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Taxable plan vs Deferred Compensation plan

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  • Taxable plan vs Deferred Compensation plan

    I have a question regarding what is my best option. This is probably not much different in the end, but I want to make sure I'm not overlooking something.
    My work offers a pre-tax deferred physician's plan. I can contribute up to my base salary. It is not portable, so if I were to change jobs I would have to withdraw all of the funds as a lump or over 3 years and take the tax hit.
    This is what we are currently doing-

    Savings
    401k - maxed x 2 + employer contrib
    Deferred compensation - 2%
    FSA - 2500
    HSA - n/a
    IRA - maxed x 2
    6mo emergency fund

    Gross income allocation
    ~1/3 taxes -  ouch
    ~1/3 to student loans
    ~1/3 everything else (including 401k's)

    I do plan to stay at my current job long term at this point. My question is whether or not it is best to use this deferred pre-tax plan and take the tax hit whenever/if my job changes or just start contributing to a taxable plan at Vanguard.

    I know the available funds is a big factor here. This plan actually has a great mix of index funds, bonds, int'l stocks so that isn't really a factor.
    Like most have seen this year, it has seen excellent growth at about 20% YTD. I have already come out pretty well thus far if I were to need to withdraw these funds.

    Another consideration is using some of these funds for a house downpayment. I really really would want to avoid doing this, but putting additional savings into the fund to knowingly be used toward 20% down on a house I think would be a wiser option rather than putting it in a 1% ally savings fund. Thoughts on that?

    Thanks!

  • #2
    I did some numbers in excel this afternoon and I think I've answered my own question. It looks like contributing to an account with after-tax dollars is better in the end. Do these numbers make sense to you guys? Don't worry about the specifics - some of this is exaggerated to help see a difference.

    50k starting funds
    15 years @ 8% return
    assuming 300k salary without raises
    5% of base salary contributed to each -- pre-tax account is a "true" 5%, after-tax account is really 30% less

    Deferred plan - $15k annually contributed - $597k --> $417k after 30% taxes (I know retirement tax rate would be lower, but assuming I'll switch jobs at some point and have to take it all out)

    Taxable account - 5% of base salary, minus 30% out for taxes - $10,500 annually contributed - $468k

    After all of this work, this basically looks like a roth vs traditional ira argument. It makes obvious sense the pre-tax account is going to grow more at the end, but if you withdraw at a 30% tax rate, it negates all of that benefit. The break even point is about a 22% tax rate.

    Even if you keep this account for 30 years, the interest still does not make up for the tax hit at the end.  1.69mil after 30% tax vs 1.87mil. Of course, hopefully you're retired by that point.

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    • #3
      At you sure you'll have to take it out as a taxable event, or can it be rolled over into an IRA?

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