Personally, I think a lot of financial planners/advisors that have been giving the cookie cutter advise of “put away as much money into a tax deferred 401k or IRA” might be wrong for people who are well disciplined savers/investors… I think this cookie cutter advise might be for the majority of the american population that generally suck at saving/investing their money, and need some sort of disciplined and easy way to put money off to the side for their golden years…However, easy does not necessarily mean its the best and most tax efficient way for someone that is financially disciplined and doesn’t need to to be handheld to bi-weekly put money off to the side to save for their golden years.
For starters, many 401k plans just suck in terms of the high fees, the shitty investment options, and general lack of flexibility. Second, for 401ks and IRAs that are tax deferred, you don’t know how much taxes all that taxed deferred investing is really going to be 10, 20, 30 years down the road, and that seems to be a moving target. For many of you that are hard core savers, putting all that money off to the side and letting it compound all these years, you might end up having a very large required minimum distribution RMD when you reach your golden years, and your annual RMD income might end up being larger than your current AGI, putting you into a much higher tax bracket in your golden years than you currently are with your current AGI. Furthermore, I seriously doubt taxes across all tax brackets in the future will be lower than they are now, unless you are just poor. So for hard core savers/investors, it’s likely that not only will you be in a much higher tax bracket in the future, the taxes you pay in that bracket will be more than even if you were in the higher tax bracket now.
Which begs the question, what’s the point of putting so much money into the traditional tax deferred 401k and IRA anyway, versus just paying taxes now upfront on your earned income and use that money to invest in some more well known, quantifiable taxed asset in present day? Being a disciplined saver, you’re not going to piss away that money today anyway, so you might as well get the tax done on it, and work with it present day, where you know how it’s going to get taxed.
The one exception might be if your employer offers a matching 401k plan, like mine does. And then, yeah I guess it would make sense to contribute the least amount of money to the 401k as possible, just so you get the full match from the employer….or… some employers now offer both a Traditional 401k and Roth 401k, so if you’re hell bent on doing that maximum $19k/year deferral to a 401k ($19.5k/year starting in 2020, whoohoo), you could pay taxes on that $19k up front, and put it all into the Roth 401k part….and gamble that 10-20-30 years from now, our government won’t try to tap into the Roth401ks/RothIRAs that were supposedly not taxable at all…maybe….
