Why do Roth 401k when MBR is an option?

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Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sat Aug 01, 2020 5:09 pm

Hello all,

I'm making plans for 2021 and a 401k question came up.

Background: I have the ability to make after-tax contributions to my 401k with unlimited in-service rollovers to my Roth IRA (MBR). This year I should be able to completely max out my 401k ($57k) but only with the help of traditional (pre-tax) 401k contributions. For 2021, I think I'll be able to do the same but with all Roth/after-tax contributions. I'd like to do this since after-tax money is worth more.

Question: why would I want to make Roth 401k contributions when I can make after-tax 401k contributions and immediately transfer them to my Roth IRA. Is it okay to only make after-tax 401k contributions and no Traditional/Roth 401k contributions? The funds available in my 401k have similar expense ratios to those available in my IRA.

Thanks,
Justin
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Duckie
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Re: Why do Roth 401k when MBR is an option?

Post by Duckie » Sat Aug 01, 2020 5:55 pm

4a757374696e wrote:I have the ability to make after-tax contributions to my 401k with unlimited in-service rollovers to my Roth IRA (MBR). This year I should be able to completely max out my 401k ($57k) but only with the help of traditional (pre-tax) 401k contributions. For 2021, I think I'll be able to do the same but with all Roth/after-tax contributions. I'd like to do this since after-tax money is worth more.
Roth/after-tax money is worth more later. Reducing current taxes is worth more now.
Question: why would I want to make Roth 401k contributions when I can make after-tax 401k contributions and immediately transfer them to my Roth IRA.
401k plans have some ERISA protections that IRAs do not.
Is it okay to only make after-tax 401k contributions and no Traditional/Roth 401k contributions?
It's okay if your plan allows it. Some plans won't let you make after-tax contributions until you've maxed your employee deferral.

Do you get an employer match? If you choose all after-tax will you still get any matching? And if you do remember to subtract that from the $57K.

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Re: Why do Roth 401k when MBR is an option?

Post by TropikThunder » Sat Aug 01, 2020 5:58 pm

4a757374696e wrote:
Sat Aug 01, 2020 5:09 pm
Hello all,

I'm making plans for 2021 and a 401k question came up.

Background: I have the ability to make after-tax contributions to my 401k with unlimited in-service rollovers to my Roth IRA (MBR). This year I should be able to completely max out my 401k ($57k) but only with the help of traditional (pre-tax) 401k contributions. For 2021, I think I'll be able to do the same but with all Roth/after-tax contributions. I'd like to do this since after-tax money is worth more.

Question: why would I want to make Roth 401k contributions when I can make after-tax 401k contributions and immediately transfer them to my Roth IRA. Is it okay to only make after-tax 401k contributions and no Traditional/Roth 401k contributions? The funds available in my 401k have similar expense ratios to those available in my IRA.

Thanks,
Justin
Generally the after-tax contributions are those made above the elective deferral limit, not instead of. You can't make the entire amount [$57k - employer contributions] as after-tax.

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sat Aug 01, 2020 6:53 pm

Duckie wrote:
Sat Aug 01, 2020 5:55 pm
Roth/after-tax money is worth more later. Reducing current taxes is worth more now.
Good distinction. I'm just wanting to put as much into tax-advantaged accounts as possible.
Duckie wrote:
Sat Aug 01, 2020 5:55 pm
401k plans have some ERISA protections that IRAs do not.
Oh that's a fantastic point! I'm not planning on going bankrupt (or have any civil suits) anytime soon, but who does :|
Duckie wrote:
Sat Aug 01, 2020 5:55 pm
It's okay if your plan allows it. Some plans won't let you make after-tax contributions until you've maxed your employee deferral.

Do you get an employer match? If you choose all after-tax will you still get any matching? And if you do remember to subtract that from the $57K.
I believe my plan does allow after-tax contributions before I've maxed my employee deferral, but I'll double check just to be sure. I didn't think of that, so thanks. And yes, my employer will (thankfully) match after-tax contributions the same as traditional/Roth contributions.
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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sat Aug 01, 2020 6:57 pm

TropikThunder wrote:
Sat Aug 01, 2020 5:58 pm
Generally the after-tax contributions are those made above the elective deferral limit, not instead of. You can't make the entire amount [$57k - employer contributions] as after-tax.
You seem pretty sure of that. I believe my plan does allow after-tax contributions prior to the elective deferral limit. I will be sure to double check that this week. I didn't think of that possibility though, so thanks!
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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sat Aug 01, 2020 8:22 pm

4a757374696e wrote:
Sat Aug 01, 2020 6:53 pm
Duckie wrote:
Sat Aug 01, 2020 5:55 pm
Roth/after-tax money is worth more later. Reducing current taxes is worth more now.
Good distinction. I'm just wanting to put as much into tax-advantaged accounts as possible.
See Traditional versus Roth - Bogleheads for how you might decide which will be better for you.

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Re: Why do Roth 401k when MBR is an option?

Post by Spirit Rider » Sat Aug 01, 2020 8:45 pm

TropikThunder wrote:
Sat Aug 01, 2020 5:58 pm
Generally the after-tax contributions are those made above the elective deferral limit, not instead of. You can't make the entire amount [$57k - employer contributions] as after-tax.
This is entirely at the discretion of the plan.

Since IRS notice 2014-54, more and more plans allow the explicit election of an employee after-tax contribution percentage starting on 1/1 regardless of any employee deferrals.

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sat Aug 01, 2020 9:07 pm

FiveK wrote:
Sat Aug 01, 2020 8:22 pm
4a757374696e wrote:
Sat Aug 01, 2020 6:53 pm
Duckie wrote:
Sat Aug 01, 2020 5:55 pm
Roth/after-tax money is worth more later. Reducing current taxes is worth more now.
Good distinction. I'm just wanting to put as much into tax-advantaged accounts as possible.
See Traditional versus Roth - Bogleheads for how you might decide which will be better for you.
Thanks. I've read the page before. There's a ton of good information in there! It's part of the reason I'm wanting to switch contributions from Traditional to Roth. From the "maxing out your retirement accounts" section:
The IRS contribution limits do not distinguish between Traditional (pre-tax) and Roth (after-tax) accounts. Because after-tax money is worth more than pre-tax money, Roth accounts effectively allow you to contribute more than Traditional accounts.
Don't do anything tomorrow that can be done today

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Re: Why do Roth 401k when MBR is an option?

Post by MrJedi » Sat Aug 01, 2020 9:19 pm

Depending on your compensation level, you might be limited on after tax contributions below the IRS limit due to ACP testing.

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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sat Aug 01, 2020 9:23 pm

4a757374696e wrote:
Sat Aug 01, 2020 9:07 pm
Thanks. I've read the page before. There's a ton of good information in there! It's part of the reason I'm wanting to switch contributions from Traditional to Roth. From the "maxing out your retirement accounts" section:
The IRS contribution limits do not distinguish between Traditional (pre-tax) and Roth (after-tax) accounts. Because after-tax money is worth more than pre-tax money, Roth accounts effectively allow you to contribute more than Traditional accounts.
Yes...but that is not the most important consideration. The main reason to prefer one type of account over the other is the comparison of marginal tax rates.

When one maxes contributions, that can shift the Break-even withdrawal rate some percent, but it's still a question of "by how much?" when comparing marginal rates.

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sat Aug 01, 2020 11:21 pm

FiveK wrote:
Sat Aug 01, 2020 9:23 pm
4a757374696e wrote:
Sat Aug 01, 2020 9:07 pm
Thanks. I've read the page before. There's a ton of good information in there! It's part of the reason I'm wanting to switch contributions from Traditional to Roth. From the "maxing out your retirement accounts" section:
The IRS contribution limits do not distinguish between Traditional (pre-tax) and Roth (after-tax) accounts. Because after-tax money is worth more than pre-tax money, Roth accounts effectively allow you to contribute more than Traditional accounts.
Yes...but that is not the most important consideration. The main reason to prefer one type of account over the other is the comparison of marginal tax rates.

When one maxes contributions, that can shift the Break-even withdrawal rate some percent, but it's still a question of "by how much?" when comparing marginal rates.
That's a really neat formula. My marginal tax rate is 24% percent and I still have a while until retirement (maybe 35 years). Copying the tax advantaged return, taxable return, and capital gains rate from the example, the result is 19.42%. Who knows what my tax rate will be in 35 years; there are just so many unknowns. I'm actually a little surprised by the result though. I thought there would be a bigger difference.

Another consideration for myself is the potential to contribute directly to a Roth IRA if I make enough pre-tax contributions. In 2021, I'm expecting my gross income to be approximately $145k (single filed). If I decide lower my adjusted gross income by making pre-tax contributions (to 401k & HSA) I could probably sneak in right below the beginning of the Roth IRA contribution phase-out income limit of $124k. I think $19.5k pre-tax + $6k Roth (rather than taxable) might sweeten the pot enough for me to keep doing pre-tax contributions. Though, I would like to put more money in Roth before I hit the 32% marginal tax bracket at $163k.
Last edited by 4a757374696e on Sat Aug 01, 2020 11:35 pm, edited 1 time in total.
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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sat Aug 01, 2020 11:29 pm

MrJedi wrote:
Sat Aug 01, 2020 9:19 pm
Depending on your compensation level, you might be limited on after tax contributions below the IRS limit due to ACP testing.
I'm not super familiar with this. For 2020, is that the $285k income limit mentioned here? Rest assured, my income is much lower than that; it's around $140k right now.
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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 12:00 am

4a757374696e wrote:
Sat Aug 01, 2020 11:21 pm
That's a really neat formula. My marginal tax rate is 24% percent and I still have a while until retirement (maybe 35 years). Copying the tax advantaged return, taxable return, and capital gains rate from the example, the result is 19.42%. Who knows what my tax rate will be in 35 years; there are just so many unknowns.
Sure are. E.g., you might retire (voluntarily or involuntarily) in 25 years, in which case the breakeven rate will be higher and traditional now may be better.
Another consideration for myself is the potential to contribute directly to a Roth IRA if I make enough pre-tax contributions.
The Backdoor Roth process, if you have no pre-tax IRA balance, takes minimal effort.
Though, I would like to put more money in Roth before I hit the 32% marginal tax bracket at $163k.
That's also a reasonable consideration, and Roth now may be better.

The main thing is that you are contributing at all now, and given future uncertainties either traditional or Roth could be the better choice now. Pick one, then reevaluate next year, and the year after that, etc. As time goes by your investment growth, salary progression, life situation, tax law, etc., will change and one or the other will "clearly" :wink: look better for the next year's contribution as you compare your current marginal tax rate to what you expect in retirement.

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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 12:05 am

4a757374696e wrote:
Sat Aug 01, 2020 11:29 pm
MrJedi wrote:
Sat Aug 01, 2020 9:19 pm
Depending on your compensation level, you might be limited on after tax contributions below the IRS limit due to ACP testing.
I'm not super familiar with this. For 2020, is that the $285k income limit mentioned here? Rest assured, my income is much lower than that; it's around $140k right now.
Not that limit.

It's whether you are considered a Highly Compensated Employee, and whether your company's plan passes the 401(k) ACP Test.

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sun Aug 02, 2020 12:12 am

FiveK wrote:
Sun Aug 02, 2020 12:00 am
Another consideration for myself is the potential to contribute directly to a Roth IRA if I make enough pre-tax contributions.
The Backdoor Roth process, if you have no pre-tax IRA balance, takes minimal effort.
Oh man! Can I do Mega Backdoor Roth and Backdoor Roth? I can't believe I didn't think of that. I guess for some reason I thought I could only do one. My traditional IRA is empty, so I'm good to go.
FiveK wrote:
Sun Aug 02, 2020 12:00 am
The main thing is that you are contributing at all now, and given future uncertainties either traditional or Roth could be the better choice now. Pick one, then reevaluate next year, and the year after that, etc. As time goes by your investment growth, salary progression, life situation, tax law, etc., will change and one or the other will "clearly" :wink: look better for the next year's contribution as you compare your current marginal tax rate to what you expect in retirement.
That's all very wise advice. Thanks for help! I've learned lots tonight.
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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 12:16 am

4a757374696e wrote:
Sun Aug 02, 2020 12:12 am
Oh man! Can I do Mega Backdoor Roth and Backdoor Roth? I can't believe I didn't think of that. I guess for some reason I thought I could only do one. My traditional IRA is empty, so I'm good to go.
Yes, completely separate processes. :)

Good luck!

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Re: Why do Roth 401k when MBR is an option?

Post by babystep » Sun Aug 02, 2020 2:40 am

4a757374696e wrote:
Sat Aug 01, 2020 11:21 pm
FiveK wrote:
Sat Aug 01, 2020 9:23 pm
4a757374696e wrote:
Sat Aug 01, 2020 9:07 pm
Thanks. I've read the page before. There's a ton of good information in there! It's part of the reason I'm wanting to switch contributions from Traditional to Roth. From the "maxing out your retirement accounts" section:
The IRS contribution limits do not distinguish between Traditional (pre-tax) and Roth (after-tax) accounts. Because after-tax money is worth more than pre-tax money, Roth accounts effectively allow you to contribute more than Traditional accounts.
Yes...but that is not the most important consideration. The main reason to prefer one type of account over the other is the comparison of marginal tax rates.

When one maxes contributions, that can shift the Break-even withdrawal rate some percent, but it's still a question of "by how much?" when comparing marginal rates.
That's a really neat formula. My marginal tax rate is 24% percent and I still have a while until retirement (maybe 35 years). Copying the tax advantaged return, taxable return, and capital gains rate from the example, the result is 19.42%. Who knows what my tax rate will be in 35 years; there are just so many unknowns. I'm actually a little surprised by the result though. I thought there would be a bigger difference.

Another consideration for myself is the potential to contribute directly to a Roth IRA if I make enough pre-tax contributions. In 2021, I'm expecting my gross income to be approximately $145k (single filed). If I decide lower my adjusted gross income by making pre-tax contributions (to 401k & HSA) I could probably sneak in right below the beginning of the Roth IRA contribution phase-out income limit of $124k. I think $19.5k pre-tax + $6k Roth (rather than taxable) might sweeten the pot enough for me to keep doing pre-tax contributions. Though, I would like to put more money in Roth before I hit the 32% marginal tax bracket at $163k.
This is the order for most cases. 401k, HSA, IRA/Roth IRA/Backdoor, After-Tax/MBR.

https://www.bogleheads.org/wiki/Priorit ... nvestments

In your tax bracket, I will do it in the above order.

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Re: Why do Roth 401k when MBR is an option?

Post by invest4 » Sun Aug 02, 2020 7:51 am

babystep wrote:
Sun Aug 02, 2020 2:40 am

This is the order for most cases. 401k, HSA, IRA/Roth IRA/Backdoor, After-Tax/MBR.

https://www.bogleheads.org/wiki/Priorit ... nvestments

In your tax bracket, I will do it in the above order.
+1 Agreed.

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Re: Why do Roth 401k when MBR is an option?

Post by aristotelian » Sun Aug 02, 2020 8:13 am

4a757374696e wrote:
Sat Aug 01, 2020 11:21 pm
That's a really neat formula. My marginal tax rate is 24% percent and I still have a while until retirement (maybe 35 years). Copying the tax advantaged return, taxable return, and capital gains rate from the example, the result is 19.42%. Who knows what my tax rate will be in 35 years; there are just so many unknowns. I'm actually a little surprised by the result though. I thought there would be a bigger difference.
You might try this tool. In discussing it with the Redditor who created it, I believe we discovered an error in the Wiki formula, which predicts almost all future taxable dividends will be non-qualified when it should be the opposite, therefore inclining toward Roth. IMO in the 24% bracket it is far more likely you will end up in a lower bracket and you should be doing pretax as much as possible.

https://www.reddit.com/r/financialindep ... roth_some/

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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 8:22 am

aristotelian wrote:
Sun Aug 02, 2020 8:13 am
...I believe we discovered an error in the Wiki formula, which predicts almost all future taxable dividends will be non-qualified when it should be the opposite....
The wiki says "Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so. Take 2% of that value as qualified dividends."

Is there somewhere else in the wiki that suggests assuming non-qualified dividends?

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Re: Why do Roth 401k when MBR is an option?

Post by aristotelian » Sun Aug 02, 2020 8:30 am

FiveK wrote:
Sun Aug 02, 2020 8:22 am
aristotelian wrote:
Sun Aug 02, 2020 8:13 am
...I believe we discovered an error in the Wiki formula, which predicts almost all future taxable dividends will be non-qualified when it should be the opposite....
The wiki says "Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so. Take 2% of that value as qualified dividends."

Is there somewhere else in the wiki that suggests assuming non-qualified dividends?
Sorry, I didn't word that correctly. Haven't had my coffee yet. The issue is that it appears to count qualified dividends as pushing up your marginal tax rate.

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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 8:37 am

aristotelian wrote:
Sun Aug 02, 2020 8:30 am
FiveK wrote:
Sun Aug 02, 2020 8:22 am
aristotelian wrote:
Sun Aug 02, 2020 8:13 am
...I believe we discovered an error in the Wiki formula, which predicts almost all future taxable dividends will be non-qualified when it should be the opposite....
The wiki says "Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so. Take 2% of that value as qualified dividends."

Is there somewhere else in the wiki that suggests assuming non-qualified dividends?
Sorry, I didn't word that correctly. Haven't had my coffee yet. The issue is that it appears to count qualified dividends as pushing up your marginal tax rate.
It just says to use tax law to calculate the marginal rate. The presence of qualified dividends may affect the marginal rate on traditional withdrawals, even when properly treated.

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sun Aug 02, 2020 11:26 am

invest4 wrote:
Sun Aug 02, 2020 7:51 am
babystep wrote:
Sun Aug 02, 2020 2:40 am

This is the order for most cases. 401k, HSA, IRA/Roth IRA/Backdoor, After-Tax/MBR.

https://www.bogleheads.org/wiki/Priorit ... nvestments

In your tax bracket, I will do it in the above order.
+1 Agreed.
I guess I'm just a bit afraid of having too much in pre-tax accounts. With my current contributions, I could expect to have $3mm by the age of 72 assuming an annual return of 7% (includes inflation). Who knows if it will actually be that. With current required minimum distributions (RMD) withdrawal rates, I would be forced to withdrawal about $120k at 72, and that number would only go higher. With that income, I might have to pay more in taxes than I would right now. And I was planning on continuing pre-tax contributions after my marginal tax rate hits 32% or something else prompts change.

If the option to do Roth ladder conversions exists when I retire I would definitely like to do that, but it only makes sense to convert so much per year, right? There are many factors to consider, but $50k/year sounds reasonable. I wouldn't be able to convert enough between retirement (maybe 50) and 72 to solve the RMD problem.
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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 12:17 pm

4a757374696e wrote:
Sun Aug 02, 2020 11:26 am
I guess I'm just a bit afraid of having too much in pre-tax accounts. With my current contributions, I could expect to have $3mm by the age of 72 assuming an annual return of 7% (includes inflation).
Because tax brackets also increase with inflation, using "real" (i.e., excluding inflation) returns is a common practice. That allows everything to be done in today's dollars.
And I was planning on continuing pre-tax contributions after my marginal tax rate hits 32% or something else prompts change.
If the option to do Roth ladder conversions exists when I retire I would definitely like to do that, but it only makes sense to convert so much per year, right?
When at that point, it often makes sense to convert about as much per year as needed to equate the marginal rate while converting to the marginal rate you will pay when taking SS and RMDs. That could be a very small or a very large amount per year. E.g., if you expect to be paying 24% with SS and RMDs added and have no pension, converting ~$150K/yr might not be unreasonable.

Have you made a back-of-the-envelope estimate of at your withdrawal marginal tax rate in retirement?

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Re: Why do Roth 401k when MBR is an option?

Post by slbnoob » Sun Aug 02, 2020 12:54 pm

OP, I hope you don't mind me asking a related question on your thread, looking for feedback if my rationale makes sense.

I have a similar plan as OP. I usually made calls to my custodian (Fidelity) to rollover the After-Tax 401k contribution+earnings to my out-of-plan Roth IRA. Given the greater protections (ERISA) of the 401k plan, I assume these protections also apply to the in-plan Roth sub-account of the 401k. Hence I am now thinking that it makes sense to just let it (automatically) rollover to the in-plan Roth sub-account rather than to the out-of-plan Roth IRA.
Is this reasonable? What do folks prefer: in-plan Roth or their own Roth IRA?

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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 1:04 pm

slbnoob wrote:
Sun Aug 02, 2020 12:54 pm
What do folks prefer: in-plan Roth or their own Roth IRA?
1. Whichever has the lower fees for the desired investment. If equal, then
2. Whichever is easier to roll into.

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sun Aug 02, 2020 1:30 pm

FiveK wrote:
Sun Aug 02, 2020 12:17 pm
4a757374696e wrote:
Sun Aug 02, 2020 11:26 am
I guess I'm just a bit afraid of having too much in pre-tax accounts. With my current contributions, I could expect to have $3mm by the age of 72 assuming an annual return of 7% (includes inflation).
Because tax brackets also increase with inflation, using "real" (i.e., excluding inflation) returns is a common practice. That allows everything to be done in today's dollars.
I think we are referring to the same thing. I did (principal * (1.07 ** (72 - age))) = $3mm. Where 1.07 is (10% - 3%) (nominal - inflation). I made the mistake of saying including rather than excluding.
FiveK wrote:
Sun Aug 02, 2020 12:17 pm
And I was planning on continuing pre-tax contributions after my marginal tax rate hits 32% or something else prompts change.
If the option to do Roth ladder conversions exists when I retire I would definitely like to do that, but it only makes sense to convert so much per year, right?
When at that point, it often makes sense to convert about as much per year as needed to equate the marginal rate while converting to the marginal rate you will pay when taking SS and RMDs. That could be a very small or a very large amount per year. E.g., if you expect to be paying 24% with SS and RMDs added and have no pension, converting ~$150K/yr might not be unreasonable.
Good to know. Also, I expect my tax deductions to be higher in retirement than right now, and therefore a lower tax rate in retirement at the same income. Currently single with no kids, but marriage and kids are definitely things I'm wanting in the future.
FiveK wrote:
Sun Aug 02, 2020 12:17 pm
Have you made a back-of-the-envelope estimate of at your withdrawal marginal tax rate in retirement?
Sorry, I have not. There are too many unknowns.
Don't do anything tomorrow that can be done today

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sun Aug 02, 2020 2:00 pm

slbnoob wrote:
Sun Aug 02, 2020 12:54 pm
OP, I hope you don't mind me asking a related question on your thread, looking for feedback if my rationale makes sense.
Of course not! This is the peoples' thread now :sharebeer
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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Sun Aug 02, 2020 2:08 pm

4a757374696e wrote:
Sun Aug 02, 2020 1:30 pm
FiveK wrote:
Sun Aug 02, 2020 12:17 pm
Have you made a back-of-the-envelope estimate of at your withdrawal marginal tax rate in retirement?
Sorry, I have not. There are too many unknowns.
Certainly no great urgency, but some rainy day it may be worth a few minutes to do so. As the wiki notes, "The steps above may look complicated at first, but you don't need great precision. The answer will either be "obvious" or "difficult to choose". If the latter, it likely won't make much difference which you pick...."

As with many things, after you have done it once, redoing it in subsequent years is even easier (assuming you keep the spreadsheet or whatever you use the first time).

retiredjg
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Re: Why do Roth 401k when MBR is an option?

Post by retiredjg » Sun Aug 02, 2020 3:35 pm

Generally, in the 24% bracket, people should use a tax-deferred account. There are exceptions. There is not enough information to even guess if you are one of them.

I too believe it is possible to have too large a tax-deferred account. However, there are ways to mitigate that. Retire earlier and do Roth conversions then. Put bonds in your tax-deferred accounts so they don't grow as fast. Don't have a job with a pension ( :D ). Don't inherit any IRAs. ( :D :D )And maybe a few others.

It just seems to me too early to be assuming that will happen to you. $3million in tax-deferral now can be an issue. In 35 years, I'm don't think it will be. You may be too young to realize how little it will be in 35 years.

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4a757374696e
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Location: Austin, TX

Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sun Aug 02, 2020 5:24 pm

retiredjg wrote:
Sun Aug 02, 2020 3:35 pm
I too believe it is possible to have too large a tax-deferred account. However, there are ways to mitigate that. Retire earlier and do Roth conversions then. Put bonds in your tax-deferred accounts so they don't grow as fast. Don't have a job with a pension ( :D ). Don't inherit any IRAs. ( :D :D ) And maybe a few others.
Ha!
retiredjg wrote:
Sun Aug 02, 2020 3:35 pm
It just seems to me too early to be assuming that will happen to you. $3million in tax-deferral now can be an issue. In 35 years, I'm don't think it will be. You may be too young to realize how little it will be in 35 years.
I agree it is really early, but I'm a planner :) and too much in tax-deferral is a good problem to have. I'm just trying to be smart while time is on my side. If I continue to defer taxes while the differences are negligible, I'll end up with some crazy RMDs. That $3mm figure assumes I never make another pre-tax contribution.

Y'all have given me a lot of good advice. Thank you! I'll have to re-evaluate the pros and cons of Traditional vs Roth. I understand the typical advice is to defer taxes at my income. Good thing I have several months to think it over.
Last edited by 4a757374696e on Sun Aug 02, 2020 5:55 pm, edited 1 time in total.
Don't do anything tomorrow that can be done today

retiredjg
Posts: 41150
Joined: Thu Jan 10, 2008 12:56 pm

Re: Why do Roth 401k when MBR is an option?

Post by retiredjg » Sun Aug 02, 2020 5:52 pm

Are you in one of those jobs where your income and tax bracket will be going up from now and never come down? If yes, it could be better to use more Roth at 24% and use more tax-deferral when you get to 37%.

For people who will stay in near the same bracket till retirement, maybe not - they can just stop doing tax-deferral later on when things are clearer.

Some people have just decide that predicting the best outcome is not possible and have chosen to just do half and half.

babystep
Posts: 216
Joined: Tue Apr 09, 2019 9:44 am

Re: Why do Roth 401k when MBR is an option?

Post by babystep » Sun Aug 02, 2020 5:56 pm

4a757374696e wrote:
Sun Aug 02, 2020 11:26 am
invest4 wrote:
Sun Aug 02, 2020 7:51 am
babystep wrote:
Sun Aug 02, 2020 2:40 am

This is the order for most cases. 401k, HSA, IRA/Roth IRA/Backdoor, After-Tax/MBR.

https://www.bogleheads.org/wiki/Priorit ... nvestments

In your tax bracket, I will do it in the above order.
+1 Agreed.
I guess I'm just a bit afraid of having too much in pre-tax accounts. With my current contributions, I could expect to have $3mm by the age of 72 assuming an annual return of 7% (includes inflation). Who knows if it will actually be that. With current required minimum distributions (RMD) withdrawal rates, I would be forced to withdrawal about $120k at 72, and that number would only go higher. With that income, I might have to pay more in taxes than I would right now. And I was planning on continuing pre-tax contributions after my marginal tax rate hits 32% or something else prompts change.

If the option to do Roth ladder conversions exists when I retire I would definitely like to do that, but it only makes sense to convert so much per year, right? There are many factors to consider, but $50k/year sounds reasonable. I wouldn't be able to convert enough between retirement (maybe 50) and 72 to solve the RMD problem.
There is a saying: don't count your chickens before they hatch.

It is a long time period so anything can happen between now and age 72. Even if you take the optimistic scenarios, MFJ 24% tax bracket is up to $321,450 per year income. It will adjust upwards for inflation so if you believe that you will be earning more than $321,450 per year in taxable income in the retirement then you should tilt more towards the Roth since you are currently saving 24% in taxes for your 401k contributions.

I would continue to prioritize 401k and re-evaluate every few years.

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4a757374696e
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Location: Austin, TX

Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sun Aug 02, 2020 6:07 pm

retiredjg wrote:
Sun Aug 02, 2020 5:52 pm
Are you in one of those jobs where your income and tax bracket will be going up from now and never come down? If yes, it could be better to use more Roth at 24% and use more tax-deferral when you get to 37%.
Well I'm never one to say never, but I haven't plateaued yet. I'm still relatively early in my career. Unless something drastic happens, I don't expect to reach the 37% marginal tax bracket.
Don't do anything tomorrow that can be done today

Topic Author
4a757374696e
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Location: Austin, TX

Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Sun Aug 02, 2020 6:47 pm

babystep wrote:
Sun Aug 02, 2020 5:56 pm
There is a saying: don't count your chickens before they hatch.
Yeah good advice. I try my best not too.
babystep wrote:
Sun Aug 02, 2020 5:56 pm
It is a long time period so anything can happen between now and age 72. Even if you take the optimistic scenarios, MFJ 24% tax bracket is up to $321,450 per year income. It will adjust upwards for inflation so if you believe that you will be earning more than $321,450 per year in taxable income in the retirement then you should tilt more towards the Roth since you are currently saving 24% in taxes for your 401k contributions.
I agree. Anything could happen. I could lose my job, the stock market could become stagnant, or I might not even make it that far in life. I'm hoping for the best though. $321k/year seems like a lot. I'm not sure I could alone contribute enough pre-tax for RMDs to be greater than that.
babystep wrote:
Sun Aug 02, 2020 5:56 pm
I would continue to prioritize 401k and re-evaluate every few years.
Ugh, I suspect you're right. But in a few years, my marginal tax bracket might be 32% or the tax brackets themselves might be raised. I feel like there are still a few more years that I could contribute to Roth before it becomes clear to defer taxes.
Don't do anything tomorrow that can be done today

babystep
Posts: 216
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Re: Why do Roth 401k when MBR is an option?

Post by babystep » Sun Aug 02, 2020 8:10 pm

4a757374696e wrote:
Sun Aug 02, 2020 6:47 pm
babystep wrote:
Sun Aug 02, 2020 5:56 pm
There is a saying: don't count your chickens before they hatch.
Yeah good advice. I try my best not too.
babystep wrote:
Sun Aug 02, 2020 5:56 pm
It is a long time period so anything can happen between now and age 72. Even if you take the optimistic scenarios, MFJ 24% tax bracket is up to $321,450 per year income. It will adjust upwards for inflation so if you believe that you will be earning more than $321,450 per year in taxable income in the retirement then you should tilt more towards the Roth since you are currently saving 24% in taxes for your 401k contributions.
I agree. Anything could happen. I could lose my job, the stock market could become stagnant, or I might not even make it that far in life. I'm hoping for the best though. $321k/year seems like a lot. I'm not sure I could alone contribute enough pre-tax for RMDs to be greater than that.
babystep wrote:
Sun Aug 02, 2020 5:56 pm
I would continue to prioritize 401k and re-evaluate every few years.
Ugh, I suspect you're right. But in a few years, my marginal tax bracket might be 32% or the tax brackets themselves might be raised. I feel like there are still a few more years that I could contribute to Roth before it becomes clear to defer taxes.
Ok, if that is the case then you should contribute to Roth instead of 401k. Just remember that when you choose to not contribute 19,500 to 401k then you are paying $4680 every year to IRS rather than putting that $4680 into your own pocket.

invest4
Posts: 170
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Re: Why do Roth 401k when MBR is an option?

Post by invest4 » Sun Aug 02, 2020 8:22 pm

4a757374696e wrote:
Sun Aug 02, 2020 6:47 pm

Ugh, I suspect you're right. But in a few years, my marginal tax bracket might be 32% or the tax brackets themselves might be raised. I feel like there are still a few more years that I could contribute to Roth before it becomes clear to defer taxes.
Of course, you should do whatever makes the most sense to you. I was a couple of years working when the Roth was introduced and unaware of it...nor had I discovered this wonderful forum yet.

No doubt I missed some benefit in those early years and currently have a portfolio that is 85% tax deferred and 15% Roth. Fortunately, I have the option of the Mega Backdoor Roth and actively filling all the spaces up, close to the annual contribution limit to make the mix a bit better (65/35 projected by age 62).

Alas, I have no idea what will transpire from now until then, so I do them all to the best of my financial ability to do so...just like everyone else.

Best wishes.

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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Tue Aug 04, 2020 11:37 am

babystep wrote:
Sun Aug 02, 2020 8:10 pm
Ok, if that is the case then you should contribute to Roth instead of 401k. Just remember that when you choose to not contribute 19,500 to 401k then you are paying $4680 every year to IRS rather than putting that $4680 into your own pocket.
Well that feels a bit disingenuous. Taxes are going to have to be paid eventually.
Don't do anything tomorrow that can be done today

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4a757374696e
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Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Tue Aug 04, 2020 11:39 am

invest4 wrote:
Sun Aug 02, 2020 8:22 pm
No doubt I missed some benefit in those early years and currently have a portfolio that is 85% tax deferred and 15% Roth. Fortunately, I have the option of the Mega Backdoor Roth and actively filling all the spaces up, close to the annual contribution limit to make the mix a bit better (65/35 projected by age 62).
Good luck! That sounds like a good mixture. I'm all for diversification.
Don't do anything tomorrow that can be done today

babystep
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Re: Why do Roth 401k when MBR is an option?

Post by babystep » Wed Aug 05, 2020 12:44 am

4a757374696e wrote:
Tue Aug 04, 2020 11:37 am
babystep wrote:
Sun Aug 02, 2020 8:10 pm
Ok, if that is the case then you should contribute to Roth instead of 401k. Just remember that when you choose to not contribute 19,500 to 401k then you are paying $4680 every year to IRS rather than putting that $4680 into your own pocket.
Well that feels a bit disingenuous. Taxes are going to have to be paid eventually.
You are choosing the certainty over maybe. I have explained above the tax rates and required income above to reach the 24% tax rate.

I feel that you have been provided the information for you to choose and you have strong feelings over certain options, hence my comment above about going with your feeling. It is up to you.

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Location: Austin, TX

Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Wed Aug 05, 2020 11:23 pm

After reading everyone's feedback I discovered I didn't really know my situation, and I was still concerned with RMDs. I'm a fan of seeing the numbers for myself so I wrote a little program to spit out a bunch of variants. Variables are interest_rate={1.04,1.05,1.06,1.07} (all real rates) and years_to_wait={10,5,0} (years before I start tax-deferred contributions again). Here are the results:

Code: Select all

interest_rate=1.04, years_to_wait=10, value=2,415,059.43, rmd=94,338.26
interest_rate=1.04, years_to_wait=05, value=2,883,879.32, rmd=112,651.54
interest_rate=1.04, years_to_wait=00, value=3,454,270.39, rmd=134,932.44

interest_rate=1.05, years_to_wait=10, value=3,269,552.67, rmd=127,716.90
interest_rate=1.05, years_to_wait=05, value=3,957,586.63, rmd=154,593.23
interest_rate=1.05, years_to_wait=00, value=4,835,711.69, rmd=188,894.99

interest_rate=1.06, years_to_wait=10, value=4,486,542.02, rmd=175,255.55
interest_rate=1.06, years_to_wait=05, value=5,492,807.76, rmd=214,562.80
interest_rate=1.06, years_to_wait=00, value=6,839,418.32, rmd=267,164.78

interest_rate=1.07, years_to_wait=10, value=6,230,924.74, rmd=243,395.50
interest_rate=1.07, years_to_wait=05, value=7,697,626.52, rmd=300,688.54
interest_rate=1.07, years_to_wait=00, value=9,754,751.66, rmd=381,044.99
Currently, I am 25 years old with $120k in a tax-deferred accounts. Yearly contributions would be $19.5k (current 401k limit). I have 47 years until I (hopefully) reach 72. I found that the current withdrawal factor (WF) at 72 is 25.6 and RMD is calculated by assets/WF. With time, I expect the WF to go down and RMDs to go up.

Given the following tax brackets:

Code: Select all

===2020 Tax Brackets MFJ===
22% $ 80,251 to $171,050
24% $171,051 to $326,600
32% $326,601 to $414,700

Code: Select all

===2020 Tax Brackets SINGLE===
22% $ 40,126 to $ 85,525
24% $ 85,526 to $163,300
32% $163,301 to $207,350
If I'm married at 72, ...

it would be clearly better (income < $171,051) to defer taxes in the following scenarios:

Code: Select all

interest_rate={1.04} & years_to_wait={10,5,0}
interest_rate={1.05} & years_to_wait={10,5}
it would be clearly worse (income > $326,600) to defer taxes in the following scenarios:

Code: Select all

interest_rate={1.07} & years_to_wait={0}
If I'm single at 72, ...

it would be clearly better (income < $85,526) to defer taxes in the following scenarios:

none

it would be clearly worse (income > $163,300) to defer taxes in the following scenarios:

Code: Select all

interest_rate={1.05} & years_to_wait={0}
interest_rate={1.06} & years_to_wait={10,5,0}
interest_rate={1.07} & years_to_wait={10,5,0}
Thoughts after looking at the results

So I think the key is to just make sure I'm married at 72 :wink: (jokes)

If I'm married it seems like the downsides are pretty unlikely (only one instance). But that's also making a lot of assumptions, like no social security, no spousal retirement income, and no "after retirement pre 72" rollovers.

On the other hand, if I'm single at 72 there's no real benefit to defer taxes. Even in the worst case scenario, I would be in the same tax bracket; and there's a decent chance things would be worse.

Edit: One thing I didn't think of at the time was stopping contributions at retirement. Given that contributions stop at the age of 50 (who knows when I'll actually retire), the numbers would look like:

Code: Select all

interest_rate=1.04, years_to_wait=10, value=1,720,510.60, rmd=67,207.45
interest_rate=1.04, years_to_wait=05, value=2,189,330.49, rmd=85,520.72
interest_rate=1.04, years_to_wait=00, value=2,759,721.56, rmd=107,801.62

interest_rate=1.05, years_to_wait=10, value=2,481,158.41, rmd=96,920.25
interest_rate=1.05, years_to_wait=05, value=3,169,192.37, rmd=123,796.58
interest_rate=1.05, years_to_wait=00, value=4,047,317.43, rmd=158,098.34

interest_rate=1.06, years_to_wait=10, value=3,589,623.38, rmd=140,219.66
interest_rate=1.06, years_to_wait=05, value=4,595,889.12, rmd=179,526.92
interest_rate=1.06, years_to_wait=00, value=5,942,499.68, rmd=232,128.89

interest_rate=1.07, years_to_wait=10, value=5,208,419.99, rmd=203,453.91
interest_rate=1.07, years_to_wait=05, value=6,675,121.78, rmd=260,746.94
interest_rate=1.07, years_to_wait=00, value=8,732,246.91, rmd=341,103.39
Don't do anything tomorrow that can be done today

babystep
Posts: 216
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Re: Why do Roth 401k when MBR is an option?

Post by babystep » Thu Aug 06, 2020 12:04 am

4a757374696e wrote:
Wed Aug 05, 2020 11:23 pm
After reading everyone's feedback I discovered I didn't really know my situation, and I was still concerned with RMDs. I'm a fan of seeing the numbers for myself so I wrote a little program to spit out a bunch of variants. Variables are interest_rate={1.04,1.05,1.06,1.07} (all real rates) and years_to_wait={10,5,0} (years before I start tax-deferred contributions again). Here are the results:

Code: Select all

interest_rate=1.04, years_to_wait=10, value=2,415,059.43, rmd=94,338.26
interest_rate=1.04, years_to_wait=05, value=2,883,879.32, rmd=112,651.54
interest_rate=1.04, years_to_wait=00, value=3,454,270.39, rmd=134,932.44

interest_rate=1.05, years_to_wait=10, value=3,269,552.67, rmd=127,716.90
interest_rate=1.05, years_to_wait=05, value=3,957,586.63, rmd=154,593.23
interest_rate=1.05, years_to_wait=00, value=4,835,711.69, rmd=188,894.99

interest_rate=1.06, years_to_wait=10, value=4,486,542.02, rmd=175,255.55
interest_rate=1.06, years_to_wait=05, value=5,492,807.76, rmd=214,562.80
interest_rate=1.06, years_to_wait=00, value=6,839,418.32, rmd=267,164.78

interest_rate=1.07, years_to_wait=10, value=6,230,924.74, rmd=243,395.50
interest_rate=1.07, years_to_wait=05, value=7,697,626.52, rmd=300,688.54
interest_rate=1.07, years_to_wait=00, value=9,754,751.66, rmd=381,044.99
Currently, I am 25 years old with $120k in a tax-deferred accounts. Yearly contributions would be $19.5k (current 401k limit). I have 47 years until I (hopefully) reach 72. I found that the current withdrawal factor (WF) at 72 is 25.6 and RMD is calculated by assets/WF. With time, I expect the WF to go down and RMDs to go up.

Given the following tax brackets:

Code: Select all

===2020 Tax Brackets MFJ===
22% $ 80,251 to $171,050
24% $171,051 to $326,600
32% $326,601 to $414,700

Code: Select all

===2020 Tax Brackets SINGLE===
22% $ 40,126 to $ 85,525
24% $ 85,526 to $163,300
32% $163,301 to $207,350
If I'm married at 72, ...

it would be clearly better (income < $171,051) to defer taxes in the following scenarios:

Code: Select all

interest_rate={1.04} & years_to_wait={10,5,0}
interest_rate={1.05} & years_to_wait={10,5}
it would be clearly worse (income > $326,600) to defer taxes in the following scenarios:

Code: Select all

interest_rate={1.07} & years_to_wait={0}
If I'm single at 72, ...

it would be clearly better (income < $85,526) to defer taxes in the following scenarios:

none

it would be clearly worse (income > $163,300) to defer taxes in the following scenarios:

Code: Select all

interest_rate={1.05} & years_to_wait={0}
interest_rate={1.06} & years_to_wait={10,5,0}
interest_rate={1.07} & years_to_wait={10,5,0}
Thoughts after looking at the results

So I think the key is to just make sure I'm married at 72 :wink: (jokes)

If I'm married it seems like the downsides are pretty unlikely (only one instance). But that's also making a lot of assumptions, like no social security, no spousal retirement income, and no "after retirement pre 72" rollovers.

On the other hand, if I'm single at 72 there's no real benefit to defer taxes. Even in the worst case scenario, I would be in the same tax bracket; and there's a decent chance things would be worse.

Edit: One thing I didn't think of at the time was stopping contributions at retirement. Given that contributions stop at the age of 50 (who knows when I'll actually retire), the numbers would look like:

Code: Select all

interest_rate=1.04, years_to_wait=10, value=1,720,510.60, rmd=67,207.45
interest_rate=1.04, years_to_wait=05, value=2,189,330.49, rmd=85,520.72
interest_rate=1.04, years_to_wait=00, value=2,759,721.56, rmd=107,801.62

interest_rate=1.05, years_to_wait=10, value=2,481,158.41, rmd=96,920.25
interest_rate=1.05, years_to_wait=05, value=3,169,192.37, rmd=123,796.58
interest_rate=1.05, years_to_wait=00, value=4,047,317.43, rmd=158,098.34

interest_rate=1.06, years_to_wait=10, value=3,589,623.38, rmd=140,219.66
interest_rate=1.06, years_to_wait=05, value=4,595,889.12, rmd=179,526.92
interest_rate=1.06, years_to_wait=00, value=5,942,499.68, rmd=232,128.89

interest_rate=1.07, years_to_wait=10, value=5,208,419.99, rmd=203,453.91
interest_rate=1.07, years_to_wait=05, value=6,675,121.78, rmd=260,746.94
interest_rate=1.07, years_to_wait=00, value=8,732,246.91, rmd=341,103.39
Your calculation and thereby the conclusion is wrong. You didn't take into account the inflation adjustment to the tax rates.

The 24% single income limit of 163k after 47 years with inflation of 2% adjustment will be 414k income.

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Location: Austin, TX

Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Thu Aug 06, 2020 12:12 am

babystep wrote:
Thu Aug 06, 2020 12:04 am
Your calculation and thereby the conclusion is wrong. You didn't take into account the inflation adjustment to the tax rates.

The 24% single income limit of 163k after 47 years with inflation of 2% adjustment will be 414k income.
Do real returns not adjust for inflation? Everything should be in 2020 dollars... with 2020 tax brackets.
Don't do anything tomorrow that can be done today

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FiveK
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Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Thu Aug 06, 2020 12:20 am

4a757374696e wrote:
Thu Aug 06, 2020 12:12 am
babystep wrote:
Thu Aug 06, 2020 12:04 am
Your calculation and thereby the conclusion is wrong. You didn't take into account the inflation adjustment to the tax rates.

The 24% single income limit of 163k after 47 years with inflation of 2% adjustment will be 414k income.
Do real returns not adjust for inflation? Everything should be in 2020 dollars... with 2020 tax brackets.
Correct - if you achieve those real returns the calculations are appropriate.

User avatar
FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Why do Roth 401k when MBR is an option?

Post by FiveK » Thu Aug 06, 2020 12:24 am

4a757374696e wrote:
Wed Aug 05, 2020 11:23 pm
Edit: One thing I didn't think of at the time was stopping contributions at retirement. Given that contributions stop at the age of 50 (who knows when I'll actually retire), the numbers would look like:
Must have rained a lot ;) - well done!

Now you can add things such as
- Roth conversions after retirement that can be done at lower marginal rates and reduce eventual RMDs.
- IRMAA tiers that make marginal rates at higher retirement incomes even worse
- etc. :)

babystep
Posts: 216
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Re: Why do Roth 401k when MBR is an option?

Post by babystep » Thu Aug 06, 2020 12:26 am

4a757374696e wrote:
Thu Aug 06, 2020 12:12 am
babystep wrote:
Thu Aug 06, 2020 12:04 am
Your calculation and thereby the conclusion is wrong. You didn't take into account the inflation adjustment to the tax rates.

The 24% single income limit of 163k after 47 years with inflation of 2% adjustment will be 414k income.
Do real returns not adjust for inflation? Everything should be in 2020 dollars... with 2020 tax brackets.
If you want to use real returns then use maybe 3-5% instead of 7%. You can see what experts have to say about the expected returns here.

https://www.bogleheads.org/wiki/Histori ... re_returns

Some are expecting 2% and most optimistic are 5% for the real returns.

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Location: Austin, TX

Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Thu Aug 06, 2020 12:39 am

babystep wrote:
Thu Aug 06, 2020 12:26 am
4a757374696e wrote:
Thu Aug 06, 2020 12:12 am
babystep wrote:
Thu Aug 06, 2020 12:04 am
Your calculation and thereby the conclusion is wrong. You didn't take into account the inflation adjustment to the tax rates.

The 24% single income limit of 163k after 47 years with inflation of 2% adjustment will be 414k income.
Do real returns not adjust for inflation? Everything should be in 2020 dollars... with 2020 tax brackets.
If you want to use real returns then use maybe 3-5% instead of 7%. You can see what experts have to say about the expected returns here.

https://www.bogleheads.org/wiki/Histori ... re_returns

Some are expecting 2% and most optimistic are 5% for the real returns.
To be fair, those are all for the next 10 years and they are just predictions. I'm trying to think a little more long-term than that. We have a great page with all types of information about S&P 500 returns. Between the years of 1926 and 2017 the real Compound Annual Growth Rate (CAGR) is 6.91%. And sure, I think returns have lowered in the past 50 years, but who's to say things won't be different in the next 50 years. My investments are pretty diversified too. It seems I'm a little more optimistic than you.
Don't do anything tomorrow that can be done today

Topic Author
4a757374696e
Posts: 36
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Location: Austin, TX

Re: Why do Roth 401k when MBR is an option?

Post by 4a757374696e » Thu Aug 06, 2020 12:44 am

FiveK wrote:
Thu Aug 06, 2020 12:24 am
Must have rained a lot ;) - well done!

Now you can add things such as
- Roth conversions after retirement that can be done at lower marginal rates and reduce eventual RMDs.
- IRMAA tiers that make marginal rates at higher retirement incomes even worse
- etc. :)
Thanks! :) I have been very fortunate. I will certainly look into accounting for those things in my plan.
Don't do anything tomorrow that can be done today

babystep
Posts: 216
Joined: Tue Apr 09, 2019 9:44 am

Re: Why do Roth 401k when MBR is an option?

Post by babystep » Thu Aug 06, 2020 12:48 am

4a757374696e wrote:
Thu Aug 06, 2020 12:39 am
babystep wrote:
Thu Aug 06, 2020 12:26 am
4a757374696e wrote:
Thu Aug 06, 2020 12:12 am
babystep wrote:
Thu Aug 06, 2020 12:04 am
Your calculation and thereby the conclusion is wrong. You didn't take into account the inflation adjustment to the tax rates.

The 24% single income limit of 163k after 47 years with inflation of 2% adjustment will be 414k income.
Do real returns not adjust for inflation? Everything should be in 2020 dollars... with 2020 tax brackets.
If you want to use real returns then use maybe 3-5% instead of 7%. You can see what experts have to say about the expected returns here.

https://www.bogleheads.org/wiki/Histori ... re_returns

Some are expecting 2% and most optimistic are 5% for the real returns.
To be fair, those are all for the next 10 years and they are just predictions. I'm trying to think a little more long-term than that. We have a great page with all types of information about S&P 500 returns. Between the years of 1926 and 2017 the real Compound Annual Growth Rate (CAGR) is 6.91%. And sure, I think returns have lowered in the past 50 years, but who's to say things won't be different in the next 50 years. My investments are pretty diversified too. It seems I'm a little more optimistic than you.
Rick Ferri's expectation is for 30 years and not 10 years. I highly recommend that you re-read the thread carefully.
You may benefit from reading this thread as well. viewtopic.php?t=268179

With all sincerity, I wish you all the best with the decision you take.

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