justin said:
Nords, you already conceded that the small error I made did not change the outcome of the analysis I presented.
Yes. In the context in which you asked the question, you win despite the error.
The question has to be asked, though, how you reassure yourself that your spreadsheet doesn't have other errors in its assumptions or its logic. And if I had one error pointed out to me, no matter whether it's big or small or irrelevant, I'd feel a lot less inclined to argue the rest of the topic.
justin said:
It may be semantics as to whether one is taxed once or twice in an after tax account...
Heck yeah, that's why we disagree. This reminds me of the perpetual reciprocated diatribes on how to calculate net worth or savings rates.
justin said:
... but the end result is you'll pay more tax and have less money if you invest in an after tax account instead of a tax deferred account. That is, assuming:
- same tax rate on earned income today and in the future.
-non-zero tax rate on capital gains
-identical investment options in tax deferred and after tax account
I may be a dunce for making a mistake in my earlier calculations, but If I'm missing something that changes the conclusion, please post it. Post a copy of your excel analysis if you want. I'm curious to see where you're coming from.
Sure, the assumptions make all the difference, but it's difficult to decide which assumptions are more "valid" than others.
I think that we're not going to see taxes get any lower than the current rates, just like we're gonna have to wait quite a while to see 2004-5 mortgage interest rates again. So if I have a choice of paying less taxes now or more taxes later, I'm more likely to go against dogma and pay them now. This choice brings tears to the eyes of my BIL-the-CPA and we have many wonderful discussions on the discount rate of our future-value calculations.
Getting back to the topic, there aren't identical rates in thefed's 401(k) & taxable accounts. It's not that easy to analyze the difference between: (1) a high-cost 401(k) that rolls to a low-cost IRA and then converts to a Roth versus (2) an after-tax account. This two-part choice is further complicated by the source of the money to pay the conversion taxes-- from the IRA (especially after age 59.5) or from other after-tax investments.
And while that after-tax account may lose out in the previous scenario, an after-tax account could actually do better than a 401(k) portfolio that rolls to a conventional IRA and whose RMD is then taxed at regular income rates as well as taxing Social Security income. If the IRA performs unusually well (resulting in higher RMDs) then thefed could be pushed well into a higher marginal tax bracket. That's why conventional wisdom limits 401(k) contributions to the employer's match.
I suspect that if I was in thefed's position that I'd max out the 401(k) match, max out the Roth (if qualified) or conventional IRA, and then think about my future. If I expected a long low-income period between ER and Social Security, then I'd be tempted to put additional savings in the 401(k) and gradually convert to a Roth when I ER. I'd definitely do it if my pension income plus RMDs was going to boost me into a higher tax bracket than I'm in now. But I'd also have to determine my Social Security start date (62? 65? 70?, an issue complicated by longevity expectations & spouse income needs) and the amount of that SS (earnings history). Social Security taxation isn't a very significant issue for a 40-something ER with a puny earnings record compared to a 60ish ER with decades of six-figure incomes.
These types of choices ensure that this topic is another eternal reciprocated diatribe, as well as fodder for not one but TWO of Ed Slott's books plus a couple dozen websites on where to invest and whether to convert. And that's assuming everyone's spreadsheets are correct.
Whether it's correct or not, when the subject is this complicated a spreadsheet just won't cut it. I've tried and I'm not there yet.