True, if you cash out that soon you only get use of the tax money for a little while. I like TLH for the same reason I like a traditional 401(k). Right now I’m getting a Bay Area tech salary and RSUs, and I want to defer some taxes until I’m in a lower bracket.
The main problem is that TLH is irrelevant in tax-free/deferred retirement funds, which is where you should be sticking your savings if you haven't maxed them out, which is the situation of most people who use these robo services.
TLH only comes into play with taxable accounts. I would bet a lot of VGs AUM is from tax advantaged accounts.
Even in taxable accounts TLH is really oversold. It's another way to shift taxes around, which can be good, but the obvious methods of maxing out tax advantaged accounts should be done first.
You can keep it there and withdraw it after 65 penalty free (have to pay taxes like a traditional IRA) or you can pull it out now and pay taxes plus a 10% penalty.
This constraint is why I've been putting more emphasis on my brokerage account. Even without tax sheltering, I have been able to outpace my retirement account's rate of growth by a very substantial margin (it's already maxed for matching purposes).
There are tons of added benefits to having your money in a place where you can actually control it (i.e. buy specific stocks with no maintenance fees). I am starting to see the tax deferral status as a sales tactic to lock people into lucratively-managed funds. There are so many ridiculous constraints around how much you can contribute that the tax deferral feels meaningless once you put all of the factors together over a truly meaningful sum of money.
All of that said, I am totally onboard with encouraging healthy savings habits for the masses, but for more advanced users there are definitely better options out there.
To make a point specifically toward Telsa - I feel working for one of Elon's companies is sort of a risk in and of itself. You know you are going to be worked harder and maybe be compensated less. The stock offering is paltry for the average case when considering the volatility of the underlying and lack of diversification. For the advanced user case, TSLA might make perfect sense. More savvy employees may decide to trade their TSLA shares on their brokerage or directly through other platforms in order to build a more diversified portfolio.
And considering how early this pandemic hit in the year, if you were laid off in March you didn't even make 25% of your salary yet. That means your taxes are likely to be quite low for the year, so this is actually a good time to withdraw money from a 401k and take the tax hit.
If I ever have a full year gap between jobs (like some kind of a long sabbatical), I'm going to be doing a lot of Traditional to Roth converting, for exactly this reason.
That's not accurate. TFSA contributions are only made with post tax income, the real benefit comes when you take the money out since any gains made with the invested money will be tax free when withdrawn.
> If you withdraw from a 401k, doesn’t that become taxable income?
Currently, if you're married, the first $24K or so is tax free. If you're in California, there are plenty of credits/deductions, so it's likely more than $24K.
Also, you can have a 401K Roth, where all withdrawals are tax free.
No point. There's far easier ways to withdraw tax-deferred money before full retirement age without penalties. Waiting 5 years after a Roth conversion or a 72(t) election are far easier.
There's also self-dealing restrictions on IRAs and presumably self-directed 401(k)s as well.
Besides which, if you're fucking with the IRS, there's far better things to do than merely avoid a 10% early withdrawal penalty. Eg - have your Roth account own some company, then figure out a way to smuggle a gigantic pile of cash into said company. That money then never ends up getting taxed.
They also have the all cash option, which by itself offers a very good return if you factor in matching and tax benefits. And if you switch jobs somewhat frequently you can roll it over into a no fee IRA you manage without necessarily worrying about the state of the market when you do the rollover.
It's not only about being in a lower tax bracket in retirement. Tax deferral means that your compounding rate of return will be faster now before you retire, because instead of giving money to the government you can invest it in something that produces a return. I think the section of the article I linked explains it pretty well.
> Figure out how to do tax loss harvesting. Figure out what a back-door IRA is. Figure out how to take out a loan on your 401(k).
I'm not convinced any of those things is "smart". For example, if LT cap gains is your lowest-rate taxable income, why would you want to offset it? I make sure when I have a cap loss for the year, I have no LT cap gains and keep it to around $3K (which offsets higher-tax-rate ordinary income). Loans against 401(k)s are rarely a good idea, you shouldn't put in money in the first place if you need it before retirement. And I've always thought that (assuming I have any pre-tax Trad IRA money, which would be the case if a ever leaving a job and rolling over the old 401k), it's more effective to use my annual $6K after tax money to pay tax on a larger Roth conversion than to simply go though extra steps to get the $6K into the Roth (greater leverage).
It's true that many tech workers are eventually affected by the contribution limit, but my understanding is that it's essentially always smart to contribute to tax-advantaged accounts while possible.
In theory, having a chunk in the Roth is a better deal. You pay taxes on that money now, but down the road, you don't have to pay when you withdraw. Assuming it has grown multiple times, you pay much less in taxes by doing it now. And, you are not forced to take mandatory withdrawals when you are older.
I understand the penalty for early withdraw, should you need to do that at some point, is more forgiving with a Roth as well.
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