Comment by parliament32
5 hours ago
Yeah exactly. This is what makes RRSPs/401ks the absolute worst place to park your money. You are locking away your funds, and deferring taxes to 1) the stage in your life you probably want to pay the least tax possible, and 2) a time when the tax rate will probably be higher than it is now (after all, tax rates pretty much exclusively go up).
If your employer offers a match, you should absolutely contribute up to the maximum match (it's free money after all), but not a penny more IMO. There are much, much better vehicles for parking your money than retirement funds.
My friend, I'm not sure you've thought through this all the way.
Historically, tax rates have gone down over time, not up. Especially in recent history.
You do pay a reduced tax in retirement because you're able to blend your income. You defer taxes on the 401k until requirement, but you pre-pay taxes on a mega backdoor/roth, so if you need 100k of income in retirement you pull 50k from 401k and 50k on the roth and only pay taxes on half of it, putting you in a lower bracket.
Having the pretax money to grow before paying taxes on it is greater than having post tax money and having less to compound.
The alternative to tax advantaged places to park your money for retirement is strictly worse than non-tax advantaged. In a 401k you pay taxes only in retirement, for roth's you pay taxes only with your paycheck. In a brokerage, you pay taxes at your paycheck and then you pay taxes on withdraw for your cost basis.
Not sure if there's a US equivalent, but in Canada, "having the pretax money to grow before paying taxes on it" is a worse deal. In an RRSP/401k you pay full tax on any investment earnings. Meanwhile a normal non-registered investment account is classified as "capital gains" and only taxed at 50% of your marginal tax rate.
At the end of the day though, I'm sure it boils down to having both instead of trying to minmax it. Being able to liquidate a portion of your investments to, say, purchase a house is probably a good idea, which you can't do if you've been putting everything you have into a retirement account.
Idk about Canada - but in the US most people are going to be in a lower tax bracket in retirement (sometimes substantially lower). Is that not the case in Canada? You only pay your marginal tax rate on what you withdraw.
For example - if my wife and I max out our 401k’s - that’s about 50k we are deferring taxes on. If our pre-tax household income is 300k - then that 50k would have been taxed at 24% marginal rate.
In a year of retirement - let’s say we withdrawal that 50k but now it’s doubled (probably more than that since it only takes 9 years to double at 8% annual growth via compound interest). Now we pay 12% and end up with 88k. (Technically we’d have more than that because of the 24k standard deduction - but we’ll ignore that for the sake of simplicity)
Let’s take the non-tax advantaged comparison. We’d have paid 24% up front and invested 38k. It doubles to 76k. We’d pay 0% capital gains - but even then we end up with less investment income.
I used to agree with you, but then I learned about 401k/roth conversion ladders. Basically, you can convert everything in a 401k to a roth (taxable event) and after 5 years you can withdraw all of that money penalty free and tax free (except the gains made in those 5 years). The key thing is that you want to strategically do the conversion when you have a very low income, for instance if you're already retired and living off of Roth contributions or taxable brokerage investments, so your only income for the year is the amount you convert. So basically, you just need enough funds to retire for 5 years before you can start withdrawing from the 401k->Roth.
I started doing this when I got a raise and realized pretty much half of my raise was going straight to taxes, whereas I could invest it all if I just upped my 401k contributions.
Very cool. I'm Canadian (which is why I mentioned RRSPs above), and I don't think an equivalent exists for us. Our alternatives to an RRSP (which is equivalent to your 401k) basically boil down to:
TFSA: you pay standard income tax up front, but no income tax on investment earnings. Annual contribution room is added. You can withdraw anytime and get the contribution room back.
FHSA: you do not pay income tax up front, you do not pay income tax on investment earnings. But you can only withdraw for a first home purchase (or convert into RRSP), and there's yearly and lifetime limits on contributions.
Non-registered investment account: you pay standard income tax up front. Investment earnings as capital gains are 50% of standard income tax. Withdraw anytime, no limits obviously.
With RRSPs: you do not pay income tax up front, but you pay standard income tax when you withdraw, and pay standard income tax on investment earnings (no capital gains rate). You cannot withdraw until retirement age.
Those are effectively your only four options here. When they're broken down that way.. does it make more sense?
Gotcha, your TFSA sounds pretty similar to a Roth. So if there was a way to convert RRSP into TFSA in the manner I described, you could potentially get access to that money earlier than 59.5 (or whatever your age limit is in Canada) if that rollover is able to count as a "contribution".
I’m sorry but this is just bad financial advice