Some Blog Site

Not too long ago, I posted this article about someone’s trying to convince me that it would be to my advantage to reduce my 401k contributions and increase my Roth IRA contributions by the same amount. Since then, I have put together a handy-dandy online calculator to compare the scenario for me.  You can click the link in that previous sentence or use the link in the sidebar to the right, under the Pages category.

The goal of the calculator was to show that there is really no difference to me. And it does show that. The amount I have at retirement is the same regardless of the mixture. I will pay slightly more in taxes in the one case, but it does not affect my bottom line.  The key is that in having more in the pre-tax 401k, I will have more take-home pay, which means that I can contribute that extra to a Roth.  Feel free to put various scenarios and situations into the calculator and see how much the mixture of 401(k) and Roth matters.

The real problem with reducing my 401k contribution is that I know I will not be as diligent in saving the money for a Roth IRA as I am with the 401k, since the 401k is done automatically by payroll before I ever see the money.

“Behold, I send you out as sheep in the midst of wolves; so be shrewd as serpents and innocent as doves.”
– Matthew 10:16

I had a meeting with a personal financial representative and he told me I was saving too much money in my 401(k).

His recommendation to me was to contribute only the minimum amount necessary to get all available company matching for the 401(k) then take the difference from my now extra take-home pay and put it into a Roth IRA. The reason was to pay less in taxes. His question was “Would you rather pay taxes on small contributions or on the large sum that you’ll have in retirement?”

Here is an example to show how it works. Note that the numbers used are general figures.

Round numbers: Someone make $50,000 a year. He contributes 7% of his salary, making that $3500 a year. $3500 invested for 40 years at an average return of 10% = $1,700,000. Isn’t compound interest great?

Now he contributes 3% of his salary, making that $1500 a year. This hypothetical individual wants to keep some money going into his 401k in order to get his company’s matching contributions.  He takes the extra $2000 after taxes and puts it into a Roth IRA. His total investment over 40 years is going to be the same, $3500 a year for 40 years.

But the tax amount is what differs. His total return in the first part was $1,700,000. That is not going to be taxed until he retires, so he’ll pay 15% on $1,700,000 (assume he drops down one tax bracket in retirement). Total taxes = $255,000 at a minimum (his funds would continue to grow during his retirement, but this is a simple example).

His taxes in the second part are going to be 25% of $2000 a year, or $500. $500 for 40 years equals $20,000. After he retires, his Roth IRA withdrawals are tax-free.  “So,” the representative said after showing me a fancy graph, “would you rather pay the government $20,000 or over 10 times that?”

If one’s goal is to help fund the government, then one can keep maxing out one’s 401k. For the other strategy to work, one need to be disciplined enough to fund the Roth IRA one’s self. The other question is this: would the government rather have a little money now or a lot of money later?

If the government compounds $500 a year for 40 years at a 10% rate, it would end up with $243,000, which is pretty close to what it would get later. So at the end of it all, it would seem to be a wash: the government could end up with $250,000 either way. But one way, the individual pays the entire amount; whereas the other way, the government has to invest a smaller amount and earn the full amount.

To see how much he has at retirement, he could take the $1.7 million and subtract taxes from the 401k withdrawals. In the first case, the withdrawals would have taxes of at least $255,000. In the second case, he has to see how much of the $1.7 million comes from the 401k and subtract those taxes. He could also see how much extra taxes he would pay because his take-home pay is larger going with a Roth IRA. So if he went with a full 401k and invested the extra take-home pay in a Roth, what would be the effect of that?

The advisor’s point was that I should reduce my 401k contributions and do more with my Roth IRA. His motivation behind compelling me to do that was mostly because he had some mutual funds that would be just right for my Roth IRA, I think. In case you are wondering how things ended: I did not move any of my 401k into his mutual funds.

The example was a little simple, as it does not take it to account a lot of factors: the higher take-home pay due to reduced 401k contributions will result in higher income tax, maybe I would rather have $500 a year now at the expense of future money, will Roth IRA rules change in the future?, how much would inflation cause that $225,000 tax bill to be in today’s dollars?, etc.

How much should you put into your 401k?  How much should you put into a Roth IRA?  I don’t know.  I am not a financial advisor nor do I play one on TV. Any information on this site is general in nature and is not intended to be financial advice for your specific situation. I recommend that you discuss any tax, investing, or other financial items with a professional advisor.

“Know well the condition of your flocks, {And} pay attention to your herds; For riches are not forever, Nor does a crown {endure} to all generations.”
– Proverbs 27:23-24

A while back I had an interesting traffic situation. I was attempting to leave a shopping area. There was one car in front of me, sitting at the stop sign.  Just when traffic was about to clear, allowing us to enter the road, the driver put his car in park and got out. He then crossed to the far side of the driveway, went partway down the drainage ditch, and picked up an empty can.

It took him about 15 seconds to get the can and return. And 15 seconds of idling would waste about 1/1200 of a gallon (at a rate of 1/10 of a gallon per 30 minutes).

At $3.00 a gallon, 15 seconds of idling burns about a quarter of a penny.  The shopping center was in the state of Michigan, which gives you 10 cents for eligible can returns. So the guy did not waste that much money by idling his car – in fact he came out 9.75 cents ahead.

And 9.75 cents per 15 seconds of work translates to 39 cents a minute or 23.4 dollars an hour, not a bad rate. But there is no way he would be able to collect cans at a sustained rate of 1 can every 15 seconds, at least not by driving along the road and stopping for recyclables.

These calculations do not take into account the extra idling required because he then missed the traffic window provided by the nearby stoplight. So he and I – and the person behind me – had to wait even longer for traffic to clear. And I did not get any money out of it, so it was not worth my time.

It is one thing to stop and pick up cans. It is another to block traffic to do so. If you’re going to stop your car, please make sure you are not in anyone’s way.  And if you are stuck behind someone, do give them the benefit of the doubt

“If it is possible, as far as it depends on you, live at peace with everyone.”
– Romans 12:18

This post was prompted by the news heard yesterday that no one won the jackpot.

There are very few optional or voluntary taxes. Most of the time, people try to avoid paying any taxes they don’t have to pay, and sometimes even taxes they do have to pay.

The lottery is a good example of a voluntary tax. People pay millions of dollars to the government and get nothing in return. That’s even worse than a normal tax, which theoretically has some direct relationship to the payer (new roads nearby, police service for the area, etc).

Governments have reduced that argument by having the lottery profits fund the schools. That also helps to sell the concept of a lottery to some of those who would oppose a lottery. I am glad to have lower property taxes in return for having other people fund the public schools. I would be happier still without a lottery or casinos, but at least I have a choice not to fund them.

“For the love of money is a root of all sorts of evil, and some by longing for it have wandered away from the faith and pierced themselves with many griefs.”
– I Timothy 6:10