Should I keep maxing my 401k or not? What about the tax consequences at retirement?

Question

I have read and heard *alot* about the possibility of *higher* , not lower, taxes at retirement, making me think hard as to whether I should keep maxing my 401k or not. I wonder about this new idea that everyone should put the minimum 401k to get the max employer match, max out a RothIRA, then put all the rest in aftertax low cost investments (ie, Vanguard total market funds,etc). How likely is it that most people will pay *more* taxes after retirement than they are now (while working)
I bring in about $100-120k a year, age 43, and have been maxing out my 401k for a number of years, and just last year made the decision to also fund 2xRothIRA's fully each year as well (one for myself and one for my wife). Should I keep maxing my 401k or use this alternate plan so many books are pushing aound ?
Tnx! Confused!

Answer 1

The distributions to Roth IRAs are not taxable. However, the more you withdraw upon retirement, the more you are taxed. The amount of you TOTAL income determines your tax bracket.

This tax question is really determined by the investment vehicle. Some investment vehicles are taxed base upon the earnings, while others are only taxed upon distributions (withdrawls from the plan) and some are not taxed at all, such as the Roth IRA's.

I would say you should ALWAYS max out your ROTHs, and max yout your employer match cuz that would just be silly not to. As far as the 401K is concerned, go at least to the employer max match amount. After that, it's important to know the type investment vehicle it is. Research how your particular 401K is taxed.

It may be wise to setup shell companies or s-corps that shelter your income so you are taxed at a lower rate. YOU SHOULD TALK TO A PROFFESSIONAL WHO IS MORE FAMILIAR WITH YOUR SITUATION BEFORE YOU DO THAT!

Answer 2

Personally, I'd keep maxing it out and then placing some (if you have it) in an after tax account invested in tax free municipal bonds and retire at age 55. You can avoid paying the 10% penalty if you take your distributions based upon your life expectancy.... btw, you'll need over 3 million to be able to get your 100-120k each year that you would need to stay in the same tax bracket. That's 20k a year for 34 years at 8% interest.

I'm not so sure about the Roth. You're already in a high tax bracket. People have been screaming about tax rates going up for years (and we have had wars for years....) but they tend to decrease not increase. If you're already in an upper bracket now you're not going to get much benefit out of it. I'd verify that you can even use one based upon your income and status as being covered by a 401k. Either way..only good it will do you is to be able to play with the tax brackets slightly. Likely for you it's 6 of one, 1/2 dozen of the other.

Answer 3

The 2nd option is slightly better but you should keep an eye out for the Roth 401k which has been approved but is slow to be adopted by most companies.

I prefer working in a properly funded insurance program but that is beyond the scope of this board. Also, the thing you need to know about Vanguard is that they have a PR budget the size of most advertising budgets. They use it to pay writers to mention them by name. Vanguard is a good company with a simple message... cheap... but they aren't the end all be all.

Performance is more important than most writers talk about but I can't guarantee performance while Vanguard can guarantee lower prices. But at the end of the day... my portfolio comes out ahead and that's what matters to me.

Still... Vanguard does more good than harm and is a decent investment company.

Answer 4

Dave's right on the money! Contribute to your 401(k) to the point where you maximize your matching contribution. Then, assuming you're eligible, contribute to the Roth. After that, you can increase your 401(k) contribution.

Look at it this way: Get as much free money as you can, then as much tax-free as you can. After that, take advantage of anything pre-tax and tax deferred.