House Democrats Aim to Remove 401k Tax Breaks

All American Blogger ^ | 10/22/08 | Duane Lester

[nufsed]

I don’t understand your explanation of the non-tax deferred account.

[nufsed]

"Having to pay taxes on the earnings each year means your 7.5% return each year only compounds your 35 years of savings to $545K instead of the $1 million you expect. So the 401k participant can expect $75K before taxes during the 35 years of retirement, but the non-401k saver can expect only $40K before taxes."

If I can take a stab at your explanation. I'm not sure if I really understood it.

If you put in $500 tax deferred and I put in $500 after-tax or tax free. We both make 7.5%. We both have $1 million.

Continuing the 7.5% you would not make $75,000, your principle would be diminished by the roll out and the tax paid. My fund would pay the full $75,000 because it's tax free.

The difference is the tax deferred savings during the 35 years of contribution. That's $70,000. If you stay in the same margin, there is no other difference in the taxes on other income.

But for the sake of your argument, let's say the deferment creates an additional tax savings of 2,000 a year for you. That's a doubling of the savings in the 401k to $140,000. Compared to the taxes paid in the rollout and ongoing in 35 years of retirement of about 800,000, it's still a tremendous advantage to the IUL.

What did I miss it?

Additionally in the IUL, I can accelerate my program by taking our equity at a net cost of 4% and invest it for 7.5-9.61 compounding tax-free. No tax on equity and no tax during the compounding growth or distribution of the fund, and no tax on the death benefit. Lastly, no age restrictions or withdrawal penalties.

[magellan]

[anniegetyourgun]

xactly.

That's a great one, Mag!

[nufsed]

forgot to cc you on 102

[Kellis91789]

“If you put in $500 tax deferred and I put in $500 after-tax or tax free. We both make 7.5%. We both have $1 million.”

Where would you get $500/month after-tax from ? If you had to pay 33.3% tax on the money as in your example, then what was left to save after-tax would only be $333/month and not the full $500 that could go into a 401k.

And you seem confused about how a 401k works when you say “roll out”. You do not take all the money out of a 401k at one time and pay the taxes on it right then and there. You only pay the taxes on the money that you withdraw each year, while the rest of it continues to grow according to whatever it is invested in.

[nufsed]

Not confused at all.

I never indicated a one-time roll-out.

Where would I get 500 after tax? The same place I got $333. I added another $167. Yes that's the deferred part we've both been referring to. Comes to $2,000 per year.

In order to compare equal amounts I made the contribution the same.

Also, since the IUL has no contribution limit it's most likely to get a lump sum and have even more.

I'll wrap up.

Your way is a tax trap set up by the government. My way saves hundreds of thousands in taxes, is more liquid, and most likely safer. It also comes with a death benefit.

So carry on. No harm no foul!

[Kellis91789]

You are VERY confused. ROFLMAO!! You don’t understand the difference that compounding makes. You can’t count the full $500/month and watch it compound and then just take $70K off the end. Sorry, math doesn’t work that way.

[nufsed]

Tell me how the $167 a month will grow tax free and make up the difference for hundreds of thousands in taxes.

Tell me how the fund can take on additional lump sum contributions.

So how much will your extra $2,000 a year in the 401k make in 35 years?

Tell me how it will make 9.61 tax free (Old Mutual) for 25 years. Old Mutual outran the index by 150,000 for the last 25 years baseed upon a start of $100,000 in 1983.

Tell me what the tax free death benefit is in a 401k

And we'll all have a good laugh.

[nufsed]

If someone invests the $167 a month to be equivalent to the 500 after tax. The original year's investment will be worth about $24,000 and then the amount will decrease in value until the 35th year, the last year of work. It will then be subject to taxes. So you'll still be a few hundred thousands of dollars behind. If fact, it will increase your marginal tax rate.

If I plug in the 9.61% rate and the death benefit, you're still not close.

[nufsed]

Another view. If I just invest the after tax amount of $333 a month for 33 years at the Old Mutual rate of return for the last 25 years of 9.61, I’ll have 1,078,000 in the fund (plus the death benefit) paying out 100,000 tax free per year. If your 401k is beating that then congratulations.

[Kellis91789]

Now suddenly you are talking about 9.61% instead of 7.5% as originally stated ?

It doesn’t change the concept. If you must pay taxes before you invest, and then must pay taxes each year on the earnings, then there is no way to accumulate the same nestegg as investing and compounding tax-free. Mathematically impossible, and if somebody has told you different then you’ve been conned.

Had you actually taken the time to run a few numbers yourself through any compounding interest calculator, you wouldn’t be asking such ridiculous questions.

[nufsed]

You wanted to get real with numbers. I originally gave a general example with both funds gaining at 7.5%. So if we're going to compare programs, then let's use real numbers. Is your 401k doing 7.5? I told you before how much my program outran the index.

You are mistaken. There is no tax "each year on the earnings." The fund grows tax free and the distributions are tax free.

Compare your earnings on your 401k and the taxes due during retirement , then let me know who's being conned.

[Fawn]

You didn’t read it. You are OBLIGATED To contribute. If you work - you can not OPT OUT.