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Hopefully transferring a solo 401k to Schwab isn't a huge deal. Still something i didn't want to figure out.
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Apr 18, 2024 01:35
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Boo, I have a simple with Vanguard. Hopefully the new admin will keep access to all their funds. Otherwise, I'll probably advocate moving to.. Fidelity?
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Apr 18, 2024 01:55
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drk posted:Boo, I have a simple with Vanguard. Hopefully the new admin will keep access to all their funds. Some googling tells me that it's either fidelity or Schwab, although apparently fidelity makes you fund solo 401ks either via mailing in a check or calling them (ie the phone) to transfer funds from another fidelity account.
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Apr 18, 2024 02:00
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Not sure about solo 401k, but the Simple says "Employers can contribute online". And they let you invest in ETFs, which my Vanguard acct does not.
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Apr 18, 2024 02:09
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drk posted:Not sure about solo 401k, but the Simple says "Employers can contribute online". Yeah I'm not quite sure. I see Reddit posts from within the past year with people complaining solo 401ks at fidelity have no online contribution option. Not sure if things changed and/or are different for SIMPLE plans. Edit: based on Reddit posts from fidelity (lol), apparently they've finally added this in the past few months. Residency Evil fucked around with this message at 02:25 on Apr 18, 2024 |
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Apr 18, 2024 02:14
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I have a weird problem caused by my company's 401k. My company allows the mega backdoor Roth in the 401k, but only inconveniently. You have mail all the forms to Vanguard and you can only do in service withdrawals 4 times per year. Vanguard customer service takes, on average, 4 weeks to handle this process, but sometimes they take more. The process is also buggy, Vanguard thought I quit the company last time and stopped adding my paycheck deductions to my account for a few weeks, which was a fun mess to sort out. Contributions in excess of the 401k limit are automatically converted to post tax contributions. So the minimal headache solution is to set how much money I want to contribute at the start of the year and start mailing in forms after I put in more than the normal 401k limit. I have to contribute at least 8% of my salary per paycheck to get the company match, so front loading everything is not an option. My job security is somewhere around government employee and tenured professor, I am fine assuming that I will be employed the whole year. The problem is that my start of year paychecks are larger than my end of year paychecks. This is because I get all of my tax deductible contributions done by summer, then I start paying taxes on mega backdoor Roth contributions. This year, I will go from ~$2900 a paycheck to ~$2500 and I hope to increase my contribution percentage next year, which will only increase the delta. Getting paid earlier is better than getting paid later, so I should be better off frontloading the tax advantaged part. Plus it minimizes paperwork and I can't really invest after tax contributions till they are converted, which would take a month and a half (on average) if I spread them evenly throughout the year. I am fine from a cash flow perspective, most months I spend under $3k. But I have some lumpy expenses which this makes it harder to plan for. What should I do with the start of year tax savings? Just stick them in an extended emergency fund? T-Bills? Breakable CDs? I can't use it to max out my IRA and HSA, my end of year bonus already covers that. pointlesspart fucked around with this message at 04:10 on Apr 18, 2024 |
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Apr 18, 2024 04:00
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Leperflesh posted:Took me a second to re-read, and that's not the regular Vanguard 401(k)s, nor ordinary trad and Roth IRAs. It's just the weirdo redheaded stepchildren: individual 401ks, SEPs, and SIMPLEs (neither of which ought to be called IRAs but they are, gently caress you whoever named them that). Edit: can rollover my SIMPLE to a regular IRA, maybe I'll do that
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Apr 18, 2024 04:23
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What is the procedure to rollover SIMPLE into IRA at vanguard?
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Apr 18, 2024 04:35
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Ascencus managed my last company’s 401k on behalf of Vanguard and they’ve been a total mess. I was forced to take an excess contribution distribution due to ERISA non-discrimination rule, and they withheld taxes for the wrong state. It’s been two months and I’m still trying to get a corrected 1099-R from them. (yes I filed an extension for the state in question … which I don’t reside in lmao.) Customer service has been kind, easy to reach in person, and useless for solving any actual issues.
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Apr 18, 2024 04:42
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Crunching the numbers on my retirement savings and comparing it to where I should be at my age right now. I’m realizing that despite having a good bit saved up already, only about 23% of that is in tax-advantaged accounts - 401ks, rollover IRA, Roth IRA. The rest is either in my HYSA, or in my long-term investment brokerage account (which isn’t supposed to be touched until I’m ready to retire). This is mostly due to either being a windfall from startup ISOs and some other RSUs (brokerage account), or from being over the Roth IRA contribution income limit (HYSA), so for one reason or another they couldn’t be moved into a tax-advantaged account. Most of the advice I see along the lines of “how much should I have saved up for retirement by age NN?” only talks about money in tax-advantaged accounts. Obviously the money in the HYSA is for short-term use and isn’t meant to grow like a 401k or IRA, but I’m not sure how to value my brokerage account. How should I treat it in comparison? With the assumption that I’m not touching it for like another three decades. Chances are this is a “go read your books again Pollyanna” thing but hey, gotta post post post. 
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Apr 18, 2024 19:04
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Couplea things: first the aside, which is that if you're over the roth IRA contribution limit you can do the backdoor roth, so look into that. Your non-tax-advantaged savings will throw off dividends and earnings and so on, and you'll have to pay taxes on those when you get them, i.e. every year. If you withdraw money to do that, that's a drag on your performance; if you spend money from your pocket to do that, you're effectively not depositing that money into savings, so it's the same. Otherwise they are similar when you compare balances, to a roth IRA account, in that you will not have to pay income tax on your money when you withdraw it when you retire...but different in that many of your withdrawals will involve a capital gain tax. So in principle what you need to do is discount your long-term non-advantaged savings by the additional tax you'll pay on them compared to other savings, both the drag mentioned above plus the capital gains taxes on sale (see below). There are retirement calculators that are advanced enough to sorta do this for you, but it's always going to be a guesstimate because not only are you trying to project what your tax rate will be in retirement, you're trying to project what the capital gain will be on the assets you sell. And while we typically use a projected earnings rate on our investments (like, say, 7% above inflation) that's for the whole portfolio: in retirement, to avoid capital gains in high-tax years you may be able to selectively sell the worst-performing assets. But on the other hand, you may prefer to selectively sell the best-performing asset in any given year, because you'll have an asset allocation and selling the outperformers while buying more underperformers is the only way to rebalance once you're no longer making contributions. So the tl;dr of that is that it's harder, and IMO the way to do it is just discount your projected returns above inflation by some amount, like say 1%, and discount your projected withdrawals by some reasonable amount, like say 10% or so, compared to savings in an IRA. Like say you project your roth ira to grow 8% above inflation annually for 20 years, you might project your identically-invested (asset balances) brokerage account to grow 7% above inflation instead. And then say you assume you'll be pulling X of the total balance of your IRA out annually in retirement and that's $Y, assume in order to get $Y from your identically invested brokerage account you'd have to withdraw 10% more than X. If X is 20k, assume you have to pull $22k from the brokerage account to get the same $20k of after-tax money. The above numbers are all kinda pulled out of my rear end, but I feel like they're not gonna be wildly off the mark. The long term capital gains tax on your investments is likely to be 15%, but that's on the gains, not the principal, so if your money tripled in value then you'd pay LTCG on the difference, not the total, so like 10% instead of 15% is how I got there. That's fudgy. E. a third factor is that you'll be able to decide in retirement how much over the RMDs to take from your tax-advantaged accounts, if that allows you to defer paying LTCGs on your brokerage balances. And, you can set your total asset allocation to put more tax-efficient investments into your brokerage, which should further reduce your ultimate tax exposure. But, doing this would likely mean a different rate of return on the brokerage balances, which in turn affects your projected growth rates... yuck IMO just shovel a bit extra in there and be conservative with your projections for tax reasons and then don't stress about it too much. There's a good chance by the time you retire congress will change the tax laws anyway. Leperflesh fucked around with this message at 20:25 on Apr 18, 2024 |
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Apr 18, 2024 20:13
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Leperflesh posted:
Discounting your real returns doesn't cover the problem. If you have a real return 5% above inflation, but inflation is 4%, that is substantially worse for a taxable investor than a real rate of 5%, but inflation is 2%. This is because the inflation adjustments to the initial investment are taxable, so they eat into principal. To use an example consider $10,000 invested at 0% real for one decade, one with 4% inflation and one with 2%. They have inflation adjusted cost bases of 10*(10.04**10)=$14,802, $720 LTCG owed, 4.8% of total 10*(10.04**10)=$12,189, $328 LTCG owed, 2.6% of total Assuming you have to pay 15% LTCG. The problem actually inverts if we have deflation, since the losses to your cost basis start making your returns tax free. But the odds of sustained deflation are substantially lower than inflation. Over a long enough time period of positive inflation, the ratio of your cost basis to the current value of your investment tends toward zero. So you can analyze the worst case scenario by assuming you will have to pay LTCG on all your taxable investments. It can't get worse than that, unless you have to pay taxes on inflation adjustments along the way.
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Apr 18, 2024 21:40
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If you were lump sum investing that would all make sense but I was assuming the investor is doing the thing most investors for retirement do, and adding cash periodically throughout their working careers. LTCG will be higher for the earlier investments and lower for the later ones, but the earlier purchases would tend to be for smaller dollar amounts (lower salary) and later ones higher dollar amounts (higher salary). And presumably you can be smart about which lots to sell and maybe even do a bit of tax loss harvesting. Still, what you're saying is a very good point, the basis cost for finding your capital gain is in nominal not inflation adjusted dollars. Leperflesh fucked around with this message at 23:54 on Apr 18, 2024 |
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Apr 18, 2024 23:52
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I'm not sure you can make the assumption that retirement savings will follow the normal, gradually rising path for the OP. Windfalls and RSUs are highly variable and subject to feast and famine periods. The way to properly do this is to specify exactly how much you will be investing in each time period (negatively for withdrawals), what the returns will be in each period, the inflation rate, and the tax rate. The cost basis issue means how you get to a certain investment amount matters, path dependence is a pain. But you can avoid all of these cost basis issues and use a simpler model if you promise to only touch your taxable investments in the following ways: 1. Never dip into principal. You pay for taxes on dividends out of dividends, so multiply them by the appropriate tax rate. You will need two rates of return to model it, one on the principal and one on the dividends. 2. Never sell any taxable investments. Even if you have a loss, how much loss will vary based on your cost basis. So just never sell. 3. You may donate taxable investments to charity, you get the full tax write off from those regardless of the cost basis. 4. Die. If you have less than $13.61 Million, you won't pay estate tax and your investments get a step up in cost basis. If you have more than $13.61 Million, you should probably be paying someone to worry about this for you. This will make it easier to model the problem, in exchange for making it harder to solve the problem. Or you can accept some uncertainty in retirement planning and sell your assets as needed. The error bars for financial planning are fairly wide anyway, I'd project out a best, worst, and average case scenario. Maybe work out an average taxable cost basis for year X, add in some inflation scenarios (0%, 1%, 2%, 4%, 8%, 16%), and discount dividends stock and bond funds by LTCG rates in the historic range of 15%-25% (net of tax deductions). A simple script would be able to handle it.
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Apr 19, 2024 02:52
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Pollyanna posted:... I’m not sure how to value my brokerage account. How should I treat it in comparison? With the assumption that I’m not touching it for like another three decades. ... Wouldn't it just be subtracting 15% (or whatever LTCG rate you anticipate) from the gain, and adding that to the basis? My approach is so simple and some of these responses so long that I'm probably wrong in some major way. My retirement savings in taxable/brokerage are all in a total stock market fund. The money I've transferred in is basically the same as the basis, and any change from that total is the gain/loss. So, I just multiply the investment gain/loss by 85% (to estimate 15% LTCG tax) and add to the basis. Then I use that estimate for things like monitoring net worth or estimating overall progress of retirement investments.
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Apr 22, 2024 01:47
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remembertorelax posted:Wouldn't it just be subtracting 15% (or whatever LTCG rate you anticipate) from the gain, and adding that to the basis? There are at least two problems with this approach 1. There are two kinds of return: capital gains and dividends. Both are taxed at the same rate (assuming the dividends are qualified), but one has to be paid every year. As an example, consider two funds that return a nominal 7% every year, one of which is entirely capital gains and one of which is all dividends. After 10 years, if you invest $10k in both and pay 15% LTCG Capital Gains = 10*(1.07**10)=$19.67k, $1.45k in deferred LTCG. So if you sold everything, you would get $18.22k Dividends = 10*((1+.07*.85)**10)=$17.82k Most funds are a mix of both Capital Gains and Dividends, so you have to know which percentage of each you are getting. 2. Your cost basis is tax exempt, but inflation changes the real value of those nominal dollars. This means you can't just plug in the long term real return of stocks and bonds, you have to guess inflation too. You end up paying a deferred LTCG tax on an increasing portion of your investments as the nominal amount of dollars you hold rise at the inflation rate. The worst of all worlds is if the cost basis of your investments tanks to (for practical purposes) 0 and all your returns come from dividends. Think owning $SPY shortly after hyperinflation. $100,000 buys a hamburger and the DJIA is at $300 million, so you pay deferred LTCG on all of your investments. Stock buybacks were banned decades ago, companies have been paying out massive dividends and all your returns paid dividend taxes up to that point. Assuming the stock market returns 5% real over a 30 year time horizon, the real value of your taxable investments is 10*((1+.05*.85)**30)=$34.85k, with $5.23k in deferred LTCG. Alternatively, say inflation was 0 for decades, Japan style, and all your returns were capital gains. Then you have 10*(1.05**30)=$43.21k, with $4.98 in deferred LTCG. This gives the account a liquidation value lower bound of $29.62k and a upper bound of $38.23k. Nothing about the investment returns or tax rate changed, just inflation and the timing of the taxes. You could have 29% more money as a result of just those two. If tax rates are higher than 15%, which they have been, the inflation rate and dividends vs capital gains matter more. None of this is hard to track for past investments. You can just look up what your actual basis is, actual returns, and actual inflation. But for retirement planning, you have to assume something about the future state of the world.
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Apr 22, 2024 05:10
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Pollyanna posted:Crunching the numbers on my retirement savings and comparing it to where I should be at my age right now. I’m realizing that despite having a good bit saved up already, only about 23% of that is in tax-advantaged accounts - 401ks, rollover IRA, Roth IRA. The rest is either in my HYSA, or in my long-term investment brokerage account (which isn’t supposed to be touched until I’m ready to retire). This is mostly due to either being a windfall from startup ISOs and some other RSUs (brokerage account), or from being over the Roth IRA contribution income limit (HYSA), so for one reason or another they couldn’t be moved into a tax-advantaged account. What many people miss is that money in a taxable account well managed (minimal turnover/interest/dividends resulting in minimal tax drag) often is higher valued than money inside a traditional IRA/401k account. That Trad tax advantaged money will be fully taxed coming out at normal income tax rate. Taxable money is taxed on gains and that often at preferred LTCG/QD tax rates.
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Apr 22, 2024 21:07
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A bunch of long term money in a taxable brokerage is great, very flexible, and likely to be taxed very favorably if its just index funds and the like. Tax advantaged accounts are also great, maybe better for the specific purpose of retirement saving but it's complicated and it depends. The rules of thumb and r/pf peanut gallery gets weirdly hung up on taxes and "just always do x" and misses the big picture sometimes. Having a lot of both is a really good problem to have, with a lot of tools at your disposal to flex and optimize.
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Apr 22, 2024 21:13
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I do not think tax advantaged accounts ever "lose" to a brokerage account for long term savings? You always got your dividends/growth tax free (no capital gains taxes paid), and you always got either the deposit or the withdrawal tax free. In Polyanna's case, we're talking about at least some of that money being "a windfall from startup ISOs and some other RSUs ", in both cases she'll have had to pay tax on that money when she got it. If she had a way to get that into a tax-advantaged account I think I can confidently say it would have been better or (if she had literally a zero percent tax rate somehow) at least no worse. And the money she says she can't put into a roth IRA due to being over the income limit, it bears repeating, can get into a Roth IRA anyway via the backdoor roth unless she has no earned income. The more challenging aspect of trying to project growth and taxes into retirement is complex, but IMO the actual question of what to do next is a bit simpler: take maximum advantage of the tax advantaged accounts available, including by using the backdoor roth. Project future retirement savings by presuming the money grows at around 7% or so above inflation. Assume at least some of the money will be subject to your top marginal income tax rate in retirement, and discount money outside of the 401k/ira space will also be subject to long-term capital gains tax. Then pick some amount of money you think you'll be comfortable living on and project when you run out of money. If it's well after you're ~95 you're good, if it's right at like age 90 you are close enough to wanting more money that saving a bit more is a good idea but don't stress about it much, and if it's like you're gonna run out of money at age 78, you need to save more or plan to live on less. Regardless of all of the above, track your actual money annually and this lets you make adjustments to your plan as you go. It's likely that for most of us, going into retirement in our mid-60s, we'll be able to modestly adjust our spending to account for some minor, unforseen shortfall, or enjoy spending a bit more if we wind up having saved "too much", and probably won't miss the mark by a huge margin if we did the above even if we didn't perfectly account for taxes, dividends, etc. All the talk about exactly how to account for inflation and taxes shifts the numbers a bit but I think you can make reasonable approximations and, given our inability to predict the future anyway, that's enough to see if we're basically on track or not and then act on that.
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Apr 22, 2024 23:46
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Leperflesh posted:I do not think tax advantaged accounts ever "lose" to a brokerage account for long term savings? You always got your dividends/growth tax free (no capital gains taxes paid), and you always got either the deposit or the withdrawal tax free. How does that work out? The capital gains on a traditional retirement account are not tax free, they're taxed at normal income rates. And the principal is also taxed at normal income rates. The advantage is that the taxes are deferred, which reduces tax drag. Traditional retirement accounts *really* lose to a taxable account in the case of inheritances. Taxable accounts are stepped up in basis, traditional retirement accounts heirs still have to pay full normal income tax rates on withdrawals.
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Apr 23, 2024 00:07
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Saw that Fidelity was adding SPAXX as a core position for their cash management accounts in June, so no more having to manually buy SPAXX or manually sending money over to an actual brokerage account w/ Fidelity. They confirm it in their official subreddit and I see the same fine print on my combined statement for March: https://www.reddit.com/r/fidelityinvestments/comments/1bui60e/spaxx_as_cma_core_position_coming/
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Apr 23, 2024 00:16
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drk posted:How does that work out? The capital gains on a traditional retirement account are not tax free, they're taxed at normal income rates. And the principal is also taxed at normal income rates. What? No. Earnings, dividends, cap gains, etc. within a tax-advantaged retirement account are not taxed at the time you get them. In a traditional IRA or 401k, you pay tax on your distributions, at your income tax rate. So in these cases the cap gains tax is effectively deferred, but paid at your top marginal rate, however high or low that may be. It's better to refer to this as just paying income tax on withdrawals and ignoring cap gains. Particularly because, since you don't pay tax on your cap gains etc. as you go, you get to reinvest 100% of that money within the account. You can only do that with a brokerage account if you add more money or pay your tax from somewhere... in other words, cap gains tax is a constant drag on your performance of a reinvested account balance. The reason we say that trad retirement savings are better if you are paying higher tax now than you will in retirement is because your income tax on the money before you put it in now would be higher than the income tax you'd pay on that money as it comes out. On a Roth IRA or 401k, you pay no tax on your withdrawals. That means you paid no cap gains tax or tax on dividends or other incomes such as bond coupons, etc. that occurred within your account throughout its lifetime. Leperflesh fucked around with this message at 00:22 on Apr 23, 2024 |
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Apr 23, 2024 00:16
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Boris Galerkin posted:Saw that Fidelity was adding SPAXX as a core position for their cash management accounts in June, so no more having to manually buy SPAXX or manually sending money over to an actual brokerage account w/ Fidelity. Hey thank you for sharing, I'm going to take advantage of this. ...to make like seven extra dollars in interest. Still counts!
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Apr 23, 2024 00:20
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Leperflesh posted:What? No. I think we're talking about the same thing. You said "You always got your dividends/growth tax free (no capital gains taxes paid)". This is correct (you don't pay capital gains taxes), but also wrong (it's not tax free, you have to pay normal income taxes eventually which are currently higher than capital gains rates).
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Apr 23, 2024 00:47
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Boris Galerkin posted:Saw that Fidelity was adding SPAXX as a core position for their cash management accounts in June, so no more having to manually buy SPAXX or manually sending money over to an actual brokerage account w/ Fidelity. This is really cool, I prefer FDLXX so I'll have to make manual transfers either way, but it's nice not having to worry about forgetting to do so at least.
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Apr 23, 2024 00:55
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drk posted:I think we're talking about the same thing. Here’s a quick way to think about it and why taxable loses to tax advantaged. Roth IRA v Taxable Brokerage: the principle is taxed on the way in. Taxable brokerage pays tax on dividends/interest/gains, Roth IRA pays no more. Traditional IRA has the same benefits, just on the front end instead of the back end.
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Apr 23, 2024 01:28
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Now figure for effect on Social Security payments.
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Apr 23, 2024 01:54
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drk posted:I think we're talking about the same thing. Ungratek’s comparison is spot on. If Roth is better than taxable, then pre-tax must also be better than taxable since pre-tax and Roth are the same (assuming the same income tax rate now vs later). I think you guys were originally talking about the “density” of the balances in each account when this confusion happened. Given the same dollar value, a taxable account does have a higher usable value than a pre-tax account since capital gains taxes on the increased value is always going to be less than income taxes on the full amount. This is important to consider if you’re deciding how close you are to having enough to retire (or do anything else with the money idk). The part that I think you’re missing is that “the same dollar value” is not how it would play out - you would always have a higher dollar value in the pre-tax account since you get to out both your money in there and uncle sam’s. In the taxable account you only get to deposit your own money.
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Apr 23, 2024 01:55
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drk posted:I think we're talking about the same thing. Personally I've always considered this to be something of a disadvantage of traditional retirement accounts. They convert long term capital gains and qualified dividends to ordinary income. I suppose that doesn't matter a whole lot in many cases as it gives you an easy way to fill your standard deduction and the lower couple of tax brackets each year. But once RMDs kick in you're probably going to find yourself paying similar taxes as when you were working, maybe even higher if you get kicked past an IRMAA limit. This is especially true if you have substantial retirement savings. (Which I think a lot of posters in this thread have.) This all tends to lead to Roth conversion strategies in the early years of retirement which can be something of a pain to plan out. If you have a sizable taxable account then you are already filling the standard deduction and the lower couple of tax brackets with dividends, capital gains, and possibly interest from that every year. This can complicate Roth conversion planning and mess with IRMAA limits so having a traditional retirement account along side a taxable one can be real headache. This isn't a super common situation but I think it goes to show that traditional retirement accounts aren't nearly as useful for high earners as many people make them out to be. Roth accounts on the other hand suffer from none of these issues and offer their tax benefits to everyone regardless of income level. Assuming you can do a backdoor Roth IRA without the complications caused by already having traditional IRA money of course.
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Apr 23, 2024 01:58
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Significant medical expenses can offset the tax on RMDs which a lot of people have later in life.
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Apr 23, 2024 02:05
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Eyes Only posted:Ungratek’s comparison is spot on. If Roth is better than taxable, then pre-tax must also be better than taxable since pre-tax and Roth are the same (assuming the same income tax rate now vs later). Most people seem to fall for this fallacy. This is only true if you take the tax savings from investing in a traditional retirement account and invest them somewhere else. Like a taxable account. Almost nobody actually does this. Most people max out their IRA and/or 401k each year, regardless of whether its Roth or traditional and call it done. They then spend whatever they didn't invest. This means Timmy Traditional and Rodger Roth will have the exact same balances in their retirement accounts when they retire assuming they invest in the exact same things and put the same amounts in at the same points in time and all that. In this situation, Rodger Roth wins by a mile. I suppose you can argue that the traditional retirement account allows you to have a slightly higher standard of living during your working years but its hard to quantify something like that.
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Apr 23, 2024 02:05
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Eyes Only posted:Ungratek’s comparison is spot on. If Roth is better than taxable, then pre-tax must also be better than taxable since pre-tax and Roth are the same (assuming the same income tax rate now vs later). and in either case, if we assume you reinvest dividends etc. you are saving money on the capital gains tax drag that occurs in a taxable brokerage account. if you have $100 of shares that pay a $1 dividend annually, after 1 year in a tax advantaged account you are investing $101. After 1 year in a brokerage account you are investing $100, plus ($1 - tax) is <$101. Qualified dividends are taxed at 0, 15, or 20%, depending on your other income. Over the long term of 10, 20, 30+ years, that drag has an effect on the amount of money you have to withdraw at the end. If you're comparing a trad IRA to a brokerage account, your traditional ira distributions are taxed as income whereas the sales of the shares in your brokerage account are taxed at a LTCG rate, and if your income tax is higher than that LTCG rate (also accounting for your cost basis) you could well be paying lower tax for the latter... but it's lower tax on a lower amount of money. And, of course, you got to put the money into the trad IRA tax free, so you got to invest more to begin with. You have to do the math to determine if the latter is better than the former but in most cases the former will be better, because in most cases your top marginal rate that you're saving when you made your deposits, plus the tax-free reinvestment of dividends etc. factor, comes out to more than the difference between the top marginal rate and the (sale price - cost basis) * LTCG rate at the end. If you are comparing a Roth IRA to a brokerage account, you get to take the Roth IRA money out tax free. You can ignore cost basis, and the dividends etc. taxes weren't just deferred, they don't happen at all. Since your deposits into your Roth IRA were post-income-tax (assuming you're depositing income) and so were your deposits into your brokerage account (same assumption), the Roth IRA is at least as good or almost always strictly better: it's at least as good when your income is so low that your LTCG rate on your brokerage account is 0% the entire time so you never had to actually pay tax on the dividends etc. and also low in retirement so your LTCG rate is 0% in retirement too. This would be very unusual for most savers. I don't know about the inherited thing. The step up in cost basis could be very significant and I imagine it depends on the actual fact of those cost bases and how much longer after that the money will be invested with free reinvestment on the dividends etc. as well as what the saver's income tax rates are, but I can believe that there are scenarios where the step up thing outweighs all the other concerns. I'm not sure. Antillie posted:Most people max out their IRA and/or 401k each year, regardless of whether its Roth or traditional and call it done. Leperflesh fucked around with this message at 02:10 on Apr 23, 2024 |
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Apr 23, 2024 02:08
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Ungratek posted:Significant medical expenses can offset the tax on RMDs which a lot of people have later in life. I wasn't aware of this. Interesting. But from what I can tell, at least initially, it looks like up to $10,860 of medical expenses can be itemized on your taxes. But only if said expenses exceed 7.5% of your AGI, which the RMD would be pushing upward. This seems to be focused mostly on long-term care insurance premiums. What other medical expenses would qualify doesn't seem terribly clear. In any case you need to be in a position to itemize your deductions at the very least and a large RMD could possibly push your AGI too high for you to qualify for the deduction. Its unclear if the 7.5% of AGI limit applies to only the $10,860 deduction limit or to the entire expense. Time for research! Antillie fucked around with this message at 02:27 on Apr 23, 2024 |
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Apr 23, 2024 02:19
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Leperflesh posted:I feel like 98% certain that this is not true. I will grant you that most people do not max out these accounts. But either way I feel that most people are contributing the same amount to the account regardless of account type and not investing the tax savings. If for no other reason than the fact that they just don't know what the tax benefits of their account are, what the differences between the two types are, or that the other account type even exists. In the case where a lower income person is able to invest more due to the immediate tax savings offered by a traditional account they would arguably be just as well off with a Roth account as it would allow them to lock in their currently low tax bracket. I guess ultimately I just feel that taxes probably aren't going to be going down over the next 20+ years. In fact I feel its likely that they will go up one way or another. Even if the actual income tax brackets themselves don't change the IRMAA limits or the income limits for things like ACA tax credits can be adjusted downwards to achieve the same net effect. There are plenty of things outside of the actual income tax rates that can be adjusted to create a functional tax increase and the way I see it, something has to change eventually with regards to the difference between government spending and government income. Maybe it won't happen till I've been dead for 20 years. Or maybe it will happen just after I retire. Or maybe it somehow won't happen at all. I guess what I'm saying is that future taxes are an uncertainty. And I don't like uncertainty. Antillie fucked around with this message at 02:48 on Apr 23, 2024 |
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Apr 23, 2024 02:20
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I did the math instead of posting hot phone takes and I think I was wrong. Assuming tax rates never change, it seems to always be better to defer taxes in a traditional IRA vs putting it in a taxable account. There are situations when this isnt correct (such as assuming lower tax rates now vs later), but in general, I am wrong. I am extra wrong in the case of states that have no special capital gains rates like CA. Mea cupla
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Apr 23, 2024 02:27
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But the original question was how to value money in a taxable account versus a tax-advantaged account, not whether it is advantageous to put more money into a tax advantaged account. Dollar for dollar money in a taxable account is more valuable than money in a traditional tax advantaged space. That is because every dollar inside a traditional tax advantaged space will be fully taxed at income rates when withdrawn, thus it should be discounted in value at your expected withdrawal tax rate. Roth dollars of course are maximum value. Taxable account dollars are valued somewhere in between trad and roth. Where exactly is difficult to define, but long-term capital gains will be taxed preferably to income at any tax level. I agree that it is almost always worthwhile to maximize your tax advantaged space, even Trad. But this does not mean that a current dollar in Trad assets is worth more than a dollar in taxable.
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Apr 23, 2024 03:16
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it's just complicated and it doesn't seem like there's any one-size-fits-all on taxable vs traditional tax-advantaged space. future incomes will vary, future capital gains tax rates and income tax brackets in 20+ years are uncertain / unknowable. in a trad IRA you can also trade, like say, going to cash before march 2020 without having to take a big tax hit at the time. the lack of paying taxes every year gives greater advantages to funds that throw off income, e.g. SCHD or JEPI, as compared to a taxable account. on the other hand, you probably wouldn't want to hold a MLP in an IRA because you'll lose tax advantages, so if you saw a big opportunity there [1], may as well hold it in taxable. simplest solution is just to roth if you can and spread around the rest. cap out the trad and rest in taxable. [1] https://x.com/real_bill_gross/status/1775887755568124012
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Apr 23, 2024 03:48
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Subvisual Haze posted:But the original question was how to value money in a taxable account versus a tax-advantaged account, not whether it is advantageous to put more money into a tax advantaged account. Dollar for dollar money in a taxable account is more valuable than money in a traditional tax advantaged space. That is because every dollar inside a traditional tax advantaged space will be fully taxed at income rates when withdrawn, thus it should be discounted in value at your expected withdrawal tax rate. Roth dollars of course are maximum value. Taxable account dollars are valued somewhere in between trad and roth. Where exactly is difficult to define, but long-term capital gains will be taxed preferably to income at any tax level. That depends. If you have a low income, then trad dollars are worth as much as taxable dollars. The standard deduction is $14,600. Then you have $11,600 at 10% and $35,550 at 12%, with double all these numbers for married couples. So if you have a low income, you will pay less than 15% tax on average on traditional account withdrawals. Of course, LTCG tax only kicks in if your taxable income exceeds the 12% bracket. But for that first $14,600 (higher if you itemize), traditional and taxable dollars are taxed at the same rate. You also get no tax liability for donating traditional dollars to charity as Qualified Charitable Distributions. So giving money away lets you count them both the same, provided you jump through the QCD hoops.
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Apr 23, 2024 04:23
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pointlesspart posted:That depends. If you have a low income, then trad dollars are worth as much as taxable dollars.
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Apr 23, 2024 04:33
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One thing that’s missing from this discussion is that there are income limits in order to deduct contributions to a traditional IRA if you’re eligible for an employer sponsored retirement plan. So for the average person whose work offers a 401k, if their MAGI is more than $77k in 2024, they start to lose the ability to deduct contributions to a traditional IRA, phasing out entirely at $87k. So for those people, a traditional IRA doesn’t make any sense, unless it’s just to do a backdoor Roth.
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Apr 23, 2024 09:54
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