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| kapr |
 Posted: Wed Feb 14, 2007 4:50 pm Post subject: Maxed Out Pre-Tax....Now What? |
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My wife and I are approaching 30 and we currently are maxing out our pre-tax contributions to our 401Ks and Roth IRAs (we each have both). Are there any other good tax deferred growth opportunities? I have heard a lot of hype around annuities, but have read some negative things about them as well. Currently, all of our after tax savings are in an ING savings account. Are after-tax 401K contributions a better bet? Also, how accessible (fees and penalties) are after-tax contributions? Would it just be better to invest outside of the 401K? Any advice would be appreciated!  |
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| efflandt |
| Posted: Thu Feb 15, 2007 3:10 pm Post subject: |
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Investing Manager
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What do you mean by after-tax 401(k) contributions? A regular 401(k) is tax deferred. A Roth 401(k) is after-tax, but gains are tax free. The annual contribution limit applies to regular and Roth 401(k) combined. So if you already max out your 401(k) contributions, the only thing you could do with that is possibly make part of that taxable contributions to a Roth 401(k) (if your company plan offers that). The IRA limit is separate from employer plan limits, but you are already max'ing that.
Something to note is that in taxable accounts, long term capital gains and "qualified" dividends are taxed at a lower rate than regular income, or bonds, or money market, etc. So solid stocks that you plan to hold onto for a long time are effectively tax deferred, and might even be taxed at a lower rate than your 401(k) distributions, depending upon how large that grows and tax rates at that time.
If a stock pays decent dividends, you could get into dividend reinvestment (DRiP), possibly through that company's stock agent, or with a broker, that will reinvest the dividends in more of that stock for little or no fee, which over time increases shares and effective yield based on your original investment. The dividends are taxed the year they are reinvested (long term gain rates if qualified), but no further tax on those shares until sold. You would need to keep good long term records of the cost basis of the dividends reinvested.
Note that REIT's receive special tax treatment on their end, so their dividends are taxed at normal rates (NOT "qualified"). Those are best kept in a Roth.
Last edited by efflandt on Thu Feb 15, 2007 3:14 pm; edited 1 time in total |
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| Dave Rathbun |
| Posted: Thu Feb 15, 2007 3:12 pm Post subject: |
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CFO
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| You can make "after-tax" contributions to a 401K. The contributions are taxed (unlike pre-tax contributions) but gains on those deposits are tax deferred like the rest of your 401K. |
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| efflandt |
| Posted: Thu Feb 15, 2007 3:33 pm Post subject: |
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Investing Manager
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I was not aware that you could make non-deductable contributions to a regular 401(k), or maybe it varies by plan.
I had a hard enough time trying to dig up tax records from an unknown period (that turned out to be 1990-1991) to account for a taxable contribution to an IRA when doing a Roth conversion. So I pity anyone making taxed contributions to a tax-deferred account and trying to account for that during distributions 20-50 years later. You cannot withdraw the already taxed part when you want to, you have to account for it as a little percentage at a time, for each year of distribution (I am doing IRA to Roth IRA conversions over a period of years).
But a nice surprise is that Illinois does NOT tax IRA distributions (or Roth conversions). |
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| Dave Rathbun |
| Posted: Thu Feb 15, 2007 3:37 pm Post subject: |
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CFO
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That's my understanding. But you're right, it could vary by plan... although it would seem that you either can or can't by tax law. I don't know.
There are plans to offer a Roth 401(k) which would work like a Roth IRA in that you can make contributions after tax, and there are no taxes on gains at withdrawal. I'm looking forward to that one. |
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| kapr |
| Posted: Thu Feb 15, 2007 6:36 pm Post subject: Reply |
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My 401(k) does allow me to make after-tax contributions. The part that concerns me and where I think I may have a better opportunity elsewhere is in my narrow selections that my 401(k) offers.
My Roth is a Roth IRA, not Roth 401(k). I am allowed to put $4000/year in after-tax contributions per year for both my wife and I. It is not affected by my 401(k) contributions.
Long term capitol gains from stocks or mutual funds sound like a good idea, but what qualifies the gains as "long term"? If I need access to some cash due to unforeseen circumstances am I penalized heavily? |
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| Dave Rathbun |
| Posted: Thu Feb 15, 2007 8:03 pm Post subject: |
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CFO
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| I am not a tax lawyer or even an accountant. But I believe you can withdraw your after-tax contributions without penalty. Any gains must remain in the account until proper retirement distributions can be made. You should, of course, confirm this with a proper expert before making any important decisions. But I think that's correct. |
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| efflandt |
| Posted: Sat Feb 17, 2007 8:32 am Post subject: |
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Investing Manager
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Search http://www.irs.gov/ for "capital gains".
Capitial gains are the difference between sell price and sell fees minus cost basis (buy price and fees, possibly adjusted if dividends include any return of capital). There is no tax (or loss deduction) until you sell.
Long term capital gains (held over a year) are taxed at a lower rate than short term gains or interest. If a stock is held for at least 61 days in the 120 day period surrounding ex-div date, dividends are also considered long term gains IF they are "qualified" (most US and US recognized foreign corporations, but not REIT's).
So if you are in a 25% marginal tax bracket, the 4.5% interest on your ING savings would be taxed at 25% (leaving you 3.375% net). But a 4.5% qualified dividend would be taxed at 15% (3.825% net). The 4.8% dividend of my bank stock nets 4.08% after federal tax, plus price appreciation taxed at 15% rate if I need to sell any shares held over a year. That particular stock trades within limited range and rarely dips for more than 2 weeks to 2 months, which offers buying opportunities.
There is more to it than that (risk, surprises, etc.). But even fixed interest can be risky in a way if rates after tax are less than inflation. |
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