Investing in 401K with no matching

Jun 8 15 Comments

Does this make sense?

401K will be taxed as ordinary income whereas profits from stock investment will be taxed as long term capital gains.

Over a long period(40+ years) when the money doubles, is it better to pay normal tax for initial income and long term capital gains on profits vs pay normal income tax on everything.

What is the general advise?

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TOP 15 Comments
  • Snapchat boohpo
    Let's take an example, if you invest the max of 19k in 2019 in your 401k, assuming 8% return (over the last 50 years SP 500 has had an annualized return around this), you will have ~413k in 40 years. If you didn't put this in your 401k, and if your tax bracket (state+fed) was 30%, you would have 13.3k to invest post tax. Over 40 years this will get you ~289k at 8%. Now the question is around what your tax rate will be when you are taking this money out. For long term capital gains the current rate is less than 15% if you are pulling less than 100k. If you pull the same today in Seattle from your 401k, your income tax rate would be 23%.

    That would mean 85k (invest post 401k) vs 77k (401k), a difference of 10% more, but your total capital at this point would have been 42% lower (289k vs 414k)
    Jun 8 1
    • Wells Fargo qUyB01
      Good example. Plus there’s the optionality of moving to a low or no tax state when you retire and pull money from your 401K. Right now if you work in CA and don’t invest in your 401K your marginal tax rate is going to be 35%+ at least for the TCs on blind
      Jun 8
  • Illumina tech lead
    Following - but it always makes sense to max 401k, with or without match. Tax deduction during accumulation phase / highest tax years. Also makes sense to do the max backdoor Roth per year (~$6000). Read bogleheads for more.
    Jun 8 7
    • Microsoft @FB
      Backdoor max is not 6k. You’re confusing it with “normal” Roth which probably no one here qualifies for.
      Jun 8
    • Illumina tech lead
      Traditional -> Roth conversion (backdoor) is $5500-$6000 (forget which). None of us get the tax deduction, but is an easy way to get money into a ROTH. Far superior than taxable accounts. Everyone gets to do this.

      You must be thinking of a mega backdoor Roth (via after tax 401k contributions).
      Jun 8
    • Microsoft @FB
      Ok, I was thinking of the mega backdoor Roth. I didn’t know there was a 3rd way of financing it.
      Jun 8
    • Illumina tech lead
      It’s only $5500 but still. Tax free gains are tax free gains !
      Jun 8
    • Microsoft HINs46
      tech lead, $5500 is mini backdoor. Search for mega backdoor, which can be $30k+ depending on emplyer match.
      Jun 9
    • Illumina tech lead
      Yes yes I know. Too bad I don’t have access to the mega :/
      7d
  • Amazon alive_girl
    You can save more by not having to pay taxes on the invested amount right now. More money upfront, more long-term compounding. Also, the whole idea of the income tax deferment is that your tax rate will almost certainly be lower when you retire.
    Jun 8 0
  • Yahoo KEXI07
    I assume the question is, “Should I save in a 401(K) with no matching or should I save the money in a regular brokerage account?”
    IMHO, the answer is Yes. Two reasons, one is that a 401(K) brings down your taxable income and it saves you money right away. Second reason is that, unless you know what your tax rate will be 40 years from now, you can’t be certain of paying a certain amount.
    Also, my first advice to people on financial matters is, don’t take advice from strangers on the internet 😀
    All the best!
    Jun 8 0
  • OpenText TSLAstock🤣
    Don’t forget about payroll tax: social security, medicare, and unemployment insurance.
    Jun 8 2
    • New / Other
      DuQvV7y

      New Other

      BIO
      Did stuff. Hustled hard. Retired
      DuQvV7ymore
      What about these?

      You pay these on the full amount of your income regardless of 401k contributions or not
      Jun 9
    • OpenText TSLAstock🤣
      FUCK. I thought I was reducing my taxes on those.
      Jun 9

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