401k vs Roth 401k

[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]

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]

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]

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]

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]

...the Financial advisor who spew that rhetoric are not talking to US ..

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

 

[jzajzz]

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

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

 

[SevenUp]

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]

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]

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]

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]

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.

 

[SevenUp]

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?
...
ER forum members...are prone to...retire even earlier than projected.

That's a good question and requires some thought, even given the benefit of some hindsight.

Funny thing about traditional and Roth contributions: the more one uses either one of them, the more likely that choice becomes incorrect at some point:
- If one contributes "too much" to traditional, withdrawal tax rates get "too high"
- If one contributes "too much" to Roth, withdrawal tax rates stay "too low".

Early retirement will reduce the likelihood that too much goes into traditional accounts, but not eliminate it. In order to look back and decide what you should have done from age 22-30, you also need to look ahead and project what your withdrawal tax rate will be.

Investment Order - MMM has a decent write-up on this:

Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Include any guaranteed pension amount that you can't defer in return for higher payments when you do start
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so. Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so. Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

The steps above may look complicated at first, but you don't need great precision. The answer will either be "obvious" or "difficult to choose". If the latter, it likely won't make much difference which you pick anyway.

Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income

Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem.
Thus using traditional is a "safer" choice.

 

[jzajzz]

That's a good question and requires some thought, even given the benefit of some hindsight.

Funny thing about traditional and Roth contributions: the more one uses either one of them, the more likely that choice becomes incorrect at some point:
- If one contributes "too much" to traditional, withdrawal tax rates get "too high"
- If one contributes "too much" to Roth, withdrawal tax rates stay "too low".

Early retirement will reduce the likelihood that too much goes into traditional accounts, but not eliminate it. In order to look back and decide what you should have done from age 22-30, you also need to look ahead and project what your withdrawal tax rate will be.

Investment Order - MMM has a decent write-up on this:

If it's "too difficult to chose" ... that's where I lean to the Roth option most .. because it's PREDICTABLE .. . I can adjust my savings during my working years but I only retire once .. and yes chances are tax rates won't be that different years from now.. but it'sstill a possibility .. and I rather have that certainty .. when there's not much to gain on the other side

 

[SevenUp]

If it's "too difficult to chose" ... that's where I lean to the Roth option most .. because it's PREDICTABLE .. . I can adjust my savings during my working years but I only retire once .. and yes chances are tax rates won't be that different years from now.. but it'sstill a possibility .. and I rather have that certainty .. when there's not much to gain on the other side

"Tie goes to the Roth" is a reasonable choice, both for reasons you note here and what happens when maxing out your retirement accounts.

"Tie goes to the traditional" is also a reasonable choice for those who consider the effects of making the wrong choice less bad when choosing traditional.

Reasonable people can disagree....

 

[jzajzz]

"Tie goes to the Roth" is a reasonable choice, both for reasons you note here and what happens when maxing out your retirement accounts.

"Tie goes to the traditional" is also a reasonable choice for those who consider the effects of making the wrong choice less bad when choosing traditional.

Reasonable people can disagree....

I agree .. hence why I emphasize why "I" would rather have the Roth option .. I"m just not in agreement with the financial bloggers out there who speak in absolutes...

 

[abirdinthehand]

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.

You will have 25% less ( or insert your marginal tax rate) in your account at retirement if you do Roth instead of 401k or IRA. Do not underestimate the power of the tax deduction you can receive.

I will have $1,000,000 and you will have $750,000, and since I will amortize my account over 25 years, planning to have a zero balance before my spouse and I die. My effective or net tax rate will be substantially below my working years marginal tax rate because some will be taxed at zero, some at 10%, and some at 15%, etc.

E.g. 1 mil over 25 years is approx 58k/yr, my effective tax rate is 8.01%. Yours, of course, will be zero, but it will take you 53 years to make it back. 250k /$4647 ( annual taxes).

So you are taking a huge gamble should you continue to take this course of
action - namely that taxes rates will be substantially higher. Totally ignoring the last 40 years of history where tax rates have dropped by 2/3. And last but not least you are assuming that all your dreams will come true.

Men make plans and God laughs...

 

[abirdinthehand]

A Roth contribution is only appropriate in two cases: your net taxable income for the year is at or near zero, or you want to give your Roth account as an inheritance since it can be left to accumulate tax free for two lifetimes. This is an extremely powerful legacy building technique.

For most people a Roth contribution is a colossal blunder and any "financial advisor" who suggests otherwise should be put in jail.

 

[abirdinthehand]

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.

Don't kick yourself too hard, you have 25% more in your account than if you did a Roth, and your total NET federal tax is less than 10% even with your ss benefits being taxed.

 

[jzajzz]

You will have 25% less ( or insert your marginal tax rate) in your account at retirement if you do Roth instead of 401k or IRA. Do not underestimate the power of the tax deduction you can receive.

I will have $1,000,000 and you will have $750,000, and since I will amortize my account over 25 years, planning to have a zero balance before my spouse and I die. My effective or net tax rate will be substantially below my working years marginal tax rate because some will be taxed at zero, some at 10%, and some at 15%, etc.

E.g. 1 mil over 25 years is approx 58k/yr, my effective tax rate is 8.01%. Yours, of course, will be zero, but it will take you 53 years to make it back. 250k /$4647 ( annual taxes).

So you are taking a huge gamble should you continue to take this course of
action - namely that taxes rates will be substantially higher. Totally ignoring the last 40 years of history where tax rates have dropped by 2/3. And last but not least you are assuming that all your dreams will come true.

Men make plans and God laughs...

you are right.. men makes plans and God laughs..

...so when are you planning on dying again?

what happens when you're alive the day after you planned on dying?

better yet .. what happens when you have 1 year worght of income left on your account .. .and you realize .. you are pretty healthy ..why would you want to put yourself through that ?


This is not about a math problem.. this is about having a plan where I can control as much as I can... like I said .. i can always adjust and save more during my working years... but I can't control what the tax rate will be like 30 years from now.. .. and I'm not betting that it will be higher.. I just don't want to bet at all..

and the fact that taxes have been coming down for so long .. doesn't tell me that it 's oging to keep coming down... for so long, I'm worried that it might swing back the other way.. it's not like our national debt has been coming down along with it.

 

[abirdinthehand]

To each his own. I prefer to have 25% more money. It's always about money. And what makes you think the tax rules for Roth IRA's won't be changed, as well. Good luck.

 

[SevenUp]

My effective or net tax rate will be substantially below my working years marginal tax rate because some will be taxed at zero, some at 10%, and some at 15%, etc.

The use of effective withdrawal tax rate is appropriate if discussing an "all traditional vs. all Roth for an entire career" choice.

For those willing to change between traditional and Roth from year to year, depending on circumstances, marginal withdrawal tax rate is the appropriate choice for comparison.