Invest Pre-tax or Roth in 401k?

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Topic Author
sonar230
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Invest Pre-tax or Roth in 401k?

Post by sonar230 » Thu Mar 26, 2020 10:12 pm

I'm current 52 years old, in the 24% tax bracket, and want to retire at or before 55 years old. My current salary allows me to max out my 401k contributions and accrue an additional $70k-$80k in cash/year until retirement. At age 60, I will be eligible to receive a pension of which will cover roughly 50% of my expenses. Roughly 80% of my investments are in pre-tax accounts, with roughly 3 years of living expenses in taxable accounts. I also have approximately an additional 1.5 years of living expenses in actual cash in savings accounts. My current plan involves accruing sufficient cash to help fund the gap years between retirement and taking my pension using the taxable and cash accounts. My 401k plan this year allowed a Roth option and I am currently making all my 401 contributions to Roth which is increasing my tax burden now, but will reduce my need to perform Roth conversions in the future. Based upon my situation, what are the opinions regarding pre-tax vs. Roth in my 401k? I expect that taxes will increase in the future, but I will be in a lower tax bracket in retirement.

Thanks,
sonar230

lakpr
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Re: Invest Pre-tax or Roth in 401k?

Post by lakpr » Thu Mar 26, 2020 11:04 pm

That last sentence alone is the key. The rest of the post can be completely ignored. Traditional 401k; escape taxes now at a higher rate, pay them when you are in a lower tax bracket.

With Traditional 401k, you retain the option of paying taxes at a time of your choice; when your income is lower. With Roth 401k, you lose that option. Once you make a Roth 401k contribution, that choice is forever taken away from you; taxes are immediately required to be paid. You cannot later retroactively make that a Traditional 401k contribution.

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FiveK
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Re: Invest Pre-tax or Roth in 401k?

Post by FiveK » Thu Mar 26, 2020 11:10 pm

lakpr's answer is correct if reality matches your expectations.

How much calculation/estimation have you done to develop those expectations?

E.g., see Estimating future marginal tax rate and Taxation of Social Security benefits - Bogleheads.

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grabiner
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Re: Invest Pre-tax or Roth in 401k?

Post by grabiner » Fri Mar 27, 2020 11:25 am

If you intend to retire within a few years, it is better to contribute to the pre-tax 401(k) now, and then convert to a Roth IRA after you have retired; this works out better if you have a slightly lower marginal tax rate.

Here's how I worked it out, using the old tax rates (2016), so that I assumed a 28% bracket now and 25% at retirement:
Roth 401(k) in a 28% bracket thoughts
Wiki David Grabiner

retiredjg
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Re: Invest Pre-tax or Roth in 401k?

Post by retiredjg » Fri Mar 27, 2020 11:33 am

sonar230 wrote:
Thu Mar 26, 2020 10:12 pm
Roughly 80% of my investments are in pre-tax accounts...
I agree with the others...except in the case where one's tax deferred accounts are already too large. Are they? I suspect they are since you have already wondered if it is better to use Roth now to reduce how much you need to convert to Roth later.

You expect to be in a lower bracket later, but that might be before considering Roth conversions. Paying 24% now may be the same as paying 25% later (after tax rates revert in 2026) so why not pay 24% now?

ETA...the pension works into this too because it reduces the amount you can convert at a very low rate.

Topic Author
sonar230
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Re: Invest Pre-tax or Roth in 401k?

Post by sonar230 » Fri Mar 27, 2020 12:05 pm

All,

Thanks for the input. I will spend some time this evening reviewing all the information that has been shared and circle back with the group.

Regards,
Devin

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ruralavalon
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Re: Invest Pre-tax or Roth in 401k?

Post by ruralavalon » Fri Mar 27, 2020 12:17 pm

sonar230 wrote:
Thu Mar 26, 2020 10:12 pm
I'm current 52 years old, in the 24% tax bracket, and want to retire at or before 55 years old. My current salary allows me to max out my 401k contributions and accrue an additional $70k-$80k in cash/year until retirement. At age 60, I will be eligible to receive a pension of which will cover roughly 50% of my expenses. Roughly 80% of my investments are in pre-tax accounts, [emphasis added] with roughly 3 years of living expenses in taxable accounts. I also have approximately an additional 1.5 years of living expenses in actual cash in savings accounts. My current plan involves accruing sufficient cash to help fund the gap years between retirement and taking my pension using the taxable and cash accounts. My 401k plan this year allowed a Roth option and I am currently making all my 401 contributions to Roth which is increasing my tax burden now, but will reduce my need to perform Roth conversions in the future. Based upon my situation, what are the opinions regarding pre-tax vs. Roth in my 401k? I expect that taxes will increase in the future, but I will be in a lower tax bracket in retirement. [emphasis added]

Thanks,
sonar230
Will you receive Social Security in addition to your pension?

For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

In addition when you withdraw from your 401k in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
sonar230
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Re: Invest Pre-tax or Roth in 401k?

Post by sonar230 » Fri Mar 27, 2020 4:59 pm

ruralavalon wrote:
Fri Mar 27, 2020 12:17 pm
sonar230 wrote:
Thu Mar 26, 2020 10:12 pm
I'm current 52 years old, in the 24% tax bracket, and want to retire at or before 55 years old. My current salary allows me to max out my 401k contributions and accrue an additional $70k-$80k in cash/year until retirement. At age 60, I will be eligible to receive a pension of which will cover roughly 50% of my expenses. Roughly 80% of my investments are in pre-tax accounts, [emphasis added] with roughly 3 years of living expenses in taxable accounts. I also have approximately an additional 1.5 years of living expenses in actual cash in savings accounts. My current plan involves accruing sufficient cash to help fund the gap years between retirement and taking my pension using the taxable and cash accounts. My 401k plan this year allowed a Roth option and I am currently making all my 401 contributions to Roth which is increasing my tax burden now, but will reduce my need to perform Roth conversions in the future. Based upon my situation, what are the opinions regarding pre-tax vs. Roth in my 401k? I expect that taxes will increase in the future, but I will be in a lower tax bracket in retirement. [emphasis added]

Thanks,
sonar230
Will you receive Social Security in addition to your pension?

For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

In addition when you withdraw from your 401k in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
Yes - I will receive social security between age 67 and 70.

Thanks,
sonar230

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