Question for Americans: 401k, IRA, 529s??

[ScottNZ]

Well, based on my research it seems the best option is to keep the funds where they are. We are in our 30s so we won’t be taking withdrawals for some time and therefore the four year tax exempt window would not apply to us. I’m certainly not going to give up their status in protected tax shelters either. I’ll consult an international tax advisor on the matter. Specifically will I be taxed by the US government on 401k withdrawals (that would be my only “income” in the USA). Roth IRA and 529s go in after taxes, and come out tax free. Also would the NZ IRD tax us on this if we are permanent residents or citizens, in addition to the US taxes? So many questions…

[JandM]

This may help. http://www.ird.govt.nz/yoursituation-nonres/double-tax/ There is a double taxation agreement between NZ and the USA, so you won't get the full weight of tax from both countries on the same income.

[James 1077]

Specifically will I be taxed by the US government on 401k withdrawals (that would be my only “income” in the USA).

The 401k withdrawal will be treated as taxable income in the US and will need to go down on your US tax return - even if you are resident outside of the US.

Not sure on NZ without doing any research into it but my initial feeling would be that it won't be taxable over here.

[dragonrides]

Sorry - please remove this post - posted under my partner's uid.

[Conzar]

Wow. I take it that you like to maximize your tax bill.

You take it wrong then. In the USA, there are many ways to minimize the amount of income tax both at state and federal levels. 401(k)'s are a very deceiptive device because it seems like you are saving money on not being taxed. The problem is you will eventually be taxed and you have to bet on 1) your income tax rate being less then it is currently and 2) the USA tax law remains the same.

If you believe all those financial advisers out there that you will be a millionaire when you retire, then I suspect tax rates for millionaire's to be much greater then your average working class person. That's of course if your 401(k) hasn't killed any profit you could make by the numerous hidden fees that 401(k) managers charge (have you ever asked for a detailed fee structure from your 401(k) manager?).

My defacto partner and I did a detailed analysis on 401(k)'s a few years back after reading from other people who claimed 401(k)'s were a bad deal. We made a financial model that allowed us to compare 401(k)'s with CD's. At the conclusion of it all, we had stopped contributing to the schemes we already had foolishly bought into and waited until we could minimize the tax we had to payout by taking it all out as an early withdraw.

If you just go by what the 401(k) management companies provide you, then you could easily be fooled into thinking you are making more money then you actually are (they love sending you incomplete graphs and information about how your money is growing).

Anyways, then there is this huge risk that the stock market will crash yet again which could wipe out your retirement. Financial Advisers/Bankers will tell you that its very rare for the stock market to crash and it hasn't happened for 30 years before this one. But all it takes is one time for your wealth to be wiped out. If you are close to retirement age like many Americans are right now, then you have no chance at making that money back.

It seems that the op already made his mind up about his "tax shelters". I wonder why he even posted the question in the first place???

[Bozeman]

Well, based on my research it seems the best option is to keep the funds where they are. We are in our 30s so we won’t be taking withdrawals for some time and therefore the four year tax exempt window would not apply to us. I’m certainly not going to give up their status in protected tax shelters either. I’ll consult an international tax advisor on the matter. Specifically will I be taxed by the US government on 401k withdrawals (that would be my only “income” in the USA). Roth IRA and 529s go in after taxes, and come out tax free. Also would the NZ IRD tax us on this if we are permanent residents or citizens, in addition to the US taxes? So many questions…

Unfortunately, not only does the IRD not recognize the tax-sheltered status of your IRA, 401k and 529 plans (unless, as previously noted, they were accummulated as part of an employee scheme), the paper profits (generally capped at 5%) of such plans are subject to tax under the FIE rules which go into effect once your four years are up. Crazy but true.

The IRD does not care about your citizenship or visa status. They only care about your tax residency status - which the IRD website can explain much better than I.

[Bozeman]

You take it wrong then. In the USA, there are many ways to minimize the amount of income tax both at state and federal levels. 401(k)'s are a very deceiptive device because it seems like you are saving money on not being taxed. The problem is you will eventually be taxed and you have to bet on 1) your income tax rate being less then it is currently and 2) the USA tax law remains the same.

If you believe all those financial advisers out there that you will be a millionaire when you retire, then I suspect tax rates for millionaire's to be much greater then your average working class person. That's of course if your 401(k) hasn't killed any profit you could make by the numerous hidden fees that 401(k) managers charge (have you ever asked for a detailed fee structure from your 401(k) manager?).

My defacto partner and I did a detailed analysis on 401(k)'s a few years back after reading from other people who claimed 401(k)'s were a bad deal. We made a financial model that allowed us to compare 401(k)'s with CD's. At the conclusion of it all, we had stopped contributing to the schemes we already had foolishly bought into and waited until we could minimize the tax we had to payout by taking it all out as an early withdraw.

If you just go by what the 401(k) management companies provide you, then you could easily be fooled into thinking you are making more money then you actually are (they love sending you incomplete graphs and information about how your money is growing).

Anyways, then there is this huge risk that the stock market will crash yet again which could wipe out your retirement. Financial Advisers/Bankers will tell you that its very rare for the stock market to crash and it hasn't happened for 30 years before this one. But all it takes is one time for your wealth to be wiped out. If you are close to retirement age like many Americans are right now, then you have no chance at making that money back.

It seems that the op already made his mind up about his "tax shelters". I wonder why he even posted the question in the first place???

More power to you, mate.

[ScottNZ]

My defacto partner and I did a detailed analysis on 401(k)'s a few years back after reading from other people who claimed 401(k)'s were a bad deal. We made a financial model that allowed us to compare 401(k)'s with CD's. At the conclusion of it all, we had stopped contributing to the schemes we already had foolishly bought into and waited until we could minimize the tax we had to payout by taking it all out as an early withdraw.

It would depend on your age and how close to retirement you are. At any rate, regardless of age having all one's retirement money in CDs seems overly conservative as this would not even keep pace with inflation. Besides all that interest is taxable, while keeping the funds inside a 401k or IRA means the gains are tax deferred (401k) or not taxable at all (Roth IRA).
Anyways, it seems more research is needed on the matter regarding how NZ would tax such funds. I'll post my findings.

[dragonrides]

It is very hard to even question whether 401K is a good idea, let alone talking about taking the money out altogether with a seemingly huge 10% penalty. Every other fellow working American is contributing to the pool, how can it be wrong?

However, if you spend some time and really think hard on the following questions, you may just change your mind, and this is just a few things that you will find yourself uncovering the tip of the iceberg...it's contrary to your instinct (who likes to admit that what he believes to be the right thing to do may just be another Ponzi scheme?), but if you don't, you will still have to find out when you hit 60, the difference is, by then, it might be too late, too little.

1) Why was 401K created?
2) Is it really tax free?
3) What are the fees your 401K administrator is charging you?
4) Is it really your money?
....

This is our findings:
1) It was created by Wall Street to rid of pension plans and other defined benefits, shifting the responsibility to individuals, leaving them vulnerable to market risks.

2) It's like going to an amusement park, you do not need to get a ticket, it's "free" to get it, just when you leave the park, you will be charged at certain rate. US tax rates are only going up (to finance all the wars and government debt), we simply just DON'T know what the income tax rate will be 15, 20, 30 years from now. You might make it only if your portfolio performs much much better than average, which we don't know either if that will happen.

3) This took me at least one month to make the calls at the time, and I still don't know the answer. My two 401K accounts have two different administrators, and they sign contracts with each individual companies, the management fee they charge varies depending on the contract, and the fees are bundled into the charges, it's not published, even the reps didn't have a clue, and you won't either because they don't print your original investment on your statement, they only show you the current market value...and this is the best, the 401K fee, even though it might be 0.5% is charged on your TOTAL ACCOUNT BALANCE, each year, so if you have 100K in your portfolio, you are losing 500 to 1K every year. Based on our own calculations, to cover the fees we pay them, our portfolio has to perform close to 10% a year, that might be possible for a year or two, even three, but it is almost impossible for 15 or 20 year horizon!

4) We found out we have to take out the money after we reach 59.5 years old (everyone knows this), but also the penalty kicks in if you don't clean out your account before you hit 70.5. We will be leaving our money exposed to huge market risks in that short window of 11 years. That's why a lot of people now who are eligible to take distribution but can't afford to do so, they've lost too much money.

...and there's so much more once you dig deeper, for us, we understand that there's a chance we might be better off, but the odds are just too small, even if our portfolio performs great, most of the profits go to the management companies (aka Wall Street), not us. We just couldn't see how we can retire on this thing...We took out our money, happily, with a small profit in a really crappy market, even after 10% penalty since this is the only time that our income will be so low (both staying home with the babies), and it feels good to move on with no worries. As a matter of fact, one of my accounts I sold off all the stocks and kept them in CD and Money Market years ago, but there's recent talks about money market being in danger, so I am going to take out that money as well before our move.

Here are some great information sources you might find helpful:
http://www.youtube.com/watch?v=08UPQ...45847F170B6F5D

And a book that explains the history of 401K and what you can do about it:
"The Great 401(k) Hoax: What You Need to Know to Protect Your Family and Your Future"

It will take us close to 30 years to find out what really happens (we are in the 30s as well , it sounds great that your money can go tax-free, but then there's so much fees involved, and so many rules and regulations are just uncertain, we can just keep our money elsewhere, like banks (unfortunately), even though it may not even beat the inflation but at least we can go and spend it anytime we want. If the game (tax rate, penalty, etc.) changes, we have no choice but to follow, it's the big government, and locking up a big portion of our wages in a stock market for 20, 30 years, is it really our money any more?

[Super_BQ]

If the US 401K plan is a hoax, then how does that compare to NZ's "Kiwi Saver" scheme?

Both share the same view that investing is for 'LONG TERM' and have some sort of 'matching' contributions by the employer. What most people don't know is the managers that operate these funds are creaming off the top with their expensive management fees.

IMO for most people, they would be better to take matters in their own hands and just invest in the IRA plan. Pick proven, solid companies and forget about it for 10 or 20 years, or you could pick high tech companies like Apple and Google. Of course hind sight is 20/20 but all too often, these people that charge management fees to run the mutual/managed funds are no better at picking stocks than a monkey throwing darts on a board.