayer.

JoeTaxpayer ♦

No problem. The assumptions I make are clear. One can use any number of assumptions one desires, including a single buy and buy with a sell at the time of payout. Better still, the taxable account can take a zero cap profit and increase the base after the owner's death, the 401 (k) cannot.

JoeTaxpayer ♦

@davmp - I've added a snapshot reflecting your scenario. Let me know if I have misrepresented your position.