Roth + Time vs Pretax + tax

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Superleaf444
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Roth + Time vs Pretax + tax

Post by Superleaf444 » Fri May 22, 2020 1:09 pm

Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.

emoore
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Re: Roth + Time vs Pretax + tax

Post by emoore » Fri May 22, 2020 1:24 pm

If your tax rate is the same at 18 thru end of retirement then it doesn't matter if you go Roth or Traditional. They will be equal. But in real life your taxes are variable so that's where the advice came from. Not sure what time has to do with it if your tax rate is the same.

IndexCore
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Re: Roth + Time vs Pretax + tax

Post by IndexCore » Fri May 22, 2020 1:36 pm

An oversimplified example, you have $10,000 that will triple while it's in one of two accounts.
First choice, the money is cut in half when you put it in: your $10k becomes $5k and triples to $15k, which you withdraw.
OR: the money is cut in half on withdrawal: your $10k triples to $30k and when withdrawn, is cut in half to $15k.
For the same tax rate, the choices are the same for Roth and Traditional.

Note, however, that you have more certainty with the Roth: what you see is what you get. That's one of the reasons, all else being equal, I favor Roth over Traditional. The flexibility of penalty-free withdrawals (equal to contributions, not growth) is a nice feature, as well.

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Superleaf444
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Re: Roth + Time vs Pretax + tax

Post by Superleaf444 » Fri May 22, 2020 1:39 pm

emoore wrote:
Fri May 22, 2020 1:24 pm
If your tax rate is the same at 18 thru end of retirement then it doesn't matter if you go Roth or Traditional. They will be equal. But in real life your taxes are variable so that's where the advice came from. Not sure what time has to do with it if your tax rate is the same.
Very good point. I should have made the example messy like life. ha

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Re: Roth + Time vs Pretax + tax

Post by Vanguard Fan 1367 » Fri May 22, 2020 1:40 pm

emoore wrote:
Fri May 22, 2020 1:24 pm
If your tax rate is the same at 18 thru end of retirement then it doesn't matter if you go Roth or Traditional. They will be equal. But in real life your taxes are variable so that's where the advice came from. Not sure what time has to do with it if your tax rate is the same.
The great Warren Buffet says that a dollar saved with frugal spending is worth 8 dollars maybe 40 years later. So I think you should calculate how much the extra dollars you can invest due to less taxes paid adds up over 40 or more years of investing.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."

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David Jay
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Re: Roth + Time vs Pretax + tax

Post by David Jay » Fri May 22, 2020 2:36 pm

My quickie rule of thumb: If your current marginal rate is 12% or less, go Roth. If your current marginal rate is 32% or higher, go tIRA. 22% - 24% requires a more detailed analysis (focusing on future projected marginal tax rate).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

langlands
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Re: Roth + Time vs Pretax + tax

Post by langlands » Fri May 22, 2020 2:50 pm

IndexCore wrote:
Fri May 22, 2020 1:36 pm
An oversimplified example, you have $10,000 that will triple while it's in one of two accounts.
First choice, the money is cut in half when you put it in: your $10k becomes $5k and triples to $15k, which you withdraw.
OR: the money is cut in half on withdrawal: your $10k triples to $30k and when withdrawn, is cut in half to $15k.
For the same tax rate, the choices are the same for Roth and Traditional.

Note, however, that you have more certainty with the Roth: what you see is what you get. That's one of the reasons, all else being equal, I favor Roth over Traditional. The flexibility of penalty-free withdrawals (equal to contributions, not growth) is a nice feature, as well.
This is correct. Essentially, OP's intuition that time plays a factor is incorrect. It's all about tax rates now vs. in the future. It's a common misconception though and I previously also made this error.

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Re: Roth + Time vs Pretax + tax

Post by 02nz » Fri May 22, 2020 2:57 pm

Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
IndexCore's example (remember the commutative property of multiplication from middle school?) shows why this is wrong. It's always about the tax rate that applies to that chunk of money if paying taxes now (Roth) vs the tax rate on that same chunk of money (including growth) if paying taxes later (traditional). Determining that rate can be complex because it can span multiple tax brackets or even tax years. But it doesn't matter if the time span is 1.5 years or 150 years.

This is a frequent misconception and I've heard personal finance gurus parrot this line - "sure you pay your taxes now with Roth, but it grows tax-free for so long, it's worth it." The length of time is irrelevant, as Roth and traditional enjoy the same tax advantage in the growth phase.

Traditional makes sense for those whose income will be lower in retirement. That's most people, because, well, in retirement they're no longer working and thus have much less income. The exact answer depends on a whole lot of things and assumptions and can't be known until you're dead. If you can afford it, max both a Roth IRA and traditional 401k, and you'll be fine for retirement.

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celia
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Re: Roth + Time vs Pretax + tax

Post by celia » Fri May 22, 2020 3:26 pm

I agree that time is relavant. This is like looking at the absolute dollar amount of the taxes due now (for Roth) vs later (for tax-deferred). Inflation will make future dollars worth less (both in the tax bill and the part you keep). But if you can grow the investment faster than inflation, you can come out ahead.

Many people here are focused on comparing tax rates now vs. later. But the tax rates change every 10 years or so. And your marital status along the way can change. (Singles have half the space in each tax bracket compared to MFJ.) And various tax credits can help you on some years but not others.

I prefer to look at the dollar value of the conversion taxes and if I have that amount in taxable readily available. If I won’t be needing it anytime soon, why not use it for Roth conversion taxes, I ask myself. (Possibly that is what I’d like to ‘buy’ at the moment, using a spending analogy.)

But I don’t see it as the length of time in the account so much as the point in time that matters to my eventual net worth. When I’m unemployed, on medical leave, or the market is going down rapidly, those are the best times to convert, other than early retirement. That is because either your tax bracket is temporarily lower or because you can convert more shares for the same tax bill.
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: Roth + Time vs Pretax + tax

Post by KlangFool » Fri May 22, 2020 3:34 pm

OP,

This is a false argument. You can have both: Trad. 401K + Roth IRA. And, 90+% of the time, it works well enough.

KlangFool

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Re: Roth + Time vs Pretax + tax

Post by firebirdparts » Fri May 22, 2020 3:43 pm

Superleaf444 wrote:
Fri May 22, 2020 1:09 pm

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.
Time doesn't come into it; If you have $10 and you put that in a pretax IRA, you compare that to paying $2 in taxes and putting $8 in a Roth. Let's say it quadruples: The pretax is now $40 and you owe $8 taxes. The Roth is now $32.

If the tax rate is the same, then it doesn't matter which one you use based on that consideration alone, and time is irrelevant.
A fool and your money are soon partners

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FiveK
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Re: Roth + Time vs Pretax + tax

Post by FiveK » Fri May 22, 2020 3:51 pm


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Eagle33
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Re: Roth + Time vs Pretax + tax

Post by Eagle33 » Fri May 22, 2020 10:21 pm

Why no mention of that Social Security may be taxed with tIRA withdrawals and not with rIRA withdrawals?
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FiveK
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Re: Roth + Time vs Pretax + tax

Post by FiveK » Fri May 22, 2020 10:29 pm

Eagle33 wrote:
Fri May 22, 2020 10:21 pm
Why no mention of that Social Security may be taxed with tIRA withdrawals and not with rIRA withdrawals?
Perhaps because that's only one part of the overall marginal tax calculations that determine whether traditional or Roth provides the best result.

JustinR
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Re: Roth + Time vs Pretax + tax

Post by JustinR » Fri May 22, 2020 10:34 pm

Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
Unless your taxes right now are 0%, pretax is almost always better.

Always do pretax until you're forced to do Roth, because you can pay 0% taxes on all of it if you plan correctly.

Don't bother trying to predict the future; just do pretax as you may regret it later if you don't. With pretax you hold all the cards to make the best play. With Roth, it's final so there's nothing you can do to unwind it.


I'll break it down into simplest terms:

Government says,
  • Pretax: "Give us 0% right now. In the future, you can give us 0% to X%... you control how much and when."
  • Roth: "Give us X% right now, and that's final."
Last edited by JustinR on Sat May 23, 2020 5:17 am, edited 6 times in total.

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FiveK
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Re: Roth + Time vs Pretax + tax

Post by FiveK » Fri May 22, 2020 10:59 pm

JustinR wrote:
Fri May 22, 2020 10:34 pm
...because you can pay 0% taxes on all of it if you plan correctly.
Of course that depends on the definition of "correctly" which is at best subjective and, for many, unachievable or undesirable.

RetiredAL
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Re: Roth + Time vs Pretax + tax

Post by RetiredAL » Fri May 22, 2020 11:13 pm

I disagree with those that that categorically say time in not important. It can be for anyone married. You see, more than likely one day, the original owner or the subsequent owner will be filing as single and that survivor's tax rate will likely increase with that event, impacting the tax bill forced by withdrawals.

Some may argue that's tax rate. I argue with each advancing year, the likelihood of being forced into that higher tax rate scenario increases.

This is the exact reason why many of us are doing conversions before RMD's hit. Would not the same functionality have occurred if in your early years, which are possibly your lower tax rate years, that you had done Roth instead or IRA/401K.

I am not disagreeing with the concept that on a single straight-line basis, with tax rate to that saver having held constant ( not stepped into a higher bracket ) over the years, that it's a wash comparing pre-tax IRA/401K to post-tax Roth/Roth401k.

There's no simple equation to determine the best pre vs post points, because there are so many unknown assumptions one has make in their modeling.

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Re: Roth + Time vs Pretax + tax

Post by Small Savanna » Sat May 23, 2020 1:48 am

Intuition wasn't helping me figure this out, so I did a spreadsheet to "what if" this for varying levels of Pre-tax vs Roth contributions. TLDR is that time doesn't seem to be a factor, and that Roth vs. Pre-tax doesn't matter as much as I expected.

To keep it fair, I assumed that a couple in the middle of the 24% bracket would either save up to 10% of their wages in pre-tax or up to 7.6% of their wages in Roth, or a sliding scale in between, since those choices all yield the same take home pay. Important assumptions are that their income is level over a long period of years and that the tax laws won't change. Other assumptions:
- Ignored state taxes
- Ignored net investment income tax
- 85% of Social Security would be taxable for this couple across all of the strategies
- Standard deduction

The conclusion is that in terms of spendable (after tax) retirement income, it really doesn't matter. The 100% pre-tax strategy performed the best, but 50% Roth did 99% as well. My conclusion is that most of your retirement savings should be in pre-tax, but having 10% to 30% in Roth is a good hedging strategy against things I didn't include in the model, like IRMAA, death of a spouse, or higher tax rates in the future.

Here is an excerpt of the spreadsheet - apologies that some of the formatting goes away when I cut and paste; there doesn't seem to be an easy way to insert a table. You can infer the formulas and roll your own if desired.

Roth Percent 20% Assume Married Filing Jointly in Middle of 24% bracket, Standard Deduction
ACCUMULATION PHASE
Age Wages Tax Def Roth AGI Taxable Tax. Net Tax Def Bal. Roth Bal
22 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $24,000. $4,560. Roth %. Net. % of optimal
23 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $48,960.00 $9,302.40. 0% $141,535 100.00%
24 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $74,918.40 $14,234.50 10% $141,303 99.84%
25 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $101,915.14 $19,363.88 20% $141,075 99.67%
26 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $129,991.74 $24,698.43 30% $140,847 99.51%
27 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $159,191.41 $30,246.37 40% $140,619 99.35%
28 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $189,559.07 $36,016.22 50% $139,877 98.83%
29 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $221,141.43 $42,016.87 60% $138,509 97.86%
30 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $253,987.09 $48,257.55
60 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $2,169,819.59 $412,265.72
61 $300,000 $24,000 $4,560 $276,000 $252,000 $48,829 $222,611 $2,280,612.38 $433,316.35
SPENDING PHASE
Taxable Tax Free SocSec AGI. Taxable Tax Net
62 $91,224 $17,333 $48,000 $132,024 $108,024 $15,482 $141,075

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1789
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Re: Roth + Time vs Pretax + tax

Post by 1789 » Sat May 23, 2020 1:53 am

JustinR wrote:
Fri May 22, 2020 10:34 pm
Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
Unless your taxes right now are 0%, pretax is almost always better.

Always do pretax until you're forced to do Roth, because you can pay 0% taxes on all of it if you plan correctly.

Don't bother trying to predict the future; just do pretax as you may regret it later if you don't. With pretax you hold all the cards to make the best play. With Roth, it's final so there's nothing you can do to unwind it.
+1 well said JustinR
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FiveK
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Re: Roth + Time vs Pretax + tax

Post by FiveK » Sat May 23, 2020 2:36 am

Small Savanna wrote:
Sat May 23, 2020 1:48 am
Important assumptions are that their income is level over a long period of years and that the tax laws won't change. Other assumptions:
- Ignored state taxes
- Ignored net investment income tax
- 85% of Social Security would be taxable for this couple across all of the strategies
- Standard deduction
What do you conclude if the couple decides
- they can afford $50K/yr pre-tax, and
- earns 8%/yr (2%/yr from dividends and 6%/yr from growth)?

Note that
- the $50K/yr pre-tax all fits into the $38K/yr limit for 2 Roth 401k contributions, but
- $12K/yr would be taxed and go into a taxable account if the $38K/yr is used for 2 traditional 401k contributions.

Rxwolf
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Re: Roth + Time vs Pretax + tax

Post by Rxwolf » Sat May 23, 2020 2:43 am

First, let me say I think that Roth has many more positives and whatever math you want to use, Roth is better.

I offer two choices:
A. at your retirement age you have all of your money in Pretax 401K, IRA, etc
B. At your retirement age you have half of you money in Pretax 401K, IRA and the other half in Roth 401K, IRA

which is better?
I'm not asking the cost to get there, I am asking which is a better option to have.

I say option B is better for many reasons.
1. If have have my money in a Roth 401k and I change jobs, I can roll that over 100% to Roth IRA
If I have my money in Trad. 401k and I change jobs, I can roll that over 100% to Trad IRA
Now, for some this makes no difference, but for people over the Roth IRA income limits, having Pre-tax money in IRA causes issues when doing
backdoor Roth IRA. And by "causes issues", I mean extra tax, extra record keeping, extra calculations, etc.
I understand that some company plans do not allow a direct roll over from a different company, I know many do but I don't believe there is a rule
requiring they allow.

2. If you don't spend all of your money before you die and you wish to leave some to your children or other friends/relatives, having the Roth vs trad saves them from the future taxes due. With the new 10 year rules for depleting the account, this could cause them to pay their highest tax rate on your gift. Now, I am not saying I would not take any gifts of Trad. IRA, and please to prove your counter point, give it to me and I will suffer the taxes, just kidding unless you really want to give me money. However, one could leave all the money in the Roth IRA until 9 years 11 months and gain ALL of the tax advantage. However, what some do is take out 1/10 per year, or withdrawal the entire amount even earlier to reduce the tax hit, and lose some of the advantage the IRA has to offer.

3. It is again a great problem to have but there are some who are quite upset at 85% of their SS being taxed, well by having a maxed SS payout at age 70, it does not take much Trad. 401K/IRA distribution to cause your SS income to be 85% taxed. If all of your money was Roth, it would not.

2. By having some money in Trad. 401k and some in Roth 401K, you can choose what your income is for a certain year. Let's say there is a global pandemic and you get free money from the govt. if you make under x amount. Crazy right. Well with money in different pots, you get to decide and can choose what your income for that year is and could reap the reward. If you never put money into Roth, you will never be able to use it.

3. Along the same lines, if you were given a opportunity to spend or invest a large sum of money. Example, real estate investment, medical bills, invest in a sure fire startup, etc. If you had Roth, you could pull the money out and not work about taxes, or other issues. I know that some will say, they would not pull money from Roth to do any of these things. They would find some other way to get the money. I agree, but sometimes people have no other options and if they had planned ahead and had sizeable Roth balances the amount of taxes owed would not be another hurtle.

So what about the cost to have Roth money?

Well as O2nz noted on IndexCore example:
"IndexCore's example (remember the commutative property of multiplication from middle school?) shows why this is wrong. It's always about the tax rate that applies to that chunk of money if paying taxes now (Roth) vs the tax rate on that same chunk of money (including growth) if paying taxes later (traditional). Determining that rate can be complex because it can span multiple tax brackets or even tax years. But it doesn't matter if the time span is 1.5 years or 150 years.

This is a frequent misconception and I've heard personal finance gurus parrot this line - "sure you pay your taxes now with Roth, but it grows tax-free for so long, it's worth it." The length of time is irrelevant, as Roth and traditional enjoy the same tax advantage in the growth phase."

So it all comes down to the tax rate when adding and tax rate when withdrawing. I agree. But it is not the whole story.
However, I would note what I included above to say that Roth comes out ahead.

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FiveK
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Re: Roth + Time vs Pretax + tax

Post by FiveK » Sat May 23, 2020 2:59 am

JustinR wrote:
Fri May 22, 2020 10:34 pm
Always do pretax until you're forced to do Roth....
Rxwolf wrote:
Sat May 23, 2020 2:43 am
First, let me say I think that Roth has many more positives and whatever math you want to use, Roth is better.
:D

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Re: Roth + Time vs Pretax + tax

Post by Rxwolf » Sat May 23, 2020 3:44 am

Ugh, forgot to include the extra tax hit for death of a spouse for above. I knew I was forgetting something.

My personal situation is that my wife and I have been fortunate and have high paying jobs and both of us listened to my craziness and saved the max when young. So here is where we stand:

Regular 403b ~1,000,000 adding 16,830/year (employer contribution)
Roth 403B ~92,000 adding 39,000/year (our contribution)
Roth IRA ~410,000 adding 12,000/year

1. Even with going 100% Roth 403b, we are still getting a sizeable contribution to pre-tax 403b due to our employer only add pre-tax. Many overlook this.
2. I wish we had Roth 403b earlier, because maxing Roth now, the Regular 403B will be ~2.8 mill in 15 years at 6% return. While Roth accounts (403b/IRA) will only be ~2.4 mill in 15 years at 6%. so we will be ~ 50/50 mix.

We will be fine.
But if I had choice of which to do as a new grad or first job.
I would tell you to 100% put money into Roth, your employer will more than likely add matching to a pre-tax account.
Also your first job is usually lower pay, so pay the tax now a what should be a lower tax rate.
If you find that you are near an IRS breakpoint or income limit, well change your allocation that year to gain that advantage. However, you can always contribute to Roth IRA--you can do the backdoor IRA at any income level, so add to pre-tax just get under income for Roth IRA.

Rxwolf
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Re: Roth + Time vs Pretax + tax

Post by Rxwolf » Sat May 23, 2020 3:58 am

FiveK wrote:
Sat May 23, 2020 2:59 am
JustinR wrote:
Fri May 22, 2020 10:34 pm
Always do pretax until you're forced to do Roth....
Rxwolf wrote:
Sat May 23, 2020 2:43 am
First, let me say I think that Roth has many more positives and whatever math you want to use, Roth is better.
:D
I don't understand what you are noting here. The two quotes seem to me to disagree. I don't get the smile face.

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FiveK
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Re: Roth + Time vs Pretax + tax

Post by FiveK » Sat May 23, 2020 4:19 am

Rxwolf wrote:
Sat May 23, 2020 3:58 am
FiveK wrote:
Sat May 23, 2020 2:59 am
JustinR wrote:
Fri May 22, 2020 10:34 pm
Always do pretax until you're forced to do Roth....
Rxwolf wrote:
Sat May 23, 2020 2:43 am
First, let me say I think that Roth has many more positives and whatever math you want to use, Roth is better.
:D
I don't understand what you are noting here. The two quotes seem to me to disagree. I don't get the smile face.
Yes, they sure do disagree!

You and JustinR can argue over these unconditional statements.

Neither is inherently better, as either one may be a better investment choice in different situations. See that link for details.

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Superleaf444
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Re: Roth + Time vs Pretax + tax

Post by Superleaf444 » Sat May 23, 2020 8:21 am

langlands wrote:
Fri May 22, 2020 2:50 pm
IndexCore wrote:
Fri May 22, 2020 1:36 pm
An oversimplified example, you have $10,000 that will triple while it's in one of two accounts.
First choice, the money is cut in half when you put it in: your $10k becomes $5k and triples to $15k, which you withdraw.
OR: the money is cut in half on withdrawal: your $10k triples to $30k and when withdrawn, is cut in half to $15k.
For the same tax rate, the choices are the same for Roth and Traditional.

Note, however, that you have more certainty with the Roth: what you see is what you get. That's one of the reasons, all else being equal, I favor Roth over Traditional. The flexibility of penalty-free withdrawals (equal to contributions, not growth) is a nice feature, as well.
This is correct. Essentially, OP's intuition that time plays a factor is incorrect. It's all about tax rates now vs. in the future. It's a common misconception though and I previously also made this error.
You could avoid paying taxes now and the growth of the funds could become so great that it pushes you into a higher tax bracket. And the reverse could be true.

————————————

In general, I'm not exactly asking which is better than the other. Love this conversation tho!

This is the thing about roth vs pretax, it seems like so many people have VASTLY strong opinions on them I find it fascinating.

One expert will say roth is better because of tax free growth, also technically you can contribute more; while others say doing pretax is better because you can always roll it over and you are avoiding high taxes now + planning can put you in a lower tax bracket.

I've also seen plenty of reports that MOST cases an individual will end up with the same amount no matter the vehicle, because it almost always comes down to contributions + low fees rather than account.


Personally:
I'm on the threshold of not being able to contribute to a Roth IRA. I usually do enough into Pretax 401k to lower my MAGI so I can do contribute to my Roth IRA without doing a backdoor. When I think about this broadly, I do know this could be pointless, but it also helps give me a variety of tax options, so eh.

I also think picking pretax vs roth is a bit like choosing funds on past returns. There is no guarantee on the future tax laws so it is a bit of chaos.

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Re: Roth + Time vs Pretax + tax

Post by grabiner » Sat May 23, 2020 10:54 am

Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.
This is only relevant if you max out your retirement accounts. If you are maxing out, a Roth is always better than a traditional account if you will retire at the same marginal tax rate, but the advantage when you will retire at a lower tax rate depends on how far you are from retirement.

First, suppose you are not maxing out. You are in a 22% tax bracket, and will retire in a 22% tax bracket, and you have $7800 to invest. You could invest $7800 in a Roth 401(k), or $10,000 in a traditional 401(k). No matter what happens to the markets, if you invest the two accounts the same way, you will break even; if you have $78,000 in the Roth 401(k), you could have had $100,000 in the traditional 401(k) which would be $78,000 after tax.

Now, suppose you are maxing out. You are in a 24% tax bracket, and will retire in a 22% tax bracket, and you have $19,500 to invest. You could invest $19,500 in a Roth 401(k), or $19,500 in a traditional 401(k) and invest the $4680 tax savings in a taxable account. As before, $19,500 in a traditional 401(k) is equivalent to $15,210 in a Roth 401(k). But now, if you use the Roth account, you have $4290 in the Roth 401(k), while if you use the traditional account, you have $4680 in a taxable account. Whether the traditional or Roth account is better depends on how long you invest the $4680, as it will lose a percentage to taxes every year. If you are close to retirement, you would be better off using the traditional 401(k), and then, when you retire, using the taxable account to pay the tax on converting the traditional account to a Roth in a 22% bracket; you will have lost less than the 9% difference between $4680 and $4290 to taxes while waiting to convert.

If the tax rates are not close, the traditional account will be ahead under almost any reasonable assumption. Consider the same example if you are in a 32% tax bracket but will still retire in a 22% bracket, so that the traditional 401(k) gives you a $6240 tax savings. Using the Roth gives you $4290 of Roth money instead of $6240 of taxable money, and it takes a very long time for a taxable account to lose a third of its value to taxes compared with a tax-free account.
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Re: Roth + Time vs Pretax + tax

Post by grabiner » Sat May 23, 2020 10:57 am

Here is a more detailed analysis: Roth 401(k) in a 28% bracket thoughts

With the tax rates and bond yields in effect in 2016, I estimated that it is better to max out a traditional 401(k) rather than a Roth 401(k) if you were in the 28% bracket, expected to retire in the 25% bracket, and were less than 15 years from retirement. Bond yields are lower now, which makes the break-even time longer for the same tax rate gap.
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Re: Roth + Time vs Pretax + tax

Post by teen persuasion » Sat May 23, 2020 11:17 am

JustinR wrote:
Fri May 22, 2020 10:34 pm
Always do pretax until you're forced to do Roth....
This is the appropriate answer for my family's situation, though it's more correctly stated as "Always do pre-tax employer plan contributions, until you've exhausted the tax benefits, then do Roth IRA".

This is due to refundable tax credits, which effectively raise our marginal rate by the combined EITC phaseout rates. Normal rule of thumb says we should go all Roth in the 10-12% bracket, but that 21% + 6.3% phaseout rate means we go all pre-tax (but only in employer retirement accounts, tIRA is not equivalent for this credit).


Low income does not always equal low marginal tax rate, it can actually approach 50%.

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Re: Roth + Time vs Pretax + tax

Post by grabiner » Sat May 23, 2020 11:35 am

teen persuasion wrote:
Sat May 23, 2020 11:17 am
JustinR wrote:
Fri May 22, 2020 10:34 pm
Always do pretax until you're forced to do Roth....
This is the appropriate answer for my family's situation, though it's more correctly stated as "Always do pre-tax employer plan contributions, until you've exhausted the tax benefits, then do Roth IRA".

This is due to refundable tax credits, which effectively raise our marginal rate by the combined EITC phaseout rates. Normal rule of thumb says we should go all Roth in the 10-12% bracket, but that 21% + 6.3% phaseout rate means we go all pre-tax (but only in employer retirement accounts, tIRA is not equivalent for this credit).


Low income does not always equal low marginal tax rate, it can actually approach 50%.
The same thing can happen in retirement; the phase-in of Social Security taxation means that many retirees in the 12% bracket have a 22.2% marginal tax rate. This is is the reason that a Roth is recommended if your marginal tax rate is 12% (which, as shown above, is not equivalent to your tax bracket being 12%).
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Re: Roth + Time vs Pretax + tax

Post by teen persuasion » Sat May 23, 2020 1:36 pm

grabiner wrote:
Sat May 23, 2020 11:35 am
teen persuasion wrote:
Sat May 23, 2020 11:17 am
JustinR wrote:
Fri May 22, 2020 10:34 pm
Always do pretax until you're forced to do Roth....
This is the appropriate answer for my family's situation, though it's more correctly stated as "Always do pre-tax employer plan contributions, until you've exhausted the tax benefits, then do Roth IRA".

This is due to refundable tax credits, which effectively raise our marginal rate by the combined EITC phaseout rates. Normal rule of thumb says we should go all Roth in the 10-12% bracket, but that 21% + 6.3% phaseout rate means we go all pre-tax (but only in employer retirement accounts, tIRA is not equivalent for this credit).


Low income does not always equal low marginal tax rate, it can actually approach 50%.
The same thing can happen in retirement; the phase-in of Social Security taxation means that many retirees in the 12% bracket have a 22.2% marginal tax rate. This is is the reason that a Roth is recommended if your marginal tax rate is 12% (which, as shown above, is not equivalent to your tax bracket being 12%).
Good point, which is why we have some of each (1/3 Roth, 2/3 pre-tax), and intend to Roth convert at zero or near zero rates before SS at 70. We can fine tune our retirement tax rate, and keep an RMD tax torpedo or SS tax hump manageable.

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Re: Roth + Time vs Pretax + tax

Post by David Althaus » Sun May 24, 2020 8:30 am

I may demonstrate a weakness for rules of thumb but: If you have more than 20 years to let the Roth compound that's most likely what you should do. Less and it's likely a wash. Don't wait. I did and now it's too late.

All the best

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Re: Roth + Time vs Pretax + tax

Post by grabiner » Sun May 24, 2020 8:56 am

David Althaus wrote:
Sun May 24, 2020 8:30 am
I may demonstrate a weakness for rules of thumb but: If you have more than 20 years to let the Roth compound that's most likely what you should do. Less and it's likely a wash. Don't wait. I did and now it's too late.
As the above discussion suggests, this is a reasonable rule of thumb if the tax rates are close (24% versus 22%) and you can max out your tax-advantaged savings.

If you cannot max out, the time horizon becomes irrelevant. $7800 in a Roth and $10,000 in a traditional account will give you the same amount of money to spend in retirement if you retire at a 22% marginal tax rate, and the traditional is better if you retire at a lower marginal tax rate, independent of your time horizon. ($10,000 in a Roth is better than $10,000 in a traditional account at any tax rate, but that is not a decision on how to invest; in order to put the same dollar amount in the Roth, you need to reduce your current spending, and you could use that reduction to put more dollars in the traditional account instead.)
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Re: Roth + Time vs Pretax + tax

Post by firebirdparts » Sun May 24, 2020 8:56 am

RetiredAL wrote:
Fri May 22, 2020 11:13 pm
I disagree with those that that categorically say time in not important. It can be for anyone married. You see, more than likely one day, the original owner or the subsequent owner will be filing as single and that survivor's tax rate will likely increase with that event, impacting the tax bill forced by withdrawals.

That’s not what time is.
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Re: Roth + Time vs Pretax + tax

Post by Small Savanna » Sun May 24, 2020 6:48 pm

FiveK wrote:
Sat May 23, 2020 2:36 am
Small Savanna wrote:
Sat May 23, 2020 1:48 am
Important assumptions are that their income is level over a long period of years and that the tax laws won't change. Other assumptions:
- Ignored state taxes
- Ignored net investment income tax
- 85% of Social Security would be taxable for this couple across all of the strategies
- Standard deduction
What do you conclude if the couple decides
- they can afford $50K/yr pre-tax, and
- earns 8%/yr (2%/yr from dividends and 6%/yr from growth)?

Note that
- the $50K/yr pre-tax all fits into the $38K/yr limit for 2 Roth 401k contributions, but
- $12K/yr would be taxed and go into a taxable account if the $38K/yr is used for 2 traditional 401k contributions.
I ran those numbers, and it propels them into a higher tax bracket post retirement, mostly due to the 8% real return assumption. So in that case, putting a higher proportion of savings into Roth provides a benefit, which levels off at 58% pre-tax and 42% Roth. That's the split that pushes post-retirement income back into the 24% bracket

I think very few people in the 24% bracket manage to save quite that much, but if you are currently in the 24% bracket and anticipate having more then about $4M in pre-Tax by the time you retire, or substantial other sources of post-retirement income like a large pension, then you should be putting a higher fraction of your retirement savings into Roth. That's a good problem to have...

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Re: Roth + Time vs Pretax + tax

Post by grabiner » Sun May 24, 2020 7:42 pm

Small Savanna wrote:
Sun May 24, 2020 6:48 pm
FiveK wrote:
Sat May 23, 2020 2:36 am
Small Savanna wrote:
Sat May 23, 2020 1:48 am
Important assumptions are that their income is level over a long period of years and that the tax laws won't change. Other assumptions:
- Ignored state taxes
- Ignored net investment income tax
- 85% of Social Security would be taxable for this couple across all of the strategies
- Standard deduction
What do you conclude if the couple decides
- they can afford $50K/yr pre-tax, and
- earns 8%/yr (2%/yr from dividends and 6%/yr from growth)?

Note that
- the $50K/yr pre-tax all fits into the $38K/yr limit for 2 Roth 401k contributions, but
- $12K/yr would be taxed and go into a taxable account if the $38K/yr is used for 2 traditional 401k contributions.
I ran those numbers, and it propels them into a higher tax bracket post retirement, mostly due to the 8% real return assumption. So in that case, putting a higher proportion of savings into Roth provides a benefit, which levels off at 58% pre-tax and 42% Roth. That's the split that pushes post-retirement income back into the 24% bracket
If your investments have an 8% return, you aren't going to spend all of them in your lifetime, since your plan for retirement must work out even if you get below-average market returns. This will reduce the fraction of your IRA which gets taxed during your lifetime (unless you live to 100 and have to take almost all of it as RMDs). Most likely, you will either retire early when your portfolio is enough to retire on, or else keep the portfolio growing but make a lot of QCDs to give a large part of your IRA to charity.
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Re: Roth + Time vs Pretax + tax

Post by FiveK » Sun May 24, 2020 7:43 pm

Small Savanna wrote:
Sun May 24, 2020 6:48 pm
I ran those numbers, and it propels them into a higher tax bracket post retirement, mostly due to the 8% real return assumption. So in that case, putting a higher proportion of savings into Roth provides a benefit, which levels off at 58% pre-tax and 42% Roth. That's the split that pushes post-retirement income back into the 24% bracket

I think very few people in the 24% bracket manage to save quite that much, but if you are currently in the 24% bracket and anticipate having more then about $4M in pre-Tax by the time you retire, or substantial other sources of post-retirement income like a large pension, then you should be putting a higher fraction of your retirement savings into Roth. That's a good problem to have...
Looks good!

Don't know how many MFJ with $300K gross income do save that much, but with a 5% flat state income tax, they could put $38K into 401ks, $11,362 into taxable*, $12K into Roth IRAs, $500/mo pre-tax insurance, and $7100/yr HSA, and they would still have just under $150K/yr left for food, clothing, shelter, entertainment, additional investing, etc. Seems doable.... ;)

Your work is another good example of why people should look closely at their own specifics, rather than rely on generic adages in this area.

*$11,362 = ($38K/(1-0.299) - $38K) * (1 - 0.299), the amount that must go into taxable to make "traditional + taxable" equivalent to $38K into a Roth 401k. The 29.9% comes from 24% federal, 5% state, and 0.9% additional Medicare tax.

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Re: Roth + Time vs Pretax + tax

Post by Peter Foley » Sun May 24, 2020 7:58 pm

Overall asset placement obviously plays a role.

I personally don't view this as a time issue except in the case of Roth conversions. Only convert money you don't plan to spend in the near future. Important to me is to have a mix of stocks and bonds and to place the asset with the best potential for growth in the Roth.

My Roths are 100% stock mutual funds while almost all my bonds are held in tax deferred. I hold a mix of stocks, bonds, and cash in taxable. This allows me a great deal of control over my rate of taxation (tax bracket) in retirement.

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Re: Roth + Time vs Pretax + tax

Post by marklearnsbogle » Wed May 27, 2020 8:24 am

JustinR wrote:
Fri May 22, 2020 10:34 pm
Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
Unless your taxes right now are 0%, pretax is almost always better.

Always do pretax until you're forced to do Roth, because you can pay 0% taxes on all of it if you plan correctly.

Don't bother trying to predict the future; just do pretax as you may regret it later if you don't. With pretax you hold all the cards to make the best play. With Roth, it's final so there's nothing you can do to unwind it.


I'll break it down into simplest terms:

Government says,
  • Pretax: "Give us 0% right now. In the future, you can give us 0% to X%... you control how much and when."
  • Roth: "Give us X% right now, and that's final."
Would you please elaborate on how one can "pay 0% taxes on all of it if you plan correctly?" My basic assumption is that in retirement my tax rate will be lower, and therefore that justifies doing pre-tax and paying taxes in retirement. Thanks.
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.

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Re: Roth + Time vs Pretax + tax

Post by marklearnsbogle » Wed May 27, 2020 8:35 am

02nz wrote:
Fri May 22, 2020 2:57 pm
Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
IndexCore's example (remember the commutative property of multiplication from middle school?) shows why this is wrong. It's always about the tax rate that applies to that chunk of money if paying taxes now (Roth) vs the tax rate on that same chunk of money (including growth) if paying taxes later (traditional). Determining that rate can be complex because it can span multiple tax brackets or even tax years. But it doesn't matter if the time span is 1.5 years or 150 years.

This is a frequent misconception and I've heard personal finance gurus parrot this line - "sure you pay your taxes now with Roth, but it grows tax-free for so long, it's worth it." The length of time is irrelevant, as Roth and traditional enjoy the same tax advantage in the growth phase.

Traditional makes sense for those whose income will be lower in retirement. That's most people, because, well, in retirement they're no longer working and thus have much less income. The exact answer depends on a whole lot of things and assumptions and can't be known until you're dead. If you can afford it, max both a Roth IRA and traditional 401k, and you'll be fine for retirement.
"It's always about the tax rate that applies to that chunk of money if paying taxes now (Roth) vs the tax rate on that same chunk of money (including growth) if paying taxes later (traditional)." Traditional makes sense for those whose income will be lower in retirement. That's most people, because, well, in retirement they're no longer working and thus have much less income." Thank you, this well said, and as I understand it, the basic difference, clearly stated.
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.

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Re: Roth + Time vs Pretax + tax

Post by grabiner » Wed May 27, 2020 4:26 pm

marklearnsbogle wrote:
Wed May 27, 2020 8:24 am
Unless your taxes right now are 0%, pretax is almost always better.

Always do pretax until you're forced to do Roth, because you can pay 0% taxes on all of it if you plan correctly.

Don't bother trying to predict the future; just do pretax as you may regret it later if you don't. With pretax you hold all the cards to make the best play. With Roth, it's final so there's nothing you can do to unwind it.


I'll break it down into simplest terms:

Government says,
  • Pretax: "Give us 0% right now. In the future, you can give us 0% to X%... you control how much and when."
  • Roth: "Give us X% right now, and that's final."
Two cautions: the final value for taxable may be Y% which is greater than X%, and it may also not be under your control because of RMDs (unless you donate those RMDs to charity).
JustinR wrote:Would you please elaborate on how one can "pay 0% taxes on all of it if you plan correctly?" My basic assumption is that in retirement my tax rate will be lower, and therefore that justifies doing pre-tax and paying taxes in retirement. Thanks.
You can pay 0% on pretax if your ordinary-taxed income is less than your deductions, and your total income including qualified dividends and capital gains minus your deductions is less than $40K single/$80K married. If you have some Roth and taxable income, you may be able to have a moderate income and still do this; you may also do it in years you have huge medical expenses, such as nursing care in the last few years of your life.

But if you miss this, you may wind up with a higher marginal tax rate. Once you have started taking Social Security, if your ordinary taxable income is in the 12% bracket, your marginal tax rate may be 18% or 22.2%; every additional dollar withdrawn from your traditional IRA makes 50 or 85 cents more of Social Security taxable.

And the 0% may be unattainable. Your employer match in your 401(k) will always be traditional. You may have traditional contributions from previous years, or from future years in which traditional contributions are clearly right. Some of your Social Security is likely to be ordinary-taxed income. And a few people still earn pensions. (This makes the Roth TSP attractive to career US government employees.)

This is why I normally recommend Roth accounts for investors in the 12% bracket who are not currently in any income-based phase-out, particularly if they expect to move to higher brackets later in their careers. You can pay 12% now, or be likely to pay 22.2% later if you retire in the 12% bracket and in the phase-in, or 22% if you retire in the 22% bracket.
By the same logic, if you are in the 22% bracket now, traditional is just as good as Roth in either of these situations, and better than Roth for years you are in the 12% bracket and not affected by the phase-in.
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Re: Roth + Time vs Pretax + tax

Post by JustinR » Thu May 28, 2020 4:33 am

marklearnsbogle wrote:
Wed May 27, 2020 8:24 am
JustinR wrote:
Fri May 22, 2020 10:34 pm
Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
Unless your taxes right now are 0%, pretax is almost always better.

Always do pretax until you're forced to do Roth, because you can pay 0% taxes on all of it if you plan correctly.

Don't bother trying to predict the future; just do pretax as you may regret it later if you don't. With pretax you hold all the cards to make the best play. With Roth, it's final so there's nothing you can do to unwind it.


I'll break it down into simplest terms:

Government says,
  • Pretax: "Give us 0% right now. In the future, you can give us 0% to X%... you control how much and when."
  • Roth: "Give us X% right now, and that's final."
Would you please elaborate on how one can "pay 0% taxes on all of it if you plan correctly?" My basic assumption is that in retirement my tax rate will be lower, and therefore that justifies doing pre-tax and paying taxes in retirement. Thanks.

Sure. The idea is called a Roth Conversion Ladder.



The Process

When you retire and your income is low:
  1. Roll your pre-tax 401k funds into your Traditional IRA (TIRA). This is tax free since they're the same thing.
  2. Now all your pretax money is in your TIRA.
  3. Start converting some of your TIRA funds to your Roth IRA every year (called a Roth Conversion). This is a taxable event. But this tax can be 0% or very low. You control what your taxes are.
  4. Now your pretax money is in your Roth...which means it is now post-tax! And you paid 0% taxes the entire process...from the moment you earned it to when you withdraw it!


How to Pay 0% Taxes

So, how did you pay 0% taxes on step #3?

Let's assume you're married filing your taxes jointly.
  • The standard deduction for 65+ couples is around $27,000. So every year you can convert $27,000 of your TIRA money into your Roth IRA at 0% tax.
  • But you need money to fund your annual living expenses, right? Well, your long term capital gains tax is 0%, which means you can sell up to $80,000 in stock gains or qualified dividends tax free. Use whatever you need here as income to fund your expenses for the year.
That's a total of $107,000 a year while owing $0 in federal taxes ($27k TIRA to Roth conversion + $80k living expenses).

If $27k a year is too slow for you, remember you can always convert more and still pay a low amount of taxes. For example, you can convert an additional $20k at the lowest bracket (10%) so almost $50k a year.



The Ladder

The cherry on the top is that converted funds in your Roth IRA are considered contributions...and that means that you can actually withdraw those funds penalty free 5 years after converting it.

So after 5 years, you can use the previously converted funds to help fund your annual expenses, which means you can sell less stocks. That's why it's called a Roth Conversion Ladder...because every year you can convert some (to be withdrawn 5 years later) and withdraw some (from 5 years ago). Of course, you don't have to withdraw any at all. It's sitting in your Roth tax free to be withdrawn whenever.



Perfect for FIRE

You can see how this is literally perfect for early retirees.
  1. They'll have a lot more years to do conversions
  2. They can use the ladder to fund their annual expenses after the first 5 years
  3. They can access ALL their 401k/TIRA money BEFORE retirement age penalty and tax free (because again, conversions are considered contributions)
Isn't that insane?

Additional reading: https://www.gocurrycracker.com/never-pay-taxes-again/



Remember: You can't do any of this if you went with a Roth over a Traditional.

This is why you should do as much pretax as you humanly can. Traditional over a Roth all day, every day. Your fat 401k is more powerful than you ever knew. You own 100% of that thing, and you'll pay $0 in taxes on it if you do it correctly. You're in control.

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Re: Roth + Time vs Pretax + tax

Post by sd323232 » Thu May 28, 2020 5:54 am

JustinR wrote:
Fri May 22, 2020 10:34 pm
Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
Unless your taxes right now are 0%, pretax is almost always better.

Always do pretax until you're forced to do Roth, because you can pay 0% taxes on all of it if you plan correctly.

Don't bother trying to predict the future; just do pretax as you may regret it later if you don't. With pretax you hold all the cards to make the best play. With Roth, it's final so there's nothing you can do to unwind it.


I'll break it down into simplest terms:

Government says,
  • Pretax: "Give us 0% right now. In the future, you can give us 0% to X%... you control how much and when."
  • Roth: "Give us X% right now, and that's final."
Im not sure if you ever heard of Required Minimal Distribution. People at some point will be forced to withdraw from their 401k and IRA.

Some people here on this board have multimillion 401ks and IRAs and they are forced to do RMD. They cannot avoid tax here. So, no you dont have control of how much and when.

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Re: Roth + Time vs Pretax + tax

Post by firebirdparts » Thu May 28, 2020 10:07 am

We've had multiple misleading takes on this now. I guess it's the internet, right? Oh, well.

But if you look past the misleading info, you at least see the issues. Time invested is truly irrelevant. Tax rate and tax treatments are super important. You will want some ability to manipulate your AGI and capital gains taxes when you're retired.
- You will not be paying capital gains taxes of 0% on your taxable account if you don't have one.
- You won't be taking low-tax-bracket withdrawals from and making Roth conversions of your traditional IRA/401k if you don't have one.
- You won't be living at a high income tax free off your Roth holdings if you don't have one.
A fool and your money are soon partners

hulburt1
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Re: Roth + Time vs Pretax + tax

Post by hulburt1 » Thu May 28, 2020 10:58 am

3 things-RMD at 72-SS will add to income and in 5 years your tax's will go up it's in the law. I'm 67 those tax's are going to hurt more then you think, So a Roth now my help with the hurt. Take a look at RMD for 1m..at 72 its not bad but at 77 it will really hurt.
With pension, Ira-RMD, SS and the increase on your tax's if the law dose not change. Roth will help. :moneybag

ValuationsMatter
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Re: Roth + Time vs Pretax + tax

Post by ValuationsMatter » Thu May 28, 2020 12:50 pm

I have never given it much thought. I was originally forced to go traditional with the Government TSP. When Roth became available, my limited research indicated it was the smart approach. Since then, I've always maxed out my TSP & IRA contributions as Roth.

My reasons:
- Roths are more flexible before retirement (penalty free withdrawal of contributions, 1st time home-buyer, & special education circumstances)
- Roths are more flexible after retirement (no RMDs for you or heirs)
- Since the caps are the same Roth effectively allows more of my income to be tax sheltered. At 22% marginal tax-rate, it would take $32,692.31 in income to hit the max 25.5k in a Roth (the rest would be paid in taxes). Whereas going traditional would subject 22% of that (~$7,192) to immediate taxes & all of the investments to some form of taxes eventually (capital gains on taxable account & ordinary income tax on tIRA/401k). In both cases, I'd have 25.5k in my retirement acct. In the Roth all of it, and all gains would be tax free. So, if I'm going to pay ordinary income tax eventually, then the difference might as well be in a tax-free account.
- I hope to earn a $50k+ pension, which would leave me at a minimum in my current 22% marginal bracket (assuming tax tables don't change for the better)
- Pension + SS + taxable withdrawals + retirement accounts + possibly another pension (thus am likely to incur significant taxes in retirement & it may not be easy to convert from traditional)
- Roth takes risk of tax reform (increases) out of the picture, unless they toss the entire concept of Roth on its head and start taxing it anyways. That being highly unlikely, I like having more certainty in the plan.
Last edited by ValuationsMatter on Thu May 28, 2020 3:45 pm, edited 2 times in total.

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marklearnsbogle
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Re: Roth + Time vs Pretax + tax

Post by marklearnsbogle » Thu May 28, 2020 2:07 pm

JustinR wrote:
Thu May 28, 2020 4:33 am
marklearnsbogle wrote:
Wed May 27, 2020 8:24 am
JustinR wrote:
Fri May 22, 2020 10:34 pm
Superleaf444 wrote:
Fri May 22, 2020 1:09 pm
Hiya,

Looking for an open discussion on this one.

I feel like anytime people discuss Roth vs Pretax it almost always comes down to the loose rule of thumb that if you will be taxed more in the future go with Roth and if you expect the opposite go with Pretax.

One factor that is usually mentioned, but rarely explored, is the time element.

In theory, if you are 18 and have lower taxes in the future a Roth still might be worth it, because the sheer amount of time and compounding.

I feel like there should be a rule of thumb for time frames, but I don't believe I've ever seen any mention of it. So what are your thoughts? At what time frame does the benefit of Roth fall off?

My gut says around 15 years pending your tax stays-ish the same. That is completely unscientific and is only coming from my gut.
Unless your taxes right now are 0%, pretax is almost always better.

Always do pretax until you're forced to do Roth, because you can pay 0% taxes on all of it if you plan correctly.

Don't bother trying to predict the future; just do pretax as you may regret it later if you don't. With pretax you hold all the cards to make the best play. With Roth, it's final so there's nothing you can do to unwind it.


I'll break it down into simplest terms:

Government says,
  • Pretax: "Give us 0% right now. In the future, you can give us 0% to X%... you control how much and when."
  • Roth: "Give us X% right now, and that's final."
Would you please elaborate on how one can "pay 0% taxes on all of it if you plan correctly?" My basic assumption is that in retirement my tax rate will be lower, and therefore that justifies doing pre-tax and paying taxes in retirement. Thanks.

Sure. The idea is called a Roth Conversion Ladder.

This is why you should do as much pretax as you humanly can. Traditional over a Roth all day, every day. Your fat 401k is more powerful than you ever knew. You own 100% of that thing, and you'll pay $0 in taxes on it if you do it correctly. You're in control.
Thanks, JustinR, for taking the time to lay all of this out - much appreciated!
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.

corp_sharecropper
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Re: Roth + Time vs Pretax + tax

Post by corp_sharecropper » Thu May 28, 2020 2:21 pm

I know mathematically it doesn't make sense, but I've also learned that family/personal finance is never as clean as some sort of mathematical proof. So my feelings are the following:

1) Hedge, do some of both, Roth & pre-tax.

2) the "certainty" factor of Roth is often underrated and so I would rather dig a tiny bit deeper in my budgeting (here's what I was referencing in the beginning, there is ALWAYS adjustments that can be made & family finance is never as clean as sterile math), even at the risk of not coming out on top by the numbers at the end, because I likely will never calculate whether I won vs pre-tax anyway but I definitely will appreciate knowing my big Roth balance is certainly mine tax free the whole time I'm accumulating/de-accumulating and to me that is worth it vs the uncertainty of the conventional wisdom that says you'll be in a lower tax bracket in retirement.

Chip
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Re: Roth + Time vs Pretax + tax

Post by Chip » Thu May 28, 2020 2:41 pm

marklearnsbogle wrote:
Thu May 28, 2020 2:07 pm
Thanks, JustinR, for taking the time to lay all of this out - much appreciated!
Please note that this hyperbole from JustinR has been debunked before. Traditional, while often the correct choice, is not always the correct choice. Each person has to evaluate their own situation, and probably should do it every year.

The ability to contribute at zero tax and withdraw at zero tax is only possible with an extreme set of assumptions that probably apply to almost no one. This post contains some examples of how things might work in real life.

viewtopic.php?p=4740700#p4740700

Onlineid3089
Posts: 38
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Re: Roth + Time vs Pretax + tax

Post by Onlineid3089 » Thu May 28, 2020 4:14 pm

ValuationsMatter wrote:
Thu May 28, 2020 12:50 pm
I have never given it much thought. I was originally forced to go traditional with the Government TSP. When Roth became available, my limited research indicated it was the smart approach. Since then, I've always maxed out my TSP & IRA contributions as Roth.

My reasons:
- Roths are more flexible before retirement (penalty free withdrawal of contributions, 1st time home-buyer, & special education circumstances)
- Roths are more flexible after retirement (no RMDs for you or heirs)
- Since the caps are the same Roth effectively allows more of my income to be tax sheltered. At 22% marginal tax-rate, it would take $32,692.31 in income to hit the max 25.5k in a Roth (the rest would be paid in taxes). Whereas going traditional would subject 22% of that (~$7,192) to immediate taxes & all of the investments to some form of taxes eventually (capital gains on taxable account & ordinary income tax on tIRA/401k). In both cases, I'd have 25.5k in my retirement acct. In the Roth all of it, and all gains would be tax free. So, if I'm going to pay ordinary income tax eventually, then the difference might as well be in a tax-free account.
- I hope to earn a $50k+ pension, which would leave me at a minimum in my current 22% marginal bracket (assuming tax tables don't change for the better)
- Pension + SS + taxable withdrawals + retirement accounts + possibly another pension (thus am likely to incur significant taxes in retirement & it may not be easy to convert from traditional)
- Roth takes risk of tax reform (increases) out of the picture, unless they toss the entire concept of Roth on its head and start taxing it anyways. That being highly unlikely, I like having more certainty in the plan.
I prefer Roth for my IRA, but I'm covered by my state's pension. With their current estimates for my pension our bottom tax brackets will already be filled before we even consider SS. No telling if I'll stay in employment covered by that over the long haul, but I'm already vested so I will probably be inclined to move to another county hospital if I ever do decide to leave.

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