New to the US, can anyone explain me the advantage of 401k? Seems like even though it’s before-tax when you put money there, you will still need to pay income tax when you’re withdrawing (+10% fee if you want to get your money early). Is the only benefit in avoidance of ~15% capital gain tax? Not sure if I want to lock my money for 30+ years in some random mutual fund just for that. What am I missing here?

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Compound interest

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If you have 100 of pretax income, you’ll have say 70 of post tax income. Then you invest and hold. All of your dividends will be taxed prior to reinvestment. You’ll realize gains and pay tax on any buy-sell activity to rebalance your portfolio.

It’s not the same.

1. Pay taxes later. Taxes could be lower then or you could be in a state with no tax then vs. now
2. You’re likely going to draw less in retirement and so you’re tax bracket would be lower, so you pay less to the government
3. Company match of 50% or more. Post tax on $100, without 401k I’d get $65. With 401k and 50% company match with 10% penalty, I’d get $82.5
4. Diligent investing that compounds: it’s on auto-save mode and doesn’t rely on you (sometimes people can get lazy)
5. Separate pot of money that just goes untouched for decades vs. if it were to be post tax dollars in your bank account. So you tend to tailor your standard of living to what shows up in your bank account. It encourages less spending by design

likesmarthelpful

What is the then Accenture? You comment on 3 reply’s saying they’re wrong but have yet to comment yourself..

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You can put away money now and not have to pay taxes now. Later when you withdraw the money you pay taxes on the amount and any gains. This works in your favor if you make more money now per year than you expect to withdraw per year in retirement.

If you expect to have higher income in retirement, look into roth 401k or backdoor so that you can pay your taxes now and your gains can grow tax free.

likehelpful

Missing the point

funny

Roth 401k to pay the taxes now and cash in later. And honestly you’re less likely to do something stupid with that money over the next 30 years in that account with only mutual funds. Tbh my retirement accounts are just hedges against my own stock gambling habits.

likesmartfunny

Me too. I do company match 401k and max Roth IRA . I have 3x more in my brokerage than my retirement accounts lmao

The advantage of a 401k is all about employer matches.

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Salesforce you are so wrong

funny

If your tax rate is 20% then you get 20% extra growth every year you contribute. Over 30 years that’s a lot of money.

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That’s correct but with one caveat, you can’t assume current tax rates will be the same when you retire. Tax rates are historically low and are likely to rise in the future. This also diminishes the benefits of a traditional 401k

Contributing up to the company match is always a good idea because it’s free money. After that the benefits of a 401k are marginal because like you said your money is locked up until retirement. The other benefit of a 401k is more behavioral - it encourages employees to save for retirement instead of placing their retirement money in a normal taxable account and having the temptation to spend it before retirement.

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It’s a retirement vehicle. Treat it as something different and yeah it’s not going to look as attractive.

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It’s tax rate arbitrage. Avoid taxes now as a high earner, pay less taxes when you’re on a lower, retirement income.

smart

Wrong again. Still waiting for the right answer to pop up in the thread.

smartfunny

I was thinking exactly like you and made the mistake of not investing in 401k when I moved here, please go ahead and invest it. Do more research to understand the advantages

You can keep the money in the US until retirement. The main question is how your home country will treat the account for tax purposes. If they don’t tax it until withdrawal either, then you might as well

There are two types of 401ks: before tax and Roth (technically there is a third type after tax which you can backdoor to a Roth at certain companies). By taking advantage of before tax 401k, you can make paying taxes tomorrow's problem instead of today's.

OP, you might want to look up the possible options to withdraw or borrow with no penalties. Might still be useful to contribute. Even if you think you’ll withdraw with a penalty at some point in the future.

I think the other benefit is that income earned within the 401k is taxed using the much lower 15-20% capital gains tax. This matters significantly for the portion that you didn’t pay in taxes to the government today since you get to compound it and pay limited taxes on it

Incorrect. But you did mention the point that everyone is missing. *Hint* capital gains

2 main things:
- a lot of employers match, the better the match rate the better the incentive
- most places have progressive income tax systems. There’s a good chance you’re making more money (and paying more taxes/higher tax rate) today than what you will take out annually when you retire, effectively making you pay less taxes today but without paying as much later (+time value of money!)

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