{"items": [{"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=615987354282", "anchor": "fb-615987354282", "service": "fb", "text": "People recommend Roths over traditional IRAs/401ks because nowadays most young people expect their income tax bracket to be higher at retirement, not lower.", "timestamp": "1370955406"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=615987793402", "anchor": "fb-615987793402", "service": "fb", "text": "@Arthur: I think the reason that doesn't come out in my example is that the example person earns $50k/year over their whole career while (real) earnings usually rise for a while at the beginning of your career.", "timestamp": "1370955785"}, {"author": "Anne", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=615999639662", "anchor": "fb-615999639662", "service": "fb", "text": "nice math. chances are that inflation adjusted needs after retirement will be less, because housing is paid off. some good thoughts on the subject are here: http://www.mrmoneymustache.com/", "timestamp": "1370963696"}, {"author": "Sara", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616008287332", "anchor": "fb-616008287332", "service": "fb", "text": "You don't mention that some 401(k) plans include employer contributions. My former employer matched 50% of my contributions for many years, effectively bringing my 6% contribution up to 9% at no cost to me.", "timestamp": "1370969431"}, {"author": "Samuel", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616014669542", "anchor": "fb-616014669542", "service": "fb", "text": "I think this analysis is on the right path, in that expected relative tax rates (before v. after retirement and earned income v. investment income) are the key drivers as to which tax treatment is better. Things to consider: are you living in a high-tax or low-tax state when earning? What about when drawing from those funds? One benefit to taxable accounts: you can control the timing of the income events. For myself: when I'm paying more in taxes (high tax state or high income year), I'm likely to favor saving in a traditional 401k. If I'm paying less in taxes (low income year or low tax state), Roth becomes more tempting. I hope to accumulate all three types of savings so that I can perform a similar trade-off when I'm drawing from them: if I'm in a low-tax situation, maybe drawing from the 401k makes sense. If a high-tax situation, maybe drawing from the Roth or taxable accounts would be better.", "timestamp": "1370973394"}, {"author": "Phillip", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616020722412", "anchor": "fb-616020722412", "service": "fb", "text": "The key is tax advantaged growth, which occurs with both Roth and Traditional 401K. Match is a tricky issue. Your match will end up in a traditional 401K regardless, otherwise the match becomes income in this tax year, which is messy from a putting it into your W2 point of view. I recommend to people starting out to go roth because the tax advantage is small in the current year and the 40 or more years of growth should lead to some nice income down the road. he one thing for which there is no excuse is failing to get the 50% - 100% day one returns you get if your company matches your contribution.", "timestamp": "1370976227"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616023741362", "anchor": "fb-616023741362", "service": "fb", "text": "Hedging for every unknown you can within reason is always smart, and since I have honestly no idea what my tax situation will be like in the future I have both a Roth IRA and traditional 401k.", "timestamp": "1370977806"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616029414992", "anchor": "fb-616029414992", "service": "fb", "text": "Also HSAs are the ultimate in tax avoidance since they are never taxed at all for anything if you use them for health expenses (which will almost certainly be a good chunk of your retirement expenses).
The problem is that HSAs are only available if you have an HDHP, which is an objectively terrible decision no matter what your situation (in my opinion). But if you're in a situation where you don't really have any choice but an HDHP you might as well take advantage of it.", "timestamp": "1370981799"}, {"author": "Jim", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616061390912", "anchor": "fb-616061390912", "service": "fb", "text": "All of this is true given the assumptions, but putting money in a 401k account is still a terrible idea, because the money is effectively frozen. Freezing your money for decades is a *huge deal*, very nearly as bad as setting that money on fire. Compared to what one gets out of wisely spending on personal development or on productive assets, a 3.5%/year rate of return is absolutely pathetic.
Middle-class people are commonly advised to invest in the stock market, so that they can retire. However, this is a relatively recent phenomenon; and the influx of retail investors meant the market-wide price of stocks was bid up as this became common practice. However, the rise in price this created was a one-time phenomenon, and it grossly inflated the historical rate of return. Combined with the large structural uncertainty in the world and grossly understated inflation, I seriously doubt that expected returns to stock-market investing are even positive.
I believe that the common advice, to use the stock market to save lots of money for retirement, should be treated as actively malicious, when given to young people. The practical effect is to destroy wealth, not to preserve it. Excess money should be converted into time, skill development, and connections, as these things have dramatically higher rates of return.", "timestamp": "1370983530"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616061705282", "anchor": "fb-616061705282", "service": "fb", "text": "Your computations look somewhat wrong to me, but I haven't done them carefully myself. There is always an advantage in delaying paying taxes since you can invest the money that you are paying. Delaying a tax payment is like an interest free loan. Also, many investment vehicles have substantially different real rates of return inside a tax advantaged account and outside. For example, bonds and REITs and to some extent small cap equity indices. I don't see where you discuss how distributions for traditional accounts convert capital gains into ordinary income which is a disadvantage compared to a Roth.", "timestamp": "1370983691"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616062284122", "anchor": "fb-616062284122", "service": "fb", "text": "The real point of your example is that rich people gain much more from these tax advantaged structures than people with typical incomes. The higher my marginal rate and the more I can contribute the more I will gain relative to not using the accounts. My understanding is that 401(k) plans were designed to serve the wealthier managers. Furthermore, if I am part of the investment class I can structure my income to all be capital gains so if I elect not to realize them I can prevent my income in a given tax year from going above what I need to be able to use IRAs.", "timestamp": "1370983952"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616062658372", "anchor": "fb-616062658372", "service": "fb", "text": "These computations are highly sensitive to marginal tax rates so for people that live in a state with a high state income tax, they will get a much larger advantage from the account.", "timestamp": "1370984155"}, {"author": "Anne", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616065248182", "anchor": "fb-616065248182", "service": "fb", "text": "Money in your 401k is not \"frozen\". There are several reasonable ways to access it before you are 59.5. Here are some ways: http://www.mrmoneymustache.com/.../how-much-is-too-much.../", "timestamp": "1370985337"}, {"author": "Jim", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616065941792", "anchor": "fb-616065941792", "service": "fb", "text": "The linked article describes three ways of getting money out of a 401k. The first requires sacrificing all the tax benefits you previously got, then paying another 10% on top of that. The second has a 5-year lead time, and the third doesn't give access to the principal at all, it only yields a trickle of money.
So it's not *completely* frozen, but it's pretty close.", "timestamp": "1370985802"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616070572512", "anchor": "fb-616070572512", "service": "fb", "text": "I could theoretically realize greater returns than stock market investing by spending all that money on, say, getting another degree in CS and getting a high-paying CS job out of it, but that would require me to actually go to school, fight my way through the job market and then do a job I don't want to do.
My time and mental attention are worth more to me than money, and I don't have the time and mental attention to do anything with my money other than put it somewhere where hopefully it'll grow.
Your advice is fine for someone who actually wants to be an entrepreneur or Renaissance man, but for most of us the choice is between investing and just letting the money sit in a checking account doing nothing.", "timestamp": "1370988724"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616070886882", "anchor": "fb-616070886882", "service": "fb", "text": "George is right, though -- replacing actual Social Security with tax-advantaged investing is going to be the death of our society (among the many other ways America has been dying since the 1980s).", "timestamp": "1370988858"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616093481602", "anchor": "fb-616093481602", "service": "fb", "text": "@George: \"My understanding is that 401(k) plans were designed to serve the wealthier managers.\"
401(k)s weren't actually designed at all; they were more \"discovered\". Look up Ted Benna.", "timestamp": "1371001375"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616093576412", "anchor": "fb-616093576412", "service": "fb", "text": "@George: \"rich people gain much more from these tax advantaged structures than people with typical incomes\"
Pretty much, in that \"tax advantaged\" means you can avoid paying tax you otherwise would and the higher your income the more tax there is to avoid.", "timestamp": "1371001442"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616093795972", "anchor": "fb-616093795972", "service": "fb", "text": "@Arthur: \"which will almost certainly be a good chunk of your retirement expenses\"
Unless sometime in the next 50 years we wise up and switch to single-payer like the rest of the world.
\"objectively terrible decision no matter what your situation\"
Huh? I'm in one, and I'm pretty happy with it. As long as I stay lucky and healthy I pay relatively little, and if something bad happens I'm covered after the deductible.", "timestamp": "1371001602"}, {"author": "Samuel", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616100607322", "anchor": "fb-616100607322", "service": "fb", "text": "@George: \"401(k) plans were designed to serve the wealthier managers.\" I think it depends on the plan. Mine gives access to share classes of funds with lower expense ratios that I could typically get on my own (e.g. PIMCO's institutional share classes, and Vanguard's signal shares). I've certainly seen plans with far more expensive choices, but there are some plans that are pretty sane. I suspect Google's is one of the saner ones. And...most 401(k)'s I've seen of late offer a self-directed option if you really want to pick your own investments.", "timestamp": "1371004264"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616113945592", "anchor": "fb-616113945592", "service": "fb", "text": "Sam, the point is that any retirement scheme that stresses tax advantages above all else is implicitly geared only toward those who have enough money that taxes actually account for a significant expense.
It's only for the wealthy manager class that you could make any argument that 401ks are a better option than the defined benefit pensions they've replaced. God knows I would personally much rather have a straight up pension than leave my retirement to the whim of the markets, but that's an option no one wants to give workers now. (Please note that \"don't want to\" is distinct from \"can't\".)", "timestamp": "1371010475"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616114768942", "anchor": "fb-616114768942", "service": "fb", "text": "Jeff, in the unlikely but happy event that HSAs became obsolete for their original purpose they would just become traditional 401ks -- they already function as such. (They're tax-free both ways for health spending and subject only to income tax on withdrawal if you take money out of them after retirement for non medical expenses.) You have little to lose by choosing to max your HSA before your 401k.
As far as whether, if you had a choice, you should pick an HDHP in the first place -- HDHPs are great if you don't get sick, and they're still find if you develop an acute problem that is then resolved in the course of a given year.
However, if you develop a chronic condition or a permanent disability, HDHPs become a horrible inescapable black hole -- they're only \"affordable\" if you don't max your deductible every year, which you will if you have a chronic condition. And once you get that chronic condition it's too late to get better insurance, and in some cases the HDHP might fuck you even worse by disqualifying you for government assistance that might have actually left you better off if you were uninsured. (Note: this is rare and in most cases HDHPs are still better than nothing.)
Even if you're lucky enough to not be disabled and confident that you won't be, it remains an obvious fact that buying into HDHPs and therefore taking yourself out of the traditional insurance pool is throwing the disabled under the bus. HDHPs were created on the premise of \"accountability\" and \"choice\", which is another way of saying they were created to throw the disabled under the bus. (\"Accountability\" = \"Your condition is probably your fault\"; \"choice\" = \"I should be allowed to pay a lower premium to get insurance that excludes sick losers like you\").
The whole concept of HDHPs is to erode the social safety net by letting the more fortunate disentangle their risks from the less fortunate. I find that disgusting on a very basic moral level, but I also dislike them out of self-interest because I am indeed not confident I will always be one of the healthy ones. Disability activists like to call the non-disabled the \"temporarily abled\", after all.", "timestamp": "1371011110"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/615986915162?comment_id=616154758802", "anchor": "fb-616154758802", "service": "fb", "text": "@Arthur: \"once you get that chronic condition it's too late to get better insurance\"
I'm pretty sure that's not the case for me, and I don't think it's the case in general. I get my health insurance through my employer, and there's open enrollment every year where I can choose which plan I want.
\"buying into HDHPs and therefore taking yourself out of the traditional insurance pool is throwing the disabled under the bus\"
There are two sensible ways to pay for health care: proportional to your risk or the same for everyone. What we have in this country is a horrible hybrid system with much of the worst of both [1], but refusing to use an HDHP when one is available is basically a donation to the people in the pool with higher health care costs. In my case those would be other Google employees. If I'm going to transfer money to other people to help with health care (which I do, and think is important) I don't think giving it to Google employees is anywhere near where my money goes the farthest.
[1] I've written more about this: http://www.jefftk.com/news/2012-03-24", "timestamp": "1371057222"}]}