thoughts about financial advisors comments regarding roth 401k

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lazylarry
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thoughts about financial advisors comments regarding roth 401k

Postby lazylarry » Wed Jan 11, 2017 11:18 pm

So I know this has been discussed quite a lot but wanted to get your thoughts. There is a financial adviser I have access to (as a medical resident) for free who doesn't have any control or ability to control my retirement assets now. He was trying to explain to me that contributing to a Roth 401k now was definitely worse than contributing to a 401k, and seemed very sure that I was wrong that roth 401k may be better for me. I'm in the 25% marginal now, and likely will be in at least the 25% on retirement, but probably 28-33 (4.5 mil per retirement calculators for what that's worth). I have no pension or other sources of taxable income (other than equities), no deductions now, am contributing to Roth IRA. Reading through the numerous debates here and online about this, I was a bit confused, as I thought that this was a complicated decision - e.g. effective vs marginal tax rate, when I retire, AA, etc. Am I missing something obvious here as to why Roth 401k is clearly a bad decision for me?
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Re: thoughts about financial advisors comments regarding roth 401k

Postby JamesSFO » Wed Jan 11, 2017 11:28 pm

It's hard to come up with a "right" answer for this (as in 1+1 = 2) because which is right depends on assumptions projected out 20-30 years about the tax code, returns on investments, etc. Very smart folks on this forum have argued strongly (from facts) that the traditional (deductible) 401K is a lot better for the vast majority of folks and this includes folks who've been very thoughtful and diligent in designing low cost 401Ks for their companies. Others have argued to the contrary.

I personally "split" the baby by using traditional 401K now and Roth IRA (via backdoor) and so I have some diversification of my tax deferred types.

EDIT TO ADD: Pre-Boglehead days I was doing the Roth 401K and Roth IRA.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby mcraepat9 » Wed Jan 11, 2017 11:30 pm

I don't think you are. I wouldn't call the decision a "complicated" one - the number of working Americans that are in a lower tax bracket while working than in retirement is very small (probably less than 5%). Medical residents are legitimately one such group (earning low in residency, higher at other times). If you have done the math and are confident, then ignore the advisor's advice.

I would reassess once you are no longer a resident, particularly if you are in a high income tax state and plan to retire to a low/no income tax state.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby shjin » Wed Jan 11, 2017 11:44 pm

It's just generally ok statement to say that Roth is better if you expect your tax rate is going to be higher than now at the time of retirement.

However no one knows how tax policy will change at the time of your retirement. So I don't think anyone can say with 100% confidence which of pre-tax or Roth is better.

Just like how you mix stock and bond in your asset allocation, why don't you put some money in pre-tax and some money in Roth? When you need large sum of money some time during retirement, you can take money from Roth and pay no-tax. If you need monthly spending, get money from pre-tax account and pay income tax. This way, you can enjoy some tax deduction as well.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby BolderBoy » Wed Jan 11, 2017 11:56 pm

My reasoning is that if contributing to the Roth 401k would not cause you financial or lifestyle pain, now, then do it. Years down the line you'll be glad you did.

But if you are just getting by and financially miserable now, then go with the traditional 401k.
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Re: thoughts about financial advisors comments regarding roth 401k

Postby monsterid » Thu Jan 12, 2017 12:05 am

I do a traditional 401k and Roth IRA to diversify. Any year I have a low taxable income (e.g. career break or something) I'd use the t->roth ladder strategy and push stuff across.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby Nekrotok » Thu Jan 12, 2017 12:15 am

A more detailed analysis would require more information (current age, retirement age, life expectancy, savings rate, etc.), but the quick answer, IMO, is that if you are in the 25% tax bracket and planning for a "normal" retirement, then somewhere around $2MM-$4MM (in 2017 dollars) is a pretty good target range for your tax-deferred account balance at retirement. You might get too much maxing 401k, but you're not gonna get there doing all roth 401k. You might want to do half and half, or you may want to do all roth 401k in the 25% bracket now and do 401k when you reach the 28% bracket. The goal is to have the same marginal tax rate in retirement as now. Effective tax rate is irrelevant.

edit: $2MM-$4MM assumes married, halve that for single.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby Afty » Thu Jan 12, 2017 12:52 am

If (1) you are a resident, and (2) you post on Bogleheads, there's a good chance you will save enough to be in a higher tax bracket in retirement. I think a Roth 401k would be a good choice for you right now.

I assume that once you become an attending, you will use a traditional 401k, so you'll end up with some tax diversification that way.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby j0nnyg1984 » Thu Jan 12, 2017 1:39 am

For me it's about total dollars invested. I'm already investing 18k in my t401k, 5500 in my rIRA, 3300 in my HSA. I don't feel that I need to invest an additional 6-7k in taxes to be able to make my 401k contributions Roth instead of traditional.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby livesoft » Thu Jan 12, 2017 4:59 am

Right now in 2017 one can have $4.5million or more in retirement and still be in the 15% marginal income tax bracket.

I don't think the decision is so clear cut, so I don't think it matters whether you do traditional or Roth 401(k).
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Re: thoughts about financial advisors comments regarding roth 401k

Postby Toons » Thu Jan 12, 2017 7:01 am

Go for the after tax,
Tax free upon withdrawal,
Roth.
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Re: thoughts about financial advisors comments regarding roth 401k

Postby celia » Thu Jan 12, 2017 7:25 am

lazylarry wrote:He was trying to explain to me that contributing to a Roth 401k now was definitely worse than contributing to a 401k, and seemed very sure that I was wrong that roth 401k may be better for me.

He is right in that contributing to a Roth is worse for HIM, but not for YOU.

Am I missing something obvious here as to why Roth 401k is clearly a bad decision for me?

Here's the reason: For every $1,000 you don't need for living expenses, you can either put it into traditional and pay taxes later --OR-- pay $250 in taxes now and put the remaining $750 in Roth. He won't get as big a commission for managing the $750 as if he managed the traditional $1,000.

Avoid this salesman. Of course, he needs to earn a living, but you can spend an hour deciding what fund(s) is best for yourself then set up automatic withholdings and forget about it. If you let the money pass through his hands, he will take, let's say, 1% per year, leaving less to end up in your account--traditional or Roth!
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby jh-1391 » Thu Jan 12, 2017 8:11 am

I feel like if you're able to comfortably fund the max contributions to a traditional 401k, then mixing in some as Roth contributions may be the right step. If you can comfortably fund the max for a Roth 401k, then I probably would.

I have the Roth option with my 401k, but I'm currently not maxing my contributions, so I don't feel like I'm losing any money by going the traditional route. In fact, I feel like I would lose money if I was doing Roth instead. I have a Roth IRA via backdoor method, so I do have some tax-free growth retirement savings in my portfolio though.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby TIAX » Thu Jan 12, 2017 11:56 am

lazylarry wrote:and seemed very sure that I was wrong that roth 401k may be better for me.

Well, as long as he was sure, he must be right. How is he so sure not knowing (1) when you plan to retire (and have years of traditional to Roth conversions at low rates); and (2) what state you plan on retiring in (perhaps a low/no income tax state)? And does he understand that while, during accumulation, you receive a deduction at your marginal (federal + state) tax rate, whereas in retirement, you pay tax at your effective tax rate, filling up the brackets? I doubt it.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby lazylarry » Thu Jan 12, 2017 5:41 pm

Thank you all!! Appreciate your help. Sounds like the future is just uncertain and the advisor guy just wants to make money. Some things never change... But I will plan on funding the Roth 401k partially and the regular 401k as well. Account diversity never hurts.
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Re: thoughts about financial advisors comments regarding roth 401k

Postby grabiner » Thu Jan 12, 2017 11:19 pm

See Traditional versus Roth on the wiki for information about this decision.

As some other posters mentioned, if your tax bracket will be higher for most of your working life (for example, a physician in residency), and will still be 25% or higher in retirement, the Roth 401(k) is better now, and you'll get the tax diversification by contributing to a traditional 401(k) when you move into the 28% or 33% bracket later.

If you expect to be in a 25% bracket for most of your career, and retire in a 25% bracket, you get some tax diversification by contributing to the Roth 401(k) and getting your employer match in traditional money. This is a good deal if you can max out your retirement accounts, as you effectively tax-defer more money. If you can't max out the Roth 401(k) and Roth IRA, then it's break-even.

If you might retire in a 15% bracket, the traditional 401(k) is probably better.
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Re: thoughts about financial advisors comments regarding roth 401k

Postby kd2008 » Thu Jan 12, 2017 11:59 pm

Please read these articles,

This one is about case against roth 401k

https://thefinancebuff.com/case-against-roth-401k.html

Next, this one is about suitability of roth 401k for those who contribute to max.

https://thefinancebuff.com/roth-401k-fo ... e-max.html

These are best two articles any where on the internet on this topic.

Understand the concept that the first dollar coming out (withdrawal) of traditional 401k is at the lowest tax bracket but the dollar going in (contribution) is at your current higher marginal rate of 25%. So the tax advantage created by trad 401k is hard to overcome by roth 401k usually.



The author of the articles also indicates how you may play roth 401k to your advantage in one of the comments.

It’s more complicated than that. It’s not about what you currently have in a traditional account is already enough to fill the lower brackets. It’s about whether you *will* have enough to fill them. For someone in late 20s, if the salary is projected to increase at a good pace above inflation, a Roth 401k account may very well be better even if you don’t have much saved already. Current income can go to Roth and let future income go to Traditional.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby KlangFool » Fri Jan 13, 2017 12:19 am

lazylarry wrote:
I'm in the 25% marginal now, and likely will be in at least the 25% on retirement, but probably 28-33 (4.5 mil per retirement calculators for what that's worth).



lazylarry,

1) Do you do your own tax?

<<probably 28-33 (4.5 mil per retirement calculators for what that's worth).>>

2) Please explain how 4.5 million translates into 28% to 33% tax? Especially if you have no pension.

<<I'm in the 25% marginal now, and likely will be in at least the 25% on retirement,>>

3) Let's assume that is true, you still save tax.

A) Money into Trad 401K is taxed at 25%.

B) Money out of Trad. 401K in retirement is taxed at 0%, 10%, 15%, and 25%. It is not all taxed at 25%. You will know this if you do your own tax.

Check out your own tax return. Is all your income taxed at 25%?

It is very simple.

Roth 401K is the wrong answer for 90+% of people. If you do not know clearly what to do and how you will save tax with Roth 401K, Roth 401K is probably the wrong answer for you. Especially for people that do not do their own taxes.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby FIREchief » Fri Jan 13, 2017 12:28 am

celia wrote:
lazylarry wrote:He was trying to explain to me that contributing to a Roth 401k now was definitely worse than contributing to a 401k, and seemed very sure that I was wrong that roth 401k may be better for me.

He is right in that contributing to a Roth is worse for HIM, but not for YOU.

Am I missing something obvious here as to why Roth 401k is clearly a bad decision for me?

Here's the reason: For every $1,000 you don't need for living expenses, you can either put it into traditional and pay taxes later --OR-- pay $250 in taxes now and put the remaining $750 in Roth. He won't get as big a commission for managing the $750 as if he managed the traditional $1,000.

Avoid this salesman. Of course, he needs to earn a living, but you can spend an hour deciding what fund(s) is best for yourself then set up automatic withholdings and forget about it. If you let the money pass through his hands, he will take, let's say, 1% per year, leaving less to end up in your account--traditional or Roth!


Thank you for posting this. I had the same thought, but was hoping somebody else would take the time to explain this to the OP (just feeling a bit lazy tonight). Just because an "advisor" isn't getting paid a percent of AUM, doesn't mean that they don't have a significant financial motivation to increase AUM. I believe that annual bonuses based upon AUM, including extra credit for AUM that have higher ERs, is common.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby Watty » Fri Jan 13, 2017 12:54 am

A couple of things that might be factors to consider.

1) You also need to consider your state taxes. If you are in a state with high taxes but you are likely to move somewhere else that would make the Roth less desirable.

2) To paraphrase a saying "life happens". I have seen lots of people run into financial setbacks because of their careers, health, divorce, having kids with special needs, Job burnout, etc. While it sounds like you have great financial prospects you are a long way from being in high retirement tax bracket.

3) If you put $1,000 into a deductible IRA then you will have $250 in tax savings that you can use to do things like save up a down-payment for a house or pay down student loans. That will help you become financially secure earlier so you will be better able to handle things if "life happens".

4) The Roth is only the best choice if you are in a retirement tax bracket higher than 25% and it takes a lot of income for a couple to get into the next tax bracket. If you have a paid off house and any kids are out on their own then your retirement expenses may not be anywhere near enough to force you into the 28% tax bracket.

5) The 28% tax bracket is only 3% above the 25% tax bracket so even if you are in that tax bracket in retirement the extra 3% would not be the end of the world.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby BL » Fri Jan 13, 2017 1:03 am

The white coat investor blog and book has lots of things relevant to high-income folks, so you might want to check it out. He also posts here on occasion.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby j0nnyg1984 » Fri Jan 13, 2017 2:18 am

kd2008 wrote:Please read these articles,

This one is about case against roth 401k

https://thefinancebuff.com/case-against-roth-401k.html

Next, this one is about suitability of roth 401k for those who contribute to max.

https://thefinancebuff.com/roth-401k-fo ... e-max.html

These are best two articles any where on the internet on this topic.

Understand the concept that the first dollar coming out (withdrawal) of traditional 401k is at the lowest tax bracket but the dollar going in (contribution) is at your current higher marginal rate of 25%. So the tax advantage created by trad 401k is hard to overcome by roth 401k usually.



The author of the articles also indicates how you may play roth 401k to your advantage in one of the comments.

It’s more complicated than that. It’s not about what you currently have in a traditional account is already enough to fill the lower brackets. It’s about whether you *will* have enough to fill them. For someone in late 20s, if the salary is projected to increase at a good pace above inflation, a Roth 401k account may very well be better even if you don’t have much saved already. Current income can go to Roth and let future income go to Traditional.


Okay, that's ridiculously smart, and I never even thought about that. One more reason I'll keep my t401k contributions going :)

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Re: thoughts about financial advisors comments regarding roth 401k

Postby lazylarry » Fri Jan 13, 2017 9:36 pm

So many opinions. Honestly, this is a academic discussion more than anything, since I will be contributing likely only <40k total to the Roth 401k. I'm not going to contribute to roth 401k when income >80k. Still quite fun to debate :).


This one is about case against roth 401k

https://thefinancebuff.com/case-against-roth-401k.html

Next, this one is about suitability of roth 401k for those who contribute to max.

https://thefinancebuff.com/roth-401k-fo ... e-max.html

These are best two articles any where on the internet on this topic.

From the article
"A Roth 401(k) is good for people in low paying jobs now but expect to have high paying jobs later. Medical doctors in resident programs fit that description very well. They are paid very little while they are in residency but their income is expected to rise substantially higher when they finish the program."

...which I am

1) Do you do your own tax?

Yes I enjoy doing it.

Please explain how 4.5 million translates into 28% to 33% tax? Especially if you have no pension.


It doesn't right now. "Probably" was based on if tax rates rise. This was an assumption on my part to be fair.

A) Money into Trad 401K is taxed at 25%.

B) Money out of Trad. 401K in retirement is taxed at 0%, 10%, 15%, and 25%. It is not all taxed at 25%. You will know this if you do your own tax.


Yes am well aware of this. I'd look at the spreadsheet on the website on here, if you haven't already. It's not so clear cut.
https://thefinancebuff.com/roth-401k-fo ... e-max.html


1) You also need to consider your state taxes. If you are in a state with high taxes but you are likely to move somewhere else that would make the Roth less desirable.

Yes that's true, they are minimal in my state but definitely affect things.

2) To paraphrase a saying "life happens". I have seen lots of people run into financial setbacks because of their careers, health, divorce, having kids with special needs, Job burnout, etc. While it sounds like you have great financial prospects you are a long way from being in high retirement tax bracket.

3) If you put $1,000 into a deductible IRA then you will have $250 in tax savings that you can use to do things like save up a down-payment for a house or pay down student loans. That will help you become financially secure earlier so you will be better able to handle things if "life happens".

4) The Roth is only the best choice if you are in a retirement tax bracket higher than 25% and it takes a lot of income for a couple to get into the next tax bracket. If you have a paid off house and any kids are out on their own then your retirement expenses may not be anywhere near enough to force you into the 28% tax bracket.


I'm lucky enough to not have needs such as downpayment or significant student loans at this time. Bad things can definitely come up - and I expect something bad to happen in the next 40 yrs, which is why I have emergency funds and family who could support me if something if devasting things .


I find it interesting that people tend to focus on the risk-aversiveness of a t401k but to an excessive degree IMHO.What if tax rates change/increase? Or capital gains tax is eliminated? Suddenly the Roth 401k becomes massively better with their tax diversification benefits. I wonder if studies have been done to try to figure out the probabilities of these future events happening vs people's estimates.

I think for me, the Roth 401k is somewhat less helpful because a) I'm not contributing fully to t401k and b) I have state tax. But from a practical point, (a) is bound to happen because I don't know exactly how much money I'll need based on variablility of my yearly expenses - e.g. licensure can be 1-3k easily or travel could be another 1-2k. Regardless, I figure that I'm saving one way or the other. At the very least, I'll be sticking it to the financial advisor guy, which is priceless.
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Re: thoughts about financial advisors comments regarding roth 401k

Postby FiveK » Sat Jan 14, 2017 3:24 am

TIAX wrote:And does he understand that while, during accumulation, you receive a deduction at your marginal (federal + state) tax rate, whereas in retirement, you pay tax at your effective tax rate, filling up the brackets?
kd2008 wrote:Understand the concept that the first dollar coming out (withdrawal) of traditional 401k is at the lowest tax bracket but the dollar going in (contribution) is at your current higher marginal rate of 25%. So the tax advantage created by trad 401k is hard to overcome by roth 401k usually.

TIAX/kd2008, do you recall where you first saw this idea? It is not correct, but does resurface from time to time.

The correct comparison is your marginal savings rate now vs. your marginal tax rate later.

See Traditional vs Roth - Dec. 2016 thread for a very similar question.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby kd2008 » Sat Jan 14, 2017 12:14 pm

FiveK wrote:
The correct comparison is your marginal savings rate now vs. your marginal tax rate later.

See Traditional vs Roth - Dec. 2016 thread for a very similar question.


You are correct about apples to apples comparison it is the marginal dollar. But that is for the purist.

Unfortunately, the tax code is not same for retirees as for the employed.

There have been ample examples about $100,000 withdrawals being close to zero tax rate for retirees. This point gets lost in marginal dollar comparison. Most people do not think in marginal dollar sense and it not very useful at all for the annual tax bill. If structured right, retiree tax bill can average 5 to 8% effective (marginal rates are moot due to tax hump due to ss, income not counted due to state tax rules etc.) So for the retiree, each year they take out money at much lower rate than they put in - except may be for the very rich.

I read the thread you pointed out and the points you make are valid but real life taxes do not work out like that.

Additionally, you say it yourself: " If one had to make a career-long decision on Roth vs. traditional, that comparison might be valid."

The articles and comment I cite point precisely to this aspect.

From Bernstein to others who have said, it is important to understand career-long choices as they have greater impact than worrying about the marginal dollar.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby Wakefield1 » Sat Jan 14, 2017 3:23 pm

"Money out of trad 401 K is not all taxed at 25%,it is taxed at 0%,10%,15% and 25%" (trad. IRA,401a,457)
what if you have already filled up brackets into 25% because of pension,Social Security,income thrown off of taxable investment assets including capital gains distributions,qualified dividends,Bond dividends ? Because of all the money saved by not having Ed Jones and Ameriprise :shock: Old enough to have been working and saving when there was no such thing as an IRA or 401k (there)
Knocking on door of :?: bracket? (Single)

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Re: thoughts about financial advisors comments regarding roth 401k

Postby FiveK » Sat Jan 14, 2017 7:06 pm

kd2008 wrote:
FiveK wrote:The correct comparison is your marginal savings rate now vs. your marginal tax rate later.
See Traditional vs Roth - Dec. 2016 thread for a very similar question.

You are correct about apples to apples comparison it is the marginal dollar. But that is for the purist.
Not sure what you mean by "purist." Using marginal rates is simply what one must do if trying to determine the better choice for a given contribution.

There have been ample examples about $100,000 withdrawals being close to zero tax rate for retirees. This point gets lost in marginal dollar comparison.
Why "lost"? If someone will pay the same (zero or not) tax for a $101K withdrawal vs. a $100K withdrawal, the marginal tax is 0% for that person. If someone else will pay an extra $250 for a $101K withdrawal vs. a $100K withdrawal, the marginal tax is 25% for that person. People should evaluate marginal rates applicable to their individual situations - agreed?

Most people do not think in marginal dollar sense
True - we're trying to help them understand why, for a traditional vs. Roth choice, they should.

If structured right, retiree tax bill can average 5 to 8% effective (marginal rates are moot due to tax hump due to ss, income not counted due to state tax rules etc.) So for the retiree, each year they take out money at much lower rate than they put in - except may be for the very rich.
Why "moot"? The tax hump is a great example of a high marginal rate.

I read the thread you pointed out and the points you make are valid but real life taxes do not work out like that.
Actually they do. Unless you have a counterexample?

Additionally, you say it yourself: " If one had to make a career-long decision on Roth vs. traditional, that comparison might be valid."
The articles and comment I cite point precisely to this aspect.
From Bernstein to others who have said, it is important to understand career-long choices as they have greater impact than worrying about the marginal dollar.
By "career-long decision" we mean "if you had to choose traditional vs. Roth once and for all." Fortunately, in real life taxes do not work that way: one gets to choose anew every year (even, as grabiner is wont to observe, for every dollar) whether to go traditional vs. Roth.

See viewtopic.php?f=10&t=208169#p3193285 for a specific example of a person who is now paying 28% marginal but was saving only 25% marginal. As The Wizard notes, it would have been better to use Roth due to the marginal rates. Does that make sense?

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Re: thoughts about financial advisors comments regarding roth 401k

Postby Zedon » Sun Jan 15, 2017 2:23 am

Wakefield1 wrote:"Money out of trad 401 K is not all taxed at 25%,it is taxed at 0%,10%,15% and 25%" (trad. IRA,401a,457)
what if you have already filled up brackets into 25% because of pension,Social Security,income thrown off of taxable investment assets including capital gains distributions,qualified dividends,Bond dividends ? Because of all the money saved by not having Ed Jones and Ameriprise :shock: Old enough to have been working and saving when there was no such thing as an IRA or 401k (there)
Knocking on door of :?: bracket? (Single)


This is a good point, if you knew all of the other income besides your RMDs you'd know your tax rate. I will have a pension and envision I will be in the 25% bracket so this is always a question I have toiled with, to Roth or not. I have decided to do Roth IRA and t401k/t457b for now, but if I had extra dollars I think I would max Roth to diversify since my pension will fill up my taxable. Plus a dollar in Roth is worth more than a dollar in traditional if you know you will have other sizeable taxable income.

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Re: thoughts about financial advisors comments regarding roth 401k

Postby TIAX » Sun Jan 15, 2017 3:33 am

FiveK wrote:
TIAX wrote:And does he understand that while, during accumulation, you receive a deduction at your marginal (federal + state) tax rate, whereas in retirement, you pay tax at your effective tax rate, filling up the brackets?
kd2008 wrote:Understand the concept that the first dollar coming out (withdrawal) of traditional 401k is at the lowest tax bracket but the dollar going in (contribution) is at your current higher marginal rate of 25%. So the tax advantage created by trad 401k is hard to overcome by roth 401k usually.

TIAX/kd2008, do you recall where you first saw this idea? It is not correct, but does resurface from time to time.

The correct comparison is your marginal savings rate now vs. your marginal tax rate later.

Where did I see the idea? In the tax code and it is correct. For example, ignoring state income taxes, if a single person's taxable income is 50k in 2017, his 401(k) deduction would have a value to him of his marginal tax rate (25%). If that person wanted to withdraw 50k in retirement, assuming tax rates stayed the same, he would first take a standard deduction of $6350 and a personal exemption of $4050, making his taxable income $39600. The first $9325 would be taxed at 10%, the amount over $9325 to $37950 at 15%, and over $37950 to $39600 at 25%. The tax due would be $5638.75, which is 11.2% of 50k.

Wakefield1
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Re: thoughts about financial advisors comments regarding roth 401k

Postby Wakefield1 » Sun Jan 15, 2017 10:50 am

Zedon wrote:
Wakefield1 wrote:"Money out of trad 401 K is not all taxed at 25%,it is taxed at 0%,10%,15% and 25%" (trad. IRA,401a,457)
what if you have already filled up brackets into 25% because of pension,Social Security,income thrown off of taxable investment assets including capital gains distributions,qualified dividends,Bond dividends ? Because of all the money saved by not having Ed Jones and Ameriprise :shock: Old enough to have been working and saving when there was no such thing as an IRA or 401k (there)
Knocking on door of :?: bracket? (Single)


This is a good point, if you knew all of the other income besides your RMDs you'd know your tax rate. I will have a pension and envision I will be in the 25% bracket so this is always a question I have toiled with, to Roth or not. I have decided to do Roth IRA and t401k/t457b for now, but if I had extra dollars I think I would max Roth to diversify since my pension will fill up my taxable. Plus a dollar in Roth is worth more than a dollar in traditional if you know you will have other sizeable taxable income.

I would be tempted to say that Roth vs. deductible IRA/401 accounts are almost a matter of personal preference,not knowing the future (either of your own earnings or of your future tax brackets). There is the advantage of avoiding the required minimum distributions (at least in the Roth IRA)
As to Roth conversions one must of course keep in mind that the tax cost to convert is money that could otherwise have been invested (presumably in taxable accounts for those already retired) and then State tax also needs to be kept in mind

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FiveK
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Re: thoughts about financial advisors comments regarding roth 401k

Postby FiveK » Sun Jan 15, 2017 11:32 am

TIAX wrote:
FiveK wrote:TIAX/kd2008, do you recall where you first saw this idea? It is not correct, but does resurface from time to time.
The correct comparison is your marginal savings rate now vs. your marginal tax rate later.

Where did I see the idea? In the tax code and it is correct. For example, ignoring state income taxes, if a single person's taxable income is 50k in 2017, his 401(k) deduction would have a value to him of his marginal tax rate (25%). If that person wanted to withdraw 50k in retirement, assuming tax rates stayed the same, he would first take a standard deduction of $6350 and a personal exemption of $4050, making his taxable income $39600. The first $9325 would be taxed at 10%, the amount over $9325 to $37950 at 15%, and over $37950 to $39600 at 25%. The tax due would be $5638.75, which is 11.2% of 50k.

Yes, that's a good summary of tax brackets. Now, back to how a given year's contribution and its withdrawals are taxed.

Assume one hasn't made a 2017 t401k contribution yet, but has contributed in previous years.

If this person never made another t401k contribution ever, come retirement withdrawals could be made from amounts contributed in previous years. Any pension or SS would merely add to the base already occupied by previous traditional contributions.

The withdrawals from any traditional contribution made in 2017 will come on top of withdrawals from the base described above, and be taxed at marginal rates. Does that make sense?

See also Fundamental Difference in Roth and Traditional 401k - Bogleheads.org for a post that arrives at the same result, but perhaps says it in a better way. And there is always the wiki on Traditional versus Roth - marginal tax rates.


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