I agree in theory, but what if you retire at 60 and have yearly income of $0? How does that work? Are you suddenly in the lowest tax bracket?
You just need to be sure you’re paying yourself back and not the recordkeeper. I haven’t heard about it in a while, so they may have done away with it, but there were 401k plans that charged interest to loan you your own money.
So long as you’re paying yourself the interest, the only real downside is the opportunity cost of whatever that amount would have done had it been fully invested less the interest you pay yourself. And, many people tap their 401k for the down payment to get to 20% to avoid PMI. That should also be taken into account as PMI is a total bitch.
Pretty much. If you don’t have any income, you don’t have any income, and you don’t owe any income tax.
And remember that as long as your taxable income is less than $75k (MFJ), you don’t owe any tax on the dividends or capital gains. The rest is at a reduced rate (15%, 20%, or 24%, depending on income).
And if you’re in the 24% investment tax rate, then you don’t qualify for a Roth, your Traditional IRA probably isn’t deductible, and even though you can save $18k in a 401k, it’s probably a just drop in the bucket compared to your other savings.
Hmm thanks! I thought you do pay interest to yourself, but I guess that’s not always the case and I would have to do some research should I decide to tap into 401K. I doubt I’ll be doing it for the house (or anything really). My rule is if I don’t have 25% for downpayment outside of 401K - I can’t afford the house.
I suppose, but I would like to think that in 35 years (when I turn 60) I’ll have a sizable enough taxable portfolio that it throws off a meaningful amount of income. Also I’ll have 38 years worth of 401k/IRA contributions to draw from that then are taxable income.
All I need in 35 years is a sign and a nice fat sharpie. Maybe a hat too.
Combining the 30% tax advantage with a 20% correction and saying you’re coming out 10% ahead is comparing apples to oranges. Yes you avoid paying taxes on it now but you will have to pay taxes when you take it as a distribution - the question is whether your bracket is higher or lower than 30% at that time.
My philosophy has changed a bit over time - I used to lean heavily towards maximizing after-tax accounts on the belief that tax rates won’t be going down in the long run. The more I thought about it though, when I retire and the paychecks stop if I’m in a high marginal bracket due to investment income I figure I’m in pretty good financial shape and going to wish I hadn’t been so tight about money when I was more capable of enjoying it. If I’m in a lower bracket it was the right financial decision.
FWIW value stocks have far underperformed growth stocks in the last 10 years; and historically they have far far outperformed in any long-term horizon. IIRC Vanguard VTV (value ETF) was up by 7%-ish CAGR for the last 10 years; while VTI (broad ETF) was 8%-ish and VUG (growth) 9%-ish. So, if you were a betting man, buy VTV to hold it for the next 10 years. At this point, not a lot of other options except cash and real estate (not REITs, private or public, but the “alligator” real estate.) No bonds, no how.
Ther might be individual names that are fair-to-undervalued but not a whole lot. This market has been picked over pretty well. Maybe safe and big and not too expensive like WMT, JNJ or BRK.
EDIT: I am not philosophically opposed to growth stocks, just that the likelihood of value outperforming growth is higher (IMHO.)
I like some traditionally considered growth stocks that have been beaten up a bit - CHRW and FAST.
^so over the past ten years, value has outperformed growth. In fact value has returned 7% per year and growth has returned 9%.
Sounds legit.
That’s why the majority of my income generating investments are in munis. Last year, my income portfolio generated high 5 figures in interest, of which less than $2000 of it was actually taxable.
You buy high yield munis, a ladder or what?
Read my post again, please.
Past ten years have been an outlier because growth has outperformed value. Over most long periods value has outperformed growth. So if you were to buy stocks today, value stocks are a safer bet (not safe, but safer than growth.)
I’m not sure this is sound logic. Nothing suggests stocks revert to their historical mean. And, I’m unsure what the effect of the end of the bond bull market will have on stocks…whenever rates rise. In other words, predicting the next 10 years based on past performance could be next to meaningless.
For Institutional Use Only
Past performance is no guarantee of future results
Not sure if you are implying that the company match counts towards your personal 401k contribution limit. It doesn’t. The match is like a bonus contribution over and above your annual limit.
I mean, let’s say the company matches 5%, and I therefore contribute 5% of my compensation to the 401k. That alone has been enough to maximize the 401k contribution limit, counting only my contribution and not the company’s.
Assuming this 5% case, I would lose money by contributing anything greater than 5% from any paycheck, since the company would not match the contribution above 5%.
Yeah, but by what month?
Maxed out by May or you might as well be in IT.
Generally, I max out as soon as the bonus gets paid. So, in the beginning of the year…
Look at your W-2 and it will tell you what you need to know.
Say you make $100,000 per year and contribute $10k to your 401k.
- Box 5 will show $100k (your total compensation).
- Box 12, code D, will show $10k (which is the 401k deducted from your paycheck)
- Box 1 will show $90k (which is the amount subject to tax).
Any company match doesn’t show up on your W-2, and doesn’t count against the $18k limit.
While true, all I am saying is that I personally am betting that value stocks will do relatively better than growth stocks because historically they have; and their recent (last 10-year) underperformance makes that even more likely. It may be illogical, I don’t disagree, but to me it makes sense that relative performance of value vs growth would mean revert (and value will beat growth.)
Separately, bonds vs stocks is interesting. Rising rates and falling bond prices will definitely hurt stocks because at a basic level they are competing for the same dollars and bond yield is one kind of hurdle rate for stocks to overcome, via dividends + cap gains together. But right now bonds are priced so high that even they could fall by a lot, maybe comparable to the fall in stock prices. The ride may be smoother on the way down with bonds but is that really a factor in mid-to-long term returns?
^Re: value vs. growth:
I read an interesting observation a while back (can’t remember where) that suggested that when value starts to “win”, it wins for several years in a row. And when growth starts to “win”, it wins for several years in a row. The winner tends to keep winning for a while.
It said that the smartest thing to do–whatever won last year, invest in that. So if growth beat value last year, stay in growth. Then when value wins, switch to value.
I’ll try to find the link.