401k vs Roth 401k

[evilanne]

I see where you are coming from but you are assuming that you will put more in. If you are maxing out your 401k (18,000/year to get the to get to $100K ), you cannot add the money to account for the Taxes paid. So you would only have $300K; I think your original calculation would be closer to the reality. From you link:

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Tax risk If all else is equal (that is, you expect to retire in the same bracket, and never to have the opportunity to convert in a lower bracket), the Roth account has a slight advantage because there is less tax risk. You might not retire with the same marginal tax rate that you expect, either because tax rates change or because your taxable income is higher or lower. If you will have a lot of money in retirement, it is desirable to have some Roth money because of Required Minimum Distibutions. If all of your retirement money is in traditional accounts, you will have to take the RMDs even if that is more than you need to live on, and thus pay tax prematurely. If you have Roth accounts which you do not need in your own retirement, you can leave them for your heirs.

Based on the amounts some people in this forum have, I think it is more likely that many will be in the same tax bracket. With a higher rate of return, it may actually put you into a higher tax bracket at some point, especially when RMDs kick in. If the intent is to eventually convert, it still makes more sense to me to put money in Roth while working rather than waiting until after you retire when your income will be lower. I'm probably not going to convince you and you do make a valid argument, so I guess we will have to agree to disagree.

[SevenUp]

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Originally Posted by evilanne I see where you are coming from but you are assuming that you will put more in. If you are maxing out your 401k (18,000/year to get the to get to $100K ), you cannot add the money to account for the Taxes paid.

That's a valid consideration. E.g., starting with $24K one could
* pay $6K tax now and put $18K into a Roth, or
* put $18K into traditional, pay $1.5K tax and put $4.5K into a taxable account.
See Maxing out your retirement accounts for more.
In short, given enough time, the tax drag on the "side account" for one making the traditional contribution means Roth can be better even if the withdrawal marginal rate is a few percentage points below the contribution marginal rate. This could apply, for example, to the 28% vs. 25% marginal rates. For a 25% contribution rate vs. a 15% withdrawal rate, however, traditional will be better.

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If the intent is to eventually convert, it still makes more sense to me to put money in Roth while working rather than waiting until after you retire when your income will be lower.

I hope you come to see why this is likely an incorrect strategy. If you can save to traditional at a higher tax rate now, and pay at a lower tax rate (when you withdraw or convert to Roth from traditional) later, you will come out ahead.

If you expect your income to be higher after retirement, in that case using Roth makes sense now.

ETA: clarify timing.

[kaneohe]

Quote:

Originally Posted by evilanne .............................................. Based on the amounts some people in this forum have, I think it is more likely that many will be in the same tax bracket. With a higher rate of return, it may actually put you into a higher tax bracket at some point, especially when RMDs kick in. If the intent is to eventually convert, it still makes more sense to me to put money in Roth while working rather than waiting until after you retire when your income will be lower. I'm probably not going to convince you and you do make a valid argument, so I guess we will have to agree to disagree.

Very true that there is certainly uncertainty about your future tax bracket......
both because of future tax rates and your own personal situation. Even if you end up in a lower bracket, your ability to convert in that lower bracket may be
limited and you might be able to convert only a small fraction of your retirement account at those rates. So in a real situation, there is certainly room for different opinions about what to do.

However in the theoretical situation that you were discussing about about 25% rate now and 15% rate later, there should only be 1 correct answer based on hard numbers. The conclusion should be based on the funds left after taxes.

[sengsational]

Although I never used it during accumulation phase, i-orp might give you an idea of the value of tax deferral now vs later. When you have plenty of time, find the full i-orp input page, understand all of the inputs and get those right. Then alter just the one thing (add to traditional 401k or Roth) and see the results. When you see how horrific the RMDs are, you might find it easier to choose a path. Of course you must make an assumption about future tax rates, but the model let's you play with that, or presume the rates will remain the same.

The i-orp "long form" is what you use to have the most flexibility.

[jzajzz]

In general .. I like to go with the ROTH option .. if everything is equal .. I'm 34 as well ... 59 -1/2 is 25 years from now. Who knows what the tax laws and brackets will be 25 years from now. I like my retirment money to be a predictable source of income... You have a lot more flexibility during your working years then you do when you retire. It's easier to work more.. it's easier to get a better paying job etc... I don't want to have a set income one year after tax and because of a new tax reform law have that changed in one fell swoop .

With that said.. Everything is rarely equal... but even the bracket slightly favors the 401k.. I'd rather go with the Roth

[CRLLS]

I was a good little boy and did what everyone told me to do. "Save in pretax dollars because your tax rate will be lower when you retire". Yeah right! I wish I knew then what I know now. I now wish I would have put everything into Roths. I know that I will be in the same bracket now as I was then, and most here point out that there is no difference. However, I later found that 85% of my SS will be taxed when withdrawing from my 401K and IRA's. If they were in Roths, that would not be the case. But not only for me (us) the bite will be much worse should one of us "go" before the other and the tax brackets will change du to single filer vs married filing joint.

I'm not complaining, but I do wish I knew more back then.

[jzajzz]

Quote:

Originally Posted by CRLLS I was a good little boy and did what everyone told me to do. "Save in pretax dollars because your tax rate will be lower when you retire". Yeah right! I wish I knew then what I know now. I now wish I would have put everything into Roths. I know that I will be in the same bracket now as I was then, and most here point out that there is no difference. However, I later found that 85% of my SS will be taxed when withdrawing from my 401K and IRA's. If they were in Roths, that would not be the case. But not only for me (us) the bite will be much worse should one of us "go" before the other and the tax brackets will change du to single filer vs married filing joint. I'm not complaining, but I do wish I knew more back then.

BAM!!! ... People don't understand .. I"m 34 now and I can see this from a mile away .. I"m glad there are some people here who are actually live it who can echo what I"m saying.

Who aspires to earn less as time goes on.. ? ..

[GrayHare]

I wish I'd known before starting an IRA that all the normally, relatively low-tax cap gains and dividends earned inside an IRA instead become taxed at typically higher ordinary income rates upon withdrawal. Ouch.

[SevenUp]

Quote:

Originally Posted by CRLLS I was a good little boy and did what everyone told me to do. "Save in pretax dollars because your tax rate will be lower when you retire". Yeah right! I wish I knew then what I know now. I now wish I would have put everything into Roths. I know that I will be in the same bracket now as I was then, and most here point out that there is no difference. However, I later found that 85% of my SS will be taxed when withdrawing from my 401K and IRA's. If they were in Roths, that would not be the case. But not only for me (us) the bite will be much worse should one of us "go" before the other and the tax brackets will change du to single filer vs married filing joint. I'm not complaining, but I do wish I knew more back then.

Good point that it isn't the bracket that matters, it's the marginal tax rate. Sometimes those are equal, but not (e.g., SS taxation) always. That applies to contribution saving rates as well as withdrawal tax rates.

Of course, putting so much into Roth that one pays 0% tax in retirement would mean that opportunities were missed and more should have gone into traditional.

Unless one prefers coin-flipping, making a "best guess" estimate of withdrawal marginal tax rate, comparing that to current marginal saving rate, then choosing traditional vs. Roth based on that comparison, seems as good as one can do. Lacking a working crystal ball, that is.

[SevenUp]

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Originally Posted by jzajzz Who aspires to earn less as time goes on.. ? ..

Anyone who earns "more than enough" now, can put the excess into retirement funds, and then withdraw "enough" to live happily ever after.

[jzajzz]

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Originally Posted by SevenUp Anyone who earns "more than enough" now, can put the excess into retirement funds, and then withdraw "enough" to live happily ever after.

I commend that ... and I know that many of the extreme savers are on this forum.. and that's great.. but the Financial advisor who spew that rhetoric are not talking to US ..

[SevenUp]

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Originally Posted by jzajzz ...the Financial advisor who spew that rhetoric are not talking to US ..

Don't understand "that rhetoric" and "US"...?

[jzajzz]

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Originally Posted by SevenUp Don't understand "that rhetoric" and "US"...?

rhetoric that you will need less money in retirement
us - member of this forum ...

[SevenUp]

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Originally Posted by jzajzz rhetoric that you will need less money in retirement us - member of this forum ...

Why do you think
- you will need to earn more per year in retirement?
- the rest of the forum thinks likewise?

[exnavynuke]

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Originally Posted by SevenUp Why do you think - you will need to earn more per year in retirement? - the rest of the forum thinks likewise?

Anecdotal evidence only, but it seems that "most" of the people I see posting on this site plan to spend as much or more during their early years of retirement as they did before retirement when they account for increased health care costs, increased travel, etc.

That said, spending "as much" necessitates more money than the "you will need less money in retirement" 'rhetoric' he mentioned, and seems in-line with much of the advice on this board that I've seen new posters get (track current spending and use that plus adjustments for increased healthcare costs to determine if you can afford to retire).

[CRLLS]

I don't have a dog in this fight, But for a sampling of one, I plan on "spending" as much or a bit more in retirement than I did when I was working. And all during my working life, the pundits were saying my spending will go down as will my taxes. Ha!

[exnavynuke]

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Originally Posted by CRLLS I don't have a dog in this fight, But for a sampling of one, I plan on "spending" as much or a bit more in retirement than I did when I was working. And all during my working life, the pundits were saying my spending will go down as will my taxes. Ha!

I do expect my taxes to go down significantly in retirement, but I'm only planning on $50-60k max spending per year, with ~40% of that from tax free sources and the rest dividends/LTCG, all of which will be taxed below my current effective tax rate..

[SevenUp]

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Originally Posted by exnavynuke I do expect my taxes to go down significantly in retirement, but I'm only planning on $50-60k max spending per year, with ~40% of that from tax free sources and the rest dividends/LTCG, all of which will be taxed below my current effective tax rate..

Good point. There is a difference between "spending" vs. "taxable income", especially when capital is sold to finance spending. It's the marginal tax rate that determines the traditional/Roth choice, not the spending itself.

[CRLLS]

I also am planning on ~60K expenses. if I do Roth conversions for a few years, even keeping it below the next tax bracket threshold, that will increase my actual taxes, i'm not concerned about how much we pay, as $$ is fungible. I am concerned about staying in the same tax rate. when an unexpected expense comes up it will cost me an extra 10% From 15 to 25% bracket. My situation is that most all of my retirement dollars are in pretax investments. And when MRD's hit, I may be jumping into the next tax bracket.

My comment was that the Guru's 20 years ago were pushing pretax savings on the basis of lower tax brackets in retirement. At least that is what I heard them say. I think they actually said "plan on your spending to be ~85% of your work spending level". I never heard them mention the SS taxation level or the MRD side of the planning. They both make a BIG difference from the actual "planned spending" side of the calculations!

Of course everyone's personal situation is different.

[jzajzz]

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Originally Posted by SevenUp Why do you think - you will need to earn more per year in retirement? - the rest of the forum thinks likewise?

hmm well i'm 33 now and until I was 30 .. I was making what people would consider entry level for a kid out of college with incremental raises.. and at 32 I made double the salary i was making at 30 ... needless to say I'm in a different tax bracket... I'm pretty sure I would be better off putting that money I earned between 22-30 in a Roth type investment vehicle.. do you not agree?

Most people are like me.. they graduate college .. they get an entry level position and they get incremental raises.. in the meantime they look for opportunity to either move up or find a job elsewhwere that would increase their salary.. my situation is a little more extreme than my peers because I stayed flat for quite a while but got a sudden increase..

Given the amount of student loans kids have these days,.. they better look to increase their income as time goes on..

So I would be fine if my retirmeent income is less than what it was 3 years before I retire .. but what about the previous 30 years .. my salary has most likely been increasing over that span.

ER forum members are a little different than the average american in that forum members are prone to save a lot more and keep their expenses down ... I would assume not necessarily to increase their retirement income but to retire even earlier than projected. so the financial "rhetoric" applies more to forum members than it would to the average american ...

and although I'm a forum member .. I 'm closer to the average american ..though my goal is to start saving a lot more than I currently do.