Comments on: A Taxing Situation – My Biggest Financial Regret

By: MossySF

MossySF — Mon, 10 Mar 2008 09:57:57 +0000

Ahem … multiplication is commutative. What that means is if you apply a compounding factor to the total sum, you must also apply the same factor to the taxes saved. One year of saved taxes 30 years into the future is not 15.5K x 30% — instead, it is 15.5K x 30% x 1.08 ^ 30. Now do this for all the years:

Taxes not paid * Growth ^ 30
Taxes not paid * Growth ^ 29
…
Taxes not paid * Growth ^ 2
Taxes not paid * Growth ^ 1

Add it up and you find — HEY, it matches up the exact percentage as if you had deducted the 30% off the original amounts because that’s what commutative means! You can take off X% before Y years of growth or you can take X% after T0 years of growth — you will get the same value.

As for the other idea of having a pile of cash to buy other people’s crap … err, possessions — ok, whatever floats your boat. BTW, would you like to buy some plastic orange boxes? I think they’re worth $2000 but I guess I’m willing to accept half price for them if you can pay me in cash.

By: PT

PT — Sun, 09 Mar 2008 03:24:32 +0000

Great post. I think most would have liked to start earlier. But starting at 31 is no slouch. You’ve got at least 30 years to accumulate. At the max level that will be an amazing “pile of cash” as that idiot commentor said.

By: Becky@FamilyandFinances

Becky@FamilyandFinances — Wed, 05 Mar 2008 13:19:30 +0000

@Brianne
I would max out your ROTH first and then invest in the 401(k) if you have money left over that you want to be saved for retirement. Your company’s profit sharing will go in whether you invest in it or not!

By: JK

JK — Wed, 05 Mar 2008 05:13:37 +0000

I tend to agree with #5… The tax benefit of the 401k/403b is not as good as they would have you believe it is.

Consider this: If you max out a 401k for 30 years ($15500) at 8%, your 401k will be worth roughly $2 million, over the course of 30 years, you will save about $140,000 in taxes at 30% tax rate (15500×0.3×30=139,500). So when you take your money out of your 401k, say you are taking out $100k/year, you will pay 30k/year in taxes! In less than 5 years, you will pay more taxes than you saved over the course of 30 years! I would seriously consider a Roth IRA and/or Roth 401k, especially if you are young enough to watch it grow for a couple of decades! Check out the calculator here: http://www.bloomberg.com/invest/calculators/roth_tra.html

To Your Wealth,

By: G.E. Miller

G.E. Miller — Wed, 05 Mar 2008 03:05:38 +0000

Reducing your taxable income is huge, especially early in your career. I recently wrote all about the benefit of funding a pre-tax 401K vs. a Roth 401K, just for that very reason.