Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

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corp_sharecropper
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Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by corp_sharecropper » Sun Nov 03, 2019 5:45 pm

If you haven't or can't max out pre-tax contributions to a 401k, in other words you still have room left, it would seem to me, and I admit I haven't spent much time thinking about it, that the older you get (or the closer to retirement you get) the more the benefits of tax free growth diminishes. Let's assume we're not concerned with having money to pass on to heirs here. Wouldn't there be some point, in age or years until retirement, that it would just make more sense to put additional funds in pre-tax accounts of there's still room?

I know some people recommend maxing pre-tax before Roth IRA anyway and so would never even be in this situation. I can understand that, and again, I admit I haven't thought this all the way through, but the more I think about what tax free growth and no RMDs mean, the more I can't help but think what an enormous advantage it would be to have been building up a Roth IRA from day 1 of starting a career. I'm 38 now, I know that's plenty young still in most peoples' eyes, and certainly still young enough to benefit from tax free growth, but I can't help but wish I knew what I know now, or was even just aware of this whole topic, in my early 20's. Is there an age at which it definitely just makes sense, as in not much of a debate, to fill out pre-tax capacity as opposed to a Roth? Does investment/market performance factor in? At first thought I don't see why it would but maybe I'm not considering the right factors.

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sometimesinvestor
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by sometimesinvestor » Sun Nov 03, 2019 6:02 pm

My own view is that its an income thing.. If you are in the 30+% The traditional is clearly right, If you are in the 20's split or decide on other factors . Below 20 go for Roth.If you retire at or below age 70 consider roth conversions if they make sense.A trap to avoid is having RMD's help put you in your highest ever tax bracket

Longdog
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Longdog » Sun Nov 03, 2019 6:03 pm

Generally, if your current marginal tax bracket is higher than your expected tax bracket in retirement, than pre-tax contributions make the most sense. If the opposite is the case, then Roth contributions are generally more beneficial.
Steve

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Brianmcg321
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Brianmcg321 » Sun Nov 03, 2019 6:04 pm

Just use the Roth IRAs last to increase the tax free growth as much as possible.

You want to use up more tax deferred before you start having to take RMDs.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

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Watty
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Watty » Sun Nov 03, 2019 6:39 pm

Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?
To me assuming that there is not as easy choice then it is just the opposite and it becomes easier to justify a Roth the closer you get to retirement because your likely retirement situation become clearer.

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Ben Mathew
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Ben Mathew » Sun Nov 03, 2019 7:21 pm

The time horizon does not directly affect the Roth vs traditional calculation in the way you describe. Only the prevailing marginal income tax rates do.

If you have $X pre-tax today, you will get:

Traditional: X*(1+investment growth)*(1- marginal income tax at withdrawal)
Roth: X*(1- marginal income tax rate today)*(1+investment growth)

If marginal income tax rates are the same today as it is at withdrawal, then both accounts will yield the same amount after taxes. Time horizon does not directly enter the picture. (It can however affect things indirectly by affecting the marginal tax rates.)

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Wiggums
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Wiggums » Sun Nov 03, 2019 7:27 pm

Ben Mathew wrote:
Sun Nov 03, 2019 7:21 pm
The time horizon does not directly affect the Roth vs traditional calculation in the way you describe. Only the prevailing marginal income tax rates do.

If you have $X pre-tax today, you will get:

Traditional: X*(1+investment growth)*(1- marginal income tax at withdrawal)
Roth: X*(1- marginal income tax rate today)*(1+investment growth)

If marginal income tax rates are the same today as it is at withdrawal, then both accounts will yield the same amount after taxes. Time horizon does not directly enter the picture. (It can however affect things indirectly by affecting the marginal tax rates.)
+1

Luckywon
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Luckywon » Sun Nov 03, 2019 7:36 pm

For some people, some of the money distributed from retirement accounts may be taxed at less than the marginal rate, as the tax buckets are being "filled up" so shouldn't that be taken into account too?

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CABob
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by CABob » Sun Nov 03, 2019 8:42 pm

I can't provide definitive guidance or answer to your question but my personal experience might be of interest. The Roth IRA came along as I was in my mid to late 50's as I was just starting to think about retirement. My thoughts and conclusion at the time was that I just did not have enough time for contributions to make it worthwhile so I did not contribute. Now 20 years or so later I think this might have been one (perhaps of many) of my investing mistakes. Having the Roth in my later years would have provided some options as far as contributions, withdrawals, asset locations and inheritance considerations and I think it would have had many advantages if I had contributed at the time.
Bob

peseta
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by peseta » Sun Nov 03, 2019 9:13 pm

You hear "experts" say from time to time that you should do Roth when young, and traditional when old. That's incomplete at best. As Ben Mathew points out, the math doesn't change the older you get.

Folks say this probably as an oversimplification: the older you are, the more money you are likely to make (which isn't always the case, of course). What really drives the decision is the marginal tax rate. What rate should be the decision point is always a matter of intense debate around here, of course . . .

peseta

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FiveK
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by FiveK » Mon Nov 04, 2019 4:38 am

Luckywon wrote:
Sun Nov 03, 2019 7:36 pm
For some people, some of the money distributed from retirement accounts may be taxed at less than the marginal rate, as the tax buckets are being "filled up" so shouldn't that be taken into account too?
Although it may seem that way at first thought, for any new contribution the withdrawal buckets are already "spoken for" up to whatever level due to previous contributions, so those new contributions will be taxed at a marginal rate when withdrawn.

See the first of two Common misconceptions for more details.

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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Ready3Retire » Mon Nov 04, 2019 5:47 am

This Kitces article may be helpful (https://www.kitces.com/blog/roth-vs-tra ... h-is-best/ )
There are only four factors that impact the wealth outcome when choosing between a Roth or traditional IRA (or other retirement account). They are: current vs future tax rates, the impact of required minimum distributions, the opportunity to avoid using up the contribution limit with an embedded tax liability, and the impact of state (but not Federal) estate taxes.
Personally, I am 59 yrs old MFJ and squarely in the 22% tax bracket, and expect to remain there after retirement. I max my 401K and Roth IRA contributions each year and have about 1 year until retirement. I'm growing concerned RMD's will push me to a higher brkt given I will have a $70K pension.
My total retirement savings are about 78% tax deferred (401K & tIRA), and only 10% Roth, so I've recently split my 401K contributions to half in Roth 401K. This will still keep me in the 22% tax brkt but bump up my overall Roth/Tax free percentage. I figure this is really just getting a jump start on Roth conversions which i-orp says I should do prior to 70 1/2 years old.

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FiveK
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by FiveK » Mon Nov 04, 2019 6:07 am

Ready3Retire wrote:
Mon Nov 04, 2019 5:47 am
...squarely in the 22% tax bracket, and expect to remain there after retirement. I max my 401K....
If that is your expectation and contribution amount, the indicated action is to go 100% Roth because a tie goes to the Roth when Maxing out your retirement accounts.

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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Ready3Retire » Mon Nov 04, 2019 6:56 am

If that is your expectation and contribution amount, the indicated action is to go 100% Roth because a tie goes to the Roth when Maxing out your retirement accounts.
Sorry, I should have mentioned, 1/2 401K Roth contributions will keep me in the 22% tax bracket. 100% will push me up to 25% marginal tax bracket. So, half, or up to the top of the 22% tax bracket, makes the most sense to me. Thanks.

Rxwolf
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by Rxwolf » Mon Nov 04, 2019 11:36 am

Ready3Retire wrote:
Mon Nov 04, 2019 5:47 am
This Kitces article may be helpful (https://www.kitces.com/blog/roth-vs-tra ... h-is-best/ )
There are only four factors that impact the wealth outcome when choosing between a Roth or traditional IRA (or other retirement account). They are: current vs future tax rates, the impact of required minimum distributions, the opportunity to avoid using up the contribution limit with an embedded tax liability, and the impact of state (but not Federal) estate taxes.
Personally, I am 59 yrs old MFJ and squarely in the 22% tax bracket, and expect to remain there after retirement. I max my 401K and Roth IRA contributions each year and have about 1 year until retirement. I'm growing concerned RMD's will push me to a higher brkt given I will have a $70K pension.
My total retirement savings are about 78% tax deferred (401K & tIRA), and only 10% Roth, so I've recently split my 401K contributions to half in Roth 401K. This will still keep me in the 22% tax brkt but bump up my overall Roth/Tax free percentage. I figure this is really just getting a jump start on Roth conversions which i-orp says I should do prior to 70 1/2 years old.
I disagree.

Using dave ramsey investment calc: https://www.daveramsey.com/smartvestor/ ... calculator

Two options.

Save for one year (66yo to 67yo) vs 42 years (25yo to 67yo)--ages not important, only the time invested is.

Age 66
One year of 401K growth of $19,000
6% ROR
Total = $20,140
Growth--6% of total--$1,140


Age 25
42 years of 401k growth of one time $19,000 contribution (not 42 years of $19,000 contributions, just one year)
6% ROR
Total = $219,583
Growth--91% of total = $200,583

I feel that time is one of the most important factors in investing, is it the only one?, no.

So pick one of the following options below--does not matter your tax rate--

Tax deduction first:
Tax deduction of $19,000 but pay taxes on $20,140
Tax deduction of $19,000 buy pay taxes on $219,583

Pay taxes first:
Roth--Pay tax on $19,000 but pay no taxes on $20,140
Roth--Pay tax on $19,000 but pay no taxes on $219,583


But, but...
I will convert x dollars by age 70...
My expenses WILL not be x amount...
The tax rate will go UP (or DOWN) ...

No one KNOWS the tax rate in 10-20 or even 42 years from now.
No one KNOWS their expenses in 10-20 or even 42 years from now.
No one KNOWS they WILL be able to do conversions prior to age 70.5--when they NEED to do them.
No one KNOWS even if RMD will be the same % or starting age or even if they are required, in distant future.

But the one thing that is KNOWN is that:
ROTH 401K, IRA, etc have tax free distributions of ALL in the account.
Contributions and EARNINGS.

While Trad 401k, IRA, etc have taxable distributions of ALL in the account.
Tax-deduction contributions and EARNINGS.

To the OP:
I don't know the age, income level, asset amount, tax rates, etc you have but time 100% should go into the calculation.


I have money in both 403b and Roth 403b, all IRA money in ROTH, have trad. IRA for backdoor.
I already have large chunk in Trad 403b and get all my matching in trad. 403b.

ExitStageLeft
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by ExitStageLeft » Mon Nov 04, 2019 4:15 pm

We do know that under existing law the tax rates are due to go up in 2025, so that does shift the calculation a little in favor of increasing your Roth savings. If you can max out both 401k and IRA savings each year, the recommendation of tax-deferred in 401k and Roth IRA gives you a good balance. Once you get a little more clarity into what your income sources will be in retirement and what your likely tax burden will be, you can further tweak things then.

retiredjg
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by retiredjg » Mon Nov 04, 2019 4:21 pm

corp_sharecropper wrote:
Sun Nov 03, 2019 5:45 pm
Wouldn't there be some point, in age or years until retirement, that it would just make more sense to put additional funds in pre-tax accounts of there's still room?
I don't see that age or years until retirement have anything to do with this decision.

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David Jay
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Re: Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?

Post by David Jay » Mon Nov 04, 2019 6:32 pm

Watty wrote:
Sun Nov 03, 2019 6:39 pm
Is there a typical age (or years until retirement) where Roth IRA stops making sense vs pre-tax (401k)?
To me assuming that there is not as easy choice then it is just the opposite and it becomes easier to justify a Roth the closer you get to retirement because your likely retirement situation become clearer.
This!

The simplicity of Roth withdrawals in retirement without any concerns about tax implications is the ultimate simplification. My goal is to spend down all of my tax-deferred while MFJ and leave my spouse with nothing but a nice big Roth. And she can leave what she can’t spend to the kids.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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