Figuring 401k roth vs traditional

[lwhorton]

I'm trying to do the math behind the value of a 401k roth versus 401k traditional.

Here is what I have deduced so far, but I can guarantee you I am overlooking something, as the answer is just not what I expected. Perhaps the numbers are too simple, or I'm missing a big section of tax code... please let me know.

Assuming 2015 tax brackets of:

income step   rate
9225                 10%
37450         15%
90750         25%
189300         28%

And an annual salary of 103500 (roth), or as far as taxes are concerned, an annual salary of 85500 (traditional) with 18k into the 401k. This is the amount I would be paying into each tax bucket.

   103500   85500
10%   922.5   922.5
15%   4233.75   4233.75
25%   13325   12012.5
28%   3570   0

total    22051.25   17168.75

Which offers a leftover 4882.5 for investing elsewhere (a taxed account).

Let's assume a post-inflation growth of 5%, my accounts would both contain 77794.96 after 30 years (principal * (growth^years)). The principal for each investment is 18k.

But in the case of the traditional, I took the tax-saved dollars and put them into another investment, also earning 5% post-inflation.

investment
                        21101.88365
capital gains   15%
after tax           17936.6011

So my total value of each would be 77794.96 (roth) and 95731.56 (traditional + investment).

But now to factor in the taxes I have to pay on the withdraw, assuming an income of 37450 per year.

10%   922.5
15%   4233.75
   
traditional tax total   5156.25

Leaving my total value...
401k roth: 77794.96
401k trad: 90575.31

At first glance, traditional is clearly the way to go, but I want to be sure. Do these numbers change as my salary grows? I'm smack in the middle of the 28% bracket, so there's really no way to get out, or any expectation that my taxes will go up.

Can someone point out me errors here, or offer some additional variables? Is state/local tax large enough to be considered in this calculation? What else am I missing?

[MDM]

I'm trying to do the math behind the value of a 401k roth versus 401k traditional.

...
But now to factor in the taxes I have to pay on the withdraw, assuming an income of 37450 per year.

Under the above assumption (i.e., income in retirement much less than while working, and unchanged tax brackets) traditional will indeed be better.

See https://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 for a math-heavy discussion.

[dandarc]

If your tax rates on withdrawal are lower in retirement than in the accumulation phase - traditional wins.  If they are higher, then Roth usually wins.

So your analysis looks reasonable to me, and if you are somewhat creative in your withdrawal strategy, you can effectively stop paying income taxes all together in retirement.

And why are you investing the tax savings in a taxable account and not a Traditional IRA, saving you even more taxes now?

[lwhorton]

And why are you investing the tax savings in a taxable account and not a Traditional IRA, saving you even more taxes now?

I'm currently already maxing out a Roth IRA. But I haven't yet considered the switch to traditional there. It already has some 35k. I'm not sure if it's better to abandon this 35k and start contributing to a traditional IRA, or to keep pushing into Roth for larger compounds. That's a whole 'nother story.

Edit; Nevermind. I forgot about income limitations surrounding deductible IRA contributions. You have to be under $71k to take any deductions, in which case Roth is clearly the winner.

@MDM Thanks for the link to that post.

[dandarc]

Ah - single.  Married so I have those numbers a little more ingrained mentally.