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Chief
Even without the match, it’s probably still worth it to contribute something to the 401(k) because of the preferential tax treatment.
I don’t know where you heard that you never pay tax on a taxable account, but you were misinformed. Technically it’s possible for a portion of it if all you did was sell as much as the standard deduction, but otherwise it’s flat wrong thinking. You contribute after-tax dollars on the way in and pay capital gains tax on the way out.
Chief
I don’t think that’s true, and neither do these people.
https://oakmontadvisory.com/could-congress-make-the-roth-ira-taxable/
https://www.investopedia.com/will-roth-ira-withdrawals-be-taxed-in-the-future-4770847
“Can it happen? Absolutely. But will it happen? While that’s anyone’s guess, most financial professionals agree it’s unlikely, for two reasons.”
https://phillipjamesfinancial.com/blog/will-roth-iras-ever-be-taxed
Chief
Funds make dividend payment and capital gain distributions that are taxed. But your gains are also taxed. Let’s say you take 10,000 and put it into 401k or brokerage account. 401k is all tax deferred. Let’s say money doubles. You have 20k and that’s all taxable as ordinary income. With 25% tax you get $15,000 out after tax. In the brokerage account the money is after tax so you don’t have 10k to start with because you had to pay tax on the income. You only have 7500. Then let’s say that your 7500 paid 1000 in gains and dividends and had 6500 in gains. That fist 1000 is taxed as dividends and gains at a lower rate than ordinary income but you had to pay that when it occurred. The remaining 6500 is taxed as a long term gain at a lower rate. After tax you have $ 13500. Compared to Roth, you would invest that same 7500 (after tax) but your 1000 in distributions and 6500 in gains would give you 15000 tax free (same as 401k). So with same tax rate traditional and Roth are same and better than brokerage.
Super helpful thanks so much
If you don’t use a 401k then all of your dividends will be taxed every year too. You don’t necessarily have to sell to get taxed.
Also, can someone give me some data points on what % match is a good 401k match?
Chief
>0% is a good match
What about when you do sell? You don’t realize any gains if you don’t sell, when you do you’ll be paying capital gains tax on that in a brokerage account…
Also the current admin is trying to make unrealized gains taxable, so keep that in mind.
Yes because (1) favorable tax deductions and (2) protection from your potential future bankruptcy
It’s not that there’s two different arguments. It’s that in the ladder of prioritization you put enough to get match because you have a guaranteed return, then you do IRA and HSA (if applicable), then focus on what fincial goals are if now or future and start funding 401k further (long term horizon/retirement) or allocating some to a taxable broker (short term horizon/non retirement)
Ask another question: can you contribute the full max contribution limit of the year, even if you’ve only been employed for half the year?
If your employer offers roth 401k you can contribute after tax money into it up to the IRS limit. If they don’t, you contribute pretax money into it up to the IRS limit.
If your household makes more than 200k (can't remember the exact number), you might not even be allowed to put the money into a Roth IRA for this fiscal year. In this case 401k may help get the qualifications back assuming you're in that weird borderline.