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401k millionaires

Discussion in 'North American Politics' started by Akivah, May 22, 2018.

  1. Koldo

    Koldo Incredible Member

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    You wouldn't mind proving that even the poorest have some spare money, would you ?
     
  2. Shaul

    Shaul Well-Known Member

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    You are overlooking the simple truth. If you don’t save the money it will be taxed at your personal highest rate, as high as 37%, whereas if you choose to save it it will be taxed at a rate of 10%. If you would think letting the government take almost four times as much of your money is fine, well...
     
  3. Shaul

    Shaul Well-Known Member

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    As you must know there are too many variables for a one size fits all solution. Nonetheless I will give you one possible scenario. Assuming a person is in the lowest tax bracket he does this: he modifies his withholding (payroll deductions) by filing an updated W-4 while simultaneously directing the net income increase amount into his tax deferred qualified savings account (i.e. his 401k or an IRA). The results are that his gross income increases (but the increase goes into his retirement savings account) but his taxable income does not. Meanwhile he experiences no change whatsoever in his take home pay. There you have one general scenario which works. No need to find “spare” money. The “spare” money came from choosing to redirect money from needlessly going to the government to going into his personal retirement account instead. Yes, this does work.
     
  4. Shaul

    Shaul Well-Known Member

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  5. 9-10ths_Penguin

    9-10ths_Penguin 1/10 Riboflavin
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    So you're assuming:

    - this person is making at least $500,000 a year now (to be at 37%)
    - the person will withdraw no more than $19,050 a year in retirement (to be at 10%)
    - tax rates won't rise significantly between now and retirement.
    - tax treatment of 401(k) plans definitely won't change in the future (e.g. there's zero chance that a future government won't start taxing them in some way).

    Do I understand you correctly?

    If so, do you see why I'm questioning these assumptions?

    In reality, what often happens is something like this, ignoring inflation:

    - a 30-year-old guy is making $50,000/y (so 22% marginal rate for 2018).
    - he has grand plans to make $500,000/y before he retires.
    - he follows the standard (but IMO questionable) advice of living on 70% of his pre-retirement income in retirement: $350,000/y (35% marginal rate)

    ... so any tax savings he gets from his 401(k) now will end up costing him more when he withdraws it. And that's even before asking if tax rates will go up before he retires. He would have been better off putting his money into something where he pays tax at the front end and doesn't pay tax on the increase (i.e. a Roth IRA in the US or a TFSA in Canada).

    In any case: remember that our income - and therefore our marginal rate - tends to go up as we get older. It's very common for your annual withdrawal in retirement to be closer to your salary immediately before retirement than to your salary when you just started in the workforce.
     
  6. Jayhawker Soule

    Jayhawker Soule <yawn> ignore </yawn>
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    And it is quite possible to live in the US and die from diarrhea.
     
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  7. Thermos aquaticus

    Thermos aquaticus Well-Known Member

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    Those alternate plans do not force the employer to contribute. My 401k wouldn't be anywhere close to what it is without employer contributions, and I certainly couldn't afford to save any money if I were just above the poverty line. I don't think you are taking these factors into account.


    I have been in that situation, and I couldn't save enough money to be a 401k millionaire and still have a place to live. I disagree because I know the facts.
     
  8. 9-10ths_Penguin

    9-10ths_Penguin 1/10 Riboflavin
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    403(b) and SEP plans are also only offered by certain employers.

    And I wasn't saying that these people can't save for retirement; I was pointing out that huge chunks of the workforce don't have access to employer matching, so they have only half the ability to save as someone who has access to employer matching.

    So we have a system where you can effectively get free money, but typically not if you have precarious work and not if you're working for a less-than-ideal employer... and if you're lucky enough to get access to it, you can only take advantage of it if you can spare the cash right now. Do you understand how this disadvantages the working poor?
     
  9. Koldo

    Koldo Incredible Member

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    Correct me if I am wrong, but as far as I understand it you can not deduct however much you put in your 401k from your taxes. You only get less taxes because of the reduced taxable income. So, if, for example, you earned 15.000$ in a year, you would be taxed 1.500$, and end up with 13.500$. But if you decided to put 1.000$ in your 401k you would get taxed on 14.000$ and end up with 12.600$ plus 1.000$ in your 401k. That's still 900$ less per year in your hands, which means you need 900$ to spare. Not to mention I don't see what's the point of putting 1.000$ in your 401k when you are already paying the lowest tax possible and you are going to pay at least that much sooner or later. So, what do you mean by ''he experiences no change whatsoever in his take home pay'' ?
     
  10. Jayhawker Soule

    Jayhawker Soule <yawn> ignore </yawn>
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    Company match.
     
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  11. Thermos aquaticus

    Thermos aquaticus Well-Known Member

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  12. Akivah

    Akivah Well-Known Member

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    Ah, along the lines of that idiotic Obama statement "you didn't build that"?
     
  13. Akivah

    Akivah Well-Known Member

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    Actually, one can be wealthy with steady savings with even low pay. It requires living below your means and consistently investing the excess. Then even those emergencies can be handled without going into debt.
     
  14. Akivah

    Akivah Well-Known Member

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    Paying reasonable taxes are fine. It's when people complain that millionaires aren't paying their fair share that is silly. When pressed for what a "fair share" is, that I've heard people say most of it should be taken. People shouldn't be punished for managing their finances well.
     
  15. Akivah

    Akivah Well-Known Member

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    Wrong! Try listening to Dave Ramsey for a while to learn differently.
     
  16. Akivah

    Akivah Well-Known Member

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    It's not easy, it requires sacrifice, budgeting, and hard work. But it is do-able by almost anyone.
     
  17. Akivah

    Akivah Well-Known Member

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    We give a mix of names and numbers to things. For example, we use IRA instead of (section) 408.
     
  18. Akivah

    Akivah Well-Known Member

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    Actually, the surveys show 94% of US millionaires are first generation millionaires. Meaning they didn't inherit it, they earned it.
    While there is some luck in your specific investment choices, it's far more sacrifice, planning, and dedication.
     
  19. Shaul

    Shaul Well-Known Member

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    No, I didn’t make any of those assumptions and most of them are actually incorrect. I don’t assume the person is in the top tax bracket. Reread what I wrote. I said that was the maximum possible. No, I don’t assume someone will only withdraw no more than the threshold for the first tax bracket ($19,050). What I wrote was that until his taxable income when he begins withdrawals exceeds that then all his withdrawals would be tax at only 10%. That is not the same thing. In addition many (actually most) individuals could withdraw much more than $19,050 from their 401k and still keep their taxable rate to 10%. No, I don’t assume taxes won’t rise. What I wrote, which you don’t seem to understand, is that it doesn’t impact the tax deferred compounding within the account which makes any tax increases insignificant in comparison. Furthermore these supposed tax increases that you are touting would have to be increases on the lowest tax brackets. Historically the lowest tax bracket rate don’t go up. No, I don’t assume that there won’t be any changes to retirement plans by legislation, quite the contrary. But whatever changes are made can be adapted to. Nonetheless the current laws are the only ones we can make our plans with. And the current laws have established 401ks as an excellent vehicle for retirement.

    So, no, you don’t understand me correctly. It also appears you make a lot of erroneous assumptions. Which explains why you fail to understand 401ks as you do.
     
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  20. Shaul

    Shaul Well-Known Member

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    But the $50 a week doesn’t come out of take home pay. By adjusting withholding the $50 can be redirected from going to the government as tax credit and instead goes into the retirement account.

    You are making an error. You assume the money that is to go into the retirement account must comes from the employee’s take home pay. It does not. The money comes from the money that would otherwise go to the government. You assume, incorrectly, that the total salary kept by the employee (as the total of his take home pay and retirement account contributions) is a zero sum. It isn’t. Try to understand.
     
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