1099 work offered w2 is there a catch?

[finalpsychyear]

I have never had a w2 position as an attending so I am a bit unclear on the differences. Let's assume that w2 hourly will be based on the 1099 hourly rate as that is what is making this tempting to consider. If anyone can clarify a few points below that would be great.

1. currently have a 401k that allows me to deduct for both the employee and employer a total of 58k pre tax how does this change if your employed I think they offer a 2% match of gross and its called a 403b instead of a 401k then a pension 3% gross ? I have a feeling its less than half of what i can put away now also without any control of what i can invest in as i can do index, stocks or combo in my 401k.

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[nexus73]

Not an expert. Pretty sure you save on employment tax as W2. But you lose tax advantages for business deductions and retirement contribution limits. I think 403b limit is like $19k.

W2 may have other benefits like accessing cheaper health insurance or having a fund for CME and other professional costs.

 

[G Sheb]

1099 is almost always better money wise. You can deduct business expenses, can save and deduct more for retirement. The only negative is health insurance, but this is peanuts on a doctor's salary.

The question is though: do the terms of your job change or not? The real difference in W2 and 1099 in that 1099 the employer is not supposed to set your schedule, you can walk away anytime you want (and they can as well). Whereas in W2 you are bound by a time contract and of course, they set your vacation/sick days..etc and depending on the contract they can't fire you without prior notice.
As a psychiatrist the job market is so much in your favor that job security is not a huge issue and the flexibility of 1099 is a huge bonus.

 

[Stagg737]

I think 403b limit is like $19k.

$20.5k

 

[calvnandhobbs68]

You really have to give more details about the setup here for people to give you good advice

 

[comp1]

Yeah, there are definitely W2 jobs that are way better than 1099's and the reverse. Give us some details! Personally, I find the 1099 deductions and billing...horrible. The simplicity of a W2 job is definitely the life for me. However, if you really want us to compare, we need a lot more details about the benefits involved with the W2 positions. Hopefully there are a heck of a lot more than just a 403b with some sort of partial match.

 

[randomdoc1]

As an employer, I have to contribute to W2 social security and Medicare and some other tax stuff (can't think off the top of my head). It's more expensive for me to pay a W2 than 1099. Also, if someone is a W2 if I decide to offer health insurance, I am bound by laws where I have to include everyone based on certain criteria. Same thing for 401k. I'm bound by more employment laws. This is actually to the benefit of employees. I would think it's more beneficial for the employee to be a W2 over 1099 in many circumstances. Yes, you can do tax write offs on a 1099 but you also have to contribute entirely to things like Medicare and social security I believe. It definitely cost me more to switch everyone to W2. But I was advised by my attorney and accountant. If the IRS catches you 1099ing someone who technically is closer to a W2, you can get penalized badly and potentially face prison time. lol

 

[clausewitz2]

I would think it's more beneficial for the employee to be a W2 over 1099 in many circumstances. Yes, you can do tax write offs on a 1099 but you also have to contribute entirely to things like Medicare and social security I believe. I

You do have to pay these as a 1099 but you get to deduct half of social security tax from your income, i.e. the employer's share. 1099 often works out better because it is almost always a higher gross than W2. If this is not the case then I would be suspicious for an employer trying to misclassify employees.

 

[G Sheb]

401Ks are way overrated anyway. A lot of the time you don't decide how to invest. Your money is locked and taking it out is subject to the whims of the institution. You're not paying taxes now but you're going to pay taxes later when you take out the money, so I'm not sure how big the tax benefit. Flexibility counts for so much.

I also think W2 are most definitely in favor of employers. If you're getting paid below the 100k and you need the health insurance or you wouldn't get a job if you are fired then W2 gets the advantage. But once you get into the higher percentiles, there is really no advantage for W2.

 

[clausewitz2]

I also think W2 are most definitely in favor of employers. If you're getting paid below the 100k and you need the health insurance or you wouldn't get a job if you are fired then W2 gets the advantage. But once you get into the higher percentiles, there is really no advantage for W2.

W2 means you are being paid less than you would on 1099, but way cheaper for the employer to do 1099. They don't have to cover half of your medicare and social security tax and don't have to give you a lick of benefits. This is why people get in trouble for misclassifying employees as contractors but not the other way around.

 

[G Sheb]

W2 means you are being paid less than you would on 1099, but way cheaper for the employer to do 1099. They don't have to cover half of your medicare and social security tax and don't have to give you a lick of benefits. This is why people get in trouble for misclassifying employees as contractors but not the other way around.

It is not really cheaper for them when you consider that the contractor can step out anytime and they would have to find someone else. They also can't control your schedule; they have no control besides the finished product. These things make W2 employment much more favorable to employers.
Employers run into trouble when they try to get the control without the 'benefits' (outside of health insurace, it's glorified bs imo). That;s basically 1099 in name only but in reality it's a W2-type contract.

 

[calvnandhobbs68]

It is not really cheaper for them when you consider that the contractor can step out anytime and they would have to find someone else. They also can't control your schedule; they have no control besides the finished product. These things make W2 employment much more favorable to employers.
Employers run into trouble when they try to get the control without the 'benefits' (outside of health insurace, it's glorified bs imo). That;s basically 1099 in name only but in reality it's a W2-type contract.

In most states, you can also step out whenever you want or with very little notice as a W2 as well unless you have some long notice built into your contract. That's why companies can fire employees all the time without any notice.

1099 is also way simpler for employers. They literally just cut a check every month or few weeks or whenever X job is done. There's no "payroll", calculating witholdings, etc so saves them a lot of labor costs calculating that stuff or paying for the software to calculate that stuff.

 

[randomdoc1]

It is not really cheaper for them when you consider that the contractor can step out anytime and they would have to find someone else. They also can't control your schedule; they have no control besides the finished product. These things make W2 employment much more favorable to employers.
Employers run into trouble when they try to get the control without the 'benefits' (outside of health insurace, it's glorified bs imo). That;s basically 1099 in name only but in reality it's a W2-type contract.

It's actually not as black and white as that. There are certain specific terms you can flesh out even on a 1099. This is a checklist employers can use to decide if someone is a 1099 versus W2 and even there, there is a lot of gray. W2 is way more expensive for the employer, believe me. I'd love to 1099 everyone but I'm not interested in going to prison. Many employers try to go 1099 if they can get away with it. https://www.flexprofessionalsllc.com/wp-content/uploads/2014/10/1099-vs-W2-Checklist.pdf

There's no "payroll", calculating witholdings, etc so saves them a lot of labor costs calculating that stuff or paying for the software to calculate that stuff.

Payroll software is dirt cheap these days : D

 

[G Sheb]

It's actually not as black and white as that. There are certain specific terms you can flesh out even on a 1099. This is a checklist employers can use to decide if someone is a 1099 versus W2 and even there, there is a lot of gray. W2 is way more expensive for the employer, believe me. I'd love to 1099 everyone but I'm not interested in going to prison. Many employers try to go 1099 if they can get away with it. https://www.flexprofessionalsllc.com/wp-content/uploads/2014/10/1099-vs-W2-Checklist.pdf


Payroll software is dirt cheap these days : D

But that's the point. "if they can get away with it" because they want to have the W2 control without any of the legal requirements.
It doesn't mean they favor actual 1099 terms as legally defined over a W2.
You really think employers, especially the big ones, would love for their employees to set their own schedules fully? To take vacations as much as they want, when they want? Etc... Control is a huge issue in the employee/employer dynamic. It's not just the pennies they are giving away for health insurance and other 'benefits'.

 

[randomdoc1]

But that's the point. "if they can get away with it" because they want to have the W2 control without any of the legal requirements.
It doesn't mean they favor actual 1099 terms as legally defined over a W2.
You really think employers, especially the big ones, would love for their employees to set their own schedules fully? To take vacations as much as they want, when they want? Etc... Control is a huge issue in the employee/employer dynamic. It's not just the pennies they are giving away for health insurance and other 'benefits'.

meh, just my take. I'm only an employer w/e *shrug*
You are absolutely correct! Bravo!👏
Enjoy.

 

[finalpsychyear]

As an employer, I have to contribute to W2 social security and Medicare and some other tax stuff (can't think off the top of my head). It's more expensive for me to pay a W2 than 1099. Also, if someone is a W2 if I decide to offer health insurance, I am bound by laws where I have to include everyone based on certain criteria. Same thing for 401k. I'm bound by more employment laws. This is actually to the benefit of employees. I would think it's more beneficial for the employee to be a W2 over 1099 in many circumstances. Yes, you can do tax write offs on a 1099 but you also have to contribute entirely to things like Medicare and social security I believe. It definitely cost me more to switch everyone to W2. But I was advised by my attorney and accountant. If the IRS catches you 1099ing someone who technically is closer to a W2, you can get penalized badly and potentially face prison time. lol

I just can't see how a 1099 loses here even if we are only talking about 401k not even going to discuss hsa (3500-7k there too). I can contribute 61k pre tax ( as of 2022) as a 1099 but only 20k as a w2 with a 5-6k employer contribution additional to max out at 25-26k as w2. Thus, as a 1099 i can put 2.5x more into my 401k along with being able to invest it any way i want. I pay 400/mo now getting my own health insurance vs maybe 150-200 as an employee. They maybe give you 3wks pto plus 1wk cme but i feel the 401k deduction of up to 61k makes this a no brainer. I already get malpractice paid for. Not sure what other benefits there are.

 

[finalpsychyear]

Yeah, there are definitely W2 jobs that are way better than 1099's and the reverse. Give us some details! Personally, I find the 1099 deductions and billing...horrible. The simplicity of a W2 job is definitely the life for me. However, if you really want us to compare, we need a lot more details about the benefits involved with the W2 positions. Hopefully there are a heck of a lot more than just a 403b with some sort of partial match.

I mean standard benefits for w2 like health ins, dental, vision but that's a difference of like 200 bucks a month for me as a 1099 plus i can deduct the premium as a 1099. Also, 61k plus hsa deductions as a 1099. They pay malpractice either way. Sure no 3 wks pto plus 1 wk cme for me or sick days but in the several years there i have not taken sick days. I do take 4-6wks unpaid pto a year whenever i want no 30,60,90 day notice required but i try to always give them its just no one can say no which is pretty priceless to take vaca whenever you need to.

 

[Candidate2017]

Don't forget employees do not have the right to sue for workplace injuries and negligence. Workers comp is all you get. Something to think about, even as a 1099 independent contractor. Because The Man will always argue you were more like an employee if god forbid anything happens to you due to their negligence.

 

[SmallBird]

401Ks are way overrated anyway. A lot of the time you don't decide how to invest. Your money is locked and taking it out is subject to the whims of the institution. You're not paying taxes now but you're going to pay taxes later when you take out the money, so I'm not sure how big the tax benefit. Flexibility counts for so much.

I also think W2 are most definitely in favor of employers. If you're getting paid below the 100k and you need the health insurance or you wouldn't get a job if you are fired then W2 gets the advantage. But once you get into the higher percentiles, there is really no advantage for W2.

This is terrible advice! The tax advantages are tremendous - if you have an income of $300k and you put $20500 into your 401k, that is money that would otherwise have been taxed at >30%, with some variability based on state. When you retire, if you take money out of your 401k, the first $20k or so isn't even taxed at all, and you can likely cover your expenses withdrawing from your 401k at a significantly lower tax rate. Further, this money grows TAX FREE for your entire career which is an additional tremendous tax benefit. I have never heard of a 401k that is set up where you can't choose between at least a few investment options.

 

[calvnandhobbs68]

Don't forget employees do not have the right to sue for workplace injuries and negligence. Workers comp is all you get. Something to think about, even as a 1099 independent contractor. Because The Man will always argue you were more like an employee if god forbid anything happens to you due to their negligence.

I think you got that all wrong bud. It's very difficult for an independent contractor to recover anything for workplace injuries, as there is much less of a "duty for a safe work environment" for a contractor. The Man does NOT want you to be an employee if something happens on the job.

 

[AD04]

As an employer, I have to contribute to W2 social security and Medicare and some other tax stuff (can't think off the top of my head). It's more expensive for me to pay a W2 than 1099. Also, if someone is a W2 if I decide to offer health insurance, I am bound by laws where I have to include everyone based on certain criteria. Same thing for 401k. I'm bound by more employment laws. This is actually to the benefit of employees. I would think it's more beneficial for the employee to be a W2 over 1099 in many circumstances. Yes, you can do tax write offs on a 1099 but you also have to contribute entirely to things like Medicare and social security I believe. It definitely cost me more to switch everyone to W2. But I was advised by my attorney and accountant. If the IRS catches you 1099ing someone who technically is closer to a W2, you can get penalized badly and potentially face prison time. lol

You're right. Hiring contractors are cheaper than hiring employees. What unscrupulous practices do is try to get a doctor working as employee (e.g. set practice hours and set days) but pay as 1099. You sound legit so you don't do that. And most people won't realize how expensive it is to have employees (compared to having a contractor) until they have their own business and have to hire employees (or work as an accountant).

I just can't see how a 1099 loses here even if we are only talking about 401k not even going to discuss hsa (3500-7k there too). I can contribute 61k pre tax ( as of 2022) as a 1099 but only 20k as a w2 with a 5-6k employer contribution additional to max out at 25-26k as w2. Thus, as a 1099 i can put 2.5x more into my 401k along with being able to invest it any way i want. I pay 400/mo now getting my own health insurance vs maybe 150-200 as an employee. They maybe give you 3wks pto plus 1wk cme but i feel the 401k deduction of up to 61k makes this a no brainer. I already get malpractice paid for. Not sure what other benefits there are.

Being 1099 isn't always better than being W-2. Yes, there are huge tax savings with bigger 401k contributions as 1099. However, the employee gets 401k / 403b match and HSA match and 457 and better health insurance / $ and doesn't have to pay employer portion of payroll taxes. As W-2, there are other benefits such as loan repayment and sign on bonus and such. As 1099, you'll have to do accounting and should incorporate to save on Medicare taxes. That costs either extra time or extra money that a W-2 doesn't have to worry about.

1099 is better in the following conditions:
- higher profit (more than $500k / year)
- higher lifestyle spending
- married

At a high enough profit, you can pay yourself a fair wage while pass through profit to escape payroll taxes (mainly Medicare). And if you have a lavish lifestyle, you can be aggressive with expenses and depreciation. And if you're married and have kids, you can spread the profits around. You can double the contribution to 401k (husband and wife -- assuming both partners work on the business). And since you set up your own 401k, you have more options for investments than indexing in stocks / bonds. (The 401k contribution is a moot point if you're shooting for early retirement though.)

To make it work best, you'll need aggressive and competent tax lawyer and CPA. The type that can figure out how to structure payment to sugar babies as deductions. Possibly charitable contributions to an education fund for women in need?

 

[finalpsychyear]

You're right. Hiring contractors are cheaper than hiring employees. What unscrupulous practices do is try to get a doctor working as employee (e.g. set practice hours and set days) but pay as 1099. You sound legit so you don't do that. And most people won't realize how expensive it is to have employees (compared to having a contractor) until they have their own business and have to hire employees (or work as an accountant).



Being 1099 isn't always better than being W-2. Yes, there are huge tax savings with bigger 401k contributions as 1099. However, the employee gets 401k / 403b match and HSA match and 457 and better health insurance / $ and doesn't have to pay employer portion of payroll taxes. As W-2, there are other benefits such as loan repayment and sign on bonus and such. As 1099, you'll have to do accounting and should incorporate to save on Medicare taxes. That costs either extra time or extra money that a W-2 doesn't have to worry about.

1099 is better in the following conditions:
- higher profit (more than $500k / year)
- higher lifestyle spending
- married

At a high enough profit, you can pay yourself a fair wage while pass through profit to escape payroll taxes (mainly Medicare). And if you have a lavish lifestyle, you can be aggressive with expenses and depreciation. And if you're married and have kids, you can spread the profits around. You can double the contribution to 401k (husband and wife -- assuming both partners work on the business). And since you set up your own 401k, you have more options for investments than indexing in stocks / bonds. (The 401k contribution is a moot point if you're shooting for early retirement though.)

To make it work best, you'll need aggressive and competent tax lawyer and CPA. The type that can figure out how to structure payment to sugar babies as deductions. Possibly charitable contributions to an education fund for women in need?

Sure I guess. But i believe you can have access starting at 55 yo so if someone retires 45-50 its not that far off. Also, if invested properly that can be a large sum esp in certain stocks with disruptive tech ex: tesla, nvidia, ark etf that I'd be surprised if they don't 2-3x in the next 10 years at worst let alone this recent inflation bill which will likely boost these companies even further.

 

[calvnandhobbs68]

Sure I guess. But i believe you can have access starting at 55 yo so if someone retires 45-50 its not that far off. Also, if invested properly that can be a large sum esp in certain stocks with disruptive tech ex: tesla, nvidia, ark etf that I'd be surprised if they don't 2-3x in the next 10 years at worst let alone this recent inflation bill which will likely boost these companies even further.

Only if you retire on or after the year you turn 55. Otherwise it’s 59.5 minimum age. So you can’t retire at 54 and start withdrawing at 55 penalty free for instance.

 

[G Sheb]

This is terrible advice! The tax advantages are tremendous - if you have an income of $300k and you put $20500 into your 401k, that is money that would otherwise have been taxed at >30%, with some variability based on state. When you retire, if you take money out of your 401k, the first $20k or so isn't even taxed at all, and you can likely cover your expenses withdrawing from your 401k at a significantly lower tax rate. Further, this money grows TAX FREE for your entire career which is an additional tremendous tax benefit. I have never heard of a 401k that is set up where you can't choose between at least a few investment options.

The tax benefits on a 401K rest on the assumption that you'll be in a lower income bracket when you retire. Not exactly something to write home about when your retirement goals should be that you keep a similar standard of living. You are still going to pay taxes on your savings and gains (capital gains being taxed at the income rate). "between at least a few investment options" is not exactly flexible, so I'm not sure what's the point here. At the end of the day, there is a price to pay for not having your income taxed. It's going to be locked up out of your reach (Big Brother decides when and how you touch it), going to investments you largely don't decide and someone is making money off of it.

 

[Orgone]

The tax benefits on a 401K rest on the assumption that you'll be in a lower income bracket when you retire. Not exactly something to write home about when your retirement goals should be that you keep a similar standard of living. You are still going to pay taxes on your savings and gains (capital gains being taxed at the income rate). "between at least a few investment options" is not exactly flexible, so I'm not sure what's the point here. At the end of the day, there is a price to pay for not having your income taxed. It's going to be locked up out of your reach (Big Brother decides when and how you touch it), going to investments you largely don't decide and someone is making money off of it.

This picture is incomplete, although it may apply more at lower incomes. At higher incomes, and depending on the state, sheltering the income taxed at the top marginal rates nearly doubles what you initially invest, and subsequently yield as a return. Investing 50k (after tax) vs 100k (pre-tax in 401k type vehicle), at 8% returns and after 15 years, will yield 158k vs 317k.

It is true you will still pay taxes on withdrawals, but for high earners the money needed to fund a current standard of living is likely much less than current earnings. It is for me. Expenses to maintain a lifestyle will also likely be less as homes are paid off, children's school/college are paid for, all the child support and alimonies age out, etc. So the average tax rate in retirement, even to maintain the same standard of living, will be significantly less than the current marginal rate that is being avoided. And again, you have the benefit of 15-20 years of compounding gains.

The point about limited investment options is variable depending on the plan, and does not apply to those of us in 1099 land, which as mentioned is a significant benefit.

The lack of access to funds is a drawback no doubt. There are some ways to tap into them, one being a SEPP which avoids penalties but requires a commitment to long term withdrawals.

As usual their is little that is black and white, but there is a reason many financially savvy physicians utilize 401k, DBP etc.

 

[G Sheb]

This picture is incomplete, although it may apply more at lower incomes. At higher incomes, and depending on the state, sheltering the income taxed at the top marginal rates nearly doubles what you initially invest, and subsequently yield as a return. Investing 50k (after tax) vs 100k (pre-tax in 401k type vehicle), at 8% returns and after 15 years, will yield 158k vs 317k.

Not sure how you’re doing your math.
If you’re putting in 100K pretax then you should assume at least 65k post-tax (if income rate is 35%). Now on withdrawal 401k gets income tax while post tax you only get capital gain 15%.
That leaves you with 197k for post tax and 206k for 401k……. (15 years 8% compounded)

If you think this is an impressive difference….
As I said, the tax benefits of 401k rest almost solely on you being in a lower tax bracket in retirement.

In reality, assuming the same compound interest is wrong to start with since you have much less investing freedom on 401k (and I’m talking about employer based 401k) and further your income taxes are likely going to be lower than 35% in the post-tax if you count all the deductions you can take that you can’t take post retirement.

If you are in a higher income bracket you have so many more options than putting your money in the hands of institutions without having the ability to touch it, besides the inconvenience of not having access to it for decades. There’s an inherent risk in that as well. The future is not entirely predictable. Economies collapse and you bet someone will be putting their hands on the billions there.

Again I’m not saying don’t do 401k. But they are overrated. A lot of people don’t have any other options but if you do there are other and better ways to save for retirement.

 

[SmallBird]

Not sure how you’re doing your math.
If you’re putting in 100K pretax then you should assume at least 65k post-tax (if income rate is 35%). Now on withdrawal 401k gets income tax while post tax you only get capital gain 15%.
That leaves you with 197k for post tax and 206k for 401k……. (15 years 8% compounded)

If you think this is an impressive difference….
As I said, the tax benefits of 401k rest almost solely on you being in a lower tax bracket in retirement.

In reality, assuming the same compound interest is wrong to start with since you have much less investing freedom on 401k (and I’m talking about employer based 401k) and further your income taxes are likely going to be lower than 35% in the post-tax if you count all the deductions you can take that you can’t take post retirement.

If you are in a higher income bracket you have so many more options than putting your money in the hands of institutions without having the ability to touch it, besides the inconvenience of not having access to it for decades. There’s an inherent risk in that as well. The future is not entirely predictable. Economies collapse and you bet someone will be putting their hands on the billions there.

Again I’m not saying don’t do 401k. But they are overrated. A lot of people don’t have any other options but if you do there are other and better ways to save for retirement.

His or her math is correct, your math is wrong. Because the money you put into a 401k is deducted from income that would otherwise be taxed at your top marginal tax bracket, you are investing as much as 50% more. When you withdraw that money, even if you withdraw on an annual basis the same amount as you earned (including tax!) as an attending, you will still pay less tax because the first 20k or so will be untaxed (standard deduction), the next big chunk will be taxed at 10%, then 12% and so on. A much more common scenario is that someone who paid into their 401k while earning 400k a year will withdraw about 80k a year during retirement for living expenses (the 400k as an attending was likely not all used to maintain lifestyle, much of it went to tax, much of it was saved, a mortgage/car payment may have been present and gone in retirement) which would be taxed at an effective rate of closer to 10-12%.

 

[jambro]

Only if you retire on or after the year you turn 55. Otherwise it’s 59.5 minimum age. So you can’t retire at 54 and start withdrawing at 55 penalty free for instance.

Yeah you can, its called rule 72t

 

[ObsequiousAplomb]

His or her math is correct, your math is wrong. Because the money you put into a 401k is deducted from income that would otherwise be taxed at your top marginal tax bracket, you are investing as much as 50% more. When you withdraw that money, even if you withdraw on an annual basis the same amount as you earned (including tax!) as an attending, you will still pay less tax because the first 20k or so will be untaxed (standard deduction), the next big chunk will be taxed at 10%, then 12% and so on. A much more common scenario is that someone who paid into their 401k while earning 400k a year will withdraw about 80k a year during retirement for living expenses (the 400k as an attending was likely not all used to maintain lifestyle, much of it went to tax, much of it was saved, a mortgage/car payment may have been present and gone in retirement) which would be taxed at an effective rate of closer to 10-12%.

I don't really have an opinion on this subject. I'm just trying to clarify people talking to each other and seemingly ignoring each other's arguments.

They're saying 35% because for most psychiatrists, that will be their top marginal bracket. For single filers, 35% is for $216-539k. For married filers, that's $432-648k. There's only one bracket above 35%, and it's 37%. 50% is not really anywhere near 35%.

If you make $500k (which statistically you probably aren't as a psychiatrist) and put $50k of that away in a tax-deferred account as a married filer, $28k of that would have been at the lower bracket (32%).

22,000*.35 = $7,700
28,000*.32 = $8,960

$7,700 + $8,960 = $16,660

That means if you paid taxes on that $50,000 before investing it, you would be putting $33,340 away instead.

$33,340 is 66.68% of $50,000. You can also say that $50,000 is 150% of $33,340. This is really the only way I could figure out where the 50% number and the 35% number might make sense.

 

[SmallBird]

I don't really have an opinion on this subject. I'm just trying to clarify people talking to each other and seemingly ignoring each other's arguments.

They're saying 35% because for most psychiatrists, that will be their top marginal bracket. For single filers, 35% is for $216-539k. For married filers, that's $432-648k. There's only one bracket above 35%, and it's 37%. 50% is not really anywhere near 35%.

If you make $500k (which statistically you probably aren't as a psychiatrist) and put $50k of that away in a tax-deferred account as a married filer, $28k of that would have been at the lower bracket (32%).

22,000*.35 = $7,700
28,000*.32 = $8,960

$7,700 + $8,960 = $16,660

That means if you paid taxes on that $50,000 before investing it, you would be putting $33,340 away instead.

$33,340 is 66.68% of $50,000. You can also say that $50,000 is 150% of $33,340. This is really the only way I could figure out where the 50% number and the 35% number might make sense.

Social security tax is 6.2% on first $140k and Medicare tax is 1.45% on everything, and then depending where you live state tax could be 0 to 11.3% (in a state where 30 million people live). But sure maybe it's more fair to say about 40%

 

[OraclePL]

The tax benefits on a 401K rest on the assumption that you'll be in a lower income bracket when you retire. Not exactly something to write home about when your retirement goals should be that you keep a similar standard of living. You are still going to pay taxes on your savings and gains (capital gains being taxed at the income rate). "between at least a few investment options" is not exactly flexible, so I'm not sure what's the point here. At the end of the day, there is a price to pay for not having your income taxed. It's going to be locked up out of your reach (Big Brother decides when and how you touch it), going to investments you largely don't decide and someone is making money off of it.

Most 401k plans nowadays have much better investment options. Any semi-educated investor can decide the investments in their retirement plan. Sure, there are crappy 401ks out there, but they're no longer as widespread as they used to be.

Not sure how you’re doing your math.
If you’re putting in 100K pretax then you should assume at least 65k post-tax (if income rate is 35%). Now on withdrawal 401k gets income tax while post tax you only get capital gain 15%.
That leaves you with 197k for post tax and 206k for 401k……. (15 years 8% compounded)

If you think this is an impressive difference….
As I said, the tax benefits of 401k rest almost solely on you being in a lower tax bracket in retirement.

In reality, assuming the same compound interest is wrong to start with since you have much less investing freedom on 401k (and I’m talking about employer based 401k) and further your income taxes are likely going to be lower than 35% in the post-tax if you count all the deductions you can take that you can’t take post retirement.

If you are in a higher income bracket you have so many more options than putting your money in the hands of institutions without having the ability to touch it, besides the inconvenience of not having access to it for decades. There’s an inherent risk in that as well. The future is not entirely predictable. Economies collapse and you bet someone will be putting their hands on the billions there.

Again I’m not saying don’t do 401k. But they are overrated. A lot of people don’t have any other options but if you do there are other and better ways to save for retirement.

Your math is flawed. You're ignoring the progressive nature of the tax system. No one is taxed at a flat 35%, it's a progressive tax rate and the math is far more complicated than what you just presented.

You're also ignoring the fact that in a 401k, the investment grows tax protected for the length of the person's career. Year to year churn is not taxed. Depending on the amount of churn/turnover in one's portfolio, this can be a sizeable difference over a 30 year career. Even a total stock market portfolio with a sub-2% dividend yield has some taxed dividends.

Here is a nice calculator showing you how massive this difference can be with real numbers. Depending on the amount saved each year, it's a large 6 figure difference. Also note that calculator is similarly flawed: they assume you're taking your 401k distribution in a lump sum at the marginal tax rate, which is not how it works in real life. In real life someone will have a pool of 401k and Roth investments, and will draw from both to minimize taxes in retirement.

Most doctors who are intelligent will have paid off mortgages in retirement and will have a lower need for spending in retirement than their attending physician income. A doc making $400k at his peak will not necessarily have to withdraw $400k to sustain a retirement without a mortgage payment, college savings, etc. Take away a lot of the expenses of middle age, and a good HSA, and withdrawn retirement income should be lower than peak earnings.

Sure, if you work at a hospital with a terrible 401(k) that only offers active funds with 3% expense ratios that underperform the market, then the math gets trickier. But employers have a fiduciary responsibility to employees to offer reasonable 401(k) plans or face legal action, and so the vast majority of retirement plans in today's age have improved investment choices.

 

[Orgone]

They're saying 35% because for most psychiatrists, that will be their top marginal bracket. For single filers, 35% is for $216-539k. For married filers, that's $432-648k. There's only one bracket above 35%, and it's 37%. 50% is not really anywhere near 35%.

It actually is very close! And anyone can experience this mathematical magic! All you have to do is close your eyes, tap your heels together, and think to yourself three times "There's no place like home in California".

Voila! 35% wondrously transforms into 50%.

Maybe not exactly but near enough. And even at the 35% I argue the benefits outweigh the disadvantages, but that's a decision we all get to make and live with.

 

[G Sheb]

Most 401k plans nowadays have much better investment options. Any semi-educated investor can decide the investments in their retirement plan. Sure, there are crappy 401ks out there, but they're no longer as widespread as they used to be.



Your math is flawed. You're ignoring the progressive nature of the tax system. No one is taxed at a flat 35%, it's a progressive tax rate and the math is far more complicated than what you just presented.

You're also ignoring the fact that in a 401k, the investment grows tax protected for the length of the person's career. Year to year churn is not taxed. Depending on the amount of churn/turnover in one's portfolio, this can be a sizeable difference over a 30 year career. Even a total stock market portfolio with a sub-2% dividend yield has some taxed dividends.

Here is a nice calculator showing you how massive this difference can be with real numbers. Depending on the amount saved each year, it's a large 6 figure difference. Also note that calculator is similarly flawed: they assume you're taking your 401k distribution in a lump sum at the marginal tax rate, which is not how it works in real life. In real life someone will have a pool of 401k and Roth investments, and will draw from both to minimize taxes in retirement.

Most doctors who are intelligent will have paid off mortgages in retirement and will have a lower need for spending in retirement than their attending physician income. A doc making $400k at his peak will not necessarily have to withdraw $400k to sustain a retirement without a mortgage payment, college savings, etc. Take away a lot of the expenses of middle age, and a good HSA, and withdrawn retirement income should be lower than peak earnings.

Sure, if you work at a hospital with a terrible 401(k) that only offers active funds with 3% expense ratios that underperform the market, then the math gets trickier. But employers have a fiduciary responsibility to employees to offer reasonable 401(k) plans or face legal action, and so the vast majority of retirement plans in today's age have improved investment choices.

I understand people getting sensitive on this given the choices they make, but no need to bring out the 'you're going to take less in retirement' thing when it's already been accounted for. The whole point is that tax-deferred gets the advantage if you plan on taking less. So we're not even disagreeing here.

Take a look at this. calculator It is meant to highlight the advantages of a 401K.

If you are in the same income bracket pre and post retirement, 401K works a bit better early on but then as the years go by post-tax gets the advantage, and that effect become larger as you increase your post-retirement income. Again assuming that you're in the same tax bracket (which will be if you are taking the same income). 401K gets a clear advantage if you're going into a lower tax bracket. I'm not inventing the wheel here. This is a well known fact about 401Ks.
Personally, I'm putting in a 401K but I'm less convinced it's critical for retirement planning, especially after you account for all the loss of flexibility and access.

 

[DoctwoB]

I understand people getting sensitive on this given the choices they make, but no need to bring out the 'you're going to take less in retirement' thing when it's already been accounted for. The whole point is that tax-deferred gets the advantage if you plan on taking less. So we're not even disagreeing here.

Take a look at this. calculator It is meant to highlight the advantages of a 401K.

If you are in the same income bracket pre and post retirement, 401K works a bit better early on but then as the years go by post-tax gets the advantage, and that effect become larger as you increase your post-retirement income. Again assuming that you're in the same tax bracket (which will be if you are taking the same income). 401K gets a clear advantage if you're going into a lower tax bracket. I'm not inventing the wheel here. This is a well known fact about 401Ks.
Personally, I'm putting in a 401K but I'm less convinced it's critical for retirement planning, especially after you account for all the loss of flexibility and access.

You are making a mistake in that you are conflating average and marginal tax rates.

Say you're a mid career doc earning 500k. Say you're marginal total tax rate is 40%, so every extra dollar you earn is at 40%. So every dollar you put into your 401k you are saving 40 cents in taxes.

Now say you're retired. And somehow you are still "earning" i.e. withdrawing 500k/year. That is highly unlikely, but lets say its true. Your marginal tax rate is still 40%. But your overall tax rate is probably closer to 25-30% after deductions. That means that instead of paying 40 cents in taxes 20 years ago you pay 30 cents in taxes now, because you are putting money in at marginal rates and withdrawing it at average rates. That is ignoring the benefit of tax free growth, which is also huge.

The only reason to pay taxes now and use a taxable account over a 401k is you need access to the money earlier, or you expect taxes in retirement to be significantly higher then they are currently.

 

[SmallBird]

I understand people getting sensitive on this given the choices they make, but no need to bring out the 'you're going to take less in retirement' thing when it's already been accounted for. The whole point is that tax-deferred gets the advantage if you plan on taking less. So we're not even disagreeing here.

Take a look at this. calculator It is meant to highlight the advantages of a 401K.

If you are in the same income bracket pre and post retirement, 401K works a bit better early on but then as the years go by post-tax gets the advantage, and that effect become larger as you increase your post-retirement income. Again assuming that you're in the same tax bracket (which will be if you are taking the same income). 401K gets a clear advantage if you're going into a lower tax bracket. I'm not inventing the wheel here. This is a well known fact about 401Ks.
Personally, I'm putting in a 401K but I'm less convinced it's critical for retirement planning, especially after you account for all the loss of flexibility and access.

The White Coat Investor would say you don't understand the concept of 'filling the brackets' - as I can't improve upon his explanation, I'd encourage you to read this:

Roth vs. Tax-Deferred: The Critical Concept of Filling the Brackets | White Coat Investor

Those who suggest doctors in their peak earnings years should make Roth 401(k) contributions, do Roth conversions, or worse, avoid tax-deferred accounts altogether are either ignorant or selling something.

www.whitecoatinvestor.com

 

[OraclePL]

I understand people getting sensitive on this given the choices they make, but no need to bring out the 'you're going to take less in retirement' thing when it's already been accounted for. The whole point is that tax-deferred gets the advantage if you plan on taking less. So we're not even disagreeing here.

Take a look at this. calculator It is meant to highlight the advantages of a 401K.

If you are in the same income bracket pre and post retirement, 401K works a bit better early on but then as the years go by post-tax gets the advantage, and that effect become larger as you increase your post-retirement income. Again assuming that you're in the same tax bracket (which will be if you are taking the same income). 401K gets a clear advantage if you're going into a lower tax bracket. I'm not inventing the wheel here. This is a well known fact about 401Ks.
Personally, I'm putting in a 401K but I'm less convinced it's critical for retirement planning, especially after you account for all the loss of flexibility and access.

This is the first time I’ve heard you mention post tax. Most of your posts have suggested you’re talking about taxable accounts versus 401(k)s. Post tax accounts like Roth accounts have enormous tax benefits in retirement, regardless of income. So you're switching it up a little.

 

[G Sheb]

This is the first time I’ve heard you mention post tax. Most of your posts have suggested you’re talking about taxable accounts versus 401(k)s. Post tax accounts like Roth accounts have enormous tax benefits in retirement, regardless of income. So you're switching it up a little.

No I meant taxable accounts (and this calculator compares taxable vs tax-deferred).
And I agree Roth accounts are a completely different ball game.
If you can set up a mega backdoor Roth, you're winning.

 

[Merovinge]

I understand people getting sensitive on this given the choices they make, but no need to bring out the 'you're going to take less in retirement' thing when it's already been accounted for. The whole point is that tax-deferred gets the advantage if you plan on taking less. So we're not even disagreeing here.

Take a look at this. calculator It is meant to highlight the advantages of a 401K.

If you are in the same income bracket pre and post retirement, 401K works a bit better early on but then as the years go by post-tax gets the advantage, and that effect become larger as you increase your post-retirement income. Again assuming that you're in the same tax bracket (which will be if you are taking the same income). 401K gets a clear advantage if you're going into a lower tax bracket. I'm not inventing the wheel here. This is a well known fact about 401Ks.
Personally, I'm putting in a 401K but I'm less convinced it's critical for retirement planning, especially after you account for all the loss of flexibility and access.

Essentially no one has the same income in retirement versus during their working years. It's a very bizarre place to make your arguments for a tiny fraction of the workforce. There are super savers that might have 5-10 million in today's dollars that might withdrawal anything close to their working years, but this is a huge minority.

 

[G Sheb]

Essentially no one has the same income in retirement versus during their working years. It's a very bizarre place to make your arguments for a tiny fraction of the workforce. There are super savers that might have 5-10 million in today's dollars that might withdrawal anything close to their working years, but this is a huge minority.

Almost every single financial advisor will tell you that you should aim to have 75-80% of your income.
If you're making 400K as an attending, that means you will still land in the same tax bracket....

Practically I really don't know what's so bizarre about that. The assumption is that you've paid the mortgage, paid for education for your kids...etc, but these aren't always safe assumptions. What if you had to sell and buy a new house because your marriage crumbled? What if you need that extra money to help family or relatives in trouble? What if you want to spend your time traveling in retirement or even pay for your own medical expenses?

You do need to aim better than having an 80K retirement income. Just my opinion.

 

[Merovinge]

Almost every single financial advisor will tell you that you should aim to have 75-80% of your income.
If you're making 400K as an attending, that means you will still land in the same tax bracket....

Practically I really don't know what's so bizarre about that. The assumption is that you've paid the mortgage, paid for education for your kids...etc, but these aren't always safe assumptions. What if you had to sell and buy a new house because your marriage crumbled? What if you need that extra money to help family or relatives in trouble? What if you want to spend your time traveling in retirement or even pay for your own medical expenses?

You do need to aim better than having an 80K retirement income. Just my opinion.

Almost no financial advisor would recommend 75-80% of 400k salary income in retirement salary. Of course you should aim for more than 80k/year if you make 400k a year. There is a huge chasm between 300k and 80k that you are referencing. Most people who I know that are well paid physicians are aiming for around 5 million in today's dollars for around 200k/year in today's dollars for retirement and that would definitely be on the fatter side of FIRE. Waiting until you could draw down 300k/year, would be a 7.5 million dollar portfolio at the now somewhat optimistic 4% rule, the only person doing that is a super saver that is driving a 10 year old Honda Civic on 400k/year salary or someone who loves medicine and just keeps work well beyond what is needed to support a happy and luxurious retirement. You are making assumptions that apply to a tiny single digit percentage of people and applying it generally, it's a bad idea in medicine and a bad idea in personal finance.

 

[SmallBird]

Almost every single financial advisor will tell you that you should aim to have 75-80% of your income.
If you're making 400K as an attending, that means you will still land in the same tax bracket....

Practically I really don't know what's so bizarre about that. The assumption is that you've paid the mortgage, paid for education for your kids...etc, but these aren't always safe assumptions. What if you had to sell and buy a new house because your marriage crumbled? What if you need that extra money to help family or relatives in trouble? What if you want to spend your time traveling in retirement or even pay for your own medical expenses?

You do need to aim better than having an 80K retirement income. Just my opinion.

In retirement, you don't need to save for retirement, which must surely be your biggest expense during your peak earning years, particularly if you don't plan to live of a reduced income at all.

 

[OraclePL]

Agreed with above. The 80% of pre-retirement income is very bad advice for doctors.

 

[G Sheb]

Almost no financial advisor would recommend 75-80% of 400k salary income in retirement salary. Of course you should aim for more than 80k/year if you make 400k a year. There is a huge chasm between 300k and 80k that you are referencing. Most people who I know that are well paid physicians are aiming for around 5 million in today's dollars for around 200k/year in today's dollars for retirement and that would definitely be on the fatter side of FIRE. Waiting until you could draw down 300k/year, would be a 7.5 million dollar portfolio at the now somewhat optimistic 4% rule, the only person doing that is a super saver that is driving a 10 year old Honda Civic on 400k/year salary or someone who loves medicine and just keeps work well beyond what is needed to support a happy and luxurious retirement. You are making assumptions that apply to a tiny single digit percentage of people and applying it generally, it's a bad idea in medicine and a bad idea in personal finance.

You realize that 200k is a few thousands apart from being in the same tax bracket as 400k? And if it’s not there the difference is 3%.
Someone else threw the 80k number. I think it’s great if you want to live prudently but that is besides the point. The point was that 401k do not work great if you stay in the same tax bracket and even with your argument you will stay roughly the same.

Obviously people are sensitive about this and there is all sort of red herring being thrown around.

 

[calvnandhobbs68]

You realize that 200k is a few thousands apart from being in the same tax bracket as 400k? And if it’s not there the difference is 3%.
Someone else threw the 80k number. I think it’s great if you want to live prudently but that is besides the point. The point was that 401k do not work great if you stay in the same tax bracket and even with your argument you will stay roughly the same.

Obviously people are sensitive about this and there is all sort of red herring being thrown around.

Depends if you're single or not. If you're married filing jointly, tax brackets are wayyy wider. If you're single without dependents, you're gonna have to try pretty hard to live on >200K/year in retirement (for again, the vast majority of the population) unless you're really living it up.

It's well known that you're probably going to shoot yourself for foot for retirement quite a bit if you get divorced, especially if there's significant income asymmetry...most financial advisors will tell you that's the most expensive financial problem most people run into.

 

[SmallBird]

You realize that 200k is a few thousands apart from being in the same tax bracket as 400k? And if it’s not there the difference is 3%.
Someone else threw the 80k number. I think it’s great if you want to live prudently but that is besides the point. The point was that 401k do not work great if you stay in the same tax bracket and even with your argument you will stay roughly the same.

Obviously people are sensitive about this and there is all sort of red herring being thrown around.

I suspect the reason for continued engagement with you is not sensitivity but a desire to provide correct information on an important topic that you don't understand correctly. Even with this specific point you misunderstand taxes - the effective tax rate for an income of $200k is 20% for a single filler. The effective tax rate for an income of $400k is 28%. Do you understand that income tax bracket only applies to the income above the threshold to be in that bracket?

 

[Merovinge]

You realize that 200k is a few thousands apart from being in the same tax bracket as 400k? And if it’s not there the difference is 3%.
Someone else threw the 80k number. I think it’s great if you want to live prudently but that is besides the point. The point was that 401k do not work great if you stay in the same tax bracket and even with your argument you will stay roughly the same.

Obviously people are sensitive about this and there is all sort of red herring being thrown around.

This isn't about sensitivity or red herring. What you are saying is just objectively wrong. The effective tax rate for 200k for a married couple is 14.9% at a marginal rate of 22%, at 400k its 20.4% at a marginal rate of 32%. Your tax benefit is at the marginal rate for a 401k, this is a 10% difference, not withstanding the tax free growth in a 401k.

If you want to talk about single tax rates, I can't imagine why you would be looking at 200k/year in today's dollars for retirement unless you have a strong propensity to eat food from Thomas Keller or Grant Achatz on a monthly basis. At an equivocally lower draw down each year to support one person you will have a similar delta in tax rate (say 3 million for 120,000/year).

 

[G Sheb]

This isn't about sensitivity or red herring. What you are saying is just objectively wrong. The effective tax rate for 200k for a married couple is 14.9% at a marginal rate of 22%, at 400k its 20.4% at a marginal rate of 32%. Your tax benefit is at the marginal rate for a 401k, this is a 10% difference, not withstanding the tax free growth in a 401k.

If you want to talk about single tax rates, I can't imagine why you would be looking at 200k/year in today's dollars for retirement unless you have a strong propensity to eat food from Thomas Keller or Grant Achatz on a monthly basis. At an equivocally lower draw down each year to support one person you will have a similar delta in tax rate (say 3 million for 120,000/year).

I suspect the reason for continued engagement with you is not sensitivity but a desire to provide correct information on an important topic that you don't understand correctly. Even with this specific point you misunderstand taxes - the effective tax rate for an income of $200k is 20% for a single filler. The effective tax rate for an income of $400k is 28%. Do you understand that income tax bracket only applies to the income above the threshold to be in that bracket?

There's nothing objective here. You are making assumptions about lifestyle and probably your own situations and your own values to argue your points.

In NYC for example, the effective tax rate (including state and city taxes) without deductions for a single person on a 200K income is 35.75%. For a 400K it is 41.72%. New York Income Tax Calculator - SmartAsset . This is without any deductions. In reality, especially if you're 1099, your deductions are going to be more when you're working so your effective tax rates will be even LESS than in retirement. If you're married the difference is even smaller. These are the objective numbers.

Now you can tell me oh why do you want to live in NYC or why do you want to spend 200K as a single person in retirement (which btw is probably more equivalent to 100K in current dollars, hardly 'luxurious'). You figure this out yourselves, but the reality is none of this is 'bizarre' or inconceivable.

Your persistence to correct 'wrong information on an important topic' is admirable, but I'm not entirely buying it and we'd have to agree to disagree.

 

[SmallBird]

There's nothing objective here. You are making assumptions about lifestyle and probably your own situations and your own values to argue your points.

In NYC for example, the effective tax rate (including state and city taxes) without deductions for a single person on a 200K income is 35.75%. For a 400K it is 41.72%. New York Income Tax Calculator - SmartAsset . This is without any deductions. In reality, especially if you're 1099, your deductions are going to be more when you're working so your effective tax rates will be even LESS than in retirement. These are the objective numbers.

Now you can tell me oh why do you want to live in NYC or why do you want to spend 200K as a single person in retirement (which btw is probably more equivalent to 100K in current dollars, hardly 'luxurious'). You figure this out yourselves, but the reality is none of this is 'bizarre' or inconceivable.

Your persistence to correct 'wrong information on an important topic' is admirable, but I'm not entirely buying it and we'd have to agree to disagree.

You don't pay FICA on 401k distributions.

 

[OraclePL]

You are making a mistake in that you are conflating average and marginal tax rates.

Say you're a mid career doc earning 500k. Say you're marginal total tax rate is 40%, so every extra dollar you earn is at 40%. So every dollar you put into your 401k you are saving 40 cents in taxes.

Now say you're retired. And somehow you are still "earning" i.e. withdrawing 500k/year. That is highly unlikely, but lets say its true. Your marginal tax rate is still 40%. But your overall tax rate is probably closer to 25-30% after deductions. That means that instead of paying 40 cents in taxes 20 years ago you pay 30 cents in taxes now, because you are putting money in at marginal rates and withdrawing it at average rates. That is ignoring the benefit of tax free growth, which is also huge.

The only reason to pay taxes now and use a taxable account over a 401k is you need access to the money earlier, or you expect taxes in retirement to be significantly higher then they are currently.

GSheb- You should read his post above more carefully. This is an excellent explanation. we are trying to explain why a 401(k) is beneficial even if you want to withdraw the same 400 K in retirement as you made in your earnings years.

You are also ignoring the year to year tax protection that happens, you are aware that taxable brokerage accounts are taxed on an annual basis correct?

No one is sensitive about a 401(k), at the end of the day it does not matter what you decide to do with your money. But your posts are misleading for people who are coming onto the forum and trying to learn more about finances.

 

[G Sheb]

GSheb- You should read his post above more carefully. This is an excellent explanation. we are trying to explain why a 401(k) is beneficial even if you want to withdraw the same 400 K in retirement as you made in your earnings years.

You are also ignoring the year to year tax protection that happens, you are aware that taxable brokerage accounts are taxed on an annual basis correct?

No one is sensitive about a 401(k), at the end of the day it does not matter what you decide to do with your money. But your posts are misleading for people who are coming onto the forum and trying to learn more about finances.

They are taxed when you sell or on your dividends. How is that a bad thing when you actually have the freedom to move your money around or even withdraw it from the stock market in downfalls as opposed to a 401K when you watch it tank and then figure out if you want to slap another 10% penalty on it. Which is why it's very misleading to suggest you will have the same return on a 401K vs a regular investment account.
All of that while you get slapped with much higher fees in mutual funds with much less flexibility.

There's no question that if you expect to pay similar or higher taxes in retirement that ROTH accounts will do better. But I'd argue even for regular brokerage accounts, since you're only taxed for capital gains in withdrawal you might have an advantage as well, depending on your tax bracket (again, far from bizarre or inconceivable that your effective taxes will be lower during work years, especially if you're on a 1099 - which can pretty handily cut 10% of your tax rate). Again, I refer you to the calculator I posted earlier meant to highlight advantages of tax-deferral (conveniently ignored) that put fully taxed account in head to head vs tax-deferred. Tax-deferred are advantaged only if you expect you're going to a lower tax bracket (assuming same gain and not accounting for fees, again faulty assumptions).

Hear it from the horse's mouth:

Complex Tax Implications ​

Arguably the most highly touted 401(k) plan attribute is the pre-tax treatment of invested cash flows. This feature is important because if you have more money to invest upfront, you should have a greater opportunity to enhance your returns down the road.




However, before accepting the premise that pre-tax investing is an investment advantage, keep in mind that when you withdraw your money from your 401(k) plan, the entire amount will be taxed at your personal income tax level.




This may be a disadvantage if your investment strategy achieves substantial long-term gains that could have been taxed at the lower capital gains tax rate level. Since these gains will be taxed as income under a 401(k) plan structure, your perceived pre-tax advantage on the front end will be offset to a certain degree by the tax disadvantage on the back end.




Assessing tax implications is complex because your tax status and tax laws will change over time. In addition, new retirement plan schemes will be developed in the future. Therefore, what looks like a good deal today may very well be a bad deal tomorrow.

Problems With 401(k) Plans and What You Can Do About Them

401(k)s are an important part of retirement planning, but they have some problems. Find out what you can do about them and whether a 401(k) is worth investing in.

www.investopedia.com

I think I'm touching on real anxieties (which I understand). There is an inherent risk in 401Ks. You're leaving your money with little access and making a set assumptions that we simply don't know if they will hold or not. It's perfectly reasonable to expect a heavy downturn at the time close to retirement where much of your earnings can be cut. It's not a very safe assumption that taxes will remain at the current rate or lower. Wars, pandemics, economical disasters do not happen every 10 years (401Ks have been available for really 30 years). You're losing access to a big stream of money that you otherwise could invest in other avenues. You're betting your future on the stock market and hedge funds managers. Seemed like a great idea in the 80s, especially if that meant killing pension plans and giving more leverage for corporations.

Again, I'm not saying don't do 401Ks. I don;t know what options you have. Everyone can make their own calculations and figure out what's best for them.

Also lol @ misleading for people who are coming here to learn about finances. I guess I should add a warning label to my posts "talk with a financial advisor before closing your 401K".