When to use traditional 401k vs Roth 401k - need explanation

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muitu
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When to use traditional 401k vs Roth 401k - need explanation

Post by muitu »

After all these years, I'm still not sure about at what point someone would choose a traditional 401k option over the Roth option.

I understand the tax implications of both (traditional contributions lower your taxable income, right?), but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.

If the most common response to this is, "everyone's situation is different." then what made you make your decision?

Also, do you even need to change the type of 401k or could I stick with the Roth option for 40 years...?
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by alex_686 »

Let us assume that your tax rate today is the same as the tax rate when you retire. If so, the after tax dollars you can spend will be equal. This is hard math. It does not matter the length of time held, the assets held, or your rate of return.

If your retirement tax rate will be lower, than a traditional plan would be better. If higher then a Roth.

Roths do have some advantages if you consider thing other than after tax dollars. RMDs, inherited Roths, etc. Technically Roths allow you to contribute a bit more since the tax contribution happens outside of the actual contribution. Some people here on Bogleheads are passionate about these items. I think for the average person who plan to spend down the majority of their retirement accounts the advantages are fairly small.

I personally advocate a 50/50 split since I am no confident what my future tax rate will be. My income will be lower but maybe the tax rate will be higher.
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Admiral
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Admiral »

It's very hard to generalize because indeed, everyone's situation is different. But if forced, here's the answer:

If you expect to be in a higher marginal tax bracket when retired, save in Roth. If not, save in pre-tax. If the same, then it's a wash. (There are approximately one million exceptions that have to do with controlling income for various reasons like ACA subsidies, estate planning, etc, but those are, again, specific to each person.)

Aside from edge cases, the VAST majority of people will be in a lower bracket in retirement because: they have no earned income. It takes millions of dollars in savings to generate enough income (even with RMDs) to move married couples into the higher tax brackets.

For Bogleheads, again to generalize, people MAY begin to save in Roth once their pre-tax account reaches seven figures because they want to minimize RMDs which MAY move them to a higher marginal bracket. However, one can still save in pre-tax and then convert to Roth later when one's earned income is lower. The reverse is not possible. For those with very large pensions, Roth also can make sense since the lower tax brackets may be filled with income before social security is claimed.

Predicting future tax rates is difficult. For the most part, take the bird in the hand (current tax savings) now and worry about the taxes later.

My $.02.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by retired@50 »

muitu wrote: Thu May 12, 2022 10:55 am ...Is there general rule for when a person would switch...
The wiki page on this topic discusses many of the nuances.

See link on traditional versus Roth: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
This is one person's opinion. Nothing more.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by KlangFool »

muitu wrote: Thu May 12, 2022 10:55 am After all these years, I'm still not sure about at what point someone would choose a traditional 401k option over the Roth option.
muitu,

1) The correct statement is most people that choose Roth 401K have been proven to be wrong so far.

10% or less of the US Household has a net worth of more than 1 million. So, most people would never has a tax-deferred account of 1 million or more. In summary, it is unlikely for someone to have higher or same marginal tax rate at retirement.

The only possible exception is someone with a very generous pension.

2) And, in general, people that are confused do not file their own taxes.

3) "could I stick with the Roth option for 40 years...?"

Only if you enjoy pay more taxes instead of spending your own money.

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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by ruralavalon »

muitu wrote: Thu May 12, 2022 10:55 am After all these years, I'm still not sure about at what point someone would choose a traditional 401k option over the Roth option.

I understand the tax implications of both (traditional contributions lower your taxable income, right?), but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.

If the most common response to this is, "everyone's situation is different." then what made you make your decision?

Also, do you even need to change the type of 401k or could I stick with the Roth option for 40 years...?
There is no general rule. Most people will likely be in a lower tax bracket in retirement, and for most people traditional tax-deductible contributions Will likely be better.

This involves comparing your current tax bracket to your future tax brackets. General factors to consider include:

1) your current tax bracket;
2) whether you expect to be in higher tax brackets the rest of your working life and during retirement;
3) whether you will be eligible for both a significant pension and Social Security benefits; and
4) whether you already have a very large balance in traditional tax-deferred accounts;

Wiki article Traditional vs. Roth.

TFB blog post, The Case Against Roth 401(k): Still True After All These Years.
Last edited by ruralavalon on Thu May 12, 2022 11:36 am, edited 1 time in total.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by HMSVictory »

I'll take the other side of the trade on this and say almost everyone comes out ahead doing Roth. Why?

Because very, very, very few people take the tax savings from the pre-tax contributions and invest them in a taxable account. Most spend it.

Almost none (outside of the Boglehead world where we track every penny and debate 0.05 vs 0.04 bps costs).

If you do then the only difference will be your tax rate while working vs tax rate while retired. It is impossible to know what rates will in the future although we do know the TCJA signed into law in 2017 is set to expire in 2026 (which will increase rates on everyone).

Most people defer either 10% (as an example) into pre-tax or 10% into Roth (and take home a net slightly lower check). Between these two you are investing more by doing Roth.

If you are in the 37% tax bracket I can see the appeal of the pre-tax option but I am in the 32% bracket and I max the Roth options out (yes I have a large pension which will eat up the majority of the tax brackets). Even after maxing the Roths out I still put almost half my savings into a taxable brokerage account. Also an overlooked benefit of the Roth is it insulates you from future tax hikes as you paid the tax on your contributions.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by runninginvestor »

retired@50 wrote: Thu May 12, 2022 11:19 am
muitu wrote: Thu May 12, 2022 10:55 am ...Is there general rule for when a person would switch...
The wiki page on this topic discusses many of the nuances.

See link on traditional versus Roth: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
Additionally, it links to further examples and a summary generalization: https://www.bogleheads.org/wiki/Traditi ... h_examples
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by ruralavalon »

HMSVictory wrote: Thu May 12, 2022 11:36 am I'll take the other side of the trade on this and say almost everyone comes out ahead doing Roth. Why?

Because very, very, very few people take the tax savings from the pre-tax contributions and invest them in a taxable account. Most spend it.

. . . . .
But money saved now via tax-deferral is not wasted if not invested in taxable account in a retirement portfolio. Most people have some competing financial goals. There are other uses of money which can also add to financial security.

Money saved via the tax deferral is usually well spent if:
1) used to purchase a home;
2) used to avoid debt;
3) used to payoff high interest debt;
3) used to cash flow college expenses for children.

. . .I am in the 32% bracket and I max the Roth options out (yes I have a large pension which will eat up the majority of the tax brackets) . . .
With your pension you are not the usual case.
Last edited by ruralavalon on Thu May 12, 2022 11:58 am, edited 1 time in total.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Admiral »

HMSVictory wrote: Thu May 12, 2022 11:36 am I'll take the other side of the trade on this and say almost everyone comes out ahead doing Roth. Why?

Because very, very, very few people take the tax savings from the pre-tax contributions and invest them in a taxable account. Most spend it.

Almost none (outside of the Boglehead world where we track every penny and debate 0.05 vs 0.04 bps costs).

If you do then the only difference will be your tax rate while working vs tax rate while retired. It is impossible to know what rates will in the future although we do know the TCJA signed into law in 2017 is set to expire in 2026 (which will increase rates on everyone).

Most people defer either 10% (as an example) into pre-tax or 10% into Roth (and take home a net slightly lower check). Between these two you are investing more by doing Roth.

If you are in the 37% tax bracket I can see the appeal of the pre-tax option but I am in the 32% bracket and I max the Roth options out (yes I have a large pension which will eat up the majority of the tax brackets). Even after maxing the Roths out I still put almost half my savings into a taxable brokerage account. Also an overlooked benefit of the Roth is it insulates you from future tax hikes as you paid the tax on your contributions.
Your situation (large pension) is an outlier. Your advice is inaccurate for most people. Regardless of whether one adjusts their savings rate/amount to account for the tax savings as you yourself acknowledge what matters is the marginal rate now vs later. In addition, the progressive tax system means we're only speaking of the tax on the marginal (last) dollar, not all dollars or even the average dollar. Just because you'll have SOME dollars in a high bracket when retired does not negate the fact that ALL your current dollars can be taken off the top NOW: that is, from your highest marginal bracket.

Your argument about future tax rates is not relevant to those retiring far in the future. Who knows where things will stand then? But if you have earned income now, and none in the future, what rates are in the future is irrelevant. People who receive social security in retirement and have no other sources of income save investments are not going to be in a higher tax bracket unless they are very wealthy, period.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by HMSVictory »

ruralavalon wrote: Thu May 12, 2022 11:45 am
But money saved now via tax-deferral is not wasted if not invested in taxable account in a retirement portfolio. Most people have some competing financial goals. There are other uses of money which can also add to financial security.

Money saved via the tax deferral is usually well spent if:
1) used to purchase a home;
2) used to avoid debt;
3) used to payoff high interest debt;
3) used to cash flow college expenses for children.
No argument there I agree that those 4 items are very useful to building wealth especially paying off debt.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by HMSVictory »

Admiral wrote: Thu May 12, 2022 11:52 am
HMSVictory wrote: Thu May 12, 2022 11:36 am I'll take the other side of the trade on this and say almost everyone comes out ahead doing Roth. Why?

Because very, very, very few people take the tax savings from the pre-tax contributions and invest them in a taxable account. Most spend it.

Almost none (outside of the Boglehead world where we track every penny and debate 0.05 vs 0.04 bps costs).

If you do then the only difference will be your tax rate while working vs tax rate while retired. It is impossible to know what rates will in the future although we do know the TCJA signed into law in 2017 is set to expire in 2026 (which will increase rates on everyone).

Most people defer either 10% (as an example) into pre-tax or 10% into Roth (and take home a net slightly lower check). Between these two you are investing more by doing Roth.

If you are in the 37% tax bracket I can see the appeal of the pre-tax option but I am in the 32% bracket and I max the Roth options out (yes I have a large pension which will eat up the majority of the tax brackets). Even after maxing the Roths out I still put almost half my savings into a taxable brokerage account. Also an overlooked benefit of the Roth is it insulates you from future tax hikes as you paid the tax on your contributions.
Your situation (large pension) is an outlier. Your advice is inaccurate for most people. Regardless of whether one adjusts their savings rate/amount to account for the tax savings as you yourself acknowledge what matters is the marginal rate now vs later. In addition, the progressive tax system means we're only speaking of the tax on the marginal (last) dollar, not all dollars or even the average dollar. Just because you'll have SOME dollars in a high bracket when retired does not negate the fact that ALL your current dollars can be taken off the top NOW: that is, from your highest marginal bracket.

Your argument about future tax rates is not relevant to those retiring far in the future. Who knows where things will stand then? But if you have earned income now, and none in the future, what rates are in the future is irrelevant. People who receive social security in retirement and have no other sources of income save investments are not going to be in a higher tax bracket unless they are very wealthy, period.
This board is full of outliers. :shock: I mean we have tech workers posting they are making $10M a year......

I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).

She wishes she would have paid the taxes (while working and in the MFJ tax brackets) and yes her pre tax accounts are in the millions. First world problems I know.

With 30T in US gov debt and growing daily I think the argument about future tax rates is the most important part of this discussion and one in which we have zero control over. Pre-tax withdraws come out taxed as income - how can you have none with RMDs?
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by KlangFool »

HMSVictory wrote: Thu May 12, 2022 12:09 pm
Pre-tax withdraws come out taxed as income - how can you have none with RMDs?
HMSVictory ,

How could everyone be fully-employed continuously and do not need to withdraw from that pre-tax account until RMD age?

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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by jharkin »

HMSVictory wrote: Thu May 12, 2022 12:09 pm I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).
And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by HMSVictory »

KlangFool wrote: Thu May 12, 2022 12:19 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm
Pre-tax withdraws come out taxed as income - how can you have none with RMDs?
HMSVictory ,

How could everyone be fully-employed continuously and do not need to withdraw from that pre-tax account until RMD age?

KlangFool
Pensions + SSB + dividends = more than she spent in a year.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by HMSVictory »

jharkin wrote: Thu May 12, 2022 12:35 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).
And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by KlangFool »

HMSVictory wrote: Thu May 12, 2022 12:37 pm
KlangFool wrote: Thu May 12, 2022 12:19 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm
Pre-tax withdraws come out taxed as income - how can you have none with RMDs?
HMSVictory ,

How could everyone be fully-employed continuously and do not need to withdraw from that pre-tax account until RMD age?

KlangFool
Pensions + SSB + dividends = more than she spent in a year.
Aka, she was fully-employed continuously until she can withdraw pension and SSB. A very lucky person. Never was unemployed in any recession even though millions did.

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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by HMSVictory »

KlangFool wrote: Thu May 12, 2022 12:47 pm
HMSVictory wrote: Thu May 12, 2022 12:37 pm
KlangFool wrote: Thu May 12, 2022 12:19 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm
Pre-tax withdraws come out taxed as income - how can you have none with RMDs?
HMSVictory ,

How could everyone be fully-employed continuously and do not need to withdraw from that pre-tax account until RMD age?

KlangFool
Pensions + SSB + dividends = more than she spent in a year.
Aka, she was fully-employed continuously until she can withdraw pension and SSB. A very lucky person. Never was unemployed in any recession even though millions did.

KlangFool
You know what they say.... better to be lucky then good.

I've been working 30 years. Never unemployed but its always a possibility.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by JPM »

Just my 2cents, and am no expert.

Forecasts are only as good as the untestable assumptions that underlie them.

Assumptions about future tax rates as they relate to this decision are reasonable reliable as long as the investment horizon is short. Not likely to be big changes in tax laws in the next 2-5 years, but not impossible. As for what rates may be like in 30-40 years when today's young investors retire is anybody's guess and so IMO not a fair basis for making OP's decision.

Time horizon is another consideration. McQ in his posts on this subject suggests, at least to me, that the longer your investment time horizon, the more beneficial the Roth choice may be, but again there are underlying assumptions regarding investment returns, tax rates, and the availability of funds to pay the taxes without reducing the Roth contribution there. If you assume it takes ten years for an investment to double (7% annual return) and you have 30-40 year time horizon then your 8-fold or 16-fold multiplication of today's investment will be tax-free in a Roth in 2052 or 2062 but will be taxed at 2052 or 2062 rates if in a tIRA. This must assume that taxes on this year's Roth contributions are paid out of current income, and reasonably comfortably, and not out of the contributions or conversions themselves.

There is some benefit to tax diversification in retirement for the well-to-do

For most people, tIRA is best because their income levels do not allow much if any Roth benefit for low or moderately low income-earners.

Like most things in investing, you place your bet and take your chances.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by teen persuasion »

We made the decision to use traditional 401k based on marginal tax rate, as affected by tax credit phaseouts. Then we put the larger refundable tax credits into Roth IRAs (because we'd reached the point of no more tax advantage to pretax contributions, and a fluke in the credit rules that prefers pretax 401k over tIRA).

It looks like this for us: EITC phases out at 21% with multiple kids. My state matches EITC at 30%, so another effective 6.3% phaseout. Stack that on top of 4-5% state tax, and 10-12% federal tax, and our marginal rate is approaching 45%. But low income and lots of dependents means we pay zero tax. The value of the refundable credits (compounded by state credits) increases our savings - we put that additional money into Roth IRAs, it's free money going into Roth!

Using traditional contributions also helps us with college aid calculations, as long as we can stay under certain thresholds.

But we are in (or can put ourselves in) a narrow band to take advantage. Having employer plans at all is a HUGE part of this. My DS4 has no employer plan, and is limited to just an IRA. He can't move his AGI very much with just that. And tIRA contributions won't work to increase EITC, only employer pretax contributions can do that. They are not equivalent.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by LilyFleur »

The more distant the investment horizon is, the more hazy the crystal ball.

The divorce rate is highest in the age 50-60 crowd. A divorce puts you into the single tax bracket at a time when your children (if you have them) are launching. My own transition from head of household to the single bracket was a bit of an adjustment.

Forty years ago, I had no idea that I would enter retirement in the single tax bracket. I had no idea how much my savings would earn before my retirement. I had no idea how expensive it would be to buy my own health insurance as an early retiree, or that health insurance would even be available to me without a job. I didn't know what a Roth was until I was already retired. I didn't know what IRMAA was and how it would affect my retirement. I didn't know I would have a pension, or how much. I didn't understand all the nuances in deciding when to start social security. I didn't understand how health conditions would affect my energy levels in my late 50s and 60s.

I have learned much about investing from this forum. I am thankful.

One of the best pieces of advice I received here, when I was asking if I should do a Roth conversion, was this: it is best to have a diversity of types of retirement accounts, including 401k or IRA, Roth, and taxable. We cannot know the future, so a variety of types of financial resources is an advantage in retirement. You can then devise a better retirement income-tax strategy if you have these different types of accounts.

My Schwab advisor advised my son, when he graduated from college, to fully fund a Roth every year that his income was under the Roth income ceiling. A very long horizon for Roth earnings is a good thing, I think.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Admiral »

HMSVictory wrote: Thu May 12, 2022 12:40 pm
jharkin wrote: Thu May 12, 2022 12:35 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).
And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by smitcat »

Admiral wrote: Thu May 12, 2022 3:02 pm
HMSVictory wrote: Thu May 12, 2022 12:40 pm
jharkin wrote: Thu May 12, 2022 12:35 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).
And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
"for the OP (who's asking about $100k salaries) or for 99% of the population."
I am curious how we/you know the OP is asking about $100K salaries?

I doubt highly only 1% of the population which saves will have a decision to make for Roth vs Traditional.
Most of the population does not save significantly = does not apply in any way.
Many of those who do save also have pensions and/or 457, 403 , inheritance etc.
Admiral
Posts: 4157
Joined: Mon Oct 27, 2014 12:35 pm

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Admiral »

smitcat wrote: Thu May 12, 2022 3:15 pm
Admiral wrote: Thu May 12, 2022 3:02 pm
HMSVictory wrote: Thu May 12, 2022 12:40 pm
jharkin wrote: Thu May 12, 2022 12:35 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).
And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
"for the OP (who's asking about $100k salaries) or for 99% of the population."
I am curious how we/you know the OP is asking about $100K salaries?

I doubt highly only 1% of the population which saves will have a decision to make for Roth vs Traditional.
Most of the population does not save significantly = does not apply in any way.
Many of those who do save also have pensions and/or 457, 403 , inheritance etc.
This is what the OP posted:
but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.
ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective. Of course there are edge cases, we're speaking in generalities. People who make large salaries and will have huge pre-tax accounts and face six figure RMDs are not most people, even in wealthy countries.
smitcat
Posts: 8940
Joined: Mon Nov 07, 2016 10:51 am

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by smitcat »

Admiral wrote: Thu May 12, 2022 3:16 pm
smitcat wrote: Thu May 12, 2022 3:15 pm
Admiral wrote: Thu May 12, 2022 3:02 pm
HMSVictory wrote: Thu May 12, 2022 12:40 pm
jharkin wrote: Thu May 12, 2022 12:35 pm

And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
"for the OP (who's asking about $100k salaries) or for 99% of the population."
I am curious how we/you know the OP is asking about $100K salaries?

I doubt highly only 1% of the population which saves will have a decision to make for Roth vs Traditional.
Most of the population does not save significantly = does not apply in any way.
Many of those who do save also have pensions and/or 457, 403 , inheritance etc.
This is what the OP posted:
but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.
I would suggest that these decisions need to be made on an individual basis - I know a number for folks who are younger and make around $100K and since one or both have pensions the models favor Roth.
RetiredAL
Posts: 2072
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by RetiredAL »

HMSVictory wrote: Thu May 12, 2022 12:09 pm
I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).

She wishes she would have paid the taxes (while working and in the MFJ tax brackets) and yes her pre tax accounts are in the millions. First world problems I know.
+1

I have done conversions to minimize this for the last one standing between me and DW.

My income placed us was near to top of the 15% bracket before I retired. So all the $ into my 401K was 15% deferred. Now with both of us drawing SS, I've found that due to the SS taxation rules, we are paying 22% increment long before the current regular 12% bracket is topped. So about 1/2 my RMD $ is taxed at 22%, when I deferred it at 15%.

Now if you are solidly in the 22% bracket while working, this SS tax hump resulting in an early 22% rate becomes in-material. An earner in the lower end of the 22% bracket who thinks they will drop into the 12% bracket, will get caught by this SS accelerated 22% hump feature.

However, for the last standing, they will enter the 22% bracket much sooner. My projections was that the survivor's tax bill will just about double and there is not much I can do/plan to stop that without converting most of my $1.2M IRA $. What my conversions have been mostly for is to keep the last standing out of IRMAA-Step2 or even Step-3. Step-1 will be inevitable. We are currently IRMAA-0, no additional cost.

I retired with about 30% of our funds in our Roths. I very glad we fully funded them for near 20 years. Without those contributions and the conversion, the last standing would be Step-3 for sure.
Last edited by RetiredAL on Thu May 12, 2022 3:42 pm, edited 1 time in total.
smitcat
Posts: 8940
Joined: Mon Nov 07, 2016 10:51 am

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by smitcat »

Admiral wrote: Thu May 12, 2022 3:16 pm
smitcat wrote: Thu May 12, 2022 3:15 pm
Admiral wrote: Thu May 12, 2022 3:02 pm
HMSVictory wrote: Thu May 12, 2022 12:40 pm
jharkin wrote: Thu May 12, 2022 12:35 pm

And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
"for the OP (who's asking about $100k salaries) or for 99% of the population."
I am curious how we/you know the OP is asking about $100K salaries?

I doubt highly only 1% of the population which saves will have a decision to make for Roth vs Traditional.
Most of the population does not save significantly = does not apply in any way.
Many of those who do save also have pensions and/or 457, 403 , inheritance etc.
This is what the OP posted:
but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.
ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective. Of course there are edge cases, we're speaking in generalities. People who make large salaries and will have huge pre-tax accounts and face six figure RMDs are not most people, even in wealthy countries.
"ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective."
There are 20+ million folks who still get pensions and who have differing rules regarding 401K's, matching, 403's, 457's etc.
One percent is not representational of those folks or other folks that may fall within those guidelines.

Of the 100% of folks that work and then retire a majority will not have any of this apply as they have saved little or nothing.
Chadnudj
Posts: 999
Joined: Tue Oct 29, 2013 11:22 am

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Chadnudj »

HMSVictory wrote: Thu May 12, 2022 12:09 pm
I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).

She wishes she would have paid the taxes (while working and in the MFJ tax brackets) and yes her pre tax accounts are in the millions. First world problems I know.

But, you see, that's the point -- her "problem" is not really one at all.

She got higher take-home paychecks during her younger working years because she went traditional 401k instead of Roth 401k (meaning she got presumably to enjoy her life more then with a slightly larger take-home paycheck -- and keep in mind, when she was working it's quite possible/certain that Roth 401ks did not even exist as they're a relatively new phenomenon, only being created in January 2006), AND NOW she has more than she needs in her retirement accounts meaning that, yes, she has to pay more in taxes, but also that she has oversaved for retirement and has probably zero percent chance of not having enough.

When that's the worst case scenario for someone when they pick traditional 401k when they should have picked Roth 401k, you'll understand why I think that the answer to "traditional 401k vs. Roth 401k" is virtually always "traditional 401k." **

** Exception being if you have a sizeable pension, are early in a career where you're certain your income will jump substantially, or you've already amassed a massive traditional 401k/IRA balance, likely in excess of $3 or even $5 million.
Admiral
Posts: 4157
Joined: Mon Oct 27, 2014 12:35 pm

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Admiral »

smitcat wrote: Thu May 12, 2022 3:27 pm
Admiral wrote: Thu May 12, 2022 3:16 pm
smitcat wrote: Thu May 12, 2022 3:15 pm
Admiral wrote: Thu May 12, 2022 3:02 pm
HMSVictory wrote: Thu May 12, 2022 12:40 pm

I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
"for the OP (who's asking about $100k salaries) or for 99% of the population."
I am curious how we/you know the OP is asking about $100K salaries?

I doubt highly only 1% of the population which saves will have a decision to make for Roth vs Traditional.
Most of the population does not save significantly = does not apply in any way.
Many of those who do save also have pensions and/or 457, 403 , inheritance etc.
This is what the OP posted:
but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.
ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective. Of course there are edge cases, we're speaking in generalities. People who make large salaries and will have huge pre-tax accounts and face six figure RMDs are not most people, even in wealthy countries.
"ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective."
There are 20+ million folks who still get pensions and who have differing rules regarding 401K's, matching, 403's, 457's etc.
One percent is not representational of those folks or other folks that may fall within those guidelines.

Of the 100% of folks that work and then retire a majority will not have any of this apply as they have saved little or nothing.
smitcat:

I am responding to the OP's question. You will note that in my first post I said "it's hard to generalize, everyone's situation is different" and then, with that caveat, gave my general opinion which is what was asked for. I think Bogleheads are not representative of the general population, and in many if not most cases will have saved well. And even among that cohort, pre-tax is likely to work out better. Is it good to have multiple types of accounts. Absolutely. Can tax rates change. Again, absolutely, I simply think MOST savings should be pre-tax for MOST people. That's MHO. You are very wealthy, and I realize that for you, Roth makes sense. This has been covered on many other threads.

Having "too much money" come RMD time such that one's tax bracket might possibly be a few percent higher than otherwise can be solved in numerous ways: spend more, gift more, donate more, retire early and convert more, and so on.

When I retire, my plan is to not fret about taxes. They are already quite low in this country compared to other developed nations.That's fact, not opinion.
Chadnudj
Posts: 999
Joined: Tue Oct 29, 2013 11:22 am

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Chadnudj »

jharkin wrote: Thu May 12, 2022 12:35 pm
My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:
They pay zero federal INCOME taxes.

But they're paying taxes -- sales taxes, property taxes, and in the case of your working parents, still paying Social Security and Medicare taxes.

(Sorry, this is my hobby horse -- people saying "50% pay no federal income taxes" while ignoring that those people still pay a lot in taxes, including paying Social Security and Medicare taxes if they're still working, which are BY FAR the largest non-military federal government expenses. Taxes are taxes, and treating "income tax" as something special while ignoring the very real taxes poor/working/middle class people pay, especially SS/Medicare taxes when those are such huge federal expenditures, seems misleading somehow).
smitcat
Posts: 8940
Joined: Mon Nov 07, 2016 10:51 am

Re: When to use traditional 401k vs Roth 401k - need explanation

Post by smitcat »

Admiral wrote: Thu May 12, 2022 3:44 pm
smitcat wrote: Thu May 12, 2022 3:27 pm
Admiral wrote: Thu May 12, 2022 3:16 pm
smitcat wrote: Thu May 12, 2022 3:15 pm
Admiral wrote: Thu May 12, 2022 3:02 pm

Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
"for the OP (who's asking about $100k salaries) or for 99% of the population."
I am curious how we/you know the OP is asking about $100K salaries?

I doubt highly only 1% of the population which saves will have a decision to make for Roth vs Traditional.
Most of the population does not save significantly = does not apply in any way.
Many of those who do save also have pensions and/or 457, 403 , inheritance etc.
This is what the OP posted:
but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.
ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective. Of course there are edge cases, we're speaking in generalities. People who make large salaries and will have huge pre-tax accounts and face six figure RMDs are not most people, even in wealthy countries.
"ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective."
There are 20+ million folks who still get pensions and who have differing rules regarding 401K's, matching, 403's, 457's etc.
One percent is not representational of those folks or other folks that may fall within those guidelines.

Of the 100% of folks that work and then retire a majority will not have any of this apply as they have saved little or nothing.
smitcat:

I am responding to the OP's question. You will note that in my first post I said "it's hard to generalize, everyone's situation is different" and then, with that caveat, gave my general opinion which is what was asked for. I think Bogleheads are not representative of the general population, and in many if not most cases will have saved well. And even among that cohort, pre-tax is likely to work out better. Is it good to have multiple types of accounts. Absolutely. Can tax rates change. Again, absolutely, I simply think MOST savings should be pre-tax for MOST people. That's MHO. You are very wealthy, and I realize that for you, Roth makes sense. This has been covered on many other threads.

Having "too much money" come RMD time such that one's tax bracket might possibly be a few percent higher than otherwise can be solved in numerous ways: spend more, gift more, donate more, retire early and convert more, and so on.

When I retire, my plan is to not fret about taxes. They are already quite low in this country compared to other developed nations.That's fact, not opinion.
I was never talking about myself nor have I ever posted about our income or current portfolio.
I am talking about a very large number of folks who do have substantial pensions and other programs. If someone does not want to bother about trying to model for best tax practices that is fine ....and that would likely mean they do not care what vehicle they save within.
Admiral
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Admiral »

smitcat wrote: Thu May 12, 2022 3:59 pm
Admiral wrote: Thu May 12, 2022 3:44 pm
smitcat wrote: Thu May 12, 2022 3:27 pm
Admiral wrote: Thu May 12, 2022 3:16 pm
smitcat wrote: Thu May 12, 2022 3:15 pm

"for the OP (who's asking about $100k salaries) or for 99% of the population."
I am curious how we/you know the OP is asking about $100K salaries?

I doubt highly only 1% of the population which saves will have a decision to make for Roth vs Traditional.
Most of the population does not save significantly = does not apply in any way.
Many of those who do save also have pensions and/or 457, 403 , inheritance etc.
This is what the OP posted:
but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.
ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective. Of course there are edge cases, we're speaking in generalities. People who make large salaries and will have huge pre-tax accounts and face six figure RMDs are not most people, even in wealthy countries.
"ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective."
There are 20+ million folks who still get pensions and who have differing rules regarding 401K's, matching, 403's, 457's etc.
One percent is not representational of those folks or other folks that may fall within those guidelines.

Of the 100% of folks that work and then retire a majority will not have any of this apply as they have saved little or nothing.
smitcat:

I am responding to the OP's question. You will note that in my first post I said "it's hard to generalize, everyone's situation is different" and then, with that caveat, gave my general opinion which is what was asked for. I think Bogleheads are not representative of the general population, and in many if not most cases will have saved well. And even among that cohort, pre-tax is likely to work out better. Is it good to have multiple types of accounts. Absolutely. Can tax rates change. Again, absolutely, I simply think MOST savings should be pre-tax for MOST people. That's MHO. You are very wealthy, and I realize that for you, Roth makes sense. This has been covered on many other threads.

Having "too much money" come RMD time such that one's tax bracket might possibly be a few percent higher than otherwise can be solved in numerous ways: spend more, gift more, donate more, retire early and convert more, and so on.

When I retire, my plan is to not fret about taxes. They are already quite low in this country compared to other developed nations.That's fact, not opinion.
I was never talking about myself nor have I ever posted about our income or current portfolio.
I am talking about a very large number of folks who do have substantial pensions and other programs. If someone does not want to bother about trying to model for best tax practices that is fine ....and that would likely mean they do not care what vehicle they save within.
Sorry I was confusing you with another poster, so my apologies.

As you will note in my multiple posts upthread, I mentioned that having a pension may/might move the scales toward Roth. The OP did not ask about Roth vs Traditional with a pension. I pointed out that filling up the lower brackets with other income can move the needle toward Roth.

If you'd care to post an example, using math and marginal rates, to show how Roth is better for the average investor or retiree (however you choose to define that) then you should do that. Again, we're speaking in generalities so if you can, please give a real-world example of someone who would do better with Roth vs Traditional who does not also have a 7 figure pre-tax account... since mostly what the pro-Roth posters seems to be concerned about is RMDs.

I will, however, grant you that when I said "99%" I should probably have written "95%."
smitcat
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by smitcat »

Admiral wrote: Thu May 12, 2022 4:26 pm
smitcat wrote: Thu May 12, 2022 3:59 pm
Admiral wrote: Thu May 12, 2022 3:44 pm
smitcat wrote: Thu May 12, 2022 3:27 pm
Admiral wrote: Thu May 12, 2022 3:16 pm

This is what the OP posted:


ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective. Of course there are edge cases, we're speaking in generalities. People who make large salaries and will have huge pre-tax accounts and face six figure RMDs are not most people, even in wealthy countries.
"ETA: What I meant was that for 99% of people who work and then retire, pre-tax is likely best from a tax-savings perspective."
There are 20+ million folks who still get pensions and who have differing rules regarding 401K's, matching, 403's, 457's etc.
One percent is not representational of those folks or other folks that may fall within those guidelines.

Of the 100% of folks that work and then retire a majority will not have any of this apply as they have saved little or nothing.
smitcat:

I am responding to the OP's question. You will note that in my first post I said "it's hard to generalize, everyone's situation is different" and then, with that caveat, gave my general opinion which is what was asked for. I think Bogleheads are not representative of the general population, and in many if not most cases will have saved well. And even among that cohort, pre-tax is likely to work out better. Is it good to have multiple types of accounts. Absolutely. Can tax rates change. Again, absolutely, I simply think MOST savings should be pre-tax for MOST people. That's MHO. You are very wealthy, and I realize that for you, Roth makes sense. This has been covered on many other threads.

Having "too much money" come RMD time such that one's tax bracket might possibly be a few percent higher than otherwise can be solved in numerous ways: spend more, gift more, donate more, retire early and convert more, and so on.

When I retire, my plan is to not fret about taxes. They are already quite low in this country compared to other developed nations.That's fact, not opinion.
I was never talking about myself nor have I ever posted about our income or current portfolio.
I am talking about a very large number of folks who do have substantial pensions and other programs. If someone does not want to bother about trying to model for best tax practices that is fine ....and that would likely mean they do not care what vehicle they save within.
Sorry I was confusing you with another poster, so my apologies.

As you will note in my multiple posts upthread, I mentioned that having a pension may/might move the scales toward Roth. The OP did not ask about Roth vs Traditional with a pension. I pointed out that filling up the lower brackets with other income can move the needle toward Roth.

If you'd care to post an example, using math and marginal rates, to show how Roth is better for the average investor or retiree (however you choose to define that) then you should do that. Again, we're speaking in generalities so if you can, please give a real-world example of someone who would do better with Roth vs Traditional who does not also have a 7 figure pre-tax account... since mostly what the pro-Roth posters seems to be concerned about is RMDs.

I will, however, grant you that when I said "99%" I should probably have written "95%."
"I will, however, grant you that when I said "99%" I should probably have written "95%.""
This was the post I was replying to as many might take the 99% as gospel - it may be that 95% of all folks is near a correct % but that would be for the entire population.

"If you'd care to post an example, using math and marginal rates, to show how Roth is better for the average investor or retiree (however you choose to define that) then you should do that."
I have made past posts on this area in the past - no intention of repeating those.
MathWizard
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by MathWizard »

muitu wrote: Thu May 12, 2022 10:55 am After all these years, I'm still not sure about at what point someone would choose a traditional 401k option over the Roth option.

I understand the tax implications of both (traditional contributions lower your taxable income, right?), but at what point (whether salary or income-wise) would a person choose the traditional option over the Roth? Is there general rule for when a person would switch - for an example, at 100k/year it would make more sense to use the traditional option over the Roth, but at 50k/year the Roth would be more fitting.

If the most common response to this is, "everyone's situation is different." then what made you make your decision?

Also, do you even need to change the type of 401k or could I stick with the Roth option for 40 years...?
In the portion of my 403b which had the match, I was only allowed tax deferred.
This was 15% of income,
Past that I could use the Roth option. I went up to the match, and my IRA was Roth,
because I could withdraw contributions if I needed to.

My take was that the tax deferred 15% was reasonable amount over my career, and
I was in the 15% (later 12%) all those years.

Once my income was such that I would pay 22%, I put whatever would get me down to the top of the 12% bracket,
and the rest went into Roth 403b.

So in 2022 an income of $109,450 , MFJ, after standard deduction puts you to the top of the 12% bracket. Below
that put what you can into Roth and above that, put it into traditional.

This is a decent rule of thumb, since adding two full 20,500 401k tax deferred contributions puts a household at the 82nd percentile of
household income. After ager 50 with two additional $6,500 catchups, you would be at the 84th percentile.
fyre4ce
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by fyre4ce »

HMSVictory wrote: Thu May 12, 2022 11:36 am I'll take the other side of the trade on this and say almost everyone comes out ahead doing Roth. Why?

Because very, very, very few people take the tax savings from the pre-tax contributions and invest them in a taxable account. Most spend it.

Almost none (outside of the Boglehead world where we track every penny and debate 0.05 vs 0.04 bps costs).

If you do then the only difference will be your tax rate while working vs tax rate while retired. It is impossible to know what rates will in the future although we do know the TCJA signed into law in 2017 is set to expire in 2026 (which will increase rates on everyone).

Most people defer either 10% (as an example) into pre-tax or 10% into Roth (and take home a net slightly lower check). Between these two you are investing more by doing Roth.

If you are in the 37% tax bracket I can see the appeal of the pre-tax option but I am in the 32% bracket and I max the Roth options out (yes I have a large pension which will eat up the majority of the tax brackets). Even after maxing the Roths out I still put almost half my savings into a taxable brokerage account. Also an overlooked benefit of the Roth is it insulates you from future tax hikes as you paid the tax on your contributions.
I find the "forced savings" argument to be pretty weak. It's often used by whole life salesmen to push their products. Once you accept the premise that it's better to put your money toward X than waste it on buying beer and ice cream, almost anything can be substituted for X, no matter how bad. If someone has the discipline to set up Roth contributions through their employer's payroll, they should have the discipline to set up an automatic contribution to their brokerage account. I'm realistic enough to know that won't apply in every case, but it's better to educate people and try to improve behavior than give generally sub-optimal advice to everyone.

In your case, you have a large pension, so it's less clear that Roth is a bad choice, or at least not as bad. But many readers have large salaries in high-tax states and no pension, and the numerical advantage for pre-tax is enormous.
jharkin
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by jharkin »

Chadnudj wrote: Thu May 12, 2022 3:50 pm
jharkin wrote: Thu May 12, 2022 12:35 pm
My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:
They pay zero federal INCOME taxes.

But they're paying taxes -- sales taxes, property taxes, and in the case of your working parents, still paying Social Security and Medicare taxes.

(Sorry, this is my hobby horse -- people saying "50% pay no federal income taxes" while ignoring that those people still pay a lot in taxes, including paying Social Security and Medicare taxes if they're still working, which are BY FAR the largest non-military federal government expenses. Taxes are taxes, and treating "income tax" as something special while ignoring the very real taxes poor/working/middle class people pay, especially SS/Medicare taxes when those are such huge federal expenditures, seems misleading somehow).
I think you missed my point, and our thoughts are more aligned than you realize.

Of course my MIL pays tax - property tax on the condo, excise tax on the car, sales tax, gas taxes, tolls on the highway, and so on.

What I was commenting is that people who moan and groan about how bad federal taxes on RMDs are do not realize that they are in the fortunate top ~5% or so that has that 'problem'. If you don't want to have to pay tax there is an easy solution - be poor. I grew up that way and I can assure them that its a worse burden than paying taxes on 6 figures of annual IRA RMDs.
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HMSVictory
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by HMSVictory »

Admiral wrote: Thu May 12, 2022 3:02 pm
HMSVictory wrote: Thu May 12, 2022 12:40 pm
jharkin wrote: Thu May 12, 2022 12:35 pm
HMSVictory wrote: Thu May 12, 2022 12:09 pm I can tell you from watching my mother retire and get hit by the widows tax trap with a large IRA that the RMD's are painful. She's in a higher bracket retired than she was ever in while working (even taking away the windows tax trap which hit her this year).
And for everyone like you mother there are 10, 50, 100 seniors out there who can only dream of having to deal with that "pain"

My MIL struggles to pay her bills on her small $1500/mo SS check... all while stressing out over what to do if her car breaks down or the cancer recurs. But at least she owns her condo outright.

My own parents could only wish to have it even that good. They are NW negative and still working in their late 70s


But they all pay zero federal tax so I guess they are lucky, eh? :oops:


.
I get it - my in laws are in the same boat. We are discussing wealth building principals here though.

Like I said first world problems..... more than 50% of Americans pay zero income taxes.
Which is why--not discounting your personal financial situation, or that of your mother--the advice to save in Roth over a pre-tax account is not useful/helpful advice: for the OP (who's asking about $100k salaries) or for 99% of the population.

I just think we need to be careful using our own lens when we try offer general advice about this kind of thing. I have also saved in Roth, but I would not say it's appropriate for most investors.

Here's a simple example of why pre-tax works for most people.

Let's say you have an affluent couple who are making $250k.
Subtract the standard deduction: $25k rounded
Leaving $225k.
Most of their income is taxed at 22%.
However, if they save $36k in a pretax account, that's a 24% tax savings off the top because they are well into the 24% bracket.
Then they pay tax on $199k, or federal tax of $36k, leaving them with:
$163,000, which is what they are living on. Pretty good!

Then they retire. Let's say they retire at FRA and each get a (very large) $36k SS check, so a total of $72k before tax. Assuming they want to live on the exact same after-tax income, they need to withdraw around $100k from their retirement accounts. Their total tax (and this is inexact due to the way SS is taxed) is around $28k, of which $9k is taxed at 12% or less and around $18k is taxed at 22%.

Exact same spendable income, lower bracket, less tax paid. And most people don't require the same amount of money to live on when they retire.

Even if this couple had $1m in a pretax account, from ages 67-72 they'd be withdrawing $100k per year, or $600k. Let's say their account grows so they still have $500k left by RMD year. Their initial RMD is $20k They are STILL not in a higher bracket than they were while working, it's either lower or the same.

Yes, if they have $2m and a $50k pension, then it might happen. That's not most people.
Under current tax law I agree with your calculations however; the TCJA is expiring in 2026 and rates are set to revert to the pre-TCJA 2017 levels.

If rates go higher in the future then the Roth is a much better option even in your calculation. These are the reasons that Vanguard advises tax diversification and yes I am an outlier and prefer to have my entire balance in Roth.

I also prefer the Roth for legacy purposes. YMMV.
Stay the course!
faltuk1
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by faltuk1 »

Another thing to consider -

If you choose traditional 401K, it will reduce your AGI. This may allow you to be eligible for various deductions, like child tax credit, AOTC, I-Bond tax deduction if used for education etc. I was eligible last year for stimulus check mainly because my traditional 401K contributions reduced AGI.
Chadnudj
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by Chadnudj »

fyre4ce wrote: Thu May 12, 2022 5:50 pm
HMSVictory wrote: Thu May 12, 2022 11:36 am I'll take the other side of the trade on this and say almost everyone comes out ahead doing Roth. Why?

Because very, very, very few people take the tax savings from the pre-tax contributions and invest them in a taxable account. Most spend it.

Almost none (outside of the Boglehead world where we track every penny and debate 0.05 vs 0.04 bps costs).

If you do then the only difference will be your tax rate while working vs tax rate while retired. It is impossible to know what rates will in the future although we do know the TCJA signed into law in 2017 is set to expire in 2026 (which will increase rates on everyone).

Most people defer either 10% (as an example) into pre-tax or 10% into Roth (and take home a net slightly lower check). Between these two you are investing more by doing Roth.

If you are in the 37% tax bracket I can see the appeal of the pre-tax option but I am in the 32% bracket and I max the Roth options out (yes I have a large pension which will eat up the majority of the tax brackets). Even after maxing the Roths out I still put almost half my savings into a taxable brokerage account. Also an overlooked benefit of the Roth is it insulates you from future tax hikes as you paid the tax on your contributions.
I find the "forced savings" argument to be pretty weak. It's often used by whole life salesmen to push their products. Once you accept the premise that it's better to put your money toward X than waste it on buying beer and ice cream, almost anything can be substituted for X, no matter how bad. If someone has the discipline to set up Roth contributions through their employer's payroll, they should have the discipline to set up an automatic contribution to their brokerage account. I'm realistic enough to know that won't apply in every case, but it's better to educate people and try to improve behavior than give generally sub-optimal advice to everyone.

In your case, you have a large pension, so it's less clear that Roth is a bad choice, or at least not as bad. But many readers have large salaries in high-tax states and no pension, and the numerical advantage for pre-tax is enormous.
Also: what's wrong with beer and ice cream? I'd rather have a bit more extra in my take-home paycheck now thanks to doing a traditional 401k and get to blow that grabbing a cocktail with a friend/splurging on some salted caramel Graters than feel at all constrained now in my spending because my take-home pay is lower since I'm doing a Roth 401k.

You have to save to enjoy retirement, but you also have to enjoy the time you have now.
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muitu
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by muitu »

KlangFool wrote: Thu May 12, 2022 11:22 am
muitu wrote: Thu May 12, 2022 10:55 am After all these years, I'm still not sure about at what point someone would choose a traditional 401k option over the Roth option.
muitu,

1) The correct statement is most people that choose Roth 401K have been proven to be wrong so far.

10% or less of the US Household has a net worth of more than 1 million. So, most people would never has a tax-deferred account of 1 million or more. In summary, it is unlikely for someone to have higher or same marginal tax rate at retirement.

The only possible exception is someone with a very generous pension.

2) And, in general, people that are confused do not file their own taxes.

3) "could I stick with the Roth option for 40 years...?"

Only if you enjoy pay more taxes instead of spending your own money.

KlangFool
Can you further explain the bolded statement?
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Re: When to use traditional 401k vs Roth 401k - need explanation

Post by KlangFool »

muitu wrote: Tue May 17, 2022 12:56 pm
KlangFool wrote: Thu May 12, 2022 11:22 am
muitu wrote: Thu May 12, 2022 10:55 am After all these years, I'm still not sure about at what point someone would choose a traditional 401k option over the Roth option.
muitu,

1) The correct statement is most people that choose Roth 401K have been proven to be wrong so far.

10% or less of the US Household has a net worth of more than 1 million. So, most people would never has a tax-deferred account of 1 million or more. In summary, it is unlikely for someone to have higher or same marginal tax rate at retirement.

The only possible exception is someone with a very generous pension.

2) And, in general, people that are confused do not file their own taxes.

3) "could I stick with the Roth option for 40 years...?"

Only if you enjoy pay more taxes instead of spending your own money.

KlangFool
Can you further explain the bolded statement?
muitu,

A) Contribute to Roth 401K and pay X% taxes now.

B) Contribute to Trad 401K and pay less than X% taxes when you retire

Why choose (A) unless you enjoy paying taxes instead of spending your own money?

If you believe (B) to be false, show us your calculation. Then, we can prove to you why you were wrong.

KlangFool
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