11 ms·

RenTech Created the Ultimate, Tax-Free IRA Account for Employees

85 points by throwawaymath 8y ago

throwawaymath 8y ago
The backstory, for those unfamiliar with Renaissance: they have more than one fund available. Their highest performing fund, Medallion, is the one which made them famous in the 90s. In the early 2000s it was closed to outside investment (likely due to capacity constraint for the strategies it uses). It's now exclusively an investment vehicle for employees and their families, somewhat like a large proprietary trading firm. The really interesting thing here is that Renaissance received clearance to roll employee IRAs into the Medallion fund. That leverages significant tax advantages on a fund which already provides significant returns for its employees.
- perfmode 8y ago
  Do new employees get to participate in Medallion?
  - throwawaymath 8y ago
    Yes, but they're restricted in how much they can contribute.
barbecue_sauce 8y ago
Isn't this Robert Mercer's company?
- throwawaymath 8y ago
  James Simons founded Renaissance in the early 80s (ish). He brought on Robert Mercer from IBM later. Then Mercer took the helm when Simons retired around 2010, if I recall correctly. Mercer himself stepped down last year (likely due to political blowback from the rest of the firm). So the short answer to what you're asking: yes.
  - auntienomen 8y ago
    I think the short answer is: kinda. Mercer was co-CEO, with Peter Brown. He was demoted when his political activities impacted recruitment. My understanding is that Simons is still holds the majority of RenTec shares, with Mercer around 3rd place. RenTec made Mercer rich, but it is isn't his.
    - throwawaymath 8y ago
      I agree with you. I'm responding to what I think is the spirit of the question. These days if someone is asking about RenTech in the context of Mercer, they're doing so because they're mostly heard about the firm as an auxiliary topic to Mercer's political activity. And last I was aware, yes, Simons still has the majority of shares. If I recall correctly that's publicly disclosed though.
hn_throwaway_99 8y ago
This article highlights what I hate about financial reporting. Take this quote "If you are expecting to earn a rate of return of 20 percent or higher, it turns out to be a really good tax shelter." Or this one "The difference: ordinary people don’t have access to Medallion, one of the most successful hedge funds of all time." It's basically insinuating that the techniques Renaissance used are somehow unfair because Medallion has such high returns, as if those returns were anointed by God instead of the work of the people at the fund. In addition, it insinuates that those high returns will go on forever - well, there have been more than few money managers who have seen their years of overperformance decimated by 1 or 2 bad years. It's fine to argue that a Roth IRA may not be good tax policy for the country, but the only thing "special" about Renaissance is they appear to be better at investing than most of their peers.
- ummonk 8y ago
  No, they also have created legal advantages for their employees that aren't available to most people. E.g. I cannot do any margin trades in my IRA and am subject to settlement rules if I try to do day trading. Additionally, if I founded my own startup I would not be able to invest my Roth IRA money in it and let it grow tax free.
  - fdjj4iu5vn 8y ago
    What about self-directed IRAs?
  - sokoloff 8y ago
    Via a self-directed Roth IRA, you probably could invest in your own startup.
    - ummonk 8y ago
      Looked into that back when I was founding a startup - lawyer said it was a no-go due to self-dealing rules.
      - 8y ago
astazangasta 8y ago
There was a discussion of this company the other day and the suggestion that unlike the other outperforming hedge funds that turned out to just be insider trading, this one is real and they are just that smart. I am skeptical; they do not have a monopoly on brains. What they do have is some shadiness in their history: http://wallstreetonparade.com/2014/07/senate-renaissance-hedge-fund-avoided-6-billion-in-taxes-in-bogus-scheme-with-banks/ http://wallstreetonparade.com/2014/07/senate-renaissance-hed... I am sure there is more like this waiting to be uncovered.
- throwawaymath 8y ago
  I know a few people who work at RenTech. I would be very surprised if the operation turned out to be fraudulent. It certainly could be, but I very much doubt it. If you have your ear to the ground you can find many proprietary trading firms which have similar or even superior returns. It's much harder to find a fund deploying similar strategies at the same capacity. As a corollary, every single new hire at the firm is expensive in more than the traditional ways. They only have so much room in Medallion, and so they tend to be both extremely secretive and extremely protective when hiring. They've lessened up on that somewhat recently, but it's still there.
  - quietthrow 8y ago
    What are the people that you know like? Are they all multimillionaires now? Are they genius level smart by conventional standards. Did they apply for a job there or where they “plucked” from else where? How do they make such a shitload of money there?
    - auntienomen 8y ago
      I can't speak for throwawaymath, but the people I knew who went there generally were academics who had already done great things or from whom great things were expected. I don't have much use for the term genius, unless we're talking about Grothendieck or Witten. But yes, we're talking about people who stood out among the crowds of extraordinarily smart people in top tier academia, and who'd actually managed to _do something_ with their intelligence. I think it's fair to say they were generally recruited via social networks. They knew what RenTec was, they knew someone who worked there (maybe an old grad school colleague or a former student), and when they reached out, RenTec already knew who they were. I don't know of anyone who went there who didn't already have a reputation in academia. So contrary to astazangasta's original claims, they do seem to me to have something of a monopoly on brains. There are other smart people at other firms, but I don't know of any other place that has such a concentration. (Aside from Jeff Dean's office, I suppose. ;)
k2enemy 8y ago
I thought there was an income limit for contributing to a Roth IRA? I'm guessing all of their employees with access to the Medallion fund would be above that limit. I must be missing something.
- hendzen 8y ago
  'The firm initially terminated its 401(k) plan for employees in 2010, a step that permitted them to roll the savings into traditional IRAs. Then, employees took advantage of a rule change that year allowing affluent Americans to convert their traditional IRAs into Roths. ' Looks like they rolled all their savings in to traditional IRAs and then converted them in to Roth IRAs. This procedure, known as a 'Backdoor Roth' conversion, effectively allows unlimited Roth IRA contributions beyond the income limits. If you are scratching your head and asking, why this is legal - so are many other people, but it appears to be accepted as within regulation by tax experts.
  - throwawaymath 8y ago
    Interestingly enough, this is also supported - sometimes explicitly, sometimes implicitly - by several top tech companies. It can be a bit tricky to pull off if it's not systematically endorsed by the organization, but it's often very doable.
  - sokoloff 8y ago
    Backdoor and Mega-backdoor Roth conversions do not allow unlimited contributions. They allow an unlimited conversion of (limited) contributions. As for whether it ought to be legal, my view is that multiplication (of which both income taxation and compound investing returns are forms) is commutative and taxing an amount now (the conversion) and then having it grow for 20 years is no different than having it grow for 20 years and taxing it then (traditional IRA), assuming growth and tax rates remain the same. A Roth conversion is in essence a bet on your marginal tax rate at withdrawal being higher than your marginal tax rate today.
    - hendzen 8y ago
paulpauper 8y ago
The Medallion fund has been restricted mainly to RenTech employees since 2005 as the firm took steps to keep its size around $10 billion. The fund has historically averaged annualized returns approaching 80 percent before fees, but such gains can slump when it gets too big. Even employees face annual investment limits, and Medallion also typically distributes its profits every six months instead of reinvesting the gains. How is that even possible? even warren buffett only averaged around 15-20 a year
- throwawaymath 8y ago
  Berkshire Hathaway has two orders of magnitude more assets under management than the Medallion Fund.
  - paulpauper 8y ago
    Even smaller funds only average at best 10-15%. 80% is just nuts and to do so with no down years, minimal volatility. I think it's more than just market timing
    - throwawaymath 8y ago
      Most smaller funds only average that much, yes. But there are outliers.
    - mrchicity 8y ago
      It's the law of large numbers. Virtu's infamous net trading profit histogram showed the firm had one losing day in over 3 years: https://www.zerohedge.com/news/2014-03-10/holy-grail-trading-has-been-found-hft-firm-reveals-1-losing-trading-day-1238-days-tr https://www.zerohedge.com/news/2014-03-10/holy-grail-trading... (1) Again I've seen the same just running a single HFT desk within a larger firm. The only time we ever lost money was from rare technology errors. Trading equities, even if one position spikes 5-10% bad on news, you will still make money, because it's just one little position out of the thousands of tickers you trade. Even guys making far fewer bets in asset classes like FX only ever lost on extreme dislocations like the Euro/Swiss unpeg. If you make a large number of bets, even with just a tiny statistical edge, you will be consistently profitable. RenTech probably isn't profitable every day, but I bet over a year they make at least as many bets as someone like Virtu makes in a day, so it's not surprising that they never have a down year, provided they have the edge. 1: Now does this mean Virtu the business made a profit above cost every day? Probably not. But it does show that consistent trading profits are achievable.
rajacombinator 8y ago
Interestingly, this private, closed fund constantly has its returns leaked, PR articles about it, etc. You are welcome to invest in their open, and very mediocre, funds though.
- altmind 8y ago
  Notably, Madoff hedge fund was also very undercover and hard to get into and had was quite picky who's money they accept.
- hendzen 8y ago
  > You are welcome to invest in their open, and very mediocre, funds though. Are you really though? Show me how an individual can invest in any Renaissance fund (e.g. RIEF) They are only open to institutional investors as far as I know - i.e. those looking to invest say, 250m or more.
gammateam 8y ago
> The firm initially terminated its 401(k) plan for employees in 2010, a step that permitted them to roll the savings into traditional IRAs. Then, employees took advantage of a rule change that year allowing affluent Americans to convert their traditional IRAs into Roths. The following year, Renaissance applied for clearance from the U.S. Labor Department for employees to invest the accounts in Medallion, which the agency granted and made effective in January 2012. This is entirely convoluted. A Roth 401K would have achieved the same thing, 10X higher annual contribution limits, and allows cheap liquidity from borrowing 50% of it at 2 points above fed funds rate. The conversion opportunity was nice but has very little to do with what has happened since 2010 for anyone that invested later. Many Reg D offerings also allow for 25-30% of the fund to be held by tax-deferred accounts. US Department of Labor wasn't necessary here. > In turn, the IRA money -- held by about 250 employees -- grew to more than 4 percent of Medallion’s gross assets from about 1 percent five years earlier. So what's the US Department of Labor for again? I'm missing something..... this must come down to the fund's structure. In any case it is nice they pulled it off. My approach to letting 401K/IRA/Tax-Deferred accounts make a ton of money is to give them a separate share class. That share class gets some outside attention and liquidity preferences sometimes. It was inspired by Bain Capital's approach, when that was in the news during Romney's presidential run and it became 'controversial' regarding how they circumvented tax liability. I didn't confirm thats what Bain Capital actually did but thats what I came up with and its passed.
- JumpCrisscross 8y ago
  > The conversion opportunity was nice but has very little to do with what has happened You can’t invest in a Roth account if you earn more than a fairly low level. You can, however, convert IRA assets into Roth assets at any income level provided you pay the tax on conversion. Disclaimer: I am not a CPA. This is not tax advice.
  - Thorrez 8y ago
    There's no income limit on Roth 401ks as far as I know, where did you hear that there is one? >You can, however, convert IRA assets into Roth assets at any income level provided you pay the tax on conversion. You seem to be saying you can convert traditional IRA money into a Roth IRA. That's true, but how do you get traditional IRA money? There's an income limit when you make traditional IRA contributions if your employer has a 401k: https://www.irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work https://www.irs.gov/retirement-plans/2019-ira-deduction-limi...
cheriot 8y ago
I suspect the reason for IRA vs 401k is entirely regulatory. For any values I try in a spreadsheet, paying the taxes up front results in larger post-tax amounts later (as long as the initial income tax rate is greater than capital gains rate). Can anyone find another reason? Edit: yes, I'm entirely ignoring predictions of tax rates rising in the future since that's not interesting mathmatically
- Spooky23 8y ago
  The upfront deduction and credits help people invest. When I was a kid, it was about 25% of my investment. Ignoring the tax rates is dangerous with the abuses of these programs, it’s going to happen.
- rfinney 8y ago
  Contributory IRA and regular 401K are basically the same thing: deferred taxes, required distributions. Roth IRA is different: no required distributions, no tax. (or a least they promise no taxes). You might want a Roth IRA because of ... #1 Higher tax rates in future. #2 You're not going to spend all your money, Roth IRA can provide tax free distributions for your heirs over their lifetimes. An inherited contributory IRA or regular 401K is taxed at distrubtion and distribution is accelerated (up to 5 years).
- jldugger 8y ago
  I'm assuming you're talking about Roth versus non-Roth. Mathematically, you're right, they are equivalent if your tax brackets don't change. It's pretty obvious once you get the correct formulas. The are reasons to prefer Roth: higher contribution limits -- paying the tax liability up front lets you save more for later. You can also pull out contributions to the IRA tax + penalty free, and pull out earnings for limited purposes (medical, downpayment on a first home). And you're not required to withdraw which can save you down the line.
- Thorrez 8y ago
  By saying "IRA vs 401k" I think you're misspeaking. There's a Roth IRA, and a traditional IRA. There's a Roth 401k and a traditional 401k. I think you're trying to make a Roth vs traditional distinction, not an IRA vs 401k distinction. You're right that the article confuses various things. But you're wrong in your analysis. Capital gains rate has nothing to do with this. Whether it's Roth or traditional, and whether it's 401k or IRA, you never pay capital gains rate, you always pay income tax rate. You're also wrong in saying paying up front is better in terms of tax rate. In terms of tax rates, Roth vs traditional both have the same rate (assuming you have the same tax rate now as in retirement) (and IRA vs 401k also both have the same rate, regardless of tax rates now vs retirement). Roth does have several advantages though. It has a higher effective legal contribution limit. It also allows a higher density of value per dollar, which is useful in a fund like the Medallion fund that is limited to $10B.

85 points by throwawaymath 8y ago

The backstory, for those unfamiliar with Renaissance: they have more than one fund available. Their highest performing fund, Medallion, is the one which made them famous in the 90s. In the early 2000s it was closed to outside investment (likely due to capacity constraint for the strategies it uses). It's now exclusively an investment vehicle for employees and their families, somewhat like a large proprietary trading firm. The really interesting thing here is that Renaissance received clearance to roll employee IRAs into the Medallion fund. That leverages significant tax advantages on a fund which already provides significant returns for its employees.

perfmode 8y ago
Do new employees get to participate in Medallion?
- throwawaymath 8y ago
  Yes, but they're restricted in how much they can contribute.

barbecue_sauce 8y ago

Isn't this Robert Mercer's company?

throwawaymath 8y ago
James Simons founded Renaissance in the early 80s (ish). He brought on Robert Mercer from IBM later. Then Mercer took the helm when Simons retired around 2010, if I recall correctly. Mercer himself stepped down last year (likely due to political blowback from the rest of the firm). So the short answer to what you're asking: yes.
- auntienomen 8y ago
  I think the short answer is: kinda. Mercer was co-CEO, with Peter Brown. He was demoted when his political activities impacted recruitment. My understanding is that Simons is still holds the majority of RenTec shares, with Mercer around 3rd place. RenTec made Mercer rich, but it is isn't his.
  - throwawaymath 8y ago
    I agree with you. I'm responding to what I think is the spirit of the question. These days if someone is asking about RenTech in the context of Mercer, they're doing so because they're mostly heard about the firm as an auxiliary topic to Mercer's political activity. And last I was aware, yes, Simons still has the majority of shares. If I recall correctly that's publicly disclosed though.

hn_throwaway_99 8y ago

This article highlights what I hate about financial reporting. Take this quote "If you are expecting to earn a rate of return of 20 percent or higher, it turns out to be a really good tax shelter." Or this one "The difference: ordinary people don’t have access to Medallion, one of the most successful hedge funds of all time." It's basically insinuating that the techniques Renaissance used are somehow unfair because Medallion has such high returns, as if those returns were anointed by God instead of the work of the people at the fund. In addition, it insinuates that those high returns will go on forever - well, there have been more than few money managers who have seen their years of overperformance decimated by 1 or 2 bad years. It's fine to argue that a Roth IRA may not be good tax policy for the country, but the only thing "special" about Renaissance is they appear to be better at investing than most of their peers.

ummonk 8y ago
No, they also have created legal advantages for their employees that aren't available to most people. E.g. I cannot do any margin trades in my IRA and am subject to settlement rules if I try to do day trading. Additionally, if I founded my own startup I would not be able to invest my Roth IRA money in it and let it grow tax free.
- fdjj4iu5vn 8y ago
  What about self-directed IRAs?
- sokoloff 8y ago
  Via a self-directed Roth IRA, you probably could invest in your own startup.
  - ummonk 8y ago
    Looked into that back when I was founding a startup - lawyer said it was a no-go due to self-dealing rules.
    - 8y ago

astazangasta 8y ago

There was a discussion of this company the other day and the suggestion that unlike the other outperforming hedge funds that turned out to just be insider trading, this one is real and they are just that smart. I am skeptical; they do not have a monopoly on brains. What they do have is some shadiness in their history: http://wallstreetonparade.com/2014/07/senate-renaissance-hedge-fund-avoided-6-billion-in-taxes-in-bogus-scheme-with-banks/ http://wallstreetonparade.com/2014/07/senate-renaissance-hed... I am sure there is more like this waiting to be uncovered.

throwawaymath 8y ago
I know a few people who work at RenTech. I would be very surprised if the operation turned out to be fraudulent. It certainly could be, but I very much doubt it. If you have your ear to the ground you can find many proprietary trading firms which have similar or even superior returns. It's much harder to find a fund deploying similar strategies at the same capacity. As a corollary, every single new hire at the firm is expensive in more than the traditional ways. They only have so much room in Medallion, and so they tend to be both extremely secretive and extremely protective when hiring. They've lessened up on that somewhat recently, but it's still there.
- quietthrow 8y ago
  What are the people that you know like? Are they all multimillionaires now? Are they genius level smart by conventional standards. Did they apply for a job there or where they “plucked” from else where? How do they make such a shitload of money there?
  - auntienomen 8y ago
    I can't speak for throwawaymath, but the people I knew who went there generally were academics who had already done great things or from whom great things were expected. I don't have much use for the term genius, unless we're talking about Grothendieck or Witten. But yes, we're talking about people who stood out among the crowds of extraordinarily smart people in top tier academia, and who'd actually managed to _do something_ with their intelligence. I think it's fair to say they were generally recruited via social networks. They knew what RenTec was, they knew someone who worked there (maybe an old grad school colleague or a former student), and when they reached out, RenTec already knew who they were. I don't know of anyone who went there who didn't already have a reputation in academia. So contrary to astazangasta's original claims, they do seem to me to have something of a monopoly on brains. There are other smart people at other firms, but I don't know of any other place that has such a concentration. (Aside from Jeff Dean's office, I suppose. ;)

k2enemy 8y ago

I thought there was an income limit for contributing to a Roth IRA? I'm guessing all of their employees with access to the Medallion fund would be above that limit. I must be missing something.

hendzen 8y ago
'The firm initially terminated its 401(k) plan for employees in 2010, a step that permitted them to roll the savings into traditional IRAs. Then, employees took advantage of a rule change that year allowing affluent Americans to convert their traditional IRAs into Roths. ' Looks like they rolled all their savings in to traditional IRAs and then converted them in to Roth IRAs. This procedure, known as a 'Backdoor Roth' conversion, effectively allows unlimited Roth IRA contributions beyond the income limits. If you are scratching your head and asking, why this is legal - so are many other people, but it appears to be accepted as within regulation by tax experts.
- throwawaymath 8y ago
  Interestingly enough, this is also supported - sometimes explicitly, sometimes implicitly - by several top tech companies. It can be a bit tricky to pull off if it's not systematically endorsed by the organization, but it's often very doable.
- sokoloff 8y ago
  Backdoor and Mega-backdoor Roth conversions do not allow unlimited contributions. They allow an unlimited conversion of (limited) contributions. As for whether it ought to be legal, my view is that multiplication (of which both income taxation and compound investing returns are forms) is commutative and taxing an amount now (the conversion) and then having it grow for 20 years is no different than having it grow for 20 years and taxing it then (traditional IRA), assuming growth and tax rates remain the same. A Roth conversion is in essence a bet on your marginal tax rate at withdrawal being higher than your marginal tax rate today.
  - hendzen 8y ago

paulpauper 8y ago

The Medallion fund has been restricted mainly to RenTech employees since 2005 as the firm took steps to keep its size around $10 billion. The fund has historically averaged annualized returns approaching 80 percent before fees, but such gains can slump when it gets too big. Even employees face annual investment limits, and Medallion also typically distributes its profits every six months instead of reinvesting the gains. How is that even possible? even warren buffett only averaged around 15-20 a year

throwawaymath 8y ago
Berkshire Hathaway has two orders of magnitude more assets under management than the Medallion Fund.
- paulpauper 8y ago
  Even smaller funds only average at best 10-15%. 80% is just nuts and to do so with no down years, minimal volatility. I think it's more than just market timing
  - throwawaymath 8y ago
    Most smaller funds only average that much, yes. But there are outliers.
  - mrchicity 8y ago
    It's the law of large numbers. Virtu's infamous net trading profit histogram showed the firm had one losing day in over 3 years: https://www.zerohedge.com/news/2014-03-10/holy-grail-trading-has-been-found-hft-firm-reveals-1-losing-trading-day-1238-days-tr https://www.zerohedge.com/news/2014-03-10/holy-grail-trading... (1) Again I've seen the same just running a single HFT desk within a larger firm. The only time we ever lost money was from rare technology errors. Trading equities, even if one position spikes 5-10% bad on news, you will still make money, because it's just one little position out of the thousands of tickers you trade. Even guys making far fewer bets in asset classes like FX only ever lost on extreme dislocations like the Euro/Swiss unpeg. If you make a large number of bets, even with just a tiny statistical edge, you will be consistently profitable. RenTech probably isn't profitable every day, but I bet over a year they make at least as many bets as someone like Virtu makes in a day, so it's not surprising that they never have a down year, provided they have the edge. 1: Now does this mean Virtu the business made a profit above cost every day? Probably not. But it does show that consistent trading profits are achievable.

rajacombinator 8y ago

Interestingly, this private, closed fund constantly has its returns leaked, PR articles about it, etc. You are welcome to invest in their open, and very mediocre, funds though.

altmind 8y ago
Notably, Madoff hedge fund was also very undercover and hard to get into and had was quite picky who's money they accept.
hendzen 8y ago
> You are welcome to invest in their open, and very mediocre, funds though. Are you really though? Show me how an individual can invest in any Renaissance fund (e.g. RIEF) They are only open to institutional investors as far as I know - i.e. those looking to invest say, 250m or more.

gammateam 8y ago

> The firm initially terminated its 401(k) plan for employees in 2010, a step that permitted them to roll the savings into traditional IRAs. Then, employees took advantage of a rule change that year allowing affluent Americans to convert their traditional IRAs into Roths. The following year, Renaissance applied for clearance from the U.S. Labor Department for employees to invest the accounts in Medallion, which the agency granted and made effective in January 2012. This is entirely convoluted. A Roth 401K would have achieved the same thing, 10X higher annual contribution limits, and allows cheap liquidity from borrowing 50% of it at 2 points above fed funds rate. The conversion opportunity was nice but has very little to do with what has happened since 2010 for anyone that invested later. Many Reg D offerings also allow for 25-30% of the fund to be held by tax-deferred accounts. US Department of Labor wasn't necessary here. > In turn, the IRA money -- held by about 250 employees -- grew to more than 4 percent of Medallion’s gross assets from about 1 percent five years earlier. So what's the US Department of Labor for again? I'm missing something..... this must come down to the fund's structure. In any case it is nice they pulled it off. My approach to letting 401K/IRA/Tax-Deferred accounts make a ton of money is to give them a separate share class. That share class gets some outside attention and liquidity preferences sometimes. It was inspired by Bain Capital's approach, when that was in the news during Romney's presidential run and it became 'controversial' regarding how they circumvented tax liability. I didn't confirm thats what Bain Capital actually did but thats what I came up with and its passed.

JumpCrisscross 8y ago
> The conversion opportunity was nice but has very little to do with what has happened You can’t invest in a Roth account if you earn more than a fairly low level. You can, however, convert IRA assets into Roth assets at any income level provided you pay the tax on conversion. Disclaimer: I am not a CPA. This is not tax advice.
- Thorrez 8y ago
  There's no income limit on Roth 401ks as far as I know, where did you hear that there is one? >You can, however, convert IRA assets into Roth assets at any income level provided you pay the tax on conversion. You seem to be saying you can convert traditional IRA money into a Roth IRA. That's true, but how do you get traditional IRA money? There's an income limit when you make traditional IRA contributions if your employer has a 401k: https://www.irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work https://www.irs.gov/retirement-plans/2019-ira-deduction-limi...

cheriot 8y ago

I suspect the reason for IRA vs 401k is entirely regulatory. For any values I try in a spreadsheet, paying the taxes up front results in larger post-tax amounts later (as long as the initial income tax rate is greater than capital gains rate). Can anyone find another reason? Edit: yes, I'm entirely ignoring predictions of tax rates rising in the future since that's not interesting mathmatically

Spooky23 8y ago
The upfront deduction and credits help people invest. When I was a kid, it was about 25% of my investment. Ignoring the tax rates is dangerous with the abuses of these programs, it’s going to happen.
rfinney 8y ago
Contributory IRA and regular 401K are basically the same thing: deferred taxes, required distributions. Roth IRA is different: no required distributions, no tax. (or a least they promise no taxes). You might want a Roth IRA because of ... #1 Higher tax rates in future. #2 You're not going to spend all your money, Roth IRA can provide tax free distributions for your heirs over their lifetimes. An inherited contributory IRA or regular 401K is taxed at distrubtion and distribution is accelerated (up to 5 years).
jldugger 8y ago
I'm assuming you're talking about Roth versus non-Roth. Mathematically, you're right, they are equivalent if your tax brackets don't change. It's pretty obvious once you get the correct formulas. The are reasons to prefer Roth: higher contribution limits -- paying the tax liability up front lets you save more for later. You can also pull out contributions to the IRA tax + penalty free, and pull out earnings for limited purposes (medical, downpayment on a first home). And you're not required to withdraw which can save you down the line.
Thorrez 8y ago
By saying "IRA vs 401k" I think you're misspeaking. There's a Roth IRA, and a traditional IRA. There's a Roth 401k and a traditional 401k. I think you're trying to make a Roth vs traditional distinction, not an IRA vs 401k distinction. You're right that the article confuses various things. But you're wrong in your analysis. Capital gains rate has nothing to do with this. Whether it's Roth or traditional, and whether it's 401k or IRA, you never pay capital gains rate, you always pay income tax rate. You're also wrong in saying paying up front is better in terms of tax rate. In terms of tax rates, Roth vs traditional both have the same rate (assuming you have the same tax rate now as in retirement) (and IRA vs 401k also both have the same rate, regardless of tax rates now vs retirement). Roth does have several advantages though. It has a higher effective legal contribution limit. It also allows a higher density of value per dollar, which is useful in a fund like the Medallion fund that is limited to $10B.