Author Topic: Traditional or Roth 401k through work  (Read 527 times)

midwestheel

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Traditional or Roth 401k through work
« on: November 14, 2017, 07:07:58 PM »
I'm currently in the 25% tax bracket, and was wondering what advice you all could provide on where I should put my money.  I understand conventional wisdom is to put your money in the most advantageous place comparing your current tax bracket with your projected future tax bracket. If planning to reach retirement in 20 years with a portfolio of $1m and assuming a 5% average return, would the entire $50k of earnings be taxed as regular income, or just the amount I withdrawal for living expenses if I keep the savings in a Traditional 401k?

Would it be advantageous to do a 50/50 split on Traditional 401k v Roth 401k? I also have another Roth IRA I contribute to outside of work, and currently max that account out.

Neva6

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Re: Traditional or Roth 401k through work
« Reply #1 on: November 14, 2017, 07:12:56 PM »
I was Roth all the way until I needed to start reducing my AGI to continue to qualify for certain tax credits. If you have kids, you need to make less than $110k AGI to claim full benefit of the child tax credit.

Only money that you pull out of the traditional 401k is taxed as income. The rest can continue to grow tax deferred.


midwestheel

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Re: Traditional or Roth 401k through work
« Reply #2 on: November 14, 2017, 07:17:21 PM »
So just so I'm clear, if the account gains $60k and we take $36k out, we're only taxed on the $36k, correct?

If that's the case, I can't see how Roth makes any sense currently based on where we are and where I project us to be, unless of course the 15% tax braket rises to higher than 25% by the time we retire.

Neva6

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Re: Traditional or Roth 401k through work
« Reply #3 on: November 14, 2017, 07:50:35 PM »
You are correct. The only major difference between roth and traditional is your tax rate now vs when you withdraw the money.  There are some other side benefits of Roth accounts but that is the main difference. Sounds like traditional is the way to go for you.

NoStacheOhio

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Re: Traditional or Roth 401k through work
« Reply #4 on: November 15, 2017, 06:14:28 AM »
This is a good breakdown: https://gocurrycracker.com/roth-sucks/
The first step is acknowledging you have a problem, right?

https://forum.mrmoneymustache.com/journals/digging-out-of-a-hole/

MDM

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Re: Traditional or Roth 401k through work
« Reply #5 on: November 15, 2017, 12:30:19 PM »
This is a good breakdown: https://gocurrycracker.com/roth-sucks/
There are many good things in that blog, but the linked article's claim that one should use marginal rate now vs. effective rate later when making a traditional vs. Roth decision is wrong.

E.g., see https://www.kitces.com/blog/understanding-marginal-tax-rate-vs-effective-tax-rate-and-when-to-use-each/ or http://www.bogleheads.org/wiki/Traditional_versus_Roth.

dcamnc

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Re: Traditional or Roth 401k through work
« Reply #6 on: November 15, 2017, 02:55:22 PM »
I do about half trad and half roth. I can guess what will happen in the future with taxes, but no one knows for sure where you (I) will be, or what the country's tax situation will be like.

Jeremy

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Re: Traditional or Roth 401k through work
« Reply #7 on: November 15, 2017, 07:05:06 PM »
This is a good breakdown: https://gocurrycracker.com/roth-sucks/
There are many good things in that blog, but the linked article's claim that one should use marginal rate now vs. effective rate later when making a traditional vs. Roth decision is wrong.


Still not wrong Uncle MDM ;)
https://forum.mrmoneymustache.com/taxes/taxes-in-early-retirement-(gocurrycracker-links)/msg1328427/#msg1328427

MDM

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Re: Traditional or Roth 401k through work
« Reply #8 on: November 15, 2017, 07:41:53 PM »
This is a good breakdown: https://gocurrycracker.com/roth-sucks/
There are many good things in that blog, but the linked article's claim that one should use marginal rate now vs. effective rate later when making a traditional vs. Roth decision is wrong.


Still not wrong Uncle MDM ;)
https://forum.mrmoneymustache.com/taxes/taxes-in-early-retirement-(gocurrycracker-links)/msg1328427/#msg1328427
Well, you are persistent.  And much of your other advice appears good.  And no argument with "For the target audience of my blog (median to high income earners who are happy to save a high percentage of income to retire early) they will have greater lifetime wealth (and minimize their lifetime taxes) by choosing Traditional over Roth."

But your advice that people compare their current marginal rate to their expected effective rate is not correct for a general audience.  For your target audience, perhaps.  But not for everyone.

Simple example
Someone saving 15% on a traditional contribution this year.  Regardless of whether that contribution is made, the person will pay a 25% marginal rate when withdrawing from traditional accounts, but the effective rate will be 11%.

Should the person contribute to traditional or Roth this year?

Jeremy

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Re: Traditional or Roth 401k through work
« Reply #9 on: November 15, 2017, 11:02:12 PM »
the person will pay a 25% marginal rate when withdrawing from traditional accounts

False

Maybe one day we can hash it out over a beer

MDM

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Re: Traditional or Roth 401k through work
« Reply #10 on: November 15, 2017, 11:19:26 PM »
the person will pay a 25% marginal rate when withdrawing from traditional accounts

False

Maybe one day we can hash it out over a beer
Oh dear, not the "No True Scotsman would ever pay such a rate" defense. ;)

Are you seriously saying there is nobody who pays such a rate?

Perhaps not your target audience, but there are a significant number of real people who would pay that much (or more, when SS taxation is considered).

P.S.  Indeed, a few pints could lubricate the discussion. :)