Would like to learn more about Roth vs Traditional (403b)

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Stezza
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Would like to learn more about Roth vs Traditional (403b)

Post by Stezza » Fri May 04, 2018 8:52 pm

Hi everyone, thank you for all the advice I have received about my retirement allocations and strategy on the other thread. I have been reading as much as I can and have been convinced of the Boglehead way. I am at a stage where I am still working on increasing my contributions to the maximum allowed, and minimizing costs. A key lesson I have learnt is that there is not rush to make any drastic changes, so I am willing to continue to learn along my path to achieving my goals. So thanks to all for the education!

One question I still have is whether I should be investing in my 403b as Roth or Traditional. I know that the general strategy is that if I think my tax rate will be higher in retirement than it is now, I should choose Roth.

I believe that I will be earning more money in retirement than I am now, primarily because I have just started my "real" career as a scientist/researcher (earning $75k/year pre-tax), and the fact that I am likely to not ever have to completely retire, rather just wind down my working life with tenure (~$180-200k year). I have also just started to receive royalty payments from my very first patent license (nothing crazy), however this could either be the first and last (biotech companies....), or an income stream larger than my salary (wish me luck!).

Anyway, could someone please guide me on the appropriate reading or tools I should explore to better judge what the right option is for me? I am also happy to provide more information if that is needed.

Thanks again,

bloom2708
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Location: Fargo, ND

Re: Would like to learn more about Roth vs Traditional (403b)

Post by bloom2708 » Fri May 04, 2018 9:01 pm

90% should choose pre-tax 403b along side your Roth IRA.

The 10% will have a pension + SS + other income that is very high. The other few % will be the extremely wealthy.

One of the toughest concepts to grasp is how your retirement income fills up the lower buckets. Your paycheck occupies those 0, 10, 12%, 22%, etc buckets now.

If you have taxable accounts, use Roth dollars (no tax out) or take from pre-tax funds, you fill up 0% first, then 10%, only then 22%. It takes quite a bit of income to get to the point where you are close to your working paycheck. Pre-tax takes off the top bracket.

Not paying the tax now allows you to invest more. You don't pay the tax (lowers your income) and you can put the savings (bigger paycheck) in Roth. The bigger amount (earlier) has longer to grow.

If I could go back to starting over. I would put much more in my pre-tax 401k/403b. I would maybe even prioritize it over Roth until you can max the 403b. Roth is also use it or lose it, so having a mix gives you more options.

Hopefully others can add their ideas.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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FiveK
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by FiveK » Sat May 05, 2018 1:20 pm

Stezza wrote:
Fri May 04, 2018 8:52 pm
I believe that I will be earning more money in retirement than I am now....
To the extent you "know" that is the case (instead of merely "believe") then Roth is better for you.

Or if you "know" that you will never retire and have ever-increasing income, then Roth is better for you.

See Traditional versus Roth - Bogleheads for more.

Stezza
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by Stezza » Sun May 13, 2018 5:41 pm

Thanks for the input guys. As I mentioned above, this is really a best guess situation for me, as even though I can predict my retirement and salary, other aspects are unknown. Are there any calculators where I can test various situations to determine whether roth or traditional is best for me?

livesoft
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by livesoft » Sun May 13, 2018 5:45 pm

I think you should do traditional 403(b). You are going to end up with lots of money anyways and your tax situation won't matter. You can always change to a Roth 403(b) when you think there is more clarity to your situation. Just be sure to invest the tax savings you get now in a taxable account and don't spend them. :)

I also think that for uber-savers, in the end there is not much difference between the traditional and Roth anyways.

A few years ago, the Roth cheerleaders wrote often "Taxes can only go UP! So Roth is better!"
Guess what? Taxes went down.
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WanderingDoc
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by WanderingDoc » Sun May 13, 2018 6:33 pm

FiveK wrote:
Sat May 05, 2018 1:20 pm
Stezza wrote:
Fri May 04, 2018 8:52 pm
I believe that I will be earning more money in retirement than I am now....
To the extent you "know" that is the case (instead of merely "believe") then Roth is better for you.

Or if you "know" that you will never retire and have ever-increasing income, then Roth is better for you.

See Traditional versus Roth - Bogleheads for more.
I don't think anyone truly knows, 100% or even 70% that their retirement income will be higher or lower.

However, I am always thought that investing all your 401k funds into traditional is basically a self-fulfilling prophecy. Let me explain. Why should one believe that will will be poorer in retirement than now? This seems like a very limited way of thinking. We should be WEALTHIER in retirement, not only net worth wise - but income wise. This is someone everyone should drive for. If not, we are going backwards. After all - income you are actually using has a real world application, whereas net worth is little more than numbers on a screen, practically speaking.

Also, with things like royalties, and real estate where 30 year mortgages will be payed off, you will see a huge bump in income very quickly. Keeping the mind sharp in old age means you should be earning more in your 50s an 60s, retired or not, than in your 20s and 30s. You are wiser and have had time on your side to accumulate income producing assets and royalties.

I do 50/50 traditional/Roth in my 401k. I've read the blogs and arguments. Doing 100% traditional is akin to a self fulfilling prophecy. If we believe we will be poorer, we probably will. YMMV :D
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

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FiveK
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by FiveK » Sun May 13, 2018 10:32 pm

WanderingDoc wrote:
Sun May 13, 2018 6:33 pm
I don't think anyone truly knows, 100% or even 70% that their retirement income will be higher or lower.
Agreed - you pays your money and takes your chances.
However, I am always thought that investing all your 401k funds into traditional is basically a self-fulfilling prophecy.
Not so sure about this one. Seems the more one favors traditional - or Roth - the more likely one is making the wrong choice.

That's because the higher the traditional balance, the higher the income on a 4%/yr (or whatever) withdrawal, so more traditional contributions increase the chance that the withdrawal marginal tax rate will be higher than at contribution. Similarly, the more one favors Roth, the lower one's withdrawal marginal tax rate will be.

WanderingDoc
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by WanderingDoc » Mon May 14, 2018 12:14 am

I don't think so.

If I put more into Roth now, I am telling myself consciously and subconsciously that "I will make more money when I am 70 than today", so if you believe in creating your own reality, self talk, and goal setting (and you should) you have the right mentality and motivation to earn more when you are older. If you put more into traditional now, you are telling yourself and moulding the reality to the contrary.

FiveK wrote:
Sun May 13, 2018 10:32 pm
WanderingDoc wrote:
Sun May 13, 2018 6:33 pm
I don't think anyone truly knows, 100% or even 70% that their retirement income will be higher or lower.
Agreed - you pays your money and takes your chances.
However, I am always thought that investing all your 401k funds into traditional is basically a self-fulfilling prophecy.
Not so sure about this one. Seems the more one favors traditional - or Roth - the more likely one is making the wrong choice.

That's because the higher the traditional balance, the higher the income on a 4%/yr (or whatever) withdrawal, so more traditional contributions increase the chance that the withdrawal marginal tax rate will be higher than at contribution. Similarly, the more one favors Roth, the lower one's withdrawal marginal tax rate will be.
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

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FiveK
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by FiveK » Mon May 14, 2018 1:17 am

WanderingDoc wrote:
Mon May 14, 2018 12:14 am
If you put more into traditional now, you are telling yourself and moulding the reality to the contrary.
Or, some might decide "I earn way more now than I need to spend, so I'll just use traditional until I've built up enough that withdrawals will suffice for happiness." As you noted, YMMV.

WanderingDoc
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by WanderingDoc » Mon May 14, 2018 2:07 am

Lets agree to disagree. :P

I plan on having a 7-figure income in my 50s and 60s. Now, I earn a bit less, so that is why I do 50/50. I am surprised I am not doing 100% Roth 401k to be honest.

Why would anyone plan on being less successful/poorer/less income in the future? I will never understand.

I also like the idea of knowing "whats yours is yours {Roth}". A 90% tax rate in 2050 isn't out of the question.
FiveK wrote:
Mon May 14, 2018 1:17 am
WanderingDoc wrote:
Mon May 14, 2018 12:14 am
If you put more into traditional now, you are telling yourself and moulding the reality to the contrary.
Or, some might decide "I earn way more now than I need to spend, so I'll just use traditional until I've built up enough that withdrawals will suffice for happiness." As you noted, YMMV.
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

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FiveK
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by FiveK » Mon May 14, 2018 3:35 am

WanderingDoc wrote:
Mon May 14, 2018 2:07 am
Lets agree to disagree. :P

I plan on having a 7-figure income in my 50s and 60s. Now, I earn a bit less, so that is why I do 50/50. I am surprised I am not doing 100% Roth 401k to be honest.

Why would anyone plan on being less successful/poorer/less income in the future? I will never understand.
That's a wonderful plan. And you are correct: if your income will be that high, 100% Roth at this point is probably appropriate. Good luck!

bloom2708
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by bloom2708 » Tue May 15, 2018 10:53 am

WanderingDoc wrote:
Mon May 14, 2018 2:07 am
Lets agree to disagree. :P

I plan on having a 7-figure income in my 50s and 60s. Now, I earn a bit less, so that is why I do 50/50. I am surprised I am not doing 100% Roth 401k to be honest.

Why would anyone plan on being less successful/poorer/less income in the future? I will never understand.

I also like the idea of knowing "whats yours is yours {Roth}". A 90% tax rate in 2050 isn't out of the question.
There is no guarantee with the Roth either. If a 90% tax rate is in the future, do you think Roth will escape? I don't.

If you pay the tax now (whatever the rate) you paid it. Can't be unpaid. What if you are so wildly successful that you don't even need to withdraw from your Roth and it moves to your heirs? Then you didn't need to pay the tax (back when) either.

Pre-tax 401k + Roth IRA still fits the bill for most. Do Roth conversions if your Traditional gets so big you don't know what to do with it.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

WanderingDoc
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by WanderingDoc » Tue May 15, 2018 1:16 pm

bloom2708 wrote:
Tue May 15, 2018 10:53 am
WanderingDoc wrote:
Mon May 14, 2018 2:07 am
Lets agree to disagree. :P

I plan on having a 7-figure income in my 50s and 60s. Now, I earn a bit less, so that is why I do 50/50. I am surprised I am not doing 100% Roth 401k to be honest.

Why would anyone plan on being less successful/poorer/less income in the future? I will never understand.

I also like the idea of knowing "whats yours is yours {Roth}". A 90% tax rate in 2050 isn't out of the question.
There is no guarantee with the Roth either. If a 90% tax rate is in the future, do you think Roth will escape? I don't.

If you pay the tax now (whatever the rate) you paid it. Can't be unpaid. What if you are so wildly successful that you don't even need to withdraw from your Roth and it moves to your heirs? Then you didn't need to pay the tax (back when) either.

Pre-tax 401k + Roth IRA still fits the bill for most. Do Roth conversions if your Traditional gets so big you don't know what to do with it.
I dunno. I believe White Coat Investor recommended to me to be 100% Roth all the way. And he's a pretty smart dude and is also a physician. I split the difference at 50/50 in the 401k and a backdoor Roth IRA.

Roth WILL "escape" a 90% tax rate, since growth and withdrawals on a Roth are tax free :beer
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

bloom2708
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by bloom2708 » Tue May 15, 2018 1:27 pm

WanderingDoc wrote:
Tue May 15, 2018 1:16 pm

I dunno. I believe White Coat Investor recommended to me to be 100% Roth all the way. And he's a pretty smart dude and is also a physician. I split the difference at 50/50 in the 401k and a backdoor Roth IRA.

Roth WILL "escape" a 90% tax rate, since growth and withdrawals on a Roth are tax free :beer
I think you mean "Withdrawals on a Roth are tax free right now...". Anything can change.

If you are a physician with a huge salary (or anyone with a huge salary) you KNOW (unless you do some stupid things) that you are going to be able to save a huge pile.

If you will have a pension that covers all your spending in retirement and fills up the lower tax brackets so you are in 22% to start, then you can make a case for a Roth.

Most all scenarios can be justified. We won't know until we get there. For the center who aren't sure, pay the tax "later". Invest the tax savings in your Roth IRA. Fill up your HSA too if you have one.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

02nz
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by 02nz » Tue May 15, 2018 1:34 pm

WanderingDoc wrote:
Sun May 13, 2018 6:33 pm
However, I am always thought that investing all your 401k funds into traditional is basically a self-fulfilling prophecy. Let me explain. Why should one believe that will will be poorer in retirement than now? This seems like a very limited way of thinking. We should be WEALTHIER in retirement, not only net worth wise - but income wise. This is someone everyone should drive for. If not, we are going backwards. After all - income you are actually using has a real world application, whereas net worth is little more than numbers on a screen, practically speaking.
I agree some of both is the right approach, but putting a lot (or even all) into 401k is definitely not a self-fulfilling prophecy. It's actually the opposite. If you think you'll be in poorer in retirement and thus have a lower tax rate, traditional contributions make more sense than Roth, but those contributions drive up taxable income in retirement and actually make it MORE likely that you'll be in the same tax rate or higher. It also works the other way around with Roth. This goes to show tax diversification is the best approach. However there's something to be said for weighing toward the worse case (of being poorer in retirement), and thus making more traditional contributions than Roth. If one ends up being wealthier in retirement than expected and faces a higher tax rate, well that's a nice a problem to have. The opposite, of having contributed all or mostly Roth but having lower than expected income in retirement is much worse.

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ruralavalon
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by ruralavalon » Tue May 15, 2018 2:37 pm

Stezza wrote:
Fri May 04, 2018 8:52 pm
Hi everyone, thank you for all the advice I have received about my retirement allocations and strategy on the other thread. I have been reading as much as I can and have been convinced of the Boglehead way. I am at a stage where I am still working on increasing my contributions to the maximum allowed, and minimizing costs. A key lesson I have learnt is that there is not rush to make any drastic changes, so I am willing to continue to learn along my path to achieving my goals. So thanks to all for the education!

One question I still have is whether I should be investing in my 403b as Roth or Traditional. I know that the general strategy is that if I think my tax rate will be higher in retirement than it is now, I should choose Roth.

I believe that I will be earning more money in retirement than I am now, primarily because I have just started my "real" career as a scientist/researcher (earning $75k/year pre-tax), and the fact that I am likely to not ever have to completely retire, rather just wind down my working life with tenure (~$180-200k year). I have also just started to receive royalty payments from my very first patent license (nothing crazy), however this could either be the first and last (biotech companies....), or an income stream larger than my salary (wish me luck!).

Anyway, could someone please guide me on the appropriate reading or tools I should explore to better judge what the right option is for me? I am also happy to provide more information if that is needed.

Thanks again,
At age 34 with around 30 years of employment ahead of you, and perhaps another 30 years of retirement, it's not possible to "know" which is best or to reduce this to a a math problem. That would require guesses about your health and earning capacity over 3 decades, and guesses about changes in tax law over 6 decades.

Here is some very general reading material in the issue at hand. Retirement usually means either that employment income has ended, or a major reduction in employment income. Most people are in a lower tax bracket in retirement. The income tax code is progressive, with a lower tax rate for lower income. Therefore, for most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."

Stezza wrote:
Sat Apr 07, 2018 1:20 pm
Tax Rate: 15% Federal, 5.5% State
My idea would be to make Roth 403b contributions as long as you are in the 15% or 12% bracket, thereafter make traditional 403b contributions. Then reevaluate after several years of traditional 403b contributions, when you have real certainty about future income. As livesoft noted "You can always change to a Roth 403(b) when you think there is more clarity to your situation."

Does your employer also offer a 457 plan?

Also contribute to a Roth IRA at a low cost provider like Vanguard, for as long as you are eligible.
Last edited by ruralavalon on Tue May 15, 2018 2:49 pm, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

aristotelian
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by aristotelian » Tue May 15, 2018 2:47 pm

WanderingDoc wrote:
Mon May 14, 2018 2:07 am
Lets agree to disagree. :P

I plan on having a 7-figure income in my 50s and 60s. Now, I earn a bit less, so that is why I do 50/50. I am surprised I am not doing 100% Roth 401k to be honest.

Why would anyone plan on being less successful/poorer/less income in the future? I will never understand.
I also like the idea of knowing "whats yours is yours {Roth}". A 90% tax rate in 2050 isn't out of the question.
You can be very wealthy and have high spending in retirement and still have low tax rate. Have you modeled it out to see if you will actually have a high tax rate in retirement? I would suggest taking advantage of pre-tax 401k, *especially* if you are high income. You can save everything in Muni Bonds and BRK-B stock in your taxable accounts and likely pay zero tax no matter how much money you have saved in your 401k.

WanderingDoc
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by WanderingDoc » Tue May 15, 2018 9:38 pm

Thats pretty useful/interesting to know!

Wouldn't $80K/yr. rental income have the same effect as having a pension, for the purposes of deciding between traditional and Roth? If I never buy another property (fat chance, but lets assume), after mortgages are payed off, I should have that amount of rental income, speaking very conservatively.

Shouldn't I be plowing everything into Roth then?

ruralavalon wrote:
Tue May 15, 2018 2:37 pm
Stezza wrote:
Fri May 04, 2018 8:52 pm
Hi everyone, thank you for all the advice I have received about my retirement allocations and strategy on the other thread. I have been reading as much as I can and have been convinced of the Boglehead way. I am at a stage where I am still working on increasing my contributions to the maximum allowed, and minimizing costs. A key lesson I have learnt is that there is not rush to make any drastic changes, so I am willing to continue to learn along my path to achieving my goals. So thanks to all for the education!

One question I still have is whether I should be investing in my 403b as Roth or Traditional. I know that the general strategy is that if I think my tax rate will be higher in retirement than it is now, I should choose Roth.

I believe that I will be earning more money in retirement than I am now, primarily because I have just started my "real" career as a scientist/researcher (earning $75k/year pre-tax), and the fact that I am likely to not ever have to completely retire, rather just wind down my working life with tenure (~$180-200k year). I have also just started to receive royalty payments from my very first patent license (nothing crazy), however this could either be the first and last (biotech companies....), or an income stream larger than my salary (wish me luck!).

Anyway, could someone please guide me on the appropriate reading or tools I should explore to better judge what the right option is for me? I am also happy to provide more information if that is needed.

Thanks again,
At age 34 with around 30 years of employment ahead of you, and perhaps another 30 years of retirement, it's not possible to "know" which is best or to reduce this to a a math problem. That would require guesses about your health and earning capacity over 3 decades, and guesses about changes in tax law over 6 decades.

Here is some very general reading material in the issue at hand. Retirement usually means either that employment income has ended, or a major reduction in employment income. Most people are in a lower tax bracket in retirement. The income tax code is progressive, with a lower tax rate for lower income. Therefore, for most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."

Stezza wrote:
Sat Apr 07, 2018 1:20 pm
Tax Rate: 15% Federal, 5.5% State
My idea would be to make Roth 403b contributions as long as you are in the 15% or 12% bracket, thereafter make traditional 403b contributions. Then reevaluate after several years of traditional 403b contributions, when you have real certainty about future income. As livesoft noted "You can always change to a Roth 403(b) when you think there is more clarity to your situation."

Does your employer also offer a 457 plan?

Also contribute to a Roth IRA at a low cost provider like Vanguard, for as long as you are eligible.
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

SANSRN
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by SANSRN » Tue May 15, 2018 9:49 pm

Interesting discussion and lot of insightful points for newbies to think about.

So, with retirement investments (401k, ...) could one withdraw at the permitted age even if one were employed at that age?

If so, could one strategically go slow - say ask for a part-time employment or work only part of the year and withdraw the retirement money at that age?

Also, when one says withdrawing money from retirement funds when the time comes - is it one lump sum withdrawal or is it like withdrawing money from one's bank account as and when one needs it? Are both allowed and what is common?

Lot of questions - i really appreciate fellow member's help with guiding me (a complete newbie to investing but been taking sincere efforts to learn).

Thank you!

KlangFool
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Re: Would like to learn more about Roth vs Traditional (403b)

Post by KlangFool » Tue May 15, 2018 10:11 pm

Stezza wrote:
Fri May 04, 2018 8:52 pm

I believe that I will be earning more money in retirement than I am now, primarily because I have just started my "real" career as a scientist/researcher (earning $75k/year pre-tax), and the fact that I am likely to not ever have to completely retire, rather just wind down my working life with tenure (~$180-200k year).
Stezza,

What if you are wrong?

1) Putting money into the Trad. 403B and deferred your tax allow you to have more money in your portfolio now. If you never retired, you just pay more tax in your retirement. It is not too bad.

2) Putting money into the Roth 403B and if it turns out that you do not have enough money in retirement, you are in deep trouble. You cannot get your money back from the IRS.

The impact of the decision of (1) versus (2) is asymmetric. (1) is not too bad. (2) is disastrous. Why would you want to choose (1)?

Put your money into Trad. 403B and put the tax savings into your Roth IRAs give you the best combination. You have tax diversification and you can build up your portfolio quicker.

We cannot predict the future. Let's not count the chicken before the egg hatches.

You should check out this URL.
https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

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