401ks bad?

User Forum Topic
Submitted by scaredyclassic on July 22, 2020 - 10:39am

Pro

Automated
No access, harder to spend
Asset protection from lawsuit
Poss. Match from employer

Con

Could end up with higher tax in future due to similar inc. Level

High mgt fees. Can do much better not in a 401k plan

Ltd. Investment options

No real control till 59.5 years old.

Maybe 401k a bad bet with tax rates currently so low if you will have decent income in retirement? Even if u earn too much for a roth? Shoot.

Systemically it seems very very dangerous to have so much money from millions of workers condotioned to buy and hold automated to buy so regularly with no regard for conditions. How can this end well
On the other hand, how can it not, with the backing of the ponzi scheme with the full faith and credit of the usa

Submitted by Coronita on July 22, 2020 - 11:02am.

My parents got hit hard with RMD.
Their forced RMD income now is way above what they use to make during the working years.

I've split my annual contributions to 50% traditional 401k and 50% Roth 401k.

Then again, they could always change the rules fo Roth 401k's too.

I don't try to trade my 401k. Drip drip drip and forget it, maybe a semi-annual rebalance.

I'm trying to build a much larger sizable position in my after tax account, paying taxes up front. So far, it's been ok.... I think when Biden takes over, we're going to see a lot of tax law changes, and for practical purposes, most people here will be paying taxes up the noses in the future.

Biden's plan is already calling for the elimination of 1031 exchanges and step-up cost basis

https://therealdeal.com/2020/07/21/biden...

Submitted by scaredyclassic on July 22, 2020 - 11:11am.

Im not sure i see any advantage to a 401k for me other than lawsuit protection. Seems actually bad.

If i were betting, id say some sort of extra 401k tax, esp on higher inc. People, is a likely future event.

Submitted by Coronita on July 22, 2020 - 11:26am.

scaredyclassic wrote:
Im not sure i see any advantage to a 401k for me other than lawsuit protection. Seems actually bad.

If i were betting, id say some sort of extra 401k tax, esp on higher inc. People, is a likely future event.

there's lawsuit protection.

In the case that your company has a 401k match, it's free money (so at least contribute to get the maximum match)

But it's also a way for people who otherwise aren't financially disciplined to force them to put money away for the future.

The problem is a lot of 401k plans suck. They fund selection suck, and the fees suck. Some plans, are more or less self-directed, so that's good.

The issue with 401k though is it's going to get a lot more complicated...

https://finance.yahoo.com/news/trump-adm...

The problem is that a lot of these funds can now speculate in much riskier private equity.

Submitted by sdrealtor on July 22, 2020 - 11:28am.

Coronita wrote:
My parents got hit hard with RMD.
Their forced RMD income now is way above what they use to make during the working years.

I've split my annual contributions to 50% traditional 401k and 50% Roth 401k.

Then again, they could always change the rules fo Roth 401k's too.

I don't try to trade my 401k. Drip drip drip and forget it, maybe a semi-annual rebalance.

I'm trying to build a much larger sizable position in my after tax account, paying taxes up front. So far, it's been ok.... I think when Biden takes over, we're going to see a lot of tax law changes, and for practical purposes, most people here will be paying taxes up the noses in the future.

Biden's plan is already calling for the elimination of 1031 exchanges and step-up cost basis

https://therealdeal.com/2020/07/21/bidens-tax-plan-would-pull-the-rug-out-from-under-the-real-estate-industry-insiders/

That is what we call a high-class problem and the spoils of the victors

Submitted by plm on July 22, 2020 - 11:33am.

I've come to the realization that deferring taxes into a 401K is shortsighted and I'm probably going to end up paying an even higher rate when RMD kicks. Just switched to a Roth 401k instead but it's too late, having maxed out contributions to 401k for a long time already.

Fidelity 401ks have something called brokeragelink where you can invest into whatever you wish. That seems a better option than rolling into an IRA since you can still do a backdoor ROTH this way.

Submitted by Coronita on July 22, 2020 - 11:44am.

plm wrote:
I've come to the realization that deferring taxes into a 401K is shortsighted and I'm probably going to end up paying an even higher rate when RMD kicks. Just switched to a Roth 401k instead but it's too late, having maxed out contributions to 401k for a long time already.

Fidelity 401ks have something called brokeragelink where you can invest into whatever you wish. That seems a better option than rolling into an IRA since you can still do a backdoor ROTH this way.

The brokerage link option for Fidelity is only available if your 401k plan allows for a self directed plan. I have a Fidelity 401k from a previous employer and one from my current employer.

My previous employer's plan allows for self directed investment via brokerage link.

My current employees plan doesn't.

If I could roll money over from my current plan to my previous one, I would. But can't do that too.

The fund selection is also better in the previous plan. Although Fidelity administers, most of the funds are institutional vanguard index funds with very low fees....

Submitted by scaredyclassic on July 22, 2020 - 12:13pm.

sdrealtor wrote:
Coronita wrote:
My parents got hit hard with RMD.
Their forced RMD income now is way above what they use to make during the working years.

I've split my annual contributions to 50% traditional 401k and 50% Roth 401k.

Then again, they could always change the rules fo Roth 401k's too.

I don't try to trade my 401k. Drip drip drip and forget it, maybe a semi-annual rebalance.

I'm trying to build a much larger sizable position in my after tax account, paying taxes up front. So far, it's been ok.... I think when Biden takes over, we're going to see a lot of tax law changes, and for practical purposes, most people here will be paying taxes up the noses in the future.

Biden's plan is already calling for the elimination of 1031 exchanges and step-up cost basis

https://therealdeal.com/2020/07/21/bidens-tax-plan-would-pull-the-rug-out-from-under-the-real-estate-industry-insiders/

That is what we call a high-class problem and the spoils of the victors

My wife keeps accusing me of bitching like a rich old guy about first world problems.

My feeling is, well, these are my problems, because im an older guy with a little money in a 1st world country, and furthermore we wouldnt be doing this well if i hadnt sweated the small stuff [that is, been such a frugal saver] over a long period of time.

And i dont feel rich.

And whats the fucking point of winning if they take big chunks of it all anyway.

But shes got a point. Sometimes i listen to myself and i want me to shut up.

If i were in the 4th world, id be mocking people bitching about their silly 3rd world problems

Submitted by sdrealtor on July 22, 2020 - 12:31pm.

FWIW I was trustee for my mother her final 10 years. The last two of which she spent in a private skilled nursing bed at $150K per year.

I told her financial adviser this is the perfect time to harvest the IRA. He said no leave the money in so you can inherit the tax advantaged funds and allow them to continue to grow.

I said no we will eventually have to pay taxes on that money if we leave it in. If we pull out $150K each year its tax free now with a huge medical expense itemized deduction that would be lost forever if not used.

I was right. It was the right decision in a long line of great decisions she taught me how to make.

Today would be my mother's 90th birthday. It is also the 1st anniversary of her passing. Happy Birthday Mom! Thanks for teaching me well. I appreciate you.

P.S. Sorry for never telling you how much we were spending for that private room. I know you would have left sooner if I had told so thats why I didnt.

Submitted by ucodegen on July 22, 2020 - 1:27pm.

I have found them useful, particularly if there is a match. I do concur that most 401K/ProfitShare setups in companies have very bad selections. The company I used to work for was such a company, but we also had a group of employees who were active personal investors. We pressured the company and the 401K provider (Prudential) for better selections and eventually got it.

The company managing the 401K started pushing automatic rebalancing and target date funds. What people don't know about both of these is that every time your account gets 'touched' by rebalancing, reallocation, transactions, etc - they get to charge a fee (hidden) on top of the standard management fee (I guess you could call it touch labor costs). On one of the meetings pushing these options, three of the company's investment club members were also at the meeting and the rep got 'cross examined' by them. The only way to keep the 401K offerings at the company honest is to be a little militant about it. Usually the selections for what is offered is pushed down to HR from the 401K management company. The HR staff involved are generally not active or knowledgeable investors - so they just accept what the 401K management company offers.

On target date funds, I would generally be careful. I mapped the return of a 30 yr target date fund vs the ones I had selected over a few years and the target date fund royally sucked.

When I was laid off, I rolled all of my 401K funds into a self directed account at a discount brokerage - this was when I was 48 (completely legal, and I would recommend for the knowledgeable)

I would recommend a Roth for those who are within the income threshold. I would be very careful on rolling over a standard 401K into a Roth because it gets taxed at your peak combined rate. If you roll over $500K and earn $100K/yr - the tax rate is on $600K for the year - don't forget that marginal tax rate is the item you have to watch out for. By my calcs, rolling over a large 401K into a Roth actually causes more taxes overall and reduces possible gains (don't forget that the taxes taken out on the roll over to a Roth could have been used for investments and gains)

I would also make discretionary retirement investments on a non tax deferred account.

As for tax effects of Roth, 401K, and 'cash' discretionary accounts - it depends upon how often you buy/sell stock.

Submitted by svelte on July 22, 2020 - 5:08pm.

scaredyclassic wrote:

My wife keeps accusing me of bitching like a rich old guy about first world problems.

lol my wife tells me I'm getting grumpy, but it's typically not about money.

scaredyclassic wrote:

And i dont feel rich.

This is what I get from my wife: I'll outline all the what-if scenarios on how we could end up having our saving whacked and not have much in our retirement years.

She'll just sit there, then turn and look at me and say "I don't think you remember what it was like to be poor."

That's cutting right to the chase. There were weeks when we had to decide what bill was paid. We're unlikely to ever be in that position again.

Submitted by svelte on July 22, 2020 - 5:10pm.

sdrealtor wrote:

Today would be my mother's 90th birthday. It is also the 1st anniversary of her passing. Happy Birthday Mom! Thanks for teaching me well. I appreciate you.

P.S. Sorry for never telling you how much we were spending for that private room. I know you would have left sooner if I had told so thats why I didnt.

I'm sorry to hear about her passing.

Submitted by scaredyclassic on July 22, 2020 - 8:05pm.

svelte wrote:
scaredyclassic wrote:

My wife keeps accusing me of bitching like a rich old guy about first world problems.

lol my wife tells me I'm getting grumpy, but it's typically not about money.

scaredyclassic wrote:

And i dont feel rich.

This is what I get from my wife: I'll outline all the what-if scenarios on how we could end up having our saving whacked and not have much in our retirement years.

She'll just sit there, then turn and look at me and say "I don't think you remember what it was like to be poor."

That's cutting right to the chase. There were weeks when we had to decide what bill was paid. We're unlikely to ever be in that position again.

Well, yeah, i should appreciate my tiny success. But i dont. It was way more fun to be young, stupid and broke and see so much potential than to be old and narrow with a cash buffer, but to have eaten the bitter truth.

. I used to blow $$$ on a housekeeper 20 years ago and we were broke. I was an idiot. I even had my shirts pressed at 2 bucks a pop. No way in hell nowadays.
401k? Haha! Why?

Its difficult for me connect my current self with the blithering young idiot who HAD A BALANCE ON hiS CREDIT CARD.

I just got done mopping a huge area and sweating profusely. Good thing im in shape. I could easily have a heart attack at my age mopping the deck.

Id rather save the 200 bucks on a houekeeper, even with slight risk of myocardial infarction, and i can iron my shirts while watching netflix, now that im stable whereas back then, i didn't have it and spent it anyway.

Money changes: its not the same as it was. I assumed it was to be spent when we married. All of it! Hell, we are 150k in the hole with student loans, who fucking cares! Lets make babies!

Later things changed. She wanted a house. I realized we would have to actually not spend all our money. It was like being in AA.

Today i am the most sober conservative old dude i could have turned into. Its staggeringly awful.

Nowadays all the money is different. I tend it and worry about it. Care for it. Hope for it. Each pile is unique, small or large, each has a tale.

If i manage to cash out some gains in a trading acct, for instance, and renovate my kitchen, ill feel like i got a "free" kitchen, whereas if i paid from my the checking acct, it would hurt me to spend it.

As the eskimos have many words for snow, we need different words for different types of monies. It is NOT fungible.

Some is sweaty money. Some is happy money. Found money. Aged money. Guilty money. Mystery money. 401k may be dumb money. Just sitting there, vulnerable to govt attack. Or maybe itll be nervous money. With alzheimers, found money.

In reality i think my later life will be somewhat better with $ but physical health and vitality will be a much greater factor in happiness and life satisfaction for 60 onwards

Submitted by Coronita on July 22, 2020 - 9:59pm.

In general, I like the idea of 401k's and IRA's, I just wish the rules were more consistent and simple, and for some, I wish there weren't hoops to jump through.

For example: let's say your AGI is above the threshold to allow you to contribute to a Roth IRA. Well, there is a legal way still available, called the backdoor Roth IRA conversion.

The idea is basically, you open a traditional IRA and deposit the money, say $3000 into your traditional IRA and then immediately do a Roth IRA conversion. Since the money you put into the new traditional IRA has not earned anything, when you do a Roth conversion, there are no tax consequences

....Well, almost no tax consequences...You see, the big assumption is that you do not have any other IRA accounts opened. If you do have any other IRA accounts, than technically when you converted that $3000 to Roth, you took a distribution across ALL your IRA accounts, not just the one that you opened. From the IRS perspective, an IRA distribution is not from a specific account, it's from your entire IRA amount across all accounts...

...However, the IRS treats IRA and 401k differently.
If you had a 401k account, and no IRA accounts, then you could do the backdoor roth IRA conversion, since you will only open 1 traditional IRA to do the backdoor roth ira conversion. Again, IRS treats your 401k diferrently from IRAs, even 401ks that were from your previous employers.....

There are two huge implications of this 401k and IRA distinction from the IRS.

1. If you ever rolled over a 401k from a previous employer to a Rollover IRA, you just eliminated your ability to do a backdoor Roth IRA. Because the moment you converted your 401k to a Rollover IRA, now you have an IRA account that will be counted as part of any distribution you take converting any IRA money into a Roth IRA,and your pay taxes on that distribution, even if you are taking out (say $3000) exactly what you just put in.

2. If you have other traditional IRAs and want to do a backdoor Roth IRA, then what you could do is you could rollover your IRAs into your existing employer's 401k plan, if they allow that. Then, for the purposes of the IRS, you have no other IRA accounts, and therefore can do a backdoor Roth IRA conversion. But there are drawbacks to doing thiss.
1. You would be limited to the fund selection(s) and fees of your current employer's 401k plan
2. This assumes your current employer even allows a rollover from elsewhere into your current plan.

Why is it this complicated, I have no idea... But again, yes another first world problem.

Morale of the story. If you want to do a backdoor Roth IRA, don't ever rollover a previous employer's 401k account into a IRA... Either keep the 401k or roll it into your existing employer's 401k plan.

Submitted by scaredyclassic on July 22, 2020 - 10:07pm.

I used to work for the IRS. nothings simple.

Submitted by svelte on July 23, 2020 - 7:28am.

scaredyclassic wrote:

Well, yeah, i should appreciate my tiny success. But i dont. It was way more fun to be young, stupid and broke and see so much potential than to be old and narrow with a cash buffer, but to have eaten the bitter truth.

. I used to blow $$$ on a housekeeper 20 years ago and we were broke. I was an idiot. I even had my shirts pressed at 2 bucks a pop. No way in hell nowadays.
401k? Haha! Why?

Its difficult for me connect my current self with the blithering young idiot who HAD A BALANCE ON hiS CREDIT CARD.

Sounds like you've went from one extreme to the other.

Here is what I've done:
a. Calculate how much money we'll need monthly in retirement
b. Calculate how much money I need to save to reach that goal
c. Put back enough each month to reach the amount saved goal when we retire
d. Spend the rest!

We've had someone come in once every 2 weeks to clean the house for 30 years, to mow the lawn for 20. We work hard during the week, I feel we deserve to use our weekends for enjoyment, not more labor.

As far as possessions go, we are pretty close to where we want to be. I can only think of one more big purchase we want to make, after that the only semi-major expense will be vacations. Some people buy vacation homes, I don't give a sh!t about that...I like going to different places each vacation, not the same place. I would find that as boring as staying home, frankly.

I've seen too many friends and relatives save like mad and not spend anything, banking on retirement. Then they die before reaching retirement. I'm not going to be one of those people who didn't get to enjoy life along the way. I decided that a long time ago.

It is getting close to the point where we'll have excess cash each month, and that may be the time I need to evaluate whether going part-time may be a better option. We'll see. Life throws us a curve ball every few months. I may never get to the point of going part time, and that's fine. Roll with the punches.

Submitted by svelte on July 23, 2020 - 7:34am.

Throwback: Now that I can't go to the gym, I've been setting up a mini-gym out back. Last week I bought a six pack of Heineken to drink one a night as I exercise. When I get to the bottom of the Heineken, exercise is over. It's a carrot to keep me exercising.

It's also a throwback - when we were young and broke our one splurge was a six back of Heineken a week. Didn't cost a whole lot, but it made us feel like we were worth something. The brain is a mysterious thing.

Yesterday I went to the fridge to get my Heineken for the night - there should have been 2 left. But there were none. ?

My wife, who drinks wine exclusively now, drank them. I guess she was feeling nostalgic also.

Submitted by scaredyclassic on July 23, 2020 - 9:26am.

yeah, we should have a housekeeper. this is too much.

however, as to a., b., c., and d. that you describe above, I dispute that there is any way to know what those numbers are.

Submitted by Coronita on July 23, 2020 - 9:38am.

scaredyclassic wrote:
yeah, we should have a housekeeper. this is too much.

however, as to a., b., c., and d. that you describe above, I dispute that there is any way to know what those numbers are.

Look at it this way. There's a lot of people out of work these days. When you hire a housekeeper, a gardener, or buy some takeout food, you're either creating a job for someone or helping someone keep theirs.

Submitted by scaredyclassic on July 23, 2020 - 9:56am.

Coronita wrote:
scaredyclassic wrote:
yeah, we should have a housekeeper. this is too much.

however, as to a., b., c., and d. that you describe above, I dispute that there is any way to know what those numbers are.

Look at it this way. There's a lot of people out of work these days. When you hire a housekeeper, a gardener, or buy some takeout food, you're either creating a job for someone or helping someone keep theirs.

that kind fo thinking doesn't help me part with money. I also rarely feel I get the value in kind for what ive paid. in fact, very very few things seem worth the money.

oats are worth it.

my washing machine.

my house.

fresh fruit.

that's about it.

Submitted by ucodegen on July 23, 2020 - 10:41am.

Coronita wrote:

Why is it this complicated, I have no idea... But again, yes another first world problem.

Morale of the story. If you want to do a backdoor Roth IRA, don't ever rollover a previous employer's 401k account into a IRA... Either keep the 401k or roll it into your existing employer's 401k plan.


It is still possible. What you are referring to is called the pro-rata rule. It is not too bad if you ONLY put pre-tax money into IRAs. It gets messy when you have both pre-tax and after tax IRAs. -- basically it is an attempt to screw those that put money into after tax IRAs... and prevent people from rolling the after tax contributions only into a Roth.

See pro-rata rule:
https://www.nerdwallet.com/blog/investin...

Submitted by sdrealtor on July 23, 2020 - 11:11am.

Svelte
Thx for the well wishes. Some great stories and I agree that at this point life is about sharing great experiences rather than accumulating more possessions ad infinitum. Last night I disposed of several great bottles of wine with some friends in the driveway at my weekly Wine Wednesday happy hour

Submitted by plm on July 23, 2020 - 11:23am.

ucodegen wrote:
Coronita wrote:

Why is it this complicated, I have no idea... But again, yes another first world problem.

Morale of the story. If you want to do a backdoor Roth IRA, don't ever rollover a previous employer's 401k account into a IRA... Either keep the 401k or roll it into your existing employer's 401k plan.


It is still possible. What you are referring to is called the pro-rata rule. It is not too bad if you ONLY put pre-tax money into IRAs. It gets messy when you have both pre-tax and after tax IRAs. -- basically it is an attempt to screw those that put money into after tax IRAs... and prevent people from rolling the after tax contributions only into a Roth.

See pro-rata rule:
https://www.nerdwallet.com/blog/investing/backdoor-roth-ira-high-income-how-to-guide/

Are you sure this is right, I read the link and it seems to me that the problem is if you have an IRA of pretax money (like converting from a standard 401k) It's just too complicated.

Submitted by svelte on July 23, 2020 - 12:19pm.

scaredyclassic wrote:
Coronita wrote:
scaredyclassic wrote:
yeah, we should have a housekeeper. this is too much.

however, as to a., b., c., and d. that you describe above, I dispute that there is any way to know what those numbers are.

Look at it this way. There's a lot of people out of work these days. When you hire a housekeeper, a gardener, or buy some takeout food, you're either creating a job for someone or helping someone keep theirs.

that kind fo thinking doesn't help me part with money. I also rarely feel I get the value in kind for what ive paid. in fact, very very few things seem worth the money.

oats are worth it.

my washing machine.

my house.

fresh fruit.

that's about it.

If having money makes you happier than spending it, then by all means hold onto money! Its not about doing what I, flu, your financial advisor or anyone else says - it is about doing what makes you happiest.

Only you can know what that is.

Agree that there is no way to definitively know what the proper figures are for a, b, c, and d. Life is a gamble! Figure out a best and worst case! Determine what worst case you could live with if it should happen and make sure you're north of there! Over estimate how much you'll need!

Or just sit on a big stash of money if that makes you happier. But as you've already expressed, that also causes you worry as to the best way to hold onto it.

Ya gotta place your bets somewhere! In the meantime, life is what happens while you're busy making plans.

Submitted by scaredyclassic on July 23, 2020 - 12:41pm.

yep.

my wife already told me she's going to spend money like crazy if i die, so i might as well spend it now, she says.

could be she's just saying that to screw with my head. i can hardly believe she'll be blowing money. but maybe she will. buying up real estate. getting a donkey. travelling.

id prefer my wife and kids spend the money than me, esp. if i were dead, since dead men spend no cash. it wouldnt be my problem at that point. seems so relaxing, not to have to think about such things. death means never having to worry about late fees. your investment horizon is zero or eternity, same difference

Submitted by svelte on July 23, 2020 - 4:14pm.

https://www.youtube.com/watch?v=TNC1frNq20c

It's almost like you watched this video before creating this thread.

Submitted by ucodegen on July 23, 2020 - 5:36pm.

plm wrote:
ucodegen wrote:

See pro-rata rule:
https://www.nerdwallet.com/blog/investing/backdoor-roth-ira-high-income-how-to-guide/

Are you sure this is right, I read the link and it seems to me that the problem is if you have an IRA of pretax money (like converting from a standard 401k) It's just too complicated.


Yes, I am quite sure it is correct. You can have an IRA funded with pretax and post tax income (not a good idea to mix, but you would be responsible for tracking the amounts - IRS form 8606). Coronita is right that the withdraw from IRA portion of the Roth rollover is treated as a distribution. The tax basis has to be calculated. If the money was placed into the IRA post tax, the basis/initial funds are not taxed on withdraw.
See also: https://rodgers-associates.com/newslette...

Submitted by plm on July 23, 2020 - 6:25pm.

I think I understand now. It is possible to do the backdoor Roth IRA but its most likely a bad idea because you have to pay taxes on a portion of any pretax IRA so it is no longer free of taxes doing the backdoor roth.

This is what I found from https://www.kitces.com/blog/how-to-do-a-...

The IRA Aggregation Rule Under IRC Section 408(d)(2)
The first caveat to the backdoor Roth contribution strategy is what’s called the “IRA aggregation rule” under IRC Section 408(d)(2).

The IRA aggregate rule stipulates that when an individual has multiple IRAs, they will all be treated as one account when determining the tax consequences of any distributions (including a distribution out of the account for a Roth conversion).

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