Why do people say to max ROTH before 401k

[nawhite]

The standard advice I've heard on where to keep your money is to put all of your savings into accounts in the following order:

1. 401k up to maximum company match (6% of salary or whatever)
2. Max out a Roth IRA ($5500/year)
3. Finish maxing out 401k (up to $17000?)
4. Taxable accounts

With an HSA thrown in early if you can get one.

My question is why should you max out the Roth before you max out the 401k? My savings rate is almost 60% so my income is high now and my spending in retirement will be comparatively low. Even if I RE, and take a 10% hit on the 401k for a couple years while I prime a Roth pipeline, the tax bracket on my new lower spending is more than 10% less than what I pay now so I think I'd end up ahead on putting money in the 401k first.

Second part of the question is where should 6.8% student loans go? Right now I'm thinking I go 401k to the max, then student loans, then Roth, then taxable accounts. Thoughts?

[matchewed]

Several reasons; tax diversification which lends itself to more flexibility when you FIRE is probably the best reason I can think of.

You also could have the money in your Roth so you don't need to take the 10% hit while you wait for the tax deferred to Roth roll over to "prime."

Regarding the debt - 6.8 is pretty high I'd tackle it right after 401k to match (#1). That's just personal as I kinda hate debt and don't believe that 6.8% returns is guaranteed in the future although history tells me my opinion is wrong and that's cool. This option will free up the income that you're dedicating to the debt sooner which gets the max into investments quicker allowing it to grow for longer.

[simonsez]

Second part of the question is where should 6.8% student loans go? Right now I'm thinking I go 401k to the max, then student loans, then Roth, then taxable accounts. Thoughts?

I'd say 401k up until the match, THEN student loans, then whatever else.

I won't comment on the order of maxing your 401k vs. the Roth IRA as that is not my area of knowledge.  But student loans should definitely come before those two (but after matching 401k, of course).  If the school loans are federal, I'm sure you can knock down the interest rate to 6.55 with auto-debit payments.

[rocketman48097]

I am a CPA and I have some thoughts.  I always thought this advice was bogus.  If you are single and have a healthy income, north of 40k per year, you are in the 25% federal tax bracket.  In this bracket, you don't want to do a Roth at all until you have exhausted your 401k, pretax deductions.

Put your money into a 401k, get a 25% deduction/savings/discount.

Withdraw the money at retirement, it gets taxed as ordinary income starting at:

0%
10%
15%
25%.

You would need an enormous amount of withdrawals to get to the 25% tax bracket in retirement, no need if you live a modest lifestyle, not even all that frugal in my opinion.  You are almost never better off contributing to a Roth unless you are in a very low tax bracket.  As for the student loans, I would probably pay all of those off first before I would contribute extra (above company match) to the 401k or the Roth.  The reason:  6.8% is a high guaranteed rate of return.  Not quite as high as stocks at 9% but for a sure thing and to get rid of debt, I would pay this down first.  Only exception:  If you were a doctor in an incredibly high tax bracket, I might suggest maxing out the 401k first for the tax savings.

Cheers,
Dan

[nawhite]

Thanks everyone for the advice. I thought that "roth before 401k" advice was bogus. As for the student loans I guess I'm looking at a 6.8% garaunteed return per year vs an average 4+% return (after inflation but with benefit of tax free growth) with a ~15% tax bonus 1 time. The maximum time I could push the loans out is another 5 years or so. So I guess its: will 2.8% extra average return per year for 5 years I could get if I keep the loans be more than the ~15% one time bonus I get with putting the same money in the 401k?

Looks pretty darn equal to me. If my investments (index guy here) do better than 4% after inflation in the next 5 years then 401k is the better move, if they don't, then the student loans are the better deal. I hate market timing. Lame.

[arebelspy]

Thanks everyone for the advice. I thought that "roth before 401k" advice was bogus.

All generic, blanket advice is bogus.

It completely depends on a person's individual, specific situation.

That being said, I think for most of the people on this site, Roth before 401k (after doing what is needed to get any match) is accurate, not "bogus."

[nawhite]

arebelspy, you're very right about it depending on the situation. I still feel like it would be a pretty good deal for a lot of people and probably even the majority especially on this site. Even if your income in your earning years is taxed at the same bracket as your retirement years, as long as you have a decent savings rate you'll still end up ahead because the 401k contribution is taxed at the highest marginal rate while the disbursments are taxed at your effective rate.

So with a family making ~50k/year (us median) any money they put in the 401k wont get taxed at the marginal rate of 15%. Instead, it will get taxed when it comes out at the effective rate for this family of ~9% (assuming they keep their spending in retirement equal to their pre-retirement spending). So by using a 401k vs a roth they get a free one time bump of around 6%.

I understand when people are expecting to have more annual income post retirement than pre that a Roth could be a good deal but I doubt that is the case for most people, let alone most people on this site.

What other situations is it beneficial?

[matchewed]

Tax flexibility for when/if the tax laws are not in the exact configuration they are today.

As an alternative to an emergency fund or rather a backup.

In case rules about withdrawing from a 401k change.

One of the primary ideas behind preparing for FIRE is to have a good understanding of the situation as is and how tentative that situation truly is as all the rules and circumstances around you may change. Given that why wouldn't I use every tool at my disposal?

[Jamesqf]

I am a CPA and I have some thoughts.  I always thought this advice was bogus.  If you are single and have a healthy income, north of 40k per year, you are in the 25% federal tax bracket.  In this bracket, you don't want to do a Roth at all until you have exhausted your 401k, pretax deductions.

Not a CPA, so I'm glad to see my opinion confirmed.

I think the reason so many here lean towards Roth is that they are planning on retiring many years before they could withdraw 401k/conventional IRA money without penalty, and for those people I think it makes sense.  But for those of us who expect to earn a 25% bracket income up to (and maybe beyond) conventional retirement age, I can't see the point of a Roth.

[Freeyourchains2]

How do we go about investing in our 401ks and IRA's if we wish to retire by age 35-40? I guess we still could pipeline the 401k through an IRA after every year, then invest the new IRA funds and wait 5 years, and only withdraw the principal of our IRA investments (not any gains until Age 59.5) to cover our expenses for Financial Independence? (though that forces you to sell your positions inside of your IRA, even if your positions are dividend focused, because you can only touch the Principal money)

There seems to be considerable Time Delay for FI with this process though for anyone who can not save more than $23,000 per year after expenses.

Am i missing something?

[Joet]

I thought around ~40k of income a couple of factors are active:

1) Difficult (nay impossible?) to 'max' 401k @ 17.5k + match
2) here you're still eligible for a deductible IRA, no real reason (IMO) for a Roth here when you can invest tax free
3) HSA is still active here for another $3k or so.
Now your take home is close to 300-400/month at this point. Heh

IMO someone making around 40-50k [aka the media or just under] really has no need for a Roth---primarily because they are still eligible for a deductible IRA beyond their 401k. Of course this is likely a moot point given they cant hit the 17.5k deduction in the 401k (+match) anyways. But maybe MMM'ers do. If so, kudos.

Roth I've always felt is all about Tax-gaming and the multi-bucket theory. EG taxable, tax-advantaged (401/403s/SEP/etc), and tax-free (Roth). As we have no idea what congress has in store for us in 20+ yrs.

However, in the income area post deductible IRA, I'd advise everyone (generally speaking) to max their 401k first to the limit before their Roth (25%+ State tax rate ++) for the immediate savings. It truly is a no brainer. Ideally this is not a zero sum game and you ALSO max your Roth contribution for the given tax year.

This is just my personal opinion that the immediate tax benefit of 25-28-33%+ federal + 5-10% state taxes far outweigh the zero % immediate tax benefits of the Roth.
As long as those 0% and 10% tax brackets exist, the 401/403/etc should come first. Just 'prime the pump' with some super minor Roth contributions if you need to age your account to that magic 5+ year marker. Put $100 in and forget.

*Not a CPA, didn't stay at a holiday Inn last night. I am also assuming tax rate in retirement is less than current. That's a huge YMMV if you are expecting an inheritance or windfall etc

[Khan]

Several reasons; tax diversification which lends itself to more flexibility when you FIRE is probably the best reason I can think of.

I'm a recent college grad making ~50K, and this is the main reason why I've maxed out my Roth (in addition to maxing out my 401k). This is a decision that I think through every year. With the standard deduction and my 401k contributions, it puts me in the 15% bracket. If I maxed out a traditional IRA, I would still be in the 15% bracket. I prefer the tax diversification and flexibility of the Roth to saving the 15% of $5500 by going with the trad IRA. Just my personal choice, but this may change as my income increases.

This. I think as mustachians/people attempting to gain FI, we are better served by first maxing out our 401k, especially as most of us are unlikely to reach the tax brackets in FI/RE that we are in our current life, but with that said, the ROTH and 401k/roth pipeline give us a lot of optionality with regards to how we obtain our income, which is one of the key things to planning FI.

[NYD3030]

One pro Roth argument I run into frequently is that your investments grow tax free so it's a better deal, while you will pay taxes on all that growth in a 401k.  Perhaps they aren't taking into account that you would have more pre tax dollars to invest.  Conversely one assumes that you would actually invest the tax savings from a 401k rather than spend it, which I suspect most people fail to do.

In any case, my employer offers both forms of 401k, and I currently split it 1/3 Roth, 2/3 traditional, and then max my Roth IRA.  I rethink this every year, throw up my hands and keep my allocation.   Any attempts to convince me otherwise are welcome!

[Joel]

Several reasons; tax diversification which lends itself to more flexibility when you FIRE is probably the best reason I can think of.

I'm a recent college grad making ~50K, and this is the main reason why I've maxed out my Roth (in addition to maxing out my 401k). This is a decision that I think through every year. With the standard deduction and my 401k contributions, it puts me in the 15% bracket. If I maxed out a traditional IRA, I would still be in the 15% bracket. I prefer the tax diversification and flexibility of the Roth to saving the 15% of $5500 by going with the trad IRA. Just my personal choice, but this may change as my income increases.

Personally, I make roth contributions until I am at the 25% marginal tax rate. I am able to make roth contributions to my 401k, and that would be something I would look into if it's offered at your company. You are better off paying 15% taxes now, building up a small roth nest egg, and then as you make more income, postpone paying the 25% taxes. I'm okay with paying 15% taxes as that is what you will pay on long-term capital gains, and on anything beyond your first 20k per year.

[dragoncar]

Here's my advice:

1) Max ROTH
1) Max 401k
1) Pay off all loans

Seriously though, nobody knows your future.  You have to predict where you think you will be and pick the investments that make the most sense.  If you have no crystal ball, you may wish to max the 401k because at least you get a definite benefit right now.

[teen persuasion]

We max DH's 401k, but I don't have any access to one, so I max a Roth for me.  I also try to max a Roth for DH, but it is a lower priority.

Maxing DH's 401k gets us just to the 0 tax bracket (3 kids still at home), so a traditional IRA is pointless for us.  I've actually been using our tax refunds to fund our Roths, but the total keeps dropping as the kids age out of the CTC.

[pom]

Hi all, don't discount this:

Tax flexibility for when/if the tax laws are not in the exact configuration they are today.

We tend to assume that the rules currently in place will stay in place. I don't know why we do that since it is a 20-30 years time horizon that we are talking about. 30 years ago was 1983, just think about all of the tax law changes since then.

I think that there is some wisdom in not putting all of your eggs in the same fiscal basket. Who know what the tax rates will be in 2043, could they be so high that 401k end up being the wrong decision? Will they add a small social-tax to Roth withdrawals so that Roth was the wrong decision? By diversifying your fiscal basket you reduce your chances of getting hit hard (admitedly you increase your chances of getting hit some).

[smalllife]

1. The contributions double as an emergency fund (more important for lower incomes)

2. Your 401k plan at work stinks and you can have full control over investments and expenses

[DK]

1. 401k up to maximum company match (6% of salary or whatever)
2. Max out a Roth IRA ($5500/year)
3. Finish maxing out 401k (up to $17000?)
4. Taxable accounts

I think you have it correct, EXCEPT I would say #2 is just until you are in the 25% bracket. So really it should be:

1. 401k until with the deduction it puts you under the 25% bracket.
2. Max out Roth IRA
3. Finish out 401k
4. Taxable accounts

Just make sure you figure what bracket you actually are in. Just with standard deduction and exemption, you can make 45K. Add in your 401k deductions, any pre-tax stuff your employer takes out, etc.

[matchewed]

1. 401k up to maximum company match (6% of salary or whatever)
2. Max out a Roth IRA ($5500/year)
3. Finish maxing out 401k (up to $17000?)
4. Taxable accounts

I think you have it correct, EXCEPT I would say #2 is just until you are in the 25% bracket. So really it should be:

1. 401k until with the deduction it puts you under the 25% bracket.
2. Max out Roth IRA
3. Finish out 401k
4. Taxable accounts

Just make sure you figure what bracket you actually are in. Just with standard deduction and exemption, you can make 45K. Add in your 401k deductions, any pre-tax stuff your employer takes out, etc.

Why would you stop contributing to a Roth IRA after you pass the 25% mark? It is still better to utilize a Roth IRA vs. taxable as both are after tax dollars being contributed while the Roth grows tax free, distributions are tax free after a certain age, and the contributions are able to be withdrawn at any time. The current rules allow it to be advantageous for an individual seeking to FIRE. It is also really good for traditional retirement savings.

[velocistar237]

For many people here, tax-deferred options are better than a Roth because current marginal tax rates are likely higher than future total tax rates. As in, pay >15% now with a Roth or <10% later with a Traditional.

The diversification idea is a good one, though not because I think tax rates on the lower brackets will increase enough to make the difference. Like MMM, a lot of us will continue to earn income in retirement. If at the same time we want to roll the Traditional into the Roth for various reasons (inheritance, avoiding higher minimum withdrawals later), our future income will be high, and the rollover will be taxed at the marginal rate, which could definitely be higher in the future. Putting money in a Roth at a marginal tax rate of 15% for this reason would make sense to me.

If you plan on not earning anything in retirement, your current income is high, and you already have accessible money in case of emergency, I don't know of any good reason to use a Roth.

[Freeyourchains2]

Why would you stop contributing to a Roth IRA after you pass the 25% mark? It is still better to utilize a Roth IRA vs. taxable as both are after tax dollars being contributed while the Roth grows tax free, distributions are tax free after a certain age, and the contributions are able to be withdrawn at any time. The current rules allow it to be advantageous for an individual seeking to FIRE. It is also really good for traditional retirement savings.

Don't you hate age restrictions? Like saying you can't retire and/or drink a beer until you are age 59.5.

Or like saying you can't own a business until you are 18, or become president until age 35, hell might as well make it age 55...because we can age restrict anything we desire when we have power over the people...

[DK]

1. 401k up to maximum company match (6% of salary or whatever)
2. Max out a Roth IRA ($5500/year)
3. Finish maxing out 401k (up to $17000?)
4. Taxable accounts

I think you have it correct, EXCEPT I would say #2 is just until you are in the 25% bracket. So really it should be:

1. 401k until with the deduction it puts you under the 25% bracket.
2. Max out Roth IRA
3. Finish out 401k
4. Taxable accounts

Just make sure you figure what bracket you actually are in. Just with standard deduction and exemption, you can make 45K. Add in your 401k deductions, any pre-tax stuff your employer takes out, etc.

Why would you stop contributing to a Roth IRA after you pass the 25% mark? It is still better to utilize a Roth IRA vs. taxable as both are after tax dollars being contributed while the Roth grows tax free, distributions are tax free after a certain age, and the contributions are able to be withdrawn at any time. The current rules allow it to be advantageous for an individual seeking to FIRE. It is also really good for traditional retirement savings.

Not sure if I was unclear, but that is what I thought I said, #2 is before #4 in my list...I am saying to max out a roth before taxable account.

The 25% is I am saying to do 401k or tax deferred account to get you under the 25% bracket before you contribute to a roth.

[matchewed]

Why would you stop contributing to a Roth IRA after you pass the 25% mark? It is still better to utilize a Roth IRA vs. taxable as both are after tax dollars being contributed while the Roth grows tax free, distributions are tax free after a certain age, and the contributions are able to be withdrawn at any time. The current rules allow it to be advantageous for an individual seeking to FIRE. It is also really good for traditional retirement savings.

Don't you hate age restrictions? Like saying you can't retire and/or drink a beer until you are age 59.5.

Or like saying you can't own a business until you are 18, or become president until age 35, hell might as well make it age 55...because we can age restrict anything we desire when we have power over the people...

You deliberately ignore the fact that there are ways around the age restriction. It's been covered with you previously. My like or dislike towards age restrictions should be irrelevant to my decision. My decision should be based on the facts and what is financially beneficial to me given multiple possible scenarios. Once I start letting emotion solely decide my decisions I can make a mistake. I'm comfortable with maxing out a Roth, currently it is beneficial towards my financial plans and goals. My feelings towards age restrictions and my retirement plan are as valid to the discussion as my feelings towards chew toys and the possibility of owning a dog.

I think you have it correct, EXCEPT I would say #2 is just until you are in the 25% bracket. So really it should be:

Why would you stop contributing to a Roth IRA after you pass the 25% mark? It is still better to utilize a Roth IRA vs. taxable as both are after tax dollars being contributed while the Roth grows tax free, distributions are tax free after a certain age, and the contributions are able to be withdrawn at any time. The current rules allow it to be advantageous for an individual seeking to FIRE. It is also really good for traditional retirement savings.

Not sure if I was unclear, but that is what I thought I said, #2 is before #4 in my list...I am saying to max out a roth before taxable account.

The 25% is I am saying to do 401k or tax deferred account to get you under the 25% bracket before you contribute to a roth.

Probably just my misunderstanding.

[Freeyourchains2]

Don't you hate age restrictions? Like saying you can't retire and/or drink a beer until you are age 59.5.

Or like saying you can't own a business until you are 18, or become president until age 35, hell might as well make it age 55...because we can age restrict anything we desire when we have power over the people...

You deliberately ignore the fact that there are ways around the age restriction. It's been covered with you previously.

I don't see a way around this age restriction and no solutions have been covered with me previously that allow me zero age restrictions, but feel free to point me to the discussion you are talking about in a different thread:

"A distribution from a Roth IRA is tax-free and penalty-free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death.
There is no brokerage account fee on Fidelity's Traditional, Roth, SEP, and Rollover IRAs. Fund expenses and brokerage commissions still apply. Depending on your situation, fees may include low-balance fees, short-term trading fees, and account closing fees. Other fees and expenses applicable to continued investment are described in the fund's current prospectus.
* There is a maintenance period when some services may not be available.
" From Fidelity IRA website.

[Khan]

That is distribution.

From Wikipedia:
Direct contributions to a Roth IRA may be withdrawn tax free at any time.[1] Rollover, converted (before age 59½) contributions held in a Roth IRA may be withdrawn tax and penalty free after the "seasoning" period (currently 5 years). Earnings may be withdrawn tax and penalty free after the seasoning period if the condition of age 59½ (or other qualifying condition) is also met. This differs from a traditional IRA where all withdrawals are taxed as Ordinary Income, and a penalty applies for withdrawals before age 59½. In contrast, capital gains on stocks or other securities held in a regular taxable account for at least a year would be taxed at the lower long-term capital gain rate. This potentially higher tax rate for withdrawals of capital gains from a traditional IRA is a quid pro quo for the deduction taken against ordinary income when putting money into the IRA.

[velocistar237]

I don't see a way around this age restriction and no solutions have been covered with me previously that allow me zero age restrictions

There's already tax-free money with no age restrictions. It's called the standard deduction. If you're arguing for a higher standard deduction and lower taxes instead of tax-advantaged accounts, I see some merit in that. I've seen it argued that incentives for tax-advantaged accounts only benefit people who would save for retirement anyway.

Even with the age restrictions, it is a benefit to me, and I'm going to take advantage of it.

[aj_yooper]

The standard advice I've heard on where to keep your money is to put all of your savings into accounts in the following order:

1. 401k up to maximum company match (6% of salary or whatever)
2. Max out a Roth IRA ($5500/year)
3. Finish maxing out 401k (up to $17000?)
4. Taxable accounts

With an HSA thrown in early if you can get one.

My question is why should you max out the Roth before you max out the 401k? My savings rate is almost 60% so my income is high now and my spending in retirement will be comparatively low. Even if I RE, and take a 10% hit on the 401k for a couple years while I prime a Roth pipeline, the tax bracket on my new lower spending is more than 10% less than what I pay now so I think I'd end up ahead on putting money in the 401k first.

Second part of the question is where should 6.8% student loans go? Right now I'm thinking I go 401k to the max, then student loans, then Roth, then taxable accounts. Thoughts?

This is from Bogleheads on paying off loans (from a bond perspective):

http://www.bogleheads.org/wiki/Paying_down_loans_versus_investing

"Paying_down_loans_versus_investing

Guidelines for making the choice

Usually, you should pay down the loan if the after-tax interest rate on the loan is significantly higher than the after-tax rate you can earn on a comparable bond investment (a low-risk bond investment with duration equal to the time until you will pay off the loan), and you can pay the loan down without any liquidity problems.
Here is the most likely order of priority for investments versus paying off loans; it does depend on the rates, so these examples are based on typical rates which may not be accurate at any specific time.
Invest in 401(k) to get maximum employer match (rate may be over 100% in the first year)
Pay down credit cards (rate 10-30+%)
Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%)
Invest in Roth IRA, deductible IRA or decent 401(k) (rate 5% on Treasury bonds)
Pay down deductible mortgage or student loans (rate 4% after tax)
Invest in taxable account (rate 4% on municipal bonds)
Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)"

[workwheniwantto]

I strongly agree with AJ (at least in concept of comparing after tax to after tax benefits; I would use different percentages, and thus order, for fund distribution).

Shorthand on this thread seems to be Roth for Roth IRA and 401k for Traditional/Deferred 401k.  Please keep in mind there is a Roth IRA, Deferred IRA, Roth 401k, and a Deferred 401k. 

On the topic of "tax gaming":
- many early retirees (who actually stop earning money) can expect to be in a lower bracket (relative to rest of contemporary taxpayers) when retired. 
- big savers who keep on working cause they love it (or who have large nonretirement investments) can expect o be in a higher bracket (relative to rest of contemporary taxpayers) once they can retire.
Note that neither of these takes into consideration whether the percentages associated with these brackets will change.  I personally expect that US tax rates will rise over time. 

For those with the luxury of higher savings, if you are looking to max out retirement savings, Roth has the benefit of effectively allowing another 33% retirement savings (100% posttax = 133% pretax at the 25% bracket).

For those reasons, since I can afford to do so, I am doing Roth (IRA and 401k) as much as I can.  Also, it just feels good to know that the money is post-tax.  For those invested in stocks/bonds, it does not matter, but for those of you in self-directed nonstandard assets like houses/mortgages, there is one other perk of going Roth - you can find and manage 25% less deals in a Roth to get the same benefit as you would from a traditional account. 

One side topic - if you have significant (15%) taxable dividends and long-term cap gains, there is also the large benefit of tweaking any given year to be just at the top of the 15% income bracket to get the very desirable 0% tax rate on these investments.  I am regretting starting with traditional, then moving to Roth (rather than the other way), since I have put myself into the position where I can no longer game that (unless I make nothing on my taxable investments, that is.)  (Employer plan does not offer the new "Roth your funds whenever you want to" option that was legislated last winter.)

[fiskeb]

Because the growth is TAX FREE instead of TAX DEFERRED and there is no required distribution.

[Freeyourchains2]

My like or dislike towards age restrictions should be irrelevant to my decision [on maxing out Roth IRA before a 401k]. My decision should be based on the facts and what is financially beneficial to me given multiple possible scenarios. Once I start letting emotion solely decide my decisions I can make a mistake. I'm comfortable with maxing out a Roth, currently it is beneficial towards my financial plans and goals. My feelings towards age restrictions and my retirement plan are as valid to the discussion as my feelings towards chew toys and the possibility of owning a dog.

See this thread:

https://forum.mrmoneymustache.com/investor-alley/what-about-a-successful-business-or-long-term-investment-scenario/

Since i am keeping to my word and trying not to divert this thread.

[nawhite]

workwheniwantto - I'm confused by your argument. I think you're saying that you're doing Roth accounts because it means you can put a greater amount into the account because 100k in a roth is worth more than 100k in a traditional account? If thats the case then I can see it being more of a wash but I'm not sure Roth comes out ahead. I'd have to do the math with your figures.

fiskeb - I can see the required distribution being an issue if I haven't laddered all of my traditional accounts into a roth by the time I'm ~70. In my situation that isn't likely to affect me. As for the tax free vs tax deferred, I'm still taking money that would be taxed at 25% now and converting it and its earnings to a tax rate of ~8% later. I guess if I was planning on keeping money in the account for 25+ years then in that time the money could have increased in value by more than 3x ( 1.05^25 = 3.38 so that makes sense). I think this may be the most reasonable answer to me for why it could be better early in your career to choose a Roth over a Traditional account.

[workwheniwantto]

workwheniwantto - I'm confused by your argument.  I think you're saying that you're doing Roth accounts because ...100k in a roth is worth more than 100k in a traditional account?

As far as confused by my argument, I blame myself for jumping all over the place with multiple reasons with little in the way of segue. 

Yes, that is one of the reasons I noted.  My unstated underlying assumption is that I would invest the money I saved from deferring taxes.  And that investment would be taxed, and then only funds that survived the taxation could be used to pay the taxes when I looked to convert/withdraw.  Or, I could pay it up front and then not pay any taxes on it ever, barring political changes.  It definitely makes sense to defer taxation in the last few years before a drop in income (to take advantage of a lower bracket), though with uncontrollable external political influences on tax rate and inflation, it is more art than science to determine how far in advance that should be. 

On the contrary, possibility of loss leans in favor of deferred.  (Roth can only and not necessarily be better if your investments are profitable, Deferred can be better if they are profitable and definitely are better if they lose money.)  That plus gaming the assumed difference in after-retirement tax bracket (or assuming we will go to some other form of taxation other than income) are the only reasons I know that support deferred.  Though those can be pretty compelling, I lean in favor of protecting (effectively) more money from taxation: 23k/(0.75) - 23k =   7.6k more per year at current allowable savings. 

[rocketman48097]

I would like to add that in the era of 0% capital gains and dividends, there is almost no incremental benefit for an early retiree to have a Roth as opposed to after tax investments.  Learn from my mistakes and skip the Roth, I have too much money tied up in our Roth's and although you can withdraw principal, that is NOT enough to get you to the early retiree promised land.  Instead, I have cut back on my 401k down to 6% (from 16% last year) and put the rest in my PG stock investment each month instead, on an after tax basis. 

It will be much easier to live off of investment income, as an early retiree, without a Roth and still get the benefits of a 0% federal tax bracket (assuming your income gets you only to the top of the 15% tax bracket.  However, even above this amount, say 45k gross for single, you are only taxed at 15% above this amount on dividends and capital gains)  I now have a ton of money saved for retirement, enough to retire today if I was MMM.  However, I do not have enough to live because it's almost all tied up. 

[matchewed]

I would like to add that in the era of 0% capital gains and dividends, there is almost no incremental benefit for an early retiree to have a Roth as opposed to after tax investments.  Learn from my mistakes and skip the Roth, I have too much money tied up in our Roth's and although you can withdraw principal, that is NOT enough to get you to the early retiree promised land.  Instead, I have cut back on my 401k down to 6% (from 16% last year) and put the rest in my PG stock investment each month instead, on an after tax basis. 

It will be much easier to live off of investment income, as an early retiree, without a Roth and still get the benefits of a 0% federal tax bracket (assuming your income gets you only to the top of the 15% tax bracket.  However, even above this amount, say 45k gross for single, you are only taxed at 15% above this amount on dividends and capital gains)  I now have a ton of money saved for retirement, enough to retire today if I was MMM.  However, I do not have enough to live because it's almost all tied up. 

Investing in the Roth provides tax free dividends, growth, withdrawals at a certain age, contributions at any time and all of this regardless of what tax bracket you happen to be in. I hardly believe that that accounts for no reason.

A poor plan will still be poorly executed. No offense but if your goal was FIRE to begin with then you should have adjusted accordingly. If that wasn't your intent when you started investing and you only looked back recently and thought "Man I could have been retired" it is not the fault of the Roth, it is the fault of that wasn't your plan to begin with so it is no surprise you didn't achieve it.

[arebelspy]

I would like to add that in the era of 0% capital gains and dividends, there is almost no incremental benefit for an early retiree to have a Roth as opposed to after tax investments. 

And you'll personally guarantee me that will stay the case for the next 60 years of my retirement?  Sweet!

[matchewed]

I would like to add that in the era of 0% capital gains and dividends, there is almost no incremental benefit for an early retiree to have a Roth as opposed to after tax investments. 

And you'll personally guarantee me that will stay the case for the next 60 years of my retirement?  Sweet!

While you're at it can you guarantee me 11% returns to? And a pony... I seriously want a pony.

[nawhite]

rocketman - worst case scenario, you need 10% more total saved to cover the fee for withdrawing from the roth before turning 59.5. So if you are 40 and have 20 years left until no fees and your yearly expenses were 40k then at most you need an additional 80k (10% of the 800k you would pull out over the course of 20 years) in your Roth to cover your fees.

So sounds to me that if you really have enough to retire on right now if only it wasn't in the roth then you shoulds be at most a couple years from retirement even if you are FIREing. At the end of your accumulation phase, your total value goes up much faster than at any other time because you are getting more investment gains than ever before. In fact, by definition, if you have enough to retire (if it wasn't in your Roth) then your investments are throwing off as much money as your spending.

If we use the example above where a person would need an additional 2x annual spending in their account to cover fees, then in 2 years your investments should have gained that much money if you really have enough to retire now.

So worst case scenario (assuming the market doesn't go crazy) is that you need 2 additional working years where you save nothing to cover the fees you would have to pay if you only used a Roth. So congratulations! you're only 2 years away!

[Freeyourchains2]

I would like to add that in the era of 0% capital gains and dividends, there is almost no incremental benefit for an early retiree to have a Roth as opposed to after tax investments. 

And you'll personally guarantee me that will stay the case for the next 60 years of my retirement?  Sweet!

Like there isn't an equal chance the government won't close the loop holes on 401k to IRA loopholes, and or tax and take your IRA/401k money.

[matchewed]

I would like to add that in the era of 0% capital gains and dividends, there is almost no incremental benefit for an early retiree to have a Roth as opposed to after tax investments. 

And you'll personally guarantee me that will stay the case for the next 60 years of my retirement?  Sweet!

Like there isn't an equal chance the government won't close the loop holes on 401k to IRA loopholes, and or tax and take your IRA/401k money.

I'm pretty sure you don't know what you're talking about.

a) You seem to be saying that the odds of the government keeping capital gains and dividend taxes unchanged is the same odds for them closing the "loophole" for the 401k to Roth IRA. Considering the history of both things I'd say it's much more likely that the government will change either dividend and/or capital gains tax structure than close a "loophole" that makes people pay income taxes.

b) They do tax IRA and 401k money. As income tax.

You do know how these things work right?

[Eric]

I would like to add that in the era of 0% capital gains and dividends, there is almost no incremental benefit for an early retiree to have a Roth as opposed to after tax investments. 

And you'll personally guarantee me that will stay the case for the next 60 years of my retirement?  Sweet!

Like there isn't an equal chance the government won't close the loop holes on 401k to IRA loopholes, and or tax and take your IRA/401k money.

So you're saying there's an equal chance that a) for the next 60 years there will be 0% capital gains and divdends and b) the government will close loop holes on 401K to IRA or take your 401k money.

I agree.  The chance of either of those happening are roughly equal.

[fiskeb]

I put enough into the 401K to get the full match, and to get my taxable income low enough that my tax burden is less than my tax credits.  Then I load up our Roths with after tax money that I didn't pay taxes on.

I don't get out much.