Author Topic: Fund 401k or Roth IRA first?  (Read 7963 times)

Zman

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Fund 401k or Roth IRA first?
« on: April 30, 2015, 04:53:59 PM »
In a calendar year, you can do $18K in a 401k plus $5.5K in a Roth...

Has anyone looked into which one to fund first (assume no employer match)?

My quick numbers show that it makes more sense to fund the 401k first because you get a greater amount of money in the account and "working for you".

I'm usually wrong, so can somebody point out what I am missing?

Frankies Girl

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Re: Fund 401k or Roth IRA first?
« Reply #1 on: April 30, 2015, 05:04:28 PM »
401k first. Even without the match, and even if it has less than stellar fund choices. Pick a fund that is closest to a broad stock market mix with the lowest expense ratio, and then put in as much as you can.

There are two great reasons - you get tax deferred growth, and since the contribution comes out of your paycheck pre tax, that also means you're reducing your income by that amount, meaning you could possibly have a much lower tax bill come April 15th.


skyrefuge

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Re: Fund 401k or Roth IRA first?
« Reply #2 on: April 30, 2015, 05:48:47 PM »
In a calendar year, you can do $18K in a 401k plus $5.5K in a Roth...

You need to clarify your terms. "401(k)" and "Roth" are not mutually-exclusive things.  You can have:

Roth 401(k)
Traditional 401(k)
Roth IRA
Traditional IRA

Frankies Girl answered the question assuming that you're comparing a Traditional 401(k) to a Roth IRA. In that case, yes, putting your money in a tax-deferred ("traditional") vehicle is a better choice for most Mustachians than putting it taxed ("Roth") vehicle.

But if you're comparing a 401(k) and an IRA of the same type, then it doesn't matter which one is filled "first".

Yes, you're correct that the earlier you get your money into a tax shelter, the more time it will have to grow under that shelter, so it's theoretically better to contribute sooner rather than later. But whether you fill up your 401(k) or IRA first isn't really relevant, nor are their relative capacities. Filling your IRA to $5.5k and then filling your 401(k) to $18k will have the same result as doing the opposite.

In a practical world, it often makes the most sense to fill the 401(k) to get the match (if any), then fill the IRA, and then fill the rest of the 401(k).

MDM

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Re: Fund 401k or Roth IRA first?
« Reply #3 on: April 30, 2015, 07:11:40 PM »
In a calendar year, you can do $18K in a 401k plus $5.5K in a Roth...

You need to clarify your terms. "401(k)" and "Roth" are not mutually-exclusive things.  You can have:

Roth 401(k)
Traditional 401(k)
Roth IRA
Traditional IRA

Frankies Girl answered the question assuming that you're comparing a Traditional 401(k) to a Roth IRA. In that case, yes, putting your money in a tax-deferred ("traditional") vehicle is a better choice for most Mustachians than putting it taxed ("Roth") vehicle.

But if you're comparing a 401(k) and an IRA of the same type, then it doesn't matter which one is filled "first".

Yes, you're correct that the earlier you get your money into a tax shelter, the more time it will have to grow under that shelter, so it's theoretically better to contribute sooner rather than later. But whether you fill up your 401(k) or IRA first isn't really relevant, nor are their relative capacities. Filling your IRA to $5.5k and then filling your 401(k) to $18k will have the same result as doing the opposite.

In a practical world, it often makes the most sense to fill the 401(k) to get the match (if any), then fill the IRA, and then fill the rest of the 401(k).
^Pretty much this.

One other consideration would be the choices in each.  The options in the 401k will be fewer than the almost unlimited options you have for an IRA so it is most likely that you can find a better choice in the IRA.  One possible exception is institutional class shares that might be available in the 401k, having even lower fees than available to you as an individual investor.

As for having a greater amount of money in one vs. the other, P1 * (1+i)^n + P2 * (1+i)^n = (P1 + P2) * (1+i)^n.  Mathematically it makes no difference whatsoever, provided the returns in each are identical.

JenniferOnFIRE

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Re: Fund 401k or Roth IRA first?
« Reply #4 on: May 02, 2015, 01:21:13 AM »
If 401(k) matching is not a factor, then the priority is to take full advantage of the incredibly powerful tax-free compounded earnings of a Roth.  This will far outweigh, in the long run, taxes saved on the initial contributions to a non-Roth 401(k) or IRA.  You have more control over an IRA, though, so fund the Roth IRA before the non-matched 401(k).  You control the investment options in an IRA, and contributions to a Roth IRA can be withdrawn at any time without taxes or penalties.  Once you've maxed out your Roth IRA, if your 401(k) has a Roth option, choose that (unless you are approaching age 60 and expect to use the funds in the near-term and are in a higher marginal tax bracket than you will be after retirement). 

There are lots of refinements that could be made to this plan based on the details of your particular situation, but generally for a beginning retirement saver Roth will be your best choice, and IRAs are preferable to 401(k)s.  But if there are 401(k) matching funds, secure those first.

JenniferOnFIRE

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Re: Fund 401k or Roth IRA first?
« Reply #5 on: May 02, 2015, 02:17:48 AM »
By the way, my understanding of why some folks in this forum say that contributing to a tax-deferred account is better than a Roth for Mustachians is based on the assumption that post-RE income levels will be very low such that they will support gradual Roth conversions over time at a lower marginal tax rate than applied to the initial contributions.  It is certainly possible that this will be the case, but note that MMM himself frequently has income levels that would not support this assumption, even though his spending is very low.  Also, since the power of the Roth is in its tax-free compounding over a long period of time, it is prudent to consider how long of a remaining investment horizon you expect to have after your anticipated conversion period.  As usual, everyone's situation must be uniquely evaluated.

skyrefuge

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Re: Fund 401k or Roth IRA first?
« Reply #6 on: May 02, 2015, 09:13:51 AM »
the priority is to take full advantage of the incredibly powerful tax-free compounded earnings of a Roth.  This will far outweigh, in the long run, taxes saved on the initial contributions to a non-Roth 401(k) or IRA.

No, this is not true. If the effective tax rate paid on contributions is the same as the effective tax rate paid on withdrawals, then Roth and non-Roth are the same. The associative property of mathematics guarantees this to be true. You're probably forgetting that the Roth has less money to compound than the non-Roth, since that money disappeared into taxes prior to the contribution.

Sure, if someone's effective tax rate on withdrawals is higher than their effective rate on contributions, then the Roth is a better choice. Maybe such a situation applies to MMM. But (and I accept that this may be anti-mustachian heresy!) I think MMM is an anomaly amongst Mustachians; very few will see the explosion in income that he has seen in retirement.

And remember that even if both your income level and tax brackets are the same during both the contribution and withdrawal phases, the non-Roth will still be a better choice, because your effective tax rate on withdrawals will be lower than your effective rate on contributions (which was equal to your marginal rate). So in order for the Roth to be a better choice, your taxable income actually has to be higher during retirement than during your working career.

I think that's sufficient to say that the default choice for most Mustachians should be non-Roth, though of course there will be exceptions, and everyone should understand the reasoning before making their own decision.

http://www.gocurrycracker.com/roth-sucks/ (FWIW, unlike GCC, I personally rank a Roth IRA above a taxable brokerage account, but still below a Traditional IRA).

seattlecyclone

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Re: Fund 401k or Roth IRA first?
« Reply #7 on: May 02, 2015, 09:23:20 AM »
Yes, I agree with skyrefuge. You should generally prefer pre-tax saving to Roth saving. If you honestly expect your tax bracket to be higher in retirement than it is now, and you're not in school or some other situation where you expect your income to increase dramatically before you retire, then you probably have enough money to retire already!

Paul der Krake

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Re: Fund 401k or Roth IRA first?
« Reply #8 on: May 02, 2015, 09:24:00 AM »
I used to intuitively believe the Roth option was superior, and the Mad Fientist's posts on tax deferrals swayed me the other way. For prospective early retirees who will have tons of time and flexibility on their hands to manipulate their AGI in the future, using pre-tax accounts is the way to go. Until your income is large too large to qualify for the deduction, that is.

Always do the math, kids.

ender

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Re: Fund 401k or Roth IRA first?
« Reply #9 on: May 02, 2015, 09:36:44 AM »
Always do the math, kids.

.... and plan to save/invest all your tax savings, rather than spend them ;)

This is where theory and practice break down for a lot of people. Many will do traditional 401k/IRA and then spend the tax savings not on investments. This makes the comparison more difficult.

JenniferOnFIRE

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Re: Fund 401k or Roth IRA first?
« Reply #10 on: May 02, 2015, 11:23:30 AM »
And remember that even if both your income level and tax brackets are the same during both the contribution and withdrawal phases, the non-Roth will still be a better choice, because your effective tax rate on withdrawals will be lower than your effective rate on contributions (which was equal to your marginal rate).

Help me understand, please, what you mean by "effective tax rate on withdrawals" in the context of a Roth?  Since Roth earnings are tax-free when withdrawn, then as long as the accumulated Roth earnings also offset the opportunity cost of the foregone initial marginal tax savings, how is one not better off going this route?
« Last Edit: May 02, 2015, 12:20:37 PM by JenniferOnFIRE »

beltim

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Re: Fund 401k or Roth IRA first?
« Reply #11 on: May 02, 2015, 11:29:00 AM »
And remember that even if both your income level and tax brackets are the same during both the contribution and withdrawal phases, the non-Roth will still be a better choice, because your effective tax rate on withdrawals will be lower than your effective rate on contributions (which was equal to your marginal rate). So in order for the Roth to be a better choice, your taxable income actually has to be higher during retirement than during your working career.

Most of your post is spot on, but this paragraph suffers from the same generalities and susceptibility to exceptions as Jennifer's post.

There are many, many cases where someone with the same federal tax rate in retirement as in their prime working years would benefit from a Roth account to a great extent than they would for a traditional tax-deferred account, especially if both are used in combination.

Druid

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Re: Fund 401k or Roth IRA first?
« Reply #12 on: May 02, 2015, 11:29:36 AM »
The traditional 401k may need to be prioritized over the traditional\roth Ira for some people because 401k savings reduce your Modified Adjusted Gross Income(MAGI). The traditional Ira starts to be reduced to amounts under $5500 when a person has a MAGI over $61000.  If you contributed $18,000  to your 401k you would not have to worry about the traditional Ira phaseout until you were making more than $79,000. The Roth IRA also has a phaseout somewhere in the low 100k's.
« Last Edit: May 02, 2015, 11:54:56 AM by Druid »

Druid

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Re: Fund 401k or Roth IRA first?
« Reply #13 on: May 02, 2015, 11:53:29 AM »
I will also mention that even a Roth investor should have enough money in their traditional accounts to offset  their exemptions and standard deductions(assuming no other income in retirement).

The Roth/traditional argument is a hopeless one. Tax rates could increase or decrease dramatically in the future. My guess is that we will see lower income tax rates for the frugal, but would not argue that point to a Roth enthusiast since I have no evidence of that fact.

The traditional vehicles allowing me to take income that would be taxed at 25 percent bracket today  with the expectation that  I will stay in the 15 bracket in my retirement seems like the better financial choice for me. On the other hand if I planned to spend more than 100 k a year in retirement I would tilt more towards Roth.
« Last Edit: May 02, 2015, 11:57:44 AM by Druid »

skyrefuge

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Re: Fund 401k or Roth IRA first?
« Reply #14 on: May 02, 2015, 12:00:53 PM »
Help me understand, please, what you mean by "effective tax rate on withdrawals" in the context of a Roth?  Since Roth earnings are tax-free when withdrawn, then if the accumulated Roth earnings are greater than the opportunity cost of the foregone initial marginal tax savings, how is one not better off going this route?

See the equations in this post for a more detailed explanation. My "effective tax rate on withdrawals" is "TR" in those equations. It does not apply to Roth withdrawals, but it applies to Traditional withdrawals, and both equations need to be calculated in order to make a comparison.

Comparing the Roth earnings to the Roth opportunity cost isn't meaningful for comparing Roth to Traditional. You have to actually compare ((Roth earnings) - (Roth opportunity cost on contribution)) to ((Traditional earnings) - (Traditional tax on withdrawals)).

JenniferOnFIRE

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Re: Fund 401k or Roth IRA first?
« Reply #15 on: May 02, 2015, 01:46:16 PM »
Most of your post is spot on, but this paragraph suffers from the same generalities and susceptibility to exceptions as Jennifer's post.

Gah!  You are absolutely right that this is not a question that lends itself to general answers based on oversimplified assumptions.  Thank you for reminding me that the choices that are working well for me are not necessarily optimal for others, and that the best distribution of savings into Roth IRAs, Traditional IRAs, Roth 401(k)s, Traditional 401(k)s, and other savings vehicles is very nuanced and specific to each individual's situation.  More information is needed than can be communicated in a brief online post.

Zman, I strongly encourage you to seek the advice of a qualified financial advisor who can help you make the best choice for your particular situation and goals.  Unfortunately, most people don't do this, and instead just get confused by the contradictory opinions offered by amateur armchair analysts in an internet forum!

Kudos to you for doing something, whichever route you choose, and I wish you great success at growing your mustache!


brooklynguy

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Re: Fund 401k or Roth IRA first?
« Reply #16 on: May 02, 2015, 03:44:43 PM »
Zman, I strongly encourage you to seek the advice of a qualified financial advisor who can help you make the best choice for your particular situation and goals.

I think even this recommendation suffers from overgeneralization and susceptibility to exceptions :)

Someone looking to obtain (and willing to pay for) good advice with minimal effort should seek the advice of a qualified financial advisor (but still put in the effort of conducting appropriate due diligence in the selection of that qualified financial advisor).

But the DIY route is a perfectly valid alternative for someone with the ability and willingness to self-learn (and I would even argue that, generally speaking, that is the better alternative for aspiring early retirees, who tend to have specialized needs and circumstances that mainstream financial advisors don't have familiarity or experience with).

Based on the simple fact that Zman made his way to this corner of the internet (let alone the fact that he created this thread seeking answers to his questions), I wouldn't be surprised if he falls into the latter category.

Quote
Unfortunately, most people don't do this, and instead just get confused by the contradictory opinions offered by amateur armchair analysts in an internet forum!

Although most of the armchair analysts in this forum are amateurs, I wouldn't discount the value of the advice that is available here (for free no less!) even as compared to the advice of bona fide experts.  Everyone should of course do their own diligence and back-up research, but, on these issues, I would personally value the advice of just about any of the posters who responded in this thread above that of, say, the average certified financial planner.

This stuff is complicated, and the consequences of getting it wrong can be not-insignificant, so anyone who chooses to handle it themselves should make sure to put in the time, energy and research required to get it right.  But it's not open heart surgery, so I have no qualms about recommending that sufficiently motivated people take it upon themselves to insource.  The display of self-taught prowess on these topics on display in this thread alone is good support for that :)

Cathy

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Re: Fund 401k or Roth IRA first?
« Reply #17 on: May 02, 2015, 04:16:06 PM »
Zman, I strongly encourage you to seek the advice of a qualified financial advisor who can help you make the best choice for your particular situation and goals.

The problem is that identifying a bona fide expert is nearly as difficult as becoming an expert yourself, perhaps even more so because you can't really know how good the adviser is until after you've paid for advice, and you can't evaluate the quality of that advice unless you're already an expert in the field yourself.

If you are very rich and operating a large-scale business, it can start to make sense to invest the very significant work required to identify bona fide experts and retain them to do work that you could do yourself but that you don't have time to do. However, if you aren't at that point yet, I think it makes more sense to become an expert on the field yourself, rather than becoming an expert at identifying experts in the field.

But to be realistic, most people don't make any serious attempt to identify a bona fide expert. They simply assume that endorsement by a licensing agency or other authority is sufficient proof of competence and they go through life without really understanding what is going on around them. Personally, I think that is completely antithetical to the whole MMM program.

As for the open-heart surgery comment, I would perform open-heart surgery on myself if it were possible to do so (but it's probably not due to the nature of the procedure). To inject a fictional reference into this post, I think there is an episode of House where the eponymous character performs a major surgery on himself. I remember thinking that that was pretty hardcore.
« Last Edit: May 02, 2015, 04:40:45 PM by Cathy »

beltim

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Re: Fund 401k or Roth IRA first?
« Reply #18 on: May 02, 2015, 04:26:38 PM »
Most of your post is spot on, but this paragraph suffers from the same generalities and susceptibility to exceptions as Jennifer's post.

Gah!  You are absolutely right that this is not a question that lends itself to general answers based on oversimplified assumptions.  Thank you for reminding me that the choices that are working well for me are not necessarily optimal for others, and that the best distribution of savings into Roth IRAs, Traditional IRAs, Roth 401(k)s, Traditional 401(k)s, and other savings vehicles is very nuanced and specific to each individual's situation.  More information is needed than can be communicated in a brief online post.

Zman, I strongly encourage you to seek the advice of a qualified financial advisor who can help you make the best choice for your particular situation and goals.  Unfortunately, most people don't do this, and instead just get confused by the contradictory opinions offered by amateur armchair analysts in an internet forum!

Kudos to you for doing something, whichever route you choose, and I wish you great success at growing your mustache!

Ah, it's not that bad.  The issue is that answering the question doesn't lead to any meaningful simplifications.  That is, the answer to the question, "What is the best retirement account for me to save money in?" is: "The combination that, in retirement, gives you the most after-tax money."  This answer, however, is NOT the same as:
"The one that minimizes total taxes (or current taxes, or future taxes)"
"Compare your marginal tax rate now to your effective tax rate in retirement"
or any other simplification that's meaningful.

That said, I think any of the advanced amateurs here even the ones I frequently remind not to use simplifications that don't always work would be able to give the correct answer if a complete financial picture were painted in a case study.

MDM

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Re: Fund 401k or Roth IRA first?
« Reply #19 on: May 02, 2015, 05:00:19 PM »
...the answer to the question, "What is the best retirement account for me to save money in?" is: "The combination that, in retirement, gives you the most after-tax money."  This answer, however, is NOT the same as:
"The one that minimizes total taxes (or current taxes, or future taxes)"
"Compare your marginal tax rate now to your effective tax rate in retirement"
or any other simplification that's meaningful.
Bingo on the highlighted phrase.

Some "exceptions to the rules", etc.:
  - If one can contribute the maximum amount, it turns out "Roth is better" even for identical marginal rates.  See https://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758.
  - As posters Joel and seattlecyclone reminded me recently, it really is the marginal rates, not overall rates, that matter when one evaluates traditional vs. Roth.  Once your marginal rate in retirement reaches your marginal rate when contributing, traditional ceases to be better.  They may only be equivalent, but at that point traditional is not better.

ender

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Re: Fund 401k or Roth IRA first?
« Reply #20 on: May 02, 2015, 05:53:13 PM »
Once your marginal rate in retirement reaches your marginal rate when contributing, traditional ceases to be better.  They may only be equivalent, but at that point traditional is not better.

You should compare the average rate the withdrawals are taxed at vs the average rate during your contributing years.

This is not necessarily your marginal rate in retirement, especially if you do Roth conversions.


kunostories

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Re: Fund 401k or Roth IRA first?
« Reply #21 on: May 02, 2015, 08:01:00 PM »
This:

http://www.bankrate.com/calculators/retirement/401-k-or-roth-ira-calculator.aspx

Pay careful attention to whether you invest any tax savings created by choosing the traditional. It makes a difference.

MDM

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Re: Fund 401k or Roth IRA first?
« Reply #22 on: May 02, 2015, 09:59:17 PM »
Once your marginal rate in retirement reaches your marginal rate when contributing, traditional ceases to be better.  They may only be equivalent, but at that point traditional is not better.

You should compare the average rate the withdrawals are taxed at vs the average rate during your contributing years.

This is not necessarily your marginal rate in retirement, especially if you do Roth conversions.
It might be helpful to include some "for example"s here, otherwise we could be bringing different assumptions to this discussion - and when that happens, it's highly unlikely that consensus will emerge.

Main Assumption: beltim's "...the answer to the question, 'What is the best retirement account for me to save money in?' is: 'The combination that, in retirement, gives you the most after-tax money.'" is the correct measurement to use. Anyone have a different definition?


The attached spreadsheet is intended to illustrate the marginal vs. overall point.

As attached, a couple contributes a fixed amount for 11 years then withdraws over 5 years, earning 5% return at all times.  Note: one could make the withdrawal period longer to favor traditional, or one could also assume other income to favor Roth.  The exercise here is not intended to evaluate trad vs. Roth per se, but rather to investigate what tax boundaries cause the evaluation answer to change.

Under these conditions, the best result (greatest amount of after tax cash) for the traditional vs. Roth comes when contributing ~$13,743 each year.  Traditional provides $18,552.05 more than Roth. 

This contribution amount is the most the couple can make and remain in the 10% marginal bracket for at least one withdrawal year.  When contributions go to $13,744/yr all withdrawals have some amount of 15% tax and the traditional minus Roth drops to $18,552.01.  The more contributions, the worse for the T vs. R comparison.  It appears that crossing this marginal rate boundary leads to a change in the slope of the response function.

If looking only at tax paid, one does pay more tax using Roth, up to a contribution of ~$25,654/yr.  The greatest excess tax paid via Roth comes at $11306.72/yr, the highest contribution amount that keeps all withdrawals in the 10% marginal bracket.  We hit equal amounts of tax paid at ~$25,654/yr - but tax paid, while an interesting sidelight, is less important compared with money available for spending.

If (e.g., by long withdrawals, no side income, etc.)
  - one can keep the retirement marginal rate below the contributing marginal rate,
  - then traditional is better. 

If (e.g., by having other income, trying to withdraw too fast, etc.)
  - one has a retirement marginal rate above the contributing marginal rate,
  - then Roth would have been better.

If marginal rates are the same, then it doesn't matter (aside from the "maximum contributions" scenario covered elsewhere).

I wish it were as simple as marginal (same as average if one stays in that bracket) during contribution vs. overall in retirement, but it seems that just isn't the case.  Does anyone have an example that points to a different conclusion?


JenniferOnFIRE

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Re: Fund 401k or Roth IRA first?
« Reply #23 on: May 03, 2015, 07:23:05 AM »
That is, the answer to the question, "What is the best retirement account for me to save money in?" is: "The combination that, in retirement, gives you the most after-tax money." 

But isn't that a bit of an oversimplification, too?  Tax planning is certainly an important consideration, but so is financial planning and estate planning, which I would think are significant factors to consider for mustachians with long early retirement horizons and the likelihood of ending up with a financial surplus.

For example, say the tax projections work out to be a wash between a Roth and a Traditional IRA.  In that case, wouldn't a Roth be preferred due to its other characteristics, especially for mustachians?  Like the ability to withdraw the contributions at any time under the age of 59 1/2 without taxes or penalties, which allows it to serve as an emergency fund while giving the money plenty of time to grow and provide accessible tax-free money for early retirees in the later stretch before that age.  Or the lack of Required Minimum Distributions, which doesn't force additional (taxable) income on you that you may not need.  Or the ability to potentially transfer a sizable pot to your heirs that can continue to grow tax free for them for decades?

Seems like a balance of these factors is needed to optimize one's plan, just as a balance of taxable, tax-deferred, and tax-free investments is good to have in one's portfolio.

MDM

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Re: Fund 401k or Roth IRA first?
« Reply #24 on: May 03, 2015, 07:59:53 AM »
That is, the answer to the question, "What is the best retirement account for me to save money in?" is: "The combination that, in retirement, gives you the most after-tax money." 

But isn't that a bit of an oversimplification, too?  Tax planning is certainly an important consideration, but so is financial planning and estate planning, which I would think are significant factors to consider for mustachians with long early retirement horizons and the likelihood of ending up with a financial surplus.

For example, say the tax projections work out to be a wash between a Roth and a Traditional IRA.  In that case, wouldn't a Roth be preferred due to its other characteristics, especially for mustachians?  Like the ability to withdraw the contributions at any time under the age of 59 1/2 without taxes or penalties, which allows it to serve as an emergency fund while giving the money plenty of time to grow and provide accessible tax-free money for early retirees in the later stretch before that age.  Or the lack of Required Minimum Distributions, which doesn't force additional (taxable) income on you that you may not need.  Or the ability to potentially transfer a sizable pot to your heirs that can continue to grow tax free for them for decades?

Seems like a balance of these factors is needed to optimize one's plan, just as a balance of taxable, tax-deferred, and tax-free investments is good to have in one's portfolio.
Perhaps one could say the answer to the question, "What is the best retirement account for me to save money in?" starts with: "The combination that, in retirement, gives you the most after-tax money."  Once that quantitative answer is known, one can then apply qualitative measures such as the ones above.

seattlecyclone

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Re: Fund 401k or Roth IRA first?
« Reply #25 on: May 03, 2015, 09:47:34 AM »
For example, say the tax projections work out to be a wash between a Roth and a Traditional IRA.  In that case, wouldn't a Roth be preferred due to its other characteristics, especially for mustachians?  Like the ability to withdraw the contributions at any time under the age of 59 1/2 without taxes or penalties, which allows it to serve as an emergency fund while giving the money plenty of time to grow and provide accessible tax-free money for early retirees in the later stretch before that age.  Or the lack of Required Minimum Distributions, which doesn't force additional (taxable) income on you that you may not need.  Or the ability to potentially transfer a sizable pot to your heirs that can continue to grow tax free for them for decades?

I plan to do Roth conversions after I retire to get all of these benefits without paying extra taxes at my current marginal rate while I'm working. Sometimes you can have your cake and eat it too.

beltim

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Re: Fund 401k or Roth IRA first?
« Reply #26 on: May 03, 2015, 02:53:46 PM »
That is, the answer to the question, "What is the best retirement account for me to save money in?" is: "The combination that, in retirement, gives you the most after-tax money." 

But isn't that a bit of an oversimplification, too?  Tax planning is certainly an important consideration, but so is financial planning and estate planning, which I would think are significant factors to consider for mustachians with long early retirement horizons and the likelihood of ending up with a financial surplus.

Yes, that's probably true.  My statement was intended for people who plan to spend their money in retirement.  I guess a more general form would be:
"The combination that best allows you to achieve your financial goals."

RWD

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Re: Fund 401k or Roth IRA first?
« Reply #27 on: May 03, 2015, 08:14:23 PM »
I've found this post to be very informative in comparing Traditional versus Roth:
http://www.gocurrycracker.com/roth-sucks/

MDM

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Re: Fund 401k or Roth IRA first?
« Reply #28 on: May 03, 2015, 08:23:23 PM »
I've found this post to be very informative in comparing Traditional versus Roth:
http://www.gocurrycracker.com/roth-sucks/
It is informative, but perhaps not correct when it suggests that one should compare the marginal rate at contribution to the overall rate in retirement.  That's the point of some discussion (ongoing further via e-mail) at the bottom of comments in the above blog post, and this post in this thread.