Author Topic: Roth 401K vs Trad 401K  (Read 2850 times)

Panfish

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Roth 401K vs Trad 401K
« on: March 21, 2017, 12:35:20 PM »
Hello Mustachians, I have a question for you fine folks that in most FIRE circumstances would be an easy answer (trad 401K).  My DW and I are living in a smallish town while she is getting her PhD.  I do well income wise for this small of a market (around 95K after bonuses) and she makes about 20K a year for a PhD stipend.  My wife is hella smart and she will probably be a very successful Professor/Researcher/Inventor(she makes most of the equipment she uses for experiments).   Once we are FI (paid off house and 500K investments) I plan on not working in my lucrative field and doing something i like for probably about a third of what I make now.   My DW has already stated that the earliest she will retire is probably 70 because being an old tenured professor is pretty gravy. 

Because of these factors we will probably become obscenely wealthy (in my mind so probably about 3m+ in assets).  With my wife slated for a 42 year career our traditional retirement accounts will probably be huge at retirement age and our tax bill will be as well when we do our RMD's at 70.5.  I guess I would just like to know if it makes sense for me to invest a portion of my 401K in the Roth option for a tax hedge?  We will probably average an income of 150K in today's dollars every year for the next 42 years.

Right now DW is 28 and I am 33.  We have 135K in invested retirement assets and a 20K for a house down payment fund. This should be more but I was in idiot who went to college forever and took out many loans. We probably save about 40 to 45% of our income which should only ramp up when DW has a tenure track job. A lot of University retirement matches are obscene (like 10% to 18%) so her retirement accounts will accumulate very rapidly with pre-tax moneys.

TL:DR version:  My wife will probably never stop working at a high salary so does it make sense to invest in in a Roth 401K as a tax hedge to her pobably huge retirement accounts.

P.S. We will not sip Dom and fly first class across the globe with this wealth.  We hope to pay for several generations of College and be generous to those in need.

TheAnonOne

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Re: Roth 401K vs Trad 401K
« Reply #1 on: March 21, 2017, 12:52:06 PM »
Traditional 401k is still better, the tax savings mean more money (30% more) is being invested today.

At 70 your income will have plummeted and you won't need to have a massive tax bill. Though, if you're moving millions, it will still be high, but with going with roth, you'd have less millions.

I'd rather make more stache faster, then if you need it in your 50s or 40s you have it. Traditional is the best route.

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SeattleCPA

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Re: Roth 401K vs Trad 401K
« Reply #2 on: March 21, 2017, 01:36:46 PM »
Traditional 401k is still better, the tax savings mean more money (30% more) is being invested today.

At 70 your income will have plummeted and you won't need to have a massive tax bill. Though, if you're moving millions, it will still be high, but with going with roth, you'd have less millions.

I'd rather make more stache faster, then if you need it in your 50s or 40s you have it. Traditional is the best route.

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I agree with TheAnonOne.

I figure, roughly, you can make a decent case for using a Roth if you already have $10M. Here's my logic:

http://evergreensmallbusiness.com/the-only-times-you-should-use-a-roth-style-account/


boarder42

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Re: Roth 401K vs Trad 401K
« Reply #3 on: March 21, 2017, 05:10:25 PM »
Until you hit your FIRE marginal tax bracket *25 in savings in trad then switch to roth.

MDM

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Re: Roth 401K vs Trad 401K
« Reply #4 on: March 22, 2017, 12:28:04 AM »
You aren't likely to predict your exact marginal withdrawal rate, but you can do at least a ballpark estimate.  Then use that to guide your traditional vs. Roth decision.
      
Note the possibility of self-defeating predictions: predict high taxable income > contribute to Roth > get low taxable income; predict low taxable income > contribute to traditional > get high taxable income      

Here is one procedure to consider:
1) Include any pension amount (or continued income if planned retirement date is ~never) that you can't defer in return for higher payments when you do start      
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.      
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.      
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.      
4b) Include SS income projections (using today's dollars) if needed from step 4a.      
5) Calculate marginal rate using today's tax law on the numbers from step 1-4.      
6) Make your traditional vs. Roth decision for this year's contribution      
7) Repeat steps 1-6 every year until retirement      

For 2017 I'd guess the answer will be "traditional" - but instead of guessing, what do you get if you run the numbers?

Panfish

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Re: Roth 401K vs Trad 401K
« Reply #5 on: March 22, 2017, 02:54:37 PM »
MDM,

I did a more simplified version (although not as accurate) of what you explained and using today's tax brackets I would be in the meaty part of the 28% tax bracket for my RMD's.  Compounding tax free with my current 25% taxes should way outperform any Roth options i may have.  Also, in retirement if i give to charity i should get pretty good tax deductions any way.

Thank you so much for helping me see the light.

beltim

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Re: Roth 401K vs Trad 401K
« Reply #6 on: March 23, 2017, 11:09:41 AM »
MDM,

I did a more simplified version (although not as accurate) of what you explained and using today's tax brackets I would be in the meaty part of the 28% tax bracket for my RMD's.  Compounding tax free with my current 25% taxes should way outperform any Roth options i may have.  Also, in retirement if i give to charity i should get pretty good tax deductions any way.

Thank you so much for helping me see the light.

If your marginal tax bracket in retirement would exceed your current marginal tax rate, it's a no-brainer to invest at least a portion in a Roth 401k.

Traditional 401k is still better, the tax savings mean more money (30% more) is being invested today.

This is not the right metric.  What matters is the money you pull out after taxes.

TheAnonOne

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Re: Roth 401K vs Trad 401K
« Reply #7 on: March 23, 2017, 11:47:21 AM »



Traditional 401k is still better, the tax savings mean more money (30% more) is being invested today.

This is not the right metric.  What matters is the money you pull out after taxes.

Right, however a trad 401 will probably grow to a level above what they need so they would only end up pulling a fraction out.

That also being said, it's hard to pay as much taxes as when you're working.

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BabyShark

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Re: Roth 401K vs Trad 401K
« Reply #8 on: March 23, 2017, 11:59:25 AM »
This thread inspired me to take the leap and change my Roth contributions to Traditional. 

The wisdom I'd always heard was Roth when you're young, Traditional later.  After about two years of reading PF blogs and jumping into this forum and now prepping my taxes for 2016, I'm at the point, incomewise, where Traditional makes more sense, even though I'm still young.

VoteCthulu

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Re: Roth 401K vs Trad 401K
« Reply #9 on: March 23, 2017, 12:27:14 PM »
One other great benefit of traditional is that if you have too much money, you can donate part or all of your RMD directly to charity without any tax consiquences. If you're are so rich you'll just donate your roth anyway you'd be losing out on a bunch of additional charity.

beltim

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Re: Roth 401K vs Trad 401K
« Reply #10 on: March 25, 2017, 03:18:15 AM »
MDM,

I did a more simplified version (although not as accurate) of what you explained and using today's tax brackets I would be in the meaty part of the 28% tax bracket for my RMD's.  Compounding tax free with my current 25% taxes should way outperform any Roth options i may have.  Also, in retirement if i give to charity i should get pretty good tax deductions any way.

Thank you so much for helping me see the light.

Traditional 401k is still better, the tax savings mean more money (30% more) is being invested today.

At 70 your income will have plummeted and you won't need to have a massive tax bill. Though, if you're moving millions, it will still be high, but with going with roth, you'd have less millions.

I'd rather make more stache faster, then if you need it in your 50s or 40s you have it. Traditional is the best route.

Sent from my SM-G935T using Tapatalk

I agree with TheAnonOne.

I figure, roughly, you can make a decent case for using a Roth if you already have $10M. Here's my logic:

http://evergreensmallbusiness.com/the-only-times-you-should-use-a-roth-style-account/



People need to review the associative property of multiplication.

SeattleCPA

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Re: Roth 401K vs Trad 401K
« Reply #11 on: March 25, 2017, 03:42:33 PM »
MDM,

I did a more simplified version (although not as accurate) of what you explained and using today's tax brackets I would be in the meaty part of the 28% tax bracket for my RMD's.  Compounding tax free with my current 25% taxes should way outperform any Roth options i may have.  Also, in retirement if i give to charity i should get pretty good tax deductions any way.

Thank you so much for helping me see the light.

Traditional 401k is still better, the tax savings mean more money (30% more) is being invested today.

At 70 your income will have plummeted and you won't need to have a massive tax bill. Though, if you're moving millions, it will still be high, but with going with roth, you'd have less millions.

I'd rather make more stache faster, then if you need it in your 50s or 40s you have it. Traditional is the best route.

Sent from my SM-G935T using Tapatalk

I agree with TheAnonOne.

I figure, roughly, you can make a decent case for using a Roth if you already have $10M. Here's my logic:

http://evergreensmallbusiness.com/the-only-times-you-should-use-a-roth-style-account/



People need to review the associative property of multiplication.

+1