Some Roth 403b better early in career?

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need403bhelp
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Some Roth 403b better early in career?

Post by need403bhelp » Thu Jan 03, 2019 12:14 am

Happy New Year, all!

I'm still trying to process Roth vs traditional 403b (over the course of > 1 year). I understand that pre-tax 401k/403b accounts are generally favored on the forum for most people. Specifically, the advantages of filling one's pre-tax 401k/403b rather than Roth are:
1. Most people will be in a lower marginal tax bracket in retirement than when they are working AND
2. Even if one is in a higher marginal tax bracket in retirement, since the 401k/403b will make up most of their income, some withdrawals in each retirement year will be taxed at the lowest tax bracket, some at the second lowest, etc. - so the bulk of the withdrawals still will come out in a lower tax bracket than when they were put into the 401k/403b.

Therefore, I've seen recommendations on the forum that, unless one is making substantially less now than in their future working career, one should make all 401k/403b contributions as pre-tax until they have sufficient retirement funds where they KNOW they will have filled the lower tax brackets in retirement with pre-tax 401k/403b contributions. Only then should they switch some 401k/403b contributions to Roth.

However, I am also familiar with tfb's analysis of Roth vs traditional 401k for those who max out the account:
https://thefinancebuff.com/roth-401k-fo ... e-max.html

Specifically, in this analysis, if one picks a traditional 401k, one places the tax savings into a taxable account. This taxable account has "tax drag," and the amount of tax drag is greater the longer the account grows (i.e., the longer one has before one retires, or the earlier one is in their career). Thus, for someone who is maxing out tax advantaged accounts, early in their career, and expects to retire in a similar or slightly lower marginal tax bracket in retirement, should one not START by making some Roth 401k/403b contributions and then gradually decrease the amount of Roth 401k/403b contributions so that they are then largely making traditional/pre-tax contributions only?

Thank you so much!

02nz
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Re: Some Roth 403b better early in career?

Post by 02nz » Thu Jan 03, 2019 12:54 am

The argument has some merit. I would answer though:

- Tax drag in the taxable account can be minimized by using tax-efficient investments, like index funds;
- When withdrawn, the capital gains tax can be very favorable, as low as 0%; and
- There's another way to get a mix of tax-deferred and Roth accounts - max the 401k or 403b with trad'l contributions and max a Roth IRA (or do a backdoor Roth IRA);

More broadly: Choosing Roth optimizes taxes for a high-income retirement. Choosing wrong can be costly: if the retiree has lower income than anticipated, he/she will have lost out on a lot of tax savings, money that would've made a difference. Conversely, traditional optimizes for a lower-income retirement, and if one chooses wrong, it means he/she's better off in retirement than expected and ends up paying more tax than by going with Roth. Not optimal, but a nice problem to have. So, unless the circumstances overwhelmingly favor Roth, going with traditional is a good risk-hedging move.

For those who have very low income early in their careers (e.g. residents), the Roth 403b is a perfect fit. But if one faces marginal tax rates of 20% or higher, I think deferring taxes is the better way to go.

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Ben Mathew
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Re: Some Roth 403b better early in career?

Post by Ben Mathew » Thu Jan 03, 2019 4:42 am

Yes, if marginal tax rates are equal throughout your working years and you're maxing out your retirement accounts, it would be better to make Roth contributions earlier in life and traditional contributions later in life to minimize the tax drag on the taxable side account. However, traditional contributions can lower your tax bracket. So it could work out that it's best to contribute to traditional till you're in a lower bracket, and put the rest in the Roth. This would argue for a mix of both traditional and Roth every year throughout your working years.

The other factor, as 02nz mentioned, is risk. If things don't go as well as planned, traditional works better because you might not have to pay much taxes when you take the money out in retirement. That argues for filling up traditional earlier.

So now we have:

(1) Roth early and traditional late (to minimize tax drag on the side account)
(2) A mix of Roth and traditional throughout (to minimize marginal tax rates)
(3) Traditional early and Roth late (to minimize risk of a low income retirement)

So, no clear answer. It depends on future earnings, savings, marginal tax rates, and portfolio returns--none of which is easy to predict. I think it makes sense to start out with a mix (maybe a traditional 401K and a Roth IRA). Then, depending on how things turn out, you can tilt towards Roth or traditional later in life. If your savings and returns are spectacular and your retirement accounts are overflowing, tilt towards Roth. If savings and returns turn out to be worse than expected, tilt towards traditional.

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need403bhelp
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Re: Some Roth 403b better early in career?

Post by need403bhelp » Thu Jan 03, 2019 5:52 am

02nz wrote:
Thu Jan 03, 2019 12:54 am
The argument has some merit. I would answer though:

- Tax drag in the taxable account can be minimized by using tax-efficient investments, like index funds;
- When withdrawn, the capital gains tax can be very favorable, as low as 0%; and
- There's another way to get a mix of tax-deferred and Roth accounts - max the 401k or 403b with trad'l contributions and max a Roth IRA (or do a backdoor Roth IRA);

More broadly: Choosing Roth optimizes taxes for a high-income retirement. Choosing wrong can be costly: if the retiree has lower income than anticipated, he/she will have lost out on a lot of tax savings, money that would've made a difference. Conversely, traditional optimizes for a lower-income retirement, and if one chooses wrong, it means he/she's better off in retirement than expected and ends up paying more tax than by going with Roth. Not optimal, but a nice problem to have. So, unless the circumstances overwhelmingly favor Roth, going with traditional is a good risk-hedging move.

For those who have very low income early in their careers (e.g. residents), the Roth 403b is a perfect fit. But if one faces marginal tax rates of 20% or higher, I think deferring taxes is the better way to go.
Ben Mathew wrote:
Thu Jan 03, 2019 4:42 am
Yes, if marginal tax rates are equal throughout your working years and you're maxing out your retirement accounts, it would be better to make Roth contributions earlier in life and traditional contributions later in life to minimize the tax drag on the taxable side account. However, traditional contributions can lower your tax bracket. So it could work out that it's best to contribute to traditional till you're in a lower bracket, and put the rest in the Roth. This would argue for a mix of both traditional and Roth every year throughout your working years.

The other factor, as 02nz mentioned, is risk. If things don't go as well as planned, traditional works better because you might not have to pay much taxes when you take the money out in retirement. That argues for filling up traditional earlier.

So now we have:

(1) Roth early and traditional late (to minimize tax drag on the side account)
(2) A mix of Roth and traditional throughout (to minimize marginal tax rates)
(3) Traditional early and Roth late (to minimize risk of a low income retirement)

So, no clear answer. It depends on future earnings, savings, marginal tax rates, and portfolio returns--none of which is easy to predict. I think it makes sense to start out with a mix (maybe a traditional 401K and a Roth IRA). Then, depending on how things turn out, you can tilt towards Roth or traditional later in life. If your savings and returns are spectacular and your retirement accounts are overflowing, tilt towards Roth. If savings and returns turn out to be worse than expected, tilt towards traditional.
Thank you both for your thorough and detailed replies. Thank you, also, for emphasizing that choosing to go all-traditional maximizes retirement savings if one does not end up saving "enough," whereas choosing a large Roth contribution increases the risk that one will pay too much tax now and will not have "enough" to support one's retirement. That is a great argument for traditional 401k/403b rather than Roth.

Currently, DW and I are lucky to have a plethora of tax advantaged space. We are currently maxing out my 403b with $56,000 including employer match (~$13,000 Roth, rest traditional), $19,000 (traditional) in my governmental 457b, another $19,000 in my wife's all-Roth 403b, another $19,000 (traditional) in my wife's governmental 457b, and $12,000 in back-door Roth IRAs. This makes our annual contributions:

$44,000 Roth
$81,000 Traditional/pre-tax

Thanks to really understanding earlier this month (after a year of reading about traditional vs Roth 401k's!) that traditional/pre-tax contributions are withdrawn in multiple tax brackets at retirement (including 0%, etc.), and thus have a significant tax advantage over Roth contributions, I am willing to change the Roth contributions to traditional. However, I am still somewhat hesitant to do this all at once right now. My reasons:

1. If I am in the same or higher marginal tax bracket in retirement, then I understand that there is some benefit NOW to making Roth contributions early in our careers rather than later on when we are close to retirement.
2. I'd like to hedge a little against the possibility of future tax rates being higher.
3. Although I am happy at my current employer & job, I don't know whether I will be there forever. Same for DW. I'm not sure that, in a future job, we would have such a plethora of Roth options (or any) of which to take advantage.

Thus, I'd like to adjust the $44,000 from 100% Roth to 0% Roth over a period of several years. I've thought of doing it over 5 years (100% Roth year 1, 80% Roth year 2, etc.), 7 years (100% Roth year 1, 90% Roth year 2, 75% Roth year 3, 60% Roth year 4, ...), or 10 years (100% Roth year 1, 90% Roth year 2, ...). I am leaning towards the 7 or 10 year, although I'm still quite confused as I feel that my need to have some non-IRA Roth space now is not completely rational, but there is an emotional aspect (hedging for an uncertain future).

Any other thoughts as relate to our specific situation in this context much appreciated.

Thank you!

KlangFool
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Re: Some Roth 403b better early in career?

Post by KlangFool » Thu Jan 03, 2019 9:03 am

need403bhelp wrote:
Thu Jan 03, 2019 5:52 am

Any other thoughts as relate to our specific situation in this context much appreciated.

Thank you!
need403bhelp,

At your current saving rate, what makes you think that you will work until full retirement age? Most likely, you won't. Hence, you will retire early and your retirement marginal tax rate will be low.

There will be a point when your portfolio earned close to your income. Then, why would you continue to work?

KlangFool

KlangFool
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Re: Some Roth 403b better early in career?

Post by KlangFool » Thu Jan 03, 2019 9:37 am

OP,

1) What is your annual expense?

2) What is your retirement/Financial Independent number?

You should calculate your number. Let that to be your guide for your decision. How could you get somewhere if you do not know what your goal is?

KlangFool
Last edited by KlangFool on Thu Jan 03, 2019 12:06 pm, edited 1 time in total.

aristotelian
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Re: Some Roth 403b better early in career?

Post by aristotelian » Thu Jan 03, 2019 9:43 am

"Early career" is too vague. What really matters is your current tax bracket and tax bracket in retirement. If you don't know, then it may be wise to diversify and have some of each. In general, I would recommend traditional on the 401k side for the reasons you stated, with Roth on the IRA side.

02nz
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Re: Some Roth 403b better early in career?

Post by 02nz » Thu Jan 03, 2019 11:20 am

OP, you have a great savings rate, so you're very likely to arrive at retirement with very high balances. So a roughly 1:2 Roth to traditional ratio is certainly not "wrong," particularly given that the current tax rates are scheduled to go back up. I wouldn't overthink it - there's some uncertainty regardless of what you do. However, do consider the possibility of early retirement that KlangFool noted, which enables withdrawing much larger tax-deferred balances at low rates.

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Re: Some Roth 403b better early in career?

Post by Ben Mathew » Thu Jan 03, 2019 1:22 pm

need403bhelp wrote:
Thu Jan 03, 2019 5:52 am
This makes our annual contributions:

$44,000 Roth
$81,000 Traditional/pre-tax
It's hard to say without knowing all the details and expectations, but if you are putting $81K/year into traditional, you might be headed for a very high traditional balance. $81K/year growing at 3% real becomes $3.9 million real in 30 years. A 4% real withdrawal means pulling out $154K per year. If you expect your traditional balance to become nearly this large, I would continue with the Roth contributions. At current tax rates, the marginal rates on $154K might not be very high. But who knows what your tax rates will be far in the future? Prepaying the tax is a form of insurance against high taxes. Roth also has better flexibility (no RMDs), and is a better vehicle for leaving an inheritance (if that matters).

You can always stop the Roth and tilt towards traditional later if things change. And, as you said, you might not have the Roth option later anyway if you change jobs.

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need403bhelp
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Re: Some Roth 403b better early in career?

Post by need403bhelp » Fri Jan 04, 2019 11:07 pm

KlangFool wrote:
Thu Jan 03, 2019 9:03 am
need403bhelp wrote:
Thu Jan 03, 2019 5:52 am

Any other thoughts as relate to our specific situation in this context much appreciated.

Thank you!
need403bhelp,

At your current saving rate, what makes you think that you will work until full retirement age? Most likely, you won't. Hence, you will retire early and your retirement marginal tax rate will be low.

There will be a point when your portfolio earned close to your income. Then, why would you continue to work?

KlangFool
Hi KlangFool,

Thank you so much for your reply. I haven’t honestly considered early retirement, although I guess it is always good to have the option if one reaches FI. Also, I could always work part time. Definitely good to think about, though.
KlangFool wrote:
Thu Jan 03, 2019 9:37 am
OP,

1) What is your annual expense?

2) What is your retirement/Financial Independent number?

You should calculate your number. Let that to be your guide for your decision. How could you get somewhere if you do not know what your goal is?

KlangFool
1) Annual expense - $72,100 in 2018. HOWEVER, we don’t yet have a house or children and are planning for both. Although my metropolitan area is LCOL or MCOL, the area where we are looking to purchase a house (close to work & good schools) seems to be HCOL (of 22 open houses we have seen that have sold, average price/sq ft is $223.43 and property taxes are ~2%, although we have no state or local income tax). Thus, I suspect these will go up.

2) This is difficult. Again, there are a lot of big changes coming (house & kids), so I’m not sure how accurately I could gauge this. Any suggestions?
aristotelian wrote:
Thu Jan 03, 2019 9:43 am
"Early career" is too vague. What really matters is your current tax bracket and tax bracket in retirement. If you don't know, then it may be wise to diversify and have some of each. In general, I would recommend traditional on the 401k side for the reasons you stated, with Roth on the IRA side.
I see. So following up on your recommendation of traditional on 401k side and Roth on IRA side, let’s say both spouses can max $19,000 in traditional 401k ($38,000) and do backdoor Roth IRA’s ($12,000). This means they have 61% traditional contributions annually and 39% Roth contributions annually.

Our current contributions of $81,000 traditional and $44,000 Roth, on the other hand, correspond to 65% traditional and 35% Roth. Thus, based on your recommendation, should we now stay the course with our traditional/Roth mix, as it is quite close to your recommendation?
02nz wrote:
Thu Jan 03, 2019 11:20 am
OP, you have a great savings rate, so you're very likely to arrive at retirement with very high balances. So a roughly 1:2 Roth to traditional ratio is certainly not "wrong," particularly given that the current tax rates are scheduled to go back up. I wouldn't overthink it - there's some uncertainty regardless of what you do. However, do consider the possibility of early retirement that KlangFool noted, which enables withdrawing much larger tax-deferred balances at low rates.
Thank you for your thoughts. To clarify, when you say that early retirement enables withdrawing much larger tax-deferred balances at low rates, is this because one would not yet be receiving social security benefits and thus have a larger amount of space to fill in the lowest tax brackets?
Ben Mathew wrote:
Thu Jan 03, 2019 1:22 pm
need403bhelp wrote:
Thu Jan 03, 2019 5:52 am
This makes our annual contributions:

$44,000 Roth
$81,000 Traditional/pre-tax
It's hard to say without knowing all the details and expectations, but if you are putting $81K/year into traditional, you might be headed for a very high traditional balance. $81K/year growing at 3% real becomes $3.9 million real in 30 years. A 4% real withdrawal means pulling out $154K per year. If you expect your traditional balance to become nearly this large, I would continue with the Roth contributions. At current tax rates, the marginal rates on $154K might not be very high. But who knows what your tax rates will be far in the future? Prepaying the tax is a form of insurance against high taxes. Roth also has better flexibility (no RMDs), and is a better vehicle for leaving an inheritance (if that matters).

You can always stop the Roth and tilt towards traditional later if things change. And, as you said, you might not have the Roth option later anyway if you change jobs.
I see. Thank you so much for your advice that continuing the current balance that we have between traditional and Roth may not be a horrible idea.

aristotelian
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Re: Some Roth 403b better early in career?

Post by aristotelian » Fri Jan 04, 2019 11:40 pm

need403bhelp wrote:
Fri Jan 04, 2019 11:07 pm
aristotelian wrote:
Thu Jan 03, 2019 9:43 am
"Early career" is too vague. What really matters is your current tax bracket and tax bracket in retirement. If you don't know, then it may be wise to diversify and have some of each. In general, I would recommend traditional on the 401k side for the reasons you stated, with Roth on the IRA side.
I see. So following up on your recommendation of traditional on 401k side and Roth on IRA side, let’s say both spouses can max $19,000 in traditional 401k ($38,000) and do backdoor Roth IRA’s ($12,000). This means they have 61% traditional contributions annually and 39% Roth contributions annually.

Our current contributions of $81,000 traditional and $44,000 Roth, on the other hand, correspond to 65% traditional and 35% Roth. Thus, based on your recommendation, should we now stay the course with our traditional/Roth mix, as it is quite close to your recommendation?
I still would need more information. Have you told us your pretax salary and marginal tax rate? If you are in a higher tax bracket, you get a bigger premium for saving pretax, particularly if early retirement might be in your future.

Something else to consider is the most efficient allocation between accounts. Ideally you will want to *contribute* a lot to Traditional, but have the *growth* occur in Roth. If you hold bonds in Traditional, that will help keep your Traditional from getting too big, even though it is getting the bulk of your contributions.

Also, just a correction, if you do $12K Roth/$38K Traditional, that comes out to 24% Roth.

KlangFool
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Re: Some Roth 403b better early in career?

Post by KlangFool » Fri Jan 04, 2019 11:41 pm

need403bhelp wrote:
Fri Jan 04, 2019 11:07 pm

KlangFool wrote:
Thu Jan 03, 2019 9:37 am
OP,

1) What is your annual expense?

2) What is your retirement/Financial Independent number?

You should calculate your number. Let that to be your guide for your decision. How could you get somewhere if you do not know what your goal is?

KlangFool
1) Annual expense - $72,100 in 2018. HOWEVER, we don’t yet have a house or children and are planning for both. Although my metropolitan area is LCOL or MCOL, the area where we are looking to purchase a house (close to work & good schools) seems to be HCOL (of 22 open houses we have seen that have sold, average price/sq ft is $223.43 and property taxes are ~2%, although we have no state or local income tax). Thus, I suspect these will go up.

2) This is difficult. Again, there are a lot of big changes coming (house & kids), so I’m not sure how accurately I could gauge this. Any suggestions?
need403bhelp,

Take your annual expense and multiply by a number between 25 to 50. Let's take 40 as the number and assume your annual expense increase to 100K. It would make the number 4 million.

Take your current portfolio size, annual savings and assume a conservative nominal return rate of 6%. Then, see how long before you get there.

KlangFool

Topic Author
need403bhelp
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Re: Some Roth 403b better early in career?

Post by need403bhelp » Sat Jan 05, 2019 9:38 am

aristotelian wrote:
Fri Jan 04, 2019 11:40 pm
need403bhelp wrote:
Fri Jan 04, 2019 11:07 pm
aristotelian wrote:
Thu Jan 03, 2019 9:43 am
"Early career" is too vague. What really matters is your current tax bracket and tax bracket in retirement. If you don't know, then it may be wise to diversify and have some of each. In general, I would recommend traditional on the 401k side for the reasons you stated, with Roth on the IRA side.
I see. So following up on your recommendation of traditional on 401k side and Roth on IRA side, let’s say both spouses can max $19,000 in traditional 401k ($38,000) and do backdoor Roth IRA’s ($12,000). This means they have 61% traditional contributions annually and 39% Roth contributions annually.

Our current contributions of $81,000 traditional and $44,000 Roth, on the other hand, correspond to 65% traditional and 35% Roth. Thus, based on your recommendation, should we now stay the course with our traditional/Roth mix, as it is quite close to your recommendation?
I still would need more information. Have you told us your pretax salary and marginal tax rate? If you are in a higher tax bracket, you get a bigger premium for saving pretax, particularly if early retirement might be in your future.

Something else to consider is the most efficient allocation between accounts. Ideally you will want to *contribute* a lot to Traditional, but have the *growth* occur in Roth. If you hold bonds in Traditional, that will help keep your Traditional from getting too big, even though it is getting the bulk of your contributions.

Also, just a correction, if you do $12K Roth/$38K Traditional, that comes out to 24% Roth.
Pre-tax salary (me & DW) for 2019 will be $328,000. It was slightly lower in 2018 as DW received less pay and only began her work towards the middle of the year (she lived abroad previously). This puts us in 32% marginal, but squarely in 24% marginal after subtracting our $81,000 traditional contributions to land us at $247,000 taxable income. Even if our $44,000 Roth was all placed into traditional, we would still be at $203,000 which is still in 24% marginal (lower limit $165,001).

Re bonds in traditional vs Roth, to be fair we have our fixed income (TIAA Traditional, fully liquid) in traditional right now, so our Roth would grow somewhat faster than traditional. I guess I had seen the opposite advice previously, put highest-expected-earning assets in Roth, so that is what I followed.

Thank you for your correction - my mistake. For some reason, when I was doing the calculation, I compared 2*19,000 in traditional vs 2*12,000 in Roth, whereas I should have been comparing to 2*6,000 in Roth.

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need403bhelp
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Re: Some Roth 403b better early in career?

Post by need403bhelp » Sat Jan 05, 2019 9:41 am

KlangFool wrote:
Fri Jan 04, 2019 11:41 pm
need403bhelp wrote:
Fri Jan 04, 2019 11:07 pm

KlangFool wrote:
Thu Jan 03, 2019 9:37 am
OP,

1) What is your annual expense?

2) What is your retirement/Financial Independent number?

You should calculate your number. Let that to be your guide for your decision. How could you get somewhere if you do not know what your goal is?

KlangFool
1) Annual expense - $72,100 in 2018. HOWEVER, we don’t yet have a house or children and are planning for both. Although my metropolitan area is LCOL or MCOL, the area where we are looking to purchase a house (close to work & good schools) seems to be HCOL (of 22 open houses we have seen that have sold, average price/sq ft is $223.43 and property taxes are ~2%, although we have no state or local income tax). Thus, I suspect these will go up.

2) This is difficult. Again, there are a lot of big changes coming (house & kids), so I’m not sure how accurately I could gauge this. Any suggestions?
need403bhelp,

Take your annual expense and multiply by a number between 25 to 50. Let's take 40 as the number and assume your annual expense increase to 100K. It would make the number 4 million.

Take your current portfolio size, annual savings and assume a conservative nominal return rate of 6%. Then, see how long before you get there.

KlangFool
I see, thanks for the helpful advice.

So looking at a maximum house price that we are considering, including current interest rates from mortgage professor (surprisingly lower than ones I've checked previously), 2% annually for property taxes and 1% for maintenance, I get total monthly expenses + total housing costs will be $123,000. Multiply by 40 = $5 million.

Using the future value function in Excel, I get that we'll be there with you 6% return rate in 20 years (although, ideally, we will pay off the mortgage in 20 years, the plan is to do 30 year and pay off as 15 year for more flexibility - plus, at current rates, this would result in only $18,000 over the life of the loan in additional interest paid).

What does the above tell me about Roth vs traditional?

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

Re: Some Roth 403b better early in career?

Post by KlangFool » Sat Jan 05, 2019 10:50 am

need403bhelp wrote:
Sat Jan 05, 2019 9:41 am
KlangFool wrote:
Fri Jan 04, 2019 11:41 pm
need403bhelp wrote:
Fri Jan 04, 2019 11:07 pm

KlangFool wrote:
Thu Jan 03, 2019 9:37 am
OP,

1) What is your annual expense?

2) What is your retirement/Financial Independent number?

You should calculate your number. Let that to be your guide for your decision. How could you get somewhere if you do not know what your goal is?

KlangFool
1) Annual expense - $72,100 in 2018. HOWEVER, we don’t yet have a house or children and are planning for both. Although my metropolitan area is LCOL or MCOL, the area where we are looking to purchase a house (close to work & good schools) seems to be HCOL (of 22 open houses we have seen that have sold, average price/sq ft is $223.43 and property taxes are ~2%, although we have no state or local income tax). Thus, I suspect these will go up.

2) This is difficult. Again, there are a lot of big changes coming (house & kids), so I’m not sure how accurately I could gauge this. Any suggestions?
need403bhelp,

Take your annual expense and multiply by a number between 25 to 50. Let's take 40 as the number and assume your annual expense increase to 100K. It would make the number 4 million.

Take your current portfolio size, annual savings and assume a conservative nominal return rate of 6%. Then, see how long before you get there.

KlangFool
I see, thanks for the helpful advice.

So looking at a maximum house price that we are considering, including current interest rates from mortgage professor (surprisingly lower than ones I've checked previously), 2% annually for property taxes and 1% for maintenance, I get total monthly expenses + total housing costs will be $123,000. Multiply by 40 = $5 million.

Using the future value function in Excel, I get that we'll be there with you 6% return rate in 20 years (although, ideally, we will pay off the mortgage in 20 years, the plan is to do 30 year and pay off as 15 year for more flexibility - plus, at current rates, this would result in only $18,000 over the life of the loan in additional interest paid).

What does the above tell me about Roth vs traditional?
need403bhelp,

1) How old are you and your spouse?

2) What is your marginal tax rate and state income tax rate?

3) Will you or your spouse will be collecting a pension? If yes, how much and at what age?

4) Please note that out of that 5 million, only about 3 million is tax-deferred. So, you could be spending the Roth IRA's contribution and doing Roth conversion at the same time.

KlangFool

https://taxfoundation.org/2019-tax-brackets/

I see that you are in 24% marginal tax rate. To reach 24% at retirement, you need about 180K of income. Assuming that you withdraw 4% from tax-deferred, it means that you need 180K X 25 = 4.5 million in tax-deferred.

In your case, traditional win.

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Ben Mathew
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Re: Some Roth 403b better early in career?

Post by Ben Mathew » Sat Jan 05, 2019 11:48 am

need403bhelp wrote:
Sat Jan 05, 2019 9:38 am
aristotelian wrote:
Fri Jan 04, 2019 11:40 pm
Something else to consider is the most efficient allocation between accounts. Ideally you will want to *contribute* a lot to Traditional, but have the *growth* occur in Roth. If you hold bonds in Traditional, that will help keep your Traditional from getting too big, even though it is getting the bulk of your contributions.
Re bonds in traditional vs Roth, to be fair we have our fixed income (TIAA Traditional, fully liquid) in traditional right now, so our Roth would grow somewhat faster than traditional. I guess I had seen the opposite advice previously, put highest-expected-earning assets in Roth, so that is what I followed.
I think it's the same advice. Slow growing bonds in traditional, and fast growing stocks in Roth.

dknightd
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Re: Some Roth 403b better early in career?

Post by dknightd » Sat Jan 05, 2019 12:11 pm

KlangFool wrote:
Fri Jan 04, 2019 11:41 pm

Take your current portfolio size, annual savings and assume a conservative nominal return rate of 6%. Then, see how long before you get there.

KlangFool
That is not conservative. For conservative I assume 0% real return. So Nominal return is same as CPI.

To answer OP question. I think some Roth 403b is a good idea. When I was early career it was not an option. But even in late career I have started using that option for some of my savings. I'm right on the border of 12 and 22 fed tax rates. Assuming that border keeps up with CPI, I expect to be near it forever. The advantage of having some savings in Roth is that I can use some of those funds in the future to keep myself in the current 12% bracket. My guess is that future tax rates will not decrease. If they stay the same I break even from a tax standpoint. If they go down I lose. But probably not very much. Even if I have to pay 22% on my current Roth contributions, I'll probably keep putting some in that account. Nobody knows what the future might hold. I like Roth money because I could use it for future lumpy expenses without having to worry it might bump me up a tax bracket. I'd use it for tax diversification, since prior results can not predict the future.

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Re: Some Roth 403b better early in career?

Post by aristotelian » Sat Jan 05, 2019 12:24 pm

need403bhelp wrote:
Sat Jan 05, 2019 9:38 am
Pre-tax salary (me & DW) for 2019 will be $328,000. It was slightly lower in 2018 as DW received less pay and only began her work towards the middle of the year (she lived abroad previously). This puts us in 32% marginal, but squarely in 24% marginal after subtracting our $81,000 traditional contributions to land us at $247,000 taxable income. Even if our $44,000 Roth was all placed into traditional, we would still be at $203,000 which is still in 24% marginal (lower limit $165,001).

Re bonds in traditional vs Roth, to be fair we have our fixed income (TIAA Traditional, fully liquid) in traditional right now, so our Roth would grow somewhat faster than traditional. I guess I had seen the opposite advice previously, put highest-expected-earning assets in Roth, so that is what I followed.

Thank you for your correction - my mistake. For some reason, when I was doing the calculation, I compared 2*19,000 in traditional vs 2*12,000 in Roth, whereas I should have been comparing to 2*6,000 in Roth.
This is very easy. You are in a high tax bracket. It is very unlikely you are going to be in a higher tax bracket in retirement. You get to invest $1.24 in traditional for every $1 you could put in Roth. The Traditional 401k is made for you. I would max it, no question. (If you are lucky enough to be in the 32% bracket in retirement, with over $300K taxable income, well, you aren't going to care whether you did Roth or Traditional back in 2019).

By the way, you are in excess of the Roth IRA limit, so you will need to do backdoor Roth on the IRA side.

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Re: Some Roth 403b better early in career?

Post by aristotelian » Sat Jan 05, 2019 12:26 pm

dknightd wrote:
Sat Jan 05, 2019 12:11 pm

To answer OP question. I think some Roth 403b is a good idea. When I was early career it was not an option. But even in late career I have started using that option for some of my savings. I'm right on the border of 12 and 22 fed tax rates. Assuming that border keeps up with CPI, I expect to be near it forever. The advantage of having some savings in Roth is that I can use some of those funds in the future to keep myself in the current 12% bracket. My guess is that future tax rates will not decrease. If they stay the same I break even from a tax standpoint. If they go down I lose. But probably not very much. Even if I have to pay 22% on my current Roth contributions, I'll probably keep putting some in that account. Nobody knows what the future might hold. I like Roth money because I could use it for future lumpy expenses without having to worry it might bump me up a tax bracket. I'd use it for tax diversification, since prior results can not predict the future.
OP's situation is different. He is in the 24% bracket.

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Re: Some Roth 403b better early in career?

Post by MathIsMyWayr » Sat Jan 05, 2019 12:46 pm

In principle, the choice of traditional vs. Roth is a simple problem. If you have a clear crystal ball into the future, there is an optimal ratio of traditional to Roth. Unfortunately, this involves a lot of assumptions. Once you get the optimal ratio, you fill up traditional contributions during the years of lower tax brackets and Roth during higher tax brackets. The question is how your assumptions play out.

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Re: Some Roth 403b better early in career?

Post by dknightd » Sat Jan 05, 2019 1:30 pm

aristotelian wrote:
Sat Jan 05, 2019 12:26 pm

OP's situation is different. He is in the 24% bracket.
22% or 24% is that enough to be worried about?

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Re: Some Roth 403b better early in career?

Post by aristotelian » Sat Jan 05, 2019 1:36 pm

dknightd wrote:
Sat Jan 05, 2019 1:30 pm
aristotelian wrote:
Sat Jan 05, 2019 12:26 pm

OP's situation is different. He is in the 24% bracket.
22% or 24% is that enough to be worried about?
MFJ, he would need be making $315K taxable income in retirement for Traditional to be disadvantageous. That is very hard to do when you are retired.

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Re: Some Roth 403b better early in career?

Post by dknightd » Sat Jan 05, 2019 1:46 pm

aristotelian wrote:
Sat Jan 05, 2019 1:36 pm
dknightd wrote:
Sat Jan 05, 2019 1:30 pm
aristotelian wrote:
Sat Jan 05, 2019 12:26 pm

OP's situation is different. He is in the 24% bracket.
22% or 24% is that enough to be worried about?
MFJ, he would need be making $315K taxable income in retirement for Traditional to be disadvantageous. That is very hard to do when you are retired.
I guess I'm just poor, or underpaid. $315K!

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Re: Some Roth 403b better early in career?

Post by aristotelian » Sat Jan 05, 2019 2:02 pm

dknightd wrote:
Sat Jan 05, 2019 1:46 pm
aristotelian wrote:
Sat Jan 05, 2019 1:36 pm
dknightd wrote:
Sat Jan 05, 2019 1:30 pm
aristotelian wrote:
Sat Jan 05, 2019 12:26 pm

OP's situation is different. He is in the 24% bracket.
22% or 24% is that enough to be worried about?
MFJ, he would need be making $315K taxable income in retirement for Traditional to be disadvantageous. That is very hard to do when you are retired.
I guess I'm just poor, or underpaid. $315K!
I am hoping to be at least be somewhat wealthy in retirement but have zero taxable income. That is why traditional 401k is so powerful, especially if you are in a high bracket while saving.

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Re: Some Roth 403b better early in career?

Post by FiveK » Sun Jan 06, 2019 12:56 am

need403bhelp wrote:
Thu Jan 03, 2019 5:52 am
Thanks to really understanding earlier this month (after a year of reading about traditional vs Roth 401k's!) that traditional/pre-tax contributions are withdrawn in multiple tax brackets at retirement (including 0%, etc.)
It doesn't work as implied here. In other words, comparing marginal now to effective later is not correct.

You should look at your "guaranteed" (be that from pension, or SS, or from, say, 4%/yr withdrawals from your expected traditional balance based on previous years' contributions, etc.) income in retirement, assuming you make no more traditional contributions. Once that expected retirement income is high enough to fill a given tax bracket, any further traditional contributions will be taxed at the marginal rate above that given bracket.

Does that make sense?

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Re: Some Roth 403b better early in career?

Post by need403bhelp » Sun Jan 06, 2019 2:13 am

KlangFool wrote:
Sat Jan 05, 2019 10:50 am
need403bhelp,

1) How old are you and your spouse?

2) What is your marginal tax rate and state income tax rate?

3) Will you or your spouse will be collecting a pension? If yes, how much and at what age?

4) Please note that out of that 5 million, only about 3 million is tax-deferred. So, you could be spending the Roth IRA's contribution and doing Roth conversion at the same time.

KlangFool

https://taxfoundation.org/2019-tax-brackets/

I see that you are in 24% marginal tax rate. To reach 24% at retirement, you need about 180K of income. Assuming that you withdraw 4% from tax-deferred, it means that you need 180K X 25 = 4.5 million in tax-deferred.

In your case, traditional win.
1. I am 38. DW is 32. We had a pretty “late start” due to 3 doctorates between us as well as medical residency.
2. I think you already saw my answer.
3. No pension for me. If DW stays at her current institution >5 years, she will be eligible for a pension. However, I think she is still very much exploring her options career-wise, so we’ll cross that bridge when we get there.
4. I see. So it seems probably the major advantage of retiring early would be Roth conversions pre-Social Security in low tax years when no longer working full-time.

I guess I’ll throw in the Tax Cuts and Jobs Act of 2017 (TCJA) to make it more interesting ☺ . When I started working with full salary in the fall of 2017 (my first “real job” per se), we still had the old tax brackets. For purposes of calculating asset allocation with both Roth and traditional funds, I guesstimated the 25% tax bracket in retirement (I adjust traditional amounts down by 25% when calculating asset allocation). As, per the current law, the brackets will go back to pre-TCJA percentages when I retire, I’ve kept this guesstimate at 25%.

Additionally, per the current TCJA, tax brackets will increase in 9 years. I realize that this will effectively be a tax increase and may not actually thus happen due to Congress wanting to get re-elected, but still this is the current law. Thus, it still seems to me that having SOME Roth contributions (in addition to backdoor Roth IRAs) may be a good idea versus 100% traditional. I’m not opposed to gradually taking 403b down to 0% Roth, as I see that traditional will GENERALLY be better for me than Roth, but I still see some benefits to making SOME Roth contributions and doing so EARLY in my career (if nothing else, they will have more time to grow).

Thus, my question would still be how SLOWLY or QUICKLY to decrease my Roth 403b contributions from current level (say 100%) to target level of 0% or close to it. Am I understanding correctly that you are advocating changing to 0% Roth 403b contributions with next available paycheck?
Ben Mathew wrote:
Sat Jan 05, 2019 11:48 am
need403bhelp wrote:
Sat Jan 05, 2019 9:38 am
aristotelian wrote:
Fri Jan 04, 2019 11:40 pm
Something else to consider is the most efficient allocation between accounts. Ideally you will want to *contribute* a lot to Traditional, but have the *growth* occur in Roth. If you hold bonds in Traditional, that will help keep your Traditional from getting too big, even though it is getting the bulk of your contributions.
Re bonds in traditional vs Roth, to be fair we have our fixed income (TIAA Traditional, fully liquid) in traditional right now, so our Roth would grow somewhat faster than traditional. I guess I had seen the opposite advice previously, put highest-expected-earning assets in Roth, so that is what I followed.
I think it's the same advice. Slow growing bonds in traditional, and fast growing stocks in Roth.
Oops, you are correct. Sorry.
dknightd wrote:
Sat Jan 05, 2019 12:11 pm
KlangFool wrote:
Fri Jan 04, 2019 11:41 pm

Take your current portfolio size, annual savings and assume a conservative nominal return rate of 6%. Then, see how long before you get there.

KlangFool
That is not conservative. For conservative I assume 0% real return. So Nominal return is same as CPI.

To answer OP question. I think some Roth 403b is a good idea. When I was early career it was not an option. But even in late career I have started using that option for some of my savings. I'm right on the border of 12 and 22 fed tax rates. Assuming that border keeps up with CPI, I expect to be near it forever. The advantage of having some savings in Roth is that I can use some of those funds in the future to keep myself in the current 12% bracket. My guess is that future tax rates will not decrease. If they stay the same I break even from a tax standpoint. If they go down I lose. But probably not very much. Even if I have to pay 22% on my current Roth contributions, I'll probably keep putting some in that account. Nobody knows what the future might hold. I like Roth money because I could use it for future lumpy expenses without having to worry it might bump me up a tax bracket. I'd use it for tax diversification, since prior results can not predict the future.
Just for reference, at 0% real return, I would get to $5 million in 39 years(!). Let’s hope that real return will be slightly higher ☺

Thanks so much for sharing your experience and your advice regarding tax diversification.
aristotelian wrote:
Sat Jan 05, 2019 12:24 pm
need403bhelp wrote:
Sat Jan 05, 2019 9:38 am
Pre-tax salary (me & DW) for 2019 will be $328,000. It was slightly lower in 2018 as DW received less pay and only began her work towards the middle of the year (she lived abroad previously). This puts us in 32% marginal, but squarely in 24% marginal after subtracting our $81,000 traditional contributions to land us at $247,000 taxable income. Even if our $44,000 Roth was all placed into traditional, we would still be at $203,000 which is still in 24% marginal (lower limit $165,001).

Re bonds in traditional vs Roth, to be fair we have our fixed income (TIAA Traditional, fully liquid) in traditional right now, so our Roth would grow somewhat faster than traditional. I guess I had seen the opposite advice previously, put highest-expected-earning assets in Roth, so that is what I followed.

Thank you for your correction - my mistake. For some reason, when I was doing the calculation, I compared 2*19,000 in traditional vs 2*12,000 in Roth, whereas I should have been comparing to 2*6,000 in Roth.
This is very easy. You are in a high tax bracket. It is very unlikely you are going to be in a higher tax bracket in retirement. You get to invest $1.24 in traditional for every $1 you could put in Roth. The Traditional 401k is made for you. I would max it, no question. (If you are lucky enough to be in the 32% bracket in retirement, with over $300K taxable income, well, you aren't going to care whether you did Roth or Traditional back in 2019).

By the way, you are in excess of the Roth IRA limit, so you will need to do backdoor Roth on the IRA side.
Thanks for sharing your thoughts. As a counter-point/to play devil’s advocate (and see my comments above to KlangFool re TCJA), current law is written so that the current tax brackets end in 9 years. If this holds true with no changes, I only have to make $75,900 taxable income as MFJ to already be in the 25% tax bracket (https://taxfoundation.org/2017-tax-brackets/) and “win” the Roth 403b bet, no? If so, would this not indicate that I should still have SOME Roth 403b contributions in addition to the Roth IRA contributions?

Thank you. I should have clarified that we are doing backdoor Roth IRAs.
FiveK wrote:
Sun Jan 06, 2019 12:56 am
need403bhelp wrote:
Thu Jan 03, 2019 5:52 am
Thanks to really understanding earlier this month (after a year of reading about traditional vs Roth 401k's!) that traditional/pre-tax contributions are withdrawn in multiple tax brackets at retirement (including 0%, etc.)
It doesn't work as implied here. In other words, comparing marginal now to effective later is not correct.

You should look at your "guaranteed" (be that from pension, or SS, or from, say, 4%/yr withdrawals from your expected traditional balance based on previous years' contributions, etc.) income in retirement, assuming you make no more traditional contributions. Once that expected retirement income is high enough to fill a given tax bracket, any further traditional contributions will be taxed at the marginal rate above that given bracket.

Does that make sense?
Thanks. I had tried very hard to avoid saying effective tax rate at retirement as I saw there was a heated discussion about it in another thread.

So do I understand correctly that you are advocating that I should take total current TRADITIONAL contributions, pick some rate of return (between 0% as chosen by dknightd and 6% as chosen by KlangFool), assume contributions continue at same rate as 2018, pick retirement age, then predict TOTAL TRADITIONAL BALANCE at retirement? Then, take 4% of that number, use current tax brackets to see marginal rate in retirement, and go from there to see whether Roth 403b contributions make sense?

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Re: Some Roth 403b better early in career?

Post by FiveK » Sun Jan 06, 2019 2:57 am

need403bhelp wrote:
Sun Jan 06, 2019 2:13 am
Thanks. I had tried very hard to avoid saying effective tax rate at retirement as I saw there was a heated discussion about it in another thread.
Some of the heat comes from semantics. E.g., some mean "marginal" in the calculus sense of a point derivative, and (rightfully) object to the idea that the derivative on the very last dollar should guide what one does with a large contribution. But if one uses "marginal" in the sense described in marginal tax rate, "amount of additional taxes that will be due (or reduced) by the amount of income involved" then all is well. To add to the confusion, some call that the "effective marginal" rate. ;)

Just don't include all the other "fixed" income (pension, SS, withdrawals based on previous years' contributions, etc.) that goes into the overall effective rate in the denominator when estimating your withdrawal marginal rate.
So do I understand correctly that you are advocating that I should take total current TRADITIONAL contributions, pick some rate of return (between 0% as chosen by dknightd and 6% as chosen by KlangFool), assume contributions continue at same rate as 2018, pick retirement age, then predict TOTAL TRADITIONAL BALANCE at retirement? Then, take 4% of that number, [add any "unavoidable" income (dividends, interest, pension, etc.), and] use current tax brackets to see marginal rate in retirement, and go from there to see whether Roth 403b contributions make sense?
With the exception of the struck-through phrase, and the addition of the bracketed phrase, yes. See Investment Order for more details.

You are trying to decide what to do for this year. Start by understanding your expected situation (i.e., your retirement marginal rate) if you do nothing. Then use that understanding to guide what you should do for this year.

Repeat each year until retirement. At that point you can substitute "how much to convert from traditional to Roth?" for "how much should I contribute to traditional vs. Roth?" in your thinking process.

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Re: Some Roth 403b better early in career?

Post by need403bhelp » Sun Jan 06, 2019 4:05 am

FiveK wrote:
Sun Jan 06, 2019 2:57 am
need403bhelp wrote:
Sun Jan 06, 2019 2:13 am
Thanks. I had tried very hard to avoid saying effective tax rate at retirement as I saw there was a heated discussion about it in another thread.
Some of the heat comes from semantics. E.g., some mean "marginal" in the calculus sense of a point derivative, and (rightfully) object to the idea that the derivative on the very last dollar should guide what one does with a large contribution. But if one uses "marginal" in the sense described in marginal tax rate, "amount of additional taxes that will be due (or reduced) by the amount of income involved" then all is well. To add to the confusion, some call that the "effective marginal" rate. ;)

Just don't include all the other "fixed" income (pension, SS, withdrawals based on previous years' contributions, etc.) that goes into the overall effective rate in the denominator when estimating your withdrawal marginal rate.
So do I understand correctly that you are advocating that I should take total current TRADITIONAL contributions, pick some rate of return (between 0% as chosen by dknightd and 6% as chosen by KlangFool), assume contributions continue at same rate as 2018, pick retirement age, then predict TOTAL TRADITIONAL BALANCE at retirement? Then, take 4% of that number, [add any "unavoidable" income (dividends, interest, pension, etc.), and] use current tax brackets to see marginal rate in retirement, and go from there to see whether Roth 403b contributions make sense?
With the exception of the struck-through phrase, and the addition of the bracketed phrase, yes. See Investment Order for more details.

You are trying to decide what to do for this year. Start by understanding your expected situation (i.e., your retirement marginal rate) if you do nothing. Then use that understanding to guide what you should do for this year.

Repeat each year until retirement. At that point you can substitute "how much to convert from traditional to Roth?" for "how much should I contribute to traditional vs. Roth?" in your thinking process.
Ok, so my understanding is that you are basically saying in the second part of your comment to predict traditional/pre-tax retirement balance at retirement without any further contributions but with market growth, and use THAT number to decide whether to make Roth or traditional contributions this year.

This gets back to my question in my original post. Ideally, if one SHOULD HAVE (based, e.g., on your suggested calculation at some period of time - say one year prior to retirement) some Roth retirement balances, would one not want to make the EARLIER in one's career than later? Some reasons:

1. I initially referenced TFB's analysis https://thefinancebuff.com/roth-401k-fo ... e-max.html that suggests that, due to tax drag, there is SOME benefit to investing in Roth now if maxing 401k vs traditional + taxable account even if one's marginal tax rate in retirement is slightly lower than one's current marginal tax rate (his example with 35% marginal tax rate now and 28% marginal tax rate in retirement comes out basically even between max Roth 401k vs traditional + taxable).
2. You will give your Roth money more time to grow if investing in Roth EARLY (i.e., when one has a small traditional balance) than later - thus, will ideally require investing less money in Roth than you would have needed had you started Roth balances later on (I realize with equal marginal rates in retirement and now, Roth vs traditional is a wash.)
3. Current law, TJCA, suggests that tax rates will increase by law in 9 years (although I realize this could change).

In other words, my assertion is that IF one needs to have some Roth accounts in retirement based on one's marginal tax bracket in retirement vs that while working (e.g., based on the analysis you suggested done one year prior to retirement), one will financially benefit by investing in these Roth accounts EARLIER rather than LATER. Is this not true?

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Re: Some Roth 403b better early in career?

Post by aristotelian » Sun Jan 06, 2019 7:31 am

OP, as you are thinking about taxes in retirement, you might take a look at this thread. This is one of my all time favorite Bogleheads threads and completely changed my approach to 401k. I wish I had discovered it earlier. I know you are anticipating being wealthy in retirement, but you can be wealthy with high spending and still have low taxable income.
viewtopic.php?t=87471

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Re: Some Roth 403b better early in career?

Post by KlangFool » Sun Jan 06, 2019 10:36 am

OP,

1) 100% Trad. 403B until your tax-deferred account reaches 1.5 million

2) 75K taxable income = 100K gross income if you have factored in the standard deduction. 25 X 100K = 2.5 million.

3) If you contribute 100% to Trad. 403B and put the tax savings into the taxable account, you will reach your FI number earlier. Then, you could retire earlier.

4) Tax drag in the taxable account

A) In the worst case, the annual dividend/distribution is about 2% to 3% and at 25% marginal tax rate, the annual tax drag = 3% X 25% = 0.75%. This is assuming that you do nothing.

Use the following spreadsheet to calculate the actual tax drag.

viewtopic.php?t=242137

B) But, if you tax loss harvest, besides no tax drag, you can write off $3,000 of tax loss from your ordinary income.

C) Long-term capital gain tax is at 0% and 15%.

https://www.bogleheads.org/wiki/Tax_gain_harvesting
https://www.bogleheads.org/wiki/Tax_loss_harvesting

If you have money in all 3 accounts: taxable, Roth, and tax-deferred, how much tax do you pay in the retirement is up to you when you early retire. And, the best way to achieve this tax diversification for you is 100% Trad. 403B until your tax-deferred account is big enough. I would not even reconsider my decision until the tax-deferred account is at least 1.5 million.

KlangFool

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Re: Some Roth 403b better early in career?

Post by FiveK » Sun Jan 06, 2019 1:37 pm

need403bhelp wrote:
Sun Jan 06, 2019 4:05 am
Ok, so my understanding is that you are basically saying in the second part of your comment to predict traditional/pre-tax retirement balance at retirement without any further contributions but with market growth, and use THAT number to decide whether to make Roth or traditional contributions this year.
Yes.

With perfect foreknowledge one could look at this for every paycheck or even for every dollar. Given the error band around future rates based on market return uncertainty, however, that seems a bit much.
This gets back to my question in my original post. Ideally, if one SHOULD HAVE (based, e.g., on your suggested calculation at some period of time - say one year prior to retirement) some Roth retirement balances, would one not want to make the EARLIER in one's career than later?
Yes. However, if it takes until the very last year prior to retirement for one to have accumulated enough in traditional that Roth becomes preferable, then the decision to use traditional all those previous years should satisfy all but the most nit-picky.
1. I initially referenced TFB's analysis https://thefinancebuff.com/roth-401k-fo ... e-max.html that suggests that, due to tax drag, there is SOME benefit to investing in Roth now if maxing 401k vs traditional + taxable account even if one's marginal tax rate in retirement is slightly lower than one's current marginal tax rate (his example with 35% marginal tax rate now and 28% marginal tax rate in retirement comes out basically even between max Roth 401k vs traditional + taxable).
Perhaps semantics again - if by "some benefit" you mean "some defensible reason" then yes. Using hindsight is the only way to know whether any given traditional or Roth choice was correct (or didn't matter). In other words, the correct value of "slightly lower" can be estimated, but not known, in advance.
3. Current law, TJCA, suggests that tax rates will increase by law in 9 years (although I realize this could change).
One can use whatever assumptions about future tax rates one desires. Those assumptions will eventually be proven correct or incorrect.
2. You will give your Roth money more time to grow if investing in Roth EARLY (i.e., when one has a small traditional balance) than later - thus, will ideally require investing less money in Roth than you would have needed had you started Roth balances later on (I realize with equal marginal rates in retirement and now, Roth vs traditional is a wash.)
In other words, my assertion is that IF one needs to have some Roth accounts in retirement based on one's marginal tax bracket in retirement vs that while working (e.g., based on the analysis you suggested done one year prior to retirement), one will financially benefit by investing in these Roth accounts EARLIER rather than LATER. Is this not true?
Maybe.

See the third from last (i.e., this post) in Roth vs Traditional 401K - earliest Bogleheads thread. It takes some time to digest, but I think addresses your question under one set of assumptions. In that case, the maximum spendable retirement income didn't change whether one started with Roth or traditional.

If the marginal rate for traditional savings increases over a career then, if one has a career as long as predicted, it probably can be shown that starting with Roth is preferable. As has already been discussed in this thread, however, if the career actually (by choice or not) becomes shorter than originally predicted, starting with traditional will likely have been better.

Taken to the extreme, one could say that any non-zero marginal saving rate should go to traditional until it becomes "certain" that withdrawal tax rates rise to that (or some "slightly lower") level. But early in a career, making an arbitrary choice to use traditional above some marginal rate and Roth at or below that rate, seems reasonable. E.g., using traditional until one drops out of the 22% bracket and Roth in the 12% bracket.

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Re: Some Roth 403b better early in career?

Post by need403bhelp » Fri Jan 11, 2019 6:00 pm

Sorry for my absence from this thread - have been traveling.

I understand everyone’s arguments for doing 100% Traditional 403b in 24% marginal bracket as follows:
1. No one can predict the future. Until I reach a sufficiently amount in traditional accounts, doing 100% Traditional 403b maximizes retirement account funds, so that worst case I will have too much and end up paying too much tax in retirement. Whereas prioritizing Roth contributions reduces total amount in retirement accounts - worst case not enough to live on in retirement, which is worse than having enough but paying too much tax.
2. At least per current tax code, having funds in traditional, Roth, and taxable allows one sufficient flexibility to significantly influence tax rate in retirement even when withdrawing significant amounts.
3. No one really knows what future tax brackets will be, so it is reasonable to assume current tax brackets in the future for discussion of Roth vs traditional.

I guess my current thoughts are based on having significant Roth 403b options currently with my employer, and knowing that I may not stay with my same employer indefinitely (and more so for DW). I did not have such an option with my prior employer.

Additionally, it is my understanding per this and other threads (I can provide a direct quote from the original Roth vs traditional 401k thread linked earlier) is that there is SOME benefit to contributing to Roth earlier in one’s career if one is to contribute to Roth 403b at all.

Finally, if I personally had to pick, especially with TJCA the way it is now, I would bet rates would go up in the future. Also, although I realize life is not under my control, I don’t currently but plan to retire early.

Thus, I am leaning towards the following strategy for my current Roth 403b contributions:
1. 2019 - 100% of my current planned Roth 403b contributions stay as Roth
2. 2020 - 80% stay as Roth, 20% Traditional + taxable
3. 2021 - 60% as Roth
4. 2022 - 40% as Roth
5. 2023 - 20% as Roth
6. 2024 - 0% as Roth

I realize this is a gamble, but I would like to take advantage of my Roth 403b space and what I believe are lower marginal tax rates under TJCA while they are both available.

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Re: Some Roth 403b better early in career?

Post by FiveK » Fri Jan 11, 2019 6:20 pm

need403bhelp wrote:
Fri Jan 11, 2019 6:00 pm
I realize this is a gamble, but I would like to take advantage of my Roth 403b space and what I believe are lower marginal tax rates under TJCA while they are both available.
Check back in ~20-30 years and let us know how it worked out. ;)

Good luck! :happy

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Re: Some Roth 403b better early in career?

Post by need403bhelp » Fri Jan 11, 2019 6:24 pm

FiveK wrote:
Fri Jan 11, 2019 6:20 pm
need403bhelp wrote:
Fri Jan 11, 2019 6:00 pm
I realize this is a gamble, but I would like to take advantage of my Roth 403b space and what I believe are lower marginal tax rates under TJCA while they are both available.
Check back in ~20-30 years and let us know how it worked out. ;)

Good luck! :happy
Thanks, will do! ;)

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need403bhelp
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Re: Some Roth 403b better early in career?

Post by need403bhelp » Sun Feb 03, 2019 8:00 pm

FWIW, here is what we ended up putting in our IPS regarding our Roth vs traditional contributions for the XYZ portion of our 403b for which we have this option:
Which account to use? (Roth vs Traditional XYZ)
Our employer has a Roth option for the XYZ portion of the 403(b). Due to uncertainty about exact investment returns and future tax brackets, no one can accurately predict the optimal ratio between traditional (pre-tax) and Roth contributions. There are some arguments for favoring traditional (pre-tax) contributions over Roth contributions when one invests the corresponding tax savings in a taxable account (otherwise, one is actually investing a greater pre-tax amount in the Roth account and the comparison becomes inaccurate). Intuitively, investments made in a traditional (pre-tax) account result in tax savings at one’s highest (marginal) tax rate. On the other hand, assuming no additional income in retirement, withdrawals will necessarily be taxed in all brackets up to and including one’s highest (marginal) tax rate in retirement. Thus, even with identical highest/marginal “tax brackets” during one’s career and retirement, traditional (pre-tax) investments will come out ahead.

Additionally, the total (nominal) amount invested in a traditional + taxable account is, by definition, greater because of the immediate tax savings than the amount invested in a Roth account. This means that one accumulates a higher balance when investing in traditional + taxable accounts than one does when investing in a Roth account. Thus, the “worst-case” scenario of investing 100% Roth, which results in a lower account balance than investing in traditional + taxable accounts, is that one will have insufficient funds to support one’s annual expenses in retirement. On the other hand, the “worst-case” scenario of investing 100% traditional (pre-tax) is that one will pay too much tax in retirement. Clearly, the former (not having enough funds to support expenses) is worse than the latter (having sufficient funds but paying too much tax). Finally, a future government could potentially change the tax-free nature of Roth contributions, and this is another risk in choosing to invest in a Roth account.

With that said, when contributions are made and withdrawn at the same tax rate, due to tax drag in the corresponding taxable account, there is some advantage to Roth over traditional + taxable contributions. Due to the nature of tax drag (taxes on dividends every year), these advantages become more pronounced when Roth investments are made earlier in one’s career. The Bogleheads Wiki has a great article on "Traditional versus Roth" in the case of "Maxing out your retirement accounts," at https://www.bogleheads.org/wiki/Traditi ... t_accounts . They provide an example that it is advantageous to contribute to a Roth over traditional account for someone who is currently in a 28% tax bracket and will be withdrawing contributions in a 25% tax bracket in retirement. Additionally, the Finance Buff has another example at https://thefinancebuff.com/roth-401k-fo ... e-max.html that, for people who max out their retirement accounts, even if the current marginal tax rate is 35% and the tax rate for withdrawals in retirement in 30 years will be 28% (7% lower), there is practically no difference between investing in the traditional vs. Roth versions of the 403(b). Thus, if one were to withdraw contributions in a similar or slightly lower tax bracket in retirement compared to one’s tax bracket when making contributions, there is some advantage to making Roth contributions, and to making them early in one’s career. Finally, the current Tax Cuts and Jobs Act (TCJA) of 2017 provides for lower tax brackets until 2027.

Conclusion regarding Roth vs Traditional XYZ: We recognize that, based on the above, it is likely ideal to have most of our retirement contributions as traditional (pre-tax) + taxable rather than Roth. However, we would also like to take advantage of the current TCJA lower tax rates as well as of the slight benefit of Roth over traditional + taxable due to tax drag early in one’s career when investing and withdrawing in similar tax brackets. Thus, in 2019, we will continue to make 100% of our XYZ 403(b) contributions as Roth. In 2020, we will make 80% of our XYZ 403(b) contributions as Roth and 20% as traditional. In 2021, we will make 60% of our XYZ 403(b) contributions as Roth, in 2022 40%, in 2023 20%, and finally in 2024 and beyond, we will make 100% of our XYZ 403(b) contributions as traditional (pre-tax).

il0kin
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Re: Some Roth 403b better early in career?

Post by il0kin » Sun Feb 03, 2019 11:02 pm

I've struggled with this as well and as described, you can arrive at any combination of inputs and outputs based on the scenario. We save 17% (+3% match), and to quit worrying about micro-optimizing, we're set at 4% Roth and 13% traditional pre-tax. This allows us to substantially lower our AGI and thus capitalize on our 10% (+/- 1% depending on year) effective tax rate by doing a bit of Roth savings. I suppose it's possible we could end up with a lower effective tax rate in retirement, but I think that's probably unlikely and I think eventually something will have to give and US citizens will end up paying higher tax rates, but who knows, really. It works for us.

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need403bhelp
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Re: Some Roth 403b better early in career?

Post by need403bhelp » Sun Feb 03, 2019 11:03 pm

il0kin wrote:
Sun Feb 03, 2019 11:02 pm
I've struggled with this as well and as described, you can arrive at any combination of inputs and outputs based on the scenario. We save 17% (+3% match), and to quit worrying about micro-optimizing, we're set at 4% Roth and 13% traditional pre-tax. This allows us to substantially lower our AGI and thus capitalize on our 10% (+/- 1% depending on year) effective tax rate by doing a bit of Roth savings. I suppose it's possible we could end up with a lower effective tax rate in retirement, but I think that's probably unlikely and I think eventually something will have to give and US citizens will end up paying higher tax rates, but who knows, really. It works for us.
Thanks for sharing your Roth vs pre-tax strategy and your justification for the strategy.

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FiveK
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Re: Some Roth 403b better early in career?

Post by FiveK » Sun Feb 03, 2019 11:55 pm

il0kin wrote:
Sun Feb 03, 2019 11:02 pm
I've struggled with this as well and as described, you can arrive at any combination of inputs and outputs based on the scenario. We save 17% (+3% match), and to quit worrying about micro-optimizing, we're set at 4% Roth and 13% traditional pre-tax. This allows us to substantially lower our AGI and thus capitalize on our 10% (+/- 1% depending on year) effective tax rate by doing a bit of Roth savings. I suppose it's possible we could end up with a lower effective tax rate in retirement, but I think that's probably unlikely and I think eventually something will have to give and US citizens will end up paying higher tax rates, but who knows, really. It works for us.
Note that your effective rate isn't a reliable guide for whether your choice should be traditional or Roth for any particular contribution. What tax you do or don't pay on the rest of your income has no effect (so to speak) on what happens with a particular contribution amount.

Your decision (should you choose to base it on anything other than an arbitrary split) should use marginal tax rates, both for contributions and withdrawals.

il0kin
Posts: 260
Joined: Mon Feb 26, 2018 8:19 pm

Re: Some Roth 403b better early in career?

Post by il0kin » Mon Feb 04, 2019 10:47 am

FiveK wrote:
Sun Feb 03, 2019 11:55 pm
il0kin wrote:
Sun Feb 03, 2019 11:02 pm
I've struggled with this as well and as described, you can arrive at any combination of inputs and outputs based on the scenario. We save 17% (+3% match), and to quit worrying about micro-optimizing, we're set at 4% Roth and 13% traditional pre-tax. This allows us to substantially lower our AGI and thus capitalize on our 10% (+/- 1% depending on year) effective tax rate by doing a bit of Roth savings. I suppose it's possible we could end up with a lower effective tax rate in retirement, but I think that's probably unlikely and I think eventually something will have to give and US citizens will end up paying higher tax rates, but who knows, really. It works for us.
Note that your effective rate isn't a reliable guide for whether your choice should be traditional or Roth for any particular contribution. What tax you do or don't pay on the rest of your income has no effect (so to speak) on what happens with a particular contribution amount.

Your decision (should you choose to base it on anything other than an arbitrary split) should use marginal tax rates, both for contributions and withdrawals.
Thanks, FiveK. It appears I have somewhat misunderstood the effective vs. marginal taxation as it relates to Roth accounts. I will need to do some math but it may make sense to switch back to all traditional as our marginal bracket is 22%.

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