Traditional 401K vs Roth 401k

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K72
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Traditional 401K vs Roth 401k

Post by K72 » Wed Jan 02, 2019 11:16 pm

Last weekend on the radio I heard a financial adviser recommending (to potentially thousands of listeners) that traditional 401k should be used instead of Roth 401k simply because you know you'll get the tax benefit in the first case (at least for the current year) but have no idea whether you'll ever reap the benefits of Roth (especially tax free withdrawals) because of potential future tax law changes. It's a bird in the hand kind of argument.

My first reaction was to think the guy was totally out of his mind, but then I remembered that SS was tax free up until 1984, confirming that anything can happen. Do we really need to be so cynical that we exclude the Roth 401K out of uncertainty of the future tax changes?

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bluquark
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Re: Traditional 401K vs Roth 401k

Post by bluquark » Wed Jan 02, 2019 11:25 pm

It might be a tie-breaking factor in the common case that there's no clear winner between the two because it's too hard to figure out whether retirement income will be higher or lower. Maybe this fear is baseless, but even if so it's probably not as harmful as the similar reasoning that leads folks to claim SS too early.

I'll note there's a similar reasoning at play for people who think they might decide to retire abroad, in a country whose tax code does not recognize US tax-advantaged accounts.
Last edited by bluquark on Wed Jan 02, 2019 11:27 pm, edited 1 time in total.
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mcraepat9
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Re: Traditional 401K vs Roth 401k

Post by mcraepat9 » Wed Jan 02, 2019 11:26 pm

I think that the default choice for most people should be traditional 401k for a litany of reasons easily searchable on this forum. I don’t think the argument you cite is the best I’ve heard, but there are many other reasons traditional should be the standard choice for most.
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JustinR
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Re: Traditional 401K vs Roth 401k

Post by JustinR » Wed Jan 02, 2019 11:32 pm

Traditional is better for almost everybody.

The exception is people who have extremely low incomes.

And it's not really about future tax laws...traditional is simply just better for a lot of reasons. The only thing Roth is good for is if you owe like 0% tax now.
Last edited by JustinR on Wed Jan 02, 2019 11:41 pm, edited 1 time in total.

02nz
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Re: Traditional 401K vs Roth 401k

Post by 02nz » Wed Jan 02, 2019 11:36 pm

mcraepat9 wrote:
Wed Jan 02, 2019 11:26 pm
I think that the default choice for most people should be traditional 401k for a litany of reasons easily searchable on this forum. I don’t think the argument you cite is the best I’ve heard, but there are many other reasons traditional should be the standard choice for most.
+1. I don't buy the argument that "Roth is tax-free now but who knows what they could do." There would (quite rightly) be a huge backlash against any proposal to tax Roth IRAs. The conclusion is correct though - most people are best off with traditional. I think most people don't fully understand the progressive tax structure, which makes it possible to withdraw from traditional accounts at very low tax rates in retirement. I also suspect a fair number of people don't understand the commutative property of multiplication - i.e., they think "Roth is better because it grows tax free" when in fact neither has a tax advantage in the compounding phase. Finally, I think just the word "traditional" creates the idea that it's old-fashioned, obsolete even. Who wants traditional when there's this other, newer thing? It's even got a name!

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Re: Traditional 401K vs Roth 401k

Post by PackersFan12 » Wed Jan 02, 2019 11:49 pm

Why not use both?

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Re: Traditional 401K vs Roth 401k

Post by 02nz » Wed Jan 02, 2019 11:53 pm

BWildt wrote:
Wed Jan 02, 2019 11:49 pm
Why not use both?
Diversification is usually the right answer, but for most it still makes sense to tilt toward traditional. 19K traditional 401k or equivalent + 6K Roth IRA makes a lot of sense for those that can contribute that much.

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Re: Traditional 401K vs Roth 401k

Post by K72 » Thu Jan 03, 2019 12:04 am

The argument I've heard the most is that Roth is better if your tax rate while contributing is lower than when you withdraw. The opposite is true for pre-tax 401K (pre-tax sounds better than traditional). I'll be retiring soon and my federal marginal rate isn't going to be much lower (yeah it's lower than the last couple of years when I was a peak income, but not necessarily from when I was making contributions). In fact, I just checked my federal tax rate when I first starting working in and my marginal rate was higher then vs now. I guess the point is there needs to be other criteria because we really cannot predict that our tax rates will be lower after retirement. A work colleague of mine did a Roth conversion of 100% of his 401K/IRA money a couple of years ago and was happy to do it, though I didn't ask him why he did it. I for one do not like the idea of taking RMD's, thus converting the $ to a taxable account.

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Re: Traditional 401K vs Roth 401k

Post by AnalogKid22 » Thu Jan 03, 2019 12:19 am

BWildt wrote:
Wed Jan 02, 2019 11:49 pm
Why not use both?
I do. Tax sheltered means the govt only taxes the money when it enters or leaves the account. Letting it grow for decades without being taxed every month, quarter, year, for example, is a major advantage. I max my HSA for the same reasons.

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Re: Traditional 401K vs Roth 401k

Post by 02nz » Thu Jan 03, 2019 12:19 am

Ken72 wrote:
Thu Jan 03, 2019 12:04 am
The argument I've heard the most is that Roth is better if your tax rate while contributing is lower than when you withdraw. The opposite is true for pre-tax 401K (pre-tax sounds better than traditional). I'll be retiring soon and my federal marginal rate isn't going to be much lower (yeah it's lower than the last couple of years when I was a peak income, but not necessarily from when I was making contributions). In fact, I just checked my federal tax rate when I first starting working in and my marginal rate was higher then vs now. I guess the point is there needs to be other criteria because we really cannot predict that our tax rates will be lower after retirement. A work colleague of mine did a Roth conversion of 100% of his 401K/IRA money a couple of years ago and was happy to do it, though I didn't ask him why he did it. I for one do not like the idea of taking RMD's, thus converting the $ to a taxable account.
Federal employees are something of an exception (see https://thefinancebuff.com/most-tsp-par ... h-tsp.html), as they get regular Social Security (unless they're CSRS) and a pension, in addition to withdrawals from TSP. They also get a supplemental annuity between retirement and start of SS benefits, so they have less low-tax space to fill. Some could well be in a higher tax bracket in retirement. But most people won't be in the same position. For example, public school teachers generally have pensions but many don't pay into, and thus don't receive, SS.

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Re: Traditional 401K vs Roth 401k

Post by elderwise » Thu Jan 03, 2019 11:08 am

02nz wrote:
Thu Jan 03, 2019 12:19 am
Ken72 wrote:
Thu Jan 03, 2019 12:04 am
The argument I've heard the most is that Roth is better if your tax rate while contributing is lower than when you withdraw. The opposite is true for pre-tax 401K (pre-tax sounds better than traditional). I'll be retiring soon and my federal marginal rate isn't going to be much lower (yeah it's lower than the last couple of years when I was a peak income, but not necessarily from when I was making contributions). In fact, I just checked my federal tax rate when I first starting working in and my marginal rate was higher then vs now. I guess the point is there needs to be other criteria because we really cannot predict that our tax rates will be lower after retirement. A work colleague of mine did a Roth conversion of 100% of his 401K/IRA money a couple of years ago and was happy to do it, though I didn't ask him why he did it. I for one do not like the idea of taking RMD's, thus converting the $ to a taxable account.
Federal employees are something of an exception (see https://thefinancebuff.com/most-tsp-par ... h-tsp.html), as they get regular Social Security (unless they're CSRS) and a pension, in addition to withdrawals from TSP. They also get a supplemental annuity between retirement and start of SS benefits, so they have less low-tax space to fill. Some could well be in a higher tax bracket in retirement. But most people won't be in the same position. For example, public school teachers generally have pensions but many don't pay into, and thus don't receive, SS.
I believe this is not just for Feds, any govt / state / public agency employee - who has paid into SS + has DBP + any other retirement accounts like 401k / 457b / 403b

So they would get SS + Pension + any 401k or IRA ...

Granted some public employees like School Teachers, and others (agency / employer) has opted out of SS would not get SS, but there are many govt agencies that have SS withholding, and option to do 401, 457 and also state / gov pension.I guess in this case, it would be useful to know how much is too much in traditional accounts..certainly not the 1 mil because you have the ss + gov pension (varies)

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Re: Traditional 401K vs Roth 401k

Post by teen persuasion » Thu Jan 03, 2019 1:42 pm

JustinR wrote:
Wed Jan 02, 2019 11:32 pm
Traditional is better for almost everybody.

The exception is people who have extremely low incomes.

And it's not really about future tax laws...traditional is simply just better for a lot of reasons. The only thing Roth is good for is if you owe like 0% tax now.
Even low incomes can benefit from traditional, if they are (or can become) eligible for refundable credits. Low income families can have surprisingly high marginal tax rates, even if they owe $0 in taxes.

We could contribute to a Roth 401k for DH, and tax credits should cover taxes owed. Or we could contribute to the traditional 401k, become eligible for much larger refundable credits (triggering partially matching state refundable credits) thru reduced AGI, and use the resulting additional cash to fund Roth IRAs.

In the future we can gradually convert the traditional account's contents to Roth, paying little to no tax on conversions within the standard deduction amount or possibly the 10% bracket. No tax in, little to no tax out.

Why limit our annual savings by using refundable credits on tax prepayment, when we might never owe tax at all?

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Re: Traditional 401K vs Roth 401k

Post by sjt » Thu Jan 03, 2019 2:44 pm

Ken72 wrote:
Thu Jan 03, 2019 12:04 am
The argument I've heard the most is that Roth is better if your tax rate while contributing is lower than when you withdraw. The opposite is true for pre-tax 401K (pre-tax sounds better than traditional). I'll be retiring soon and my federal marginal rate isn't going to be much lower (yeah it's lower than the last couple of years when I was a peak income, but not necessarily from when I was making contributions). In fact, I just checked my federal tax rate when I first starting working in and my marginal rate was higher then vs now. I guess the point is there needs to be other criteria because we really cannot predict that our tax rates will be lower after retirement. A work colleague of mine did a Roth conversion of 100% of his 401K/IRA money a couple of years ago and was happy to do it, though I didn't ask him why he did it. I for one do not like the idea of taking RMD's, thus converting the $ to a taxable account.
Be sure to compare the marginal tax rate when contributing to the effective tax rate when withdrawing. For example, someone earning $150k is in the 22% marginal tax bracket, but pays 13% effective tax. Assuming If you were to maintain the same lifestyle from working years to retirement, would you rather pay 22% now or 13% later? For most of us, Pretax 401k (paying 13% later) is better.

There are scenarios where this isn't the case, such as early death and heirs getting stuck with your RMD's when they are already in a high tax bracket.
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Re: Traditional 401K vs Roth 401k

Post by Crisium » Thu Jan 03, 2019 2:48 pm

I'd focus on current law more than trying to read a crystal ball about what may come.

Current law sees tax rates rising (in ~9 years IIRC). Current law also has subsidies for ACA Health Insurance based on income. I choose Roth because I am locking in a (based on law) temporarily low tax rate and when I retire my income should be low enough to receive heavily subsided health insurance.

I can only work with what we know today. I do have some traditional based on employer match though.
Last edited by Crisium on Thu Jan 03, 2019 2:49 pm, edited 2 times in total.

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Re: Traditional 401K vs Roth 401k

Post by nullbytes » Thu Jan 03, 2019 2:48 pm

02nz wrote:
Wed Jan 02, 2019 11:53 pm
BWildt wrote:
Wed Jan 02, 2019 11:49 pm
Why not use both?
Diversification is usually the right answer, but for most it still makes sense to tilt toward traditional. 19K traditional 401k or equivalent + 6K Roth IRA makes a lot of sense for those that can contribute that much.

that's my current set up. max out pre-tax 401k (get the tax benefits now), do a backdoor roth for 6k, then any spare change funnel into brokerage account / 529

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Re: Traditional 401K vs Roth 401k

Post by Watty » Thu Jan 03, 2019 3:09 pm

JustinR wrote:
Wed Jan 02, 2019 11:32 pm
Traditional is better for almost everybody.

The exception is people who have extremely low incomes.

And it's not really about future tax laws...traditional is simply just better for a lot of reasons. The only thing Roth is good for is if you owe like 0% tax now.
+1

One thing to keep in mind is that under the current tax laws an over 65 couple can have over $100K in taxable income and still be in the 12% federal tax bracket.

For most people that and a paid off house will fund a retirement lifestyle that is far above average in all but the most expensive parts of the country.

Compared to many of the posters here I have a pretty middle class lifestyle and budget. I have not started Social Security yet but when we do we can have around $40K in Social Security and $30K in taxable IRA withdrawals and pay very little if any Federal income taxes. (I have not crunched the numbers recently) Some years I may be able to pay no federal or state income taxes. I live in a medium cost of living area so with a paid off house that is plenty for nice middle class retirement.

The way Social Security is taxed, and the differences in single tax brackets makes that a bit less cut and dried but even then it takes a lot to be in a really high tax retirement tax bracket.

When I was going through my 50s I also saw more people than I would have expected run into health issues, career setbacks, the death of a spouse, etc than caused them to not have as high a retirement income as they had planned on.

I have also seen some people, like myself, get into their 50s and realized that they can comfortably retire in the 12% federal tax bracket and decide to retire early.

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Re: Traditional 401K vs Roth 401k

Post by ThrustVectoring » Thu Jan 03, 2019 3:30 pm

JustinR wrote:
Wed Jan 02, 2019 11:32 pm
Traditional is better for almost everybody.

The exception is people who have extremely low incomes.

And it's not really about future tax laws...traditional is simply just better for a lot of reasons. The only thing Roth is good for is if you owe like 0% tax now.
If you're very likely to get a massive increase in income later in your career, Roth can be a very good idea now. A prime example of this is a medical resident - average salary is something like $64k which puts them in the 22% bracket, and a full medical doctor has an average salary of like $180k which puts them in the 32% bracket, so they're likely to defer so much income later on in their career that a Roth makes a lot of sense right now. Especially if they wind up moonlighting and dumping that income into a one-participant 401(k).

Alternatively, if you don't expect to have non-working years before taking social security or pensions, then Roth makes a lot more sense. Eg, someone planning on retiring with a military pension.

Outside of a couple situations like that though, yeah, over 90% of the time it's better to defer taxes.
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Re: Traditional 401K vs Roth 401k

Post by nolesrule » Thu Jan 03, 2019 3:44 pm

sjt wrote:
Thu Jan 03, 2019 2:44 pm
Ken72 wrote:
Thu Jan 03, 2019 12:04 am
The argument I've heard the most is that Roth is better if your tax rate while contributing is lower than when you withdraw. The opposite is true for pre-tax 401K (pre-tax sounds better than traditional). I'll be retiring soon and my federal marginal rate isn't going to be much lower (yeah it's lower than the last couple of years when I was a peak income, but not necessarily from when I was making contributions). In fact, I just checked my federal tax rate when I first starting working in and my marginal rate was higher then vs now. I guess the point is there needs to be other criteria because we really cannot predict that our tax rates will be lower after retirement. A work colleague of mine did a Roth conversion of 100% of his 401K/IRA money a couple of years ago and was happy to do it, though I didn't ask him why he did it. I for one do not like the idea of taking RMD's, thus converting the $ to a taxable account.
Be sure to compare the marginal tax rate when contributing to the effective tax rate when withdrawing. For example, someone earning $150k is in the 22% marginal tax bracket, but pays 13% effective tax. Assuming If you were to maintain the same lifestyle from working years to retirement, would you rather pay 22% now or 13% later? For most of us, Pretax 401k (paying 13% later) is better.

There are scenarios where this isn't the case, such as early death and heirs getting stuck with your RMD's when they are already in a high tax bracket.
The comparison is marginal now vs. marginal later. The amount of money you put in this year won't come out at some average rate, it'll be at the top of the stack until you add more money in a future year. You can do the same analysis each year for new contributions.

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Re: Traditional 401K vs Roth 401k

Post by international001 » Thu Jan 03, 2019 3:59 pm

bluquark wrote:
Wed Jan 02, 2019 11:25 pm
It might be a tie-breaking factor in the common case that there's no clear winner between the two because it's too hard to figure out whether retirement income will be higher or lower. Maybe this fear is baseless, but even if so it's probably not as harmful as the similar reasoning that leads folks to claim SS too early.

I'll note there's a similar reasoning at play for people who think they might decide to retire abroad, in a country whose tax code does not recognize US tax-advantaged accounts.
You are talking about Roth 401k or pre-tax 401k?
Do you have a list of countries based on what they recognize?

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Re: Traditional 401K vs Roth 401k

Post by bluquark » Thu Jan 03, 2019 4:52 pm

I don't have a list, it's very complicated and depends on lots of individual tax treaties. But my point is that if they don't recognize the trad 401k it hardly makes much difference at withdrawal time, whereas if they don't recognize the Roth 401k the foreign country might tax you on withdrawals.
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Re: Traditional 401K vs Roth 401k

Post by international001 » Fri Jan 04, 2019 10:33 am

bluquark wrote:
Thu Jan 03, 2019 4:52 pm
I don't have a list, it's very complicated and depends on lots of individual tax treaties. But my point is that if they don't recognize the trad 401k it hardly makes much difference at withdrawal time, whereas if they don't recognize the Roth 401k the foreign country might tax you on withdrawals.
Yes, that's what I was thinking. pre-tax 401k should be taxed by both US and your residency country, and then you can get a credit in US, like a regular employee income.
For Roth 401k, if the residency country wants to tax it, you are in trouble. But I wonder how can they pretend to tax it if it's not "recognized". You could just claim is like a regular bank account and don't treat it as income everytime you make a distribution. Or it's the Roth 401k not reconnized but it's distributions may be?

In the worst case scenario, you can just be a US resident one year after 59.5 and withdraw the whole Roth 401k

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Re: Traditional 401K vs Roth 401k

Post by bluquark » Fri Jan 04, 2019 11:10 am

Countries tend to have uniform treatment of all foreign investment and their tax code is written with the idea of preventing capital from escaping into tax havens. Often, foreign investments are required to be reported as investments (claiming it’s a bank account may be considered tax evasion). A Roth 401k “sounds” like a tax haven investment to a generically written tax code, and it will be subject to regular capital gains (against the purchase cost basis — if you don’t have any record of that because you thought it didn’t matter, that’s your problem) and dividend taxes, deliberately disregarding the US’s opinion that this investment should not be taxed.

Because this is very frustrating to US expats and it’s a case of retirement accounts caught in the crossfire of billionaire tax enforcement, some countries have signed tax treaties with the US, which among other things recognize a special exception for retirement accounts. For example, Canada is such a country and if you plan to retire to Canada, there is less to worry about.
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Re: Traditional 401K vs Roth 401k

Post by international001 » Fri Jan 04, 2019 11:37 am

yes, tax cost basis would be another problem.
In countries of Europe where they are allowed, I guess a (pre-tax/Roth) 401k can be considered as an account of accumulating funds, so you don't have to pay $ till you do a distribution. And when you do the distribution, consider the tax cost basis of the initial contribution, not of the divident reinvestment. This are just the rules of accumulating funds. That's just a thought, I don't know how it works. Otherwise you would have to pay taxes for your 401k even if you go to work outside US for a few years.
There are US expats all over the world. I wonder, as a practical matter, how do they handle it? How do they report it? Does the expatriation country have even a way of figuring out any evasion?

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Re: Traditional 401K vs Roth 401k

Post by TheHouse7 » Fri Jan 04, 2019 12:05 pm

I've read many comparisons and like financial samari's summary the best. If you can figure out that you will have more than 2+ mil in traditional(most people will not) then you should figure out how to pay the least tax you can to get Roth.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

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Re: Traditional 401K vs Roth 401k

Post by international001 » Fri Jan 04, 2019 12:31 pm

TheHouse7 wrote:
Fri Jan 04, 2019 12:05 pm
I've read many comparisons and like financial samari's summary the best. If you can figure out that you will have more than 2+ mil in traditional(most people will not) then you should figure out how to pay the least tax you can to get Roth.
you mean https://www.financialsamurai.com/the-on ... -roth-ira/ ?
Is not that good.
Problem is that you don't know all the variables in the future. This is why is good to have a spreadsheet and make assumptions every (few) years to be adaptive. If you are a big saver (likely a BH) chances are a mix of both is the best option.
You need to make some assumptions like what would the taxes be in the future.
It also takes some bold decisions to maximize. For instance, contribute Roth in your first years where your income is likely lower.

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Re: Traditional 401K vs Roth 401k

Post by TheHouse7 » Fri Jan 04, 2019 12:52 pm

international001 wrote:
Fri Jan 04, 2019 12:31 pm
TheHouse7 wrote:
Fri Jan 04, 2019 12:05 pm
I've read many comparisons and like financial samari's summary the best. If you can figure out that you will have more than 2+ mil in traditional(most people will not) then you should figure out how to pay the least tax you can to get Roth.
you mean https://www.financialsamurai.com/the-on ... -roth-ira/ ?
Is not that good.
Problem is that you don't know all the variables in the future. This is why is good to have a spreadsheet and make assumptions every (few) years to be adaptive. If you are a big saver (likely a BH) chances are a mix of both is the best option.
You need to make some assumptions like what would the taxes be in the future.
It also takes some bold decisions to maximize. For instance, contribute Roth in your first years where your income is likely lower.
You will always pay taxes in the future. There is little reason to think you will be in a higher tax bracket in retirement when you won't be making as much money as when your working. (Unless inheritance, life insurance, lotto, ect.)

First years are for education, marriage, rent/down payment, medical, transition/stabilization.

We invest in one traditional 410k and try to Max 2 Roth IRA in the 12% bracket for diversification mentioned above.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

international001
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Re: Traditional 401K vs Roth 401k

Post by international001 » Fri Jan 04, 2019 1:02 pm

TheHouse7 wrote:
Fri Jan 04, 2019 12:52 pm
international001 wrote:
Fri Jan 04, 2019 12:31 pm
TheHouse7 wrote:
Fri Jan 04, 2019 12:05 pm
I've read many comparisons and like financial samari's summary the best. If you can figure out that you will have more than 2+ mil in traditional(most people will not) then you should figure out how to pay the least tax you can to get Roth.
you mean https://www.financialsamurai.com/the-on ... -roth-ira/ ?
Is not that good.
Problem is that you don't know all the variables in the future. This is why is good to have a spreadsheet and make assumptions every (few) years to be adaptive. If you are a big saver (likely a BH) chances are a mix of both is the best option.
You need to make some assumptions like what would the taxes be in the future.
It also takes some bold decisions to maximize. For instance, contribute Roth in your first years where your income is likely lower.
You will always pay taxes in the future. There is little reason to think you will be in a higher tax bracket in retirement when you won't be making as much money as when your working. (Unless inheritance, life insurance, lotto, ect.)

First years are for education, marriage, rent/down payment, medical, transition/stabilization.

We invest in one traditional 410k and try to Max 2 Roth IRA in the 12% bracket for diversification mentioned above.
Unless you save a lot. Unless you think the current taxes are very low, and there is a chance they will be be much higher but the chance or being *much* lower is slim (assymetrical) risk. Lots of IFs
This topic has been beaten to death. IMHO, paying today 22% marginal tax in Roth, if you have or plan to have a big chunk of traditional pre-tax is fine. Not many chances your tax bracket at retirement will be much lower than 22%, but a big chance it will be higher.

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Re: Traditional 401K vs Roth 401k

Post by FiveK » Fri Jan 04, 2019 5:54 pm

nolesrule wrote:
Thu Jan 03, 2019 3:44 pm
sjt wrote:
Thu Jan 03, 2019 2:44 pm
Be sure to compare the marginal tax rate when contributing to the effective tax rate when withdrawing. For example, someone earning $150k is in the 22% marginal tax bracket, but pays 13% effective tax. Assuming If you were to maintain the same lifestyle from working years to retirement, would you rather pay 22% now or 13% later? For most of us, Pretax 401k (paying 13% later) is better.
The comparison is marginal now vs. marginal later. The amount of money you put in this year won't come out at some average rate, it'll be at the top of the stack until you add more money in a future year. You can do the same analysis each year for new contributions.
nolesrule is correct.

Traditional is indeed better for most people, but not as much better as the incorrect comparison of marginal vs. effective would lead one to believe.

See the wiki on Traditional versus Roth.

JustinR
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Re: Traditional 401K vs Roth 401k

Post by JustinR » Fri Jan 04, 2019 6:23 pm

Ken72 wrote:
Thu Jan 03, 2019 12:04 am
The argument I've heard the most is that Roth is better if your tax rate while contributing is lower than when you withdraw. The opposite is true for pre-tax 401K (pre-tax sounds better than traditional). I'll be retiring soon and my federal marginal rate isn't going to be much lower (yeah it's lower than the last couple of years when I was a peak income, but not necessarily from when I was making contributions). In fact, I just checked my federal tax rate when I first starting working in and my marginal rate was higher then vs now. I guess the point is there needs to be other criteria because we really cannot predict that our tax rates will be lower after retirement. A work colleague of mine did a Roth conversion of 100% of his 401K/IRA money a couple of years ago and was happy to do it, though I didn't ask him why he did it. I for one do not like the idea of taking RMD's, thus converting the $ to a taxable account.
Again, it's not as simple as "taxes in the future vs now". Traditional 401ks give you flexibility and the ability to manipulate your taxes later. There are ways to be strategic with your income in retirement.

Google "Roth conversion ladder"

It's a strategy where you can pay ZERO taxes on traditional 401k money. 0% taxes putting money in your 401k, converting it, and withdrawing. It's a triple tax free strategy, and you can do it before retirement age. The very best benefit you can get from any retirement account anywhere.

If you pay taxes now for a Roth 401k, well... You already paid the tax so no amount of strategy will help you later.

Always defer taxes as much as you can. Let your future self take care of that later.

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Re: Traditional 401K vs Roth 401k

Post by WanderingDoc » Fri Jan 04, 2019 11:27 pm

Roth is best for those who plan on being wealthy when we are older. I define wealthy as having a LOT more wealth in our 50s and 60s, than we had in our 20s and 30s. If you've decided on traditional 401k now, you've psyched yourself into planning to be poorer in retirement. I think psychology plays a very important role in achieving our goals. Very few people woke up wealthy. Those people had a burning desire, motivation, plan, and backup plan to do so. This is why I include at least half my retirement in a Roth. I am planning to be prosperous in my old age. I hope to do a lot of giving as well.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Re: Traditional 401K vs Roth 401k

Post by 02nz » Fri Jan 04, 2019 11:36 pm

WanderingDoc wrote:
Fri Jan 04, 2019 11:27 pm
If you've decided on traditional 401k now, you've psyched yourself into planning to be poorer in retirement.
No, I haven't psyched myself into anything. I don't plan on being poorer in retirement than I am now (quite the opposite), I'm just planning on paying less in taxes.

Kix
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Re: Traditional 401K vs Roth 401k

Post by Kix » Sat Jan 05, 2019 1:19 am

We too are trying to make this distinction. With an income of 85k and 5 child tax credits (taking the standard deduction and filing MFJ), we lean toward saving in the Roth 401k while the kids are at home to get more mileage out of the credits. We *think* this is the better plan because the credits are only partially refundable, but we haven't found any calculators that figure the child tax credits well enough to compare our options.

We'll see how it shakes out at tax time I guess. We also moved this year to a state with state income tax, so that might make the Roth 401k less desirable as well.

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FiveK
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Re: Traditional 401K vs Roth 401k

Post by FiveK » Sat Jan 05, 2019 2:04 am

Kix wrote:
Sat Jan 05, 2019 1:19 am
We too are trying to make this distinction. With an income of 85k and 5 child tax credits (taking the standard deduction and filing MFJ), we lean toward saving in the Roth 401k while the kids are at home to get more mileage out of the credits. We *think* this is the better plan because the credits are only partially refundable, but we haven't found any calculators that figure the child tax credits well enough to compare our options.
From what you have described, the personal finance toolbox spreadsheet will figure your situation very well.

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Re: Traditional 401K vs Roth 401k

Post by Kix » Sat Jan 05, 2019 8:21 am

Thanks 5k, I'll check it out.

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Re: Traditional 401K vs Roth 401k

Post by are_cynic » Sat Jan 05, 2019 8:45 am

One advantage of Roth (IRA and 401k) is that the contribution space is effectively larger. The IRS specifies that the max contribution is $6k and $19k, but this is agnostic of contribution type. $19k in a Roth 401k is worth more than $19k in a Trad 401k, simply because the future earnings of the Traditional are going to be taxed, and Roth won’t. Therefore, by using Roth, you end up with more retirement income from IRA and 401k. So if you want to max out tax advantaged accounts, keep in mind that there is more space in Roth than in Traditional.
"Invert, always invert" ~Carl Jacobi

WanderingDoc
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Re: Traditional 401K vs Roth 401k

Post by WanderingDoc » Sat Jan 05, 2019 11:26 am

02nz wrote:
Fri Jan 04, 2019 11:36 pm
WanderingDoc wrote:
Fri Jan 04, 2019 11:27 pm
If you've decided on traditional 401k now, you've psyched yourself into planning to be poorer in retirement.
No, I haven't psyched myself into anything. I don't plan on being poorer in retirement than I am now (quite the opposite), I'm just planning on paying less in taxes.
Those are one and the same.

If I make $200K now, I want to make $400K in 20 years. If my net worth is $1M now, I want it to be $5M in 20 years.

Paying more in taxes is a sign that you've really made it. A billionaire (that realizes income) pays more in taxes than a millionaire, all else equal.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Re: Traditional 401K vs Roth 401k

Post by 02nz » Sat Jan 05, 2019 11:36 am

WanderingDoc wrote:
Sat Jan 05, 2019 11:26 am
02nz wrote:
Fri Jan 04, 2019 11:36 pm
WanderingDoc wrote:
Fri Jan 04, 2019 11:27 pm
If you've decided on traditional 401k now, you've psyched yourself into planning to be poorer in retirement.
No, I haven't psyched myself into anything. I don't plan on being poorer in retirement than I am now (quite the opposite), I'm just planning on paying less in taxes.
Those are one and the same.

If I make $200K now, I want to make $400K in 20 years. If my net worth is $1M now, I want it to be $5M in 20 years.

Paying more in taxes is a sign that you've really made it. A billionaire (that realizes income) pays more in taxes than a millionaire, all else equal.
The whole point here is that all else isn't equal. Whether you have a $1M net worth or $5M, you can choose the rates your retirement savings are taxed at. That's math, not psychology.

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FiveK
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Re: Traditional 401K vs Roth 401k

Post by FiveK » Sat Jan 05, 2019 11:53 am

WanderingDoc wrote:
Sat Jan 05, 2019 11:26 am
Paying more in taxes is a sign that you've really made it.
Perhaps to some, but definitely not to all.

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FiveK
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Re: Traditional 401K vs Roth 401k

Post by FiveK » Sat Jan 05, 2019 11:56 am

are_cynic wrote:
Sat Jan 05, 2019 8:45 am
One advantage of Roth (IRA and 401k) is that the contribution space is effectively larger. The IRS specifies that the max contribution is $6k and $19k, but this is agnostic of contribution type. $19k in a Roth 401k is worth more than $19k in a Trad 401k, simply because the future earnings of the Traditional are going to be taxed, and Roth won’t. Therefore, by using Roth, you end up with more retirement income from IRA and 401k. So if you want to max out tax advantaged accounts, keep in mind that there is more space in Roth than in Traditional.
This does give the advantage to a Roth if one assumes equal marginal tax rates, but if (for example) one assumes saving 22% now and paying 12% on withdrawal, traditional is still better. See Maxing out your retirement accounts for details.

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Re: Traditional 401K vs Roth 401k

Post by teen persuasion » Sat Jan 05, 2019 12:18 pm

WanderingDoc wrote:
Fri Jan 04, 2019 11:27 pm
Roth is best for those who plan on being wealthy when we are older. I define wealthy as having a LOT more wealth in our 50s and 60s, than we had in our 20s and 30s. If you've decided on traditional 401k now, you've psyched yourself into planning to be poorer in retirement. I think psychology plays a very important role in achieving our goals. Very few people woke up wealthy. Those people had a burning desire, motivation, plan, and backup plan to do so. This is why I include at least half my retirement in a Roth. I am planning to be prosperous in my old age. I hope to do a lot of giving as well.
Wouldn't traditional contributions be better for giving to charity?

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Re: Traditional 401K vs Roth 401k

Post by LadyGeek » Sat Jan 05, 2019 1:27 pm

I removed an off-topic post. As a reminder, this is a "no politics" forum. See: Politics and Religion
In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
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Re: Traditional 401K vs Roth 401k

Post by JBTX » Sat Jan 05, 2019 3:12 pm

The choice isn't as easy as many here want to make it out to be. It really depends on a lot of individual factors.

Factors favoring traditional:

- high current marginal rate
- plans to retire early and do Roth conversions prior to SS
- fully committed to taking traditional tax savings and putting it in Roth or taxable account until retirement
- if traditional lowers your MAGI enough to contribute to individual Roth IRA.
- you live in a high state income tax state, but move to a low income tax state in retirement

Factors favoring Roth:
- lower current marginal rate
- you don't plan to retire early
- taxability of social security will increase your marginal rate in retirement
- you will have other income in retirement, such as pension or rental properties.
- you feel like income tax rates in the future are more likely to go up vs go down.
- Roth may be more flexible for estate planning purposes, especially taxable trusts, if you plan to leave an inheritance.

I also subscribe to the philosophy of diversity between both is good, because it is difficult to know what your furture situation will be or what future tax law will be.

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FiveK
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Re: Traditional 401K vs Roth 401k

Post by FiveK » Sat Jan 05, 2019 5:52 pm

teen persuasion wrote:
Sat Jan 05, 2019 12:18 pm
Wouldn't traditional contributions be better for giving to charity?
Sure would, as one pays 0% on QCDs. That's likely a lower marginal rate than most will save on traditional contributions.

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Re: Traditional 401K vs Roth 401k

Post by MathIsMyWayr » Sat Jan 05, 2019 6:41 pm

are_cynic wrote:
Sat Jan 05, 2019 8:45 am
One advantage of Roth (IRA and 401k) is that the contribution space is effectively larger. The IRS specifies that the max contribution is $6k and $19k, but this is agnostic of contribution type. $19k in a Roth 401k is worth more than $19k in a Trad 401k, simply because the future earnings of the Traditional are going to be taxed, and Roth won’t. Therefore, by using Roth, you end up with more retirement income from IRA and 401k. So if you want to max out tax advantaged accounts, keep in mind that there is more space in Roth than in Traditional.
+1. This is often overlooked. Assume your tax rate is 25% (fed+state). In the first example, assume you have pre-tax $19,000 to invest. You may contribute all to a pre-tax 401(k) or $14,250 to Roth after tax. In this case, $19,000 in pre-tax 401(k) is equivalent to $14,250 in Roth and they are a toss-up depending on many factors. In the 2nd example, assume you have $25,333 to invest. You may put $19,000 in pre-tax 401(k) and the remaining $4,750 in a taxable after paying tax on $6,333. You may put the entire $19,000 in Roth after paying tax instead. $4,750 in Roth is obviously better than $4,750 in a taxable.

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Re: Traditional 401K vs Roth 401k

Post by WanderingDoc » Sat Jan 05, 2019 11:16 pm

teen persuasion wrote:
Sat Jan 05, 2019 12:18 pm
WanderingDoc wrote:
Fri Jan 04, 2019 11:27 pm
Roth is best for those who plan on being wealthy when we are older. I define wealthy as having a LOT more wealth in our 50s and 60s, than we had in our 20s and 30s. If you've decided on traditional 401k now, you've psyched yourself into planning to be poorer in retirement. I think psychology plays a very important role in achieving our goals. Very few people woke up wealthy. Those people had a burning desire, motivation, plan, and backup plan to do so. This is why I include at least half my retirement in a Roth. I am planning to be prosperous in my old age. I hope to do a lot of giving as well.
Wouldn't traditional contributions be better for giving to charity?
Being very wealthy is the best way :wink:
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Re: Traditional 401K vs Roth 401k

Post by international001 » Sun Jan 06, 2019 7:45 am

MathIsMyWayr wrote:
Sat Jan 05, 2019 6:41 pm
are_cynic wrote:
Sat Jan 05, 2019 8:45 am
One advantage of Roth (IRA and 401k) is that the contribution space is effectively larger. The IRS specifies that the max contribution is $6k and $19k, but this is agnostic of contribution type. $19k in a Roth 401k is worth more than $19k in a Trad 401k, simply because the future earnings of the Traditional are going to be taxed, and Roth won’t. Therefore, by using Roth, you end up with more retirement income from IRA and 401k. So if you want to max out tax advantaged accounts, keep in mind that there is more space in Roth than in Traditional.
+1. This is often overlooked. Assume your tax rate is 25% (fed+state). In the first example, assume you have pre-tax $19,000 to invest. You may contribute all to a pre-tax 401(k) or $14,250 to Roth after tax. In this case, $19,000 in pre-tax 401(k) is equivalent to $14,250 in Roth and they are a toss-up depending on many factors. In the 2nd example, assume you have $25,333 to invest. You may put $19,000 in pre-tax 401(k) and the remaining $4,750 in a taxable after paying tax on $6,333. You may put the entire $19,000 in Roth after paying tax instead. $4,750 in Roth is obviously better than $4,750 in a taxable.
Only if you are maxing out the 55K (using mega back door). If not, allow other considerations (e.g. marginal tax buckets) to drive your decission

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Re: Traditional 401K vs Roth 401k

Post by TomatoTomahto » Sun Jan 06, 2019 8:33 am

JBTX wrote:
Sat Jan 05, 2019 3:12 pm
The choice isn't as easy as many here want to make it out to be. It really depends on a lot of individual factors.

Factors favoring traditional:

- high current marginal rate
- plans to retire early and do Roth conversions prior to SS
- fully committed to taking traditional tax savings and putting it in Roth or taxable account until retirement
- if traditional lowers your MAGI enough to contribute to individual Roth IRA.
- you live in a high state income tax state, but move to a low income tax state in retirement

Factors favoring Roth:
- lower current marginal rate
- you don't plan to retire early
- taxability of social security will increase your marginal rate in retirement
- you will have other income in retirement, such as pension or rental properties.
- you feel like income tax rates in the future are more likely to go up vs go down.
- Roth may be more flexible for estate planning purposes, especially taxable trusts, if you plan to leave an inheritance.

I also subscribe to the philosophy of diversity between both is good, because it is difficult to know what your furture situation will be or what future tax law will be.
+1
We recently decided to change my wife’s contributions (including catch up) to r401k. It won’t move the needle that much in either direction, but it will make for a better bequest, diversity is always a plus, we are too old for early retirement, I will be subject to RMDs before my wife retires, and deferred income will mean we don’t have any opportunity for Roth conversions at a low rate.

As far as tax rate predictions go, I expect rates to go up, but I also think a consumption tax is likely, so “nobody knows nothin.”
Okay, I get it; I won't be political or controversial. The Earth is flat.

DrivingFun
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Re: Traditional 401K vs Roth 401k

Post by DrivingFun » Sun Jan 06, 2019 8:55 am

JBTX wrote:
Sat Jan 05, 2019 3:12 pm
The choice isn't as easy as many here want to make it out to be. It really depends on a lot of individual factors.

Factors favoring traditional:

- high current marginal rate
- plans to retire early and do Roth conversions prior to SS
- fully committed to taking traditional tax savings and putting it in Roth or taxable account until retirement
- if traditional lowers your MAGI enough to contribute to individual Roth IRA.
- you live in a high state income tax state, but move to a low income tax state in retirement

Factors favoring Roth:
- lower current marginal rate
- you don't plan to retire early
- taxability of social security will increase your marginal rate in retirement
- you will have other income in retirement, such as pension or rental properties.
- you feel like income tax rates in the future are more likely to go up vs go down.
- Roth may be more flexible for estate planning purposes, especially taxable trusts, if you plan to leave an inheritance.

I also subscribe to the philosophy of diversity between both is good, because it is difficult to know what your furture situation will be or what future tax law will be.
The more I read about this the more I have no idea what the right thing to do is, therefor I have been doing both. We're a mid 30s couple in the 24% bracket right now. I am hopeful to retire in my 50s.

are_cynic
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Re: Traditional 401K vs Roth 401k

Post by are_cynic » Sun Jan 06, 2019 9:50 am

JBTX wrote:
Sat Jan 05, 2019 3:12 pm
The choice isn't as easy as many here want to make it out to be. It really depends on a lot of individual factors.

Factors favoring traditional:

- high current marginal rate
- plans to retire early and do Roth conversions prior to SS
- fully committed to taking traditional tax savings and putting it in Roth or taxable account until retirement
- if traditional lowers your MAGI enough to contribute to individual Roth IRA.
- you live in a high state income tax state, but move to a low income tax state in retirement

Factors favoring Roth:
- lower current marginal rate
- you don't plan to retire early
- taxability of social security will increase your marginal rate in retirement
- you will have other income in retirement, such as pension or rental properties.
- you feel like income tax rates in the future are more likely to go up vs go down.
- Roth may be more flexible for estate planning purposes, especially taxable trusts, if you plan to leave an inheritance.

I also subscribe to the philosophy of diversity between both is good, because it is difficult to know what your furture situation will be or what future tax law will be.
I would add that the mechanics of company matching play into this decision. The common advice is to contribute at least up to the company match- but the company match is always tax-deferred (as far as I know). In my case, I must contribute 8% to get to the full match of 7%. So my contributions have to be exclusively Roth to even reach (roughly) Roth-Trad parity. Acheiving diversification entails Roth heavy contributions, at least at first. Once past the match, contributions can be more evenly weighted.

The downside of the Traditional match is that it’s all the annoyance of future tax planning without the benefit of a present year deduction.
"Invert, always invert" ~Carl Jacobi

Pops1860
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Re: Traditional 401K vs Roth 401k

Post by Pops1860 » Sun Jan 06, 2019 10:31 am

One advantage of a Roth IRA (but not a Roth 401k, as I understand), especially for a younger investor just starting out, is that the contributions (but not earnings) to a Roth IRA can be withdrawn at any time, for any reason, without tax or penalty. This means the Roth IRA can serve as an 'emergency fund,' where the contributions are always easily available, but if not needed, they are a great head start on retirement savings.

For young investors who think they may need the $$ for house down payment, child expenses, or other major but normal young adult/family expenses, a Roth IRA gives them options.

This is one reason we help our grandkids start their Roth IRAs (based on their earnings, but we contribute the Roth IRA $$ as a 'matching' gift). They have access to the money should they need it at any time (we are not 'control freaks' with the gift), but they are exposed to tax advantaged retirement accounts/planning at the start of their careers.

I suspect that for most young investors, first maxing out the 'employer matching' xx% contribution to their traditional 401k, then maxing out their 'individual' Roth IRA contribution, is the way to go. Contribution profile can be adjusted as appropriate as family and career evolve. But good place to start. So, forget the Roth 401k for this situation, is my perspective.
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