Author Topic: Roth 401k almost always better than a traditional 401k?  (Read 1344 times)

Xlar

  • Stubble
  • **
  • Posts: 132
Roth 401k almost always better than a traditional 401k?
« on: July 10, 2018, 03:14:00 PM »
Article makes basic mistakes to reach the conclusion that a Roth 401k is almost always better than a traditional 401k: https://twocents.lifehacker.com/why-a-roth-401-k-is-almost-always-better-than-a-trad-1827477812#_ga=2.41234210.1000902570.1531145396-1989004882.1529083517

Of course if you put $1000 into a traditional and $1000 into a roth and then only pay 25% tax at the end on the traditional the Roth will come out ahead... You have to pay tax going into the Roth so you should start with $1000 into the traditional and $750 into the Roth. Then you will see that they are even unless the tax rate changes...

MDM

  • Walrus Stache
  • *******
  • Posts: 8699
Re: Roth 401k almost always better than a traditional 401k?
« Reply #1 on: July 10, 2018, 03:26:17 PM »
So many errors in both the article and the comments....

Anyone interested in a more factual analysis could use Traditional versus Roth - Bogleheads.

Eric

  • Magnum Stache
  • ******
  • Posts: 3934
  • Location: On my bike
Re: Roth 401k almost always better than a traditional 401k?
« Reply #2 on: July 10, 2018, 06:44:16 PM »
I like the chart where the maximum amount that your tax rate could go down is 10%.  Of course, this is likely brought to you by people who think you need to replace 90% of your salary to be able to retire, so I guess it's fitting.

simonsez

  • Pencil Stache
  • ****
  • Posts: 697
  • Age: 32
Re: Roth 401k almost always better than a traditional 401k?
« Reply #3 on: July 11, 2018, 11:37:20 AM »
Article makes basic mistakes to reach the conclusion that a Roth 401k is almost always better than a traditional 401k: https://twocents.lifehacker.com/why-a-roth-401-k-is-almost-always-better-than-a-trad-1827477812#_ga=2.41234210.1000902570.1531145396-1989004882.1529083517

Of course if you put $1000 into a traditional and $1000 into a roth and then only pay 25% tax at the end on the traditional the Roth will come out ahead... You have to pay tax going into the Roth so you should start with $1000 into the traditional and $750 into the Roth. Then you will see that they are even unless the tax rate changes...
Dollars are fungible.  There are only so many dollars that are tax-advantaged.  You could consider $1333 of take home money and you decide to set aside $1000 of that for a Roth 401k.  If $1000 was the marginal limit you had left to invest in the 401k, you can't use that $1333 amount with traditional but that is apples and oranges admittedly.  That extra $333 would have to come from somewhere*, and the investment strategy may or may not be the best in the long run for many of the reasons proffered by MDM's linked article.

*-So you can squeeze post-tax money into a Roth 401k but it isn't ceteris paribus (e.g. your taxable account might need to be lower or vacation fund or whatever would have to compensate).  i.e. In the taxes section of the Bogleheads article, the "A" in the equation, the original amount used in the traditional and Roth would not be equal in this example and could be misleading to people who are considering equal amounts to invest.

MDM

  • Walrus Stache
  • *******
  • Posts: 8699
Re: Roth 401k almost always better than a traditional 401k?
« Reply #4 on: July 11, 2018, 12:09:58 PM »
In the taxes section of the Bogleheads article, the "A" in the equation, the original amount used in the traditional and Roth would not be equal in this example and could be misleading to people who are considering equal amounts to invest.
That is covered further down in the wiki, under Maxing out your retirement accounts.

CorpRaider

  • Bristles
  • ***
  • Posts: 337
    • The Corpraider Blog
Re: Roth 401k almost always better than a traditional 401k?
« Reply #5 on: July 11, 2018, 12:37:35 PM »
Good catch of terrible article op.  Bogleheads summary is of course good.  May need an update on rule of thumb for marginal rate to 12% for TX CTZ and JBZ ACT. 

MadFientist has good stuff on this (under old rates...but analysis is basically unchanged); highlighting that for FIRE people it is rarely a close contest.

Also, bird in hand...and all that.
« Last Edit: July 11, 2018, 12:43:45 PM by CorpRaider »

Xlar

  • Stubble
  • **
  • Posts: 132
Re: Roth 401k almost always better than a traditional 401k?
« Reply #6 on: July 11, 2018, 04:21:21 PM »
Article makes basic mistakes to reach the conclusion that a Roth 401k is almost always better than a traditional 401k: https://twocents.lifehacker.com/why-a-roth-401-k-is-almost-always-better-than-a-trad-1827477812#_ga=2.41234210.1000902570.1531145396-1989004882.1529083517

Of course if you put $1000 into a traditional and $1000 into a roth and then only pay 25% tax at the end on the traditional the Roth will come out ahead... You have to pay tax going into the Roth so you should start with $1000 into the traditional and $750 into the Roth. Then you will see that they are even unless the tax rate changes...
Dollars are fungible.  There are only so many dollars that are tax-advantaged.  You could consider $1333 of take home money and you decide to set aside $1000 of that for a Roth 401k.  If $1000 was the marginal limit you had left to invest in the 401k, you can't use that $1333 amount with traditional but that is apples and oranges admittedly.  That extra $333 would have to come from somewhere*, and the investment strategy may or may not be the best in the long run for many of the reasons proffered by MDM's linked article.

*-So you can squeeze post-tax money into a Roth 401k but it isn't ceteris paribus (e.g. your taxable account might need to be lower or vacation fund or whatever would have to compensate).  i.e. In the taxes section of the Bogleheads article, the "A" in the equation, the original amount used in the traditional and Roth would not be equal in this example and could be misleading to people who are considering equal amounts to invest.

Money is definitely fungible. Let's say you had enough to max out your Roth 401k at $18,500. If you paid 25% tax (chosen to keep the numbers simple) this would be equivalent to $24,666 pre tax. If you took that same money and maxed the traditional 401k you would have $18,500 in the traditional 401k and $4625 left over to invest after tax. You need to keep the pre-tax dollar amounts the same to make an accurate comparison.

simonsez

  • Pencil Stache
  • ****
  • Posts: 697
  • Age: 32
Re: Roth 401k almost always better than a traditional 401k?
« Reply #7 on: July 12, 2018, 08:09:42 AM »
Article makes basic mistakes to reach the conclusion that a Roth 401k is almost always better than a traditional 401k: https://twocents.lifehacker.com/why-a-roth-401-k-is-almost-always-better-than-a-trad-1827477812#_ga=2.41234210.1000902570.1531145396-1989004882.1529083517

Of course if you put $1000 into a traditional and $1000 into a roth and then only pay 25% tax at the end on the traditional the Roth will come out ahead... You have to pay tax going into the Roth so you should start with $1000 into the traditional and $750 into the Roth. Then you will see that they are even unless the tax rate changes...
Dollars are fungible.  There are only so many dollars that are tax-advantaged.  You could consider $1333 of take home money and you decide to set aside $1000 of that for a Roth 401k.  If $1000 was the marginal limit you had left to invest in the 401k, you can't use that $1333 amount with traditional but that is apples and oranges admittedly.  That extra $333 would have to come from somewhere*, and the investment strategy may or may not be the best in the long run for many of the reasons proffered by MDM's linked article.

*-So you can squeeze post-tax money into a Roth 401k but it isn't ceteris paribus (e.g. your taxable account might need to be lower or vacation fund or whatever would have to compensate).  i.e. In the taxes section of the Bogleheads article, the "A" in the equation, the original amount used in the traditional and Roth would not be equal in this example and could be misleading to people who are considering equal amounts to invest.

Money is definitely fungible. Let's say you had enough to max out your Roth 401k at $18,500. If you paid 25% tax (chosen to keep the numbers simple) this would be equivalent to $24,666 pre tax. If you took that same money and maxed the traditional 401k you would have $18,500 in the traditional 401k and $4625 left over to invest after tax. You need to keep the pre-tax dollar amounts the same to make an accurate comparison.
Ha, did you just repeat what I said?

Yes, indeed that is true!  It can be misleading to use different starting amounts and not take any other factors into place.

DreamFIRE

  • Handlebar Stache
  • *****
  • Posts: 1311
Re: Roth 401k almost always better than a traditional 401k?
« Reply #8 on: July 12, 2018, 09:50:28 AM »
I don't know if the sites in the links mention the healthcare aspect, but a Roth distribution will help me keep my MAGI lower than a tIRA distribution, therefore qualifying for better PCT/CSR for ACA.

Xlar

  • Stubble
  • **
  • Posts: 132
Re: Roth 401k almost always better than a traditional 401k?
« Reply #9 on: July 12, 2018, 11:26:44 AM »
Article makes basic mistakes to reach the conclusion that a Roth 401k is almost always better than a traditional 401k: https://twocents.lifehacker.com/why-a-roth-401-k-is-almost-always-better-than-a-trad-1827477812#_ga=2.41234210.1000902570.1531145396-1989004882.1529083517

Of course if you put $1000 into a traditional and $1000 into a roth and then only pay 25% tax at the end on the traditional the Roth will come out ahead... You have to pay tax going into the Roth so you should start with $1000 into the traditional and $750 into the Roth. Then you will see that they are even unless the tax rate changes...
Dollars are fungible.  There are only so many dollars that are tax-advantaged.  You could consider $1333 of take home money and you decide to set aside $1000 of that for a Roth 401k.  If $1000 was the marginal limit you had left to invest in the 401k, you can't use that $1333 amount with traditional but that is apples and oranges admittedly.  That extra $333 would have to come from somewhere*, and the investment strategy may or may not be the best in the long run for many of the reasons proffered by MDM's linked article.

*-So you can squeeze post-tax money into a Roth 401k but it isn't ceteris paribus (e.g. your taxable account might need to be lower or vacation fund or whatever would have to compensate).  i.e. In the taxes section of the Bogleheads article, the "A" in the equation, the original amount used in the traditional and Roth would not be equal in this example and could be misleading to people who are considering equal amounts to invest.

Money is definitely fungible. Let's say you had enough to max out your Roth 401k at $18,500. If you paid 25% tax (chosen to keep the numbers simple) this would be equivalent to $24,666 pre tax. If you took that same money and maxed the traditional 401k you would have $18,500 in the traditional 401k and $4625 left over to invest after tax. You need to keep the pre-tax dollar amounts the same to make an accurate comparison.
Ha, did you just repeat what I said?

Yes, indeed that is true!  It can be misleading to use different starting amounts and not take any other factors into place.

Reading comprehension fail, hahahaha. Yes, I'm pretty sure I just did :)

bacchi

  • Magnum Stache
  • ******
  • Posts: 3121
Re: Roth 401k almost always better than a traditional 401k?
« Reply #10 on: July 12, 2018, 11:34:36 AM »
I don't know if the sites in the links mention the healthcare aspect, but a Roth distribution will help me keep my MAGI lower than a tIRA distribution, therefore qualifying for better PCT/CSR for ACA.

True enough, depending on your planned ER spend.

That may not matter in a year or two, though, if subsidies vanish.

COEE

  • Pencil Stache
  • ****
  • Posts: 525
Re: Roth 401k almost always better than a traditional 401k?
« Reply #11 on: July 12, 2018, 08:42:18 PM »
Didn't read the article.

Generally this is really simple - If you expect your tax rate to be higher in retirement - roth.  If you expect your tax rate to be lower in retirement - traditional.  If you're not sure - do both.

I do both.  I expect my tax rate to be lower, however, with taxes so low, I'm not sure it won't rebound to the taxes of the 80's at some point.