Your money is safe in 401K
Is 401k as good as it sounds considering how it's taxed?
Most of all, I see that nobody mentioned the one thing about 401 (k) accounts that is just magical - the matching deposit. In 2015, 42% of companies offered a dollar-for-dollar match for deposits. Can't beat that. (Note - To respond to Xalorous's comment, the $ 18,000 OP deposits can be almost any percentage of his income. The typical match is up to 6% of gross income. In this case, the deposits are 401 (k) But let's say he's making $ 100,000. Depositing $ 18,000 results in a $ 6,000 match. This adds complexity to the answer that I wanted to avoid, as I did at all no correspondence and no change in tax brackets shows only the deferment shows the investor the value.)
Go to main answer -
Let's pull out a table -
We'll start with $ 10,000 and assume 25%. This gives a choice of $ 10,000 in the 401 (k) or $ 7,500 in the taxable account. Let 20 years go by next with a 10% annual return. The 401 (k) sees the full 10% and $ 67,000 after 20 years. The taxable account holder waits for the 15% cap win rate to be achieved and adjusts the portfolio so that an 8.5% return is achieved each year and no ongoing profits are made. After 20 years with an 8.5% return, he has $ 38,000 net. The 401 (k) owner pays the 25% tax on withdrawal and has $ 50,000, still more than 25% more money than the taxable account. Because all transactions within the account have been tax delimited.
EDIT - Regarding Davmp's comment, I'll offer the other extreme -
In his comment, he complained (rightly) that I chose to trade every year despite assigning the long-term cap gain rate of 15%. He felt that the annual trade was my attempt to play the analysis. Above I am offering its extreme case, a 10% return per year, no trade, no dividend. Just a cap win at the end. The 401 (k) is still winning. I also left the tax (on the 401 (k)) on withdrawals at 25%, although in fact much, if not everything, is taxed at 15% or less, what the net would be at $ 57,000, or 30% above the final withholding tax Payout.
The next problem I want to address is that the 401 (k) is taken out at the highest (marginal) tax rate, e.g. B. A single applicant with taxable income greater than $ 37,650 (in 2016) would save 25% on the 401 (k). Deduction. Of course, if the deduction pulls you below that line, I'd go Roth or Taxable. However, withdrawals start from zero. Today, a single retiree has a standard ($ 4050) exemption and an exemption ($ 6300) for a total of $ 10,350 "zero bracket" with the next $ 9,275 taxed at 10%. This suggests that you need $ 500,000 in pre-tax accounts before withdrawals cross the 10% class each year. (This comes from the suggestion to use 4% as the annual payout rate).
Finally - the tax discussion naturally has two important points in time: deposits and withdrawals. But the answers here ignore all the time in between.
In between, you see that you're going to drop from 25% to 15% this year for a number of reasons. This is the time to convert some cash into Roth and top up the 15% bracket. This can happen due to job loss, marriage to a new spouse who is either not working or has a lower income, newborn baby, buying a house, etc.
Or in between, a disability has made you unemployed. That way, you can take out money with no penalty and little chance of paying even the 25% that you paid. From personal experience with a family member, a 401 (k) was funded with 28% money. Then divorced and disabled, able to use the $ 10,000 / year to supplement the employee's (non-taxed) income.
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