How much is a Roth worth?

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casualflower
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How much is a Roth worth?

Post by casualflower » Tue May 29, 2018 6:00 pm

How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?

I suspect this will depend on the estimated tax bracket at withdrawal and estimated time until withdrawal. And return rate. (assume 7%)

If so, assume 25 years until withdrawal and a 25% tax bracket. Or choose your own numbers. What tax rate / time combo would make it worthwhile to pay a 20% fee?

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Alexa9
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Re: How much is a Roth worth?

Post by Alexa9 » Tue May 29, 2018 6:06 pm

The most common comparison is a
1. Roth (not deductible - tax free growth - tax free withdrawal- worth the most)
2. Traditional (tax deductible now - tax free growth - taxable later - worth less)
3. Taxable (taxed on dividends, long term, and short term gains - worth the least)
As to what the ratio of how valuable these are, it depends on the taxes in your state and at the federal level both now and in retirement (impossible to predict - an advantage to Roth)

https://www.bogleheads.org/wiki/Traditional_versus_Roth
https://www.bogleheads.org/wiki/Tax-eff ... _placement

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arcticpineapplecorp.
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Re: How much is a Roth worth?

Post by arcticpineapplecorp. » Tue May 29, 2018 7:39 pm

metrunt wrote:
Tue May 29, 2018 6:00 pm
How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?

I suspect this will depend on the estimated tax bracket at withdrawal and estimated time until withdrawal. And return rate. (assume 7%)

If so, assume 25 years until withdrawal and a 25% tax bracket. Or choose your own numbers. What tax rate / time combo would make it worthwhile to pay a 20% fee?
Why do you even need to know this? You can deposit a $1000 into a Roth at Vanguard for 0% fee. Why would you put Roth money into anything that charges a fee when you can put it into no load mutual funds that are low cost? Are you an international investor and have no access to anything other than loaded funds? I pay 0% to fund my Roth. Why start way behind the starting gate if you don't have to? If you pay a fee for deposit, you have to earn enough to equal the fee just to break even. What's the point of this?

People do this of course. State farm charges a 5% commission (sales charge or load) and an expense ratio of 0.64% annually for a S&P500 index fund. That's madness if you ask me. But people are sold this. I wouldn't touch it with a 10 foot pole:

https://www.statefarm.com/finances/mutu ... index-fund
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Church Lady
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Re: How much is a Roth worth?

Post by Church Lady » Tue May 29, 2018 8:02 pm

Why would I pay a fee to deposit money into a Roth when there are plenty of custodians who will accept my deposit for free? :confused
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neurosphere
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Re: How much is a Roth worth?

Post by neurosphere » Tue May 29, 2018 8:29 pm

arcticpineapplecorp. wrote:
Tue May 29, 2018 7:39 pm
Why do you even need to know this?
I can imagine a situation where one has a large loan balance, perhaps student loans. Wouldn't a Roth contribution, vs loan paydown, be a "fee" of sorts?

Or imagine someone has an Rollover IRA of $3000, without the ability to roll it into an employer account. A roth conversion may 'unlock' future backdoor Roth IRA contribution. Converting the existing IRA might be considered a "fee", but then Roth contributions become "fee free" once there is no existing pre-tax SEP/Rollover/SIMPLE/Traditional IRA balances.

Is paying taxes now to convert the IRA "worth it" to be able to make subsequent Roth IRA contributions for a period of X years?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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Re: How much is a Roth worth?

Post by NoHeat » Tue May 29, 2018 8:33 pm

I think the OP’s mention of the word “fee” has confused some, here.

Perhaps the OP meant to ask what is the relative worth of $1 that’s already in a Roth account, vs $1 that’s already in another kind of account. And that question was answered in the second post.

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Re: How much is a Roth worth?

Post by sesq » Tue May 29, 2018 9:13 pm

I tax adjust my asset allocation and net worth. To do this I treat the roth assets as a $1 is a $1. For tax deferred assets I book a liability for future taxes at 30% (estimated fed/state/means testing) so $1 is worth $0.70. For my taxable account I track my lots separately and do ST or LT capital gains and book a liability accordingly. So for the gain portion, LT gains $1 is worth about 80 cents and each $1 of basis is worth $1.

Not sure if that is what you are asking?

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casualflower
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Re: How much is a Roth worth?

Post by casualflower » Wed May 30, 2018 9:05 am

I'm interested in the value of a Roth-style tax advantaged retirement account. Nothing about account fees or actual Roths. This isn't traditional vs Roth question.
neurosphere wrote:
Tue May 29, 2018 8:29 pm
Is paying taxes now to convert the IRA "worth it" to be able to make subsequent Roth IRA contributions for a period of X years?
This is the closest to what I'm getting at. Thank you.

This rumination started because over whether it's worth it to take income, pay 15.2% in SE taxes (for someone who will never use SS or Medicare), and pay income taxes, just to be able to put money an account that will grow tax free and can be withdrawn tax free (via a mega backdoor roth). Or not pay the SE taxes, just pay income tax, and put the money in a taxable account.

In this scenario, the SE tax is a 15.2% "fee". I ran some numbers and found to my surprise, that it was worth it more often than not. I didn't know if my calculations are accurate and since I found paying 15% for the ability to contribute to a Roth-style account to be worthwhile surprising, I wanted other's intuitions before explaining all of this.

At a 15.2% 'fee', 6% growth rate, 25 years, a 20% marginal at withdrawal makes this break even.

I know there are nuances here (variable rates of return, uncertainty of tax rates, etc). But many of us are trying to decide what the best choice is for something that pays of 20-30-40 years away, which has inherent uncertainty.

The biggest influence on a justifiable fee seems to be marginal rate at withdrawal, over time and rate of return.

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neurosphere
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Re: How much is a Roth worth?

Post by neurosphere » Wed May 30, 2018 9:31 am

metrunt wrote:
Wed May 30, 2018 9:05 am
This rumination started because over whether it's worth it to take income, pay 15.2% in SE taxes (for someone who will never use SS or Medicare), and pay income taxes, just to be able to put money an account that will grow tax free and can be withdrawn tax free (via a mega backdoor roth). Or not pay the SE taxes, just pay income tax, and put the money in a taxable account.
This is confusing. What do you mean "take income"? Are you referring to a decision about how/whether to pay yourself a salary via an s-corp? A mega backdoor roth implies you already have income, and have access to an employer plan. Or perhaps you are self-employed with the ability to open a plan which allows after-tax amounts?

It's not clear how you have the ability to decide whether to pay SE taxes on a specific set of income/compensation, and why this affects your ability to contribute to a Roth (via whatever method).

This raises a question in my head I've never thought of, about a self-employed person with access to an employer 401k account which allows after-tax contributions. Suppose salary is $10,000 and profits not subject to FICA tax are $90,000. Is there a limitation to how much money can be contributed to the 401k, and among sub account (e.g. tax-deductible vs after-tax, and $18,500 limit vs $55,000 overall limit)?
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casualflower
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Re: How much is a Roth worth?

Post by casualflower » Wed May 30, 2018 10:00 am

neurosphere wrote:
Wed May 30, 2018 9:31 am
It's not clear how you have the ability to decide whether to pay SE taxes on a specific set of income/compensation, and why this affects your ability to contribute to a Roth (via whatever method).
I am not asking for advice in my specific situation (though the answer has to do with deciding how to split business income between an owner and spouse). I appreciate the interest, but I am wondering about the value of a Roth-style account.

How much would you pay to contribute (more than you already can) to a Roth-style account?
neurosphere wrote:
Wed May 30, 2018 9:31 am
This raises a question in my head I've never thought of, about a self-employed person with access to an employer 401k account which allows after-tax contributions. Suppose salary is $10,000 and profits not subject to FICA tax are $90,000. Is there a limitation to how much money can be contributed to the 401k, and among sub account (e.g. tax-deductible vs after-tax, and $18,500 limit vs $55,000 overall limit)?
I'm pretty sure you can't contribute to an employer plan more than you've earned with that employer. But the only profits that wouldn't be subject to FICA are those that push the total compensation over the $127,200 limit.




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Epsilon Delta
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Re: How much is a Roth worth?

Post by Epsilon Delta » Wed May 30, 2018 10:06 am

metrunt wrote:
Wed May 30, 2018 9:05 am
This rumination started because over whether it's worth it to take income, pay 15.2% in SE taxes (for someone who will never use SS or Medicare),
It's not clear why they would never use SS or Medicare, but if the reason is that they are not a US person there are several kettles of stinking fish to work through.

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Re: How much is a Roth worth?

Post by DSInvestor » Wed May 30, 2018 10:25 am

We have tricky tax rules for retirement accounts and Roth contributions do not always come at a cost in higher taxes. For example, a taxpayer is covered by an employer plan like 401k and has income that a) does not allow any TIRA deduction and b) allows for full Roth IRA contribution. In this case, the taxpayer can max out Traditional 401k to get max tax deduction and Roth IRA. Had this taxpayer contributed to Roth 401k, there would have been a reduction in his Traditional 401k which would cost him extra taxes.
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Re: How much is a Roth worth?

Post by neurosphere » Wed May 30, 2018 11:00 am

metrunt wrote:
Wed May 30, 2018 10:00 am
I am not asking for advice in my specific situation (though the answer has to do with deciding how to split business income between an owner and spouse). I appreciate the interest, but I am wondering about the value of a Roth-style account.
Ah, the bolded part makes sense. The reason I was asking was to ensure there was not a miscommunication or knowledge deficit about eligibility for Roth contributions. Without invoking a spouse (and some possible leeway on how to apportion job duties and income), I couldn't easily see how SE taxes would be involved.

So now I understand the question a little bit better and can offer one additional variable to consider (but no good answers!): One value of having Roth monies is for tax diversification. This has some "worth" separate from the intrinsic tax benefits of the Roth alone. That is, with an unknown future, a combination of pre-tax, Roth, and taxable investments is useful. The optimal ratio can't be known in advance of course. If your current investments are overwhelmingly taxable+pre-tax, than one might consider Roth dollars to be relatively more valuable than say, if one already has substantial Roth accounts, proportionally.

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Re: How much is a Roth worth?

Post by grabiner » Wed May 30, 2018 9:23 pm

metrunt wrote:
Tue May 29, 2018 6:00 pm
How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?
Equal to your marginal tax rate when you withdraw the money, compared to a traditional account.

If you will retire in a 25% tax bracket, then $3000 in a Roth IRA and $4000 in a Traditional IRA will provide you the same return if invested the same way. Thus it was worth paying $1000 to invest in the Roth IRA, which would be the cost you paid if you could have deducted the $4000 Traditional IRA contribution in a 25% tax bracket.

The premium for a Roth over a taxable account varies over time. If you invest in taxable stock, you will pay tax on the dividends every year, and then capital-gains tax when you sell. If you invest in bonds, you will pay tax every year, or lose the difference between muni and corporate yields if you hold munis to avoid the tax. I usually estimate about 25% for a very-long-term investment.
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Re: How much is a Roth worth?

Post by EnjoyIt » Wed May 30, 2018 9:46 pm

Maybe I am misunderstanding your scenario, but you can put money in your spouses Roth IRA without the spouse being employed. It is called . . . Spousal IRA

https://www.investopedia.com/retirement ... ributions/

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Re: How much is a Roth worth?

Post by Caduceus » Fri Nov 15, 2019 6:49 am

grabiner wrote:
Wed May 30, 2018 9:23 pm
metrunt wrote:
Tue May 29, 2018 6:00 pm
How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?
Equal to your marginal tax rate when you withdraw the money, compared to a traditional account.

If you will retire in a 25% tax bracket, then $3000 in a Roth IRA and $4000 in a Traditional IRA will provide you the same return if invested the same way. Thus it was worth paying $1000 to invest in the Roth IRA, which would be the cost you paid if you could have deducted the $4000 Traditional IRA contribution in a 25% tax bracket.

The premium for a Roth over a taxable account varies over time. If you invest in taxable stock, you will pay tax on the dividends every year, and then capital-gains tax when you sell. If you invest in bonds, you will pay tax every year, or lose the difference between muni and corporate yields if you hold munis to avoid the tax. I usually estimate about 25% for a very-long-term investment.
Grabiner, does the premium of a Roth over a taxable account also depend very heavily on the timing of the capital gains realization? For example, if I put $5000 in a Roth over a taxable account, and that $5000 increases 100% in 2 years, and I sell it to buy a different position, versus that $5,000 increasing to 100% over 10 years. I wonder if 25% is a low estimate if the Roth money experiences sudden, aggressive gains early on in its history.

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Re: How much is a Roth worth?

Post by aristotelian » Fri Nov 15, 2019 6:57 am

The IRS charges a 6% excise tax on overcontributions, so presumably less than that.

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Re: How much is a Roth worth?

Post by grabiner » Fri Nov 15, 2019 10:40 pm

Caduceus wrote:
Fri Nov 15, 2019 6:49 am
grabiner wrote:
Wed May 30, 2018 9:23 pm
The premium for a Roth over a taxable account varies over time. If you invest in taxable stock, you will pay tax on the dividends every year, and then capital-gains tax when you sell. If you invest in bonds, you will pay tax every year, or lose the difference between muni and corporate yields if you hold munis to avoid the tax. I usually estimate about 25% for a very-long-term investment.
Grabiner, does the premium of a Roth over a taxable account also depend very heavily on the timing of the capital gains realization? For example, if I put $5000 in a Roth over a taxable account, and that $5000 increases 100% in 2 years, and I sell it to buy a different position, versus that $5,000 increasing to 100% over 10 years. I wonder if 25% is a low estimate if the Roth money experiences sudden, aggressive gains early on in its history.
The value of tax-deferral for stocks depends on both turnover and time horizon. If you buy and hold a stock index fund, and only sell when you spend the money (usually the best way to invest in stocks in a taxable account), you pay a small tax on the dividends every year, and tax on the portion which is an unrealized capital gain when you sell. If you pay 15% tax and the dividend yield is 2%, you can at worst lose 0.3% per year and then 15% upon sale, regardless of how much the stock appreciates. It would take about 40 years for this to compound to a 25% loss. (The loss will be greater if you pay state tax or some of the dividends are non-qualified.)

But if you turn over your stock repeatedly (or buy an actively-managed fund which turns over stock regularly), you increase the cost. Suppose that your stocks gain 8% annually, including 2% in dividends, and you turn them over every five years (20% turnover rate). In a tax-free account, $10,000 becomes $14,693. In a taxable account with after-tax dividends reinvested, $10,000 becomes $14,490. Of that $4490, $3499 is capital gain (the rest is reinvested dividends), for a tax bill of $525 and a final value of $13,965, a loss of 4.95% which is 1.01% compounded annually. It would now take only 29 years for the cost to exceed 25%. If the gains are greater, the tax cost increases.

Therefore, if you are holding an actively-managed stock fund, or turn over stocks on your own, it is better to hold those stocks in a tax-favored account of some type, where these strategies do not increase the cost.
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Re: How much is a Roth worth?

Post by celia » Sat Nov 16, 2019 7:55 am

Alexa9 wrote:
Tue May 29, 2018 6:06 pm
The most common comparison is a
1. Roth (not deductible - tax free growth - tax free withdrawal- worth the most)
2. Traditional (tax deductible now - tax free growth - taxable later - worth less)
3. Taxable (taxed on dividends, long term, and short term gains - worth the least)
This is backwards! The comparison should be:
1. Roth (worth the most after the contribution is made since all the growth is tax-free and can be withdrawn tax-free.) [The "premium" is the percent of taxes you pay in the year the money was earned/contributed.]
2. Taxable (taxed on dividends each year and LTG and STG in the year something is sold.) [The "premium" is the percent of taxes you pay in the year the money was earned.]
3. Tax-deferred (not taxed when earned, but every single dollar--contribution AND growth--is taxed at withdrawal).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: How much is a Roth worth?

Post by Juice3 » Sat Nov 16, 2019 8:23 am

casualflower wrote:
Wed May 30, 2018 9:05 am
I'm interested in the value of a Roth-style tax advantaged retirement account. Nothing about account fees or actual Roths. This isn't traditional vs Roth question.
neurosphere wrote:
Tue May 29, 2018 8:29 pm
Is paying taxes now to convert the IRA "worth it" to be able to make subsequent Roth IRA contributions for a period of X years?
This is the closest to what I'm getting at. Thank you.

In this scenario, the SE tax is a 15.2% "fee". I ran some numbers and found to my surprise, that it was worth it more often than not. I didn't know if my calculations are accurate and since I found paying 15% for the ability to contribute to a Roth-style account to be worthwhile surprising, I wanted other's intuitions before explaining all of this.

At a 15.2% 'fee', 6% growth rate, 25 years, a 20% marginal at withdrawal makes this break even.
You need to check (or post) your math.

You can find many threads here that show Roth contributions future value = tIRA if taxes and investments gains are the same. This is the case for most typically US W2 employees.

I believe you are asking about business income. Specifically, if you should distribute that income as wages to the owners and thus pay SE tax or report as schedule K income and avoid SE tax.

Unless there is some reason you have a huge arbitrage opportunity with current tax rates far exceeding future, it hard to see any scenario where paying unnecessary SE tax makes from a BogleHead perspective. I believe you comments that you are not getting SS making the hurdle even higher.

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Re: How much is a Roth worth?

Post by bsteiner » Sat Nov 16, 2019 8:59 am

It depends on several factors (tax rates, age, etc.), but it's worth more than par. If it were permissible, I would pay more than $1 for each dollar of Roth.

It's permissible in the divorce context. If divorcing spouses can agree on a non pro rata division of assets, one spouse could take the Roth and the other spouse could take other assets. They would have to agree on how much worth of other assets the other spouse gets for each dollar of Roth the spouse getting the Roth gets.

It's also permissible in the estate planning context. If one child is better to take advantage of the stretch, a Roth IRA owner could leave the Roth to that child, and other assets (in an amount that the IRA owner would determine) to the other child. We don't see that done very often in the estate planning context, but we often see IRA owners use their traditional IRAs for their charitable bequests.

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Re: How much is a Roth worth?

Post by Caduceus » Sat Nov 16, 2019 8:54 pm

bsteiner wrote:
Sat Nov 16, 2019 8:59 am
It depends on several factors (tax rates, age, etc.), but it's worth more than par. If it were permissible, I would pay more than $1 for each dollar of Roth.

It's permissible in the divorce context. If divorcing spouses can agree on a non pro rata division of assets, one spouse could take the Roth and the other spouse could take other assets. They would have to agree on how much worth of other assets the other spouse gets for each dollar of Roth the spouse getting the Roth gets.

It's also permissible in the estate planning context. If one child is better to take advantage of the stretch, a Roth IRA owner could leave the Roth to that child, and other assets (in an amount that the IRA owner would determine) to the other child. We don't see that done very often in the estate planning context, but we often see IRA owners use their traditional IRAs for their charitable bequests.
I'm not sure if I'm understanding you right. When you say that you would pay more than $1 for each dollar of Roth, do you mean that each Roth dollar is worth at least twice a dollar outside of Roth space? Usually people calculate that they might pay between $0.15 to $0.25 for every extra dollar of Roth, but more than $1 for every extra Roth dollar seems quite much, even for the specific contexts you reference?

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Re: How much is a Roth worth?

Post by Caduceus » Sat Nov 16, 2019 9:04 pm

grabiner wrote:
Fri Nov 15, 2019 10:40 pm
Caduceus wrote:
Fri Nov 15, 2019 6:49 am
grabiner wrote:
Wed May 30, 2018 9:23 pm
The premium for a Roth over a taxable account varies over time. If you invest in taxable stock, you will pay tax on the dividends every year, and then capital-gains tax when you sell. If you invest in bonds, you will pay tax every year, or lose the difference between muni and corporate yields if you hold munis to avoid the tax. I usually estimate about 25% for a very-long-term investment.
Grabiner, does the premium of a Roth over a taxable account also depend very heavily on the timing of the capital gains realization? For example, if I put $5000 in a Roth over a taxable account, and that $5000 increases 100% in 2 years, and I sell it to buy a different position, versus that $5,000 increasing to 100% over 10 years. I wonder if 25% is a low estimate if the Roth money experiences sudden, aggressive gains early on in its history.
The value of tax-deferral for stocks depends on both turnover and time horizon. If you buy and hold a stock index fund, and only sell when you spend the money (usually the best way to invest in stocks in a taxable account), you pay a small tax on the dividends every year, and tax on the portion which is an unrealized capital gain when you sell. If you pay 15% tax and the dividend yield is 2%, you can at worst lose 0.3% per year and then 15% upon sale, regardless of how much the stock appreciates. It would take about 40 years for this to compound to a 25% loss. (The loss will be greater if you pay state tax or some of the dividends are non-qualified.)

But if you turn over your stock repeatedly (or buy an actively-managed fund which turns over stock regularly), you increase the cost. Suppose that your stocks gain 8% annually, including 2% in dividends, and you turn them over every five years (20% turnover rate). In a tax-free account, $10,000 becomes $14,693. In a taxable account with after-tax dividends reinvested, $10,000 becomes $14,490. Of that $4490, $3499 is capital gain (the rest is reinvested dividends), for a tax bill of $525 and a final value of $13,965, a loss of 4.95% which is 1.01% compounded annually. It would now take only 29 years for the cost to exceed 25%. If the gains are greater, the tax cost increases.

Therefore, if you are holding an actively-managed stock fund, or turn over stocks on your own, it is better to hold those stocks in a tax-favored account of some type, where these strategies do not increase the cost.
Thank you so much, Grabiner! I found the calculations very helpful. But aren't there situations where it would take much faster than 29 years for the cost of the taxable account to exceed 25% in comparison to the Roth. This is something that's actually happened to me. As a graduate student, I was forced to choose between keeping liquid money in a taxable account, or funding my Roth IRA (no point funding a traditional IRA at my poverty-level tax bracket!). As it happened, the money I invested in the Roth doubled in a year, almost exactly, at which point I sold the stock. So every $100 I placed in the Roth doubled to $200 the next year. In that case, the Roth premium over a taxable account was 15% after only one year! Or am I thinking about this the wrong way? Is the premium only 7.5% (185/200), meaning I should have been willing to pay an additional $7.5 for every $100 of Roth space, if I had known that set of facts would ensue over the next year (i.e. my positions would double).

I guess the reason I asked the question was that it seems the Roth premium over taxable must be fairly high if the dollar is invested in strongly rising bull markets (or maybe a lucky equity bet) early on in the history of that invested dollar.

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Re: How much is a Roth worth?

Post by dodecahedron » Sat Nov 16, 2019 9:33 pm

celia wrote:
Sat Nov 16, 2019 7:55 am
Alexa9 wrote:
Tue May 29, 2018 6:06 pm
The most common comparison is a
1. Roth (not deductible - tax free growth - tax free withdrawal- worth the most)
2. Traditional (tax deductible now - tax free growth - taxable later - worth less)
3. Taxable (taxed on dividends, long term, and short term gains - worth the least)
This is backwards! The comparison should be:
1. Roth (worth the most after the contribution is made since all the growth is tax-free and can be withdrawn tax-free.) [The "premium" is the percent of taxes you pay in the year the money was earned/contributed.]
2. Taxable (taxed on dividends each year and LTG and STG in the year something is sold.) [The "premium" is the percent of taxes you pay in the year the money was earned.]
3. Tax-deferred (not taxed when earned, but every single dollar--contribution AND growth--is taxed at withdrawal).
¨3. Tax-deferred (not taxed when earned, but every single dollar--contribution AND growth--is taxed at withdrawal).¨ may not be true if you have reason to expect that a large part of your expected retirement spending will go to charitable donations and/or large medical expenses (e.g., for long term care.)

In some cases, tax-deferred may be better than taxable, especially if you are charitably inclined and over 70 1/2 and have reasons to be concerned not just about taxable income but about AGI, due to indirect tax effects. QCDs can eliminate tax drag effects on AGI in ways that donations from a taxable account may not be able to do.

Note the underlined some, if, and may in the last paragraph. There are certainly many cases where it goes the other way. One notable example: your death is approaching soon, your assets in taxable have large embedded gains and your heirs have higher marginal tax rates than you do and will benefit from step up in basis upon your death.

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Re: How much is a Roth worth?

Post by bsteiner » Sat Nov 16, 2019 10:04 pm

Caduceus wrote:
Sat Nov 16, 2019 8:54 pm
bsteiner wrote:
Sat Nov 16, 2019 8:59 am
It depends on several factors (tax rates, age, etc.), but it's worth more than par. If it were permissible, I would pay more than $1 for each dollar of Roth.

It's permissible in the divorce context. If divorcing spouses can agree on a non pro rata division of assets, one spouse could take the Roth and the other spouse could take other assets. They would have to agree on how much worth of other assets the other spouse gets for each dollar of Roth the spouse getting the Roth gets.

It's also permissible in the estate planning context. If one child is better to take advantage of the stretch, a Roth IRA owner could leave the Roth to that child, and other assets (in an amount that the IRA owner would determine) to the other child. We don't see that done very often in the estate planning context, but we often see IRA owners use their traditional IRAs for their charitable bequests.
I'm not sure if I'm understanding you right. When you say that you would pay more than $1 for each dollar of Roth, do you mean that each Roth dollar is worth at least twice a dollar outside of Roth space? Usually people calculate that they might pay between $0.15 to $0.25 for every extra dollar of Roth, but more than $1 for every extra Roth dollar seems quite much, even for the specific contexts you reference?
I would pay something more than $1 but less than $2 to buy a dollar of Roth if it were possible to do so. Since it's not possible unless I get divorced, I haven't tried to calculate it. Of course, the calculation would vary from one person to another depending on age, tax rates, and the ability for the person and his/her beneficiaries to take advantage of the stretch.

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Re: How much is a Roth worth?

Post by grabiner » Sun Nov 17, 2019 12:36 am

Caduceus wrote:
Sat Nov 16, 2019 9:04 pm
But aren't there situations where it would take much faster than 29 years for the cost of the taxable account to exceed 25% in comparison to the Roth. This is something that's actually happened to me. As a graduate student, I was forced to choose between keeping liquid money in a taxable account, or funding my Roth IRA (no point funding a traditional IRA at my poverty-level tax bracket!). As it happened, the money I invested in the Roth doubled in a year, almost exactly, at which point I sold the stock. So every $100 I placed in the Roth doubled to $200 the next year. In that case, the Roth premium over a taxable account was 15% after only one year! Or am I thinking about this the wrong way? Is the premium only 7.5% (185/200), meaning I should have been willing to pay an additional $7.5 for every $100 of Roth space, if I had known that set of facts would ensue over the next year (i.e. my positions would double).
7.5% is correct. If you had held the stock in a taxable account, and sold it after one year, your capital gain on the $200 investment would be $100, with $15 in tax due reducing your returns to $185.

And for you, it might have been zero if you held the stock for more than a year, because you were in a "poverty-level tax bracket", in which long-term capital gains are not taxed. (Or it might have been much higher if the long-term capital gain was not taxed but caused the Earned Income Credit or Saver's Credit to phase out.)
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Re: How much is a Roth worth?

Post by Caduceus » Sun Nov 17, 2019 1:36 am

bsteiner wrote:
Sat Nov 16, 2019 10:04 pm

I would pay something more than $1 but less than $2 to buy a dollar of Roth if it were possible to do so. Since it's not possible unless I get divorced, I haven't tried to calculate it. Of course, the calculation would vary from one person to another depending on age, tax rates, and the ability for the person and his/her beneficiaries to take advantage of the stretch.
Why, in your estimation, is the value of a Roth dollar so high, though? I don't think I've ever seen anyone willing to pay more than 25% for additional Roth space, but you are willing to pay at least 100%. To put it another way, you would be OK paying $100 for additional $100 of Roth space? I'm really intrigued by this.

I think Roth space can be worth more than the 25 - 30% bandied around in the forum, but this is much more than that. It seems your background is in trusts and estates, so maybe you have a different perspective on this.

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Re: How much is a Roth worth?

Post by bsteiner » Sun Nov 17, 2019 9:02 am

Caduceus wrote:
Sun Nov 17, 2019 1:36 am
bsteiner wrote:
Sat Nov 16, 2019 10:04 pm

I would pay something more than $1 but less than $2 to buy a dollar of Roth if it were possible to do so. Since it's not possible unless I get divorced, I haven't tried to calculate it. Of course, the calculation would vary from one person to another depending on age, tax rates, and the ability for the person and his/her beneficiaries to take advantage of the stretch.
Why, in your estimation, is the value of a Roth dollar so high, though? I don't think I've ever seen anyone willing to pay more than 25% for additional Roth space, but you are willing to pay at least 100%. To put it another way, you would be OK paying $100 for additional $100 of Roth space? I'm really intrigued by this.

I think Roth space can be worth more than the 25 - 30% bandied around in the forum, but this is much more than that. It seems your background is in trusts and estates, so maybe you have a different perspective on this.
I didn’t say I would pay $2 for a dollar of Roth, just that I would pay more than a dollar for a dollar of Roth.

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Re: How much is a Roth worth?

Post by simas » Sun Nov 17, 2019 9:21 am

casualflower wrote:
Tue May 29, 2018 6:00 pm
How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?

I suspect this will depend on the estimated tax bracket at withdrawal and estimated time until withdrawal. And return rate. (assume 7%)

If so, assume 25 years until withdrawal and a 25% tax bracket. Or choose your own numbers. What tax rate / time combo would make it worthwhile to pay a 20% fee?
I pay $100 a year to maintain solo 401k plan that allows me to save off between 15-25k for me and my wife annually (30-50k jointly a year) in Roth through mega backdoor (after tax contributions rolled over to Roth without tax consequences). Does that answer your question? With consulting work still continuing I am not currently doing any other conversions by paying extra to convert significant pre-tax balances to Roth at my marginal rates as I value having variety in options for the future (some is all after tax non retirement accounts, some on roth, some in traditional space).

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Re: How much is a Roth worth?

Post by HEDGEFUNDIE » Sun Nov 17, 2019 9:38 am

arcticpineapplecorp. wrote:
Tue May 29, 2018 7:39 pm
Why do you even need to know this?
Outside the divorce scenario, a common situation where this comes up is comparing job offers from companies that offer mega backdoor Roth (or not):

Offer A is for $150k with Mega Backdoor Roth
Offer B is for $160k with no Mega Backdoor Roth

Which is the better offer?

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Re: How much is a Roth worth?

Post by ClevrChico » Sun Nov 17, 2019 9:41 am

Done right, fees should be very minimal.

How much is a Roth worth? It depends, but it can be a lot. I recently calculated if a Mega Backdoor Roth was worth it. After 20 years of reinvesting the tax savings, it would return an extra $100k vs. investing in taxable.

That makes a Mega Backdoor Roth a $5k/year amortized work benefit for me. That's substantial.

(YMMV depending on expected returns, 401k space for a mega backdoor, federal, and state taxes.)

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Re: How much is a Roth worth?

Post by Juice3 » Sun Nov 17, 2019 1:27 pm

ClevrChico wrote:
Sun Nov 17, 2019 9:41 am

How much is a Roth worth? It depends, but it can be a lot. I recently calculated if a Mega Backdoor Roth was worth it. After 20 years of reinvesting the tax savings, it would return an extra $100k vs. investing in taxable.

That makes a Mega Backdoor Roth a $5k/year amortized work benefit for me. That's substantial.
I'd love to see the math behind these claims. It is super hard to believe than even a 56K backdoor Roth could be "worth" 5K per year.

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Re: How much is a Roth worth?

Post by ClevrChico » Sun Nov 17, 2019 1:36 pm

Juice3 wrote:
Sun Nov 17, 2019 1:27 pm
ClevrChico wrote:
Sun Nov 17, 2019 9:41 am

How much is a Roth worth? It depends, but it can be a lot. I recently calculated if a Mega Backdoor Roth was worth it. After 20 years of reinvesting the tax savings, it would return an extra $100k vs. investing in taxable.

That makes a Mega Backdoor Roth a $5k/year amortized work benefit for me. That's substantial.
I'd love to see the math behind these claims. It is super hard to believe than even a 56K backdoor Roth could be "worth" 5K per year.
Feel free to double check my math, it's probably wrong. (Seriously, I ball parked it in Excel, because who knows future contribution limits, returns, etc.)

Assume ~$25k/year into a Roth, 7.2% historical return with my AA, 15% federal/10% state capital gains over twenty years. Money that would be paid as tax in taxable is getting reinvested and growing in the Roth.

Compound returns make the number big in later years. It's smaller starting out. $5k/year is amortized over the twenty years.

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Re: How much is a Roth worth?

Post by Juice3 » Sun Nov 17, 2019 2:06 pm

ClevrChico wrote:
Sun Nov 17, 2019 1:36 pm

Assume ~$25k/year into a Roth, 7.2% historical return with my AA, 15% federal/10% state capital gains over twenty years. Money that would be paid as tax in taxable is getting reinvested and growing in the Roth.

Compound returns make the number big in later years. It's smaller starting out. $5k/year is amortized over the twenty years.
This math has been done a lot of times. You are making some incorrect assumptions.

There are 2 account types, Roth and tIRA.

Let's assume the AA is same and thus returns are the same.

If you pay X tax today (Roth) and also same X tax in the year you take the distro from tIRA, then it does not matter if you have the money in the Roth or tIRA.

Let's prove:

P - amount you would place in the tIRA
T - 1-Tax rate
I - 1+ Investment return
Y - Time

tIRA = Roth ...
P*(I^Y)*T = (P*T)*(I^Y)

In other words, if you pay the tax now or pay the tax later, you end up with the same amount.

What assumptions did I make that could make this untrue in some cases?
1. Tax rates could be different in the future than in the present. This may work for or against you depending which is higher.
2. You do not have the same AA or investments. Again this could be for or against you depending upon results.
3. This views retirement savings in isolation. tIRA will be considered "income" for you in retirement. If this income pushed off one of many IRS "cliffs", this could trigger additional taxes/costs, such as taxable SS, IRMAA, aca subsidies, etc.

Finally, you could view a third account type, already taxed savings. This is about the same with an additional drag that this vehicle will trigger some level of annual taxation. For example, a stock fund would yield about 2% causing you to owe P*.02*tax Rate annually. This is offset somewhat in that untaxed growth would usually be taxed in the future. Finally consider, the potential for LTCG here to be taxed at different rates than they would be in tIRA (income rates).

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Re: How much is a Roth worth?

Post by illumination » Sun Nov 17, 2019 2:38 pm

I would pay around what my expected capital gains tax rate is as a starting point.

So after I've already paid taxes on money earned, if I could pay $1.20 and convert that to $1.00 in a Roth, I would take that deal. Over a long time line it would seem to make sense. Especially in the way Roth shields your income in other ways that can't be quantified for taxes (like IRMAA)


But in a hypothetical ,for a non-Roth I put $6,000 in a compound interest calculator at 30 years at 7% interest, I get $47,268.55 I would then owe my capital gains tax rate (I just rounded up to 20% from 18.8%) and got $37,814.84 after-tax I could then spend.

I also did one where I would have a 20% discount to that amount for a Roth Contribution, so $5,000 instead of $6,000, with the same projection and got $39,390.45 in "tax-free". So the Roth has a little over $1,500 in savings in that scenario.

https://www.moneycalculator.org/CompoundInterest/


Also, the compounding effect would be increased inside the Roth as dividends paid out every year in the non-Roth would be subject to taxes. Converting to a less-risky portfolio like fixed income would not be a taxable event, that's a huge plus. There's a lot of variables that give a big benefit to Roth that are hard to plot out, but I'd at least start at 20%.

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Re: How much is a Roth worth?

Post by Juice3 » Sun Nov 17, 2019 4:30 pm

illumination wrote:
Sun Nov 17, 2019 2:38 pm
I would pay around what my expected capital gains tax rate is as a starting point.
...
but I'd at least start at 20%.
Interesting perspective, your break even point would be 26.4823 years. After 30 years, you would be up 0.84% of the Roth balance.

Switching to annual compounding (from the semi - annual you used) to make the math more clear.

Brokerage = 6K*(1.07)^30-(6K*(1.07)^30-6K)*.2 = 37,739
Roth = 5K*(1.07)^30 = 38,061

For that 300 bucks you are have to live with government regs on Roths. Worth it?

PS: If you are curious what was wrong with your math, you paid an extra 20% on the 6,000 investment ... or 1,200 that makes the number close to mine.

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Re: How much is a Roth worth?

Post by ClevrChico » Sun Nov 17, 2019 4:45 pm

Juice3 wrote:
Sun Nov 17, 2019 2:06 pm
ClevrChico wrote:
Sun Nov 17, 2019 1:36 pm

Assume ~$25k/year into a Roth, 7.2% historical return with my AA, 15% federal/10% state capital gains over twenty years. Money that would be paid as tax in taxable is getting reinvested and growing in the Roth.

Compound returns make the number big in later years. It's smaller starting out. $5k/year is amortized over the twenty years.
This math has been done a lot of times. You are making some incorrect assumptions.

There are 2 account types, Roth and tIRA.

Let's assume the AA is same and thus returns are the same.

If you pay X tax today (Roth) and also same X tax in the year you take the distro from tIRA, then it does not matter if you have the money in the Roth or tIRA.

Let's prove:

P - amount you would place in the tIRA
T - 1-Tax rate
I - 1+ Investment return
Y - Time

tIRA = Roth ...
P*(I^Y)*T = (P*T)*(I^Y)

In other words, if you pay the tax now or pay the tax later, you end up with the same amount.

What assumptions did I make that could make this untrue in some cases?
1. Tax rates could be different in the future than in the present. This may work for or against you depending which is higher.
2. You do not have the same AA or investments. Again this could be for or against you depending upon results.
3. This views retirement savings in isolation. tIRA will be considered "income" for you in retirement. If this income pushed off one of many IRS "cliffs", this could trigger additional taxes/costs, such as taxable SS, IRMAA, aca subsidies, etc.

Finally, you could view a third account type, already taxed savings. This is about the same with an additional drag that this vehicle will trigger some level of annual taxation. For example, a stock fund would yield about 2% causing you to owe P*.02*tax Rate annually. This is offset somewhat in that untaxed growth would usually be taxed in the future. Finally consider, the potential for LTCG here to be taxed at different rates than they would be in tIRA (income rates).
My example was specifically for a Mega BackDoor Roth mentioned earlier in the thread. tIRA/401k isn't in the picture, assume that is maxed out already.

$25k/year @ ~7% return X 20 years will result in $600k in capital gains to harvest after year 20.

At 15% federal and 10% state, that's a tax bill of $150k one doesn't have to pay in a Roth. Amortized per year, the Mega Backdoor Roth has an advantage/worth of $7,500 per year over taxable, or a job without this 401k feature.

(Blatant rounding was used, tax drag of taxable account not included, not everyone will have the 401k space or ability to put in $25k/year, etc.)
Last edited by ClevrChico on Sun Nov 17, 2019 4:58 pm, edited 1 time in total.

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Re: How much is a Roth worth?

Post by Juice3 » Sun Nov 17, 2019 4:58 pm

illumination wrote:
Sun Nov 17, 2019 2:38 pm
I would pay around what my expected capital gains tax rate is as a starting point.
...
but I'd at least start at 20%.

Okay, we will have to agree to disagree then. You said you were willing to pay at least 20%. I showed that the break even period for a 20% payment was 25sih years. I suggested that 20% is an at most number not "at least".

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Re: How much is a Roth worth?

Post by illumination » Sun Nov 17, 2019 9:41 pm

Juice3 wrote:
Sun Nov 17, 2019 4:58 pm
illumination wrote:
Sun Nov 17, 2019 2:38 pm
I would pay around what my expected capital gains tax rate is as a starting point.
...
but I'd at least start at 20%.

Okay, we will have to agree to disagree then. You said you were willing to pay at least 20%. I showed that the break even period for a 20% payment was 25sih years. I suggested that 20% is an at most number not "at least".
I think you might be getting into a back and forth with a different poster and mixing me up as you've replied twice to this?

I said in my original post there are several additional factors at play that are difficult to plot out that are major factors besides just the back of the envelope discount. One is the capital gains tax on every dividend distribution quarterly in the taxable account. That pulls down the total rate of return (if we're assuming the tax is pulled from the same account). I also forgot to add state tax, which is another 5%.

Also, the ability to rebalance from equities into bonds and it not be a taxable event in a Roth is huge, if you say were forced into an early retirement, you could convert into fixed income to lock in gains and not have an enormous tax bill. Also, the returns for bonds would then be sheltered in the Roth and could be pulled out tax-free, whereas in taxable you would pay your normal income tax rate ,which is usually not as favorable as capital gains.

And last, there are calculations like IRMAA where Roth earnings would still allow access to retirement money and it not raise your MediCare premiums. Also the rate your Social Security is taxed would change.

I feel like a 20% one-time tax to put dollars into a Roth would be well worth it. I wouldn't put all my eggs in that basket as I do think there are certain scenarios where it would not be worth it, but for me, it would be a no-brainer for a substantial part of my long term retirement funds.

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Re: How much is a Roth worth?

Post by Bfwolf » Sun Nov 17, 2019 9:43 pm

I assumed a starting amount of $100,000, a 2% annual dividend return, a 20% combined federal&state dividend and long term capital gain tax rate, and that investments would be held for the entire 25 year time horizon with no intermediate trading except to reinvest dividends and then everything would be cashed out at the end of 25 years. Here's what I came up with for different level of annual capital gains return rates:

2%: taxable account finished with $226,311 and Roth with $266,584, an increase of 18% for the Roth
4%: taxable account finished with $348,982 and Roth with $429,187, an increase of 23% for the Roth
6%: taxable account finished with $541,411 and Roth with $684,848, an increase of 26% for the Roth
8%: taxable account finished with $840,962 and Roth with $1,083,471, an increase of 29% for the Roth

Feel free to check my math, I probably made an error or two. https://docs.google.com/spreadsheets/d/ ... sp=sharing

I found it interesting that dividend tax drag has a bigger impact than I expected.

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Re: How much is a Roth worth?

Post by Juice3 » Mon Nov 18, 2019 6:25 am

Bfwolf wrote:
Sun Nov 17, 2019 9:43 pm

Feel free to check my math, I probably made an error or two. https://docs.google.com/spreadsheets/d/ ... sp=sharing
Thank you for actually posting your work. I see just one catastrophic error in in your math.

You forgot to discount the Roth starting balance by whatever you are willing to pay. We have been talking about 20% as an "at least" number. So edit your spreadsheet so that the Roth has 80% starting balance. All of a sudden, things do not look so rosy for the Roth. In the specific example you provided, the Roth comes out $5,632 behind.

Kudos on solving the problem this way, This approach seems to resonate with many more people then the generalized equation I posted earlier that was not inclusive of tax drag but did allow for variable returns and starting values.

Please update your original post numbers with the more accurate comparison. A very nice addition would be to include a discount rate in the top "inputs" section so that people could play with that number as well.

Other changes I might suggest would more years/rows. You will see that the break even with this math is just beyond the 25 you provided. Another would be to show the take out each year if you "closed" or liquidated the Taxable account (not just if it happened in Year 25).

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Re: How much is a Roth worth?

Post by Bfwolf » Mon Nov 18, 2019 3:15 pm

Juice3 wrote:
Mon Nov 18, 2019 6:25 am
Bfwolf wrote:
Sun Nov 17, 2019 9:43 pm

Feel free to check my math, I probably made an error or two. https://docs.google.com/spreadsheets/d/ ... sp=sharing
Thank you for actually posting your work. I see just one catastrophic error in in your math.

You forgot to discount the Roth starting balance by whatever you are willing to pay. We have been talking about 20% as an "at least" number. So edit your spreadsheet so that the Roth has 80% starting balance. All of a sudden, things do not look so rosy for the Roth. In the specific example you provided, the Roth comes out $5,632 behind.

Kudos on solving the problem this way, This approach seems to resonate with many more people then the generalized equation I posted earlier that was not inclusive of tax drag but did allow for variable returns and starting values.

Please update your original post numbers with the more accurate comparison. A very nice addition would be to include a discount rate in the top "inputs" section so that people could play with that number as well.

Other changes I might suggest would more years/rows. You will see that the break even with this math is just beyond the 25 you provided. Another would be to show the take out each year if you "closed" or liquidated the Taxable account (not just if it happened in Year 25).
You're right, I should have done it with the "solve" being the % discount of the Roth starting amount that results in breakeven. I also realize that when I copied my work from Excel to the Google sheet, it just copied the values and not the formulas! So changing the inputs wouldn't have changed anything for anybody checking it out. Sorry about that, it's been fixed. In terms of the starting Roth discount necessary to reach breakeven with the taxable account for the same assumptions as I listed above, here's what it looks like for different cap gains rates:

2%: 15% discount
4%: 19% discount
6%: 21% discount
8%: 22% discount

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Re: How much is a Roth worth?

Post by fyre4ce » Mon Nov 18, 2019 4:46 pm

It depends heavily on tax rates, investment types, and time horizon. I ran some cases through a spreadsheet of mine, and here are the results.

I considered three investments types:
"stock": 9% return, 2% yield, 90% qualified yield
"blend": 7% return, 3% yield, 30% qualified yield
"bond": 4% return, 4% yield, 0% qualified yield

I also considered four different tax rates:
"low": 12% STCG/NQD, 0% LTCG/QD
"medium": 24% STCG/NQD, 15% LTCG/QD
"high": 38.8% STCG/NQD, 18.8% LTCG/QD
"very high": 54.1% STCG/NQD, 37.1% LTCG/QD

Cases were run for each combination at 10, 20, 30, 40, and 50 year time horizons. Answers are ratio of Roth to Taxable future values.

"Low Tax" results:
Investment | 10yr | 20 yr | 30yr | 40yr | 50yr
Stock | 100.24% | 100.48% | 100.72% | 100.96% | 101.21%
Blend | 102.55% | 105.17% | 107.85% | 110.61% | 113.43%
Bond | 104.92% | 110.08% | 115.49% | 121.17% | 127.12%

"Medium Tax" results:
Investment | 10yr | 20 yr | 30yr | 40yr | 50yr
Stock | 111.02% | 118.36% | 123.88% | 128.64% | 133.12%
Blend | 111.55% | 121.91% | 131.71% | 141.42% | 151.32%
Bond | 110.08% | 121.17% | 133.38% | 146.81% | 161.61%

"High Tax" results:
Investment | 10yr | 20 yr | 30yr | 40yr | 50yr
Stock | 114.35% | 124.31% | 131.99% | 138.68% | 145.06%
Blend | 116.95% | 133.42% | 150.01% | 167.25% | 185.61%
Bond | 116.79% | 136.40% | 159.30% | 186.04% | 217.28%

"Very High Tax" results:
Investment | 10yr | 20 yr | 30yr | 40yr | 50yr
Stock | 131.32% | 156.73% | 177.51% | 195.98% | 213.82%
Blend | 130.74% | 163.54% | 198.57% | 236.57% | 278.60%
Bond | 124.16% | 154.16% | 191.40% | 237.64% | 295.06%

For low-tax investors the difference can be ~10% or less, even over long time horizons, up to ~20% for tax-inefficient investments.
For highly taxed investors, the difference can be 2:1 for tax-efficient investments and close to 3:1 for tax-inefficient investments.

Source: https://drive.google.com/file/d/138vQcr ... sp=sharing (my own work; used formulas I derived for taxable investment performance from the Wiki)

Edit: Correctly applied NIIT to short term capital gains and non-qualified dividends for high tax and very high tax cases. Results changed slightly but overall conclusions did not
Last edited by fyre4ce on Mon Nov 18, 2019 7:10 pm, edited 3 times in total.

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Re: How much is a Roth worth?

Post by fyre4ce » Mon Nov 18, 2019 7:07 pm

removed - duplicate post

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Re: How much is a Roth worth?

Post by EnjoyIt » Mon Nov 18, 2019 7:15 pm

fyre4ce wrote:
Mon Nov 18, 2019 4:46 pm

I considered three investments types:
"stock": 9% return, 2% yield, 90% qualified yield
"blend": 7% return, 3% yield, 30% qualified yield
"bond": 4% return, 4% yield, 0% qualified yield
My apologies for being bit slow. Can you explain the above better?
I just don't understand where you got the return, yield, or QD percentages from and how you utilized them in your calculations.

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Re: How much is a Roth worth?

Post by fyre4ce » Mon Nov 18, 2019 8:11 pm

EnjoyIt wrote:
Mon Nov 18, 2019 7:15 pm
fyre4ce wrote:
Mon Nov 18, 2019 4:46 pm

I considered three investments types:
"stock": 9% return, 2% yield, 90% qualified yield
"blend": 7% return, 3% yield, 30% qualified yield
"bond": 4% return, 4% yield, 0% qualified yield
My apologies for being bit slow. Can you explain the above better?
I just don't understand where you got the return, yield, or QD percentages from and how you utilized them in your calculations.
Sure, I'll give an example that might help. Let's take the "medium tax" investor with the "blend" investment. Assume a $10,000 initial investment.

After 1 year, the Roth investment is worth $10,700, because the total return is 7% tax-free.

In the taxable account, there is $400 ($10,000 x (7%-3%)) of price appreciation, and $300 ($10,000 x 3%) of yield. $90 of the yield ($300 x 30%) is taxed at qualified dividend rates (15%), resulting in a tax of $13.50 ($90 x 15%), and the remaining $210 of yield is taxed at non-qualified dividend rates (24%), resulting in a tax of $50.40 ($210 x 24%). So, the total tax that must be paid out of the account is $63.90, and the account balance after 1 year will be $10,636.10 ($10,700 - $63.90). The cost basis of the account increased by $236.10, the difference between the yield ($300) and the taxes paid ($63.90), so the cost basis after 1 year is $10,236.10. If the investment were to be sold after 1 year and long-term rates (15%) applied, the capital gains tax due would be $60 (($10,636.10 - $10,236.10) x 15%), so the final after-tax value is $10,576.10 ($10,636.10 - $60). If you ran this case in my spreadsheet, it would spit out 101.17% ($10,700 / $10,576.10) for the Roth advantage.

This is just for one year's worth of growth. Over longer periods of time, and especially if the dividend tax rates are significant, tax drag will give the Roth account a progressively bigger and bigger advantage. For the "very high tax" investor (top bracket in California) investing in bonds, after 50 years, the Roth account would be worth 3x taxable, a much bigger difference than the 1.17% in my example above.

EnjoyIt
Posts: 2886
Joined: Sun Dec 29, 2013 8:06 pm

Re: How much is a Roth worth?

Post by EnjoyIt » Mon Nov 18, 2019 8:18 pm

fyre4ce wrote:
Mon Nov 18, 2019 8:11 pm
EnjoyIt wrote:
Mon Nov 18, 2019 7:15 pm
fyre4ce wrote:
Mon Nov 18, 2019 4:46 pm

I considered three investments types:
"stock": 9% return, 2% yield, 90% qualified yield
"blend": 7% return, 3% yield, 30% qualified yield
"bond": 4% return, 4% yield, 0% qualified yield
My apologies for being bit slow. Can you explain the above better?
I just don't understand where you got the return, yield, or QD percentages from and how you utilized them in your calculations.
Sure, I'll give an example that might help. Let's take the "medium tax" investor with the "blend" investment. Assume a $10,000 initial investment.

After 1 year, the Roth investment is worth $10,700, because the total return is 7% tax-free.

In the taxable account, there is $400 ($10,000 x (7%-3%)) of price appreciation, and $300 ($10,000 x 3%) of yield. $90 of the yield ($300 x 30%) is taxed at qualified dividend rates (15%), resulting in a tax of $13.50 ($90 x 15%), and the remaining $210 of yield is taxed at non-qualified dividend rates (24%), resulting in a tax of $50.40 ($210 x 24%). So, the total tax that must be paid out of the account is $63.90, and the account balance after 1 year will be $10,636.10 ($10,700 - $63.90). The cost basis of the account increased by $236.10, the difference between the yield ($300) and the taxes paid ($63.90), so the cost basis after 1 year is $10,236.10. If the investment were to be sold after 1 year and long-term rates (15%) applied, the capital gains tax due would be $60 (($10,636.10 - $10,236.10) x 15%), so the final after-tax value is $10,576.10 ($10,636.10 - $60). If you ran this case in my spreadsheet, it would spit out 101.17% ($10,700 / $10,576.10) for the Roth advantage.

This is just for one year's worth of growth. Over longer periods of time, and especially if the dividend tax rates are significant, tax drag will give the Roth account a progressively bigger and bigger advantage. For the "very high tax" investor (top bracket in California) investing in bonds, after 50 years, the Roth account would be worth 3x taxable, a much bigger difference than the 1.17% in my example above.
I completely understand. Thanks for he example. It does go to show that maybe spending an extra lets say $1k a year to be able to do a mega backdoor Roth starts to look really good despite the cost if done over long term if the alternative is just having money in taxable.

fyre4ce
Posts: 371
Joined: Sun Aug 06, 2017 11:29 am

Re: How much is a Roth worth?

Post by fyre4ce » Mon Nov 18, 2019 8:48 pm

EnjoyIt wrote:
Mon Nov 18, 2019 8:18 pm
I completely understand. Thanks for he example. It does go to show that maybe spending an extra lets say $1k a year to be able to do a mega backdoor Roth starts to look really good despite the cost if done over long term if the alternative is just having money in taxable.
Each person's situation is different, but I put in some rough numbers for me (32% federal + California tax now, 24% federal + no state tax in the future, 30 years, 8% return, 2% yield, 90% qualified) and I got a Roth/taxable ratio of 134%. So, an extra $10,000 of Roth space would be worth $3,400 today. That ignores the better liquidity of the taxable account.

blastoff
Posts: 265
Joined: Thu Jan 19, 2012 12:04 pm

Re: How much is a Roth worth?

Post by blastoff » Mon Nov 18, 2019 9:11 pm

I have done these calculations to value the benefit of having a 457 Roth option. I got similar numbers, but agree it is very tax and situation dependent. Just adding this comment as an example of one simple scenario where these "value of a Ruth" calculations would be relevant.

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