40K benefit vs 40K cash evaluation

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gobears!!

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Hi All,

Trying to figure out the value of the automatic pretax contribution of 39.5K to 401K vs cash 39.5K

Did a simple five year scenario assuming no real return on investment:

Cash: 39.5K x .60 (take home after taxes) x 5 years = 118K

Automatic contribution: 39.5K x .75 (assuming 25% tax bracket in retirement) x 5 years = 148K

This also does not take into account long term capital gains tax against the cash value.

Over 25-30 years this amount is magnified even more.

Am I looking at this correctly? The automatic contribution wins big time? This is obviously a watered down and simplified way of looking at it, but what am I missing?

Theoretical offer: 350K cash vs a 310K plus 39.5K contribution. Is there an easy way to evaluate this?

In my scenario, I'm not sure I would really need the upfront cash. I have a 50K of loans left at 3.2% and savings for a down home payment. I believe in living under my means, saving a good amount, and retiring.
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gobears!! said:
Hi All,

Trying to figure out the value of the automatic pretax contribution of 39.5K to 401K vs cash 39.5K

Did a simple five year scenario assuming no real return on investment:

Cash: 39.5K x .60 (take home after taxes) x 5 years = 118K

Automatic contribution: 39.5K x .75 (assuming 25% tax bracket in retirement) x 5 years = 148K

This also does not take into account long term capital gains tax against the cash value.

Over 25-30 years this amount is magnified even more.

Am I looking at this correctly? The automatic contribution wins big time? This is obviously a watered down and simplified way of looking at it, but what am I missing?

Theoretical offer: 350K cash vs a 310K plus 39.5K contribution. Is there an easy way to evaluate this?

In my scenario, I'm not sure I would really need the upfront cash. I have a 50K of loans left at 3.2% and savings for a down home payment. I believe in living under my means, saving a good amount, and retiring.
Click to expand...


You are leaving out a very important part of the equation. The 401K money is growing tax free so it is compounding each year without any taxes being removed. The taxes aren't paid until 59.5 years of age or later when retirement is reached. W-2 $350 vs W-2 310k plus retirement plan of $39.5 is a very easy decision IMHO.

But, if you are 1099 employee at $350K (which needs to be more like $370K) then you can create your own 401K plan.
 
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Also, don't forget the value of getting the money into a tax protected environment (401k). The annual limit is quite low for a high earner. 18k or even 53k if you are actually maxing out doesn't get you very far if you are trying to save 15-20% of income. Also, once you miss a years contributions, that space is gone forever. You don't get to double up next year because you didn't max out this year. Additionally, and I think this is overblown, 401k money almost always safe from judgement in the event of catastrophic badness.

For full disclosure, my group kicks in 39k/year. I actually make Roth contributions of 14k to sneak a little "extra" into the 401k even though I am in 39.6% bracket. This may or may not prove to be a bad decision. With my wife's contributions, we put around 77k/year into our 401k's. The 14k of Roth money is the only Roth money we save, and who knows maybe nice to have that hanging around in 30 more years.

It is very hard to predict future tax rates. It is also very hard to predict what the 401k balance will be when you are 70.5 and need to start taking RMDs. I am 39, my wife and I have 1.1M in our combined 401ks. If you do the math or fiddle around with some of the retirement calculators that are out there, that 1.1 might be 4M or 12M in 32years when I need to start RMDs. Admittedly those numbers depend on continued savings, but if you are young, save more, not less. Always easier to spend more later.

Last thought... I like to think I am pretty disciplined. But, having the money into a 401k really does lock it up and keep you from spending it in a moment of weakness. In case of disability or death, it can be had without penalty, but if you just want to spend cash on hookers and blow, you will pay taxes owed and a 10 percent penalty to get money out of a 401k. Makes it pretty easy to set it and forget it.
 
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Ok thanks. I figured it wasn't even close which is why is did a very simplified scenari.

So let's say job A gives you 340 cash. And job B gives you 300 plus 40k retirement. BUT job A is the job you would rather have. Assuming job A is willing to match the package of job B, how much cash does job A have to offer to match the cash plus retirement offer of job B?

Seems hard to compare. But maybe there is a simple way do do it or a rough estimate.
 
If job A is paying 340k with no benefits and B is 300k plus 40k retirement, the cost to the employer is the same. Job A would likely be willing to match B because the cost to them is the same, but the tax benefit to you is much better in B. When you start adding in the value of insurance, vacation, call schedule etc, that is more complicated. The math you are presenting seems pretty straight forward.
 
Pharmado said:
If job A is paying 340k with no benefits and B is 300k plus 40k retirement, the cost to the employer is the same. Job A would likely be willing to match B because the cost to them is the same, but the tax benefit to you is much better in B. When you start adding in the value of insurance, vacation, call schedule etc, that is more complicated. The math you are presenting seems pretty straight forward.
Click to expand...

Job A is an AMC and claims they can not give any match to the retirement because of income level. So job A has to offer cash above 340 to match. The question is how much more? Is there a rough estimation?

39.5k automatic 401k contribution = X $ in base salary ? (Some dollar amount above 39.5k to make up for tax deferred account advantage)
 
gobears!! said:
Job A is an AMC and claims they can not give any match to the retirement because of income level. So job A has to offer cash above 340 to match. The question is how much more? Is there a rough estimation?

39.5k automatic 401k contribution = X $ in base salary ? (Some dollar amount above 39.5k to make up for tax deferred account advantage)
Click to expand...

Okay,

The AMC would need to pay you $65,000 more in salary to make up for the $39,500 in lost 401K. If they agreed to anything over $60K that would be fine IMHO.

AMC job of $360K with no 401K match = Job of $300K with $39,500 contribution by the company
 
sethco said:
http://taxfoundation.org/article/2016-tax-brackets

Assuming a marginal tax rate of 33%, 60k of extra income post-tax would equal 40k. However, that ignores the tax free growth of the 401k.
Click to expand...

Tax efficient ETFs should minimize turnover and taxes. Plus, the OP has access to his/her money anytime he/she chooses to use it. Also, my hunch is that tax rates are going up.
 
quote-the-money-has-to-go-to-the-federal-government-because-the-federal-government-will-spend-hillary-clinton-144-65-13.jpg
 
I don't want to turn this thread into a political debate. I'm just pointing out that the country is moving leftwards and this will likely mean higher tax rates going forward. The USA has massive debt and few politicians are going to scale back any of the existing programs.

I'm uncertain how long the "middle Class" remains off the radar because the real money is raising taxes on those in the $100-$300K tax brackets.
 
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BLADEMDA said:
Tax efficient ETFs should minimize turnover and taxes. Plus, the OP has access to his/her money anytime he/she chooses to use it. Also, my hunch is that tax rates are going up.
Click to expand...

While a taxable account can certainly be beneficial for tax loss harvesting, penalty free withdraws at any age, diversity of investments, etc., I don't think anyone would argue that money shouldn't be put in 401k/pre-tax retirement account before a taxable account, especially at our typical income levels. Nobody knows what will happen to tax rates in the future. Speculation is useless, but if that is a worry, then a Roth 401k is much better than a taxable account
 
sethco said:
While a taxable account can certainly be beneficial for tax loss harvesting, penalty free withdraws at any age, diversity of investments, etc., I don't think anyone would argue that money shouldn't be put in 401k/pre-tax retirement account before a taxable account, especially at our typical income levels. Nobody knows what will happen to tax rates in the future. Speculation is useless, but if that is a worry, then a Roth 401k is much better than a taxable account
Click to expand...

We are both responding to the OP on this thread. IMHO,every Physician should MAX out their 401K and their wife's 401K. But, the AMCs are hurting the younger generation of Anesthesiologists by short-changing their 401Ks. If everyone just said "no" to these AMCS until they paid a fair wage and agreed to max out their 401Ks then things would change for the better.

http://whitecoatinvestor.com/tag/401k/
 
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BLADEMDA said:
We are both responding to the OP on this thread. IMHO,every Physician should MAX out their 401K and their wife's 401K. But, the AMCs are hurting the younger generation of Anesthesiologists by short-changing their 401Ks. If everyone just said "no" to these AMCS until they paid a fair wage and agreed to max out their 401Ks then things would change for the better.

http://whitecoatinvestor.com/tag/401k/
Click to expand...

love white coat investor. read his book then a few after that.

agree 100% about turning down the AMC, seems like comparing these jobs is apples to oranges. i don't see the amc responding to a demand of 25K increase in salary if your math is correct blade. which means i'll be turning them down and citing lack of retirement package as the reason.
 
gobears!! said:
love white coat investor. read his book then a few after that.

agree 100% about turning down the AMC, seems like comparing these jobs is apples to oranges. i don't see the amc responding to a demand of 25K increase in salary if your math is correct blade. which means i'll be turning them down and citing lack of retirement package as the reason.
Click to expand...

But, if you prefer the AMC job see if they will agree to another $15K. I know they are cheap but losing you over $15K? Also, don't the AMCs contribute something to retirement? $5K? $10k?
 
BLADEMDA said:
But, if you prefer the AMC job see if they will agree to another $15K. I know they are cheap but losing you over $15K? Also, don't the AMCs contribute something to retirement? $5K? $10k?
Click to expand...

The AMC contributes NOTHING to the retirement plan. When I asked the AMC recruiter about the reason for a lack of any match in the 401K she they weren't allowed to give any contribution to the 401K because of the income level. Is that a rule?
 
BLADEMDA said:
I don't want to turn this thread into a political debate. I'm just pointing out that the country is moving leftwards and this will likely mean higher tax rates going forward. The USA has massive debt and few politicians are going to scale back any of the existing programs.

I'm uncertain how long the "middle Class" remains off the radar because the real money is raising taxes on those in the $100-$300K tax brackets.
Click to expand...
U get the nail in the coffin!!

I been telling peeps this for a long long time. CNN had this terminology called "HENRY" high earner not rich yet. This group is who generally gets hit the hardest with democratic tax policies. They generally referred to those making 200-500k which fits 80% of docs and probably 95% of anesthesiologists.

The super rich even in high income tax states like California shield their non earned "income" via tax exempt muni bonds or 15-20% dividen interest payments/capital gains.

We physicians work "earned income". Pelosi and other rich liberals high five rich republicans behind the scene cause tax policies don't affect their non earned income.

I thought Roth post taxed income would be safe cause I thought about converting in 2010. But it was 50/50 split between finance people I talked about. The way this country is going. Don't think that Roth post taxed money is safe either. The govt can do what they want to do. They don't necessarily have to "tax" that post tax income. They can circumvent and add a "fee" to post tax Roth account say anyone who withdraws more than 100k a year. There are many ways to extract money.

Look at prop 30 in California. A law that RETROACTIVELY raised taxes. Yes. A law approved by voters in November 2012. RETROACTIVELY INCREASED taxes on high income California earners and used the higher tax bracket dating to January 1 2012. Imagine that. Paying higher taxes RETROACTIVELY. They cited a previous Supreme Court ruling on retroactive taxes.

Bottom line. No money is safe. Even Roth IRA post tax money.
 
BLADEMDA said:
But, if you prefer the AMC job see if they will agree to another $15K. I know they are cheap but losing you over $15K? Also, don't the AMCs contribute something to retirement? $5K? $10k?
Click to expand...
The team health contract I looked at offered zero contribution from employer for the MDs.

Of course the crnas got a little matching! Another reason why it's great to be a CRNA. The best job in America for the amount of education/work hours/benefits!

The real issue is these AMCs are just drawing a line. They offer basically tHe same package to everyone. They try not to give one person a different package.
 
gobears!! said:
The AMC contributes NOTHING to the retirement plan. When I asked the AMC recruiter about the reason for a lack of any match in the 401K she they weren't allowed to give any contribution to the 401K because of the income level. Is that a rule?
Click to expand...

https://www.irs.gov/retirement-plan...ng-when-compensation-exceeds-the-annual-limit

No rule specifically. If it is a job you really like, tell the AMC you would like a nonmatching 10% yearly contribution on your salary at 300k. Vesting period is also an issue that you need to consider. If they really want you, they will find a way to make it work. Doubt they will though. There are plenty other people to fill these crappy jobs
 
BLADEMDA said:
You are leaving out a very important part of the equation. The 401K money is growing tax free so it is compounding each year without any taxes being removed. The taxes aren't paid until 59.5 years of age or later when retirement is reached. W-2 $350 vs W-2 310k plus retirement plan of $39.5 is a very easy decision IMHO.

But, if you are 1099 employee at $350K (which needs to be more like $370K) then you can create your own 401K plan.
Click to expand...
Agree. And by the time you are paying taxes on your 401k fund , you could be in a lower tax bracket( I`m hoping to be).
 
tartesos said:
Agree. And by the time you are paying taxes on your 401k fund , you could be in a lower tax bracket( I`m hoping to be).
Click to expand...

I'm hoping to always be in the highest tax bracket


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tartesos said:
Agree. And by the time you are paying taxes on your 401k fund , you could be in a lower tax bracket( I`m hoping to be).
Click to expand...

So does everyone agree with what Blade said? 65K cash is equivalent to automatic 39.5K into 401K?

job A: cash 365K = job B: cash 300K + 39.5K 401K ?
 
gobears!! said:
So does everyone agree with what Blade said? 65K cash is equivalent to automatic 39.5K into 401K?

job A: cash 365K = job B: cash 300K + 39.5K 401K ?
Click to expand...

DAaa bears!!!
that's relative... I would take the 365 k job, unless you don't want your taxable income(AGI) to account for something lets say... child support?
But that's just me.
 
gobears!! said:
So does everyone agree with what Blade said? 65K cash is equivalent to automatic 39.5K into 401K?

job A: cash 365K = job B: cash 300K + 39.5K 401K ?
Click to expand...
There are so many variables.

The post tax money (2016) can be reinvested.

If that 401k money loses value u can't write off the capital losses.

ETFs are very tax friendly these days.

How much do you value immediate access to money (without incurring 10% penalty plus regular income taxes).

There isn't a straight line answer for 401k vs post tax money.
 
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