Traditional 401K vs Roth 401K

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
skwak
Posts: 5
Joined: Sun Sep 10, 2017 7:31 pm

Traditional 401K vs Roth 401K

Post by skwak » Sun Sep 10, 2017 7:46 pm

I am brand new to the forum and very happy to be here!

I have a Traditional 401K through my current employer. Just this past year a Roth 401K option was added. I am at a loss of what to do with this if anything. We have been max in the traditional 401K and almost all of our retirement money is in traditional accounts.

Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?

Any help or a link to a straight forward approach would be great appreciated.

Thanks!

:D

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Sun Sep 10, 2017 10:29 pm

skwak wrote:
Sun Sep 10, 2017 7:46 pm
I am brand new to the forum and very happy to be here!

I have a Traditional 401K through my current employer. Just this past year a Roth 401K option was added. I am at a loss of what to do with this if anything. We have been max in the traditional 401K and almost all of our retirement money is in traditional accounts.

Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?

Any help or a link to a straight forward approach would be great appreciated.

Thanks!

:D
Yes complex topic. Probably best to go to Bogle head wiki and look up traditional vs Roth.

If you were absolutely certain your tax rate will be lower then yes traditional is probably best way to go. But determining your retirement tax rate isn't as easy as it seems. Income in retirement including RMDs of traditional IRAs cause your social security to be taxable and increase your marginal tax rate in some non intuitive ways. Plus tax policy frequently changes. Some argue (including me) that diversification among tax deferred account types is worthwhile.

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Sun Sep 10, 2017 10:38 pm

skwak wrote:
Sun Sep 10, 2017 7:46 pm
If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively?
Yes.

Of course, your choice next year can differ from your choice this year, in case something changes the view in your crystal ball.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 12:05 am

FiveK wrote:
Sun Sep 10, 2017 10:38 pm
skwak wrote:
Sun Sep 10, 2017 7:46 pm
If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively?
Yes.

Of course, your choice next year can differ from your choice this year, in case something changes the view in your crystal ball.
Maybe yes and maybe no. If you are contributing the maximum, you end up with more
In the Roth than in the traditional. If you put 18.5k max in traditional all that money and earnings will be taxed upon distribution in retirement. If you put 18.5k max in Roth you've already paid the tax up front and will have the entire amount tax free upon final retirement distribution. The Roth allows you to effectively contribute more on an after tax basis. To compare apples to apples you would have to take the upfront tax savings of the traditional and put it in a taxable account. That portion of the investment would have cap gains and dividend taxes so it will not earn as much as a tax free Roth.

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Mon Sep 11, 2017 1:07 am

JBTX wrote:
Mon Sep 11, 2017 12:05 am
FiveK wrote:
Sun Sep 10, 2017 10:38 pm
skwak wrote:
Sun Sep 10, 2017 7:46 pm
If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively?
Yes.
Of course, your choice next year can differ from your choice this year, in case something changes the view in your crystal ball.
Maybe yes and maybe no. If you are contributing the maximum, you end up with more
In the Roth than in the traditional. If you put 18.5k max in traditional all that money and earnings will be taxed upon distribution in retirement. If you put 18.5k max in Roth you've already paid the tax up front and will have the entire amount tax free upon final retirement distribution. The Roth allows you to effectively contribute more on an after tax basis. To compare apples to apples you would have to take the upfront tax savings of the traditional and put it in a taxable account. That portion of the investment would have cap gains and dividend taxes so it will not earn as much as a tax free Roth.
To quote the OP more fully, "Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?"

One can read Traditional versus Roth - Bogleheads (including Maxing out your retirement accounts that addresses that also-not-straightforward issue) and similar articles and indeed there are many "if this then that" statements, with spreadsheets available for various arcane calculations.

Realizing that "how much less?" and "how much pension if any?" are two of many qualifiers one might ask skwak, the odds-on answer to the original quote above remains "yes" - agreed? That's odds-on, not guaranteed.... :wink:

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 8:25 am

FiveK wrote:
Mon Sep 11, 2017 1:07 am
JBTX wrote:
Mon Sep 11, 2017 12:05 am
FiveK wrote:
Sun Sep 10, 2017 10:38 pm
skwak wrote:
Sun Sep 10, 2017 7:46 pm
If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively?
Yes.
Of course, your choice next year can differ from your choice this year, in case something changes the view in your crystal ball.
Maybe yes and maybe no. If you are contributing the maximum, you end up with more
In the Roth than in the traditional. If you put 18.5k max in traditional all that money and earnings will be taxed upon distribution in retirement. If you put 18.5k max in Roth you've already paid the tax up front and will have the entire amount tax free upon final retirement distribution. The Roth allows you to effectively contribute more on an after tax basis. To compare apples to apples you would have to take the upfront tax savings of the traditional and put it in a taxable account. That portion of the investment would have cap gains and dividend taxes so it will not earn as much as a tax free Roth.
To quote the OP more fully, "Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?"

One can read Traditional versus Roth - Bogleheads (including Maxing out your retirement accounts that addresses that also-not-straightforward issue) and similar articles and indeed there are many "if this then that" statements, with spreadsheets available for various arcane calculations.

Realizing that "how much less?" and "how much pension if any?" are two of many qualifiers one might ask skwak, the odds-on answer to the original quote above remains "yes" - agreed? That's odds-on, not guaranteed.... :wink:
I get what you are saying, but if you look at how people practically approach the issue, vs theoretically, the answer is less clear. If you contribute your max, as many here do, it isn't a clear cut "yes" even if tax rates are different. The theoretical argument that Roth and traditional are the same given consistent tax rates hinges on the assumption that people will plow their up front tax savings from the traditional back into their 401k or Traditional Ira and contribute more than they would the Roth. That isn't practically how most people approach the problem. Even the OP pondered contributing a share of his 401k to a Roth. As far as I could tell he wasn't pondering contributing LESS to his 401k if he contributed part of it to a Roth 401k.

It seems to me there is an overall bias towards traditional in this forum. I better understand those arguments since participating in this forum. However I don't think it is as clear cut as many make it when you practically apply the question.

I have always said and continue to say it is best to have a mix.

Jack FFR1846
Posts: 5413
Joined: Tue Dec 31, 2013 7:05 am

Re: Traditional 401K vs Roth 401K

Post by Jack FFR1846 » Mon Sep 11, 2017 8:47 am

This is a good question that I have not seen directly addressed. For me, in the 25% federal bracket currently, I have always maxed 401k traditional. Outside of this, I max my external Roth. I'd imagine that if I were in a lower bracket, perhaps I'd look at a 401k Roth? I expect to be in the 15% federal bracket in retirement.
Bogle: Smart Beta is stupid

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Mon Sep 11, 2017 8:53 am

skwak wrote:
Sun Sep 10, 2017 7:46 pm
I am brand new to the forum and very happy to be here!

I have a Traditional 401K through my current employer. Just this past year a Roth 401K option was added. I am at a loss of what to do with this if anything. We have been max in the traditional 401K and almost all of our retirement money is in traditional accounts.

Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?

Any help or a link to a straight forward approach would be great appreciated.

Thanks!

:D
skwak,

It is not complex.

1) For 90+% of people, Trad. 401K plus Roth IRA is the right answer. Only people with very good pension may go with Roth 401K.

2) If you have no idea what is the right answer, Trad. 401K plus Roth IRA is the way to go.

KlangFool

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Mon Sep 11, 2017 10:08 am

JBTX wrote:
Mon Sep 11, 2017 8:25 am
I get what you are saying, but if you look at how people practically approach the issue, vs theoretically, the answer is less clear. If you contribute your max, as many here do, it isn't a clear cut "yes" even if tax rates are different. The theoretical argument that Roth and traditional are the same given consistent tax rates hinges on the assumption that people will plow their up front tax savings from the traditional back into their 401k or Traditional Ira and contribute more than they would the Roth. That isn't practically how most people approach the problem. Even the OP pondered contributing a share of his 401k to a Roth. As far as I could tell he wasn't pondering contributing LESS to his 401k if he contributed part of it to a Roth 401k.
The fair comparison of Roth vs. traditional, whether for a 401k or an IRA, starts with the same amount of pre-tax money. E.g., for someone paying 25% tax and "contributing" $9K, the starting point is $12K pre-tax. Either $12K goes into the traditional or $9K goes into the Roth. When (Roth amount) / (1 - tax rate) goes above the IRS maximum, for a fair comparison the traditional contribution must be accompanied by a taxable account using the excess.

Yes, if someone makes it a choice between $18K traditional (with no accompanying taxable account) vs. $18K Roth, then it's really different amounts contributed and it's worth making that point to someone who doesn't realize it.

jkozlow3
Posts: 9
Joined: Tue Aug 09, 2016 1:13 pm

Re: Traditional 401K vs Roth 401K

Post by jkozlow3 » Mon Sep 11, 2017 11:42 am

I think you also need to take your income into account, as this determines Roth IRA eligibility.

For example, my wife and I make more than $186k combined. When filing jointly, Roth IRA (not Roth 401k) eligibility starts to phase out at $186k (in 2017).

I like Roth IRAs, as I can always withdraw the principal without penalty if needed. This makes it a great emergency fund should I ever need it. If not, even better!

However, I cannot contribute to a Roth IRA unless I get our AGI down to $186k or below. At our current income, I can only achieve this by maxing out each of our traditional 401k contributions and by contributing to our HSA accounts. If our income goes up too much more (it's variable depending on commissions + bonuses), we won't be eligible to contribute to a Roth IRA at all, as I won't be able to get the AGI low enough. At that point, I think it makes sense to switch our 401k contributions from traditional to Roth 401k, as 18k after-tax is a much bigger contribution than 18k before tax.

So my preference is:

1. Max out traditional 401k + Roth IRA if eligible
2. Max out Roth 401k if AGI makes me ineligible Roth IRA contributions

The problem with #1 above is that I don't KNOW if I'm eligible for the Roth IRA until the end of the year since our pay is variable based on commissions and bonuses. If I contribute to a traditional 401k all year and find out that I'm ineligible for Roth IRA contributions, then what? This hasn't happened yet, but I could see it happening in 2017 or 2018 depending on our income.

I'm happy to have my strategy critiqued if anyone has any better advice!
Last edited by jkozlow3 on Mon Sep 11, 2017 12:42 pm, edited 2 times in total.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 12:20 pm

FiveK wrote:
Mon Sep 11, 2017 10:08 am
JBTX wrote:
Mon Sep 11, 2017 8:25 am
I get what you are saying, but if you look at how people practically approach the issue, vs theoretically, the answer is less clear. If you contribute your max, as many here do, it isn't a clear cut "yes" even if tax rates are different. The theoretical argument that Roth and traditional are the same given consistent tax rates hinges on the assumption that people will plow their up front tax savings from the traditional back into their 401k or Traditional Ira and contribute more than they would the Roth. That isn't practically how most people approach the problem. Even the OP pondered contributing a share of his 401k to a Roth. As far as I could tell he wasn't pondering contributing LESS to his 401k if he contributed part of it to a Roth 401k.
The fair comparison of Roth vs. traditional, whether for a 401k or an IRA, starts with the same amount of pre-tax money. E.g., for someone paying 25% tax and "contributing" $9K, the starting point is $12K pre-tax. Either $12K goes into the traditional or $9K goes into the Roth. When (Roth amount) / (1 - tax rate) goes above the IRS maximum, for a fair comparison the traditional contribution must be accompanied by a taxable account using the excess.

Yes, if someone makes it a choice between $18K traditional (with no accompanying taxable account) vs. $18K Roth, then it's really different amounts contributed and it's worth making that point to someone who doesn't realize it.
I totally agree with that. My point is the fair comparison you are articulating is not practically the choice people encounter. They usually are looking at having $X and whether to put it traditional or Roth. The tax savings comes after and often goes into some sort of cash reserve or taxable account.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 12:30 pm

KlangFool wrote:
Mon Sep 11, 2017 8:53 am
skwak wrote:
Sun Sep 10, 2017 7:46 pm
I am brand new to the forum and very happy to be here!

I have a Traditional 401K through my current employer. Just this past year a Roth 401K option was added. I am at a loss of what to do with this if anything. We have been max in the traditional 401K and almost all of our retirement money is in traditional accounts.

Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?

Any help or a link to a straight forward approach would be great appreciated.

Thanks!

:D
skwak,

It is not complex.

1) For 90+% of people, Trad. 401K plus Roth IRA is the right answer. Only people with very good pension may go with Roth 401K.

2) If you have no idea what is the right answer, Trad. 401K plus Roth IRA is the way to go.

KlangFool
I agree with #2. Totally disagree with #1. The answers can vary dramatically from person to person. The OP mentioned all of their retirement is in traditional. We have no idea how much, but given that he likely has filled up at least some of the lower brackets during retirement, and we have no idea what the SS impact will be.

When I first arrived everybody was saying go traditional 401k. I put up my specifics and somebody in here far more wonky than me figured my retirement marginal rates would be 40+%.

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Mon Sep 11, 2017 1:03 pm

JBTX wrote:
Mon Sep 11, 2017 12:20 pm
FiveK wrote:
Mon Sep 11, 2017 10:08 am
The fair comparison of Roth vs. traditional, whether for a 401k or an IRA, starts with the same amount of pre-tax money. E.g., for someone paying 25% tax and "contributing" $9K, the starting point is $12K pre-tax. Either $12K goes into the traditional or $9K goes into the Roth. When (Roth amount) / (1 - tax rate) goes above the IRS maximum, for a fair comparison the traditional contribution must be accompanied by a taxable account using the excess.

Yes, if someone makes it a choice between $18K traditional (with no accompanying taxable account) vs. $18K Roth, then it's really different amounts contributed and it's worth making that point to someone who doesn't realize it.
I totally agree with that. My point is the fair comparison you are articulating is not practically the choice people encounter. They usually are looking at having $X and whether to put it traditional or Roth. The tax savings comes after and often goes into some sort of cash reserve or taxable account.
It can indeed be difficult at times to determine whether a posted question can be taken at face value, or if the poster means something else.

If tax savings from traditional do go into a taxable account, the wiki here and similar articles elsewhere apply directly.

If tax savings from traditional get spent instead of invested, then the extra savings "enforced" by the Roth become significant.

I think all the above is what you are saying also, and if so we agree. :sharebeer

ved
Posts: 620
Joined: Sat Jan 18, 2014 6:56 pm

Re: Traditional 401K vs Roth 401K

Post by ved » Mon Sep 11, 2017 1:09 pm

jkozlow3 wrote:
Mon Sep 11, 2017 11:42 am
I think you also need to take your income into account, as this determines Roth IRA eligibility.

For example, my wife and I make more than $186k combined. When filing jointly, Roth IRA (not Roth 401k) eligibility starts to phase out at $186k (in 2017).

I like Roth IRAs, as I can always withdraw the principal without penalty if needed. This makes it a great emergency fund should I ever need it. If not, even better!

However, I cannot contribute to a Roth IRA unless I get our AGI down to $186k or below. At our current income, I can only achieve this by maxing out each of our traditional 401k contributions and by contributing to our HSA accounts. If our income goes up too much more (it's variable depending on commissions + bonuses), we won't be eligible to contribute to a Roth IRA at all, as I won't be able to get the AGI low enough. At that point, I think it makes sense to switch our 401k contributions from traditional to Roth 401k, as 18k after-tax is a much bigger contribution than 18k before tax.

So my preference is:

1. Max out traditional 401k + Roth IRA if eligible
2. Max out Roth 401k if AGI makes me ineligible Roth IRA contributions

The problem with #1 above is that I don't KNOW if I'm eligible for the Roth IRA until the end of the year since our pay is variable based on commissions and bonuses. If I contribute to a traditional 401k all year and find out that I'm ineligible for Roth IRA contributions, then what? This hasn't happened yet, but I could see it happening in 2017 or 2018 depending on our income.

I'm happy to have my strategy critiqued if anyone has any better advice!
Do you have traditional IRAs (outside of 401k)? If not, then you are an ideal candidate for "backdoor" Roth IRA. Search the forums for hundreds of posts on this.

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Mon Sep 11, 2017 1:10 pm

JBTX wrote:
Mon Sep 11, 2017 12:30 pm
I agree with #2. Totally disagree with #1. The answers can vary dramatically from person to person. The OP mentioned all of their retirement is in traditional. We have no idea how much, but given that he likely has filled up at least some of the lower brackets during retirement, and we have no idea what the SS impact will be.

When I first arrived everybody was saying go traditional 401k. I put up my specifics and somebody in here far more wonky than me figured my retirement marginal rates would be 40+%.
Wonkyness aside, :wink:, the calculations in Contributing to tax deferred + Taxability of SS - Bogleheads.org reinforce some oft-stated advice: do Roth conversions after retirement and before SS and pension payments start, because the marginal rates will likely be lowest then.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 1:12 pm

FiveK wrote:
Mon Sep 11, 2017 1:03 pm
JBTX wrote:
Mon Sep 11, 2017 12:20 pm
FiveK wrote:
Mon Sep 11, 2017 10:08 am
The fair comparison of Roth vs. traditional, whether for a 401k or an IRA, starts with the same amount of pre-tax money. E.g., for someone paying 25% tax and "contributing" $9K, the starting point is $12K pre-tax. Either $12K goes into the traditional or $9K goes into the Roth. When (Roth amount) / (1 - tax rate) goes above the IRS maximum, for a fair comparison the traditional contribution must be accompanied by a taxable account using the excess.

Yes, if someone makes it a choice between $18K traditional (with no accompanying taxable account) vs. $18K Roth, then it's really different amounts contributed and it's worth making that point to someone who doesn't realize it.
I totally agree with that. My point is the fair comparison you are articulating is not practically the choice people encounter. They usually are looking at having $X and whether to put it traditional or Roth. The tax savings comes after and often goes into some sort of cash reserve or taxable account.
It can indeed be difficult at times to determine whether a posted question can be taken at face value, or if the poster means something else.

If tax savings from traditional do go into a taxable account, the wiki here and similar articles elsewhere apply directly.

If tax savings from traditional get spent instead of invested, then the extra savings "enforced" by the Roth become significant.

I think all the above is what you are saying also, and if so we agree. :sharebeer
Yes we are in agreement. I'm just argumentative by nature !

I will say my month or two here has challenged the way I view this and other issues. Historically I have preferred Roths. In many ways I still do, but I was underestimating some of the advantages of traditionals. I'm about 55% traditional and 45% Roth between all types of retirement accounts.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 1:20 pm

FiveK wrote:
Mon Sep 11, 2017 1:10 pm
JBTX wrote:
Mon Sep 11, 2017 12:30 pm
I agree with #2. Totally disagree with #1. The answers can vary dramatically from person to person. The OP mentioned all of their retirement is in traditional. We have no idea how much, but given that he likely has filled up at least some of the lower brackets during retirement, and we have no idea what the SS impact will be.

When I first arrived everybody was saying go traditional 401k. I put up my specifics and somebody in here far more wonky than me figured my retirement marginal rates would be 40+%.
Wonkyness aside, :wink:, the calculations in Contributing to tax deferred + Taxability of SS - Bogleheads.org reinforce some oft-stated advice: do Roth conversions after retirement and before SS and pension payments start, because the marginal rates will likely be lowest then.
Totally agree with that.

Almost 20 years ago I did some major rollovers from traditional to Roth as I rolled over a 401k from prior employer to traditional IRA then to a Roth. The tax rates were actually a bit higher than they are now. In retrospect I might not have made the same decision. But I'm kind of glad I did because now I have a substantial chunk of money in Roths that will never be taxed again, and also I got lucky and did the conversion when the Dow was very low, around 8k or 9k, such that all those subsequent gains are tax free. (I say "lucky" but that large drop was part of my reason for doing the conversion)

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Mon Sep 11, 2017 1:22 pm

JBTX wrote:
Mon Sep 11, 2017 12:30 pm
KlangFool wrote:
Mon Sep 11, 2017 8:53 am
skwak wrote:
Sun Sep 10, 2017 7:46 pm
I am brand new to the forum and very happy to be here!

I have a Traditional 401K through my current employer. Just this past year a Roth 401K option was added. I am at a loss of what to do with this if anything. We have been max in the traditional 401K and almost all of our retirement money is in traditional accounts.

Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?

Any help or a link to a straight forward approach would be great appreciated.

Thanks!

:D
skwak,

It is not complex.

1) For 90+% of people, Trad. 401K plus Roth IRA is the right answer. Only people with very good pension may go with Roth 401K.

2) If you have no idea what is the right answer, Trad. 401K plus Roth IRA is the way to go.

KlangFool
I agree with #2. Totally disagree with #1. The answers can vary dramatically from person to person. The OP mentioned all of their retirement is in traditional. We have no idea how much, but given that he likely has filled up at least some of the lower brackets during retirement, and we have no idea what the SS impact will be.

When I first arrived everybody was saying go traditional 401k. I put up my specifics and somebody in here far more wonky than me figured my retirement marginal rates would be 40+%.
JBTX,

For #1, only 10% of the US household has the net worth greater than 1 million. Those folks plus people with generous pension (which most of us do not get) has the possibility of higher retirement income tax bracket. So, 90+% is a pretty good estimate.

In my case, I would need a net worth much greater than 2 million in order for this to be true.

KlangFool

Church Lady
Posts: 288
Joined: Sat Jun 28, 2014 7:49 pm

Re: Traditional 401K vs Roth 401K

Post by Church Lady » Mon Sep 11, 2017 2:44 pm

Hi, OP.
I don't know how far out you are from retirement, but the further out you are, the more uncertain the future. We can't know your future filing status, future tax rates, how 401K withdrawals will affect your tax liability or your Social Security and Medicare benefits, or even whether these programs will exist as we know them. Today you feel certain your future tax rate will be lower, but that could change. In years to come, you may wish you had more Roth funds and less tax deferred funds. Today, we just can't know these things. Therefore, why bet 100% on the traditional 401k?

1) I suggest hedging your bets by contributing to both kinds of 401K. Pick a split between traditional and Roth contributions you are comfortable with, and go with that.

2) Consider at least a nominal contribution to the Roth 401K if you do nothing else. In my case, I made a nominal contribution when the Roth 401K was introduced, and forgot about it for decades. Most of the money in that account was added quite recently, but I meet the five year holding period because of that tiny contribution years ago. I could tap the money penalty free at any time if I had to. I don't see much downside to a nominal contribution, do you?

I'm no expert, just a layperson. Good luck with your strategy!
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

User avatar
patrick013
Posts: 1716
Joined: Mon Jul 13, 2015 7:49 pm

Re: Traditional 401K vs Roth 401K

Post by patrick013 » Mon Sep 11, 2017 3:55 pm

Church Lady wrote:
Mon Sep 11, 2017 2:44 pm
We can't know your future filing status, future tax rates, how 401K withdrawals will affect your tax liability or your Social Security and Medicare benefits, or even whether these programs will exist as we know them. Today you feel certain your future tax rate will be lower, but that could change. In years to come, you may wish you had more Roth funds and less tax deferred funds.
A portion of your Social Security benefits may be taxed as ordinary
income if you have provisional income: modified AGI plus half your
Social Security plus other items. And guess what, Roth withdrawals
are not included in this calc.

Up to 85% taxable if provisional income is over $34,000 when Single or
Head of Household and over $44,000 when Married filing jointly.

Most but not all people will not be adversely affected due to large
pensions anyway, but some could, giving advantage to Roth when a tIRA
may be used.
age in bonds, buy-and-hold, 10 year business cycle

User avatar
grabiner
Advisory Board
Posts: 20550
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Traditional 401K vs Roth 401K

Post by grabiner » Mon Sep 11, 2017 5:02 pm

patrick013 wrote:
Mon Sep 11, 2017 3:55 pm
Church Lady wrote:
Mon Sep 11, 2017 2:44 pm
We can't know your future filing status, future tax rates, how 401K withdrawals will affect your tax liability or your Social Security and Medicare benefits, or even whether these programs will exist as we know them. Today you feel certain your future tax rate will be lower, but that could change. In years to come, you may wish you had more Roth funds and less tax deferred funds.
A portion of your Social Security benefits may be taxed as ordinary
income if you have provisional income: modified AGI plus half your
Social Security plus other items. And guess what, Roth withdrawals
are not included in this calc.

Up to 85% taxable if provisional income is over $34,000 when Single or
Head of Household and over $44,000 when Married filing jointly.
This particular explanation is misleading, as the actual point at which 85% of your SS is taxable is much higher; there isn't a sharp break at this point. Every $1 of provisional income above these limits makes 85 cents of SS taxable, with a maximum taxable amount of 85% of SS.

The net effect is that many retirees in the 15% tax bracket have a marginal tax rate of 22.5% or 27.75%, depending on which side of the limit they are on. This makes it particularly attractive to contribute to a Roth account when you are in the 15% tax bracket (as long as you have enough Traditional accounts, from other years' contributions and employer matches, to use up the 10% income tax bracket in retirement).
David Grabiner

User avatar
patrick013
Posts: 1716
Joined: Mon Jul 13, 2015 7:49 pm

Re: Traditional 401K vs Roth 401K

Post by patrick013 » Mon Sep 11, 2017 6:03 pm

grabiner wrote:
Mon Sep 11, 2017 5:02 pm
patrick013 wrote:
Mon Sep 11, 2017 3:55 pm
Church Lady wrote:
Mon Sep 11, 2017 2:44 pm
We can't know your future filing status, future tax rates, how 401K withdrawals will affect your tax liability or your Social Security and Medicare benefits, or even whether these programs will exist as we know them. Today you feel certain your future tax rate will be lower, but that could change. In years to come, you may wish you had more Roth funds and less tax deferred funds.
A portion of your Social Security benefits may be taxed as ordinary
income if you have provisional income: modified AGI plus half your
Social Security plus other items. And guess what, Roth withdrawals
are not included in this calc.

Up to 85% taxable if provisional income is over $34,000 when Single or
Head of Household and over $44,000 when Married filing jointly.
This particular explanation is misleading, as the actual point at which 85% of your SS is taxable is much higher; there isn't a sharp break at this point. Every $1 of provisional income above these limits makes 85 cents of SS taxable, with a maximum taxable amount of 85% of SS.

The net effect is that many retirees in the 15% tax bracket have a marginal tax rate of 22.5% or 27.75%, depending on which side of the limit they are on. This makes it particularly attractive to contribute to a Roth account when you are in the 15% tax bracket (as long as you have enough Traditional accounts, from other years' contributions and employer matches, to use up the 10% income tax bracket in retirement).
Image
The above is from a 2017 Merrill Lynch Tax Planner. Not very detailed no doubt.
Have to get a Ernst & Young Tax Manual one of these days. Know of a better one ?

Thanks for the additional details and clarification. Shed some light on the calc of the
retirement tax rate.
age in bonds, buy-and-hold, 10 year business cycle

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Mon Sep 11, 2017 8:13 pm

patrick013 wrote:
Mon Sep 11, 2017 6:03 pm
The above is from a 2017 Merrill Lynch Tax Planner. Not very detailed no doubt.
Have to get a Ernst & Young Tax Manual one of these days. Know of a better one ?
For taxability of SS benefits, see page 16 of 2016 Publication 915 - p915.pdf or page 30 of 2016 Instruction 1040 - i1040gi.pdf.

A working spreadsheet version of that worksheet is in 'Calculations'!X31:AE50 of Tools and calculators - Personal_finance_toolbox - Bogleheads.

User avatar
patrick013
Posts: 1716
Joined: Mon Jul 13, 2015 7:49 pm

Re: Traditional 401K vs Roth 401K

Post by patrick013 » Mon Sep 11, 2017 9:16 pm

Well it looks like we need to add an estimated TD withdrawal
to determine a marginal tax rate to determine if we should have
a TD account to withdraw from in the first place based on marginal
tax rate. So be it but can an average investor go there ? May or
may not be a material difference.
age in bonds, buy-and-hold, 10 year business cycle

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 9:33 pm

KlangFool wrote:
Mon Sep 11, 2017 1:22 pm
JBTX wrote:
Mon Sep 11, 2017 12:30 pm
KlangFool wrote:
Mon Sep 11, 2017 8:53 am
skwak wrote:
Sun Sep 10, 2017 7:46 pm
I am brand new to the forum and very happy to be here!

I have a Traditional 401K through my current employer. Just this past year a Roth 401K option was added. I am at a loss of what to do with this if anything. We have been max in the traditional 401K and almost all of our retirement money is in traditional accounts.

Everything I read on this topic seems very complex and full of many if this then that statements. If you are fairly certain that your federal tax rate will be less in retirement even with RMDs is the answer as simple as use the Traditional 401K exclusively? Or it really a complex topic?

Any help or a link to a straight forward approach would be great appreciated.

Thanks!

:D
skwak,

It is not complex.

1) For 90+% of people, Trad. 401K plus Roth IRA is the right answer. Only people with very good pension may go with Roth 401K.

2) If you have no idea what is the right answer, Trad. 401K plus Roth IRA is the way to go.

KlangFool
I agree with #2. Totally disagree with #1. The answers can vary dramatically from person to person. The OP mentioned all of their retirement is in traditional. We have no idea how much, but given that he likely has filled up at least some of the lower brackets during retirement, and we have no idea what the SS impact will be.

When I first arrived everybody was saying go traditional 401k. I put up my specifics and somebody in here far more wonky than me figured my retirement marginal rates would be 40+%.
JBTX,

For #1, only 10% of the US household has the net worth greater than 1 million. Those folks plus people with generous pension (which most of us do not get) has the possibility of higher retirement income tax bracket. So, 90+% is a pretty good estimate.

In my case, I would need a net worth much greater than 2 million in order for this to be true.

KlangFool
In my case, If I project a traditional tax deferred total balance of about $1.8 million around retirement age, in today's dollars, apply the RMD rate, and then add (at least) 50% of both of our social security, that will easily get us over the 25% tax bracket. When you factor in the peculiarities of the SS tax, the marginal rate may be above 40%.

Now I understand the above is not representative of the average person. But neither is the typical poster in this forum.

If you ignored the SS taxability impact, and ignored the fact that dollar for dollar a roth investment is effectively more than a traditional investment, and assumed the tax rates will never go up, i would agree, a vast majority would be better off in traditional vs Roths. However, those are 3 huge things to ignore.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 9:45 pm

grabiner wrote:
Mon Sep 11, 2017 5:02 pm
patrick013 wrote:
Mon Sep 11, 2017 3:55 pm
Church Lady wrote:
Mon Sep 11, 2017 2:44 pm
We can't know your future filing status, future tax rates, how 401K withdrawals will affect your tax liability or your Social Security and Medicare benefits, or even whether these programs will exist as we know them. Today you feel certain your future tax rate will be lower, but that could change. In years to come, you may wish you had more Roth funds and less tax deferred funds.
A portion of your Social Security benefits may be taxed as ordinary
income if you have provisional income: modified AGI plus half your
Social Security plus other items. And guess what, Roth withdrawals
are not included in this calc.

Up to 85% taxable if provisional income is over $34,000 when Single or
Head of Household and over $44,000 when Married filing jointly.
This particular explanation is misleading, as the actual point at which 85% of your SS is taxable is much higher; there isn't a sharp break at this point. Every $1 of provisional income above these limits makes 85 cents of SS taxable, with a maximum taxable amount of 85% of SS.

The net effect is that many retirees in the 15% tax bracket have a marginal tax rate of 22.5% or 27.75%, depending on which side of the limit they are on. This makes it particularly attractive to contribute to a Roth account when you are in the 15% tax bracket (as long as you have enough Traditional accounts, from other years' contributions and employer matches, to use up the 10% income tax bracket in retirement).
From my perspective, this makes contributing to a Roth if you are currently in 28% bracket or below roughly a push. Even if your marginal rate goes down a few points, the benefits of the Roth may still be worth it given the additional retirement flexibility, and also the fact that dollar for dollar a Roth investment is worth more than a traditional investment.

Also, with a Roth, you are essentially locking in your tax liability. In general, isn't a certain outcome more valuable than an uncertain outcome? Stocks return more than cash or short bonds because of the greater variability of outcomes over time. Would not there be some premium associated with a certain outcome in terms of tax liability?

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Mon Sep 11, 2017 9:55 pm

JBTX wrote:
Mon Sep 11, 2017 9:33 pm

In my case, If I project a traditional tax deferred total balance of about $1.8 million around retirement age, in today's dollars, apply the RMD rate, and then add (at least) 50% of both of our social security, that will easily get us over the 25% tax bracket. When you factor in the peculiarities of the SS tax, the marginal rate may be above 40%.

Now I understand the above is not representative of the average person. But neither is the typical poster in this forum.

If you ignored the SS taxability impact, and ignored the fact that dollar for dollar a roth investment is effectively more than a traditional investment, and assumed the tax rates will never go up, i would agree, a vast majority would be better off in traditional vs Roths. However, those are 3 huge things to ignore.
JBTX,

<< In my case, If I project a traditional tax deferred total balance of about $1.8 million around retirement age,>>

You have a choice to be fully employed until retirement age. Many of us do not have that choice.

<< Now I understand the above is not representative of the average person. But neither is the typical poster in this forum.>>

1) I do not think it is typical for the not yet retired poster in this forum to retire at retirement age. Many of us will either be voluntary or involuntary retire before the social security age.

2) Not many of us need to worry about RMD pushing us into the 25% tax bracket either. We do not have that kind of money.

KlangFool

User avatar
grabiner
Advisory Board
Posts: 20550
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Traditional 401K vs Roth 401K

Post by grabiner » Mon Sep 11, 2017 10:00 pm

patrick013 wrote:
Mon Sep 11, 2017 6:03 pm
Image
The above is from a 2017 Merrill Lynch Tax Planner. Not very detailed no doubt.
Have to get a Ernst & Young Tax Manual one of these days. Know of a better one ?
Details are on the wiki: Taxation of Social Security benefits

The IRS worksheets are very hard to understand; they get the right answer, but they have to deal with so many special cases that you can't easily tell what you are taking 85% of.
David Grabiner

User avatar
grabiner
Advisory Board
Posts: 20550
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Traditional 401K vs Roth 401K

Post by grabiner » Mon Sep 11, 2017 10:03 pm

JBTX wrote:
Mon Sep 11, 2017 9:33 pm
In my case, If I project a traditional tax deferred total balance of about $1.8 million around retirement age, in today's dollars, apply the RMD rate, and then add (at least) 50% of both of our social security, that will easily get us over the 25% tax bracket. When you factor in the peculiarities of the SS tax, the marginal rate may be above 40%.
This last point is a rare situation; most retirees in the 25% bracket are past the phase-out and pay a marginal tax rate of 25%, not 46.25%. It will be fewer by the time you retire, because the phase-in of SS taxation is not indexed to inflation.

If you do find yourself in the 46.25% marginal tax rate, then you should convert a large part of your IRA to a Roth at 25%, and possibly even at 28%, to reduce future RMDs which will be taxed at 46.25%.
David Grabiner

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 10:37 pm

KlangFool wrote:
Mon Sep 11, 2017 9:55 pm

JBTX,

<< In my case, If I project a traditional tax deferred total balance of about $1.8 million around retirement age,>>

You have a choice to be fully employed until retirement age. Many of us do not have that choice.
You don't necessarily have to work to retirement age to get there. I don't plan to work to full retirement age. most of this is project modest growth on existing investments.
<< Now I understand the above is not representative of the average person. But neither is the typical poster in this forum.>>

1) I do not think it is typical for the not yet retired poster in this forum to retire at retirement age. Many of us will either be voluntary or involuntary retire before the social security age.


2) Not many of us need to worry about RMD pushing us into the 25% tax bracket either. We do not have that kind of money.

KlangFool
I see a lot of participants in "two comma threads", and I see even some new posters put up some pretty impressive income and savings numbers during middle working years.

Now if your point is that some of you will retire 15-20 years before retirement age, and pull traditional IRA balances down over those 20 years (presumably through some sort of averaging withdrawal plan allowing for pre 59.5 withdrawals)- at amounts not to exceed the 15% rate, then yes, your taxable income may be significantly less by the time you get to SS retirement age.

As noted by Grabiner in this thread, some people in the 15% tax bracket during retirement (social security years) will have a marginal rate in the mid 20's factoring taxable in social security impacts.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Mon Sep 11, 2017 10:52 pm

grabiner wrote:
Mon Sep 11, 2017 10:03 pm
JBTX wrote:
Mon Sep 11, 2017 9:33 pm
In my case, If I project a traditional tax deferred total balance of about $1.8 million around retirement age, in today's dollars, apply the RMD rate, and then add (at least) 50% of both of our social security, that will easily get us over the 25% tax bracket. When you factor in the peculiarities of the SS tax, the marginal rate may be above 40%.
This last point is a rare situation; most retirees in the 25% bracket are past the phase-out and pay a marginal tax rate of 25%, not 46.25%. It will be fewer by the time you retire, because the phase-in of SS taxation is not indexed to inflation.

If you do find yourself in the 46.25% marginal tax rate, then you should convert a large part of your IRA to a Roth at 25%, and possibly even at 28%, to reduce future RMDs which will be taxed at 46.25%.
I would project that we will retire, or at least have reduced income, well before SS retirement age, and at that point would convert at least to top of 15% bracket, and possibly more. The tricky thing about what you are suggesting is it assumes the tax code stays the same years into the future. I would suggest as we move forward the probability of it materially changing well exceeds the probability of it staying the same - but I understand conversations beyond that are not permitted here (unfortunately).

I don't think we have ever been above a marginal tax rate of low 30's - living in TX and previously FL helps with no income taxes. Even if the retirement marginal rate is 25% (per current law) that isn't a huge difference, and the added flexibility of the Roth, plus the increased effective after tax contribution amounts make the Roth an attractive choice in spite of losing a few marginal tax percentage points in the process.

As I have said, repeatedly, I think the optimal play is to have a balance of both Traditional and Roths, for diversity sake and also flexibility to manage tax liability along the way via conversions to Roth or early withdrawal of traditionals.

Having said all that, in spite of all the theoretical numerical advantages of traditionals assuming "apples to apples" comparisons, i would bet if you told people to put all their retirement savings into Roth, vs all of their savings into Traditional, many, perhaps most, would end up with more money in Roth at Retirement, because they effectively end up putting more in with the Roth, and they are more likely to leave money alone in a retirement account vs a taxable account.

User avatar
patrick013
Posts: 1716
Joined: Mon Jul 13, 2015 7:49 pm

Re: Traditional 401K vs Roth 401K

Post by patrick013 » Mon Sep 11, 2017 11:07 pm

I think one could still see what his marginal rate is for RMD's
knowing what his RMD is while including the RMD into the SS
tax liability calc to determine non-RMD taxable income. What
an extra step to see what that rate is to decide between IRA's
at present rates. The 50-50 idea seems more appealing right
now.
age in bonds, buy-and-hold, 10 year business cycle

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Tue Sep 12, 2017 8:12 am

JBTX wrote:
Mon Sep 11, 2017 10:37 pm
KlangFool wrote:
Mon Sep 11, 2017 9:55 pm

JBTX,

<< In my case, If I project a traditional tax deferred total balance of about $1.8 million around retirement age,>>

You have a choice to be fully employed until retirement age. Many of us do not have that choice.
You don't necessarily have to work to retirement age to get there. I don't plan to work to full retirement age. most of this is project modest growth on existing investments.
<< Now I understand the above is not representative of the average person. But neither is the typical poster in this forum.>>

1) I do not think it is typical for the not yet retired poster in this forum to retire at retirement age. Many of us will either be voluntary or involuntary retire before the social security age.


2) Not many of us need to worry about RMD pushing us into the 25% tax bracket either. We do not have that kind of money.

KlangFool
I see a lot of participants in "two comma threads", and I see even some new posters put up some pretty impressive income and savings numbers during middle working years.

Now if your point is that some of you will retire 15-20 years before retirement age, and pull traditional IRA balances down over those 20 years (presumably through some sort of averaging withdrawal plan allowing for pre 59.5 withdrawals)- at amounts not to exceed the 15% rate, then yes, your taxable income may be significantly less by the time you get to SS retirement age.

As noted by Grabiner in this thread, some people in the 15% tax bracket during retirement (social security years) will have a marginal rate in the mid 20's factoring taxable in social security impacts.
JBTX,

<<I see a lot of participants in "two comma threads", and I see even some new posters put up some pretty impressive income and savings numbers during middle working years.>>

Folks with high saving rate do not have enough tax deferred space to keep all their savings. They have plenty of money in Roth and the taxable account. In my case, I am 45/45/10 (Tax deferred / Taxable/ Roth).

So, we could spend our Roth and Roth convert our Trad. 401K.

KlangFool

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Tue Sep 12, 2017 8:18 am

JBTX wrote:
Mon Sep 11, 2017 10:52 pm

Having said all that, in spite of all the theoretical numerical advantages of traditionals assuming "apples to apples" comparisons, i would bet if you told people to put all their retirement savings into Roth, vs all of their savings into Traditional, many, perhaps most, would end up with more money in Roth at Retirement, because they effectively end up putting more in with the Roth, and they are more likely to leave money alone in a retirement account vs a taxable account.
JBTX,

<<i would bet if you told people to put all their retirement savings into Roth, vs all of their savings into Traditional, >>

I would dispute this statement. All into Roth is possible. But, all into Trad. is technically impossible for most of us if you take into account of IRA. In general, people that could contribute to the max of their Trad. 401K has an income too high to get a tax deduction for their IRA. Hence, the only choice is Roth IRA for them.

The choice for most people is

A) Roth 401K plus Roth IRA

Or

B) Trad. 401K plus Roth IRA. Put the tax savings into Roth IRA

It is clear that (B) has better tax diversification and it is a better choice for most people.

KlangFool

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Tue Sep 12, 2017 9:15 am

KlangFool wrote:
Tue Sep 12, 2017 8:18 am
JBTX wrote:
Mon Sep 11, 2017 10:52 pm

Having said all that, in spite of all the theoretical numerical advantages of traditionals assuming "apples to apples" comparisons, i would bet if you told people to put all their retirement savings into Roth, vs all of their savings into Traditional, many, perhaps most, would end up with more money in Roth at Retirement, because they effectively end up putting more in with the Roth, and they are more likely to leave money alone in a retirement account vs a taxable account.
JBTX,

<<i would bet if you told people to put all their retirement savings into Roth, vs all of their savings into Traditional, >>

I would dispute this statement. All into Roth is possible. But, all into Trad. is technically impossible for most of us if you take into account of IRA. In general, people that could contribute to the max of their Trad. 401K has an income too high to get a tax deduction for their IRA. Hence, the only choice is Roth IRA for them.

The choice for most people is

A) Roth 401K plus Roth IRA

Or

B) Trad. 401K plus Roth IRA. Put the tax savings into Roth IRA

It is clear that (B) has better tax diversification and it is a better choice for most people.

KlangFool
I get your point, I should have said, "where there is a choice, people would be better off choosing Roth over traditional".

Having said that, I do generally agree with your B) above being better than A). For someone who has too much AGI for a Roth IRA though, depending on what they have saved in traditional, and what their current tax rate is, splitting the 401k into traditional and Roth may be a better solution.

Has anybody done the math how a Roth compares to a traditional, given certain tax assumptions (say contribute at 25 and withdraw at 15), if you assume the up front traditional tax savings are invested in a taxable account? It would be interesting to know what the rate differential is that gets you to a break even point. Of course that comparison would be laden with a lot of assumptions on cap gains and dividend distributions year by year.

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Tue Sep 12, 2017 9:20 am

JBTX wrote:
Tue Sep 12, 2017 9:15 am
KlangFool wrote:
Tue Sep 12, 2017 8:18 am
JBTX wrote:
Mon Sep 11, 2017 10:52 pm

Having said all that, in spite of all the theoretical numerical advantages of traditionals assuming "apples to apples" comparisons, i would bet if you told people to put all their retirement savings into Roth, vs all of their savings into Traditional, many, perhaps most, would end up with more money in Roth at Retirement, because they effectively end up putting more in with the Roth, and they are more likely to leave money alone in a retirement account vs a taxable account.
JBTX,

<<i would bet if you told people to put all their retirement savings into Roth, vs all of their savings into Traditional, >>

I would dispute this statement. All into Roth is possible. But, all into Trad. is technically impossible for most of us if you take into account of IRA. In general, people that could contribute to the max of their Trad. 401K has an income too high to get a tax deduction for their IRA. Hence, the only choice is Roth IRA for them.

The choice for most people is

A) Roth 401K plus Roth IRA

Or

B) Trad. 401K plus Roth IRA. Put the tax savings into Roth IRA

It is clear that (B) has better tax diversification and it is a better choice for most people.

KlangFool
I get your point, I should have said, "where there is a choice, people would be better off choosing Roth over traditional".

Having said that, I do generally agree with your B) above being better than A). For someone who has too much AGI for a Roth IRA though, depending on what they have saved in traditional, and what their current tax rate is, splitting the 401k into traditional and Roth may be a better solution.

Has anybody done the math how a Roth compares to a traditional, given certain tax assumptions (say contribute at 25 and withdraw at 15), if you assume the up front traditional tax savings are invested in a taxable account? It would be interesting to know what the rate differential is that gets you to a break even point. Of course that comparison would be laden with a lot of assumptions on cap gains and dividend distributions year by year.
JBTX,

<<For someone who has too much AGI for a Roth IRA though,>>

I disagreed. Those folks could backdoor their Roth IRA.

https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

<< Has anybody done the math how a Roth compares to a traditional, given certain tax assumptions (say contribute at 25 and withdraw at 15),>>

Why would a person withdraw at 15%? The person could spend Roth contribution and earnings. Those are at 0%. Then, long term capital gain for taxable account = 0%. The person could Roth convert at 0%. This is highly dependent on individual tax circumstances.

With sufficient money in the taxable account and Roth, the person could pay 0% tax on Roth conversion.

KlangFool

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Tue Sep 12, 2017 11:11 am

JBTX wrote:
Tue Sep 12, 2017 9:15 am
Has anybody done the math how a Roth compares to a traditional, given certain tax assumptions (say contribute at 25 and withdraw at 15), if you assume the up front traditional tax savings are invested in a taxable account? It would be interesting to know what the rate differential is that gets you to a break even point. Of course that comparison would be laden with a lot of assumptions on cap gains and dividend distributions year by year.
Yes. See Maxing out your retirement accounts for words.

As noted in that wiki, see 'Misc. calcs'!A140:C153 in Tools and calculators - Personal_finance_toolbox - Bogleheads, or Traditional versus Roth (401(k) or IRA) to plug in your own numbers.

The first reference will give the break even rate directly; the second can be used to find it by trial and error.

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Tue Sep 12, 2017 1:06 pm

FiveK wrote:
Tue Sep 12, 2017 11:11 am
JBTX wrote:
Tue Sep 12, 2017 9:15 am
Has anybody done the math how a Roth compares to a traditional, given certain tax assumptions (say contribute at 25 and withdraw at 15), if you assume the up front traditional tax savings are invested in a taxable account? It would be interesting to know what the rate differential is that gets you to a break even point. Of course that comparison would be laden with a lot of assumptions on cap gains and dividend distributions year by year.
Yes. See Maxing out your retirement accounts for words.

As noted in that wiki, see 'Misc. calcs'!A140:C153 in Tools and calculators - Personal_finance_toolbox - Bogleheads, or Traditional versus Roth (401(k) or IRA) to plug in your own numbers.

The first reference will give the break even rate directly; the second can be used to find it by trial and error.
Thanks! Excellent stuff. In their example you could contribute at 28% and still come out equal or ahead with a Roth withdrawing at 23-24% tax rate. Intuitively that makes sense. In that example they ignored SS tax issue, which is admittedly very hard to model and varies from person to person.

User avatar
patrick013
Posts: 1716
Joined: Mon Jul 13, 2015 7:49 pm

Re: Traditional 401K vs Roth 401K

Post by patrick013 » Tue Sep 12, 2017 1:45 pm

FiveK wrote:
Tue Sep 12, 2017 11:11 am
JBTX wrote:
Tue Sep 12, 2017 9:15 am
Has anybody done the math how a Roth compares to a traditional, given certain tax assumptions (say contribute at 25 and withdraw at 15), if you assume the up front traditional tax savings are invested in a taxable account? It would be interesting to know what the rate differential is that gets you to a break even point. Of course that comparison would be laden with a lot of assumptions on cap gains and dividend distributions year by year.
Yes. See Maxing out your retirement accounts for words.

As noted in that wiki, see 'Misc. calcs'!A140:C153 in Tools and calculators - Personal_finance_toolbox - Bogleheads, or Traditional versus Roth (401(k) or IRA) to plug in your own numbers.

The first reference will give the break even rate directly; the second can be used to find it by trial and error.
I don't think I completely agree with some of these "spreadsheets".
The advisor manual states to use 2 methods to evaluate an investment.
Aggregate cash flow pro-forma and an Internal Rate of Return calculation.

So when I do IRR I get some discernible answers when I compare a TD account
to a Roth account side by side. I post this once in awhile.

A lower tax rate in retirement, 25% working and 15% in retirement for example :
Max tax deferred contributions to tax-deferred, withdraw RMD's or larger
withdrawals in retirement.

Equal tax rates in retirement, 25% working and 25% in retirement for example :
Tax-deferred and after-tax contributions have closer long term returns.
Max TD for tax reduction desired, but weight more to Roth as Roth
features have closer returns. 100% Roth is not bad in this case.

Higher tax rate in retirement, 25% working and 28% in retirement for example :
Max Roth contributions.

Conversions can be done anytime when in a lower tax bracket than retirement.
Non-working years, years before pension, SS, or annuities are rec'd. Higher
taxes on conversion lessen returns. Lower taxes preserve return. Equal
taxes have no effect. Each conversion starts a new 5 year wait for withdrawals,
the Roth 5 yr. Rule.

Make conversions incrementally before 70 before you leave a lower tax bracket.
Conversions before 70 reduce your RMD's also while minimizing the effects of the
tax charge you pay to make the conversion and future taxes.


If I had any clients that's what I would tell them. It's very important to be as
thorough as possible when estimating the retirement tax rate.

The approach I take is that a $10,000 annual investment costs $10,000 in a Roth
account but costs $7,500 in a TD account under 25% taxation. Both accounts being
credited with a $10,000 annual deposit. Then I just discount the cash flows to see
which is higher as an IRR computation over a number of decades.
age in bonds, buy-and-hold, 10 year business cycle

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Tue Sep 12, 2017 2:12 pm

patrick013 wrote:
Tue Sep 12, 2017 1:45 pm
FiveK wrote:
Tue Sep 12, 2017 11:11 am
See Maxing out your retirement accounts for words.

As noted in that wiki, see 'Misc. calcs'!A140:C153 in Tools and calculators - Personal_finance_toolbox - Bogleheads, or Traditional versus Roth (401(k) or IRA) to plug in your own numbers.
I don't think I completely agree with some of these "spreadsheets".
Could you give an example, listing all the inputs and results from one or both of those spreadsheet, and what you think should be a correct result?

User avatar
patrick013
Posts: 1716
Joined: Mon Jul 13, 2015 7:49 pm

Re: Traditional 401K vs Roth 401K

Post by patrick013 » Tue Sep 12, 2017 2:41 pm

FiveK wrote:
Tue Sep 12, 2017 2:12 pm
patrick013 wrote:
Tue Sep 12, 2017 1:45 pm
FiveK wrote:
Tue Sep 12, 2017 11:11 am
See Maxing out your retirement accounts for words.

As noted in that wiki, see 'Misc. calcs'!A140:C153 in Tools and calculators - Personal_finance_toolbox - Bogleheads, or Traditional versus Roth (401(k) or IRA) to plug in your own numbers.
I don't think I completely agree with some of these "spreadsheets".
Could you give an example, listing all the inputs and results from one or both of those spreadsheet, and what you think should be a correct result?
Well the only reason I said that is because they do not end up with an IRR, the number
the advisor manual recommends. They may result in similar results and some of them,
well some of them don't either. If that's the standard output(IRR) in the standard format
I'm sold. I don't want to spend all afternoon switching IRR into a proprietary formula
and back like one would take duration and equate it into YTM and vice-versa.

If the spreadsheet(s) are solid, even using a variation of the IRR somehow, the end results
for each tax bracket should be identical to my results. There are other spreadsheets
which approach the problem without using IRR and when I had the time to compare
results they did lack accuracy to a varying degree. For a problem spanning several
decades the IRR is well advised, and 100% accurate given current inputs.
age in bonds, buy-and-hold, 10 year business cycle

User avatar
FiveK
Posts: 2744
Joined: Sun Mar 16, 2014 2:43 pm

Re: Traditional 401K vs Roth 401K

Post by FiveK » Tue Sep 12, 2017 5:48 pm

patrick013 wrote:
Tue Sep 12, 2017 2:41 pm
FiveK wrote:
Tue Sep 12, 2017 2:12 pm
patrick013 wrote:
Tue Sep 12, 2017 1:45 pm
FiveK wrote:
Tue Sep 12, 2017 11:11 am
See Maxing out your retirement accounts for words.
As noted in that wiki, see 'Misc. calcs'!A140:C153 in Tools and calculators - Personal_finance_toolbox - Bogleheads, or Traditional versus Roth (401(k) or IRA) to plug in your own numbers.
I don't think I completely agree with some of these "spreadsheets".
Could you give an example, listing all the inputs and results from one or both of those spreadsheet, and what you think should be a correct result?
Well the only reason I said that is because they do not end up with an IRR, the number
the advisor manual recommends. They may result in similar results and some of them,
well some of them don't either.
...
If the spreadsheet(s) are solid, even using a variation of the IRR somehow, the end results
for each tax bracket should be identical to my results.
OK. I'm reasonably sure both the spreadsheets referenced above are correct - just wondered if you had a counterexample.

Regarding
patrick013 wrote:
Tue Sep 12, 2017 1:45 pm
Equal tax rates in retirement, 25% working and 25% in retirement for example :
Tax-deferred and after-tax contributions have closer long term returns.
Max TD for tax reduction desired, but weight more to Roth as Roth
features have closer returns. 100% Roth is not bad in this case.
if there is any tax drag at all in the taxable "side account" one must use when comparing maximum traditional vs. Roth contributions, and the investment returns are identical in all accounts, not only is 100% Roth not bad, it is exactly correct. Agreed?

skwak
Posts: 5
Joined: Sun Sep 10, 2017 7:31 pm

Re: Traditional 401K vs Roth 401K

Post by skwak » Tue Sep 12, 2017 7:09 pm

Wow, thanks everyone for the awesome input. In all honesty, I will have to print the thread out to drill down on all the advice given. I really appreciate it.

Well, I certainly feel like I received my answer to at least a portion of my question - it is not a completely straight forward topic!

Just to add a few details which might spur any additional thoughts from everyone:

We are fortunate enough that our current household gross income is about $215K to $255K depending on how annual bonuses fall. That places the later portions of our current income in a pretty high tax rate.

Given earnings a Roth IRA is not an option.

We do have pretty large traditional IRAs making the backdoor Roth less appealing.

We hope to retire early (next 4 to 8 years) and live on about $85K adjusted for annual inflation. I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.

I also respect the concept of having some tax diversity across your savings. That is why I am considering diverting a portion of the 401K to the Roth 401K.

I do appreciate the point that saving $24K in a Traditional 401K is not as much as saving the same into a Roth 401K. Even though we do not consciously save the difference, I suspect some is saved into college funds, advanced mortgage payments, etc. However, I am sure some is spent on extra beer and yodels too!

Any addition thought would be very welcome!

I like this place already. :D

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Tue Sep 12, 2017 7:17 pm

skwak wrote:
Tue Sep 12, 2017 7:09 pm

We are fortunate enough that our current household gross income is about $215K to $255K depending on how annual bonuses fall. That places the later portions of our current income in a pretty high tax rate.

Given earnings a Roth IRA is not an option.
skwak,

Roth IRA income limit is not based on gross income. It is based on MAGI. If you contribute to the max of your Trad. 401K, HSA and so on, you may qualify.

http://www.rothira.com/roth-ira-limits
http://www.rothira.com/roth-ira-com-fin ... ssary#MAGI

KlangFool

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Tue Sep 12, 2017 7:26 pm

skwak wrote:
Tue Sep 12, 2017 7:09 pm
Wow, thanks everyone for the awesome input. In all honesty, I will have to print the thread out to drill down on all the advice given. I really appreciate it.

Well, I certainly feel like I received my answer to at least a portion of my question - it is not a completely straight forward topic!

Just to add a few details which might spur any additional thoughts from everyone:

We are fortunate enough that our current household gross income is about $215K to $255K depending on how annual bonuses fall. That places the later portions of our current income in a pretty high tax rate.

Given earnings a Roth IRA is not an option.

We do have pretty large traditional IRAs making the backdoor Roth less appealing.

We hope to retire early (next 4 to 8 years) and live on about $85K adjusted for annual inflation. I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.

I also respect the concept of having some tax diversity across your savings. That is why I am considering diverting a portion of the 401K to the Roth 401K.

I do appreciate the point that saving $24K in a Traditional 401K is not as much as saving the same into a Roth 401K. Even though we do not consciously save the difference, I suspect some is saved into college funds, advanced mortgage payments, etc. However, I am sure some is spent on extra beer and yodels too!

Any addition thought would be very welcome!

I like this place already. :D
Sorry if we are confusing you with different opinions! As you can see, a lot of factors play into it.

What would help somewhat - if you are comfortable sharing it, is how much you have in your 401k and traditional IRA's, and your approximate age, and your current marginal tax rate (both federal and state). Or better yet if you want better advice follow the guidelines for posting your situation.

viewtopic.php?f=1&t=6212

If we knew your specifics better, Klang and I may actually agree what you should do! (or maybe not.... :D )

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Tue Sep 12, 2017 7:28 pm

skwak wrote:
Tue Sep 12, 2017 7:09 pm
Wow, thanks everyone for the awesome input. In all honesty, I will have to print the thread out to drill down on all the advice given. I really appreciate it.

Well, I certainly feel like I received my answer to at least a portion of my question - it is not a completely straight forward topic!

Just to add a few details which might spur any additional thoughts from everyone:

We are fortunate enough that our current household gross income is about $215K to $255K depending on how annual bonuses fall. That places the later portions of our current income in a pretty high tax rate.

Given earnings a Roth IRA is not an option.

We do have pretty large traditional IRAs making the backdoor Roth less appealing.

We hope to retire early (next 4 to 8 years) and live on about $85K adjusted for annual inflation. I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.

I also respect the concept of having some tax diversity across your savings. That is why I am considering diverting a portion of the 401K to the Roth 401K.

I do appreciate the point that saving $24K in a Traditional 401K is not as much as saving the same into a Roth 401K. Even though we do not consciously save the difference, I suspect some is saved into college funds, advanced mortgage payments, etc. However, I am sure some is spent on extra beer and yodels too!

Any addition thought would be very welcome!

I like this place already. :D
skwak,

<< We do have pretty large traditional IRAs making the backdoor Roth less appealing.

We hope to retire early (next 4 to 8 years) and live on about $85K adjusted for annual inflation. I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.

I also respect the concept of having some tax diversity across your savings. That is why I am considering diverting a portion of the 401K to the Roth 401K.>>

In order to provide proper advice, we would need to know

1) How old are you now?

2) How much investment do you have now? And, where the investment in term of Trad. IRA, Roth IRA, 401K and so on.

<<I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.[/b]>>

3) If you have a few million now, then, this may be a concern.

4) At your current income, you are paying 28% to 33% Federal tax. How is it possible that Roth 401K is a better deal for you? Especially when you plan to spend 80+K per year = 15% at retirement?

KlangFool

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Tue Sep 12, 2017 7:40 pm

KlangFool wrote:
Tue Sep 12, 2017 7:28 pm
skwak wrote:
Tue Sep 12, 2017 7:09 pm
Wow, thanks everyone for the awesome input. In all honesty, I will have to print the thread out to drill down on all the advice given. I really appreciate it.

Well, I certainly feel like I received my answer to at least a portion of my question - it is not a completely straight forward topic!

Just to add a few details which might spur any additional thoughts from everyone:

We are fortunate enough that our current household gross income is about $215K to $255K depending on how annual bonuses fall. That places the later portions of our current income in a pretty high tax rate.

Given earnings a Roth IRA is not an option.

We do have pretty large traditional IRAs making the backdoor Roth less appealing.

We hope to retire early (next 4 to 8 years) and live on about $85K adjusted for annual inflation. I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.

I also respect the concept of having some tax diversity across your savings. That is why I am considering diverting a portion of the 401K to the Roth 401K.

I do appreciate the point that saving $24K in a Traditional 401K is not as much as saving the same into a Roth 401K. Even though we do not consciously save the difference, I suspect some is saved into college funds, advanced mortgage payments, etc. However, I am sure some is spent on extra beer and yodels too!

Any addition thought would be very welcome!

I like this place already. :D
skwak,

<< We do have pretty large traditional IRAs making the backdoor Roth less appealing.

We hope to retire early (next 4 to 8 years) and live on about $85K adjusted for annual inflation. I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.

I also respect the concept of having some tax diversity across your savings. That is why I am considering diverting a portion of the 401K to the Roth 401K.>>

In order to provide proper advice, we would need to know

1) How old are you now?

2) How much investment do you have now? And, where the investment in term of Trad. IRA, Roth IRA, 401K and so on.

<<I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.[/b]>>

3) If you have a few million now, then, this may be a concern.

4) At your current income, you are paying 28% to 33% Federal tax. How is it possible that Roth 401K is a better deal for you? Especially when you plan to spend 80+K per year = 15% at retirement?

KlangFool
If he and his wife both draw anywhere near the social security max, when you add in the taxability of social security they could very easily fall into the 25% bracket once they are pulling social security

skwak
Posts: 5
Joined: Sun Sep 10, 2017 7:31 pm

Re: Traditional 401K vs Roth 401K

Post by skwak » Tue Sep 12, 2017 7:55 pm

Happy to share and I appreciate all the help.

In order to provide proper advice, we would need to know

1) How old are you now? My wife and I are 52.

2) How much investment do you have now? And, where the investment in term of Trad. IRA, Roth IRA, 401K and so on.
In total right now we have:
401K: $215K
Traditional IRAs: $835K
Taxable Investments: $140K

Realistically we should be able to move to an encore career (might be retirement) in 6 years or so. At that time we would have added another $180K to the 401K and likely sold our primary home for a profit of $250K (and moved to our mortgage-free vacation home).


<<I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.[/b]>>

3) If you have a few million now, then, this may be a concern.

4) At your current income, you are paying 28% to 33% Federal tax. How is it possible that Roth 401K is a better deal for you? Especially when you plan to spend 80+K per year = 15% at retirement? Open to suggestions!

KlangFool
Top

KlangFool
Posts: 6456
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional 401K vs Roth 401K

Post by KlangFool » Tue Sep 12, 2017 8:03 pm

skwak wrote:
Tue Sep 12, 2017 7:55 pm
Happy to share and I appreciate all the help.

In order to provide proper advice, we would need to know

1) How old are you now? My wife and I are 52.

2) How much investment do you have now? And, where the investment in term of Trad. IRA, Roth IRA, 401K and so on.
In total right now we have:
401K: $215K
Traditional IRAs: $835K
Taxable Investments: $140K

Realistically we should be able to move to an encore career (might be retirement) in 6 years or so. At that time we would have added another $180K to the 401K and likely sold our primary home for a profit of $250K (and moved to our mortgage-free vacation home).


<<I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.[/b]>>

3) If you have a few million now, then, this may be a concern.

4) At your current income, you are paying 28% to 33% Federal tax. How is it possible that Roth 401K is a better deal for you? Especially when you plan to spend 80+K per year = 15% at retirement? Open to suggestions!

KlangFool
Top
skwak,

1) Max up your Trad. 401K now. Your retirement income tax bracket will be much lower than 28%/33%.

2) The amount of money that you have is too low to worry about RMD.

3) You and your wife's social security income is probably around 40K to 50K per year combined. So, you need to spend about 30K to 40K from your portfolio every year.

4) At your portfolio size and spending, why do you need to worry about RMD?

5) If you do worry about RMD, you can do Roth conversion before 70.5 years old at 15% tax bracket.

6) For a couple, you could have a gross income of about 100K and stay at 15% tax bracket. You just Roth convert extra money into Roth IRA every year.

KlangFool

JBTX
Posts: 907
Joined: Wed Jul 26, 2017 12:46 pm

Re: Traditional 401K vs Roth 401K

Post by JBTX » Tue Sep 12, 2017 8:08 pm

skwak wrote:
Tue Sep 12, 2017 7:55 pm
Happy to share and I appreciate all the help.

In order to provide proper advice, we would need to know

1) How old are you now? My wife and I are 52.

2) How much investment do you have now? And, where the investment in term of Trad. IRA, Roth IRA, 401K and so on.
In total right now we have:
401K: $215K
Traditional IRAs: $835K
Taxable Investments: $140K

Realistically we should be able to move to an encore career (might be retirement) in 6 years or so. At that time we would have added another $180K to the 401K and likely sold our primary home for a profit of $250K (and moved to our mortgage-free vacation home).


<<I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.[/b]>>

3) If you have a few million now, then, this may be a concern.

4) At your current income, you are paying 28% to 33% Federal tax. How is it possible that Roth 401K is a better deal for you? Especially when you plan to spend 80+K per year = 15% at retirement? Open to suggestions!

KlangFool
Top

You have roughly in the ballpark of what I have in terms of traditional instruments and similar age. Between a little bit of growth and extra contributions you could be at $1.4 to $1.5 million. It all really depends on how you plan to retire.

You mention that you might decide to do something different later on, which is a perfectly plausible scenario. Many here assume that once people get to retirement age, they will stop working entirely and have zero income. If you have a little bit of income that may get you out of the very bottom brackets - the higher the bracket, the more likely a Roth will look more favorable.

I suspect without playing the numbers out, you will be somewhere on the bubble of the 15-25% tax rate once you start drawing social security. If you are at 15%, then I would agree if nothing changes tax law wise, then traditional is the best bet for you. If you get up into the 25%, then it may be closer to a push, and the Roth gives you some diversification against future tax law changes and more flexibility in dealing with RMD's and estate planning purposes.

It really comes down to how early you will "retire" before drawing SS and whether you do any sort of work or side gigs during that transition period. If you stop working at 60, and wait until 70 until you draw social security, you would probably pull your traditional assets down over the 10 years such that you will stay within 15% tax bracket (or close to it) upon retirement - which would favor traditional. If on the other hand there is a smaller gap between when you stop working and social security, and/or you decide to work a little bit during the gap, there's a good chance you may land in the 25% rate on retirement - which would be a push or maybe slightly favor Roth.

Post Reply