Roth 401k vs. Traditional 401k

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wabash_sphinx
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Roth 401k vs. Traditional 401k

Post by wabash_sphinx » Thu Aug 09, 2018 9:18 pm

Retirement investment question for the Boglehead group:

I have option to start investing in Roth 401k at work. I have been in the traditional 401k.

Current income around 330k putting me at current fed income tax rate of 32%. State tax about 3%
Employer offers traditional 457 plan. I max 401 and 457. There is also a 403 b funded by a small match from my 401k contribution.

I’m trying to decide what’s better between getting the help on lowering taxable income now vs. tax free growth long term. I’m thinking switching to the Roth plan is the answer as retirement is still 20+ years away.

I appreciate your advice in advance.

wabash_sphinx
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Re: Roth 401k vs. Traditional 401k

Post by wabash_sphinx » Thu Aug 09, 2018 9:24 pm

Admin - if seen, please move to board regarding personal investments. Sorry about placing on wrong board.

Silk McCue
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Re: Roth 401k vs. Traditional 401k

Post by Silk McCue » Thu Aug 09, 2018 9:28 pm

It’s a good idea to diversify. Having Tax-deferred, Roth and Taxable when you retire will provide you with a lot of flexibility.

To ask an admin to put this in the correct forum. Click the exclamation icon on your first post and select Wrong Forum, then submit the request

Edit: I reported it for you.

Cheers

wabash_sphinx
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Re: Roth 401k vs. Traditional 401k

Post by wabash_sphinx » Thu Aug 09, 2018 9:35 pm

Silk McCue wrote:
Thu Aug 09, 2018 9:28 pm
It’s a good idea to diversify. Having Tax-deferred, Roth and Taxable when you retire will provide you with a lot of flexibility.

To ask an admin to put this in the correct forum. Click the exclamation icon on your first post and select Wrong Forum, then submit the request

Edit: I reported it for you.

Cheers
Thank you to both pieces of advice!

uslee2004
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Re: Roth 401k vs. Traditional 401k

Post by uslee2004 » Thu Aug 09, 2018 9:45 pm

At that level of income, regular (tax deductable) 401k plus back-door Roth IRA likely is the best option. This is unless you are sure that you will stay at 30+% income tax rate for ever.
uslee

KlangFool
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Re: Roth 401k vs. Traditional 401k

Post by KlangFool » Thu Aug 09, 2018 9:46 pm

OP,


<<Current income around 330k putting me at current fed income tax rate of 32%. State tax about 3%
Employer offers traditional 457 plan. I max 401 and 457. There is also a 403 b funded by a small match from my 401k contribution.

I’m trying to decide what’s better between getting the help on lowering taxable income now vs. tax free growth long term. I’m thinking switching to the Roth plan is the answer as retirement is still 20+ years away.>>

Trad. 401K is the right answer for you.

In order to generate 330K of income at retirement, you need at least 25X 330K = 8.25 million. You will retire way before that time.

KlangFool

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Re: Roth 401k vs. Traditional 401k

Post by LadyGeek » Thu Aug 09, 2018 10:12 pm

wabash_sphinx wrote:
Thu Aug 09, 2018 9:24 pm
Admin - if seen, please move to board regarding personal investments. Sorry about placing on wrong board.
Sure, no problem. This thread is now in the Investing - Help with Personal Investments forum (portfolio help). This isn't a big deal, don't worry about it.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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patrick013
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Re: Roth 401k vs. Traditional 401k

Post by patrick013 » Thu Aug 09, 2018 10:18 pm

age in bonds, buy-and-hold, 10 year business cycle

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FiveK
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Re: Roth 401k vs. Traditional 401k

Post by FiveK » Fri Aug 10, 2018 12:52 am

wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Current income around 330k putting me at current fed income tax rate of 32%.
You need at least $339K from wage income alone to reach the 32% bracket (at which point you pay at least 32.9% due to the Additional Medicare Tax).

For MFJ it takes ~$8.5 million in traditional assets to reach the 32% bracket using a 4% withdrawal rate as your only income. It takes ~$4.7 million to reach the 24% bracket.

Thus, three questions:
1) What is your actual marginal tax saving rate on t401k contributions?
2) If you stopped making traditional contributions now, what do you expect for a traditional balance at retirement?
3) What "guaranteed" income (i.e., other than withdrawals from investments) do you expect at retirement?

wabash_sphinx
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Re: Roth 401k vs. Traditional 401k

Post by wabash_sphinx » Fri Aug 10, 2018 6:16 am

FiveK wrote:
Fri Aug 10, 2018 12:52 am
wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Current income around 330k putting me at current fed income tax rate of 32%.
You need at least $339K from wage income alone to reach the 32% bracket (at which point you pay at least 32.9% due to the Additional Medicare Tax).

For MFJ it takes ~$8.5 million in traditional assets to reach the 32% bracket using a 4% withdrawal rate as your only income. It takes ~$4.7 million to reach the 24% bracket.

Thus, three questions:
1) What is your actual marginal tax saving rate on t401k contributions?
2) If you stopped making traditional contributions now, what do you expect for a traditional balance at retirement?
3) What "guaranteed" income (i.e., other than withdrawals from investments) do you expect at retirement?
My income is expected to fluctuate over the next couple decades. I expect to stay 300-350k year. I don’t expect a lot of growth, but in a medical field with stability.

1 - what is the best way to calculate that?
2 - There is about 250k in traditional now (401k and 457). Expecting conservative 8% return annually, that would give me about 1.2mil in 20 years if I didn’t add any more. I will continue to add max to 457, so thats not perfect math there, but hope that helps.
3 - very little. Social security is likely to be of some minimal income. Beyond that I have some minor real estate investments that may be around 10k/year.

Thanks for the help

Grogs
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Re: Roth 401k vs. Traditional 401k

Post by Grogs » Fri Aug 10, 2018 6:25 am

uslee2004 wrote:
Thu Aug 09, 2018 9:45 pm
At that level of income, regular (tax deductable) 401k plus back-door Roth IRA likely is the best option. This is unless you are sure that you will stay at 30+% income tax rate for ever.
This would be my suggestion if your 401k plan allows it. Put the full 18.5 into traditional, then anything beyond that into after tax and do a backdoor Roth. That would give you a diversification of both pretax and after tax investments you could pull from each year based on circumstances.

KlangFool
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Re: Roth 401k vs. Traditional 401k

Post by KlangFool » Fri Aug 10, 2018 6:47 am

wabash_sphinx wrote:
Fri Aug 10, 2018 6:16 am
FiveK wrote:
Fri Aug 10, 2018 12:52 am
wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Current income around 330k putting me at current fed income tax rate of 32%.
You need at least $339K from wage income alone to reach the 32% bracket (at which point you pay at least 32.9% due to the Additional Medicare Tax).

For MFJ it takes ~$8.5 million in traditional assets to reach the 32% bracket using a 4% withdrawal rate as your only income. It takes ~$4.7 million to reach the 24% bracket.

Thus, three questions:
1) What is your actual marginal tax saving rate on t401k contributions?
2) If you stopped making traditional contributions now, what do you expect for a traditional balance at retirement?
3) What "guaranteed" income (i.e., other than withdrawals from investments) do you expect at retirement?
My income is expected to fluctuate over the next couple decades. I expect to stay 300-350k year. I don’t expect a lot of growth, but in a medical field with stability.

1 - what is the best way to calculate that?
2 - There is about 250k in traditional now (401k and 457). Expecting conservative 8% return annually, that would give me about 1.2mil in 20 years if I didn’t add any more. I will continue to add max to 457, so thats not perfect math there, but hope that helps.
3 - very little. Social security is likely to be of some minimal income. Beyond that I have some minor real estate investments that may be around 10k/year.

Thanks for the help
Why do you need to forecast? If and when your tax-defered account balance cross 4 million, you may reconsider whether Roth 401K make sense.

KlangFool

basspond
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Re: Roth 401k vs. Traditional 401k

Post by basspond » Fri Aug 10, 2018 7:15 am

It has served me well in retirement to have three pots of money, before, after, and Roth tax accounts. Gives me more flexibility. With that said though, Roth came later in my career so I am a little light in that bucket and not willing to fork over a lot of money to the government to convert. I would split the Roth and 401 anywhere between 40-60%.

PFInterest
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Re: Roth 401k vs. Traditional 401k

Post by PFInterest » Fri Aug 10, 2018 7:32 am

wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Retirement investment question for the Boglehead group:

I have option to start investing in Roth 401k at work. I have been in the traditional 401k.

Current income around 330k putting me at current fed income tax rate of 32%. State tax about 3%
Employer offers traditional 457 plan. I max 401 and 457. There is also a 403 b funded by a small match from my 401k contribution.

I’m trying to decide what’s better between getting the help on lowering taxable income now vs. tax free growth long term. I’m thinking switching to the Roth plan is the answer as retirement is still 20+ years away.

I appreciate your advice in advance.
t401k/457 and backdoor rIRA.
r401k/457 is likely not the answer for you.

PFInterest
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Re: Roth 401k vs. Traditional 401k

Post by PFInterest » Fri Aug 10, 2018 7:33 am

wabash_sphinx wrote:
Fri Aug 10, 2018 6:16 am
FiveK wrote:
Fri Aug 10, 2018 12:52 am
wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Current income around 330k putting me at current fed income tax rate of 32%.
You need at least $339K from wage income alone to reach the 32% bracket (at which point you pay at least 32.9% due to the Additional Medicare Tax).

For MFJ it takes ~$8.5 million in traditional assets to reach the 32% bracket using a 4% withdrawal rate as your only income. It takes ~$4.7 million to reach the 24% bracket.

Thus, three questions:
1) What is your actual marginal tax saving rate on t401k contributions?
2) If you stopped making traditional contributions now, what do you expect for a traditional balance at retirement?
3) What "guaranteed" income (i.e., other than withdrawals from investments) do you expect at retirement?
My income is expected to fluctuate over the next couple decades. I expect to stay 300-350k year. I don’t expect a lot of growth, but in a medical field with stability.

1 - what is the best way to calculate that?
2 - There is about 250k in traditional now (401k and 457). Expecting conservative 8% return annually, that would give me about 1.2mil in 20 years if I didn’t add any more. I will continue to add max to 457, so thats not perfect math there, but hope that helps.
3 - very little. Social security is likely to be of some minimal income. Beyond that I have some minor real estate investments that may be around 10k/year.

Thanks for the help
8% is not conservative. that might be reaching a little bit at this current stage.

PFInterest
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Re: Roth 401k vs. Traditional 401k

Post by PFInterest » Fri Aug 10, 2018 7:35 am

basspond wrote:
Fri Aug 10, 2018 7:15 am
It has served me well in retirement to have three pots of money, before, after, and Roth tax accounts. Gives me more flexibility. With that said though, Roth came later in my career so I am a little light in that bucket and not willing to fork over a lot of money to the government to convert. I would split the Roth and 401 anywhere between 40-60%.
nope.

wabash_sphinx
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Re: Roth 401k vs. Traditional 401k

Post by wabash_sphinx » Fri Aug 10, 2018 9:08 am

Thanks to everyone.

Should have mentioned I am maxing backdoor Roth for wife and I. Sounds like that is best way to go with continued traditional for now.
Thanks again, this group continues to amaze!

MichCPA
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Re: Roth 401k vs. Traditional 401k

Post by MichCPA » Fri Aug 10, 2018 9:17 am

patrick013 wrote:
Thu Aug 09, 2018 10:18 pm
3 reasons to invest in a Roth 
It should be noted that the no RMD aspect of Roth IRAs does not apply to a Roth 401k, but you can (should?) convert a Roth 401k to a Roth IRA at separation to avoid this issue.

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FiveK
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Re: Roth 401k vs. Traditional 401k

Post by FiveK » Fri Aug 10, 2018 10:40 am

wabash_sphinx wrote:
Fri Aug 10, 2018 6:16 am
FiveK wrote:
Fri Aug 10, 2018 12:52 am
wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Current income around 330k putting me at current fed income tax rate of 32%.
You need at least $339K from wage income alone to reach the 32% bracket (at which point you pay at least 32.9% due to the Additional Medicare Tax).

For MFJ it takes ~$8.5 million in traditional assets to reach the 32% bracket using a 4% withdrawal rate as your only income. It takes ~$4.7 million to reach the 24% bracket.

Thus, three questions:
1) What is your actual marginal tax saving rate on t401k contributions?
2) If you stopped making traditional contributions now, what do you expect for a traditional balance at retirement?
3) What "guaranteed" income (i.e., other than withdrawals from investments) do you expect at retirement?
My income is expected to fluctuate over the next couple decades. I expect to stay 300-350k year. I don’t expect a lot of growth, but in a medical field with stability.

1 - what is the best way to calculate that?
2 - There is about 250k in traditional now (401k and 457). Expecting conservative 8% return annually, that would give me about 1.2mil in 20 years if I didn’t add any more. I will continue to add max to 457, so thats not perfect math there, but hope that helps.
3 - very little. Social security is likely to be of some minimal income. Beyond that I have some minor real estate investments that may be around 10k/year.

Thanks for the help
1. Best is in the eye of the beholder, but one way is to put your situation into the personal finance toolbox spreadsheet and read the marginal rate chart there.
2&3. Given that, it appears you will save more now and pay less later if you use 100% traditional now. You can always revisit this choice in subsequent years, but unless there are significant changes the answer will likely be the same. See also Traditional versus Roth - Bogleheads.

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FiveK
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Re: Roth 401k vs. Traditional 401k

Post by FiveK » Fri Aug 10, 2018 10:44 am

KlangFool wrote:
Fri Aug 10, 2018 6:47 am
Why do you need to forecast? If and when your tax-defered account balance cross 4 million, you may reconsider whether Roth 401K make sense.

KlangFool
It's a question of what one assumes for investment growth. Waiting until the actual balance reaches a certain level is the same as assuming 0% growth.

That might be a correct assumption or an incorrect assumption - the same that can be said about any other assumption.

KlangFool
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Re: Roth 401k vs. Traditional 401k

Post by KlangFool » Fri Aug 10, 2018 11:07 am

FiveK wrote:
Fri Aug 10, 2018 10:44 am
KlangFool wrote:
Fri Aug 10, 2018 6:47 am
Why do you need to forecast? If and when your tax-defered account balance cross 4 million, you may reconsider whether Roth 401K make sense.

KlangFool
It's a question of what one assumes for investment growth. Waiting until the actual balance reaches a certain level is the same as assuming 0% growth.

That might be a correct assumption or an incorrect assumption - the same that can be said about any other assumption.
FiveK,

I disagreed. OP's crossover point is 8.5 million. At 4 million, he has plenty of time to adjust his Roth 401K versus Trad. 401K allocation without adverse effect. At this moment, it is far too early to switch to Roth 401K.

Only change to Roth 401K when it matters.

KlangFool

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Re: Roth 401k vs. Traditional 401k

Post by Admiral » Fri Aug 10, 2018 11:09 am

Note that your heirs (non-spouse that is) would be required to take RMDs from an inherited Roth IRA (assuming you would convert from a Roth 401k). The RMD of an inherited Roth is not a taxable event, but--unlike you--they cannot sit on the money forever and allow it to grow.

You have high income and one would assume if you keep saving, in 20 years you will have many millions. Just another thing to consider, if you plan/hope to leave an estate.

Personally I think a mix of account types is preferable, with the max in a traditional account. This is also important if you plan to retire early.

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FiveK
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Re: Roth 401k vs. Traditional 401k

Post by FiveK » Fri Aug 10, 2018 11:15 am

KlangFool wrote:
Fri Aug 10, 2018 11:07 am
FiveK wrote:
Fri Aug 10, 2018 10:44 am
KlangFool wrote:
Fri Aug 10, 2018 6:47 am
Why do you need to forecast? If and when your tax-defered account balance cross 4 million, you may reconsider whether Roth 401K make sense.

KlangFool
It's a question of what one assumes for investment growth. Waiting until the actual balance reaches a certain level is the same as assuming 0% growth.

That might be a correct assumption or an incorrect assumption - the same that can be said about any other assumption.
FiveK,

I disagreed. OP's crossover point is 8.5 million. At 4 million, he has plenty of time to adjust his Roth 401K versus Trad. 401K allocation without adverse effect. At this moment, it is far too early to switch to Roth 401K.

Only change to Roth 401K when it matters.

KlangFool
OK, I thought you were using the 24% bracket number which is ~$4 million. And they are unlikely to reach even that number so traditional remains preferable.

JBTX
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Re: Roth 401k vs. Traditional 401k

Post by JBTX » Fri Aug 10, 2018 11:57 am

While I think it is good to have both, at a 35% I would go traditional. I'm going to bet that somewhere down the road I'll be able to do conversions at a lower rate. It's hard to pass up a 35% up front tax break.

H-Town
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Re: Roth 401k vs. Traditional 401k

Post by H-Town » Fri Aug 10, 2018 12:41 pm

wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Retirement investment question for the Boglehead group:

I have option to start investing in Roth 401k at work. I have been in the traditional 401k.

Current income around 330k putting me at current fed income tax rate of 32%. State tax about 3%
Employer offers traditional 457 plan. I max 401 and 457. There is also a 403 b funded by a small match from my 401k contribution.

I’m trying to decide what’s better between getting the help on lowering taxable income now vs. tax free growth long term. I’m thinking switching to the Roth plan is the answer as retirement is still 20+ years away.

I appreciate your advice in advance.
I would stick to traditional 401k. My rule of thumb is either you do Roth 401k early when you're in lower tax bracket or do it later when you achieve financial independence before the age of 60. Let's say you achieve your number and retire at 50. You'll have until your RMD to convert to Roth IRA with no earned income.

At 35% fed and state rate right now, it's tough to do Roth 401k tbh.

wabash_sphinx
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Re: Roth 401k vs. Traditional 401k

Post by wabash_sphinx » Fri Aug 10, 2018 12:52 pm

thangngo wrote:
Fri Aug 10, 2018 12:41 pm
wabash_sphinx wrote:
Thu Aug 09, 2018 9:18 pm
Retirement investment question for the Boglehead group:

I have option to start investing in Roth 401k at work. I have been in the traditional 401k.

Current income around 330k putting me at current fed income tax rate of 32%. State tax about 3%
Employer offers traditional 457 plan. I max 401 and 457. There is also a 403 b funded by a small match from my 401k contribution.

I’m trying to decide what’s better between getting the help on lowering taxable income now vs. tax free growth long term. I’m thinking switching to the Roth plan is the answer as retirement is still 20+ years away.

I appreciate your advice in advance.
I would stick to traditional 401k. My rule of thumb is either you do Roth 401k early when you're in lower tax bracket or do it later when you achieve financial independence before the age of 60. Let's say you achieve your number and retire at 50. You'll have until your RMD to convert to Roth IRA with no earned income.

At 35% fed and state rate right now, it's tough to do Roth 401k tbh.
Can you elaborate on why you would change to Roth after Financial Independence?

I’m in young 30s so hope to be there well before typical retirement age. Not sure if that changes any of the thought process. My thought is that I will have a long time for money to grow tax free vs. taxed, which is why I initially thought Roth 401k would be preferred.

H-Town
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Re: Roth 401k vs. Traditional 401k

Post by H-Town » Fri Aug 10, 2018 1:02 pm

wabash_sphinx wrote:
Fri Aug 10, 2018 12:52 pm

Can you elaborate on why you would change to Roth after Financial Independence?

I’m in young 30s so hope to be there well before typical retirement age. Not sure if that changes any of the thought process. My thought is that I will have a long time for money to grow tax free vs. taxed, which is why I initially thought Roth 401k would be preferred.
Roth 401k does offer you grow tax free but don't forget that the tax you save from traditional 401k can also grow and you can use it to pay tax later. In other words, if your tax rate now is 35% and your tax rate in the future when you retire is 35%, it will be a wash as you'd end up at the same place.

The tax planning opportunities here is to choose when to pay tax at the lowest rate possible. I chose to prepay tax at early in my career when I was at 25% rate. Then, when I retire early with no earned income, I might be able to start with 0% tax bracket.

1CEBITN
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Re: Roth 401k vs. Traditional 401k

Post by 1CEBITN » Fri Aug 10, 2018 1:40 pm

I'm in a similar situation as the OP and I am doing 100% Roth now because I didn't have the Roth option when I started working. I'm going for a 50/50 split between the two for flexibility but will slowly convert those to Roth when I am in the 0% bracket while living off my Roth contributions. I don't really care what the current taxes are, that makes zero difference in this decision imho. There is no way to know what taxes will be in 20 years so it is a gamble either way and I'd rather have zero taxes and no RMDs in retirement. I should be able to fill up whatever lower brackets exist by slowly converting my traditional before I hit 70 and have to start taking RMDs. Those are the real killer for the tIRA in my opinion.

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camillus
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Re: Roth 401k vs. Traditional 401k

Post by camillus » Fri Aug 10, 2018 1:49 pm

Keep in mind that closer to retirement, different assets can be held in different places. For example, your Roth accounts can then hold 100% equities and your deferred accounts can hold all of your bonds and perhaps large cap stocks. This will promote the growth of Roth money and the slowing of deferred money, while merely implementing your chosen asset allocation.

Closer to retirement, you are likely to have a decent position in bonds. Also, in the scenario where you have "too much money" perhaps you have more of a position in bonds at that time than you might now imagine - you having won the game, and thus not needing to play as hard.

Tax efficient fund placement might be more of a lever at that point than contributions - if your goal at that later time is to minimize the growth of deferred accounts.

If you don't get things right via contributions at today's stage, you will have more solutions in the future. It's hard to pass up the tax break right now.

H-Town
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Re: Roth 401k vs. Traditional 401k

Post by H-Town » Fri Aug 10, 2018 1:59 pm

1CEBITN wrote:
Fri Aug 10, 2018 1:40 pm
I'm in a similar situation as the OP and I am doing 100% Roth now because I didn't have the Roth option when I started working. I'm going for a 50/50 split between the two for flexibility but will slowly convert those to Roth when I am in the 0% bracket while living off my Roth contributions. I don't really care what the current taxes are, that makes zero difference in this decision imho. There is no way to know what taxes will be in 20 years so it is a gamble either way and I'd rather have zero taxes and no RMDs in retirement. I should be able to fill up whatever lower brackets exist by slowly converting my traditional before I hit 70 and have to start taking RMDs. Those are the real killer for the tIRA in my opinion.
I just think that 35% and higher rate is a tough pill to swallow. I cannot consciously choose to pay tax at 35% margin rate. I'll do 401k at the rate with take my chances.

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FiveK
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Re: Roth 401k vs. Traditional 401k

Post by FiveK » Fri Aug 10, 2018 2:27 pm

1CEBITN wrote:
Fri Aug 10, 2018 1:40 pm
I don't really care what the current taxes are, that makes zero difference in this decision....
With that taken out of the analysis, you may indeed justify pretty much any decision.

What your current tax rate is now, and what you pay when you withdraw later, will determine the result of that decision.

PFInterest
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Re: Roth 401k vs. Traditional 401k

Post by PFInterest » Fri Aug 10, 2018 6:30 pm

1CEBITN wrote:
Fri Aug 10, 2018 1:40 pm
I'm in a similar situation as the OP and I am doing 100% Roth now because I didn't have the Roth option when I started working. I'm going for a 50/50 split between the two for flexibility but will slowly convert those to Roth when I am in the 0% bracket while living off my Roth contributions. I don't really care what the current taxes are, that makes zero difference in this decision imho. There is no way to know what taxes will be in 20 years so it is a gamble either way and I'd rather have zero taxes and no RMDs in retirement. I should be able to fill up whatever lower brackets exist by slowly converting my traditional before I hit 70 and have to start taking RMDs. Those are the real killer for the tIRA in my opinion.
you shouldnt.
why would you pull out Roth contributions? that defeats the entire purpose. thats what a taxable account is for.
you should care, it literally decides what you should do.
if you re already planning Roth conversions (low income/early retirement years) this further sways you away from Roth contributions.
do you already have over 4MM in tIRAs?

1CEBITN
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Re: Roth 401k vs. Traditional 401k

Post by 1CEBITN » Sat Aug 11, 2018 1:33 pm

FiveK wrote:
Fri Aug 10, 2018 2:27 pm
1CEBITN wrote:
Fri Aug 10, 2018 1:40 pm
I don't really care what the current taxes are, that makes zero difference in this decision....
With that taken out of the analysis, you may indeed justify pretty much any decision.

What your current tax rate is now, and what you pay when you withdraw later, will determine the result of that decision.
How can you leave it in the analysis if you don't know what taxes will be later in life? Like you said, unless you know what taxes are now AND what they will be in 20 years you can't make an informed decision. Since you don't have both of those facts currently but you have to decide where to put money now, how do you make the decision? I think a 50/50 split is about as good a decision as you can make and it has nothing to do with current taxes because they are meaningless without future tax information. It's not like the OP is going to make less money and move down a bracket or two so is he just never going to do any Roth contributions solely because of his tax bracket? That just seems illogical to me, that's all I'm saying.

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FiveK
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Re: Roth 401k vs. Traditional 401k

Post by FiveK » Sat Aug 11, 2018 1:50 pm

1CEBITN wrote:
Sat Aug 11, 2018 1:33 pm
FiveK wrote:
Fri Aug 10, 2018 2:27 pm
1CEBITN wrote:
Fri Aug 10, 2018 1:40 pm
I don't really care what the current taxes are, that makes zero difference in this decision....
With that taken out of the analysis, you may indeed justify pretty much any decision.
What your current tax rate is now, and what you pay when you withdraw later, will determine the result of that decision.
How can you leave it in the analysis if you don't know what taxes will be later in life?
It's easy to leave the known rate in the analysis.
Like you said, unless you know what taxes are now AND what they will be in 20 years you can't make an informed decision. Since you don't have both of those facts currently but you have to decide where to put money now, how do you make the decision? I think a 50/50 split is about as good a decision as you can make and it has nothing to do with current taxes because they are meaningless without future tax information.
A 50/50 split does have the characteristic that you won't be more than half wrong.
It's not like the OP is going to make less money and move down a bracket or two so is he just never going to do any Roth contributions solely because of his tax bracket? That just seems illogical to me, that's all I'm saying.
If his tax bracket is currently much higher than what he expects to pay when withdrawing, then it logically follows that 100% traditional and 0% Roth is the indicated course of action. It may turn out to be incorrect if his expectation is not correct, but it is logical.

JBTX
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Re: Roth 401k vs. Traditional 401k

Post by JBTX » Sat Aug 11, 2018 2:12 pm

1CEBITN wrote:
Sat Aug 11, 2018 1:33 pm
FiveK wrote:
Fri Aug 10, 2018 2:27 pm
1CEBITN wrote:
Fri Aug 10, 2018 1:40 pm
I don't really care what the current taxes are, that makes zero difference in this decision....
With that taken out of the analysis, you may indeed justify pretty much any decision.

What your current tax rate is now, and what you pay when you withdraw later, will determine the result of that decision.
How can you leave it in the analysis if you don't know what taxes will be later in life? Like you said, unless you know what taxes are now AND what they will be in 20 years you can't make an informed decision. Since you don't have both of those facts currently but you have to decide where to put money now, how do you make the decision? I think a 50/50 split is about as good a decision as you can make and it has nothing to do with current taxes because they are meaningless without future tax information. It's not like the OP is going to make less money and move down a bracket or two so is he just never going to do any Roth contributions solely because of his tax bracket? That just seems illogical to me, that's all I'm saying.
You know your current rate, and can make an educated guess on your future rate. Of course it is based upon a lot of assumptions, but all of our investing is based on evidence based assumptions. We assume stocks will go up over the longer term, and exceed the return of bonds. That is likely to be true, the longer your horizons, but there are no guarantees.

You know what the tax code is now. You know that by law it reverts in 2026. You can do reasonable estimates of what your retirement income stream may be. But of course tax laws will likely change and your income stream could change vs projected.

So it is about making educated guesses based upon perceived probabilities and your individual situation. For most people, if they are in a 35% tax bracket, the probability is pretty high that somewhere down the road their marginal rate will be lower. Maybe by retiring before receiving social security. Or maybe by a protracted period of unemployment or disability. Obviously there are no guarantees, but it is a fairly high probability gamble most people are willing to take, just like stocks investing is a gamble but with a high probability of long term success.

I fully embrace having both traditional and Roths. I have almost 50/50. 20 years ago I did Roth conversions at marginal rates of approx 28%. At the time tax rates were higher. I probably wouldn't do Roth conversions now at 28%, but I don't regret doing them because now I have a decent chunk in Roths. For me personally I would consider Roth conversions at marginal rates of mid 20's. But I would not consider them in the mid 30s.

1CEBITN
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Joined: Mon May 07, 2018 2:14 pm

Re: Roth 401k vs. Traditional 401k

Post by 1CEBITN » Sat Aug 11, 2018 2:23 pm

FiveK wrote:
Sat Aug 11, 2018 1:50 pm
If his tax bracket is currently much higher than what he expects to pay when withdrawing, then it logically follows that 100% traditional and 0% Roth is the indicated course of action. It may turn out to be incorrect if his expectation is not correct, but it is logical.
What you expect to pay in retirement is not something based on fact so that isn't logical, you are taking a calculated guess based on current tax code. You could just as easily be 100% wrong as 100% right. Using the same argument though, if he expects to be paying the same or more taxes at retirement then it is just as "logical" to do 100% Roth and 0% traditional. That's the point I was making.

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FiveK
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Re: Roth 401k vs. Traditional 401k

Post by FiveK » Sat Aug 11, 2018 2:45 pm

1CEBITN wrote:
Sat Aug 11, 2018 2:23 pm
Using the same argument though, if he expects to be paying the same or more taxes at retirement then it is just as "logical" to do 100% Roth and 0% traditional. That's the point I was making.
Exactly!

You take your best guess and do what follows logically from that guess. If you have no guess at all, then 50/50 does hedge against being more than 1/2 wrong. Some people will feel more comfortable estimating their retirement income than others.

One can always toss in some "what about...?"s such as
- a switch from income to consumption taxation (would favor traditional now)
- across-the-board doubling of all income tax rates (would favor Roth now)
- etc.
...but one should estimate the probability of any of those, and then take action accordingly.

It would be illogical for one to say "I expect to pay a lower rate in retirement so I'll contribute to Roth now," or "I expect to pay a higher rate in retirement so I'll contribute to traditional now."

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