vania-janet/multiturn-rag-retrieval-data huggingface dataset:
The reason your 401k match is always counted as pre-tax whether you are contributing to a traditional 401k or a Roth is that the money is contributed by the employer and is not counted as income, and that contribution is not taxed as income. Should you wish to pay taxes on it and convert it to a Roth, you can do that, though perhaps not until you change jobs.
You are close to understanding, but it looks like you are slightly off: regular 401K - The amount you contribute is taken out of your taxable income for tax purposes in the tax year you earn it. However, when you take it out at retirement that withdrawal counts as income for tax purposes. (You pay the tax on the money later) Roth 401K - The amount you contribute is not taken out of your taxable income for tax purposes in the tax year you earn it. However, when you take it out at retirement that withdrawal will not as income for tax purposes. (You pay the tax on the money now.) Additional benefit: You don't pay tax ever on the gains.
Be sure to consider the difference between Roth 401K and standard 401K. The Roth 401K is taxed as income then put into your account. So the money you put into the Roth 401K is taxed as income for the current year, however, any interest you accumulate over the years is not taxed when you withdraw the money.  So to break it down: You may also want to look into Self Directed 401K, which can be either standard or Roth. Check if your employer supports this type of account. But if you're self employed or 1099 it may be a good option.
With a 401k you will be taxed when you withdraw the money upon retirement (just like an IRA), but conventional wisdom had it that you're likely to be in a lower tax bracket at that time. That may not necessarily be the case though, in which case a Roth IRA would be a better option because you're paying for it with after tax dollars and distributions are untaxed. If you wanted to hedge your bets you could have both an IRA/401k and a Roth IRA.  An IRA has income limits above which the contributions are no longer tax deductible, I don't believe a 401k has the same limitations (for completion's sake: a Roth IRA has income limits above which you can't contribute to one). And like you said, the employer match is free money.
Using the default values for age and retirement and only making the changes you specified in the question. assumed ROR: 6%, current tax rate: 25%, retirement tax rate: 15%,   married, have an employer retirement plan. The results from the two calculators are: Traditional IRA: 631,341 IRA before taxes 536,640 IRA after taxes. Roth IRA: 631,341 Roth IRA 450,207 Taxable Savings where: Total taxable savings       The total amount you would have accumulated by retirement in a taxable savings account. your question: The (Traditional) IRA After Taxes value is 6.3% higher than the (Roth)   Taxable Savings amount. (Both had an equal gross amount.) Does that mean I should put my money in a tIRA instead of a Roth? My percentages don't match your percentages because you didn't specify the numbers you used. In any case the 450K number shows you what you would have if the money was not invested in an IRA or 401K. To decide between a Roth and a traditional IRA ignore the taxable savings number, that only shows what  happens if you decide not not use a retirement account.
"Allowances are calculated as your total deductions divided by the tax year's personal exemptions. As mentioned above it is a multiplier. For 2015 the standard deduction for a married couple filing jointly is $12,600 and each of you gets 1 personal exemption ($4,000 in 2015). That's a total of $12,600 + 2*($4,000) or $20,600. Divide this by the personal exemption and you get roughly 5 allowances. Now say your employer offers health insurance and a 401(k) plan. Your total health insurance (or ""cafeteria"" contributions) are $2,000 for the year, and your total 401(k) plan contributions are $6,000 for the year. This would give an additional $2,000 + $6,000 = $8,000 divided by $4,000 = 2 allowances. Thus you would file with 7 allowances. Note that tax credits are not included in the allowance calculation. That is because they do not affect your taxable income but rather directly reduce your taxes due."
If you withdraw your funds from your 401k and DO NOT mive it into another 401k plan or IRA within 60 days it will constitute as an early distribution which will carry a panlty of 10% as well as have income tax owed on it.
Then at the end, if you decide to cash in your house, you can roll the   proceeds into a fancier house to avoid paying taxes on your profit. The problem is that the book was written in 1989. That comment is no longer true; that part of the tax law changed in the 1990's. Also in 1989 the maximum amount that person could put in an IRA was $2,000 and hadn't been raised for almost a decade and wouldn't be raised for another decade. Roth accounts didn't exist; nor did HSA's or 529's. Most people didn't have a 401K. You are asking to compare what options we have today compared to what was available in the late 1980's.  For me except, for the years 2001-2005 and 2010-2015, the period from 1988 until now has had flat real estate values. Still the current values haven't returned to the peak in 2005. The score is 11 great years, 17 flat or negative. I know many people who during the 1990's had a zero return on their real estate.
"Probably not. In general, if you withdraw money from a 401k before age 59 1/2, you must pay a 10% penalty. There are some special cases. You can withdraw money to pay certain unreimbursed medical bills, if you are disabled, or to pay back taxes. You can also withdraw money if you are dead. See https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Tax-on-Early-Distributions. There is also a provision that you can make penalty-free withdrawals as long as you take them regularly: ""Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)"" See https://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide-Plan-Sponsors-General-Distribution-Rules. (I don't quite understand this rule. You can't take money out one time, but you can take money out multiple times. Oh well. I think the idea is supposed to be that you can take out money for an early retirement.)"
If you withdraw money from a 401k before you are 59 1/2, you will pay a 10% penalty, and you will have to have income tax withheld on the amount you withdraw. On the other hand, if your employer matches 100% of your 401k contributions, you could be throwing away 50% of your possible retirement savings because of your fear of the possibility of a 10% loss! In addition 401k plans do have some exceptions to the early withdrawal penalty. There are provisions for medical emergencies and home purchases for example. However, the qualifications are not entirely straight-forward, and you should read up on them before enrolling. The real answer to your fears is planning. Figure out your living expenses. Figure out how much you want in an emergency fund. Figure out when you will be wanting to buy a house, have a child, or go back to school. Set aside the savings you'll need for all those, and then for the remainder of your money you can consider long term investments with some confidence that you probably won't need to face the early withdrawal penalties.
However, I know from personal experience that this is not true. Your company can most definitely set up a separate After-Tax plan to receive all of these new contributions. Then there's no mingling of pre-tax and post-tax dollars, and you can do the rollover to Roth with the click of a button, no taxes or penalties owed. Now, this new plan still sits under the overall umbrella of your company's total retirement plan offerings. So the total amount of money that you can put into a Traditional 401(k), a Roth 401(k), and this new After-Tax 401(k) -- both your personal contributions and your company's match (if any) -- is still limited to $53k per year and still must satisfy all the non-discrimination rules for HCEs, etc. So it's not trivial to set up, and your company will almost certainly not be able to go all the way to $53k, but they could get a lot closer than they currently do.
Well, a proper answer needs a few more details: 1) What's your marginal tax bracket? (A CD is just plain silly for someone in a high tax bracket and in a high tax state) 2) What's your state of residence? 3) Do you have a 401k to draw on for a house loan in case of badly timed volatility? 4) What does will the rest of our investment portfolio look like in case of a sudden rise in interest rates? Depending on the answers to those questions, the mix of investments could be anywhere from: Tell me more about bracket/state/other investment mix and I can suggest something.
What is the question? Are you just trying to confirm that for self-employed, a Solo 401(k) is flexible, and a great tool to level out your tax rates? Sure. A W2 employee can turn on and off his 401(k) deduction any time, and bump the holding on each check as high as 75% in some cases. So in a tight stretch, I'd save to the match, but later on, top off the maximum for the year. To the points you listed - Your observation is interesting, but a bit long for what you seem to be asking. Keep in mind, there are 2 great features that you don't mention - a Roth Solo 401(k) flavor which offers even more flexibility for variable income, and loan provisions, up to $50,000 available to borrow from the account. My fellow blogger The Financial Buff offered an article Solo 401k Providers and Their Scope of Services that did a great job addressing this.
I don't quite understand your thought process here.  First, in a tax-advantaged retirement account you are NOT allowed to engage in a transaction with yourself.   If you just want to run a business and be able to write off expenses, how is using the self-directed IRA relevant? You can either buy the condo using your tax-advantaged account and rent it out to regular tenants.  Or you buy the condo yourself using your own money and then operate your business so you can deduct business expenses from doing so.  401k's allow you to take a loan out of it, so you can look into that as well.
Tax-exempt interest (and dividends attributable to tax-exempt interest) is required to be reported on Form 1040 line 8b (or the analogous line of Form 1040A).  While it is not directly taxed, it does come into play in the calculation of taxable income and various credits.  For example, tax-exempt interest is counted when determining the portion of Social Security benefits to be included in gross income.
Also, consider the possibility of early withdrawal penalties.  Regular 401k early withdrawal (for non-qualified reasons) gets you a 10% penalty, in addition to tax, on the entire amount, even if you're just withdrawing your own contributions.  Withdrawing from a Roth 401k can potentially mean less penalties (if it's been in place 5 years, and subject to a bunch of fine print of course).
First, to answer the question.  The benefit of a 401k is that you don't have to pay income tax on the money contributed nor do you pay capital gains tax on the money that accumulates.  You get that with the restriction that you can't willy nilly remove and contribute money to the account (and you are taxed on withdrawals, more severely if you do it before you are 65).  Similar sorts of restrictions apply to all retirement accounts which give tax benefits.  Now, for the 7000 not providing benefit.  Assuming a very modest 4% growth, over 40 years 7000 becomes 34,671. Not something to sneeze at (inflation, risk reward, blah, blah, blah, it is less than it looks, but 4% is really pretty low, the stock market averages anywhere from 7-&gt;10% and IIRC the bond market is somewhere around 5%).  Now, certainly, to avoid bankruptcy you should withdraw.  However, if it is possible, you will be best served by keeping the money in your 401k account.  The penalties and lost earning opportunities are pretty significant.  /u/BeatArmy99 [has the numbers](http://www.reddit.com/r/finance/comments/2ct0qy/why_cant_i_access_my_401k_if_its_my_money/cjiorl7) for how much you lose by doing an early withdraw.  Don't do this lightly and I would suggest avoiding cashing out the whole thing if you can.
"Your real question, ""why is this not discussed more?"" is intriguing. I think the media are doing a better job bringing these things into the topics they like to ponder, just not enough, yet. You actually produced the answer to How are long-term capital gains taxed if the gain pushes income into a new tax bracket? so you understand how it works. I am a fan of bracket topping. e.g. A young couple should try to top off their 15% bracket by staying with Roth but then using pretax IRA/401(k) to not creep into 25% bracket. For this discussion, 2013 numbers, a blank return (i.e. no schedule A, no other income) shows a couple with a gross $92,500 being at the 15%/25% line. It happens that $20K is exactly the sum of their standard deduction, and 2 exemptions. The last clean Distribution of Income Data is from 2006, but since wages haven't exploded and inflation has been low, it's fair to say that from the $92,000 representing the top 20% of earners, it won't have many more than top 25% today. So, yes, this is a great opportunity for most people. Any married couple with under that $92,500 figure can use this strategy to exploit your observation, and step up their basis each year. To littleadv objection - I imagine an older couple grossing $75K, by selling stock with $10K in LT gains just getting rid of the potential 15% bill at retirement. No trading cost if a mutual fund, just $20 or so if stocks. The more important point, not yet mentioned - even in a low cost 401(k), a lifetime of savings results in all gains being turned in ordinary income. And the case is strong for 'deposit to the match but no no more' as this strategy would let 2/3 of us pay zero on those gains. (To try to address the rest of your questions a bit - the strategy applies to a small sliver of people. 25% have income too high, the bottom 50% or so, have virtually no savings. Much of the 25% that remain have savings in tax sheltered accounts.
See, now you are confusing me. Is it one day or 4 years? :P  It's cool. I'm just giving you a hard time. I'll be honest, I'm scared to death that my 401k is going to tank worse than 2008. Overall, I think the trends for the stock market are positive, but there are points where it hurts. I know my dad is close to retiring and he still hasn't recovered from 08.
"It is not an either/or decision.  If you ""want to retire decades early"", then you will need to have a taxable account anyway, as you won't be able to stuff enough money into the tax-advantaged accounts to meet that goal. And if you are ""making a huge sum"", then you will be in a high tax bracket and so the tax advantages of saving into a 401K or IRA will be substantial. So, max out your 401K/IRA, and then save the rest into the taxable brokerage account.  When you retire at 39, live off your taxable account until you are old enough to tap the other ones without penalty. Unless you plan to die decades early, as well as retire decades early.  In that case, you can bypass the 401K/IRA."
HCE is defined as being above 120k$ or in the top 20 % of the company. The exact cutoff point might be different for each company. Typically, only the base salary is considered for that, but it's the company's (and 401(k)-plan's) decision. The IRS does not require HCE treatment; the IRS requires that 401(k) plans have a 'fair' distribution of usage between all employees. Very often, employees with lower income save (over-proportionally) less in their 401(k), and there is a line where the 401(k) plan is no longer acceptable to the IRS. HCE is a way for companies to ensure this forced balance; by limiting the amount of 401(k) savings for HCE, the companies ensure that the share of all contributions by below-HCE is appropriate. They will calculate/define the HCE cutoff point so that the required distribution is surely achieved. One of the consequences is that when you move over the HCE cutoff point, you can suddenly save a lot less in your 401(k). Nothing can be done about that. See this IRS page: https://www.irs.gov/retirement-plans/plan-participant-employee/definitions Highly Compensated Employee - An individual who: Owned more than 5% of   the interest in the business at any time during the year or the   preceding year, regardless of how much compensation that person earned   or received, or For the preceding year, received compensation from the   business of more than $115,000 (if the preceding year is 2014;   $120,000 if the preceding year is 2015 or 2016), and, if the employer   so chooses, was in the top 20% of employees when ranked by   compensation.
If you're simply trading with your own money and have not incorporated, then you are not eligible for a solo 401(k).  Nerdwallet has an excellent Q&A on the topic here for example.  Solo 401(k) is only allowed to be funded with earned income, and capital gains are not earned income. From the IRS page on One Participant 401(k) plans: Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit Earned income is defined by the IRS here: But not including: Even more clearly, that page notes: There are two ways to get earned income: You work for someone who pays you or You own or run a business or farm Capital gains are certainly neither of these. Now, I have read several articles suggesting one way to go about using the Solo 401k.  All of them suggest that you would need to incorporate in some fashion that would require a Schedule C tax return, though, and be trading with the company's money rather than your own, and then pay yourself a wage from that.  In that case you would be eligible for a Solo 401(k), and you might even be better off as a result of all that maneuvering (even though you'll be taxed at a higher rate for any income you do keep, likely, and have to pay self-employment tax).
"What ever you convert from the 401(k) will be subject to tax.  The bigger issue is that there's no ""do over"" no ability to recharacterize the conversion if when you do your taxes, you realize you need to undo some. I'd suggest transferring from the 401(k) to the traditional IRA first and then convert, just bring aware of the prorata taxation that will be due."
No, the situation is not different, the roll-over rules are the same. It won't be taxable (as opposed to traditional to Roth roll-over), but other than that it's the same. Whether the 401k allows rolling over or not while you're still employed - you have to check with the plan administrator (ask your payroll/HR for details). Usually, the deferred compensation cannot be rolled over out of the 401k while you're still employed.
"ASSUMING a person knows how to use and invest their money wisely, would it still be a bad idea to entirely disregard a 401k plan? Yes. A 401k, like an IRA, is a ""qualified plan"" and as such enjoys certain legal protections.  For a Roth 401k, the taxes are paid now and the interest accumulates tax free, and withdrawals will be tax-free. Doing it on your own means that your own savings will have interest taxed as you earn it.  For a traditional 401k, current savings are deducted from current earnings, and the withdrawals will be taxed. Doing it on your own loses the deferral of tax at this time.   Generally, 401ks and IRAs are highly resistant to judgements in civil lawsuits. If you file for bankruptcy protection at any time in your working career, the assets in these accounts are immune (in most states) from being used to pay off your creditors. If you do it on your own, that savings account will be emptied to pay off creditors in bankruptcy and also will be assets that can be taken from you in civil judgements (for example, you get in a car accident and they sue you). You might never be sued, nor file bankruptcy in your entire life, but you are unnecessarily exposing yourself to risks: anything might happen in the next 50 years. What you will lose in such circumstances far outweighs any perceived benefits you could possibly earn by rolling your own. If you are the sort of person who can max out your 401k and IRA contributions each year, and still have a significant sum to set aside for savings, you should contact an investment advisor and attorney to see about protecting your assets."
The plan is perfectly valid and legal as tax rules currently stand. There is no limit to the amount you can rollover or convert to Roth. Assuming your 401(k) is traditional pre-tax, you'll have to pay income taxes on the amount you convert above personal exemption + standard deduction, which is currently about $10k/year for single filers. The other caveat is you'll need funds to live off of while your conversion money is seasoning for 5 years in your Roth IRA. If you start the conversion while you are still working, you'll be paying taxes on it in your marginal bracket, which will negate much of the benefit of the pre-tax 401(k). If your living expenses are low, you can convert about $10k/year without federal income taxes, while living off capital gains from a taxable account which have a 0% rate in the 15%  income tax bracket (goes up to about $37k/year).
Conversion of after-tax 401K into a Roth is known (on Bogleheads for instance) as a Mega Backdoor Roth IRA.  Recent tax rulings seem to allow for this kind of transfer more cleanly. After conversions, the money is treated as a normal Roth - you don't pay any taxes or penalties on contributions.  For investment earnings, the Roth IRA has the standard five-year rule: most commonly - you must hold the account for five years and be 59.5  years old (there are other criteria). Otherwise, you may pay taxes plus a 10% penalty on the earnings portion of your distribution.  There are other reasons you can withdraw early - spelled out in IRS Publication 590B Figure 2-1.
If ordinary income tax rates and contribution rates to tax-advantaged retirement accounts are held constant, It's net negative to the extent that the average retirement account return exceeds the risk-free rate. Rather than pushing money into Roth accounts, the government could leave traditional 401(k)s unchanged, borrow the difference in up-front tax revenue that it's foregoing by doing so, and repay that debt as the tax revenue from traditional 401(k) disbursements comes in. Net of interest on the additional debt, the latter strategy would increase the government's total tax revenue by an amount proportional to the average excess return of the affected retirement accounts, with essentially no downside (other than messaging) relative to the strategy that's being proposed.  Of course, in reality it's likely that retirement savings rates would decline as a result of the change, so that would partially offset the overall reduction in tax revenue. However, the downsides of reduced retirement savings rates arguably far outweigh that benefit. (That's why tax-advantaged retirement accounts exist in the first place.)