The wealth-building thread

[Mort]

dont mislead people LOL
what you meant to say is they are treated as post tax contributions. They can be pretax contributions originally and then converted to a roth, by paying the tax owed in the year of conversion. As such, they are/were pretax contributions. If not a conversion, then yes, you are correct. Like everything in investing, without the details you can be right and wrong depending.

Incorrect. You can make a direct contribution to a Roth 401k. There's no conversion.

 

[tmtomh]

This works, and it is more efficient due to 2 factors. First, loss harvesting (which can also offset dividends).

True - but for non-qualified dividends, tax-loss harvesting offsets are limited to $3,000 as with all other ordinary income.

 

[MRC01]

True - but for non-qualified dividends, tax-loss harvesting offsets are limited to $3,000 as with all other ordinary income.

True, and one of the advantages of "roll-your-own" index is that, unlike an index fund, you have more control over whether the dividends are qualified because you control how long you hold each stock.

 

[JeffS7444]

Active wealth advising is a wide range services and people pay whatever it's worth to them. As long as the pricing is stated up front, there's no deception. Percentages and compounding are high school math, they shouldn't be confusing.

Admittedly, I didn't make the connection with fees acting as negative compound interest until someone (Ramit Sethi video) mentioned it.

Ironically, when I had less money, it was easier for me to ignore the fees, because a few hundred dollars per year didn't trigger any alarms.

 

[Timcognito]

That is an interesting concept. Have you seen any historical returns for this strategy compared to just owning the index? I would be concerned that this strategy might fall behind the index but don't know.

Have a meeting with my financial guy next week and will get some real data. Also, I think the advantage is for those paying a lot of taxes and those who don't have any write offs, in my case empty nester with house paid off, getting SS and having to liquidate our 401ks. These are not new strategies so there is probably some stuff on the net.

 

[Timcognito]

401k and IRA withdrawals/required distributions are taxed as ordinary income

Yes, but we started in our early thirties on the 401ks the cost basis can be low and gain high. I will try to get data for my case. Also in my case, three times, my startup companies where sold to very large pharmaceutical and medical companies where my $.10 stock was converted to high value Dow Jones stocks much I still hold and has appreciated.

 

[tmtomh]

Yes, but we started in our early thirties on the 401ks the cost basis can be low and gain high. I will try to get data for my case. Also in my case, three times, my startup companies where sold to very large pharmaceutical and medical companies where my $.10 stock was converted to high value Dow Jones stocks much I still hold and has appreciated.

If the gain is high then yes of course - paying taxes on 401k withdrawals is one of those "good problems" in that you're paying significant taxes because your 401k has grown so much and you have so much more money in it now.

But the concepts of cost basis and gain on original investment/contribution has no meaning with a 401k, beyond that everyday sense of the terms. It's not a taxable brokerage account where cost basis determines how much of your withdrawal/sale you pay capital gains taxes on. Regardless of what the investments are (unless it's a 401k Roth), when you withdraw money from the 401k, the withdrawals are taxed as ordinary income, not capital gains. So you pay whatever the relevant tax bracket is - which for most people with sizable 401ks is likely to be a higher marginal rate than their capital gains tax rate.

Regardless, my only point here is that tax-loss harvesting strategies are of minimal - and in the cases of significant income/wealth negligible - benefit when we're talking about offsetting taxes on ordinary income, because of the aforementioned cap of $3,000 per year in offset against ordinary income. Tax-loss harvesting can be very impactful when we're talking about offsetting capital gains taxes, since there's no limit on now much capital gain you can offset through loss harvesting, and you can even roll over large losses into future years if you more than fully offset your gains in one year.

 

[ahofer]

Please don’t mislead people. Roth 401ks are post-tax contributions.

I never said otherwise (although they can be both post and pre-tax, depending on your income). But there are also non-Roth post-tax 401k (I have one, in fact).

Please don’t accuse me of misleading anyone.

 

[Timcognito]

If the gain is high then yes of course - paying taxes on 401k withdrawals is one of those "good problems" in that you're paying significant taxes because your 401k has grown so much and you have so much more money in it now.

But the concepts of cost basis and gain on original investment/contribution has no meaning with a 401k, beyond that everyday sense of the terms. It's not a taxable brokerage account where cost basis determines how much of your withdrawal/sale you pay capital gains taxes on. Regardless of what the investments are (unless it's a 401k Roth), when you withdraw money from the 401k, the withdrawals are taxed as ordinary income, not capital gains. So you pay whatever the relevant tax bracket is - which for most people with sizable 401ks is likely to be a higher marginal rate than their capital gains tax rate.

Regardless, my only point here is that tax-loss harvesting strategies or of minimal - and in the cases of significant income/wealth negligible - benefit when we're talking about offsetting taxes on ordinary income, because of the aforementioned cap of $3,000 per year in offset against ordinary income. Tax-loss harvesting can be very impactful when we're talking about offsetting capital gains taxes, since there's no limit on now much capital gain you can offset through loss harvesting, and you can even roll over large losses into future years if you more than fully offset your gains in one year.

Actually my direct indexing account is a minor part my investment portfolio not 401k. Also biggest gains are in investments not 401k. Sorry for the confusion and it's new to me. We had a let ride attitude and actually have been moving the 401k stuff into fixed instruments to guard against a big drop in the market without time to recover. There we have been getting over 6%, where the switch away from stocks is tax free for now.

 

[muslhead]

Incorrect. You can make a direct contribution to a Roth 401k. There's no conversion.

Mort - stick to what you are good at and pay attention. I was not speaking to you. That was for a reason. The quotation marks are deliniating who I was addressing.

 

[Mort]

Mort - stick to what you are good at and pay attention. I was not speaking to you. That was for a reason. The quotation marks are deliniating who I was addressing.

And you are ignored

 

[just1n]

I never said otherwise (although they can be both post and pre-tax, depending on your income). But there are also non-Roth post-tax 401k (I have one, in fact).

Please don’t accuse me of misleading anyone.

A 401(k) plan can hold pre-tax, Roth, and non-Roth after-tax contributions. But Roth contributions are always after-tax; income does not determine their tax character.

I highly suggest those reading into both arguments that Roth 401K are somehow not taxed based on income is inaccurate. Sounds like a conflation or Roth IRA and Roth 401 (k) at best.

Ten differences between a Roth IRA and a designated Roth account | Internal Revenue Service

Top ten differences between a Roth IRA and a designated Roth account

www.irs.gov

 

[ahofer]

A 401(k) plan can hold pre-tax, Roth, and non-Roth after-tax contributions. But Roth contributions are always after-tax; income does not determine their tax character.

I highly suggest those reading into both arguments that Roth 401K are somehow not taxed based on income is inaccurate. Sounds like a conflation or Roth IRA and Roth 401 (k) at best.

Ten differences between a Roth IRA and a designated Roth account | Internal Revenue Service

Top ten differences between a Roth IRA and a designated Roth account

www.irs.gov

You are correct. I had thought they could be deducted at qualifying levels but they cannot. I apologize for the error.

Nonetheless, it is not what I said in my original post and none of this is relevant to this weird idea of defraying retirement plan income (ordinary) with a TME account. Fortunately, that has been clarified by the original poster.

 

[Mort]

30 year TIPS are a screaming deal.

 

[Soandso]

30 year TIPS are a screaming deal.

Me, not so sure about 30 year TIPS. I'd be the equivalent of over 100 years old in 30 years.

 

[ahofer]

Me, not so sure about 30 year TIPS. I'd be the equivalent of over 100 years old in 30 years.


View attachment 558792View attachment 558793

So here’s the thing about TIPS (and I have to be careful to steer clear of recommendations but just stick to risks, for regulatory reasons):

TIPS “Break-evens” (“BE”) may seem attractive. Priced at under 2.5% you do better in TIPS than in nominal bonds if inflation is *higher* than whatever breakeven you buy (right now the 30yr BE is 2.27% and the 10 is 2.38%) for the life of the bond, and worse if it is lower.

However, long TIPS still have *real* rate risk. So the Fed Funds rate and the Term Premium (the amount of yield payed simply for taking the risk of a longer bond) can increase as well, and cause major price fluctuations. So even if your inflation forecast pans out, you could still have a very negative return experience from rising short rates and term premiums (together: “real rates” rise). So they might outperform nominals, but still be deep in negative territory.

The long breakeven responds to the credibility of monetary policy. It could indeed go up if Bessent continues to tempt the bond market and Warsh is not seen as a credible inflation fighter. Also, the sheer size of Treasury debt suggests that inflation is likely to be *part* of any fiscal repair we might achieve. However, you might *also* expect the term premium to rise in a loss of credibility, and of course a tightening might eventually come and raise the short rate.

There are ETF vehicles that isolate the break-even from real rates, if that is your bag (long TIPS/short futures or swaps on the nominal bond to protect from real rates rise). However, there are ongoing carry costs to that trade. I can definitely see the argument that we are losing fiscal and monetary credibility. But I just want to make sure everyone sees the other risks. It’s as easy as looking at TIPS in any prior rate rise, both absolute and compared to nominal bonds. Especially right after they were issued and through the recent higher inflation period towards the end of the Biden era.

Short TIP Breakevens are more of a bet on the price of oil and/or any other large ingredient in CPI that happens to be in shortage, since those ingredients will push the inflation rate higher or lower than the BE.

 

[Soandso]

So here’s the thing about TIPS (and I have to be careful to steer clear of recommendations but just stick to risks, for regulatory reasons):

TIPS “Break-evens” (“BE”) may seem attractive. Priced at under 2.5% you do better in TIPS than in nominal bonds if inflation is *higher* than whatever breakeven you buy (right now the 30yr BE is 2.27% and the 10 is 2.38%) for the life of the bond, and worse if it is lower.

However, long TIPS still have *real* rate risk. So the Fed Funds rate and the Term Premium (the amount of yield payed simply for taking the risk of a longer bond) can increase as well, and cause major price fluctuations. So even if your inflation forecast pans out, you could still have a very negative return experience from rising short rates and term premiums (together: “real rates” rise). So they might outperform nominals, but still be deep in negative territory.

The long breakeven responds to the credibility of monetary policy. It could indeed go up if Bessent continues to tempt the bond market and Warsh is not seen as a credible inflation fighter. Also, the sheer size of Treasury debt suggests that inflation is likely to be *part* of any fiscal repair we might achieve. However, you might *also* expect the term premium to rise in a loss of credibility, and of course a tightening might eventually come and raise the short rate.

There are ETF vehicles that isolate the break-even from real rates, if that is your bag (long TIPS/short futures or swaps on the nominal bond to protect from real rates rise). However, there are ongoing carry costs to that trade. I can definitely see the argument that we are losing fiscal and monetary credibility. But I just want to make sure everyone sees the other risks. It’s as easy as looking at TIPS in any prior rate rise, both absolute and compared to nominal bonds. Especially right after they were issued and through the recent higher inflation period towards the end of the Biden era.

Short TIP Breakevens are more of a bet on the price of oil and/or any other large ingredient in CPI that happens to be in shortage, since those ingredients will push the inflation rate higher or lower than the BE.

Very comprehensive orientation. In the past when I put money into TIPS it was a loss when decided to liquidate them.

As regards same duration TIPS vs USA Treasuries the factor arises about one's age. For someone who is relatively young long dated TIPS certainly can be considered strategic wealth building bets. For one no longer working long dated Treasuries are reliable cash flow instruments every 6 months where any unneeded amount received can be rolled into short duration (1 to 6 months) treasuries for increasing wealth.

 

[dtaylo1066]

Rates are making fixed income interesting for us seniors. 5% for 10 years, not bad, hold to maturity.

 

[Soandso]

Rates are making fixed income interesting for us seniors. 5% for 10 years, not bad, hold to maturity.

Good idea and I just want to point out (for those who do not already know it) there is a difference between the current 10 year treasury yield of 5% and that same treasury issue's coupon which is 4.625% per year. The treasury coupon is a fixed % rate for 10 years and that is what you are guaranteed for every year. That current 5% yield data point is because when you buy the 10 year 4.625 % coupon bond you can do so today at a discount (which can change). In practical terms for every US$1,000 (govt. minimum required) 10 year treasury you are not going to get $50/year but actually $46.25/year.

……………………………………………………………

[If you want US treasuries that continuously pay out 5.125% per year then you can get that from the 20 year treasury coupon; today it's calculated yield is 5.406% since you can buy it at a discount. See below screen shots. For comparison 30 year treasury coupon is also 5.125%; today it's calculated yield today 5.38%. Institutions prefer the 30 year for reserving the easiest moving in and out of holdings; for retirees the selection of 20 vs. 30 year treasuries is more nuanced.]

 

[dtaylo1066]

Good idea and I just want to point out (for those who do not already know it) there is a difference between the current 10 year treasury yield of 5% and that same treasury issue's coupon which is 4.625% per year. The treasury coupon is a fixed % rate for 10 years and that is what you are guaranteed for every year. That current 5% yield data point is because when you buy the 10 year 4.625 % coupon bond you can do so today at a discount (which can change). In practical terms for every US$1,000 (govt. minimum required) 10 year treasury you are not going to get $50/year but actually $46.25/year.


View attachment 558936View attachment 558937……………………………………………………………

[If you want US treasuries that continuously pay out 5.125% per year then you can get that from the 20 year treasury coupon; today it's calculated yield is 5.406% since you can buy it at a discount. See below screen shots. For comparison 30 year treasury coupon is also 5.125%; today it's calculated yield today 5.38%. Institutions prefer the 30 year for reserving the easiest moving in and out of holdings; for retirees the selection of 20 vs. 30 year treasuries is more nuanced.]

View attachment 558938View attachment 558939

Quite correct. I would add that with the Fed likely to bump up rates, we may see 5% in the next auction.