Traditional 401k versus Roth 401k

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betterfinances
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Traditional 401k versus Roth 401k

Post by betterfinances » Thu Jan 14, 2016 10:13 pm

I need to make a decision on whether to invest a t401k or Roth 401k. My company offers both (no difference on company contribution) and I have to refill out the appropriate paperwork and turn it in next week.

I understand the mechanics behind both of them quite well, and also understand that, if my tax rates are the same in retirement as they are today, it doesn't matter which I invest in. We all know that that my tax rates will be different in 30 years than today, we just don't know if they will be higher or lower.

Here is what I do know:
Current average tax rate: 15%. Highest tax rate: 33% federal
State income tax: 0%

I'll move to a state that currently has income tax in retirement. I'll probably pay between 5% and 10% for state income tax on taxable income.

Do you think that saving state income tax today tips the balance to saving in a Roth 401k over a Traditional 401k?

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powermega
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Re: Traditional 401k versus Roth 401k

Post by powermega » Thu Jan 14, 2016 10:19 pm

If you're in the 15% bracket, you should use the Roth.
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Re: Traditional 401k versus Roth 401k

Post by KlangFool » Thu Jan 14, 2016 10:23 pm

betterfinances wrote:I need to make a decision on whether to invest a t401k or Roth 401k. My company offers both (no difference on company contribution) and I have to refill out the appropriate paperwork and turn it in next week.

I understand the mechanics behind both of them quite well, and also understand that, if my tax rates are the same in retirement as they are today, it doesn't matter which I invest in. We all know that that my tax rates will be different in 30 years than today, we just don't know if they will be higher or lower.

Here is what I do know:
Current average tax rate: 15%. Highest tax rate: 33% federal
State income tax: 0%

I'll move to a state that currently has income tax in retirement. I'll probably pay between 5% and 10% for state income tax on taxable income.

Do you think that saving state income tax today tips the balance to saving in a Roth 401k over a Traditional 401k?
betterfinances,

Are you in 33% tax bracket? If yes, trad. 401K.

http://www.bankrate.com/finance/taxes/tax-brackets.aspx

Please note that in order for your highest tax rate to be 33%,

1) As a a single filer, your taxable income need to be above 189K.

2) For married, filing jointly, your taxable income need to be above 230K.

KlangFool

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betterfinances
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Re: Traditional 401k versus Roth 401k

Post by betterfinances » Thu Jan 14, 2016 10:27 pm

powermega wrote:If you're in the 15% bracket, you should use the Roth.
The final dollar of my income is taxed at 33%. The first dollar is tax at 0%. On average it comes out to about 15.7%.

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Re: Traditional 401k versus Roth 401k

Post by KlangFool » Thu Jan 14, 2016 10:30 pm

betterfinances wrote:
powermega wrote:If you're in the 15% bracket, you should use the Roth.
The final dollar of my income is taxed at 33%. The first dollar is tax at 0%. On average it comes out to about 15.7%.
betterfinances,

Average tax rate does not matter in this case, you are in 33% bracket. Any money that you put in Trad. 401K, you save 33% in tax until you reach 28% bracket. Then, you save 28%.

KlangFool
Last edited by KlangFool on Sat Jan 23, 2016 10:10 pm, edited 1 time in total.

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FiveK
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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 3:33 am

KlangFool wrote:Average tax rate does not matter
+1

What matters is your marginal rate when contributing now vs. your marginal rate when withdrawing later. Ignore "average" values.

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Fri Jan 15, 2016 7:58 am

FiveK wrote:
KlangFool wrote:Average tax rate does not matter
+1

What matters is your marginal rate when contributing now vs. your marginal rate when withdrawing later. Ignore "average" values.
Marginal rate when contributing, average rate on withdrawal portion of income when withdrawing.

If you are collecting a significant pension and/or SS, then average and marginal rates on withdrawals may be similar, but if all income is from 401K/IRA withdrawals, then average and marginal rates on withdrawals can be quite different (this especially applies to those retiring early before pension/SS kick in).

To do this right, one should also consider taxation when collecting SS and the affect of RMD's. The latter is determined by the size of your Traditional accounts (presuming that you convert Roth 401K to Roth IRA before 70.5 and Congress doesn't decide to require RMD's from Roth IRA's).

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Re: Traditional 401k versus Roth 401k

Post by KlangFool » Fri Jan 15, 2016 8:33 am

rkhusky wrote:
FiveK wrote:
KlangFool wrote:Average tax rate does not matter
+1

What matters is your marginal rate when contributing now vs. your marginal rate when withdrawing later. Ignore "average" values.
Marginal rate when contributing, average rate on withdrawal portion of income when withdrawing.

If you are collecting a significant pension and/or SS, then average and marginal rates on withdrawals may be similar, but if all income is from 401K/IRA withdrawals, then average and marginal rates on withdrawals can be quite different (this especially applies to those retiring early before pension/SS kick in).

To do this right, one should also consider taxation when collecting SS and the affect of RMD's. The latter is determined by the size of your Traditional accounts (presuming that you convert Roth 401K to Roth IRA before 70.5 and Congress doesn't decide to require RMD's from Roth IRA's).
rkhusky,

OP is in 33% tax bracket. Tax brackets are adjusted upward by inflation every year. The chances that OP will be in 33% tax bracket and/or higher average tax rate during retirement is slim to none.

KlangFool

livesoft
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Re: Traditional 401k versus Roth 401k

Post by livesoft » Fri Jan 15, 2016 8:41 am

I wrote a little bit about this in a post earlier this month:
viewtopic.php?t=181291

@betterfinances, if you read that, does it help?

It is so hard to know how state taxes will play out in the future. Deductions will be much much higher because of inflation, too. And tax brackets will also start at much higher levels, too.
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Re: Traditional 401k versus Roth 401k

Post by psystal » Fri Jan 15, 2016 8:49 am

One additional consideration: do you have substantial student loans?

If so, contributions to the traditional 401k lower your AGI, which is how income-base repayment plans are calculated. These may or may not be important to you, depending on your situation.

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FiveK
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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 8:50 am

rkhusky wrote:Marginal rate when contributing, average rate on withdrawal portion of income when withdrawing.

If you are collecting a significant pension and/or SS, then average and marginal rates on withdrawals may be similar, but if all income is from 401K/IRA withdrawals, then average and marginal rates on withdrawals can be quite different (this especially applies to those retiring early before pension/SS kick in).

To do this right, one should also consider taxation when collecting SS and the affect of RMD's. The latter is determined by the size of your Traditional accounts (presuming that you convert Roth 401K to Roth IRA before 70.5 and Congress doesn't decide to require RMD's from Roth IRA's).
Agree with the highlighted portion, which is why one can be led astray by using average rate on withdrawal and should use marginal rate instead.

E.g., assume one is still working, has all savings in traditional 401k and IRA accounts, plans to spend $50K/yr in retirement, and has enough to withdraw $56,292/yr from those accounts when the time comes. The tax on $56,292 is $7,292 for an average tax of 13%, leaving $49K to spend. Note also that the marginal tax rate on that income (after deduction and exemption) is 25%.

When planning 401k and IRA contributions for this year, one should note that further traditional contributions will be taxed at the marginal rate of 25% on withdrawal due to investments made previously. Assuming those could be withdrawn at 13% would not be correct.

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Re: Traditional 401k versus Roth 401k

Post by Twins Fan » Fri Jan 15, 2016 9:05 am

betterfinances wrote:
powermega wrote:If you're in the 15% bracket, you should use the Roth.
The final dollar of my income is taxed at 33%. The first dollar is tax at 0%. On average it comes out to about 15.7%.
Think of it this way, contributions come off the top. So, your final dollar gets lowered by every one you contribute to the Traditional 401k. I.E. you're deferring the 33% you would have paid on those dollars.

Then your withdrawals someday start at the bottom. Although as mentioned, SS and a possible pension can bump that bottom start point up.

You should go with the Traditional 401k.

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FiveK
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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 9:38 am

Twins Fan wrote:Then your withdrawals someday start at the bottom. Although as mentioned, SS and a possible pension can bump that bottom start point up.
Previous traditional contributions also bump that bottom start point. There can be only one first withdrawal dollar for any year. The more one contributes to traditional accounts, the higher the marginal rate for subsequent years' contributions.

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Re: Traditional 401k versus Roth 401k

Post by Dulocracy » Fri Jan 15, 2016 10:05 am

OP: In your situation, I would use the Traditional to the extent that it drops you to a lower tax bracket. If it does not, keep using traditional. If it does, use Roth from there. I am a big fan of diversification in taxation as well as diversification of assets. Alternatively, use a backdoor Roth IRA to put aside more money and get diversification.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Traditional 401k versus Roth 401k

Post by _robert » Fri Jan 15, 2016 11:41 am

FiveK wrote:
Twins Fan wrote:Then your withdrawals someday start at the bottom. Although as mentioned, SS and a possible pension can bump that bottom start point up.
Previous traditional contributions also bump that bottom start point. There can be only one first withdrawal dollar for any year. The more one contributes to traditional accounts, the higher the marginal rate for subsequent years' contributions.
Can you explain this in further detail, not sure I understand what you are saying but it sounds important to know about.

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Fri Jan 15, 2016 11:59 am

FiveK wrote: E.g., assume one is still working, has all savings in traditional 401k and IRA accounts, plans to spend $50K/yr in retirement, and has enough to withdraw $56,292/yr from those accounts when the time comes. The tax on $56,292 is $7,292 for an average tax of 13%, leaving $49K to spend. Note also that the marginal tax rate on that income (after deduction and exemption) is 25%.

When planning 401k and IRA contributions for this year, one should note that further traditional contributions will be taxed at the marginal rate of 25% on withdrawal due to investments made previously. Assuming those could be withdrawn at 13% would not be correct.
Suppose that in this case one has $850K in a Traditional IRA account (invested in a MM account paying 0% interest for simplicity). The subject retires at 55 with no pension and will take SS at 70. $56,292 is withdrawn every year.

What is the average tax rate that they will pay on all the withdrawals? 13% was calculated above.

Does it make sense to have paid 25% tax while contributing, in order to pay no taxes in retirement instead with a Roth account worth $637.5K (= 0.75 * $850K)? No.

Why? Because this Roth worth $637.5K will only last 13 years at $49K/yr before it is depleted. The Traditional account will last 15 years with $5.6K left over. That's a difference of over $100K.

And the correct comparison is between the 25% that would have been paid to have the Roth vs. the average 13% tax rate on withdrawals.

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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 12:43 pm

rkhusky wrote: Suppose that in this case one has $850K in a Traditional IRA account (invested in a MM account paying 0% interest for simplicity). The subject retires at 55 with no pension and will take SS at 70. $56,292 is withdrawn every year.
What is the average tax rate that they will pay on all the withdrawals? 13% was calculated above.
Does it make sense to have paid 25% tax while contributing, in order to pay no taxes in retirement instead with a Roth account worth $637.5K (= 0.75 * $850K)? No.
Why? Because this Roth worth $637.5K will only last 13 years at $49K/yr before it is depleted. The Traditional account will last 15 years with $5.6K left over. That's a difference of over $100K.
And the correct comparison is between the 25% that would have been paid to have the Roth vs. the average 13% tax rate on withdrawals.
Yes, examples are good.

Let's take the situation above but back up one year so the subject is 54 and is $18K short of having the $56,292 x 15 = $844380 needed in the t401k.

Her marginal tax rate this year is 15%. If she looks at the 13% average withdrawal rate she will conclude "15% > 13%, therefore traditional is better." If she looks at the 25% marginal withdrawal rate she will conclude "15% < 25% therefore Roth is better." Let's plug in some numbers and see which is correct.

If $18K goes into the traditional account, she then retires and withdraws $56,292/yr, pays $7,292 in tax and has $49,000/yr to spend.

If $18K * 85% = $15300 goes into a Roth instead, she withdraws $55,092/yr from the t401k, pays $6,992 in tax and has $48,100 from the t401k. She adds $15300/15 = $1020/yr from the Roth and has a total of $49,120/yr to spend.

Comparing marginal vs. marginal allowed her to make the correct decision.

At one point I thought (and have seen in many places) that marginal vs. average was correct, but having run the numbers I agree with https://www.bogleheads.org/wiki/Traditional_versus_Roth: "The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better."

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FiveK
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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 12:46 pm

_robert wrote:
FiveK wrote:
Twins Fan wrote:Then your withdrawals someday start at the bottom. Although as mentioned, SS and a possible pension can bump that bottom start point up.
Previous traditional contributions also bump that bottom start point. There can be only one first withdrawal dollar for any year. The more one contributes to traditional accounts, the higher the marginal rate for subsequent years' contributions.
Can you explain this in further detail, not sure I understand what you are saying but it sounds important to know about.
See example (comparing 15% marginal vs. 13% average or 25% marginal) in the previous post - does that answer your question? If so, great. If not, let me know where things seem fuzzy - or where my logic actually is fuzzy. ;)

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Re: Traditional 401k versus Roth 401k

Post by Twins Fan » Fri Jan 15, 2016 12:58 pm

_robert wrote:
FiveK wrote:
Twins Fan wrote:Then your withdrawals someday start at the bottom. Although as mentioned, SS and a possible pension can bump that bottom start point up.
Previous traditional contributions also bump that bottom start point. There can be only one first withdrawal dollar for any year. The more one contributes to traditional accounts, the higher the marginal rate for subsequent years' contributions.
Can you explain this in further detail, not sure I understand what you are saying but it sounds important to know about.
My simple minded and made up numbers explanation... :happy

Say in a work year you make $100k and contribute $15k to a Trad 401k. That bumps your income for the year down to $85k. Yes, you probably contributed every two weeks, but as far as yearly taxes it all came off the top. You're in the 25% bracket. You got to defer paying 25% on the $15k.

In retirement, you get $15k a year in SS. That puts you in the 10% bracket already. You withdraw from your old 401k or IRA or take RMDs. Those withdrawals or RMDs start from the bottom, or after the $15k SS or in the 10% bracket. Until you bump up to the next bracket you're only paying 10% on the money you deferred the 25% on.

Yes, a very simple version, plenty of other things come into play, and those numbers are made up, but just to make the point. And as you can see, if you got more in SS, a healthy pension, and were taking RMDs to get you up to say $45k it gets the bottom floor up there quick.

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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 1:04 pm

rkhusky wrote:Does it make sense to have paid 25% tax while contributing, in order to pay no taxes in retirement instead with a Roth account worth $637.5K (= 0.75 * $850K)? No.
Agreed - going 100% Roth for an entire career would also not be correct. This leads to a 0% marginal rate and would thus suggest that some contributions should have been traditional.

In other words, the more one contributes to traditional the more likely some amount of Roth should be used, and the more one contributes to Roth the more likely some amount of traditional should be used.

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Re: Traditional 401k versus Roth 401k

Post by hnzw rui » Fri Jan 15, 2016 1:37 pm

FiveK wrote:Her marginal tax rate this year is 15%. If she looks at the 13% average withdrawal rate she will conclude "15% > 13%, therefore traditional is better." If she looks at the 25% marginal withdrawal rate she will conclude "15% < 25% therefore Roth is better." Let's plug in some numbers and see which is correct.
Just a thought, if someone is at just 15% marginal tax rate while working and has 13% effective tax rate when retired, that person likely has higher income or spending during retirement than while working. Either that or they went from MFJ/HoH to Single or are just starting their careers.

Also, her marginal tax rate is 33%. Her effective/average tax rate is 15%.

At the 33% marginal bracket, the maximum 401k contribution compared to income is pretty small. Just do some backdoor Roth IRA for Roth diversification. A large chunk of savings will likely have to be in a taxable account. With $18K trad 401k and $5.5 Roth IRA, that's around 75/25 split between tax deferred and Roth. Put the bond allocation in trad 401k and go all equities in Roth IRA and the IRA will probably be bigger than the 401k upon retirement.
Last edited by hnzw rui on Fri Jan 15, 2016 1:46 pm, edited 2 times in total.

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Fri Jan 15, 2016 1:37 pm

FiveK wrote: Her marginal tax rate this year is 15%.
The assumption was that the tax rate on contributions was 25%.

But I agree that one should have a mix of Roth and Traditional. And, as mentioned previously, one needs to take into account the size of their account, RMD's, SS, and expected withdrawals to get a clearer picture.

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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 1:49 pm

rkhusky wrote:
FiveK wrote: Her marginal tax rate this year is 15%.
The assumption was that the tax rate on contributions was 25%.

But I agree that one should have a mix of Roth and Traditional. And, as mentioned previously, one needs to take into account the size of their account, RMD's, SS, and expected withdrawals to get a clearer picture.
Picked a marginal contribution rate in between the average and marginal withdrawal rates to provide a clearer picture of which comparison leads to the correct result. And yes, it's rarely this simple in real life....

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FiveK
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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 2:30 pm

hnzw rui wrote:
FiveK wrote:Her marginal tax rate this year is 15%. If she looks at the 13% average withdrawal rate she will conclude "15% > 13%, therefore traditional is better." If she looks at the 25% marginal withdrawal rate she will conclude "15% < 25% therefore Roth is better." Let's plug in some numbers and see which is correct.
...
Also, her marginal tax rate is 33%. Her effective/average tax rate is 15%.
...
How is the marginal tax rate 33% for an AGI of $56,292/yr, with all that income coming from 401k distributions taken after retiring at age 55?

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Re: Traditional 401k versus Roth 401k

Post by hnzw rui » Fri Jan 15, 2016 3:08 pm

FiveK wrote:
hnzw rui wrote:
FiveK wrote:Her marginal tax rate this year is 15%. If she looks at the 13% average withdrawal rate she will conclude "15% > 13%, therefore traditional is better." If she looks at the 25% marginal withdrawal rate she will conclude "15% < 25% therefore Roth is better." Let's plug in some numbers and see which is correct.
...
Also, her marginal tax rate is 33%. Her effective/average tax rate is 15%.
...
How is the marginal tax rate 33% for an AGI of $56,292/yr, with all that income coming from 401k distributions taken after retiring at age 55?
The OP mentioned current marginal tax rate is 33%. Didn't realize you were referring to that $56K example.

Mind, for tax status single to have a marginal tax rate of 15%, AGI will have to be ~$48K so income after $18K Roth 401k contribution, ~$5K federal income tax and ~$3.5K FICA would only be $21.5K. Of course, that person could be making more than $48K but the taxes saved on the amount above $48K is 25% not just 15%.

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Re: Traditional 401k versus Roth 401k

Post by dsmil » Fri Jan 15, 2016 3:53 pm

FiveK wrote:This leads to a 0% marginal rate and would thus suggest that some contributions should have been traditional.
Even after tax deductions/exemptions, aren't a lot of people in the 15% bracket or close to it simply from social security?

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Re: Traditional 401k versus Roth 401k

Post by livesoft » Fri Jan 15, 2016 3:54 pm

dsmil wrote:Even after tax deductions/exemptions, aren't a lot of people in the 15% bracket or close to it simply from social security?
I am not collecting SS until more than 10 years from now, so I have some time to do Roth conversions before then.
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Re: Traditional 401k versus Roth 401k

Post by dsmil » Fri Jan 15, 2016 3:59 pm

livesoft wrote:
dsmil wrote:Even after tax deductions/exemptions, aren't a lot of people in the 15% bracket or close to it simply from social security?
I am not collecting SS until more than 10 years from now, so I have some time to do Roth conversions before then.
Good point! I didn't think about the early retirement angle.

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Re: Traditional 401k versus Roth 401k

Post by hnzw rui » Fri Jan 15, 2016 4:31 pm

dsmil wrote:
livesoft wrote:
dsmil wrote:Even after tax deductions/exemptions, aren't a lot of people in the 15% bracket or close to it simply from social security?
I am not collecting SS until more than 10 years from now, so I have some time to do Roth conversions before then.
Good point! I didn't think about the early retirement angle.
And "early retirement" could just as easily mean laid off in your 50s or a medical issue and can't get a new job. Hence, if at least in the 25% marginal bracket and not yet financially independent, I'd be more inclined to have the bulk of contributions in tax deferred rather than Roth. You can manage income in later years to reduce taxes but once you give Uncle Sam his cut, that money's gone forever.

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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 5:18 pm

hnzw rui wrote:Mind, for tax status single to have a marginal tax rate of 15%, AGI will have to be ~$48K so income after $18K Roth 401k contribution, ~$5K federal income tax and ~$3.5K FICA would only be $21.5K. Of course, that person could be making more than $48K but the taxes saved on the amount above $48K is 25% not just 15%.
hnzw rui wrote:Hence, if at least in the 25% marginal bracket and not yet financially independent, I'd be more inclined to have the bulk of contributions in tax deferred rather than Roth.
Agreed on all above counts, and they are also consistent with the wiki entry on this topic:
* If you are in the 15% tax bracket, prefer a Roth.
* If you expect to be in a higher tax bracket than your current bracket for most of your career, prefer a Roth.
* If you can max out a Roth account and will have a large traditional account or a pension, prefer a Roth.[3]
* Otherwise, prefer a traditional account.
...
The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better.

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Fri Jan 15, 2016 10:11 pm

FiveK wrote:
rkhusky wrote: Suppose that in this case one has $850K in a Traditional IRA account (invested in a MM account paying 0% interest for simplicity). The subject retires at 55 with no pension and will take SS at 70. $56,292 is withdrawn every year.
What is the average tax rate that they will pay on all the withdrawals? 13% was calculated above.
Does it make sense to have paid 25% tax while contributing, in order to pay no taxes in retirement instead with a Roth account worth $637.5K (= 0.75 * $850K)? No.
Why? Because this Roth worth $637.5K will only last 13 years at $49K/yr before it is depleted. The Traditional account will last 15 years with $5.6K left over. That's a difference of over $100K.
And the correct comparison is between the 25% that would have been paid to have the Roth vs. the average 13% tax rate on withdrawals.
Yes, examples are good.

Let's take the situation above but back up one year so the subject is 54 and is $18K short of having the $56,292 x 15 = $844380 needed in the t401k.

Her marginal tax rate this year is 15%. If she looks at the 13% average withdrawal rate she will conclude "15% > 13%, therefore traditional is better." If she looks at the 25% marginal withdrawal rate she will conclude "15% < 25% therefore Roth is better." Let's plug in some numbers and see which is correct.

If $18K goes into the traditional account, she then retires and withdraws $56,292/yr, pays $7,292 in tax and has $49,000/yr to spend.

If $18K * 85% = $15300 goes into a Roth instead, she withdraws $55,092/yr from the t401k, pays $6,992 in tax and has $48,100 from the t401k. She adds $15300/15 = $1020/yr from the Roth and has a total of $49,120/yr to spend.

Comparing marginal vs. marginal allowed her to make the correct decision.

At one point I thought (and have seen in many places) that marginal vs. average was correct, but having run the numbers I agree with https://www.bogleheads.org/wiki/Traditional_versus_Roth: "The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better."
This analysis is still sorely lacking. We have an individual that is expecting to pay a marginal and average rate of 25% while contributing to a Roth account, and a marginal rate of 25% and an average rate of 13% when withdrawing from a Traditional account. Should they go with Roth or Traditional during their working career?

Comparing marginal rates, 25% vs 25%, would lead one to say that it doesn't matter much, while comparing marginal while contributing to average while withdrawing, 25% vs 13%, gives one the correct answer that one should go mainly, if not entirely, with a Traditional account. This is notwithstanding that perhaps in the last year of employment when you might drop into the 15% bracket by working half a year (or any other year when you drop into the 15% bracket), that contributing to a Roth might make sense. Even there though, if one is maxing both 401K and Roth IRA, I would go entirely Traditional in the 401K.

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Re: Traditional 401k versus Roth 401k

Post by Epsilon Delta » Fri Jan 15, 2016 10:58 pm

rkhusky wrote: Comparing marginal rates, 25% vs 25%, would lead one to say that it doesn't matter much, while comparing marginal while contributing to average while withdrawing, 25% vs 13%, gives one the correct answer that one should go mainly, if not entirely, with a Traditional account. This is notwithstanding that perhaps in the last year of employment when you might drop into the 15% bracket by working half a year (or any other year when you drop into the 15% bracket), that contributing to a Roth might make sense. Even there though, if one is maxing both 401K and Roth IRA, I would go entirely Traditional in the 401K.
If in retirement the marginal rate is 25% some type of income has already filled the lower brackets, so all entire IRA withdrawal will be taxed at 25%. Conversely if the lower brackets are not filled the the marginal rate is not 25%.

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Re: Traditional 401k versus Roth 401k

Post by FiveK » Fri Jan 15, 2016 11:19 pm

rkhusky wrote:This analysis is still sorely lacking.
Well,that is your opinion.... Let's get back to quantitative analysis.
We have an individual that is expecting to pay a marginal and average rate of 25% while contributing to a Roth account
Could you explain "pay a marginal and average rate of 25%"? Is this at the same time, or is one at contribution and the other at withdrawal, or...?
and a marginal rate of 25% and an average rate of 13% when withdrawing from a Traditional account. Should they go with Roth or Traditional during their working career?
Are you assuming that every year of their working career the marginal rate is 25%?
Comparing marginal rates, 25% vs 25%, would lead one to say that it doesn't matter much,
It is only after contributing for many years (or winning the lottery, or getting an inheritance, or...) that the account balances for retirement grow to support an income that reaches the 25% marginal rate. When contributions begin, the account balances are so low that, based on them alone, there would be a 0% marginal rate on withdrawal. The 0% marginal withdrawal rate does of course suggest that traditional is preferred.
while comparing marginal while contributing to average while withdrawing, 25% vs 13%, gives one the correct answer that one should go mainly, if not entirely, with a Traditional account. This is notwithstanding that perhaps in the last year of employment when you might drop into the 15% bracket by working half a year (or any other year when you drop into the 15% bracket), that contributing to a Roth might make sense.
If one always compares marginal vs. marginal, no exceptions or special treatments are needed. Agreed that this comparison can be done on an annual basis.
Even there though, if one is maxing both 401K and Roth IRA, I would go entirely Traditional in the 401K.
There can be room for speculation instead of a pure financial analysis. One example would be contributing to a Roth early in one's career if one assumes that later years' income will be much higher, thus "saving room" for traditional contributions at higher marginal rates.

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Re: Traditional 401k versus Roth 401k

Post by basspond » Sat Jan 16, 2016 6:00 am

Diversify. Since we don't know what future tax rates will be. In retirement you will be able to manage your tax payments better if you have taxable (401k) and non-taxable (Roth and after tax savings) buckets. If you are currently squeezing by on your budget, I would set 401k contributions to 75%, Roth 25% of total contributions, reverse percentages if you don't need extra money now. At the same time save at least 1% of your income in after tax accounts.

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Re: Traditional 401k versus Roth 401k

Post by JW-Retired » Sat Jan 16, 2016 9:16 am

betterfinances wrote:
The final dollar of my income is taxed at 33%. The first dollar is tax at 0%. On average it comes out to about 15.7%.
I find your 15.7% average tax rate extremely hard to believe. A single filer taking the standard deduction who has an income just a little above the $190k taxable income bottom of the 33% bracket might have say a $205,000 gross salary. At that gross, TaxCaster says their average Federal tax rate (tax owed/taxable income) would come out to 24.6%. ($47857/$194,700)
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Re: Traditional 401k versus Roth 401k

Post by hnzw rui » Sat Jan 16, 2016 11:43 am

basspond wrote:Diversify. Since we don't know what future tax rates will be. In retirement you will be able to manage your tax payments better if you have taxable (401k) and non-taxable (Roth and after tax savings) buckets. If you are currently squeezing by on your budget, I would set 401k contributions to 75%, Roth 25% of total contributions, reverse percentages if you don't need extra money now. At the same time save at least 1% of your income in after tax accounts.
+1. The 75/25 split actually corresponds fairly closely to 401k/IRA contribution limits (18K/5.5K). At $189K taxable income (top of 28% marginal), that's just 12% so definitely should be maxing out at least that if wanting to maintain the same standard of living upon retirement.

Honestly though, unless someone has a sizeable pension or other ordinary income, pre- and post-retirement tax rates are a moving target. If someone contributes everything to Roth at 25% marginal while working, then you're at 0% marginal when you retire. If someone contributes everything to tax deferred while working and the market cooperates, then it's possible SS+RMDs might put you in a higher bracket upon retirement. It's a balancing act.

Mind, 25% marginal is a fairly wide band (~$35-85K Single, ~$75-150K MFJ or around $45-95K Single or $95-175K MFJ with standard deduction+exemptions) so I can see how someone can be at that marginal tax rate for the entirety of their working career and retirement.

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Sat Jan 16, 2016 1:30 pm

Epsilon Delta wrote:
If in retirement the marginal rate is 25% some type of income has already filled the lower brackets, so all entire IRA withdrawal will be taxed at 25%. Conversely if the lower brackets are not filled the the marginal rate is not 25%.
I am using the usual definition of marginal rate to mean the tax rate on the last dollar. If one is spanning tax brackets, I am using the term average tax rate on contributions/withdrawals.

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Re: Traditional 401k versus Roth 401k

Post by Epsilon Delta » Sat Jan 16, 2016 1:57 pm

rkhusky wrote:
Epsilon Delta wrote:
If in retirement the marginal rate is 25% some type of income has already filled the lower brackets, so all entire IRA withdrawal will be taxed at 25%. Conversely if the lower brackets are not filled the the marginal rate is not 25%.
I am using the usual definition of marginal rate to mean the tax rate on the last dollar. If one is spanning tax brackets, I am using the term average tax rate on contributions/withdrawals.
It should be the last dollar before you make the decision, i.e. without the IRA contribution, not after the IRA contribution.

If you look at the economics books that can type set ∂x/∂t you'll find that marginal rates are just partial derivatives, and are very clearly defined. That definition loses a lot in translation.

You can adopt any definition you find useful, but be aware that other people use the same definition I do, which explains much of the disagreement.

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Sat Jan 16, 2016 2:06 pm

FiveK wrote:
We have an individual that is expecting to pay a marginal and average rate of 25% while contributing to a Roth account
Could you explain "pay a marginal and average rate of 25%"? Is this at the same time, or is one at contribution and the other at withdrawal, or...?
I mean that all their contribution is taxed at 25%. One can have a marginal rate of 25%, but only $1000 is taxed at 25%, the rest being taxed at 15%. By saying that both their marginal and average rate on contributions is 25%, I mean that their Traditional contributions are not dropping them into the 15% tax bracket.
FiveK wrote:
and a marginal rate of 25% and an average rate of 13% when withdrawing from a Traditional account. Should they go with Roth or Traditional during their working career?
Are you assuming that every year of their working career the marginal rate is 25%?
Yes, I am assuming for the moment that all their 401K contributions are taxed at 25%. However, the text that you quoted is for the withdrawals. For the scenario I set forth above, the withdrawals cover the 0%, 10%, 15% and 25% tax brackets, hence the average tax rate on Traditional withdrawals has an average rate of 13%.

A common question is “I am starting to contribute to a 401K. Should I use a Traditional or Roth?” In my opinion, if all one has are the tax rates on contributions and withdrawals, then comparing the average tax rate paid now to contribute to a Roth versus the average tax rate that one would pay in retirement for Traditional withdrawals is the correct comparison for a first order approximation.

It is probably more common that the average tax rate on contributions is also the marginal tax rate, while the average withdrawal tax rate may be the same as the marginal rate, but not perhaps not as common. In the example from above, the average and marginal tax rates on withdrawals are quite different, 13% vs. 25%.

I acknowledge that the average tax rate is not the whole answer as your counter example showed. However, if one simply compared marginal rates and chosen the Roth, then the individual would have been short more than $100K than if they had chosen Traditional. You showed that by putting some into Roth if one were in the 15% marginal tax bracket for one year, one could save about $1.8K in total ($120/yr), which I would term a second order effect.

Having said that, let’s look at a more complete analysis of this simple scenario. In turns out that an interesting break point in the contributions would have been to put $716,250 (or 85% of $844,380) into the Traditional account and $128,130 into a Roth account of which $96,097.50 would have been left after paying taxes. In this way, every year one would be withdrawing $47,750 from Traditional (top of 15% bracket) and $6,406.50 from Roth for an after-tax amount of $49,000, which is exactly what one would have by contributing everything to a Traditional account, as computed above.

The interesting point is that, because some portion of the withdrawals is taxed at 25%, if one finds oneself in the 15% bracket, one could save some taxes by contributing to a Roth. That point is missed if one simply compares marginal contribution rates with average withdrawal rates, which is what I was proposing. Therefore, in this simple scenario, one could save taxes if one contributes to Roth when in the 15% bracket, up to the amount of $128,130. More than that amount, the outcome does not change.

So, in conclusion, the best comparison is between the average tax rate paid now to contribute to a Roth versus the average tax rate that one would pay in retirement for Traditional withdrawals. However, this is not the whole story and, if one knows the amount that one would withdraw from accounts in retirement and if one finds oneself contributing across multiple tax brackets, then one can fine tune contributions to save more on taxes. Comparing marginal rates can lead one to make incorrect choices. In this example, if one were to compare marginal rates (25% vs. 25%), one might be led to think that it doesn’t matter whether one chooses Roth or Traditional. Even if one contributed 50/50 to both, one would have erred and have had less at the end, since the break point turned out to be 85/15.

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Re: Traditional 401k versus Roth 401k

Post by ParkersPaPa » Sat Jan 16, 2016 2:19 pm

basspond wrote:Diversify... Since we don't know what future tax rates will be. In retirement you will be able to manage your tax payments better if you have taxable (401k) and non-taxable (Roth and after tax savings) buckets.
My mega-corp 401k administrator does not allow one to determine the bucket for withdrawal. Purely a ratio of traditional and Roth balances. :x

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Sat Jan 16, 2016 2:39 pm

Epsilon Delta wrote:
rkhusky wrote:
Epsilon Delta wrote:
If in retirement the marginal rate is 25% some type of income has already filled the lower brackets, so all entire IRA withdrawal will be taxed at 25%. Conversely if the lower brackets are not filled the the marginal rate is not 25%.
I am using the usual definition of marginal rate to mean the tax rate on the last dollar. If one is spanning tax brackets, I am using the term average tax rate on contributions/withdrawals.
It should be the last dollar before you make the decision, i.e. without the IRA contribution, not after the IRA contribution.

If you look at the economics books that can type set ∂x/∂t you'll find that marginal rates are just partial derivatives, and are very clearly defined. That definition loses a lot in translation.

You can adopt any definition you find useful, but be aware that other people use the same definition I do, which explains much of the disagreement.
Saying that one is contributing at a 25% marginal rate, but withdrawing at a 0% marginal rate doesn't seem particularly useful either. I'm thinking that because the marginal rate is a point property, it is not useful in discussing these decisions involving 10's of thousands of dollars, which often span tax brackets. Perhaps using the average tax rate on a particular amount would be the best terminology.

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Re: Traditional 401k versus Roth 401k

Post by Not Law » Sat Jan 16, 2016 3:02 pm

Most of these arguments address the dollars going in as though they were static. I think that one needs to consider that a traditional account alters all income in it to ordinary taxable income. While a regular taxable investment account allows for favorable treatment of capital gains and qualified dividends; and a Roth account eliminates taxation altogether. My goal is to try to get to about 30 to 40% of each type of account, which would allow for minimal taxation by selectively tapping the accounts.

Say I have a million invested, 40% traditional, 30% taxable and 30% Roth. I want my AA to be 60% stock and 40% bonds. Assume for the example that bonds earn 5%, and stocks earn 10%, which is all capital gains and dividends. All of my bond allocations would be in the traditional, since that income will be taxed as ordinary income anyway and the other two accounts are all stocks. So I earn $20k per year in the traditional, $30k per year each in the taxable and the Roth.

If I withdraw all earnings (married couple), the $20k from the traditional is slightly less than the standard deduction plus two exemptions, so it is not taxed at all. The $30k in the taxable account keeps me in the 15% bracket and is therefore not taxed due to the favorable capital gain/dividend treatment. By definition the Roth earnings are not taxed. Thus I have taken $80k out and paid ZERO in taxes. If all the funds were in a traditional account, I would be paying taxes on about $60k, or about $8000 per year.

Fast forward to age 70 when SS starts (lets call that $40k per year) and 70.5 when RMDs need to happen. Amazingly, my account still has a million in it! My RMD is about $15k on the $400k balance in the traditional. Not a big deal, I have been taking $20k a year. But that plus my traditional earnings, plus half my SS determine how much of my SS gets taxed. So $15k RMD +$30k traditional earnings + $20k SS/2= $65k, meaning 85% of my SS is taxable. BUT WAIT! Total income is still in the 15% bracket, so the $30k traditional earnings is not taxed. Leaving $15k RMD plus $34k taxable SS or $49k of taxable income. The first 23k is the standard (over 65) deduction plus two exemptions, leaving $26k - the first $18k is taxed at 10% ($1800) plus 15% of the $8k balance ($1200) or $3000 tax on $85k - a 3.5% effective rate.

Post SS and RMD, if all the funds were in a traditional account, the RMD would be about $37k, but you need to get $45k (or more depending on taxes), to match the above scenario. So you take the $45k. This also means that 85% of your SS is taxed for a total of $79k taxable, or $30k more than above, adding $4500 more than above to your tax bill, so now your are paying $7500 tax on $85k - a 7.9% effective rate. And you still have $4500 less to spend - so you really needed to take out over $50k to actually match the above scenario.

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Re: Traditional 401k versus Roth 401k

Post by FiveK » Sat Jan 16, 2016 3:17 pm

rkhusky wrote:A common question is “I am starting to contribute to a 401K. Should I use a Traditional or Roth?” In my opinion, if all one has are the tax rates on contributions and withdrawals, then comparing the average tax rate paid now to contribute to a Roth versus the average tax rate that one would pay in retirement for Traditional withdrawals is the correct comparison for a first order approximation.
Agreed - to the extent that this is asking "will your income in retirement be higher or lower than while working?" and restricting the options to "all traditional" vs. "all Roth".
I acknowledge that the average tax rate is not the whole answer as your counter example showed. However, if one simply compared marginal rates and chosen the Roth, then the individual would have been short more than $100K than if they had chosen Traditional. You showed that by putting some into Roth if one were in the 15% marginal tax bracket for one year, one could save about $1.8K in total ($120/yr), which I would term a second order effect.
Agreed that on an "all traditional vs. all Roth" comparison, traditional would be better. Fortunately we aren't restricted to that choice, so let's continue.
Having said that, let’s look at a more complete analysis of this simple scenario. In turns out that an interesting break point in the contributions would have been to put $716,250 (or 85% of $844,380) into the Traditional account and $128,130 into a Roth account of which $96,097.50 would have been left after paying taxes. In this way, every year one would be withdrawing $47,750 from Traditional (top of 15% bracket) and $6,406.50 from Roth for an after-tax amount of $49,000, which is exactly what one would have by contributing everything to a Traditional account, as computed above.
Now we're getting to the heart of the issue: for many (most?) people, "some of each" is the right answer. To determine "how much of each?", one can (and should) look at marginal rates. The contribution marginal rate is known. The withdrawal rate must be guessed. The first year one contributes, the expected marginal rate on withdrawal from that year's contribution is likely 0%, so that contribution goes into a traditional account. As years go by, and more contributions are made, the retirement balances grow. At some point, any more contributed to a traditional account will cause the marginal withdrawal rate to hit 25%. At that point one can switch to Roth contributions.
The interesting point is that, because some portion of the withdrawals is taxed at 25%, if one finds oneself in the 15% bracket, one could save some taxes by contributing to a Roth. That point is missed if one simply compares marginal contribution rates with average withdrawal rates, which is what I was proposing. Therefore, in this simple scenario, one could save taxes if one contributes to Roth when in the 15% bracket, up to the amount of $128,130. More than that amount, the outcome does not change.
I don't follow the "up to the amount of $128,130" but otherwise agree with all stated here.
So, in conclusion, the best comparison is between the average tax rate paid now to contribute to a Roth versus the average tax rate that one would pay in retirement for Traditional withdrawals.
Hmm, thought we were heading to a different conclusion. The best (i.e., correct) comparison is marginal vs. marginal.
However, this is not the whole story and, if one knows the amount that one would withdraw from accounts in retirement and if one finds oneself contributing across multiple tax brackets, then one can fine tune contributions to save more on taxes. Comparing marginal rates can lead one to make incorrect choices. In this example, if one were to compare marginal rates (25% vs. 25%), one might be led to think that it doesn’t matter whether one chooses Roth or Traditional.
It doesn't matter if the contribution is less than the IRS maximum for a given year. What happens when the contribution reaches the IRS maximum is a different story. Rather than sidetrack this discussion, see viewtopic.php?f=10&t=140758.
Even if one contributed 50/50 to both, one would have erred and have had less at the end, since the break point turned out to be 85/15.
Agreed.

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Re: Traditional 401k versus Roth 401k

Post by hnzw rui » Sat Jan 16, 2016 4:21 pm

ParkersPaPa wrote:
basspond wrote:Diversify... Since we don't know what future tax rates will be. In retirement you will be able to manage your tax payments better if you have taxable (401k) and non-taxable (Roth and after tax savings) buckets.
My mega-corp 401k administrator does not allow one to determine the bucket for withdrawal. Purely a ratio of traditional and Roth balances. :x
You could always rollover your 401k to IRA. Also, for additional Roth space, there's always the IRA (either direct, backdoor or even mega-backdoor).

Assuming 25 years of retirement, same spending as with working years, no SS, same tax rate with inflation-adjusted brackets/deductions/exemptions, and 0% real return once retired, the tipping point between tax deferred and Roth for the portfolio balance with single filing status is $1.2M ($48K * 25 years: AGI for top of 15% bracket).

Assuming income never exceeds 25% marginal, by commutative property of multiplication:
x * (1+r)^n * 0.75 = x * 0.75 * (1+r)^n
it doesn't really matter much whether the next $1.3M (($100K - $48K) * 25 years: AGI range for 25% bracket) is in Roth or tax deferred.

However, that's an awful lot of assumptions to make and chances are things would have changed significantly in 30 years. Best thing to do really is to diversify. i-ORP works pretty well for modeling taxes and ideal placement/source of contributions/withdrawals. Alas, you do assume a constant rate of return and inflation. :|

Personally, I'm less concerned about SS benefits getting taxed than I am in minimizing total inflation-adjusted taxes paid over my lifetime. My goal is to have both lifestyle/consumption and tax smoothing. :)

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Re: Traditional 401k versus Roth 401k

Post by betterfinances » Sat Jan 16, 2016 4:26 pm

You can only rollover your 401k if you separate from employment.

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Re: Traditional 401k versus Roth 401k

Post by hnzw rui » Sat Jan 16, 2016 4:39 pm

betterfinances wrote:You can only rollover your 401k if you separate from employment.
Not necessarily. Our plan allows in-service rollovers.

That said, since we're talking withdrawals from 401k, I reckon for most that would mean they've already retired/separated from employment. Sure, you can withdraw while working but that usually involves penalties and I doubt BHers would do that unless it's a dire emergency.

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Re: Traditional 401k versus Roth 401k

Post by TomCat96 » Sat Jan 16, 2016 4:50 pm

I'm in the 28% tax bracket and I still without a doubt go 100% traditional 401k.
Even if I were in the 25% bracket, I would still go 100% traditional (and in fact did in the past).

You literally have years to figure out various tax strategies to mitigate government taxation when you take out your money from your 401k
when you retire. That's probably a little easier for me to say as I have another 31 years to go before retirement.

But even knowing what we know today, being retired you are likely to be able to avail yourself of certain tax benefits that you cannot avail yourself of at the moment.

1) Medical expenses to the extent they exceed 10% of AGI are deductible if you itemize. This may not be an issue now, but it might be when you retire.

2) Personal exemption for being 65 which knocks 4k off your taxable income when you retire, that you cannot take today.

3) The capacity to move to a state with lower income tax when you retire.

4) The ability to advantage of any favorable tax legislation between now and the time you retire. You can always backdoor Roth between now and when you retire if the numbers work out.

These are just a scant few. If you start your own business when you retire, the strategies multiply considerably.

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Re: Traditional 401k versus Roth 401k

Post by rkhusky » Sat Jan 16, 2016 6:58 pm

FiveK wrote:
Having said that, let’s look at a more complete analysis of this simple scenario. In turns out that an interesting break point in the contributions would have been to put $716,250 (or 85% of $844,380) into the Traditional account and $128,130 into a Roth account of which $96,097.50 would have been left after paying taxes. In this way, every year one would be withdrawing $47,750 from Traditional (top of 15% bracket) and $6,406.50 from Roth for an after-tax amount of $49,000, which is exactly what one would have by contributing everything to a Traditional account, as computed above.
Now we're getting to the heart of the issue: for many (most?) people, "some of each" is the right answer. To determine "how much of each?", one can (and should) look at marginal rates. The contribution marginal rate is known. The withdrawal rate must be guessed. The first year one contributes, the expected marginal rate on withdrawal from that year's contribution is likely 0%, so that contribution goes into a traditional account. As years go by, and more contributions are made, the retirement balances grow. At some point, any more contributed to a traditional account will cause the marginal withdrawal rate to hit 25%. At that point one can switch to Roth contributions.
You can switch to Roth or not. It won't make a difference in this scenario where all contributions are taxed at 25%.
FiveK wrote:
The interesting point is that, because some portion of the withdrawals is taxed at 25%, if one finds oneself in the 15% bracket, one could save some taxes by contributing to a Roth. That point is missed if one simply compares marginal contribution rates with average withdrawal rates, which is what I was proposing. Therefore, in this simple scenario, one could save taxes if one contributes to Roth when in the 15% bracket, up to the amount of $128,130. More than that amount, the outcome does not change.
I don't follow the "up to the amount of $128,130" but otherwise agree with all stated here.
Once you have contributed an amount equal to $128,130 at 15%, further contributions won't lower your tax bill anymore (until one reaches the 10% bracket level), because your withdrawals are also being taxed at the 15% marginal level. So, you could go back to Traditional or stay with Roth. If contributions are taxed at the same average rate as withdrawals, there is no advantage to Roth or Traditional. The end result is the same.

Back to the original problem: someone just starting to contribute to a 401K says that they would be paying 25% to contribute to a Roth and they expect that when withdrawing, they would be paying a marginal tax rate of 25% and an average tax rate on their withdrawals of 13%. With only that information, what do you advise them to invest in? Roth, Traditional, or a combination of both? If the latter, what ratio do you advise? And how does your advice relate to the marginal and average tax rates that they provided?

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Re: Traditional 401k versus Roth 401k

Post by dodecahedron » Sat Jan 16, 2016 7:19 pm

TomCat96 wrote: 2) Personal exemption for being 65 which knocks 4k off your taxable income when you retire, that you cannot take today.
Being over 65 no longer gets you an additional personal exemption. That ended back in 1986!

Instead, being over 65 now gets you a (relatively small) increase in your standard deduction (SD). Exact amount of additional standard deduction depends on filing status. If you are married you get a $1,250 increase in SD. Otherwise you get a $1,550 increase in your SD. Either way much less than a $4K subtraction from taxable income. More details here: http://www.obliviousinvestor.com/2015-tax-brackets/

And, of course, if you itemize rather than take the SD, being over 65 does not give you any tax benefit (aside from a temporarily lower threshold for itemizing medical expenses, 7.5% rather than 10% of AGI.)

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Re: Traditional 401k versus Roth 401k

Post by KlangFool » Sat Jan 16, 2016 7:23 pm

rkhusky wrote:
Back to the original problem: someone just starting to contribute to a 401K says that they would be paying 25% to contribute to a Roth and they expect that when withdrawing, they would be paying a marginal tax rate of 25% and an average tax rate on their withdrawals of 13%. With only that information, what do you advise them to invest in? Roth, Traditional, or a combination of both? If the latter, what ratio do you advise? And how does your advice relate to the marginal and average tax rates that they provided?
rkhusky,

I would say that the person's expectation is unrealistic. The person would have to be extremely lucky for a very long period of time. That person is 37. He claimed that he will retire at 59.5 aka about 22 years later.

At 2015, to be in 25% tax bracket, a household needs to have taxable income of $74,900 to $151,200.

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Last edited by KlangFool on Sat Jan 16, 2016 7:40 pm, edited 1 time in total.

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