Retirement Planning 401k Traditional /401 Roth

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AJAY24
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Retirement Planning 401k Traditional /401 Roth

Post by AJAY24 » Thu Aug 08, 2019 9:53 am

I can't decide if I should continue with Roth 401k or a combination or entirely traditional.

I am contributing the maximum to 401k, $19,000/ year, for the past couple years mostly Roth. Company match is 4%

My current 401k balance is $292,000
$119,000 in Roth (41%)
$173,000 in Traditional (59%)


Age: 33
Salary: $140,000
Not married/no children
No debt
Renting
$40k in HYSA
$135k in Stocks/ETFs

If I stick with Roth 401k, I am over the MAGI limit for Roth IRA. I won't be out the 24% Fed tax bracket anytime soon with a max of $157k.

Option 1: 19k to Roth401k, 0k to Roth IRA
Option 2: 19k to Traditional 401k, $6k to Roth IRA

What am I missing here or not taking into account? Should I go with Option 2 until I phase out entirely Roth IRA potential then switch back to Option 1 after a few more years.
Last edited by AJAY24 on Fri Aug 09, 2019 9:52 am, edited 4 times in total.

nolesrule
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Re: Retirement Planning 401k Traditional /401 Roth

Post by nolesrule » Thu Aug 08, 2019 11:27 am

In your tax bracket, I would think you'd want to contribute to Traditional to 401k. Do you have any Traditional 401k or IRA money already?

There is also the possibility Backdoor Roth when your MAGI is too high fordirect Roth contributions.

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FiveK
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Re: Retirement Planning 401k Traditional /401 Roth

Post by FiveK » Thu Aug 08, 2019 2:43 pm

nolesrule wrote:
Thu Aug 08, 2019 11:27 am
In your tax bracket, I would think you'd want to contribute to Traditional to 401k. Do you have any Traditional 401k or IRA money already?

There is also the possibility Backdoor Roth when your MAGI is too high fordirect Roth contributions.
+1

AJAY24, what marginal rate do you expect to pay on withdrawals from traditional accounts? Compare that with saving 24% on traditional contributions now.

Flyer24
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Re: Retirement Planning 401k Traditional /401 Roth

Post by Flyer24 » Thu Aug 08, 2019 3:08 pm

Option 2

ExitStageLeft
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Re: Retirement Planning 401k Traditional /401 Roth

Post by ExitStageLeft » Thu Aug 08, 2019 3:24 pm

Welcome to the forum!

It seems your concern has to do with the fact that you are about to enter the phase-out range for direct Roth IRA contributions. You can continue to make maximum contributions using the backdoor Roth method. Using that method you can fill your Roth IRA every year even if your MAGI exceeds the phase-out limit.

Edit to add: Read the cautions in that wiki link about the pro rata rule for traditional IRA distributions. The bottom line is that a backdoor Roth is viable only when you don't have any tax-deferred basis in your traditional IRA.

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Thu Aug 08, 2019 3:29 pm

A single filer making 130K should do traditional 401k, no brainer. Only exception would be if you expect that salary to increase greatly or will have a significant pension.

megabad
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Re: Retirement Planning 401k Traditional /401 Roth

Post by megabad » Thu Aug 08, 2019 3:42 pm

AJAY24 wrote:
Thu Aug 08, 2019 9:53 am
What am I missing here or not taking into account? Should I go with Option 2 until I phase out entirely Roth IRA potential then switch back to Option 1 after a few more years.
Agree with ExitStageLeft, don't let the phase out play a part in this decision since you have backdoor (with current law). If you are not able to max both Roth 401k and Roth IRA, your predicted future tax situation should drive this decision. I personally strongly favor Roth for now (I guess Option 1 assuming your 401k fees are low) given the information you provided. If you are planning to get married, retire early, or have a career catapult coming, then that might change my opinion. I think any predictions of your future will be cloudy, but you will be the best at it so my opinion isn't super relevant.

retiredjg
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Re: Retirement Planning 401k Traditional /401 Roth

Post by retiredjg » Thu Aug 08, 2019 4:15 pm

AJAY24 wrote:
Thu Aug 08, 2019 9:53 am
Option 1: 19k to Roth401k, 0k to Roth IRA
Option 2: 19k to Traditional 401k, $6k to Roth IRA
Your goal should be option 2 in my opinion. If you cannot save that much, make it something like 18k to Traditional 401k and $5k to Roth IRA.

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Watty
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Re: Retirement Planning 401k Traditional /401 Roth

Post by Watty » Thu Aug 08, 2019 6:40 pm

02nz wrote:
Thu Aug 08, 2019 3:29 pm
A single filer making 130K should do traditional 401k, no brainer. Only exception would be if you expect that salary to increase greatly or will have a significant pension.
+1000

A couple of reasons;

1) You may be able to do Roth conversions later in a lower tax bracket.

2) Even if you don't think it will happen you may be married and filing a joint return when you are retired.

3) You are only 33 and you are a long way from retiring in a high tax brackets. Especially when I was in my 50's I saw a lot of people my age run into career, health, or general life setbacks which impacted their earnings and retirement savings.

4) When you get your 50's and maybe have a paid off house you may realize that you can retire very comfortably in a lower tax bracket so you may retire years earlier than your are planning.


One possible exception could be if you live in a state with no state income tax but you are pretty sure that you will retire in some other state which does have a state income tax, then the Roth might be more favorable but even then it would still not be an easy choice.

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Thu Aug 08, 2019 6:48 pm

megabad wrote:
Thu Aug 08, 2019 3:42 pm
AJAY24 wrote:
Thu Aug 08, 2019 9:53 am
What am I missing here or not taking into account? Should I go with Option 2 until I phase out entirely Roth IRA potential then switch back to Option 1 after a few more years.
Agree with ExitStageLeft, don't let the phase out play a part in this decision since you have backdoor (with current law). If you are not able to max both Roth 401k and Roth IRA, your predicted future tax situation should drive this decision. I personally strongly favor Roth for now (I guess Option 1 assuming your 401k fees are low) given the information you provided. If you are planning to get married, retire early, or have a career catapult coming, then that might change my opinion. I think any predictions of your future will be cloudy, but you will be the best at it so my opinion isn't super relevant.
Why would you strongly favor Roth for OP's situation? I wouldn't pay 24% federal income tax if there's a chance at least some of it could instead be taxed at 0 to 12 or 15% in retirement. And why would you change your opinion if OP has a "career catapult" coming? If the OP expects a large increase in income, that would be an argument for Roth now and traditional later (although I'd still favor traditional given what we know).

megabad
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Re: Retirement Planning 401k Traditional /401 Roth

Post by megabad » Thu Aug 08, 2019 7:01 pm

02nz wrote:
Thu Aug 08, 2019 6:48 pm
Why would you strongly favor Roth for OP's situation? I wouldn't pay 24% federal income tax if there's a chance at least some of it could instead be taxed at 0 to 12 or 15% in retirement. And why would you change your opinion if OP has a "career catapult" coming? If the OP expects a large increase in income, that would be an argument for Roth now and traditional later (although I'd still favor traditional given what we know).
OP is single and saving 19k per year. OP will be well into what will be 25% bracket in retirement if he works until normal retirement age based on rather conservative assumptions for growth assuming current law holds. I can't expand further as to why I would prefer Roth (against forum policy) but that illustrates obvious potential tax savings. In such cases, I almost always prefer front loading the Roth early and then switching to tax deferred later.

Sorry, my career catapult comment wasn't clear. I meant that, if OP moves to a job with significantly higher pay (career catapult) then I would reconsider my Roth preference.

Once again, I think OP should make this call as I think that he/she can predict the specific situation better than outsiders in most cases.

KFBR392
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Re: Retirement Planning 401k Traditional /401 Roth

Post by KFBR392 » Thu Aug 08, 2019 7:25 pm

02nz wrote:
Thu Aug 08, 2019 3:29 pm
A single filer making 130K should do traditional 401k, no brainer. Only exception would be if you expect that salary to increase greatly or will have a significant pension.
Why is this a no-brainer? My understanding was Roth is generally better unless it knocks you into a higher tax bracket because the growth is tax-free. Total newb here so my apologies if this has been explained a million times. (I checked the Wiki.) Thanks.

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FiveK
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Re: Retirement Planning 401k Traditional /401 Roth

Post by FiveK » Thu Aug 08, 2019 7:43 pm

KFBR392 wrote:
Thu Aug 08, 2019 7:25 pm
(I checked the Wiki.)
Did you find Traditional versus Roth - Bogleheads?

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Thu Aug 08, 2019 7:46 pm

megabad wrote:
Thu Aug 08, 2019 7:01 pm
02nz wrote:
Thu Aug 08, 2019 6:48 pm
Why would you strongly favor Roth for OP's situation? I wouldn't pay 24% federal income tax if there's a chance at least some of it could instead be taxed at 0 to 12 or 15% in retirement. And why would you change your opinion if OP has a "career catapult" coming? If the OP expects a large increase in income, that would be an argument for Roth now and traditional later (although I'd still favor traditional given what we know).
OP is single and saving 19k per year. OP will be well into what will be 25% bracket in retirement if he works until normal retirement age based on rather conservative assumptions for growth assuming current law holds. I can't expand further as to why I would prefer Roth (against forum policy) but that illustrates obvious potential tax savings. In such cases, I almost always prefer front loading the Roth early and then switching to tax deferred later.

Sorry, my career catapult comment wasn't clear. I meant that, if OP moves to a job with significantly higher pay (career catapult) then I would reconsider my Roth preference.

Once again, I think OP should make this call as I think that he/she can predict the specific situation better than outsiders in most cases.
I disagree with the bolded portion. OP didn't give his 401k balance or employer match, but let's say he has a 100K traditional balance, and that the employer match is 7K a year (which will be traditional regardless). If he continues to make all-Roth contributions, and assuming 5% real growth (rather optimistic), by age 65 he'll have just over $1M traditional balance, in today's dollars. (I'm using today's dollars because tax brackets are also indexed for inflation.) RMDs will start at about $38,000/year in today's dollars. Even as a single filer, that's well short of the 22/25% tax bracket when you account for the standard deduction.

Of course the real picture is more complicated, with SS income, possibility of marriage, possibility of early retirement, etc. But the point is that the OP has a good chance of paying less than 24% federal income tax on at least some of this money in retirement, and that's an argument for at least some traditional (I would say mostly traditional) now. Of all the traditional vs Roth queries we get here, there aren't many that more clearly favor traditional.
Last edited by 02nz on Thu Aug 08, 2019 7:51 pm, edited 1 time in total.

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Thu Aug 08, 2019 7:50 pm

KFBR392 wrote:
Thu Aug 08, 2019 7:25 pm
02nz wrote:
Thu Aug 08, 2019 3:29 pm
A single filer making 130K should do traditional 401k, no brainer. Only exception would be if you expect that salary to increase greatly or will have a significant pension.
Why is this a no-brainer? My understanding was Roth is generally better unless it knocks you into a higher tax bracket because the growth is tax-free. Total newb here so my apologies if this has been explained a million times. (I checked the Wiki.) Thanks.
The growth is tax-free for traditional, too; there's no difference there. As the Wiki points out, it comes down to what tax rate you would pay on that chunk of money now, vs what you expect to pay on that same chunk of money (including growth) when withdrawn in retirement, if deferring taxes. Single high-earners like OP should generally defer.

megabad
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Re: Retirement Planning 401k Traditional /401 Roth

Post by megabad » Thu Aug 08, 2019 7:58 pm

02nz wrote:
Thu Aug 08, 2019 7:46 pm
OP didn't give his 401k balance or employer match, but let's say he has a 100K traditional balance, and that the employer match is 7K a year (which will be traditional regardless). If he continues to make all-Roth contributions, and assuming 5% real growth (rather optimistic), by age 65 he'll have just over $1M traditional balance, in today's dollars. (I'm using today's dollars because tax brackets are also indexed for inflation.) RMDs will start at about $38,000/year in today's dollars. Even as a single filer, that's well short of the 22/25% tax bracket when you account for the standard deduction.

Of course the real picture is more complicated, with SS income, possibility of marriage, possibility of early retirement, etc. But the point is that the OP has a good chance of paying less than 24% federal income tax on at least some of this money in retirement, and that's an argument for at least some traditional (I would say mostly traditional) now. Of all the traditional vs Roth queries we get here, there aren't many that more clearly favor traditional.
I don't agree with your numbers (the RMD would be ~49k by my math), but it doesn't matter since the SS alone would put him well into the next bracket. My statement was--under current tax law, given all the assumptions, Roth would have a better outcome than traditional. And that is certainly the case. With these assumptions, OP has no chance of paying less than 24% tax bracket so I don't understand your statement there. However, the assumptions make all the difference and are of questionable accuracy. If your point is using different assumptions, the outcome can change--I agree and it is likely many of these assumptions will change with time. Either way could work out better; I just prefer Roth.

retiredjg
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Re: Retirement Planning 401k Traditional /401 Roth

Post by retiredjg » Thu Aug 08, 2019 8:39 pm

KFBR392 wrote:
Thu Aug 08, 2019 7:25 pm
Why is this a no-brainer? My understanding was Roth is generally better unless it knocks you into a higher tax bracket because the growth is tax-free. Total newb here so my apologies if this has been explained a million times. (I checked the Wiki.) Thanks.
This is one of those things that "everybody knows", but isn't correct. Imagine this.

You have $1,000 to invest. If you put it in traditional IRA and it doubles in value, you then have $2,000. If that is taxed at 25% in retirement, you end up with $1,500 to spend.

You have the same $1,000 to invest, but decide to put it into Roth IRA instead. Since you are in the 25% bracket, you only get to invest $750 and the other $250 goest o taxes. That $750 then doubles in value and you end up with $1,500 to spend in retirement.

As you can see, Roth is not "better" than traditional (aka tax deferred). In fact if you can defer taxes at 25% and later fall into a tax rate lower than 25%, you end up with MORE MONEY by using traditional (deferring taxes) while you are in accumulation mode.

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Thu Aug 08, 2019 8:51 pm

megabad wrote:
Thu Aug 08, 2019 7:58 pm
02nz wrote:
Thu Aug 08, 2019 7:46 pm
OP didn't give his 401k balance or employer match, but let's say he has a 100K traditional balance, and that the employer match is 7K a year (which will be traditional regardless). If he continues to make all-Roth contributions, and assuming 5% real growth (rather optimistic), by age 65 he'll have just over $1M traditional balance, in today's dollars. (I'm using today's dollars because tax brackets are also indexed for inflation.) RMDs will start at about $38,000/year in today's dollars. Even as a single filer, that's well short of the 22/25% tax bracket when you account for the standard deduction.

Of course the real picture is more complicated, with SS income, possibility of marriage, possibility of early retirement, etc. But the point is that the OP has a good chance of paying less than 24% federal income tax on at least some of this money in retirement, and that's an argument for at least some traditional (I would say mostly traditional) now. Of all the traditional vs Roth queries we get here, there aren't many that more clearly favor traditional.
I don't agree with your numbers (the RMD would be ~49k by my math), but it doesn't matter since the SS alone would put him well into the next bracket. My statement was--under current tax law, given all the assumptions, Roth would have a better outcome than traditional. And that is certainly the case. With these assumptions, OP has no chance of paying less than 24% tax bracket so I don't understand your statement there. However, the assumptions make all the difference and are of questionable accuracy. If your point is using different assumptions, the outcome can change--I agree and it is likely many of these assumptions will change with time. Either way could work out better; I just prefer Roth.
Highest possible SS benefit at FRA today is about $34K. At most 85% of that is taxable, or about $29K. Add to that your $49K from the traditional balance, and you're at $78K of income, or $67 taxable after standard deduction. That is well within today's 22% tax bracket for single filers, which would revert to 25% if the law stays as-is. In that case, Roth comes out ahead by a tiny amount (1% difference in federal tax rate).

But if any of the following happens, traditional comes out ahead, possibly by quite a lot:
- OP moves to a state with a lower or no state income tax, like FL or TX;
- OP gets married;
- OP retires early; and/or
- OP defers SS until 70, and uses the 5-6 years between retirement at age 65 and start of SS and RMDs to withdraw from the traditional balance or do Roth conversions at attractive rates). Today, a married couple with no other income can withdraw/convert about $100K a year and pay an average of just 9% federal income tax. So that's potentially $500-$600K that they can withdraw/convert at a far better rate than 24%, while also reducing the RMD impact later.

megabad
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Re: Retirement Planning 401k Traditional /401 Roth

Post by megabad » Thu Aug 08, 2019 9:00 pm

02nz wrote:
Thu Aug 08, 2019 8:51 pm
But if any of the following happens, traditional comes out ahead, possibly by quite a lot:
- OP moves to a state with a lower or no state income tax, like FL or TX;
- OP gets married;
- OP retires early; and/or
- OP defers SS until 70, and uses the 5-6 years between retirement at age 65 and start of SS and RMDs to withdraw from the traditional balance or do Roth conversions at attractive rates). Today, a married couple with no other income can withdraw/convert about $100K a year and pay an average of just 9% federal income tax. So that's potentially $500-$600K that they can withdraw/convert at a far better rate than 24%, while also reducing the RMD impact later.
As I said, if you change the assumptions, the outcome changes--I agree. OP will need to decide the likelihood of the items you posted and more. There are a multitude of possibilities that would result in Roth coming out ahead by "quite a lot" as well. I was merely presenting a counterargument to dispel the notion that this is an obvious "no-brainer" in all cases. There are very few "no-brainers" when predicting the future.

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Thu Aug 08, 2019 9:08 pm

megabad wrote:
Thu Aug 08, 2019 9:00 pm
02nz wrote:
Thu Aug 08, 2019 8:51 pm
But if any of the following happens, traditional comes out ahead, possibly by quite a lot:
- OP moves to a state with a lower or no state income tax, like FL or TX;
- OP gets married;
- OP retires early; and/or
- OP defers SS until 70, and uses the 5-6 years between retirement at age 65 and start of SS and RMDs to withdraw from the traditional balance or do Roth conversions at attractive rates). Today, a married couple with no other income can withdraw/convert about $100K a year and pay an average of just 9% federal income tax. So that's potentially $500-$600K that they can withdraw/convert at a far better rate than 24%, while also reducing the RMD impact later.
As I said, if you change the assumptions, the outcome changes--I agree. OP will need to decide the likelihood of the items you posted and more. There are a multitude of possibilities that would result in Roth coming out ahead by "quite a lot" as well. I was merely presenting a counterargument to dispel the notion that this is an obvious "no-brainer" in all cases. There are very few "no-brainers" when predicting the future.
I'm not trying to predict the future. But when deciding between the certainty of paying 24% tax today or deferring and quite possibly paying less, maybe even just 9% on a large chunk of it, in my book that's a no-brainer.

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FiveK
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Re: Retirement Planning 401k Traditional /401 Roth

Post by FiveK » Thu Aug 08, 2019 9:08 pm

megabad wrote:
Thu Aug 08, 2019 7:58 pm
However, the assumptions make all the difference....
Yup.

Asking the OPs in these cases to list what they are assuming can be useful. At least then one can check the conclusions against the assumptions for consistency.

Supurdueper
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Re: Retirement Planning 401k Traditional /401 Roth

Post by Supurdueper » Thu Aug 08, 2019 9:23 pm

What I don’t see posted are the likelihood of what tax brackets will be. Single in 2017 the OP would be in 25% tax bracket at $40k. In 2019 he’s in the 24% bracket now with $130k. The tax cut and job act is set to end in a few years. Wouldn’t it be advantageous by 1% already to do the Roth today?

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FiveK
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Re: Retirement Planning 401k Traditional /401 Roth

Post by FiveK » Thu Aug 08, 2019 9:50 pm

Supurdueper wrote:
Thu Aug 08, 2019 9:23 pm
What I don’t see posted are the likelihood of what tax brackets will be.
That's because
a) nobody knows, and
b) discussions of proposed laws or regulations are prohibited here.
Single in 2017 the OP would be in 25% tax bracket at $40k. In 2019 he’s in the 24% bracket now with $130k. The tax cut and job act is set to end in a few years. Wouldn’t it be advantageous by 1% already to do the Roth today?
The primary comparison isn't between tax rates in different contribution years, but rather between the contribution tax rate vs. the withdrawal tax rate.

Supurdueper
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Re: Retirement Planning 401k Traditional /401 Roth

Post by Supurdueper » Fri Aug 09, 2019 2:41 am

I read the board regulations and it’s not against policy to discuss enacted laws that may affect the investor. The Tax Cut and Jobs Act in regards to the lowered income tax brackets is set to expire on 12/31/25. I’d recommend the OP look historically at tax brackets.

Also to consider is OPs human behavior. Will OP immediately invest his taxes saved with a traditional?

nolesrule
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Re: Retirement Planning 401k Traditional /401 Roth

Post by nolesrule » Fri Aug 09, 2019 8:37 am

FiveK wrote:
Thu Aug 08, 2019 9:50 pm
Supurdueper wrote:
Thu Aug 08, 2019 9:23 pm
What I don’t see posted are the likelihood of what tax brackets will be.
That's because
a) nobody knows, and
b) discussions of proposed laws or regulations are prohibited here.
Single in 2017 the OP would be in 25% tax bracket at $40k. In 2019 he’s in the 24% bracket now with $130k. The tax cut and job act is set to end in a few years. Wouldn’t it be advantageous by 1% already to do the Roth today?
The primary comparison isn't between tax rates in different contribution years, but rather between the contribution tax rate vs. the withdrawal tax rate.
+1. And the withdrawal tax rate should be on the contribution itself on top of current balances, not on current balance plus the sum of all expected future year contributions. You'll decided on those future year contributions individually as they happen.

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AJAY24
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Re: Retirement Planning 401k Traditional /401 Roth

Post by AJAY24 » Fri Aug 09, 2019 9:04 am

02nz wrote:
Thu Aug 08, 2019 3:29 pm
A single filer making 130K should do traditional 401k, no brainer. Only exception would be if you expect that salary to increase greatly or will have a significant pension.
I added some balances and additional information. But why is it a no brainer?

firebirdparts
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Re: Retirement Planning 401k Traditional /401 Roth

Post by firebirdparts » Fri Aug 09, 2019 9:07 am

No brainer, sort of? Because of your current tax bracket.

Roth and Traditional 401k, you pay tax once either way, and if it was the same fraction either time, it would work out the same. If people argue with you about this, please don't listen to them.
There are two things to think about:
1. If your incremental tax rate before and after is different, it'll make a difference.
2. A maxed out Roth 401k is simply more money than a maxed out traditional 401k, because the dollar figure limit is the same. This also makes a difference. $19,000 with the taxes pre-paid is more money than $19,000 with taxes due. Simple.

Your current incremental tax rate is high, but you max out the contribution, so these two affects are offsetting for you. In my opinion, #1 is a bigger effect for you. If I were you, I would max out the traditional and then pile on a Roth IRA also. To get a real answer you would have to imagine doing your taxes 40 years from now.

I have met/seen/heard very few people who actually did the math. Don't expect much. You have so much money now, you are going to be extremely wealthy later on, no matter what you do. Eventually, you will want to have a lot of money in Roth because of extreme wealth. My opinion.

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Fri Aug 09, 2019 9:19 am

AJAY24 wrote:
Fri Aug 09, 2019 9:04 am
02nz wrote:
Thu Aug 08, 2019 3:29 pm
A single filer making 130K should do traditional 401k, no brainer. Only exception would be if you expect that salary to increase greatly or will have a significant pension.
I added some balances and additional information. But why is it a no brainer?
Traditional mainly because you're in a high-ish tax bracket now. As others have pointed out, it comes down to the tax rate now vs the tax rate when you withdraw the money. And you can pay considerably less than 24% on that money when withdrawn, especially if you're married then. As I noted above, today a married couple with no other income can withdraw/convert about $100K a year and pay an average of just 9% federal income tax. If you retire at 65 and postpone Social Security until 70, you can easily convert $500K+ (today's dollars) paying an average of 9% federal income tax. 9% is lower than 24%, that's why I said no-brainer.

Also, it's always good to have both traditional and Roth. I would favor Roth contributions if you got married and fell into a lower tax bracket (with a lower-earning or stay-at-home spouse).

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Fri Aug 09, 2019 9:22 am

firebirdparts wrote:
Fri Aug 09, 2019 9:07 am
2. A maxed out Roth 401k is simply more money than a maxed out traditional 401k, because the dollar figure limit is the same. This also makes a difference. $19,000 with the taxes pre-paid is more money than $19,000 with taxes due. Simple.
This is true, and some people think of this as "I'm effectively getting more tax-advantaged space with Roth." But another way of looking at it is with Roth you're just choosing to pre-pay the taxes now. With traditional, you have the option at any time to pay those taxes - you can convert to Roth tomorrow or in 20 years. In the end it still comes down to what tax rate do I pay now vs what would I pay later.

Supurdueper
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Re: Retirement Planning 401k Traditional /401 Roth

Post by Supurdueper » Fri Aug 09, 2019 9:33 am

It’s not a no brainer. Guessing the future is tough. I’m pro Roth, at you’re savings rate when you withdraw you’ll more than likely be in the same tax bracket as today.

If you did traditional will you really invest all that tax savings?

Also consider any inheritance you want to leave behind. If it’s in a Roth your heirs get that tax free withdraw benefit. If it’s in a traditional, well you are leaving a future tax bill.

02nz
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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Fri Aug 09, 2019 9:48 am

Supurdueper wrote:
Fri Aug 09, 2019 9:33 am
I’m pro Roth, at you’re savings rate when you withdraw you’ll more than likely be in the same tax bracket as today.
In that case it's a wash. But as I showed above, OP can pay much, much less than 24 or 25% on a large chunk of the traditional balance.

nolesrule
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Re: Retirement Planning 401k Traditional /401 Roth

Post by nolesrule » Fri Aug 09, 2019 9:48 am

Supurdueper wrote:
Fri Aug 09, 2019 9:33 am
It’s not a no brainer. Guessing the future is tough. I’m pro Roth, at you’re savings rate when you withdraw you’ll more than likely be in the same tax bracket as today.
You need to save enough in traditional to get to that tax bracket in retirement, otherwise you've paid too much tax to put money in tax-advantaged accounts.

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FiveK
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Re: Retirement Planning 401k Traditional /401 Roth

Post by FiveK » Fri Aug 09, 2019 10:01 am

AJAY24 wrote:
Fri Aug 09, 2019 9:04 am
02nz wrote:
Thu Aug 08, 2019 3:29 pm
A single filer making 130K should do traditional 401k, no brainer. Only exception would be if you expect that salary to increase greatly or will have a significant pension.
I added some balances and additional information. But why is it a no brainer?
AJAY24, what marginal rate do you expect to pay on withdrawals from traditional accounts (and how did you arrive at that number)? Compare that with saving 24% on traditional contributions now.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Fri Aug 09, 2019 10:07 am

nolesrule wrote:
Fri Aug 09, 2019 9:48 am
Supurdueper wrote:
Fri Aug 09, 2019 9:33 am
It’s not a no brainer. Guessing the future is tough. I’m pro Roth, at you’re savings rate when you withdraw you’ll more than likely be in the same tax bracket as today.
You need to save enough in traditional to get to that tax bracket in retirement, otherwise you've paid too much tax to put money in tax-advantaged accounts.
Right. And for the OP, even as a single filer it will take about a $2.4 million traditional balance, in today's dollars, assuming 4% withdrawal rate, to reach the 24% tax bracket. Double that if married. OP won't be anywhere near that unless he shifts at least some contributions from Roth to traditional.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by Supurdueper » Fri Aug 09, 2019 10:11 am

Agreed, you’ll need enough taxable to get to that tax bracket. One may have it with ss, pension, company match and some traditional. And no one knows what tax brackets will be, compare 2017 vs 2019. At $40k one is in the 22% bracket today. In 2017 at $40k one is in the 25% bracket. Today has some of the lowest historical tax brackets ever. Take advantage. So maybe do the Roth until 2025 and then flip to traditional.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by Supurdueper » Fri Aug 09, 2019 10:20 am

Run the numbers. Using OP’s current Trad balance, 7% return, and $19k per year he’ll be at $2.5m by age 60. S&P historical return is 10%. He will be in that 24% tax bracket, unless he find a partner who only consumes :)

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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Fri Aug 09, 2019 10:35 am

Supurdueper wrote:
Fri Aug 09, 2019 10:20 am
Run the numbers. Using OP’s current Trad balance, 7% return, and $19k per year he’ll be at $2.5m by age 60. S&P historical return is 10%. He will be in that 24% tax bracket, unless he find a partner who only consumes :)
10% is nominal returns. Tax brackets are indexed for inflation, so we should use real returns and today's dollars. I would say going forward 5% real is a more realistic expectation, not just because we've had a huge runup but also because OP isn't likely (certainly few on this board would advise) to have the entire portfolio invested 100% in stocks for the entire career.

And I agree it may not be optimal to contribute 100% traditional every year going forward, hence my note above about possible dips in tax rate. But OP's question is whether it makes sense to shift from contributing 100% Roth, which is the current setup. And it almost certainly makes sense to do so, given OP's situation.

There's another consideration which has been pointed out before in similar threads: If you favor traditional and it turns out to be wrong, it means you were better off in retirement than expected and end up paying higher taxes. Not optimal, but a nice problem to have. If you favor Roth and turn out to be wrong, it means you were worse off than anticipated, and the higher taxes you paid by choosing Roth would have made a real difference in spendable income. So when in doubt, tilt toward traditional. All the numbers thrown out by the Roth proponents in this thread show OP coming out about the same or maybe 1% better off with Roth. In that situation, choosing traditional (while also maxing Roth IRA) would be wiser.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by FiveK » Fri Aug 09, 2019 10:54 am

Supurdueper wrote:
Fri Aug 09, 2019 10:20 am
Run the numbers. Using OP’s current Trad balance, 7% return, and $19k per year he’ll be at $2.5m by age 60.
That calculation assumes use of traditional for the rest of the career. If one uses the result to choose Roth, that violates the assumption.

See nolesrule's comment to that effect in this post.

Seven percent real seems optimistic, but one could make that assumption. What will happen will happen. See 02nz's comments in the previous post.
Last edited by FiveK on Fri Aug 09, 2019 10:56 am, edited 2 times in total.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by AJAY24 » Fri Aug 09, 2019 10:54 am

Supurdueper wrote:
Fri Aug 09, 2019 9:33 am
It’s not a no brainer. Guessing the future is tough. I’m pro Roth, at you’re savings rate when you withdraw you’ll more than likely be in the same tax bracket as today.

If you did traditional will you really invest all that tax savings?

Also consider any inheritance you want to leave behind. If it’s in a Roth your heirs get that tax free withdraw benefit. If it’s in a traditional, well you are leaving a future tax bill.
I would invest any tax savings generated

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Re: Retirement Planning 401k Traditional /401 Roth

Post by nolesrule » Fri Aug 09, 2019 11:00 am

Supurdueper wrote:
Fri Aug 09, 2019 10:20 am
Run the numbers. Using OP’s current Trad balance, 7% return, and $19k per year he’ll be at $2.5m by age 60. S&P historical return is 10%. He will be in that 24% tax bracket, unless he find a partner who only consumes :)
What tax bracket will this contribution be withdrawn at in retirement? The answer is that this contribution's withdrawal bracket is affected by past contributions and growth on itself + past contributions, but it is not affected by future contributions. Those future contributions will have their own rate based on what has been contributed in previous years + growth.

A lot of people seem to miss this subtle point, in that contributions come off the top of the income, but the withdrawals are essentially a slice of all your contributions made over the years due the nature of the progressive tax brackets, and if your treat them as FIFO you can see how the tax rate in each layer falls into each bracket at withdrawal. I tried using a cake once (contributions are building the cake one layer at a time, withdrawals are taking a slice of the finished cake), but that analogy kinda fell flat.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by CnC » Fri Aug 09, 2019 11:08 am

02nz wrote:
Thu Aug 08, 2019 7:46 pm
megabad wrote:
Thu Aug 08, 2019 7:01 pm
02nz wrote:
Thu Aug 08, 2019 6:48 pm
Why would you strongly favor Roth for OP's situation? I wouldn't pay 24% federal income tax if there's a chance at least some of it could instead be taxed at 0 to 12 or 15% in retirement. And why would you change your opinion if OP has a "career catapult" coming? If the OP expects a large increase in income, that would be an argument for Roth now and traditional later (although I'd still favor traditional given what we know).
OP is single and saving 19k per year. OP will be well into what will be 25% bracket in retirement if he works until normal retirement age based on rather conservative assumptions for growth assuming current law holds. I can't expand further as to why I would prefer Roth (against forum policy) but that illustrates obvious potential tax savings. In such cases, I almost always prefer front loading the Roth early and then switching to tax deferred later.

Sorry, my career catapult comment wasn't clear. I meant that, if OP moves to a job with significantly higher pay (career catapult) then I would reconsider my Roth preference.

Once again, I think OP should make this call as I think that he/she can predict the specific situation better than outsiders in most cases.
I disagree with the bolded portion. OP didn't give his 401k balance or employer match, but let's say he has a 100K traditional balance, and that the employer match is 7K a year (which will be traditional regardless). If he continues to make all-Roth contributions, and assuming 5% real growth (rather optimistic), by age 65 he'll have just over $1M traditional balance, in today's dollars. (I'm using today's dollars because tax brackets are also indexed for inflation.) RMDs will start at about $38,000/year in today's dollars. Even as a single filer, that's well short of the 22/25% tax bracket when you account for the standard deduction.

Of course the real picture is more complicated, with SS income, possibility of marriage, possibility of early retirement, etc. But the point is that the OP has a good chance of paying less than 24% federal income tax on at least some of this money in retirement, and that's an argument for at least some traditional (I would say mostly traditional) now. Of all the traditional vs Roth queries we get here, there aren't many that more clearly favor traditional.

Where on Earth did you get that math? 33 with a 179k traditional balance and 26k saved per year (19+7 match assuming his investing keeps up inflation) 5% real returns his pre tax 401k balance would be a 2.8m in today's dollars. That would put rmd's over 105k in today's dollars.


Edit: I misread you were only counting the employer match as per tax.

My point still stands if he puts all his money in pre tax he will likely be taking rmd's + social security at 70 of more than what he is making now.

I would still go with pre tax 401k Roth IRA and see if his company allows for after tax 401k contributions and in service roll overs.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by Supurdueper » Fri Aug 09, 2019 11:29 am

nolesrule wrote:
Fri Aug 09, 2019 11:00 am
Supurdueper wrote:
Fri Aug 09, 2019 10:20 am
Run the numbers. Using OP’s current Trad balance, 7% return, and $19k per year he’ll be at $2.5m by age 60. S&P historical return is 10%. He will be in that 24% tax bracket, unless he find a partner who only consumes :)
What tax bracket will this contribution be withdrawn at in retirement? The answer is that this contribution's withdrawal bracket is affected by past contributions and growth on itself + past contributions, but it is not affected by future contributions. Those future contributions will have their own rate based on what has been contributed in previous years + growth.

A lot of people seem to miss this subtle point, in that contributions come off the top of the income, but the withdrawals are essentially a slice of all your contributions made over the years due the nature of the progressive tax brackets, and if your treat them as FIFO you can see how the tax rate in each layer falls into each bracket at withdrawal. I tried using a cake once (contributions are building the cake one layer at a time, withdrawals are taking a slice of the finished cake), but that analogy kinda fell flat.
I understand the fifo concept. All being equal it all equals? Haha. Traditional might be better, it’s a gamble as no one knows where taxes will go. The 2017 rate the OP would be in a higher tax bracket after only $40k.

The 7% return in the Roth using current balance puts OP around $2.3m.

Also to consider length of retirement. The way the OP saves now his expenses are low. I doubt he uses 4% withdraw so his balances will grow faster than he can spend. His kids and future spouse will love him :moneybag

And I’m not sure the value one can place knowing that you have complete control in retirement of all monies regardless of what taxes do. To me that power is probably worth the potential of paying less taxes today. Probably the same concept/feeling of paying off the mortgage early.

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Re: Retirement Planning 401k Traditional /401 Roth

Post by 02nz » Fri Aug 09, 2019 4:40 pm

CnC wrote:
Fri Aug 09, 2019 11:08 am
Where on Earth did you get that math? 33 with a 179k traditional balance and 26k saved per year (19+7 match assuming his investing keeps up inflation) 5% real returns his pre tax 401k balance would be a 2.8m in today's dollars. That would put rmd's over 105k in today's dollars.


Edit: I misread you were only counting the employer match as per tax.

My point still stands if he puts all his money in pre tax he will likely be taking rmd's + social security at 70 of more than what he is making now.

I would still go with pre tax 401k Roth IRA and see if his company allows for after tax 401k contributions and in service roll overs.
I specifically wrote above that a mix of Roth and traditional (not necessarily in one year) was likely optimal and would not necessarily recommend 100% traditional every year. But even taking your projections based on all-traditional contributions for the rest of OP's career, with $105K in annual withdrawals, OP would only be about $10K into the 24% bracket (28% if rates go back to prior levels) as a single filer and nowhere near if married. Even the maximum possible SS benefit does not put OP into the next higher bracket.

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