403b vs roth403b

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Tgleaso
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Joined: Fri Apr 27, 2018 11:33 pm

403b vs roth403b

Post by Tgleaso » Fri Apr 27, 2018 11:59 pm

hello,

I can’t seem to find a solid answer to this question. To me a Roth 403b seems like a no brainer over a 403b but no one else is saying so. What is your opinion? Here is my breakdown.

Roth 403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million tax free dollars

403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million taxable dollars (deduct 30% taxes) = 2.75 million
Plus invest 5400 (18000 x 30% tax bracket) =1.18 million=
2.75 + 1.18= 3.934 million

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Earl Lemongrab
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Re: 403b vs roth403b

Post by Earl Lemongrab » Sat Apr 28, 2018 11:36 am

It depends greatly on what your tax rates are now versus when you withdraw the money. It's certainly not a "no-brainer".
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

anonenigma
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Re: 403b vs roth403b

Post by anonenigma » Sat Apr 28, 2018 11:49 am

I don't believe that you've accounted for the taxes you would pay before investing in the Roth 403b. Those are after-tax dollars. Regular 403 is pretax.

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ruralavalon
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Location: Illinois

Re: 403b vs roth403b

Post by ruralavalon » Sat Apr 28, 2018 12:14 pm

Welcome to the forum :) .

This is certainly not a "no brainer".

Tgleaso wrote:
Fri Apr 27, 2018 11:59 pm
hello,

I can’t seem to find a solid answer to this question. To me a Roth 403b seems like a no brainer over a 403b but no one else is saying so. What is your opinion? Here is my breakdown.

Roth 403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million tax free dollars

403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million taxable dollars (deduct 30% taxes) = 2.75 million
Plus invest 5400 (18000 x 30% tax bracket) =1.18 million=
2.75 + 1.18= 3.934 million
Will you have a significant pension? Will you also receive Social Security?

What is your age, occupation, and expected future earning capacity?

Retirement usually means that employment income has ended. Most people are in a lower tax bracket in retirement. The income tax code is progressive, with a lower tax rate for lower income. Therefore, for most people traditional 403b contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

KlangFool
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Re: 403b vs roth403b

Post by KlangFool » Sat Apr 28, 2018 12:29 pm

Tgleaso wrote:
Fri Apr 27, 2018 11:59 pm
hello,

I can’t seem to find a solid answer to this question. To me a Roth 403b seems like a no brainer over a 403b but no one else is saying so. What is your opinion? Here is my breakdown.

Roth 403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million tax free dollars

403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million taxable dollars (deduct 30% taxes) = 2.75 million
Plus invest 5400 (18000 x 30% tax bracket) =1.18 million=
2.75 + 1.18= 3.934 million
Tgleaso,

<< To me a Roth 403b seems like a no brainer over a 403b but no one else is saying so. >>

It is a no-brainer to do the opposite. Contribute to the 403b and put the tax savings into the Roth IRAs. Why would someone choose to pay more taxes by contributing to the Roth 403B? I have no idea.


<< 403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million taxable dollars (deduct 30% taxes) = 2.75 million
Plus invest 5400 (18000 x 30% tax bracket) =1.18 million
>>

Why would someone pay 30% taxes at their retirement? Come on. No one withdraws the whole amount. In fact, this person could spend the 1.18 million from the Roth IRAs and pay 0% tax. Meanwhile, perform Roth conversion of the Trad. 403B at 0%, 10%, and 12% tax.

https://taxfoundation.org/2018-tax-brackets/

Trad. 403B wins.


viewtopic.php?t=87471
<<How to pay ZERO taxes in retirement with 6-figure expenses>>

Please read the above thread.

KlangFool

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FiveK
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Re: 403b vs roth403b

Post by FiveK » Sat Apr 28, 2018 1:19 pm

Tgleaso wrote:
Fri Apr 27, 2018 11:59 pm
To me a Roth 403b seems like a no brainer over a 403b....
Roth 403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million tax free dollars

403b:
Invest $18,000 a year for 30 years at hypothetically 10% return= $3.934 million taxable dollars (deduct 30% taxes) = 2.75 million
Plus invest 5400 (18000 x 30% tax bracket) =1.18 million=
2.75 + 1.18= 3.934 million
The T vs. R wiki article noted by ruralavalon goes into more details on the math, and you may find it worth reading.

With the assumptions behind your analysis, the results are identical. Why does that make Roth seem "a no brainer"?

Tgleaso
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Joined: Fri Apr 27, 2018 11:33 pm

Re: 403b vs roth403b

Post by Tgleaso » Sat Apr 28, 2018 1:51 pm

Thanks for input.. I rescind my “no brainer” comment. I meant to delete that after I started to do the math.
This research all stems from researching my wife’s 403b which is currently through AXA. After minimal research choosing AXA looks like a a disaster. Going to switch to NEA DirectInvest then vanguard funds.

I own a pharmacy (pharmacist) and my wife is a teacher. We are both in our early 30’s. We max out her 403b and Max out our Roth IRA (backdoor). We are ineligible to tax deduct a regular ira. My wife will receive a teachers pension and I would be eligible for social security benefit. Her pension would be 75% her final salary. Let’s say approximately 50k in today’s dollars. I am working on setting up a safe harbor 401k for myself and employees. As a owner my income is largely variable some good years some bad.

Thanks,

Tim

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ruralavalon
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Location: Illinois

Re: 403b vs roth403b

Post by ruralavalon » Sat Apr 28, 2018 1:57 pm

You are right that AXA is a disaster, it's great to see that she can switch her 403b to get Vanguard funds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Tgleaso
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Joined: Fri Apr 27, 2018 11:33 pm

Re: 403b vs roth403b

Post by Tgleaso » Sat Apr 28, 2018 2:00 pm

Why would someone pay 30% taxes at their retirement? Come on. No one withdraws the whole amount. In fact, this person could spend the 1.18 million from the Roth IRAs and pay 0% tax. Meanwhile, perform Roth conversion of the Trad. 403B at 0%, 10%, and 12% tax.

I think I just understood this comment. Is the concept to Use the tax free Roth IRA money first while converting the 403b to a Roth IRA at a lower tax brackets. Tricky! I like it!

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

Re: 403b vs roth403b

Post by KlangFool » Sat Apr 28, 2018 2:19 pm

Tgleaso wrote:
Sat Apr 28, 2018 2:00 pm
Why would someone pay 30% taxes at their retirement? Come on. No one withdraws the whole amount. In fact, this person could spend the 1.18 million from the Roth IRAs and pay 0% tax. Meanwhile, perform Roth conversion of the Trad. 403B at 0%, 10%, and 12% tax.

I think I just understood this comment. Is the concept to Use the tax free Roth IRA money first while converting the 403b to a Roth IRA at a lower tax brackets. Tricky! I like it!
Tgleaso,

Yes.

KlangFool

Ron Ronnerson
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Location: Bay Area

Re: 403b vs roth403b

Post by Ron Ronnerson » Sat Apr 28, 2018 4:10 pm

Traditional accounts offer above line deductions and those can be of great value. Here’s a real-life example (my own). My gross income is $106k as a teacher in the Bay Area. I have access to a traditional 403b and a Roth 403b. I’m expecting a pension of about $90k/year around age 60. You might think a Roth 403b is particularly good in this situation but there is more to consider.

My employer offers health insurance but requires that employees pay the entire cost of coverage. We’re a family of three and the amount would be $24k/year for us to get insurance through my employer for our family. I could also use the health care exchange to buy insurance.

If I use a traditional 403b instead a Roth 403b, it lowers my modified adjusted gross income (MAGI). The traditional 403b, taken along with other above-line deductions such as pension contributions and HSA/FSA accounts, lowers my MAGI enough that it results in my employer’s insurance not meeting the requirements of being considered “affordable” as defined by the rules of the Affordable Care Act. Additionally, it also lowers our MAGI enough that we now qualify for a subsidy on the exchange. Instead of paying $16,000/year for gold level health insurance, we now only have to pay $4,600 and the rest would be covered by the subsidy. For the bronze level coverage, we’d pay $36/year and the subsidy would be $10,000/year.

We could potentially avoid ever paying state taxes on the traditional 403b account as well. When we go to withdraw in retirement, we might be living somewhere without a state income tax (or at least with lower rates than in California).

Situations vary and it’s definitely not a no-brainer to use Roth accounts, even if one is expecting a large pension. You have to consider a variety of factors and look at your particular situation. To make it more fun and complicated, no one knows what tax rates will be in the future.

Tgleaso
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Joined: Fri Apr 27, 2018 11:33 pm

Re: 403b vs roth403b

Post by Tgleaso » Sun Apr 29, 2018 1:27 pm

Ron,

Thanks for additional input. With your info and the info about converting the 403b to a Roth IRA after retirement I can see why a regular 403b is a better option

PFInterest
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Re: 403b vs roth403b

Post by PFInterest » Sun Apr 29, 2018 1:39 pm

Tgleaso wrote:
Sun Apr 29, 2018 1:27 pm
Ron,

Thanks for additional input. With your info and the info about converting the 403b to a Roth IRA after retirement I can see why a regular 403b is a better option
Taadaa!

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