Traditional 401K vs Roth 401K

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skwak
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Re: Traditional 401K vs Roth 401K

Post by skwak » Tue Sep 12, 2017 8:20 pm

Thank you both very much! Extremely helpful advice from both of you. It sounds like continuing to max the traditional 401K is the most prudent path understanding that the the situation is very dynamic and multifaceted. At least it does not sound like that is a poor choice.

I appreciate all of the help!!

JBTX
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Tue Sep 12, 2017 8:56 pm

KlangFool wrote:
Tue Sep 12, 2017 8:03 pm
skwak wrote:
Tue Sep 12, 2017 7:55 pm
Happy to share and I appreciate all the help.

In order to provide proper advice, we would need to know

1) How old are you now? My wife and I are 52.

2) How much investment do you have now? And, where the investment in term of Trad. IRA, Roth IRA, 401K and so on.
In total right now we have:
401K: $215K
Traditional IRAs: $835K
Taxable Investments: $140K

Realistically we should be able to move to an encore career (might be retirement) in 6 years or so. At that time we would have added another $180K to the 401K and likely sold our primary home for a profit of $250K (and moved to our mortgage-free vacation home).


<<I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.[/b]>>

3) If you have a few million now, then, this may be a concern.

4) At your current income, you are paying 28% to 33% Federal tax. How is it possible that Roth 401K is a better deal for you? Especially when you plan to spend 80+K per year = 15% at retirement? Open to suggestions!

KlangFool
Top
skwak,

1) Max up your Trad. 401K now. Your retirement income tax bracket will be much lower than 28%/33%.
How do you know this? It is plausible he gets to the 25% tax bracket once they start drawing SS, and tax on social security may push up marginal rate. You are assuming he really doesn't work at all between "retirement" and social security withdrawal age and are ignoring impac of SS on marginal rates
2) The amount of money that you have is too low to worry about RMD.
$1.5 million times 3.65% approx 55K per year. Add in taxable social security and you could easily get to 25% taxable bracket at $75,900. Again, you are assuming he really draws down that traditional amount a lot before SS age.
3) You and your wife's social security income is probably around 40K to 50K per year combined. So, you need to spend about 30K to 40K from your portfolio every year.
We have income in the same ballpark as OP, roughly the same age, and ours would be about $60K for both of us, and $80K if we waited until 70. No idea how you got 40k to 50k. You are assuming wife hasn't really worked much.
4) At your portfolio size and spending, why do you need to worry about RMD?

See above.
5) If you do worry about RMD, you can do Roth conversion before 70.5 years old at 15% tax bracket.
True. But consider there may be some side income before retirement.
6) For a couple, you could have a gross income of about 100K and stay at 15% tax bracket. You just Roth convert extra money into Roth IRA every year.

KlangFool
There's got to be a better way to post this...but here are a couple of scenarios where he could land in retirement, at social security age.

Scenario A assumes he really doesn't draw much from his traditional balance before social security, which would most likely be because they are have some side taxable income coming in. Scenario B assumes the balance has been drawn down through Roth conversions or early distributions of traditional prior to social security age.

.................................................................. Scenario A____ Scenario B

Portfolio Projections Traditional at SS retirement age 1,500,000.00__ 1,000,000.00

Lower Bound RMD starting point ..................... 55,000.00 ____ 36,500.00
Less Std Deduction..................................... 13,950.00 ____ 13,950.00
Pers Exemptions........................................ 8,100.00 _____ 8,100.00

Taxable Income......................................... 32,950.00 ____ 14,450.00
Add Taxable portion of SS (50-85% of benefits)..... 52,500.00____ 42,000.00

Estimated retirement income range.................. 85,450.00 ____ 56,450.00

25% tax bracket ........................................ 75,900.00____ 75,900.00


**Marginal tax rates could be higher depending on taxability of social security benefits.

KlangFool
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Re: Traditional 401K vs Roth 401K

Post by KlangFool » Tue Sep 12, 2017 9:18 pm

JBTX,

1) What is OP's current marginal tax rate? 28%/33%. If it is 33%, Trad. 401K saves taxes. If it is 28%, in the worst case, it saves some or breaks even.

2) Let's assume that the social security income is 60K, this actually changes nothing. OP need only 20k per year. But, OP's has 140K in his taxable account. OP can spend from his taxable account and pay long term capital gain tax of 15% while doing Roth conversion.

3) Side income -> If it is worthwhile for OP to work, he pays the tax. Or else, why bother? He is not forced to work.

4) Now, if the social security income is too high, he could delay to 70 years old and spend from the taxable and tax deferred account. This is especially true if he has side income.

There are ways to get around all those obstacles if a person is willing to study and plan ahead.

KlangFool

P.S.: Having too much retirement income and pay a lot of taxes is not a bad thing. The alternative of not enough money in retirement is worse.

JBTX
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Tue Sep 12, 2017 9:32 pm

KlangFool wrote:
Tue Sep 12, 2017 9:18 pm
JBTX,

1) What is OP's current marginal tax rate? 28%/33%. If it is 33%, Trad. 401K saves taxes. If it is 28%, in the worst case, it saves some or breaks even.
How do you know what his marginal tax rate at retirement will be? Like I said, my scenario is somewhat similar to his, and somebody ran some numbers for me (based upon my inputs) and my marginal tax rate in retirement was above 40% - due to tax on social security.

2) Let's assume that the social security income is 60K, this actually changes nothing. OP need only 20k per year. But, OP's has 140K in his taxable account. OP can spend from his taxable account and pay long term capital gain tax of 15% while doing Roth conversion.
Whether he needs it or not, he will have to do minimum RMD's, which will very likely be much more than $20K per year.
3) Side income -> If it is worthwhile for OP to work, he pays the tax. Or else, why bother? He is not forced to work.
You are projection your values onto others. Many people like to work in retirement. Not because they are forced to, because they want to. I hope to find something that I will like doing and would bring in a modest income. Will I find it? I'm not sure.
4) Now, if the social security income is too high, he could delay to 70 years old and spend from the taxable and tax deferred account. This is especially true if he has side income.
True, but his social security income will go up, probably by about $20K.
There are ways to get around all those obstacles if a person is willing to study and plan ahead.

KlangFool
I'm not arguing against that. But you are assuming the obstacles are known and won't change. I assume they likely will. Tax rates could go up. Social security could become fully taxable for those of us with decent retirement income/assets. I (or OP) may find a retirement job I like - God forbid! That's why I tend to think in terms of diversification of potential outcomes, instead of managing aggressively to one particular outcome.

Thanks for the exchange. One of the reason I am pressing so hard is the OP's situation has some similarity to mine. If I'm missing something in my thought process, I'd like to find out!!

Chadnudj
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Re: Traditional 401K vs Roth 401K

Post by Chadnudj » Tue Sep 12, 2017 11:28 pm

skwak wrote:
Tue Sep 12, 2017 7:09 pm
Just to add a few details which might spur any additional thoughts from everyone:

We are fortunate enough that our current household gross income is about $215K to $255K depending on how annual bonuses fall. That places the later portions of our current income in a pretty high tax rate.

Given earnings a Roth IRA is not an option.

We do have pretty large traditional IRAs making the backdoor Roth less appealing.

We hope to retire early (next 4 to 8 years) and live on about $85K adjusted for annual inflation. I am worried that when we get to RMDS at age 70.5 that may jump a bit and cause some tax pain.

I also respect the concept of having some tax diversity across your savings. That is why I am considering diverting a portion of the 401K to the Roth 401K.

I do appreciate the point that saving $24K in a Traditional 401K is not as much as saving the same into a Roth 401K. Even though we do not consciously save the difference, I suspect some is saved into college funds, advanced mortgage payments, etc. However, I am sure some is spent on extra beer and yodels too!

Any addition thought would be very welcome!

I like this place already. :D
If you both have 401ks that have Roth options, and the fees aren't too bad in your 401ks, I would check into the possibility of rolling your traditional IRAs into your 401ks -- increasingly more 401ks have this option, and particularly they tend to have this option if your 401k is advanced enough to include a Roth 401k option (not because it's required, but just because for whatever reason allowing roll-ins to the 401k is correlated with 401k plans having a Roth option). Then, you WOULD be able to do backdoor Roths without any unappealing/complicated tax calculations.

Given that you're seemingly close to retirement (4-8 years away, and above 50 since you mention $24k max in traditional 401k), you should have a pretty good idea what 3-4% of your traditional 401k accounts represents (that being a good estimated SWR for 30+ years, your mileage may vary), which will give you an idea of what you could safely withdraw, pre-tax, going forward, and where that would put you tax wise at various points (including when SS kicks in), and whether that would be more or less than RMDs at 70.5, and whether that meets your $85k annual need. In this respect, you're EXACTLY the small minority who should consider Roth 401ks -- namely those who (a) have sizeable safe pensions, or (b) are closing in on retirement and know/are reasonably certain given conservative projections that they have enough to cover everything safely between traditional 401ks withdrawn at SWRs and SS, and thus are saving any additional money for pie-in-the-sky goals or legacy/inheritance purposes.

If you're meeting or exceeding those needs/projections, then by all means switch over to Roth 401ks -- no RMDs, tax-free growth, tax-free withdrawals, and good vehicles for inheritance.

I'll also note that your "extra beer and yodels" point is in good fun, but also a great example, too, why for 90% plus the correct choice is/will always be to do a traditional 401k over a Roth 401k -- doing the traditional gives you more money in your paycheck for fun stuff/important stuff now. Saving for retirement is very, very important, but given uncertainty in life, it's also a good idea to enjoy your life (via that little extra in your paycheck from doing traditional 401k vs. Roth 401k). And really, how bad is the risk if you choose a traditional 401k and that ends up being wrong? You have too much money and now have to pay a little more in taxes than if you had chosen the Roth 401k. To me, that doesn't seem to be a terrible problem. Annoying, yes....but not something I'd even slightly regret, since that's the type of problem you WANT to have, since it means you've more or less won the game.

Chadnudj
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Re: Traditional 401K vs Roth 401K

Post by Chadnudj » Tue Sep 12, 2017 11:39 pm

JBTX wrote:
Tue Sep 12, 2017 9:32 pm

How do you know what his marginal tax rate at retirement will be? Like I said, my scenario is somewhat similar to his, and somebody ran some numbers for me (based upon my inputs) and my marginal tax rate in retirement was above 40% - due to tax on social security.
I've seen you mention this repeatedly in this thread, but (and maybe I'm just not understanding it), I don't think that's how it works. When they say 85% of your Social Security is taxed, they don't mean that your Social Security is taxed 85%.....it means that 85% of whatever you receive gets taxed as regular income (i.e. at marginal rates, depending on where you are).

So if your total (SS+traditional 401k withdrawals) is in the 28% bracket, you're still paying no more than 28% on that last dollar (and probably less since only 85% of your SS amount is subject to that tax).

Am I right in this? Or have I got it all wrong? I just am not understanding how you come to a 40%+ marginal tax rate at all....

JBTX
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Wed Sep 13, 2017 12:01 am

Chadnudj wrote:
Tue Sep 12, 2017 11:39 pm
JBTX wrote:
Tue Sep 12, 2017 9:32 pm

How do you know what his marginal tax rate at retirement will be? Like I said, my scenario is somewhat similar to his, and somebody ran some numbers for me (based upon my inputs) and my marginal tax rate in retirement was above 40% - due to tax on social security.
I've seen you mention this repeatedly in this thread, but (and maybe I'm just not understanding it), I don't think that's how it works. When they say 85% of your Social Security is taxed, they don't mean that your Social Security is taxed 85%.....it means that 85% of whatever you receive gets taxed as regular income (i.e. at marginal rates, depending on where you are).
Yes, I fully understand that.
So if your total (SS+traditional 401k withdrawals) is in the 28% bracket, you're still paying no more than 28% on that last dollar (and probably less since only 85% of your SS amount is subject to that tax).

Am I right in this? Or have I got it all wrong? I just am not understanding how you come to a 40%+ marginal tax rate at all....
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

At very low levels of income social security is not taxable at all. Then you get to a threshold and 50% of social security benefits are taxed. Then another threshold 85% are taxed. So the fact that social security isn't taxed, then all of a sudden it is, increases your marginal rate in addition to and over your regular tax bracket. For a range of your income you are paying tax on your regular income, and paying tax on a increasing portion of your social security. After a certain point, you have reached the max tax on social security income, it no longer becomes relevant and you are back to your regular income tax bracket.

Best I can tell, it is fairly hard to model. Typically its marginal tax impacts hit fairly low on the income scale. It seems like in our case, since both spouse and I will draw near max social security, the marginal tax rate spike hits somewhat higher.

To be honest, it is pretty hard to get your arms around. Perhaps someone else here can explain it more fully.

From the link above, for the MFJ example.
There is no 46.25% rate in this situation because the example couple reaches the maximum taxable benefit amount well before reaching the 25% tax bracket. Every additional $1 of Social Security increases the income at the maximum taxable benefit amount by $1.35 (because the phase-in starts $0.50 earlier and ends $0.50 later, and $0.85 more SS is taxed). To reach the 46.25% marginal rate, the couple would need to exceed $46,044 in SS benefits; at $46,044 in benefits, $59,963 in other income makes the maximum $39,137 of Social Security taxable, for a total income of $99,100 at the top of the 15% bracket.

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FiveK
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Re: Traditional 401K vs Roth 401K

Post by FiveK » Wed Sep 13, 2017 1:36 am

Chadnudj wrote:
Tue Sep 12, 2017 11:39 pm
So if your total (SS+traditional 401k withdrawals) is in the 28% bracket, you're still paying no more than 28% on that last dollar (and probably less since only 85% of your SS amount is subject to that tax).

Am I right in this? Or have I got it all wrong? I just am not understanding how you come to a 40%+ marginal tax rate at all....
See the calculations in Contributing to tax deferred + Taxability of SS - Bogleheads.org. It is >40% for that particular situation.

Chadnudj
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Re: Traditional 401K vs Roth 401K

Post by Chadnudj » Wed Sep 13, 2017 11:17 am

FiveK wrote:
Wed Sep 13, 2017 1:36 am
Chadnudj wrote:
Tue Sep 12, 2017 11:39 pm
So if your total (SS+traditional 401k withdrawals) is in the 28% bracket, you're still paying no more than 28% on that last dollar (and probably less since only 85% of your SS amount is subject to that tax).

Am I right in this? Or have I got it all wrong? I just am not understanding how you come to a 40%+ marginal tax rate at all....
See the calculations in Contributing to tax deferred + Taxability of SS - Bogleheads.org. It is >40% for that particular situation.
Yes, I see this article and the wiki article....I'm just not grasping the math that gets you to calculating a 46.25% or 27.75% marginal rate (like in the wiki for single filers under that hypothetical). Particularly when you look at it cumulatively (per the graphs on the wiki), and they just go up smoothly.

But that's just me, struggling to get my head around it. Frankly, I'm hoping to not have to worry about it at all -- ideally, I'll be married and with enough non-SS income and SS income for my wife and I to be up in the upper bracket above which this does not matter.

JBTX
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Wed Sep 13, 2017 11:58 am

Chadnudj wrote:
Wed Sep 13, 2017 11:17 am
FiveK wrote:
Wed Sep 13, 2017 1:36 am
Chadnudj wrote:
Tue Sep 12, 2017 11:39 pm
So if your total (SS+traditional 401k withdrawals) is in the 28% bracket, you're still paying no more than 28% on that last dollar (and probably less since only 85% of your SS amount is subject to that tax).

Am I right in this? Or have I got it all wrong? I just am not understanding how you come to a 40%+ marginal tax rate at all....
See the calculations in Contributing to tax deferred + Taxability of SS - Bogleheads.org. It is >40% for that particular situation.
Yes, I see this article and the wiki article....I'm just not grasping the math that gets you to calculating a 46.25% or 27.75% marginal rate (like in the wiki for single filers under that hypothetical). Particularly when you look at it cumulatively (per the graphs on the wiki), and they just go up smoothly.

But that's just me, struggling to get my head around it. Frankly, I'm hoping to not have to worry about it at all -- ideally, I'll be married and with enough non-SS income and SS income for my wife and I to be up in the upper bracket above which this does not matter.

The formula

The full rules are in IRS Publication 915.[2][note 1] This simplification covers most cases; there are special rules if you contribute to a Traditional IRA, receive retroactive payments for prior years, or file forms to exempt other income from taxation.[3]

The relevant income for Social Security taxation includes all items which are normally part of your adjusted gross income, plus tax-exempt interest income, plus 50% of your Social Security benefits. (Historically, the 50% represents the fact that half of your Social Security contributions were made by your employer and thus not taxed.)[4]

There are two relevant base amounts; unlike most income limits in the tax code, they are not adjusted for inflation. The lower base is $25,000 if you are single, $32,000 if married filing jointly. The upper base is $34,000 if you are single, $44,000 if married filing jointly.[5]

If your relevant income is below the lower base, none of your benefits are taxable. For every $1 of relevant income between the lower and upper bases, 50 cents of your Social Security benefits become taxable, up to 50% of your total benefits. For every $1 of relevant income above the upper bases, 85 cents of your Social Security benefits become taxable, up to a total taxable amount of 85% of your benefits.[6]
Think of it this way:

If you have no income at all, your social security is (mostly) not taxable.

If you exceed the lower base, then social security is taxable, up to a point. So for a specific income range, you have your regular taxes on regular income, plus the tax on social security income. Whether or not the regular income taxes and social security income coincide depends on the factors of the individual. But in some cases, they essentially double up during a range.

Assume you have 25K of social security income, and that is your only income. That is below the lower base, and none of it is taxable. You have no taxes at all.

Now assume you have 50,000 of taxable RMD's. From there let's deduct for MFJ 2 personal exemptions and standard deduction, which amount to about $22,000. That gives you $27,000 of taxable income (ignoring any impacts from social security). You would fall into the 15% bracket for MFJ, and your tax would be $6568, and your marginal rate is 15%.

However, your $25K of social security now is taxable also, since you have exceeded the lower (and upper ) bound. 25000 times 85% = 21,250. That amount times 15% tax bracket = $3187 additional income tax.

So you have the 6568 which brought you to 15% marginal, but now you have another $3187 that increases your marginal even further above 15%. Your RMD income caused you to be liable for 2 sets of taxes and they double up over a range. Once you have exceeded the total amount of taxable social security, then your marginal rate goes back to the normal rate.


Another way to look at it:

Assume social security income is ALL taxable. But you may be eligible for a credit that offsets that income. And that credit depends on your other taxable income.

EVERYBODY gets a 15% credit on that income (100-85%)

Some people with moderate taxable income get a 50% credit on that income (100-50).

If you have very low taxable income and modest social security income, then you get a 100% credit on all your social security related income tax.

That isn't exactly how it is structured, but it is effectively how it works. There are other credits / deductions that phase out as your income increases, such as child care tax credit, or itemized deductions. Within that income phase out range your marginal tax rate increases a little bit, then levels back of to your normal tax bracket. Same here, as you are making more taxable income (RMD's, etc), you lose most (up to 85%) of the implicit "credit" for social security income.

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FiveK
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Re: Traditional 401K vs Roth 401K

Post by FiveK » Wed Sep 13, 2017 12:15 pm

Chadnudj wrote:
Wed Sep 13, 2017 11:17 am
Yes, I see this article and the wiki article....I'm just not grasping the math that gets you to calculating a 46.25% or 27.75% marginal rate (like in the wiki for single filers under that hypothetical).
Take MFJ with
$80K SS benefits and $60K tIRA withdrawal. Compare with
$80K SS benefits and $61K tIRA withdrawal.

The extra $1K from the tIRA causes an extra $850 of the SS benefits to become taxable (even though the gross SS benefit hasn't changed). The extra tax is 25% of $1000, plus 25% of $850.

Calculating marginal rate as (extra tax)/(extra income), we get
marginal rate = [(25% * $1000) + (25% * $850)] / $1000 = 25% * $1850 / $1000 = 25% * 1.85 = 46.25%.
Particularly when you look at it cumulatively (per the graphs on the wiki), and they just go up smoothly.
A step change in the cumulative line would occur only when there is a step change in the amount of tax. E.g., different tiers of the saver's credit.
Changes in the tax rate just nudge the cumulative line in a slightly different direction.

Chadnudj
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Re: Traditional 401K vs Roth 401K

Post by Chadnudj » Wed Sep 13, 2017 12:20 pm

Thank you to FiveK and JBTX for the explanations! Was really struggling with how to conceptualize it mathematically, but now I see what you're talking about.

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patrick013
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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Wed Sep 13, 2017 1:50 pm

FiveK wrote:
Tue Sep 12, 2017 5:48 pm
patrick013 wrote:
Tue Sep 12, 2017 2:41 pm
FiveK wrote:
Tue Sep 12, 2017 2:12 pm
patrick013 wrote:
Tue Sep 12, 2017 1:45 pm
FiveK wrote:
Tue Sep 12, 2017 11:11 am
See Maxing out your retirement accounts for words.
As noted in that wiki, see 'Misc. calcs'!A140:C153 in Tools and calculators - Personal_finance_toolbox - Bogleheads, or Traditional versus Roth (401(k) or IRA) to plug in your own numbers.
I don't think I completely agree with some of these "spreadsheets".
Could you give an example, listing all the inputs and results from one or both of those spreadsheet, and what you think should be a correct result?
Well the only reason I said that is because they do not end up with an IRR, the number
the advisor manual recommends. They may result in similar results and some of them,
well some of them don't either.
...
If the spreadsheet(s) are solid, even using a variation of the IRR somehow, the end results
for each tax bracket should be identical to my results.
OK. I'm reasonably sure both the spreadsheets referenced above are correct - just wondered if you had a counterexample.

Regarding
patrick013 wrote:
Tue Sep 12, 2017 1:45 pm
Equal tax rates in retirement, 25% working and 25% in retirement for example :
Tax-deferred and after-tax contributions have closer long term returns.
Max TD for tax reduction desired, but weight more to Roth as Roth
features have closer returns. 100% Roth is not bad in this case.
if there is any tax drag at all in the taxable "side account" one must use when comparing maximum traditional vs. Roth contributions, and the investment returns are identical in all accounts, not only is 100% Roth not bad, it is exactly correct. Agreed?
Well the taxable investment is really optional as the lower
cost for the tax-deferred investment is what really generates
the higher percentage return over the account life. Further I'd
go with the Roth if taxes currently and estimated at retirement
were equal. Agreed. Roth is very flexible.

Some spreadsheets include SS and Medicare tax inputs where my IRR
input needs that reflected in the retirement marginal tax rate estimate.

Traditional or Roth 401k
This spreadsheet, for one example, gives the Roth an almost equal value
at 35% working and 28% retirement tax rates with an 8% expected annual
return. The IRR for this is 8.8% IRR for tax-deferred and 8.1% for Roth.
Taxable would return 7.5% at 8% expected return. All %'s are after tax.

So I would recommend the results of the IRR and continue using the
IRR for this per the advisor manual.
age in bonds, buy-and-hold, 10 year business cycle

JBTX
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Wed Sep 13, 2017 2:24 pm

FiveK wrote:
Wed Sep 13, 2017 12:15 pm
Chadnudj wrote:
Wed Sep 13, 2017 11:17 am
Yes, I see this article and the wiki article....I'm just not grasping the math that gets you to calculating a 46.25% or 27.75% marginal rate (like in the wiki for single filers under that hypothetical).
Take MFJ with
$80K SS benefits and $60K tIRA withdrawal. Compare with
$80K SS benefits and $61K tIRA withdrawal.

The extra $1K from the tIRA causes an extra $850 of the SS benefits to become taxable (even though the gross SS benefit hasn't changed). The extra tax is 25% of $1000, plus 25% of $850.

Calculating marginal rate as (extra tax)/(extra income), we get
marginal rate = [(25% * $1000) + (25% * $850)] / $1000 = 25% * $1850 / $1000 = 25% * 1.85 = 46.25%.
Particularly when you look at it cumulatively (per the graphs on the wiki), and they just go up smoothly.
A step change in the cumulative line would occur only when there is a step change in the amount of tax. E.g., different tiers of the saver's credit.
Changes in the tax rate just nudge the cumulative line in a slightly different direction.
Given all this, would the tax on social security cause one to rethink the recommendation to wait until 70 if you have near max social security benefits for 2 earners and have substantial traditional savings (assuming you haven't drained them by SS age) ?

I know when i was playing with iorb for the first time, I put in my information, and it actually showed better outcomes for taking SS early vs later. The earlier, the better the outcome for me. I found that puzzling, especially given the model says that typically deferring to 70 gives you highest outcome.

Of course, there could have been user error involved! :oops:

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FiveK
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Re: Traditional 401K vs Roth 401K

Post by FiveK » Wed Sep 13, 2017 2:47 pm

patrick013 wrote:
Wed Sep 13, 2017 1:50 pm
Well the taxable investment is really optional as the lower
cost for the tax-deferred investment is what really generates
the higher percentage return over the account life.
Things are indeed simpler when a taxable account is not a needed accompaniment to a traditional account. When the (Roth contribution)/(1- tax rate) is above the IRS maximum, however, including a taxable account is mandatory if one wants a fair comparison. E.g., $18K into a Roth account (after paying 25% tax on $24K pre-tax) equals $18K into a traditional account plus $4.5K into a taxable account. The $4.5K comes from $24K - $18K = $6K, taxed at 25% to give $4.5K investable.
Traditional or Roth 401k
This spreadsheet, for one example, gives the Roth an almost equal value
at 35% working and 28% retirement tax rates with an 8% expected annual
return.
It's an identical result for those conditions if one further assumes 38.3 years invested:
Image

Same result from Tools and calculators - Personal_finance_toolbox - Bogleheads:
Image

Do you agree with the results above?
So I would recommend the results of the IRR and continue using the
IRR for this per the advisor manual.
To what advisor manual do you refer?

skwak
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Re: Traditional 401K vs Roth 401K

Post by skwak » Wed Sep 13, 2017 3:05 pm

Chadnudj wrote:
Tue Sep 12, 2017 11:28 pm

Saving for retirement is very, very important, but given uncertainty in life, it's also a good idea to enjoy your life (via that little extra in your paycheck from doing traditional 401k vs. Roth 401k). And really, how bad is the risk if you choose a traditional 401k and that ends up being wrong? You have too much money and now have to pay a little more in taxes than if you had chosen the Roth 401k. To me, that doesn't seem to be a terrible problem. Annoying, yes....but not something I'd even slightly regret, since that's the type of problem you WANT to have, since it means you've more or less won the game.
I think this point is very well said regardless of what direction you take: Traditional, Roth or a Mix. It is funny I asked the one (and only) professional money manager that I use (do almost everything myself for 30+ years) and he said the following: "I could argue the advantages of either Traditional or Roth 401K as a retirement investment vehicle. If one makes you feel better than the other, there is value in that experience also. What is the worst that could happen with RMDs and taxes: you have a bit too much money and have to pay some taxes. Most people would be very happy to have that problem."

Thanks for all of the insight everyone!

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Re: Traditional 401K vs Roth 401K

Post by FiveK » Wed Sep 13, 2017 3:07 pm

JBTX wrote:
Wed Sep 13, 2017 2:24 pm
Given all this, would the tax on social security cause one to rethink the recommendation to wait until 70 if you have near max social security benefits for 2 earners and have substantial traditional savings (assuming you haven't drained them by SS age) ?
The answer to "when to start taking SS benefits?" depends heavily on two things:
1) investment return on the SS benefits
2) date of death

One can adjust those two things to "prove" pretty much any SS benefit start date is "correct". :wink:

The "minimize the chance of running out of money by maximizing the annual SS benefit, subject to the constraint of not going bankrupt before SS kicks in" (i.e., delay SS start date, at least for the higher earner) argument seems compelling but YMMV.

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Re: Traditional 401K vs Roth 401K

Post by JBTX » Wed Sep 13, 2017 3:31 pm

skwak wrote:
Wed Sep 13, 2017 3:05 pm
Chadnudj wrote:
Tue Sep 12, 2017 11:28 pm

Saving for retirement is very, very important, but given uncertainty in life, it's also a good idea to enjoy your life (via that little extra in your paycheck from doing traditional 401k vs. Roth 401k). And really, how bad is the risk if you choose a traditional 401k and that ends up being wrong? You have too much money and now have to pay a little more in taxes than if you had chosen the Roth 401k. To me, that doesn't seem to be a terrible problem. Annoying, yes....but not something I'd even slightly regret, since that's the type of problem you WANT to have, since it means you've more or less won the game.
I think this point is very well said regardless of what direction you take: Traditional, Roth or a Mix. It is funny I asked the one (and only) professional money manager that I use (do almost everything myself for 30+ years) and he said the following: "I could argue the advantages of either Traditional or Roth 401K as a retirement investment vehicle. If one makes you feel better than the other, there is value in that experience also. What is the worst that could happen with RMDs and taxes: you have a bit too much money and have to pay some taxes. Most people would be very happy to have that problem."

Thanks for all of the insight everyone!
I don't disagree. Part of the reason some of us kick it around so much is we actually enjoy it. It is kind of like a game, how do you win the most points? How do you get to the optimal solution.

If one solution gives you 2 million at retirement, and the other gives you 2.1 million, either way you are probably in good shape.

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Re: Traditional 401K vs Roth 401K

Post by JBTX » Wed Sep 13, 2017 3:32 pm

FiveK wrote:
Wed Sep 13, 2017 3:07 pm
JBTX wrote:
Wed Sep 13, 2017 2:24 pm
Given all this, would the tax on social security cause one to rethink the recommendation to wait until 70 if you have near max social security benefits for 2 earners and have substantial traditional savings (assuming you haven't drained them by SS age) ?
The answer to "when to start taking SS benefits?" depends heavily on two things:
1) investment return on the SS benefits
2) date of death

One can adjust those two things to "prove" pretty much any SS benefit start date is "correct". :wink:

The "minimize the chance of running out of money by maximizing the annual SS benefit, subject to the constraint of not going bankrupt before SS kicks in" (i.e., delay SS start date, at least for the higher earner) argument seems compelling but YMMV.
Have you ever dealt with iorb? Any idea why I might have gotten that result? I used mostly standard assumptions, or slightly more conservative in some cases.

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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Wed Sep 13, 2017 4:48 pm

FiveK wrote:
Wed Sep 13, 2017 2:47 pm
patrick013 wrote:
Wed Sep 13, 2017 1:50 pm
Well the taxable investment is really optional as the lower
cost for the tax-deferred investment is what really generates
the higher percentage return over the account life.
Things are indeed simpler when a taxable account is not a needed accompaniment to a traditional account. When the (Roth contribution)/(1- tax rate) is above the IRS maximum, however, including a taxable account is mandatory if one wants a fair comparison. E.g., $18K into a Roth account (after paying 25% tax on $24K pre-tax) equals $18K into a traditional account plus $4.5K into a taxable account. The $4.5K comes from $24K - $18K = $6K, taxed at 25% to give $4.5K investable.
I'm only comparing TD and Roth at max contributions with the tax credit reducing the TD
contribution only, not the annual deposit which could also include matching to include
into the annual deposit. You've got too many equations IMO.

Say you cash your check and all your money is after-tax. Cost of Roth for analysis
is $18,000, cost of TD is $18,000 minus tax credit. 2 options. Balance of both
accounts is $18,000 to start. That's how I like it. Too many odd equations otherwise.

FiveK wrote:
Wed Sep 13, 2017 2:47 pm
patrick013 wrote:
Wed Sep 13, 2017 1:50 pm
Traditional or Roth 401k
This spreadsheet, for one example, gives the Roth an almost equal value
at 35% working and 28% retirement tax rates with an 8% expected annual
return.
It's an identical result for those conditions if one further assumes 38.3 years invested:
Image

Same result from Tools and calculators - Personal_finance_toolbox - Bogleheads:
Image

Do you agree with the results above?
No the TD account has the advantage according to my previous conceptual
results with the IRR.

FiveK wrote:
Wed Sep 13, 2017 2:47 pm
patrick013 wrote:
Wed Sep 13, 2017 1:50 pm
So I would recommend the results of the IRR and continue using the
IRR for this per the advisor manual.
To what advisor manual do you refer?
Kaplan, Wiley, some schools use Arco.
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Wed Sep 13, 2017 6:20 pm

patrick013 wrote:
Wed Sep 13, 2017 4:48 pm
FiveK wrote:
Wed Sep 13, 2017 2:47 pm
patrick013 wrote:
Wed Sep 13, 2017 1:50 pm
Well the taxable investment is really optional as the lower
cost for the tax-deferred investment is what really generates
the higher percentage return over the account life.
Things are indeed simpler when a taxable account is not a needed accompaniment to a traditional account. When the (Roth contribution)/(1- tax rate) is above the IRS maximum, however, including a taxable account is mandatory if one wants a fair comparison. E.g., $18K into a Roth account (after paying 25% tax on $24K pre-tax) equals $18K into a traditional account plus $4.5K into a taxable account. The $4.5K comes from $24K - $18K = $6K, taxed at 25% to give $4.5K investable.
I'm only comparing TD and Roth at max contributions with the tax credit reducing the TD
contribution only, not the annual deposit which could also include matching to include
into the annual deposit. You've got too many equations IMO.

Say you cash your check and all your money is after-tax. Cost of Roth for analysis
is $18,000, cost of TD is $18,000 minus tax credit. 2 options. Balance of both
accounts is $18,000 to start. That's how I like it. Too many odd equations otherwise.

FiveK wrote:
Wed Sep 13, 2017 2:47 pm
patrick013 wrote:
Wed Sep 13, 2017 1:50 pm
Traditional or Roth 401k
This spreadsheet, for one example, gives the Roth an almost equal value
at 35% working and 28% retirement tax rates with an 8% expected annual
return.
It's an identical result for those conditions if one further assumes 38.3 years invested:
Image

Same result from Tools and calculators - Personal_finance_toolbox - Bogleheads:
Image

Do you agree with the results above?
No the TD account has the advantage according to my previous conceptual
results with the IRR.


FiveK wrote:
Wed Sep 13, 2017 2:47 pm
patrick013 wrote:
Wed Sep 13, 2017 1:50 pm
So I would recommend the results of the IRR and continue using the
IRR for this per the advisor manual.
To what advisor manual do you refer?
Kaplan, Wiley, some schools use Arco.
Using IRR doesn't always lead to the theoretical best answer. NPV does. You may have a higher IRR investment, but the upfront opportunity isn't as high. Net present value always gives you the theoretically correct answer. If you had a binary choice of investing $100 and getting $500, or investing $200 and getting $800? The first is a better IRR, but the second has better NPV, and ultimately has a greater return.

You could look at Roth vs Traditional the same way. The traditional may have slightly higher IRR, but the Roth allows a greater investment, so it is entirely possible that the Roth ends up with higher NPV and traditional has higher IRR.

As 5k has stated, you really need to account for the tax savings of the traditional to keep apples to apples. Otherwise the Traditional may win on IRR but the Roth will win on NPV.

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Re: Traditional 401K vs Roth 401K

Post by grabiner » Wed Sep 13, 2017 9:05 pm

Chadnudj wrote:
Tue Sep 12, 2017 11:28 pm
I'll also note that your "extra beer and yodels" point is in good fun, but also a great example, too, why for 90% plus the correct choice is/will always be to do a traditional 401k over a Roth 401k -- doing the traditional gives you more money in your paycheck for fun stuff/important stuff now. Saving for retirement is very, very important, but given uncertainty in life, it's also a good idea to enjoy your life (via that little extra in your paycheck from doing traditional 401k vs. Roth 401k).
This is the wrong way to think about the decision, because you have two independent decisions to make: how much to spend, and where to invest the money you don't spend. If you are in a 25% tax bracket, you can save $9000 or $12,000, and invest in a Roth or traditional 401(k). If you invest in a Roth 401(k), you will contribute $9000 or $12,000; if you invest in a traditional 401(k), you will contribute $12,000 or $16,000. Thus, once you have chosen to save $9000, you can then decide whether $12,000 in traditional or $9000 in Roth is better.
David Grabiner

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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Wed Sep 13, 2017 9:26 pm

JBTX wrote:
Wed Sep 13, 2017 6:20 pm

Using IRR doesn't always lead to the theoretical best answer. NPV does. You may have a higher IRR investment, but the upfront opportunity isn't as high. Net present value always gives you the theoretically correct answer. If you had a binary choice of investing $100 and getting $500, or investing $200 and getting $800? The first is a better IRR, but the second has better NPV, and ultimately has a greater return.

You could look at Roth vs Traditional the same way. The traditional may have slightly higher IRR, but the Roth allows a greater investment, so it is entirely possible that the Roth ends up with higher NPV and traditional has higher IRR.
IRR is the rate of return I will achieve, given a stream of cash flows. NPV is the worth of
a stream of cash flows at a particular discount rate, in today’s dollars. So they
are different in that they do different things. One is not really better just good
at what it does.

Well good luck anyway trying to calc the NPV on a 40 year cash flow schedule.
The IRR can be very simple. If you use the IRR as the discount rate NPV=0.
A lower discount rate or req'd return will give you a higher NPV. Basically
meaning a higher investment at a lower annual return. Actually one should
use both IRR and NPV to look at an investment, either is better than some of
those spreadsheets. I'm fond of IRR and it's interesting the advisor manual
doesn't mention NPV when figuring an investment's desirability. Anyway,
here's some differences between TD and Roth. Notice the higher Cash In/Out
ratio for TD. Lower net investment and lower Total Cash In due primarily to
withdrawal taxes. So if you can afford it the Roth will get higher Total Cash In
and with a lower Cash In/Out ratio for Roth.
Image



JBTX wrote:
Wed Sep 13, 2017 6:20 pm
As 5k has stated, you really need to account for the tax savings of the traditional to keep apples to apples. Otherwise the Traditional may win on IRR but the Roth will win on NPV.
You have to put more money in the Roth to get more money out, and that is not a higher NPV.
In a way that's already being done. Say TD returns 7.85%, Roth returns 7.1%, and
Taxable returns 7% for stocks and similarly but lower for bonds. Logically one would
max TD, then Roth, then Taxable.

The first table is maxing TD, the second is maxing Roth for comparison. Check the returns.
I don't have Cash In/Out ratio for the total portfolio just the annualized IRR. Ever figure
out an easy way to calc the NPV let me know. But what discount rate then ? Not really
super important.
Image
Just to show all available funds are being invested.

Have a good one. :beer and my .02
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Wed Sep 13, 2017 10:07 pm

patrick013 wrote:
Wed Sep 13, 2017 9:26 pm
JBTX wrote:
Wed Sep 13, 2017 6:20 pm

Using IRR doesn't always lead to the theoretical best answer. NPV does. You may have a higher IRR investment, but the upfront opportunity isn't as high. Net present value always gives you the theoretically correct answer. If you had a binary choice of investing $100 and getting $500, or investing $200 and getting $800? The first is a better IRR, but the second has better NPV, and ultimately has a greater return.

You could look at Roth vs Traditional the same way. The traditional may have slightly higher IRR, but the Roth allows a greater investment, so it is entirely possible that the Roth ends up with higher NPV and traditional has higher IRR.
IRR is the rate of return I will achieve, given a stream of cash flows. NPV is the worth of
a stream of cash flows at a particular discount rate, in today’s dollars. So they
are different in that they do different things. One is not really better just good
at what it does.
When I think if IRR and NPV, I usually think of them in terms of capital projects. Not so much personal investments. But IRR is basically rate of return. NPV needs a declared discount rate, thus isn't really applicable per se to personal finance. I get all that.
Well good luck anyway trying to calc the NPV on a 40 year cash flow schedule.
The IRR can be very simple. If you use the IRR as the discount rate NPV=0.
A lower discount rate or req'd return will give you a higher NPV. Basically
meaning a higher investment at a lower annual return. Actually one should
use both IRR and NPV to look at an investment, either is better than some of
those spreadsheets. I'm fond of IRR and it's interesting the advisor manual
doesn't mention NPV when figuring an investment's desirability. Anyway,
here's some differences between TD and Roth. Notice the higher Cash In/Out
ratio for TD. Lower net investment and lower Total Cash In due primarily to
withdrawal taxes. So if you can afford it the Roth will get higher Total Cash In
and with a lower Cash In/Out ratio for Roth.
Image



JBTX wrote:
Wed Sep 13, 2017 6:20 pm
As 5k has stated, you really need to account for the tax savings of the traditional to keep apples to apples. Otherwise the Traditional may win on IRR but the Roth will win on NPV.
You have to put more money in the Roth to get more money out, and that is not a higher NPV.
In a way that's already being done. Say TD returns 7.85%, Roth returns 7.1%, and
Taxable returns 7% for stocks and similarly but lower for bonds. Logically one would
max TD, then Roth, then Taxable.

The first table is maxing TD, the second is maxing Roth for comparison. Check the returns.
I don't have Cash In/Out ratio for the total portfolio just the annualized IRR. Ever figure
out an easy way to calc the NPV let me know. But what discount rate then ? Not really
super important.
Image
Just to show all available funds are being invested.

Have a good one. :beer and my .02
Obviously, if you construct an example where the tax rate up front is higher than the tax rate coming out in the back, your IRR will be higher for the Traditional than the Roth. No one is disputing that. But that ignores what you are doing with the cash savings from the traditional. If you were to use NPV and set a reasonable discount rate, or a range of reasonable discount rates (which is not typically done in personal investing) the Roth very well come out with a higher NPV. I was just trying to illustrate the example using NPV and IRR since you brought IRR into the discussion.

Ultimately, our goal is not necessarily to maximize IRR for any particular slice of investments. It is to maximize our total dollars at or near retirement, on a risk adjusted basis. So an Roth with a slightly lower IRR (say 7.3%) may be more attractive than a traditional with a slightly higher IRR (7.5%), if the Roth ends up with more dollars at the end - and this would only come to pass because the traditional tax savings would be invested in a taxable account with a slower rate of return - (hypothetically lets say 6.5%). The Roth at 7.3% may very well exceed the sum total dollars of the traditional at 7.5% and the tax savings at 6.5% combined. Note: Those IRRs were pulled out of thin air for illustrative purposes...

Finally, all this ignores the wildcard impact of taxes on social security on withdrawal which could be applicable in the traditional example.

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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Wed Sep 13, 2017 10:45 pm

JBTX wrote:
Wed Sep 13, 2017 10:07 pm

Obviously, if you construct an example where the tax rate up front is higher than the tax rate coming out in the back, your IRR will be higher for the Traditional than the Roth. No one is disputing that. But that ignores what you are doing with the cash savings from the traditional.
Umm, wouldn't that go into a Roth or Taxable allocation, and receive their IRR. Directing
initial available investment dollars first to the TD account. Portfolio returns calc'd in
my tables.

JBTX wrote:
Wed Sep 13, 2017 10:07 pm
If you were to use NPV and set a reasonable discount rate, or a range of reasonable discount rates (which is not typically done in personal investing) the Roth very well come out with a higher NPV. I was just trying to illustrate the example using NPV and IRR since you brought IRR into the discussion.
Not practical. The whole portfolio IRR is needed with proper AA as well as some Cash In/Out
awareness for the retirement accounts like you requested. NPV is optional I think.
JBTX wrote:
Wed Sep 13, 2017 10:07 pm
Ultimately, our goal is not necessarily to maximize IRR for any particular slice of investments. It is to maximize our total dollars at or near retirement, on a risk adjusted basis. So an Roth with a slightly lower IRR (say 7.3%) may be more attractive than a traditional with a slightly higher IRR (7.5%), if the Roth ends up with more dollars at the end - and this would only come to pass because the traditional tax savings would be invested in a taxable account with a slower rate of return - (hypothetically lets say 6.5%). The Roth at 7.3% may very well exceed the sum total dollars of the traditional at 7.5% and the tax savings at 6.5% combined. Note: Those IRRs were pulled out of thin air for illustrative purposes...
I don't know......the IRR is not going away. Total portfolio return should max dollars
as well. Going Roth first may or may not increase total portfolio estimated per cent
return, depends. Alter one of those spreadsheets so it produces a NPV I guess. Or
just display ending total cash figures without per cent returns. That's somewhat viable.

JBTX wrote:
Wed Sep 13, 2017 10:07 pm
Finally, all this ignores the wildcard impact of taxes on social security on withdrawal which could be applicable in the traditional example.
Absolutely and I need to be sure that is included when calc'ing the retirement marginal
tax rates I need.


Perhaps do everything on an annual and ending cash basis only. That is one of the 2
alternatives mentioned in the advisor manual. No problem using that either. :)

Have an idea but I'll look at it tomorrow.
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Re: Traditional 401K vs Roth 401K

Post by FiveK » Wed Sep 13, 2017 11:12 pm

patrick013 wrote:
Wed Sep 13, 2017 10:45 pm
Perhaps do everything on an ... ending cash basis only.
If by that you mean the spendable amount (the amount left after all taxes are paid) - couldn't agree more.

No IRR, no NPV, just how much is available to spend after taxes are collected - whether upfront (Roth and taxable), or at withdrawal (traditional and taxable).

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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Wed Sep 13, 2017 11:24 pm

FiveK wrote:
Wed Sep 13, 2017 11:12 pm
patrick013 wrote:
Wed Sep 13, 2017 10:45 pm
Perhaps do everything on an ... ending cash basis only.
If by that you mean the spendable amount (the amount left after all taxes are paid) - couldn't agree more.

No IRR, no NPV, just how much is available to spend after taxes are collected - whether upfront (Roth and taxable), or at withdrawal (traditional and taxable).
Any preference on tax rates or returns ? I'll just do it for a stock investment.
TD account, a corresponding investment account added to it, and a separate
Roth account for comparison. Have the software setup OK.

This will add investment for 20 years, and withdraw for 20 years till account(s)
are zero, while adding the avg return to the account each year to balance left
after withdrawal. Should be informative.
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Re: Traditional 401K vs Roth 401K

Post by FiveK » Wed Sep 13, 2017 11:35 pm

patrick013 wrote:
Wed Sep 13, 2017 11:24 pm
Any preference on tax rates or returns ?
No, although these will affect the answers.
This will add investment for 20 years, and withdraw for 20 years till account(s)
are zero, while adding the avg return to the account each year to balance left
after withdrawal. Should be informative.
Yes, that's probably closer to real life than the "invest for X years, then withdraw all at once" assumption used by the two spreadsheets we've been discussing.

For comparison, it would also be good to see your results when using that assumption.

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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Thu Sep 14, 2017 9:05 pm

FiveK wrote:
Wed Sep 13, 2017 11:12 pm
patrick013 wrote:
Wed Sep 13, 2017 10:45 pm
Perhaps do everything on an ... ending cash basis only.
If by that you mean the spendable amount (the amount left after all taxes are paid) - couldn't agree more.
JBTX wrote:
Wed Sep 13, 2017 10:07 pm
Ultimately, our goal is not necessarily to maximize IRR for any particular slice of investments. It is to maximize our total dollars at or near retirement, on a risk adjusted basis.
The below are 20 year invest and 20 year withdrawal summary's based on average returns.
IRR's remains high due to early tax credits and the Roth Cash In remains high due to no
taxation during withdrawals. Could be made completely interactive with a little extra
work. I still like the t401k then backdoor Roth combination.

http://myphotos.mypclinuxos.com/images/ ... ndroth.png
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Thu Sep 14, 2017 9:19 pm

patrick013 wrote:
Thu Sep 14, 2017 9:05 pm
FiveK wrote:
Wed Sep 13, 2017 11:12 pm
patrick013 wrote:
Wed Sep 13, 2017 10:45 pm
Perhaps do everything on an ... ending cash basis only.
If by that you mean the spendable amount (the amount left after all taxes are paid) - couldn't agree more.
JBTX wrote:
Wed Sep 13, 2017 10:07 pm
Ultimately, our goal is not necessarily to maximize IRR for any particular slice of investments. It is to maximize our total dollars at or near retirement, on a risk adjusted basis.
The below are 20 year invest and 20 year withdrawal summary's based on average returns.
IRR's remains high due to early tax credits and the Roth Cash In remains high due to no
taxation during withdrawals. Could be made completely interactive with a little extra
work. I still like the t401k then backdoor Roth combination.

http://myphotos.mypclinuxos.com/images/ ... ndroth.png
I like the way you laid this out.

A couple of questions on things that don't look exactly right:

On your 25% in and 25% out scenario, the traditional investment (column 1) and the Roth (column (4) should have the same IRR, by definition. You have traditional slightly higher.

In your first scenario, your Roth IRR is barely any better than the taxable. A Roth has no taxes at all down the road, and taxable has capital gains and dividends, some along the way and the rest at the end.

In scenario 2, 33/25. I think the Roth should be closer to the TOTAL column than it is.

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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Thu Sep 14, 2017 9:46 pm

JBTX wrote:
Thu Sep 14, 2017 9:19 pm


A couple of questions on things that don't look exactly right:

On your 25% in and 25% out scenario, the traditional investment (column 1) and the Roth (column (4) should have the same IRR, by definition. You have traditional slightly higher.
Just the IRR discounting taxes during withdrawal. It looks OK.
In your first scenario, your Roth IRR is barely any better than the taxable. A Roth has no taxes at all down the road, and taxable has capital gains and dividends, some along the way and the rest at the end.
In the 15% tax bracket LTCG and dividends have zero tax during withdrawal keeping the rate up.
the other scenarios have 15% tax on Taxable withdrawals of LTCG and dividends.
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Thu Sep 14, 2017 10:01 pm

patrick013 wrote:
Thu Sep 14, 2017 9:46 pm
JBTX wrote:
Thu Sep 14, 2017 9:19 pm


A couple of questions on things that don't look exactly right:

On your 25% in and 25% out scenario, the traditional investment (column 1) and the Roth (column (4) should have the same IRR, by definition. You have traditional slightly higher.
Just the IRR discounting taxes during withdrawal. It looks OK.
Can't be OK. IRR should be the same.
In your first scenario, your Roth IRR is barely any better than the taxable. A Roth has no taxes at all down the road, and taxable has capital gains and dividends, some along the way and the rest at the end.
In the 15% tax bracket LTCG and dividends have zero tax during withdrawal keeping the rate up.
the other scenarios have 15% tax on Taxable withdrawals of LTCG and dividends.
Ok, understand the zero cap gains, but likely there will be some dividends and capital gains distributions (if a fund) along the way at 15% LTCG rate prior to retirement. Dividends are just less than 2.0% of total stock market index.

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Re: Traditional 401K vs Roth 401K

Post by FiveK » Thu Sep 14, 2017 10:09 pm

patrick013 wrote:
Thu Sep 14, 2017 9:05 pm
FiveK wrote:
Wed Sep 13, 2017 11:12 pm
If by that you mean the spendable amount (the amount left after all taxes are paid) - couldn't agree more.
http://myphotos.mypclinuxos.com/images/ ... ndroth.png
What numbers in that report are the spendable amounts? In other words, could you explain at least "Cash In" and "Cash Out"? Thanks.

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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Thu Sep 14, 2017 10:30 pm

JBTX wrote:
Thu Sep 14, 2017 10:01 pm
Ok, understand the zero cap gains, but likely there will be some dividends and capital gains distributions (if a fund) along the way at 15% LTCG rate prior to retirement. Dividends are just less than 2.0% of total stock market index.
The dividends 2% I record, tax, and reinvest for later withdrawal. Also part of cost
basis for later LTCG taxes when there are withdrawals. Capital gains distributions
along the way are not handled as how to estimate isn't known. Just taxing
withdrawals as part cap gain per an amortization schedule if taxes aren't zero.
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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Thu Sep 14, 2017 10:35 pm

FiveK wrote:
Thu Sep 14, 2017 10:09 pm
patrick013 wrote:
Thu Sep 14, 2017 9:05 pm
FiveK wrote:
Wed Sep 13, 2017 11:12 pm
If by that you mean the spendable amount (the amount left after all taxes are paid) - couldn't agree more.
http://myphotos.mypclinuxos.com/images/ ... ndroth.png
What numbers in that report are the spendable amounts? In other words, could you explain at least "Cash In" and "Cash Out"? Thanks.
Cash In is all withdrawals after taxes for 20 years. Cash Out is all contributions with only
TD getting a reduction in that for the tax credit. Roth and Taxable is whatever the contribution
is.
age in bonds, buy-and-hold, 10 year business cycle

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FiveK
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Re: Traditional 401K vs Roth 401K

Post by FiveK » Thu Sep 14, 2017 11:00 pm

patrick013 wrote:
Thu Sep 14, 2017 10:35 pm
Cash In is all withdrawals after taxes for 20 years. Cash Out is all contributions with only
TD getting a reduction in that for the tax credit. Roth and Taxable is whatever the contribution is.
Great, thanks again.

Results are consistent with Maxing out your retirement accounts, where it is noted that Roth is preferable to traditional for equal contribution and withdrawal tax rates (due to tax drag if present in the taxable account) when a taxable "side account" must be used due to IRS contribution limits.

Exactly how much lower the withdrawal tax rate must be (compared with the contribution tax rate) for Roth and traditional to be equivalent depends on the severity and length of the tax drag.

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patrick013
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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Thu Sep 14, 2017 11:17 pm

Yeah, a picture or a table is worth many words. :)
age in bonds, buy-and-hold, 10 year business cycle

JBTX
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Thu Sep 14, 2017 11:43 pm

patrick013 wrote:
Thu Sep 14, 2017 11:17 pm
Yeah, a picture or a table is worth many words. :)
I'd still like to understand why you show Traditional IRR as superior to Roth IRR with consistent tax rates when by definition they will end up exactly equal.

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patrick013
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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Fri Sep 15, 2017 1:58 pm

JBTX wrote:
Thu Sep 14, 2017 11:43 pm
patrick013 wrote:
Thu Sep 14, 2017 11:17 pm
Yeah, a picture or a table is worth many words. :)
I'd still like to understand why you show Traditional IRR as superior to Roth IRR with consistent tax rates when by definition they will end up exactly equal.
When going out 40 years at 4 decimal places there is going to be some minute
difference - .001 or .002 maybe, rather insignificant. The placement of the cash
flows is what matters. I discount the contributions and withdrawals on 01/01/xx
every year but the tax expense for that I discount on 12/31/xx, more related to when
the tax bill is due. Too lazy to discount it quarterly or monthly. So in a way it's more
accurate practically and in a way it's not. If the tax expense was discounted on the
exact day as the withdrawal it should be equal. But the IRR calcs the return based on
the exact date of contribution, withdrawal, or tax expense as it is supposed to do.
So something producing an equivalent numerical return every year may have a different
IRR when the exact date of receipts and disbursements are used for proper discounting
and calculation within the year(s) involved. So not too worried about it, like I said in a
way it's slightly more accurate. Will take another look at it however.
age in bonds, buy-and-hold, 10 year business cycle

JBTX
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Re: Traditional 401K vs Roth 401K

Post by JBTX » Fri Sep 15, 2017 2:09 pm

patrick013 wrote:
Fri Sep 15, 2017 1:58 pm
JBTX wrote:
Thu Sep 14, 2017 11:43 pm
patrick013 wrote:
Thu Sep 14, 2017 11:17 pm
Yeah, a picture or a table is worth many words. :)
I'd still like to understand why you show Traditional IRR as superior to Roth IRR with consistent tax rates when by definition they will end up exactly equal.
When going out 40 years at 4 decimal places there is going to be some minute
difference - .001 or .002 maybe, rather insignificant. The placement of the cash
flows is what matters. I discount the contributions and withdrawals on 01/01/xx
every year but the tax expense for that I discount on 12/31/xx, more related to when
the tax bill is due.
Too lazy to discount it quarterly or monthly. So in a way it's more
accurate practically and in a way it's not. If the tax expense was discounted on the
exact day as the withdrawal it should be equal. But the IRR calcs the return based on
the exact date of contribution, withdrawal, or tax expense as it is supposed to do.
So something producing an equivalent numerical return every year may have a different
IRR when the exact date of receipts and disbursements are used for proper discounting
and calculation within the year(s) involved. So not too worried about it, like I said in a
way it's slightly more accurate. Will take another look at it however.
Not sure why you would do this way. If it is a 401K more often than not people do it via an employer in biweekly or comparable payroll, both the contribution and tax. For self employed, I rarely do it in advance. I usually wait until late in the year or after because I don't know my cash flow situation.

In terms of tax bill, your estimated tax is due at least quarterly.

For simplicity and accuracy, seems to me you would assume the same date for contribution/withdrawal and tax expense. That is technically what is supposed to happen per tax law (or at least the same quarter). Whether you do it annual or quarterly or monthly is less important than making sure they are the same date. What you are doing is materially skewing the results and seems to be favoring the traditional vs the Roth.

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patrick013
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Re: Traditional 401K vs Roth 401K

Post by patrick013 » Fri Sep 15, 2017 2:34 pm

JBTX wrote:
Fri Sep 15, 2017 2:09 pm
In terms of tax bill, your estimated tax is due at least quarterly.
Well quarterly payments are generally made, tax credit for 401k or
tIRA based on tax return are usually just deducted. Payroll takes care
of itself for the most part. Tax expense for investment income has
quarterly estimates sent in to the IRS if material. For IRR purposes using
the same date for tax expense is conceptually fine too and let the calcs
reflect that and let tax estimates be sent in as routinely done. The money's
still in the bank so to speak.

Thanks for the response.
age in bonds, buy-and-hold, 10 year business cycle

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