Help me with the Trad vs Roth 401k Math

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 Joined: Wed Oct 03, 2018 8:11 pm
Help me with the Trad vs Roth 401k Math
Help me understand how the tax rate in retirement vs current marginal rate is all that matters when thinking of tax efficiency of Roth vs Trad. Here is how I see math if I max out the 401k at a fictional 20% current tax bracket vs 10% retirement bracket:
Trad: $19,000 contribution, grows to $190,000 in retirement. Taxes in retirement = .10 x $190,000 = $19,000. Net = $171,000
Roth: $19,000 contribution, grows to $190,000 in retirement. Taxes currently paid = .20 x $19,000 =$3,800. Net = $186,200
What am I missing here? Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
Most of the time I see this example explained as the Roth contribution would end up equal with equal tax rates because it would only be $15,200 after you paid $3,800 in taxes, but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate? How could the Trad possibly be better, assuming an extremely high growth rate in the Roth?
Can someone show me mathematically how maxing out a Roth vs Trad 401k would generate the same final net value if the tax rate stayed exactly the same?
Trad: $19,000 contribution, grows to $190,000 in retirement. Taxes in retirement = .10 x $190,000 = $19,000. Net = $171,000
Roth: $19,000 contribution, grows to $190,000 in retirement. Taxes currently paid = .20 x $19,000 =$3,800. Net = $186,200
What am I missing here? Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
Most of the time I see this example explained as the Roth contribution would end up equal with equal tax rates because it would only be $15,200 after you paid $3,800 in taxes, but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate? How could the Trad possibly be better, assuming an extremely high growth rate in the Roth?
Can someone show me mathematically how maxing out a Roth vs Trad 401k would generate the same final net value if the tax rate stayed exactly the same?
 willthrill81
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Re: Help me with the Trad vs Roth 401k Math
What you're ignoring in your example is the taxes that must be paid on the Roth contributions. This means that your example isn't apples to apples. Your Roth contributions would only be $15,200. If they then grew to $152,000 in retirement, that would be your net. So you would be better off with the traditional 401k.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 7:52 pmHelp me understand how the tax rate in retirement vs current marginal rate is all that matters when thinking of tax efficiency of Roth vs Trad. Here is how I see math if I max out the 401k at a fictional 20% current tax bracket vs 10% retirement bracket:
Trad: $19,000 contribution, grows to $190,000 in retirement. Taxes in retirement = .10 x $190,000 = $19,000. Net = $171,000
Roth: $19,000 contribution, grows to $190,000 in retirement. Taxes currently paid = .20 x $19,000 =$3,800. Net = $186,200
What am I missing here? Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
Most of the time I see this example explained as the Roth contribution would end up equal with equal tax rates because it would only be $15,200 after you paid $3,800 in taxes, but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate? How could the Trad possibly be better, assuming an extremely high growth rate in the Roth?
Can someone show me mathematically how maxing out a Roth vs Trad 401k would generate the same final net value if the tax rate stayed exactly the same?
Think of it in simpler terms to get your head wrapped around it. Assuming the 20% current and 10% retirement taxes, which would you rather pay? With traditional (aka taxdeferred) accounts, you pay the latter. With Roth accounts, you pay the former. Therefore, given the choice between the two, you would only pick the Roth if your current marginal tax bracket was at least the same as your retirement tax bracket. Now there are other reasons why you might or might not choose a Roth, but when it comes to taxes paid, that's it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

 Posts: 334
 Joined: Wed Oct 03, 2018 8:11 pm
Re: Help me with the Trad vs Roth 401k Math
But this is where I mentioned above: "but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate?"willthrill81 wrote: ↑Sat Feb 16, 2019 7:57 pmWhat you're ignoring in your example is the taxes that must be paid on the Roth contributions. This means that your example isn't apples to apples. Your Roth contributions would only be $15,200. If they then grew to $152,000 in retirement, that would be your net. So you would be better off with the traditional 401k.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 7:52 pmHelp me understand how the tax rate in retirement vs current marginal rate is all that matters when thinking of tax efficiency of Roth vs Trad. Here is how I see math if I max out the 401k at a fictional 20% current tax bracket vs 10% retirement bracket:
Trad: $19,000 contribution, grows to $190,000 in retirement. Taxes in retirement = .10 x $190,000 = $19,000. Net = $171,000
Roth: $19,000 contribution, grows to $190,000 in retirement. Taxes currently paid = .20 x $19,000 =$3,800. Net = $186,200
What am I missing here? Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
Most of the time I see this example explained as the Roth contribution would end up equal with equal tax rates because it would only be $15,200 after you paid $3,800 in taxes, but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate? How could the Trad possibly be better, assuming an extremely high growth rate in the Roth?
Can someone show me mathematically how maxing out a Roth vs Trad 401k would generate the same final net value if the tax rate stayed exactly the same?
Can't you contribute $19,000 to the Roth? Or are you saying you can only contribute $15,200 to a Roth 401k?
Re: Help me with the Trad vs Roth 401k Math
You are conveniently (or in error) ignoring the $3800 you paid in taxes now, which would grow at the same rate of investments to be equivalent to $38000 at the time you withdraw from these accounts.
 willthrill81
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Re: Help me with the Trad vs Roth 401k Math
By contributing $19k to the Roth, you are effectively contributing more than with the traditional, so it's not a 'fair' comparison.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 8:38 pmBut this is where I mentioned above: "but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate?"willthrill81 wrote: ↑Sat Feb 16, 2019 7:57 pmWhat you're ignoring in your example is the taxes that must be paid on the Roth contributions. This means that your example isn't apples to apples. Your Roth contributions would only be $15,200. If they then grew to $152,000 in retirement, that would be your net. So you would be better off with the traditional 401k.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 7:52 pmHelp me understand how the tax rate in retirement vs current marginal rate is all that matters when thinking of tax efficiency of Roth vs Trad. Here is how I see math if I max out the 401k at a fictional 20% current tax bracket vs 10% retirement bracket:
Trad: $19,000 contribution, grows to $190,000 in retirement. Taxes in retirement = .10 x $190,000 = $19,000. Net = $171,000
Roth: $19,000 contribution, grows to $190,000 in retirement. Taxes currently paid = .20 x $19,000 =$3,800. Net = $186,200
What am I missing here? Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
Most of the time I see this example explained as the Roth contribution would end up equal with equal tax rates because it would only be $15,200 after you paid $3,800 in taxes, but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate? How could the Trad possibly be better, assuming an extremely high growth rate in the Roth?
Can someone show me mathematically how maxing out a Roth vs Trad 401k would generate the same final net value if the tax rate stayed exactly the same?
Can't you contribute $19,000 to the Roth? Or are you saying you can only contribute $15,200 to a Roth 401k?
Yes, of course you can contribute $19k to the Roth. But this is only appropriate if you are planning on maxing out all of your taxadvantaged space (e.g. 401k, IRAs, HSA, etc.).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Re: Help me with the Trad vs Roth 401k Math
Assume max contribution were 10K (for math ease..........you can scale it up or down). Tax rate is 20% now/later. You have a 2K side fund in taxable.
1)Traditional............you put 10K in, pay no taxes on that income because of deduction so you still have 2K in side fund. N yrs later
both have doubled to 20K in traditional and 4K in taxable. You withdraw the funds and pay the 20% in taxes. You are left with
16K from the traditional . You have 2K gain in taxable and pay 0% in CG taxes and are left w/ 4K . The  is due to tax drag on the taxable account. Total is 20K
2)Roth..........you put 10K in, and use the 2K taxable acct to pay the 20% tax so are left only with a Roth. It also doubles in N yrs
and you are left w/ 20K after withdrawal from Roth (assumes you met the age 59.5/5 yr clock to w/d earnings w/o tax/penalty.
End result is that the accts are basically equal tho there may be a slight edge to the Roth due to taxation issues of gain on taxable acct
(maybe rate is 15% , not 0) and because of tax drag over the yrs.
***************************************************************************************
If you don't have extra funds to pay the tax on the Roth, then your Roth contribution will be lower
1)Traditional.........put in 10K. N yrs later it has doubled to 20K. You pay 20% taxes to get it out and end up w/ 16K.
2)Roth............you pay 2K taxes on the 10K and put the remaining 8K in the Roth. N yrs later it has doubled to16K.
now traditional/Roth are identical.
*********************************************************************************
you can also do the calculation for a 10% tax rate later and see how the traditional comes out ahead.
1)Traditional............you put 10K in, pay no taxes on that income because of deduction so you still have 2K in side fund. N yrs later
both have doubled to 20K in traditional and 4K in taxable. You withdraw the funds and pay the 20% in taxes. You are left with
16K from the traditional . You have 2K gain in taxable and pay 0% in CG taxes and are left w/ 4K . The  is due to tax drag on the taxable account. Total is 20K
2)Roth..........you put 10K in, and use the 2K taxable acct to pay the 20% tax so are left only with a Roth. It also doubles in N yrs
and you are left w/ 20K after withdrawal from Roth (assumes you met the age 59.5/5 yr clock to w/d earnings w/o tax/penalty.
End result is that the accts are basically equal tho there may be a slight edge to the Roth due to taxation issues of gain on taxable acct
(maybe rate is 15% , not 0) and because of tax drag over the yrs.
***************************************************************************************
If you don't have extra funds to pay the tax on the Roth, then your Roth contribution will be lower
1)Traditional.........put in 10K. N yrs later it has doubled to 20K. You pay 20% taxes to get it out and end up w/ 16K.
2)Roth............you pay 2K taxes on the 10K and put the remaining 8K in the Roth. N yrs later it has doubled to16K.
now traditional/Roth are identical.
*********************************************************************************
you can also do the calculation for a 10% tax rate later and see how the traditional comes out ahead.
Last edited by kaneohe on Sat Feb 16, 2019 9:32 pm, edited 1 time in total.

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Re: Help me with the Trad vs Roth 401k Math
Not exactly, I said this above: Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
By expound on that, what I mean is, show me how $3,800 in a taxable account has the same tax equivalency over 30 years as $3,800 in a taxdeferred 401k account. Taxable account incurs interest and dividends every year which will be taxed at different rates over time than the $3,800 growing taxdeferred until withdrawal, no?

 Posts: 334
 Joined: Wed Oct 03, 2018 8:11 pm
Re: Help me with the Trad vs Roth 401k Math
I am not talking about a socalled 'fair' comparison.willthrill81 wrote: ↑Sat Feb 16, 2019 8:56 pmBy contributing $19k to the Roth, you are effectively contributing more than with the traditional, so it's not a 'fair' comparison.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 8:38 pmBut this is where I mentioned above: "but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate?"willthrill81 wrote: ↑Sat Feb 16, 2019 7:57 pmWhat you're ignoring in your example is the taxes that must be paid on the Roth contributions. This means that your example isn't apples to apples. Your Roth contributions would only be $15,200. If they then grew to $152,000 in retirement, that would be your net. So you would be better off with the traditional 401k.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 7:52 pmHelp me understand how the tax rate in retirement vs current marginal rate is all that matters when thinking of tax efficiency of Roth vs Trad. Here is how I see math if I max out the 401k at a fictional 20% current tax bracket vs 10% retirement bracket:
Trad: $19,000 contribution, grows to $190,000 in retirement. Taxes in retirement = .10 x $190,000 = $19,000. Net = $171,000
Roth: $19,000 contribution, grows to $190,000 in retirement. Taxes currently paid = .20 x $19,000 =$3,800. Net = $186,200
What am I missing here? Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
Most of the time I see this example explained as the Roth contribution would end up equal with equal tax rates because it would only be $15,200 after you paid $3,800 in taxes, but what if you paid those $3800 taxes, and still maxed out at the $19,000 rate? How could the Trad possibly be better, assuming an extremely high growth rate in the Roth?
Can someone show me mathematically how maxing out a Roth vs Trad 401k would generate the same final net value if the tax rate stayed exactly the same?
Can't you contribute $19,000 to the Roth? Or are you saying you can only contribute $15,200 to a Roth 401k?
I am talking about a real life example of maxing out a Roth 401k vs maxing out a Traditional 401k and how we are told they are supposed to end up equal if the tax rates are the same. By my math in my post, they would not end up equal and the Roth would win every time assuming a high enough rate of taxfree growth.
I appreciate the responses (I am looking for answers/help) but so far none of them have addressed any flaws in my math/logic, to my knowledge.
Someone noted the $3800 in taxes would get invested and grow at same rate in a taxable account (I alluded to this also in my post) and that is how they end up equal, but $3800 in a taxable account would not grow at the same rate as a taxdeferred account due to tax drag of interest and dividends, am I wrong?

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Re: Help me with the Trad vs Roth 401k Math
Thanks, this is type of answer I was looking for  the Roth would still win due to the tax drag over time of money in a taxable account, right? I am looking for an example of how or why that assumption might be wrong and the two would still be equivalent.kaneohe wrote: ↑Sat Feb 16, 2019 9:03 pmAssume max contribution were 10K (for math ease..........you can scale it up or down). Tax rate is 20% now/later. You have a 2K side fund in taxable.
1)Traditional............you put 10K in, pay no taxes on that income because of deduction so you still have 2K in side fund. N yrs later
both have doubled to 20K in traditional and 4K in taxable. You withdraw the funds and pay the 20% in taxes. You are left with
16K from the traditional . You have 2K gain in taxable and pay 0% in CG taxes and are left w/ 4K . The  is due to tax drag on the taxable account. Total is 20K
2)Roth..........you put 10K in, and use the 2K taxable acct to pay the 20% tax so are left only with a Roth. It two doubles in N yrs
and you are left w/ 20K after withdrawal from Roth (assumes you met the age 59.5/5 yr clock to w/d earnings w/o tax/penalty.
End result is that the accts are basically equal tho there may be a slight edge to the Roth due to taxation issues of gain on taxable acct
(maybe rate is 15% , not 0) and because of tax drag over the yrs.
Re: Help me with the Trad vs Roth 401k Math
See Maxing out your retirement accounts for the background, and either of the two spreadsheets linked there to calculate specific cases.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:25 pmSomeone noted the $3800 in taxes would get invested and grow at same rate in a taxable account (I alluded to this also in my post) and that is how they end up equal, but $3800 in a taxable account would not grow at the same rate as a taxdeferred account due to tax drag of interest and dividends, am I wrong?
Does that explain it?
Re: Help me with the Trad vs Roth 401k Math
justsomeguy2018,justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:20 pmNot exactly, I said this above: Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
By expound on that, what I mean is, show me how $3,800 in a taxable account has the same tax equivalency over 30 years as $3,800 in a taxdeferred 401k account. Taxable account incurs interest and dividends every year which will be taxed at different rates over time than the $3,800 growing taxdeferred until withdrawal, no?
1) Why that $3,800 cannot be invested in a Roth IRA?
2) Roth 401K should be compared with Trad. 401K with Roth IRAs.
3) Roth 401K will be a sure loser in that comparison.
KlangFool
Re: Help me with the Trad vs Roth 401k Math
Of course there will be a bit of tax drag on the $3800 assumed to have been grown tenfold to $38000. It will be slightly lower. For simplicity’s sake, assume 2.5% qualified dividends on the growth, taxes at 15% rate. The tax drag approximately would be ($38000  $3800) * 0.025 * .15 = $128
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
Re: Help me with the Trad vs Roth 401k Math
Assumptions have been that traditional is fully deductible. That may not always be true for some folks. That makes the case of lower tax rates later more complex.

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Re: Help me with the Trad vs Roth 401k Math
Sure, but what if you are maxing out the Roth 401k and also maxing out the Roth IRA. Even after paying the $3800 in taxes on the Roth 401k. The only place left for the $3800 to go is in taxable, which will have a tax drag and not be equivalent.KlangFool wrote: ↑Sat Feb 16, 2019 9:30 pmjustsomeguy2018,justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:20 pmNot exactly, I said this above: Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
By expound on that, what I mean is, show me how $3,800 in a taxable account has the same tax equivalency over 30 years as $3,800 in a taxdeferred 401k account. Taxable account incurs interest and dividends every year which will be taxed at different rates over time than the $3,800 growing taxdeferred until withdrawal, no?
1) Why that $3,800 cannot be invested in a Roth IRA?
2) Roth 401K should be compared with Trad. 401K with Roth IRAs.
3) Roth 401K will be a sure loser in that comparison.
KlangFool
Re: Help me with the Trad vs Roth 401k Math
And that's exactly what the wiki entry describes....justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:41 pmSure, but what if you are maxing out the Roth 401k and also maxing out the Roth IRA. Even after paying the $3800 in taxes on the Roth 401k. The only place left for the $3800 to go is in taxable, which will have a tax drag and not be equivalent.
Re: Help me with the Trad vs Roth 401k Math
You could just convert it to ROTH at some other time you had a lower rate.
The 19k Trad can become ROTH at anytime while it grows. The tax paid grows with the investment.
The 19k Trad can become ROTH at anytime while it grows. The tax paid grows with the investment.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." Stephen Hawking
Re: Help me with the Trad vs Roth 401k Math
Traditional 401k is deductible for everyone, not certain in what case the deductibility is phased out? Keep in mind the OP’s post did start off with assumption that the hypothetical tax rate is 20% on the contributions. The nearest tax brackets are 22% and 24% currently, and 25% tax bracket if we take 2017 tax rates; and for all folks in these brackets, 401k contributions are fully deductible.

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Re: Help me with the Trad vs Roth 401k Math
A few issues with this: presumably the $3800 should match the asset allocation in the 401k if the growth rates are equivalent. Yes if you have a 100% stock allocation that will be your tax rate, but not if you have x% in bonds or REIs as part of your AA.lakpr wrote: ↑Sat Feb 16, 2019 9:34 pmOf course there will be a bit of tax drag on the $3800 assumed to have been grown tenfold to $38000. It will be slightly lower. For simplicity’s sake, assume 2.5% qualified dividends on the growth, taxes at 15% rate. The tax drag approximately would be ($38000  $3800) * 0.025 * .15 = $128
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
Second, when you "draw down" the taxable account, the tax rate will be different (longterm capital gains rates) than drawing down a traditional 401k (taxed as ordinary income). Could be a positive or negative depending on your retirement annual income.
Third, your example of $128 tax drag is for one year's worth of tax savings; I realize the math at this point could get pretty complicated and I have just been using madeup numbers, but whatever the tax drag is would have to account for each year's savings (for simplicity sake, multiple $128 x 30). Still not a huge number but more than $128 for sure.
So it still doesn't seem applestoapples comparison.
 willthrill81
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Re: Help me with the Trad vs Roth 401k Math
You really need to input your numbers into the spreadsheet that FiveK linked to above. It takes all of that into account.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:52 pmA few issues with this: presumably the $3800 should match the asset allocation in the 401k if the growth rates are equivalent. Yes if you have a 100% stock allocation that will be your tax rate, but not if you have x% in bonds or REIs as part of your AA.lakpr wrote: ↑Sat Feb 16, 2019 9:34 pmOf course there will be a bit of tax drag on the $3800 assumed to have been grown tenfold to $38000. It will be slightly lower. For simplicity’s sake, assume 2.5% qualified dividends on the growth, taxes at 15% rate. The tax drag approximately would be ($38000  $3800) * 0.025 * .15 = $128
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
Second, when you "draw down" the taxable account, the tax rate will be different (longterm capital gains rates) than drawing down a traditional 401k (taxed as ordinary income). Could be a positive or negative depending on your retirement annual income.
Third, your example of $128 tax drag is for one year's worth of tax savings; I realize the math at this point could get pretty complicated and I am using madeup numbers, but whatever the tax drag is would have to account for each year's savings (for simplicity sake, multiple $128 x 30). Still not a huge number but more than $128 for sure.
So it still doesn't seem applestoapples comparison.
The simple answer is that taxdrag on a broad index fund like VTSAX isn't much. At the top tax brackets, it's only been .4% annually, and it would obviously be less than that in a lower tax bracket. Your marginal tax rate in retirement is the big variable; you might pay 0% longterm capital gains taxes then.
I suspect that maxing out the traditional 401k and investing the savings in a taxable account will win out compared to the Roth 401k.
Last edited by willthrill81 on Sat Feb 16, 2019 9:58 pm, edited 1 time in total.
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Re: Help me with the Trad vs Roth 401k Math
op Social Security will be reduced or impacted under Traditional. Roth is a winner because your compounded profits are not taxed.
Re: Help me with the Trad vs Roth 401k Math
justsomeguy2018,justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:41 pmSure, but what if you are maxing out the Roth 401k and also maxing out the Roth IRA. Even after paying the $3800 in taxes on the Roth 401k. The only place left for the $3800 to go is in taxable, which will have a tax drag and not be equivalent.KlangFool wrote: ↑Sat Feb 16, 2019 9:30 pmjustsomeguy2018,justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:20 pmNot exactly, I said this above: Is the assumption that the $3,800 paid in taxes on Roth, would have been invested in a Taxable account, so the growth would be equivalent? If so, expound on that for me.
By expound on that, what I mean is, show me how $3,800 in a taxable account has the same tax equivalency over 30 years as $3,800 in a taxdeferred 401k account. Taxable account incurs interest and dividends every year which will be taxed at different rates over time than the $3,800 growing taxdeferred until withdrawal, no?
1) Why that $3,800 cannot be invested in a Roth IRA?
2) Roth 401K should be compared with Trad. 401K with Roth IRAs.
3) Roth 401K will be a sure loser in that comparison.
KlangFool
There is a fundamental problem here. How much tax do you think someone with a taxable account, Roth IRA, and Trad. 401K will pay in the retirement? Especially, for someone with taxable account investment, they will most likely early retire.
My annual expense is 60K. I plan to early retire (before 62 years old) when I hit my number at 1.5 million. My portfolio is 45/45/10 (taxable/taxdeferred/Roth). I will keep about 2 years of expense in my emergency fund.
How much tax will I pay when I early retire? What do you think the answer will be?
KlangFool
Last edited by KlangFool on Sat Feb 16, 2019 10:02 pm, edited 1 time in total.
Re: Help me with the Trad vs Roth 401k Math
justsomeguy2018,justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:52 pmA few issues with this: presumably the $3800 should match the asset allocation in the 401k if the growth rates are equivalent. Yes if you have a 100% stock allocation that will be your tax rate, but not if you have x% in bonds or REIs as part of your AA.lakpr wrote: ↑Sat Feb 16, 2019 9:34 pmOf course there will be a bit of tax drag on the $3800 assumed to have been grown tenfold to $38000. It will be slightly lower. For simplicity’s sake, assume 2.5% qualified dividends on the growth, taxes at 15% rate. The tax drag approximately would be ($38000  $3800) * 0.025 * .15 = $128
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
You can put your bond into your taxadvantaged accounts.
KlangFool

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Re: Help me with the Trad vs Roth 401k Math
So it sounds like I may be correct? With the exception that, as someone else in the thread pointed out, sounds like the biggest variable would be whether you have to pay LTCG on the Taxable account withdrawals. That's helpful, and the kind of answer I was looking for.FiveK wrote: ↑Sat Feb 16, 2019 9:42 pmAnd that's exactly what the wiki entry describes....justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:41 pmSure, but what if you are maxing out the Roth 401k and also maxing out the Roth IRA. Even after paying the $3800 in taxes on the Roth 401k. The only place left for the $3800 to go is in taxable, which will have a tax drag and not be equivalent.
Re: Help me with the Trad vs Roth 401k Math
First two points are valid, it was an implicit assumption that the investments in all scenarios are identical. Now you are introducing additional variables where AA is different across taxable and tax deferred and Roth investments, the apples to apples comparison is already thrown out the window.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:52 pmA few issues with this: presumably the $3800 should match the asset allocation in the 401k if the growth rates are equivalent. Yes if you have a 100% stock allocation that will be your tax rate, but not if you have x% in bonds or REIs as part of your AA.lakpr wrote: ↑Sat Feb 16, 2019 9:34 pmOf course there will be a bit of tax drag on the $3800 assumed to have been grown tenfold to $38000. It will be slightly lower. For simplicity’s sake, assume 2.5% qualified dividends on the growth, taxes at 15% rate. The tax drag approximately would be ($38000  $3800) * 0.025 * .15 = $128
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
Second, when you "draw down" the taxable account, the tax rate will be different (longterm capital gains rates) than drawing down a traditional 401k (taxed as ordinary income). Could be a positive or negative depending on your retirement annual income.
Third, your example of $128 tax drag is for one year's worth of tax savings; I realize the math at this point could get pretty complicated and I have just been using madeup numbers, but whatever the tax drag is would have to account for each year's savings (for simplicity sake, multiple $128 x 30). Still not a huge number but more than $128 for sure.
So it still doesn't seem applestoapples comparison.
The $128 tax drag is computed on the entire growth for simplicity, look at my calculations carefully. It includes taxes only on dividends, all are assumed to be qualified. I did not include capital gains taxes, that would be an additional ($38000  $3800) * .15 = $5130. I did not include this LTCG tax because we were only considering final balances without regard to taxes yet, or so I thought.
Re: Help me with the Trad vs Roth 401k Math
OP,
Someone with a taxable account, Roth IRA, Emergency Fund, Trad. 401K can do this.
A) Spend from the emergency fund and Roth IRA contribution > this count as zero income.
B) Roth converts the Trad. 401K up to the standard deduction. This is taxed at 0%
C) Tax gain harvest or sell the taxable investment at the longterm capital gain tax rate of 0%.
Someone that are married can do this up to about 100K ((B) + (C) )per year. Aka, 0%.
Meanwhile, the Roth 401K person had paid 20+% taxes.
So, how could the Roth 401K's person win versus someone that pay 0%?
KlangFool
Someone with a taxable account, Roth IRA, Emergency Fund, Trad. 401K can do this.
A) Spend from the emergency fund and Roth IRA contribution > this count as zero income.
B) Roth converts the Trad. 401K up to the standard deduction. This is taxed at 0%
C) Tax gain harvest or sell the taxable investment at the longterm capital gain tax rate of 0%.
Someone that are married can do this up to about 100K ((B) + (C) )per year. Aka, 0%.
Meanwhile, the Roth 401K person had paid 20+% taxes.
So, how could the Roth 401K's person win versus someone that pay 0%?
KlangFool

 Posts: 334
 Joined: Wed Oct 03, 2018 8:11 pm
Re: Help me with the Trad vs Roth 401k Math
No, I am saying the AA is the same across all accounts. So the tax rate on the $3800 wouldn't be exactly 15%, part of it would be taxed as bonds, unless your AA is 100%.lakpr wrote: ↑Sat Feb 16, 2019 10:03 pmFirst two points are valid, it was an implicit assumption that the investments in all scenarios are identical. Now you are introducing additional variables where AA is different across taxable and tax deferred and Roth investments, the apples to apples comparison is already thrown out the window.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:52 pmA few issues with this: presumably the $3800 should match the asset allocation in the 401k if the growth rates are equivalent. Yes if you have a 100% stock allocation that will be your tax rate, but not if you have x% in bonds or REIs as part of your AA.lakpr wrote: ↑Sat Feb 16, 2019 9:34 pmOf course there will be a bit of tax drag on the $3800 assumed to have been grown tenfold to $38000. It will be slightly lower. For simplicity’s sake, assume 2.5% qualified dividends on the growth, taxes at 15% rate. The tax drag approximately would be ($38000  $3800) * 0.025 * .15 = $128
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
Second, when you "draw down" the taxable account, the tax rate will be different (longterm capital gains rates) than drawing down a traditional 401k (taxed as ordinary income). Could be a positive or negative depending on your retirement annual income.
Third, your example of $128 tax drag is for one year's worth of tax savings; I realize the math at this point could get pretty complicated and I have just been using madeup numbers, but whatever the tax drag is would have to account for each year's savings (for simplicity sake, multiple $128 x 30). Still not a huge number but more than $128 for sure.
So it still doesn't seem applestoapples comparison.
The $128 tax drag is computed on the entire growth for simplicity, look at my calculations carefully. It includes taxes only on dividends, all are assumed to be qualified. I did not include capital gains taxes, that would be an additional ($38000  $3800) * .15 = $5130. I did not include this LTCG tax because we were only considering final balances without regard to taxes yet, or so I thought.
At any rate, after reading the Wiki and thinking it through some more, I think I am good now with the explanations and understand it a little better now.
Final thought: the math only works if you actually invest the $3800 tax savings in similar growth investment, right? if you invest the $3800 in a 2% Savings Account, e.g., then the Roth might still come out ahead, right?

 Posts: 334
 Joined: Wed Oct 03, 2018 8:11 pm
Re: Help me with the Trad vs Roth 401k Math
Those are valid pointsKlangFool wrote: ↑Sat Feb 16, 2019 10:09 pmOP,
Someone with a taxable account, Roth IRA, Emergency Fund, Trad. 401K can do this.
A) Spend from the emergency fund and Roth IRA contribution > this count as zero income.
B) Roth converts the Trad. 401K up to the standard deduction. This is taxed at 0%
C) Tax gain harvest or sell the taxable investment at the longterm capital gain tax rate of 0%.
Someone that are married can do this up to about 100K ((B) + (C) )per year. Aka, 0%.
Meanwhile, the Roth 401K person had paid 20+% taxes.
So, how could the Roth 401K's person win versus someone that pay 0%?
KlangFool
 willthrill81
 Posts: 15908
 Joined: Thu Jan 26, 2017 3:17 pm
 Location: USA
Re: Help me with the Trad vs Roth 401k Math
Simple math shows this to be false.retire2022 wrote: ↑Sat Feb 16, 2019 9:58 pmRoth is a winner because your compounded profits are not taxed.
Take $10,000 deposited into a taxdeferred account, then doubled from returns. It's taxed at 10% in retirement. You'll be left with $18,000 ($10,000 x 2 X 90%).
Take $9,000 (subjected to 10% income tax) deposited into a Roth account, then doubled that from returns. In retirement, it will be worth $18,000 taxfree.
The key here is that the tax rate when the deposits and withdrawals were made was the same. If the tax rate when the contribution is made is higher than the withdrawal tax rate, the taxdeferred account will end up with more, and vice versa for the Roth account.
Yes, Social Security and other income streams can complicate the issue, but the basic idea of tax arbitrage is the primary driver of when type of account to use.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Re: Help me with the Trad vs Roth 401k Math
justsomeguy2018,justsomeguy2018 wrote: ↑Sat Feb 16, 2019 10:14 pm
Final thought: the math only works if you actually invest the $3800 tax savings in similar growth investment, right? if you invest the $3800 in a 2% Savings Account, e.g., then the Roth might still come out ahead, right?
The Roth investment could be a 2% saving account too.
KlangFool
Re: Help me with the Trad vs Roth 401k Math
OP,
I hope you get the point.
A) The Roth 401K person paid full marginal tax rate. He cannot get the money back from the IRS.
B) The Trad. 401K + Roth IRA+ taxable account person has maximum tax diversity. He could choose how much taxes to pay at any point in time. And, depending on how well he played the game. He could come up significant ahead.
For many of us with large taxable investment, besides no taxdrag, we use tax loss harvesting to deduct $3,000 from our taxable income every year. You cannot do this if you go with Roth 401K.
KlangFool
I hope you get the point.
A) The Roth 401K person paid full marginal tax rate. He cannot get the money back from the IRS.
B) The Trad. 401K + Roth IRA+ taxable account person has maximum tax diversity. He could choose how much taxes to pay at any point in time. And, depending on how well he played the game. He could come up significant ahead.
For many of us with large taxable investment, besides no taxdrag, we use tax loss harvesting to deduct $3,000 from our taxable income every year. You cannot do this if you go with Roth 401K.
KlangFool
 willthrill81
 Posts: 15908
 Joined: Thu Jan 26, 2017 3:17 pm
 Location: USA
Re: Help me with the Trad vs Roth 401k Math
I've heard several financial planners and accountants say that their clients would be significantly better off if their clients had taken such a route so that they had some choice as to where to pull their income from in a given year.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Re: Help me with the Trad vs Roth 401k Math
Probably.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 10:14 pmNo, I am saying the AA is the same across all accounts. So the tax rate on the $3800 wouldn't be exactly 15%, part of it would be taxed as bonds, unless your AA is 100%.lakpr wrote: ↑Sat Feb 16, 2019 10:03 pmFirst two points are valid, it was an implicit assumption that the investments in all scenarios are identical. Now you are introducing additional variables where AA is different across taxable and tax deferred and Roth investments, the apples to apples comparison is already thrown out the window.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:52 pmA few issues with this: presumably the $3800 should match the asset allocation in the 401k if the growth rates are equivalent. Yes if you have a 100% stock allocation that will be your tax rate, but not if you have x% in bonds or REIs as part of your AA.lakpr wrote: ↑Sat Feb 16, 2019 9:34 pmOf course there will be a bit of tax drag on the $3800 assumed to have been grown tenfold to $38000. It will be slightly lower. For simplicity’s sake, assume 2.5% qualified dividends on the growth, taxes at 15% rate. The tax drag approximately would be ($38000  $3800) * 0.025 * .15 = $128
Edited to add: Klangfool makes an excellent point about why we aren’t considering the $3800 to have been invested in a Roth IRA. But as my crude calculations above show, even if we did consider the amount to have been invested in the taxable account, the tax drag is minor.
Second, when you "draw down" the taxable account, the tax rate will be different (longterm capital gains rates) than drawing down a traditional 401k (taxed as ordinary income). Could be a positive or negative depending on your retirement annual income.
Third, your example of $128 tax drag is for one year's worth of tax savings; I realize the math at this point could get pretty complicated and I have just been using madeup numbers, but whatever the tax drag is would have to account for each year's savings (for simplicity sake, multiple $128 x 30). Still not a huge number but more than $128 for sure.
So it still doesn't seem applestoapples comparison.
The $128 tax drag is computed on the entire growth for simplicity, look at my calculations carefully. It includes taxes only on dividends, all are assumed to be qualified. I did not include capital gains taxes, that would be an additional ($38000  $3800) * .15 = $5130. I did not include this LTCG tax because we were only considering final balances without regard to taxes yet, or so I thought.
At any rate, after reading the Wiki and thinking it through some more, I think I am good now with the explanations and understand it a little better now.
Final thought: the math only works if you actually invest the $3800 tax savings in similar growth investment, right? if you invest the $3800 in a 2% Savings Account, e.g., then the Roth might still come out ahead, right?
It really comes down to assumptions. If your retirement marginal rate is 10% less, traditional will be better assuming you invest the upfront traditional tax savings elsewhere. If you are maxing your 401k, then the traditional tax saving would go into a taxable account using comparable funds and allocations. Since the tax savings are going into a taxable account, the long term returns will be a little bit lower, and that eats into that 10% marginal tax rate advantage a bit.
For a disciplined and educated Boglehead type investor keeping the traditional tax savings invested for several decades in a taxable account until retirement may be a reasonable assumption. But it might not be a good assumption for most "normal" investors. That tax savings may be spent on consumption, or invested in a house, or used to pay off a low rate mortgage.
There are many qualitative advantages to the Roth. You don't have to worry about tax gain or tax loss harvesting. Rebalancing is somewhat easier as you don't have to worry about capital gain realization. A retirement tax advantaged account tends to viewed as less accessible than a taxable account. You don't have to worry about taxable RMDs. You don't have to worry about tax ability of social security as it relates to RMDs. You don't have to worry about "stacking" issues of realized capital gains and rmds/traditional withdrawals. You don't have to worry about future tax increases.
If you aren't one to spend all of your rmds, depending on your portfolio, those funds post RMD will now be in a taxable account, whereas a roth stays tax advantaged.
So how much are all those intangibles worth in terms of marginal tax rate differential? Easily a few points. Maybe more. It is hard to quantify.
Re: Help me with the Trad vs Roth 401k Math
Did you read the wiki and try either of the spreadsheets?justsomeguy2018 wrote: ↑Sat Feb 16, 2019 10:03 pmSo it sounds like I may be correct?FiveK wrote: ↑Sat Feb 16, 2019 9:42 pmAnd that's exactly what the wiki entry describes....justsomeguy2018 wrote: ↑Sat Feb 16, 2019 9:41 pmSure, but what if you are maxing out the Roth 401k and also maxing out the Roth IRA. Even after paying the $3800 in taxes on the Roth 401k. The only place left for the $3800 to go is in taxable, which will have a tax drag and not be equivalent.
Re: Help me with the Trad vs Roth 401k Math
This doesn't address your math problem, but with a traditional 401k you can literally pay 0% taxes on it from contribution to withdrawal (through Roth conversions). You can't do that with a Roth 401k.
Roth is a loser compared to traditional.
Roth is a loser compared to traditional.

 Posts: 2397
 Joined: Tue Apr 01, 2014 11:41 am
Re: Help me with the Trad vs Roth 401k Math
An advantage of ROTH in retirement that has not been mentioned here yet: IRMAA. Those with moderately high income over 65 must pay higher Medicare "fees" (not an income tax, it says so in the definition), based on AGI. Federal incometaxfree municipal bond interest counts for AGI in this case, but ROTH withdrawals do not.
Most people over 65 pay $134/month for Medicare part B. Higher income people must pay higher fees, (not an income tax, just a higher fee paid to the US government) of up to $428/month, per person. This is over $7,000 per year extra for a married couple filing jointly. Using ROTH instead of traditional IRA can avoid this (notanincometax) fee, at least under current law.
Ralph
Most people over 65 pay $134/month for Medicare part B. Higher income people must pay higher fees, (not an income tax, just a higher fee paid to the US government) of up to $428/month, per person. This is over $7,000 per year extra for a married couple filing jointly. Using ROTH instead of traditional IRA can avoid this (notanincometax) fee, at least under current law.
Ralph
 TomatoTomahto
 Posts: 9840
 Joined: Mon Apr 11, 2011 1:48 pm
Re: Help me with the Trad vs Roth 401k Math
Thank you for listing the “intangibles,” although, as we approach the age of 70.5, they’re becoming more tangibleJBTX wrote: ↑Sat Feb 16, 2019 10:45 pmFor a disciplined and educated Boglehead type investor keeping the traditional tax savings invested for several decades in a taxable account until retirement may be a reasonable assumption. But it might not be a good assumption for most "normal" investors. That tax savings may be spent on consumption, or invested in a house, or used to pay off a low rate mortgage.
There are many qualitative advantages to the Roth. You don't have to worry about tax gain or tax loss harvesting. Rebalancing is somewhat easier as you don't have to worry about capital gain realization. A retirement tax advantaged account tends to viewed as less accessible than a taxable account. You don't have to worry about taxable RMDs. You don't have to worry about tax ability of social security as it relates to RMDs. You don't have to worry about "stacking" issues of realized capital gains and rmds/traditional withdrawals. You don't have to worry about future tax increases.
If you aren't one to spend all of your rmds, depending on your portfolio, those funds post RMD will now be in a taxable account, whereas a roth stays tax advantaged.
So how much are all those intangibles worth in terms of marginal tax rate differential? Easily a few points. Maybe more. It is hard to quantify.
Posters always refer to the initial RMD of less than 4%. But, by age 80, it’s more than 5%, and by 86, it’s more than 7%.
I have gone around in circles about putting my wife’s 401k into a Roth. My comfort is that, at worst I’m making a few percent mistake in tax calculations and at best, I have found a refuge from the drag of taxes on my heirs’ money. My regret is not doing this years ago.
Okay, I get it; I won't be political or controversial. The Earth is flat.
 welderwannabe
 Posts: 1135
 Joined: Fri Jun 16, 2017 8:32 am
Re: Help me with the Trad vs Roth 401k Math
I don't want to hit the third rail of politics here, but tax rates are pretty low right now. Are they going to stay this low forever? I don't think so.
Therefore I have started to split my contributions 50% ROTH 50% Traditional.
Therefore I have started to split my contributions 50% ROTH 50% Traditional.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
Re: Help me with the Trad vs Roth 401k Math
That's definitely not an apple to apple comparison. The reverse is also true  if you put the Roth in a MM account and invest taxable in Total Stock Market, Roth probably does much worse.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 10:14 pmFinal thought: the math only works if you actually invest the $3800 tax savings in similar growth investment, right? if you invest the $3800 in a 2% Savings Account, e.g., then the Roth might still come out ahead, right?
If you are maxing all taxadvantaged accounts and your contribution and withdrawal rates are the same, then Roth is better than Traditional due to taxable tax drag. For my situation, I computed the drag to be worth about 35%. So, in the OP example, where the difference between contribution and withdrawal tax rates is 10%, Traditional is still better.

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Re: Help me with the Trad vs Roth 401k Math
Sorry my point may not have been very clear  as someone else mentioned earlier in this thread, I am skeptical most people have the discipline to say "Hey this $x tax dollars I am saving from Traditional, I am going to invest it in a taxable account at the same AA/growth rate as my Traditional to be sure I come out ahead vs if I had invested in Roth instead, and to ensure I capitalize on my lower tax rate in retirement vs current Roth tax rate"rkhusky wrote: ↑Sun Feb 17, 2019 8:15 amThat's definitely not an apple to apple comparison. The reverse is also true  if you put the Roth in a MM account and invest taxable in Total Stock Market, Roth probably does much worse.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 10:14 pmFinal thought: the math only works if you actually invest the $3800 tax savings in similar growth investment, right? if you invest the $3800 in a 2% Savings Account, e.g., then the Roth might still come out ahead, right?
So, if instead, the extra tax savings money just sits in a 2% yield savings account (full disclosure: I am currently doing this for now, but not for long), then the math does not necessarily work out that the Traditional still beats the Roth (assuming the market can soundly beat a 2% return or whatever the yield in the savings account is). And depending on what the Roth growth rate ends up being and the overall differences in pre and post retirement rates (in my example I used 10x growth rate and 10% vs 20% tax rate; a 2x growth rate and 10% vs 25% tax rate would not yield same conclusion).

 Posts: 250
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Re: Help me with the Trad vs Roth 401k Math
Don't want to derail, but how is it possible to convert from a traditional 401k to a Roth w/out paying Federal income tax?KlangFool wrote: ↑Sat Feb 16, 2019 10:09 pm
A) Spend from the emergency fund and Roth IRA contribution > this count as zero income.
B) Roth converts the Trad. 401K up to the standard deduction. This is taxed at 0%
C) Tax gain harvest or sell the taxable investment at the longterm capital gain tax rate of 0%.
KlangFool

 Posts: 334
 Joined: Wed Oct 03, 2018 8:11 pm
Re: Help me with the Trad vs Roth 401k Math
I am not 100% sure but I think it is based on converting $24,000 (current standard deduction amount) and assuming no additional income (e.g. perhaps using Roth or savings for that year's expenses).nick evets wrote: ↑Sun Feb 17, 2019 9:01 amDon't want to derail, but how is it possible to convert from a traditional 401k to a Roth w/out paying Federal income tax?KlangFool wrote: ↑Sat Feb 16, 2019 10:09 pm
A) Spend from the emergency fund and Roth IRA contribution > this count as zero income.
B) Roth converts the Trad. 401K up to the standard deduction. This is taxed at 0%
C) Tax gain harvest or sell the taxable investment at the longterm capital gain tax rate of 0%.
KlangFool
The thought is you ladder these, so that every 5years you have Roth monies available and pay no tax on the conversion. Pretty interesting stuff really.
Re: Help me with the Trad vs Roth 401k Math
have no other income ......or low enough income that adding the conversion is still below your deduction .nick evets wrote: ↑Sun Feb 17, 2019 9:01 amDon't want to derail, but how is it possible to convert from a traditional 401k to a Roth w/out paying Federal income tax?KlangFool wrote: ↑Sat Feb 16, 2019 10:09 pm
A) Spend from the emergency fund and Roth IRA contribution > this count as zero income.
B) Roth converts the Trad. 401K up to the standard deduction. This is taxed at 0%
C) Tax gain harvest or sell the taxable investment at the longterm capital gain tax rate of 0%.
KlangFool

 Posts: 250
 Joined: Wed Mar 01, 2017 5:40 pm
Re: Help me with the Trad vs Roth 401k Math
Whoa...that IS interesting. Thanks all  I'm not sure my wife and I would be able to live for a year, yet, w/out taxable income, but the idea is cool. Please forgive the interruption.
Re: Help me with the Trad vs Roth 401k Math
Most people probably just spend their tax savings. So, for those people who need to be forced to save, then Roth is better. They probably also overcontribute to their taxes so they get a big refund. If that is what it takes to save, they should go for it, even if it is suboptimal.justsomeguy2018 wrote: ↑Sun Feb 17, 2019 8:59 amSorry my point may not have been very clear  as someone else mentioned earlier in this thread, I am skeptical most people have the discipline to say "Hey this $x tax dollars I am saving from Traditional, I am going to invest it in a taxable account at the same AA/growth rate as my Traditional to be sure I come out ahead vs if I had invested in Roth instead, and to ensure I capitalize on my lower tax rate in retirement vs current Roth tax rate"
So, if instead, the extra tax savings money just sits in a 2% yield savings account (full disclosure: I am currently doing this for now, but not for long), then the math does not necessarily work out that the Traditional still beats the Roth (assuming the market can soundly beat a 2% return or whatever the yield in the savings account is). And depending on what the Roth growth rate ends up being and the overall differences in pre and post retirement rates (in my example I used 10x growth rate and 10% vs 20% tax rate; a 2x growth rate and 10% vs 25% tax rate would not yield same conclusion).
Re: Help me with the Trad vs Roth 401k Math
nick evets,nick evets wrote: ↑Sun Feb 17, 2019 9:25 amWhoa...that IS interesting. Thanks all  I'm not sure my wife and I would be able to live for a year, yet, w/out taxable income, but the idea is cool. Please forgive the interruption.
A) If you early retire, you should keep 1 to 2 years of the emergency fund. So, if you only spend from your emergency fund, what is your taxable income? Aka, spending cash.
B) If you are married, you have 10K to 12K of Roth IRA contribution every year. After 10 to 20 years, you have 100K to 200K worth of IRA contribution that you can spend without generating taxable income. So, how many years can you live on 100K to 200K worth of Roth IRA's contribution?
KlangFool
Re: Help me with the Trad vs Roth 401k Math
rkhusky,rkhusky wrote: ↑Sun Feb 17, 2019 9:48 amMost people probably just spend their tax savings. So, for those people who need to be forced to save, then Roth is better. They probably also overcontribute to their taxes so they get a big refund. If that is what it takes to save, they should go for it, even if it is suboptimal.justsomeguy2018 wrote: ↑Sun Feb 17, 2019 8:59 amSorry my point may not have been very clear  as someone else mentioned earlier in this thread, I am skeptical most people have the discipline to say "Hey this $x tax dollars I am saving from Traditional, I am going to invest it in a taxable account at the same AA/growth rate as my Traditional to be sure I come out ahead vs if I had invested in Roth instead, and to ensure I capitalize on my lower tax rate in retirement vs current Roth tax rate"
So, if instead, the extra tax savings money just sits in a 2% yield savings account (full disclosure: I am currently doing this for now, but not for long), then the math does not necessarily work out that the Traditional still beats the Roth (assuming the market can soundly beat a 2% return or whatever the yield in the savings account is). And depending on what the Roth growth rate ends up being and the overall differences in pre and post retirement rates (in my example I used 10x growth rate and 10% vs 20% tax rate; a 2x growth rate and 10% vs 25% tax rate would not yield same conclusion).
If those people do a Trad. 401K and Roth IRA combination, they still save and invest money.
KlangFool
Re: Help me with the Trad vs Roth 401k Math
justsomeguy2018,justsomeguy2018 wrote: ↑Sun Feb 17, 2019 8:59 amSorry my point may not have been very clear  as someone else mentioned earlier in this thread, I am skeptical most people have the discipline to say "Hey this $x tax dollars I am saving from Traditional, I am going to invest it in a taxable account at the same AA/growth rate as my Traditional to be sure I come out ahead vs if I had invested in Roth instead, and to ensure I capitalize on my lower tax rate in retirement vs current Roth tax rate"rkhusky wrote: ↑Sun Feb 17, 2019 8:15 amThat's definitely not an apple to apple comparison. The reverse is also true  if you put the Roth in a MM account and invest taxable in Total Stock Market, Roth probably does much worse.justsomeguy2018 wrote: ↑Sat Feb 16, 2019 10:14 pmFinal thought: the math only works if you actually invest the $3800 tax savings in similar growth investment, right? if you invest the $3800 in a 2% Savings Account, e.g., then the Roth might still come out ahead, right?
This is a strawman that you created in order to support your point. The best combination is Trad. 401K and Roth IRAs. If someone can save beyond that, they are not normal people. Then, you do not need to worry about their discipline of investing in the taxable account.
For a single Trad. 401K + 2 X Roth IRAs = 19K + 12K = 31K
2 X 401K + 2 Roth IRAs = 38K + 12K = 50K
KlangFool
 willthrill81
 Posts: 15908
 Joined: Thu Jan 26, 2017 3:17 pm
 Location: USA
Re: Help me with the Trad vs Roth 401k Math
Many, probably most, of those who employ this strategy have significant taxable accounts as well. These can provide significant taxfree income (remember that longterm capital gains taxes can be 0%) while you're doing Roth conversions.nick evets wrote: ↑Sun Feb 17, 2019 9:25 amWhoa...that IS interesting. Thanks all  I'm not sure my wife and I would be able to live for a year, yet, w/out taxable income, but the idea is cool.
Using a combination of filling up the standard deduction with withdrawals from taxdeferred accounts, paying for medical expenses taxfree via HSA withdrawals, and covering the rest with withdrawals from taxable and Roth accounts, it's pretty easy to craft a realistic scenario where a marriedfilingjointly couple has $100k of income in retirement that they pay no taxes on at all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Re: Help me with the Trad vs Roth 401k Math
willthrill81,willthrill81 wrote: ↑Sun Feb 17, 2019 10:43 amMany, probably most, of those who employ this strategy have significant taxable accounts as well. These can provide significant taxfree income (remember that longterm capital gains taxes can be 0%) while you're doing Roth conversions.nick evets wrote: ↑Sun Feb 17, 2019 9:25 amWhoa...that IS interesting. Thanks all  I'm not sure my wife and I would be able to live for a year, yet, w/out taxable income, but the idea is cool.
Using a combination of filling up the standard deduction with withdrawals from taxdeferred accounts, paying for medical expenses taxfree via HSA withdrawals, and covering the rest with withdrawals from taxable and Roth accounts, it's pretty easy to craft a realistic scenario where a marriedfilingjointly couple has $100k of income expense in retirement that they pay no taxes on at all.
I would like to change one word in your post.
KlangFool