Author Topic: Pre-tax v. Post-tax in traditional retirement vehicles  (Read 6131 times)

iamsoners

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Pre-tax v. Post-tax in traditional retirement vehicles
« on: August 15, 2013, 09:53:28 PM »
Hey all,
I'm wondering how your conventional retirement vehicles (401ks, IRAs) break down between pre and post tax investments.  I have over 60% in post-tax Roths but I feel like that's probably fairly unconventional.  Where are you all at?

Mike

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #1 on: August 16, 2013, 01:36:02 AM »
http://www.madfientist.com/traditional_ira_vs_roth_ira/

That article convinced me to switch my strategy in favor of tax sheltered investment.  The ratio is currently 6-1 in favor of tax deferred and climbing.

Undecided

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #2 on: August 16, 2013, 07:51:09 AM »
Hey all,
I'm wondering how your conventional retirement vehicles (401ks, IRAs) break down between pre and post tax investments.  I have over 60% in post-tax Roths but I feel like that's probably fairly unconventional.  Where are you all at?

This is heavily influenced by personal past and present taxes and future expected taxes, and 401(k) plan details. We are about 25% after-tax Roth IRAs and 75% pre-tax 401(k)s. The Roths mostly represent back door Roth conversions (we had no pre-tax option for that money) and my wife's contributions from shortly before we married (when she had a lower tax rate and knew it would increase), but after a recent change in my 401(k)'s rules, I am now putting half of the 401(k) max ($51,000) in from after-tax money and planning to roll that over to a Roth every six months or so. So going forward my expectation is to add $11,000 year in my and my spouse's Roths by back door conversion (again, there's no pre-tax option for that money for me), approximately $26,000 in pre-tax 401(k) from my and my employer's contributions, and approximately $25,000 in after-tax 401(k) to roll over to a Roth IRA.

fiveoclockshadow

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #3 on: August 16, 2013, 10:57:53 AM »
The spirit of Mustachianism is to have a low cost of living.  That means in retirement you will be in a low tax environment.  During the accumulation phase you are likely, but not necessarily, in a high or at least higher tax environment.  That would indicate going with pre-tax contributions (e.g. Traditional IRA/401k) is the most advantageous.  The linked article earlier gives a good explanation.

That said, if you are high enough up the income ladder during accumulation that pre-tax IRA is not an option and you are left only with backdoor Roth for your IRA.  In that case you'd have someone who would be making maximal traditional 401k contributions and maximal Roth IRA contributions at the same time mostly because of the specific oddities of the IRA tax code.

Standard wisdom often says do Roth, but this is based on the un-Mustachian assumption that you will be in a higher tax bracket during withdrawal than during accumulation.  For Mustachians the opposite is typically true and so pre-tax is usually the best option.  Keep in mind though that some Roth IRA does have an important liquidity advantage in that you can withdraw contributions without penalty at any time and at any age.  So it isn't entirely down to accumlate/withdrawal tax rates.  Also the Roth pipeline is presently the best way to get at sheltered funds early.  Thus some amount of Roth is probably correct for nearly everyone at almost anytime.

Mike

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #4 on: August 17, 2013, 03:59:11 AM »
Taxable brokerage accounts are also great for liquidity.  Of course, depending on the amount of time the investment(s) has/have been held, you will have to pay either income tax or long term capital gains tax on the proceeds (assuming the sale was profitable).  And if the sale was at a loss, you get to deduct it (although I think there's an annual limit to that).

aj_yooper

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #5 on: August 17, 2013, 06:34:27 AM »
http://www.madfientist.com/traditional_ira_vs_roth_ira/

That article convinced me to switch my strategy in favor of tax sheltered investment.  The ratio is currently 6-1 in favor of tax deferred and climbing.

That does seem like a smart strategy, especially if the marginal rate is 15% or under in early retirement. 

Zaga

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #6 on: August 17, 2013, 06:57:03 AM »
For various reasons we are currently at 17% Roth, 83% Traditional, and 0% Taxable.  We have been leaning more towards Traditional because our tax bracket is firmly in the 25% bracket.  This year however DH switched jobs so we only have my 401-K for now, so the Roth number is currently going up.

Although I don't have numbers to back me up, my feeling is that between 25-50% Roth is right for us.  I certainly won't live or die by that target though.

GreenGuava

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #7 on: August 17, 2013, 12:46:58 PM »
I'm am largely in traditional tax deferred;  I make too much to do a deductible t-IRA contribution each year (I would if I could), so I have some Roth space accordingly.  However, my tax-advantaged space is almost 90% deferred.

My main reason is the obvious one - I'm in the 28% federal bracket, plus I'm in California, so I have another 9.3% to pay there.  I don't think there's a chance my taxes will be anywhere near that post-60, and they'll be far less in 10-15 years too, when I can do conversions and start a Roth pipeline in my low-income years (if I choose to have them).

ender

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #8 on: August 17, 2013, 03:13:12 PM »
http://www.madfientist.com/traditional_ira_vs_roth_ira/

That article convinced me to switch my strategy in favor of tax sheltered investment.  The ratio is currently 6-1 in favor of tax deferred and climbing.

Yeah, I ran some calculations and switched my 401k from roth-401k to traditional.

I'm still putting money into a Roth IRA, but, this is partially because I'm not sure where the next decades will take me :)

Carrie

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #9 on: August 18, 2013, 06:59:28 PM »
We're about 40% Roth and 60% rollover IRAs & 401k.  Our tax rate right now is really low -- we have kids, single income, and have been able to itemize in the past (not sure about this year yet).  I think our effective federal tax rate last year was something like 5.1%.   I can't imagine that we'll be lower than that in retirement as we'll lose our little tax deductions (I mean, darling children).  Our plan is to maximize both, if we can, giving slight preference to the Roth, since we are already paying so little in taxes.  If we were able to put the max in our 401k (we only have one), then we likely would pay any tax at all.  We don't have any after tax investments, other than cash in a savings account.

little stache

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #10 on: September 02, 2013, 04:38:57 PM »
If you are not eligible for Roth, what are the other long-term post tax retirement options folks would suggest looking into?

Carrie

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #11 on: September 02, 2013, 05:03:33 PM »
Maybe start a small business to invest in an Individual 401k?  That's my next step, I think, is to use my self-employed income to fund yet another retirement account.

GreenGuava

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #12 on: September 02, 2013, 11:33:07 PM »
If you are not eligible for Roth, what are the other long-term post tax retirement options folks would suggest looking into?

Well, if you have no pre-tax IRA money, you can do a backdoor Roth.

If you aren't eligible for Roth, you hopefully have a workplace plan.  That's lots you can put away there.

You can also deal with tax-exempt bond funds in your taxable account (in addition to the usual taxable investing).  There's a little bit of a diversification loss here - going with federally tax-exempt is a middle ground (but still subject to non-federal taxes), while state-specific funds are very undiversified (compared to the total bond market) but exempt from both state and federal taxes.  Note that this exemption is on the distributions, not the capital gains of the fund.

Khan

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #13 on: September 03, 2013, 01:16:53 AM »
My current finances are 18k in 401k(have only been working in civilian world for 1 1/2 years), and 17k in ROTH IRA's, and I estimate(because TSP sucks to attempt to regain access to) ~12k in TSP. Going forward, I'll be maxing pre-tax 401k contributions every year that I can, and maxing my ROTH IRA too. However, prior decisions and not trusting the age requirements behind traditional retirement vehicles has left me with 70k in a taxable account.

I'm all for pre-tax 401k contributions, as it's a lot easier to max that then to max Roth 401k contributions at my income level, and like the others said, most Mustachians expect low expenses/low taxes in retirement. The regular ROTH IRA however is just too good to pass up, especially with the 5 year waiting flexibility that you gain on the principal, which means I'm only 2 years away from starting to gain access to that money again.

little stache

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Re: Pre-tax v. Post-tax in traditional retirement vehicles
« Reply #14 on: September 03, 2013, 10:12:29 PM »
If you aren't eligible for Roth, you hopefully have a workplace plan.  That's lots you can put away there.

I can put 35K a year into two 457(b) accounts, which is nice way to bridge the gap until pensions kick in at 62. After the 457(b), I need to find reasonable mix for approximately 40K a year in taxable savings. Will spend some time looking at federal and state specific tax exempt bond funds. At the 28% tax bracket on top of state, and local income taxes, finding investment options that may lower the overall tax burden and lower taxed income stream is something I really need to put my mind to in a more strategic way...