Author Topic: Should I focus on taxable account if hoping to (semi) retire by early/mid-40s?  (Read 13792 times)

MrDanno96

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Hello Mustachians!

Been lurking for a while, reading everything I can in preparation for opening my first (non-employer) investment accounts and hopefully getting on track for FIRE. I am 28 years old and married, combined gross income of about $145k. I'd like to have the financial flexibility to be able to quit my high-paying, but demanding and stressful, job in 12-15 years, but would probably take up part-time/lower-paying work thereafter to maintain some income. I have about $120k of student debt at 3.855% interest, which I pay approximately $1,1000/month to; no other significant debt (no mortgage).

I currently contribute $9,000/year to my employer's Roth 401K, which more than covers my employer's 3% match (no great investment options in 401k, expense ratios ranging from 0.65 to 0.75). As it stands, I can afford to invest about $25,000/year in addition to my current $9,000 401K contribution (i.e., $34k/year all together). My current plan is to open a Roth IRA, contribute the max $5,500/year to that, and then put the rest, $19,000ish, in a normal taxable account (likely invested in Vanguard total stock market index). Is this sensible in light of my current goal of semi-retirement in 12-15 years? I want access to $20-30K/year to feel comfortable quitting my job, which is why I'm thinking about putting this much into the taxable account--so I can make withdrawals without any penalties in my mid-40s ($19k/year for 15 years at 7% is about $500k, 4% of which is $20k, 6% is $30k; plus I figure in future years I'll be able to put away more than $19k/year in light of raises, etc.).

I guess some other options would be to also open a Roth IRA in my wife's name and max that out before the taxable account, possibly contribute more to my employer's Roth 401k before the taxable account, or pay off my student loans faster. But like I said, I want the flexibility to access $20-30k/year in my mid 40s, so I'm not sure putting more money into the retirement accounts is the right way to go, and my understanding is that the interest rate on my student debt is low enough where I don't need to necessarily pay it off as fast as possible. Any thoughts or suggestions would be greatly appreciated! Thank you.

shuffler

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I'm thinking about putting this much into the taxable account--so I can make withdrawals without any penalties in my mid-40s
Have you read the sticky-thread at the top of the list of threads?

How to withdraw funds from your IRA and 401k without penalty before age 59.5

MDM

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...28 years old and married, combined gross income of about $145k.
...would probably take up part-time/lower-paying work
...can afford to invest about ...$34k/year all together
...want access to $20-30K/year to feel comfortable quitting my job
...make withdrawals without any penalties in my mid-40s
MrDanno96, welcome to the forum.

First, congratulations on thinking ahead and taking significant action to help yourselves.

That said...the two of you could be poster children for those who should invest as much as possible in traditional accounts, not Roth.  Assuming you both have access to 401k plans, you could put $36K into traditional 401ks, $5500 into a traditional IRA, and $5500 into a Roth IRA.

Doing that would cut ~1 year off your time to FI if you plan to make ~$24K/yr after "retiring", or ~2 years off your time to FI if you plan no side income at all after retiring.

Those results come from reading (sometimes between the lines) your OP and putting the numbers in the MMM case study spreadsheet.  You might download the template, enter your actual numbers, test a few scenarios and see what you think....

Oh, and last but not least, as shuffler said see http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

arebelspy

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No!  See this thread for how to access the retirement accounts early, penalty free:
http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

And then check out the Guinea Pig series of posts on the MadFIentist to see why you want to use them, and how much father ahead you'll be using them:
http://www.madfientist.com/category/guinea-pig/

The premise is:
Quote
Guinea Pig
The Guinea Pig (GP) scenario will allow us to start from scratch and watch the entire journey of someone going from $0 net worth to financial independence in real time.

Not only will this be inspirational to people just starting on the journey to FI, it will also show naysayers that early retirement is in fact possible.

The part that I am most excited about though is the possibility of discovering new strategies and tactics along the way. Mad Fientist readers are some of the smartest around so since we will all be making financial decisions for the Guinea Pig, there should be some really interesting ideas to come out of the experiment.

The Plan
I plan to keep track of two different GP scenarios, one base-line scenario and one optimized scenario. This will allow us to see how many years earlier someone could retire if the strategies and tactics discussed on this site are applied in real life.

(Emphasis added.)

After just a year and 1/2, the latest post on it (from July 2015) says:
Quote
The Optimized GP will also be able to retire over two years earlier than the Normal GP, even though they both earn and spend the same amount!

So.. no.  The answer to the question in the thread title is no. :)
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Grog

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I'm not an us citizen and sometimes I envy your possibility of "rollover" to take out money penalty-free before "normal" retirement age. In Switzerland you can only do it to buy a home, and you still have to pay taxes when you take them out.
But how robust is the system? I mean what if the governement decide that people need money at 60 and block this possibility? It could screw with your FIRE plan big time.
Just curious to hear how do you asses the risk? is it worth more or less than the tax savings?

Shane

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I'm not an us citizen and sometimes I envy your possibility of "rollover" to take out money penalty-free before "normal" retirement age. In Switzerland you can only do it to buy a home, and you still have to pay taxes when you take them out.
But how robust is the system? I mean what if the governement decide that people need money at 60 and block this possibility? It could screw with your FIRE plan big time.
Just curious to hear how do you asses the risk? is it worth more or less than the tax savings?

It's unlikely the government will ever completely block early retirees' current right to convert the money in traditional IRAs and 401ks to Roths and then withdraw the principal before age 59.5. I'm pretty sure the main thing the government is concerned with is that they get paid their taxes on the money in the accounts, and with traditional IRAs and 401ks, they don't get paid any taxes until the money is withdrawn from the accounts. So from the government's perspective, the sooner we withdraw our money from our tax-deferred retirement accounts or convert the money in those accounts to Roths, the sooner they get paid.

matchewed

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I'm not an us citizen and sometimes I envy your possibility of "rollover" to take out money penalty-free before "normal" retirement age. In Switzerland you can only do it to buy a home, and you still have to pay taxes when you take them out.
But how robust is the system? I mean what if the governement decide that people need money at 60 and block this possibility? It could screw with your FIRE plan big time.
Just curious to hear how do you asses the risk? is it worth more or less than the tax savings?

It's unlikely the government will ever completely block early retirees' current right to convert the money in traditional IRAs and 401ks to Roths and then withdraw the principal before age 59.5. I'm pretty sure the main thing the government is concerned with is that they get paid their taxes on the money in the accounts, and with traditional IRAs and 401ks, they don't get paid any taxes until the money is withdrawn from the accounts. So from the government's perspective, the sooner we withdraw our money from our tax-deferred retirement accounts or convert the money in those accounts to Roths, the sooner they get paid.

Also there are an infinite number of what-if scenarios. At some point you have to work with your knowns and the unknowns that you actually can somewhat anticipate conservatively (or not depending on the type of unkown). You make a plan given those. If those change, well then you change your plan. It's just as easy for me to say "what if the government raises taxes on capital gains to 90%?" Well focusing on taxable accounts would be pretty stupid then, but it's another "what if" that isn't there right now. So why plan for it given I don't know the likelihood of it happening.

Grog

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Of course there are an infinite number of what-if. I'm simply more sensible no this topic because in Switzerland you can access your money in tax-sheltered retirement accounts only to purchase an home. Today there are more and more people that buy an home at 40 emptying their retirement account and then find themselves broke at the age of 60 with only the equivalent of social security to live on (about one third of the average salary). The state also has decided that people cannot take care oh themselves (and it has somewhat empirical evidence for that, since the situation it is what it is) and is proposing a modification of the law to block any retrieval from retirement accounts, so that in the future the government must not increase the spending in social security for the less financially competent people (aka idiots) that emptied their account for the dream of an home (über expensive in Switzerland). There was absolutely no one anticipating this and the government kind of proposed this from nowhere.

In reading here and there of what happens in the US it doesn't seem that farfetched. You have your fair share of less financially competent people too....

matchewed

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Of course there are an infinite number of what-if. I'm simply more sensible no this topic because in Switzerland you can access your money in tax-sheltered retirement accounts only to purchase an home. Today there are more and more people that buy an home at 40 emptying their retirement account and then find themselves broke at the age of 60 with only the equivalent of social security to live on (about one third of the average salary). The state also has decided that people cannot take care oh themselves (and it has somewhat empirical evidence for that, since the situation it is what it is) and is proposing a modification of the law to block any retrieval from retirement accounts, so that in the future the government must not increase the spending in social security for the less financially competent people (aka idiots) that emptied their account for the dream of an home (über expensive in Switzerland). There was absolutely no one anticipating this and the government kind of proposed this from nowhere.

In reading here and there of what happens in the US it doesn't seem that farfetched. You have your fair share of less financially competent people too....

What is going on in Switzerland has no bearing on what is actually happening in the US. The law you're discussing doesn't exist and is not being legislated in the US. It's cool that you've got your opinion, but the OP specifically is in the US. You can't apply your country's particular scenario and it doesn't matter for the questions the OP is asking in their topic.

MrDanno96

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Thanks for the responses so far, all! I'll definitely review the post about withdrawing from 401k and IRA before 59.5 and I'm sure I'll be back with questions about that. Two quick follow ups right now:

1. MDM--you suggested that it might be better if my spouse and I contribute to a regular 401k, instead of the Roth 401k. Could you elaborate on that a little, please? Is it because the tax savings I'll immediately get over the next 12-15 years will outweigh the benefit of having that money growing tax free over that same time?

2. I was hesitant to contribute more to my 401k because of the lack of great investment options (like I said, expense ratios no lower than .65, just generic names like "large cap equity fund," "small cap index equity fund," etc.) But from what I'm hearing, the tax advantages of even these non-ideal funds are better than just a taxable account, yes?

arebelspy

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If you will be in a higher tax bracket in the future when doing withdrawals, Roth is good (since you pay the tax now). If you will be in a lower one, 401k is good (since you pay the tax then).  Most ERs earn more now, and are in a higher tax bracket now, and will be in lower in ER, so 401k is better.

This is a gross generalization, of course, and has exceptions, but it is often true.
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seattlecyclone

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1. MDM--you suggested that it might be better if my spouse and I contribute to a regular 401k, instead of the Roth 401k. Could you elaborate on that a little, please? Is it because the tax savings I'll immediately get over the next 12-15 years will outweigh the benefit of having that money growing tax free over that same time?

Sort of. People tend to gravitate toward the Roth because they realize they won't pay tax on that money ever again. They think of all the years that money will be appreciating and realize that they could pay a ton of tax on that appreciation, and decide that a Roth is the better choice. However the math doesn't quite work that way.

Assume your marginal tax rate (T) is the same now as it will be during retirement. Assume you have $X in pre-tax money to contribute to a retirement account. Assume your investments will grow by a factor of G between now and retirement.

If you put your money in a Roth account, you'll pay $XT in taxes this year, leaving the account with $X(1-T) to start. When you retire, the account will have $X(1-T)G in it, and you've paid your tax on it already, so that's how much money you're left with.

If you put your money in a traditional retirement account, you'll pay no tax this year, so the account will have $X in it to start. When you retire, the account will have $XG in it, but you have to pay tax when you withdraw. That tax will be in the amount $XTG, leaving you with $(XG-XTG) = $X(1-T)G after taxes. This is the same amount as if you had contributed to a Roth account.

Where you and some other people get tripped up here is that the number of dollars of tax you pay is different between the two scenarios. With Roth you pay $XT in tax, while with traditional you pay $XTG in tax. This doesn't matter. What matters is how much you keep.

I've shown that Roth and traditional are basically equivalent with equal tax rates. The main variable that would tilt the balance in one direction or the other is that tax rate T. We previously assumed T would be the same at contribution and withdrawal time, but that's a faulty assumption for a lot of people. If your tax rate goes down in retirement, you'll generally be better off with traditional. If your tax rate goes up, you'll be better off with Roth.

Many of us save a high enough percentage of our money that we believe our tax rate will be no higher during retirement, so we prefer traditional retirement accounts.

SuperSecretName

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Like others have said, contribute the max to the trad 401k instead of ROTH.

MDM

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1. MDM--you suggested that it might be better if my spouse and I contribute to a regular 401k, instead of the Roth 401k. Could you elaborate on that a little, please? Is it because the tax savings I'll immediately get over the next 12-15 years will outweigh the benefit of having that money growing tax free over that same time?
seattlecyclone covered the "pay me now or pay me later, for the same tax rate it's the same either way" math about traditional vs. Roth.  Make sure you understand that - ask if something is still unclear.
In your case you are making $145K/yr now but expect to need <$50K/yr in retirement.  The tax rate you pay on $50K gross is less than on $145K gross, so that makes traditional more favorable for you.

Quote
2. I was hesitant to contribute more to my 401k because of the lack of great investment options (like I said, expense ratios no lower than .65, just generic names like "large cap equity fund," "small cap index equity fund," etc.) But from what I'm hearing, the tax advantages of even these non-ideal funds are better than just a taxable account, yes?
Yes, probably.  There is a tab in the case study spreadsheet where you can do exactly this comparison using your specific numbers.

MDM

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Contributions to a Roth 401k can be rolled over to a Roth IRA once you leave employment, and as long as you have an existing Roth account that has been open for five years at that point, you can then withdraw your contributions from the rollover penalty free.
This is not entirely true. Not only does the Roth IRA have to be open for 5 years you can not touch the rolled over amount for 5 years regardless of how long the account has been open unless you hit 59 1/2 years of age.
https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#rollovers
Unless I am misreading, lhamo is 100% correct.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ for more details.

Note that being 59 1/2 allows one to have a "qualified" distribution and withdraw contributions plus earnings.  Withdrawing contributions only, even for a "non-qualified" distribution, is perfectly fine under lhamo's conditions.

dandarc

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Contributions to a Roth 401k can be rolled over to a Roth IRA once you leave employment, and as long as you have an existing Roth account that has been open for five years at that point, you can then withdraw your contributions from the rollover penalty free.

This is not entirely true. Not only does the Roth IRA have to be open for 5 years you can not touch the rolled over amount for 5 years regardless of how long the account has been open unless you hit 59 1/2 years of age.

https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#rollovers
You're completely misreading that.  The main five year period on your Roth IRA starts whenever you make that first Roth IRA contribution.  There is a separate 5-year period for conversions, but a Roth 401K to Roth IRA rollover is not a conversion.

And you can withdraw Roth IRA contributions at any time.  When you rollover the Roth 401K to the Roth IRA, the basis follows.  If your Roth 401K is 10K contributions and 10K earnings, once you roll it into the Roth IRA, you can withdraw 10K before taxes and penalties apply.

This is an area where the rules are favorable to the tax payer.  Example 1 in the linked FAQ illustrates this.  Guy took a 14K distribution from the Roth 401K, only rolled over 7K of it,  and doesn't have to pay any tax or penalties on the other 7K.  No information given to his age - you could do this at any age.

sirdoug007

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OP, read through this: http://www.gocurrycracker.com/roth-sucks/

I agree on maxing out the traditional 401(k).  Your overall tax rate in retirement will be quite low with low spending.  Even with a 10% extra tax (which can be avoided) you may still come out better with traditional. 

Not paying 25% on your funds is a big deal!

seattlecyclone

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Quote
seattlecyclone covered the "pay me now or pay me later, for the same tax rate it's the same either way" math about traditional vs. Roth.  Make sure you understand that - ask if something is still unclear.
In your case you are making $145K/yr now but expect to need <$50K/yr in retirement.  The tax rate you pay on $50K gross is less than on $145K gross, so that makes traditional more favorable for you.

I used to think this way then realized that a guy the age of the OP, and with a sizable income, will likely be in a higher tax bracket in the future and thus the ROTH is a better deal. Don't believe me?

Lets say the OP maxed out his Roth 401k and one Roth IRA for a total of 23k contributed per year for the next 15 years. Lets also assume a real rate of return of 8.5%. The OP would have $694k in Roth accounts at the age of 43 not including the match. At this point the OP could withdraw 2k per month and the account would grow to $4 million by the time the OP was 70. If the OP used Roth accounts he has $4 million tax free, if he used traditional accounts he now has $4 million that is subject to RMDs which on $4 million are around $163k per year. That means he will be taxed on $163k per year plus 85% of social security income plus any other income including other investment income.


I agree that getting to age 70 with millions of dollars in a traditional IRA may not be the best idea because of the forced taxed withdrawals. However, consider an alternative scenario. Contribute to traditional retirement accounts throughout your career. During retirement, withdraw $2k/month and also convert another $2k/month to Roth instead of letting the money compound in the traditional IRA. Your income will be $48k/year, still putting you in a low tax bracket. By the time you get to RMD age, you won't have all that much left in your traditional IRA, meaning you get the best of both worlds. You save money on taxes during your high-income working years, you pay tax at a low rate during your early retirement, and you continue having a low tax rate once social security and RMDs kick in.

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Another item to consider most people have more tax credits when they are in there 20s and 30s then when they are in there 50s 60s and 70s. This means that your effective tax rate will be higher when you are 60 compared to 30 even if you make the same inflation adjusted income. 

Effective tax rate is irrelevant for these calculations. Marginal rate is what matters. Tax credits can actually be a very good point in favor of traditional contributions. Traditional retirement contributions lower your adjusted gross income during the years when you might be eligible for certain tax credits (child tax credit, saver's credit). This can be a big deal if your income is in or near the boundaries for these credits. Traditional contributions increase the amount you get back for these credits, which in many cases actually makes your marginal tax rate much higher than it might seem at first.

MDM

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Quote
seattlecyclone covered the "pay me now or pay me later, for the same tax rate it's the same either way" math about traditional vs. Roth.  Make sure you understand that - ask if something is still unclear.
In your case you are making $145K/yr now but expect to need <$50K/yr in retirement.  The tax rate you pay on $50K gross is less than on $145K gross, so that makes traditional more favorable for you.

I used to think this way then realized that a guy the age of the OP, and with a sizable income, will likely be in a higher tax bracket in the future and thus the ROTH is a better deal. Don't believe me?

Lets say the OP maxed out his Roth 401k and one Roth IRA for a total of 23k contributed per year for the next 15 years. Lets also assume a real rate of return of 8.5%. The OP would have $694k in Roth accounts at the age of 43 not including the match. At this point the OP could withdraw 2k per month and the account would grow to $4 million by the time the OP was 70. If the OP used Roth accounts he has $4 million tax free, if he used traditional accounts he now has $4 million that is subject to RMDs which on $4 million are around $163k per year. That means he will be taxed on $163k per year plus 85% of social security income plus any other income including other investment income.

Another item to consider most people have more tax credits when they are in there 20s and 30s then when they are in there 50s 60s and 70s. This means that your effective tax rate will be higher when you are 60 compared to 30 even if you make the same inflation adjusted income.

All those are good things to consider, and are reasons why a combination of traditional and Roth is "probably best for the generic person."  And Roth is actually better for equal marginal rates at contribution and withdrawal if one can contribute the maximum amount - see https://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758#p2082294 for the math.

For the specific OP (and anyone else, but this case is a particularly good example), however, there is one other thing to consider: conversions of traditional to Roth IRAs in retirement.  Doing that allows OP to save ~25% while working, then pay only ~15% to get that money into a Roth.  That is better than paying 25% up front to get the money into a Roth, and having ~25 years to do so means the effect of RMDs will be drastically reduced.


dandarc

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Effective tax rate is irrelevant for these calculations. Marginal rate is what matters. Tax credits can actually be a very good point in favor of traditional contributions. Traditional retirement contributions lower your adjusted gross income during the years when you might be eligible for certain tax credits (child tax credit, saver's credit). This can be a big deal if your income is in or near the boundaries for these credits. Traditional contributions increase the amount you get back for these credits, which in many cases actually makes your marginal tax rate much higher than it might seem at first.
+1 to this.  If your AGI (married filing jointly) is $61,001, putting $1 more into traditional IRA or 401K gets you a $400 saver's credit you otherwise wouldn't get.  That's a 40,000% marginal tax rate on that dollar!  Even worse if your AGI is $36,501 - then you get an additional credit of as much as $1200 by putting $1 more into traditional.

dandarc

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Just had a thought.  The saver's tax credit potentially increases the 0% tax bracket substantially.  All numbers to follow are 2015 figures for MFJ.  0% bracket for MFJ is generally standard deduction + 2 exemptions.  12,600 + 4,000 * 2 = $20,600.

Say an MFJ early retiree finds a way to earn 4K / year and contributes that to an IRA (traditional or roth doesn't really matter).  If the retiree can keep AGI at or below 36,500, they'll get 50% of that $4K IRA contribution as a tax credit - $2K.  A $2K tax credit shelters $16,408.30 of taxable income - add the SD and PE's, and  you get 37,008.30.  So since that is over the limit for the 50% saver's credit, up to 36.5K AGI, and you're still paying no income tax.  Minus the 4K of earned income = you can convert nearly 12K more tax free.

Am I missing something here?


seattlecyclone

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Am I missing something here?

Possibly. On line 4 of Form 8880, you have to subtract a couple years' worth of retirement account distributions from this year's contributions before applying the $2,000 per person limit. The instructions note that rollovers and Roth conversions don't count for this number, but this would come into play for anyone actually withdrawing from their retirement accounts (through the Roth pipeline, 457 plans, SEPP, etc.).

However, someone who retires with some money in taxable accounts could spend that money while earning and contributing $2,000 yearly and making Roth conversions up to the top of their new 0% bracket. Good idea!

seattlecyclone

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What's your point? We know that you have to pay a 10% early withdrawal tax on money that you convert to Roth and withdraw within five years. The type of withdrawal we're talking about here is a non-taxable transfer from a Roth 401(k) into a Roth IRA, so your bolded sentence doesn't apply.

seattlecyclone

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I am not thrilled with having to leave my retirement money in my 401k when I quit my job. I would rather roll it over into an IRA and have more control.

Yes, and we have been saying over and over again that you can do this.

There are two five-year rules for Roth IRAs. The first one says that you have to leave the account open for five years before you can take a qualified distribution. As you say, this clock stars when you open the Roth IRA, and you are not given credit for previous time than money was in a Roth 401(k). This rule is irrelevant to many of us because the Roth pipeline uses non-qualified distributions. If you contribute money to a brand new Roth IRA and withdraw it the next day, it's a non-qualified distribution because the account hasn't been open for five years, and you might not be old enough anyway. This doesn't matter because the tax rate for a non-qualified distribution that comes solely out of contributions is 0% with a 0% early withdrawal penalty. When converting from Roth 401(k) to Roth IRA, the amount you contributed to the Roth 401(k) counts the same as a Roth IRA contribution: you can withdraw it tax-free and penalty-free at any time.

The second five-year rule says that when you convert money from a pre-tax retirement account into a Roth IRA, you have to wait five years before you can withdraw that money from the Roth IRA without paying a 10% early withdrawal tax. Again, this tax doesn't apply to a Roth -> Roth transfer.
« Last Edit: December 16, 2015, 12:16:44 PM by seattlecyclone »

dandarc

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Simple solution - make a small contribution today (or by April 15th, 2016) to a Roth IRA.  Get the IRA clock rolling.  Fun fact - if you open the Roth IRA before your 2015 tax filing deadline (April 15th 2016, generally), the 5 year Roth IRA clock for qualified distributions started rolling on January 1st, 2015.

So you could make a Roth IRA contribution on April 15th, 2016, and start withdrawing qualified distributions on 1/1/2020 (assuming you also meet the other qualification standards).  Not even 4 years.

dandarc

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Simple solution - make a small contribution today (or by April 15th, 2016) to a Roth IRA.
Anticipating objections:

But I make too much money to contribute to a Roth IRA!  Do a backdoor Roth IRA.

But I have a ton in a traditional IRA already!  Do a small conversion then.  Taxes on $50 or $100 are really gonna kill you?
« Last Edit: December 16, 2015, 12:32:12 PM by dandarc »

dandarc

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Am I missing something here?

Possibly. On line 4 of Form 8880, you have to subtract a couple years' worth of retirement account distributions from this year's contributions before applying the $2,000 per person limit. The instructions note that rollovers and Roth conversions don't count for this number, but this would come into play for anyone actually withdrawing from their retirement accounts (through the Roth pipeline, 457 plans, SEPP, etc.).

However, someone who retires with some money in taxable accounts could spend that money while earning and contributing $2,000 yearly and making Roth conversions up to the top of their new 0% bracket. Good idea!
Ah - so yeah, obvious enough loophole they've already covered it.

Suppose using the taxable account depends on the amount of capital gains you'd have to take, and the dividends the account generates.  Both would reduce the amount AGI you could use for conversions and still get the 50% saver's credit.  Of course, you could do same with an AGI in the 20% saver's-credit area, but with a reduced additional tax-free amount.  I think in the 10% saver's credit area, you're at best off-setting the additional income, so you don't get any benefit.

seattlecyclone

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IRS Pub 590
"Distributions of conversion and certain rollover contributions within 5-year period.
If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions."

A Roth 401k and a Roth IRA are two different qualified retirement plans. As such to get money from a Roth 401k into a Roth IRA you have to do a rollover. I do not see how this would not be included by the above IRA publication. Can you show me a IRS publications or part of the Tax code that would exclude a Roth 401k to Roth IRA from the above publication? It says qualified retirement plan which the Roth 401k is included in.

See Q-3 on this part of the federal regulations clarifying coordination between designated Roth accounts (e.g. Roth 401(k) accounts) and Roth IRAs. For the purpose of Roth IRA withdrawal ordering rules, amounts rolled over from a Roth 401(k) that were an "investment in the contract" (i.e. Roth 401(k) contributions) are treated as Roth IRA contributions and thus withdrawable at any time with no tax due. The earnings rolled over from the Roth 401(k) are treated the same as Roth IRA earnings (subject to income tax plus a 10% penalty if not a qualified distribution).

Again, the five year rule you're worried about only controls whether or not the distribution is qualified. If the money is treated as a Roth IRA contribution, a distribution of that money is taxed at 0% whether it's a qualified distribution or not.

dandarc

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IRS Pub 590
"Distributions of conversion and certain rollover contributions within 5-year period.
If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions."

A Roth 401k and a Roth IRA are two different qualified retirement plans. As such to get money from a Roth 401k into a Roth IRA you have to do a rollover. I do not see how this would not be included by the above IRA publication. Can you show me a IRS publications or part of the Tax code that would exclude a Roth 401k to Roth IRA from the above publication? It says qualified retirement plan which the Roth 401k is included in.

See Q-3 on this part of the federal regulations clarifying coordination between designated Roth accounts (e.g. Roth 401(k) accounts) and Roth IRAs. For the purpose of Roth IRA withdrawal ordering rules, amounts rolled over from a Roth 401(k) that were an "investment in the contract" (i.e. Roth 401(k) contributions) are treated as Roth IRA contributions and thus withdrawable at any time with no tax due. The earnings rolled over from the Roth 401(k) are treated the same as Roth IRA earnings (subject to income tax plus a 10% penalty if not a qualified distribution).

Again, the five year rule you're worried about only controls whether or not the distribution is qualified. If the money is treated as a Roth IRA contribution, a distribution of that money is taxed at 0% whether it's a qualified distribution or not.
I can't believe you found a case where the law is more clear than the IRS publications.  Good work.

seattlecyclone

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My understanding is that this is an administrative regulation that only has the force of law to the extent that it clarifies, without contradicting or extending, the tax code as passed by Congress.

MrDanno96

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So, to summarize, I should:
(1) max out my 401(K) first (regardless of whether it's traditional or Roth) ($18,000);
(2) max out my Roth IRA and my wife's Roth IRA ($11,000); and
(3) then put the rest into taxable investment account.

Regarding the 401k, traditional is the way to go if I'll have a lower marginal tax rate at retirement than I do now, which seems likely as my only income in retirement will be coming from retirement account/investment account withdrawals and perhaps some low-paying part-time work. When I need access to some of the funds in the traditional 401k for early retirement, I can convert/merge it into my Roth IRA.

I'm still a little hazy on how I can access the 401k funds once it's converted, though. Some of you seem to be saying that it's just like the funds had always been in the Roth IRA, i.e., I can immediately withdraw all contributions, but would be penalized for withdrawing growth. Others seem to suggest, as does the sticky post, that I would have to wait for five years to touch any of the converted funds. Just want to make sure I understand, as I don't want to dump a bunch into the 401k only to realize in 15 years it's harder to access than I thought.

Also, if I go traditional 401k with the goal of converting it to my Roth IRA in 15 years, I would need to have money set aside to pay the taxes on the conversion, right? We'd be talking about a tax bill somewhere in the neighborhood of $65k to $85k when I convert (assuming 6-8% yearly growth and 15% tax rate at time of conversion). I presume the mustachian way to handle this would be to simply invest all the tax savings I get from using the traditional 401k in the first place.

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MDM

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So, to summarize, I should:
(1) max out my 401(K) first (regardless of whether it's traditional or Roth) ($18,000);
(2) max out my Roth IRA and my wife's Roth IRA ($11,000); and
(3) then put the rest into taxable investment account.
Does your wife not have access to a 401k (you mentioned $145K is "combined gross")?  If you can contribute only $18K to 401ks then yes it's Roth IRAs for both of you.  If you can contribute $36K to 401ks then you can do one tIRA for $5500 and one Roth for $5500 (you could do a little more in traditional but close enough...).

Quote
Regarding the 401k, traditional is the way to go if I'll have a lower marginal tax rate at retirement than I do now, which seems likely as my only income in retirement will be coming from retirement account/investment account withdrawals and perhaps some low-paying part-time work. When I need access to some of the funds in the traditional 401k for early retirement, I can convert/merge it into my Roth IRA.
In short, "yes."

Quote
I'm still a little hazy on how I can access the 401k funds once it's converted, though. Some of you seem to be saying that it's just like the funds had always been in the Roth IRA, i.e., I can immediately withdraw all contributions, but would be penalized for withdrawing growth. Others seem to suggest, as does the sticky post, that I would have to wait for five years to touch any of the converted funds. Just want to make sure I understand, as I don't want to dump a bunch into the 401k only to realize in 15 years it's harder to access than I thought.
Note that lhamo's original comment was "Contributions to a Roth 401k can be rolled over to a Roth IRA once you leave employment, and as long as you have an existing Roth account that has been open for five years at that point, you can then withdraw your contributions from the rollover penalty free."  When that is the case then the amount contributed to the Roth 401k may indeed be withdrawn from the Roth IRA.

Quote
Also, if I go traditional 401k with the goal of converting it to my Roth IRA in 15 years, I would need to have money set aside to pay the taxes on the conversion, right? We'd be talking about a tax bill somewhere in the neighborhood of $65k to $85k when I convert (assuming 6-8% yearly growth and 15% tax rate at time of conversion).
If and only if you want to convert it all at once.

Quote
I presume the mustachian way to handle this would be to simply invest all the tax savings I get from using the traditional 401k in the first place.
The mustachian way would be to convert small amounts each year (e.g., as much as you can convert and stay at or below a 15% marginal rate) so your total tax bill is much less than if you convert it all at once.
« Last Edit: December 16, 2015, 02:38:16 PM by MDM »

dandarc

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Sorry to have derailed from your original question.  Basically the entirety of the discussion today was clarifying some confusion about Roth 401K -> Roth IRA rollovers.

In that case, up to the amount of your contributions can be withdrawn tax and penalty free at any time.  Any withdrawals beyond what you put in, however, are subject to tax and penalty unless they are qualified - usually that means you're at least 59.5 years old and your first Roth IRA contribution was at least 5 years ago.

seattlecyclone

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I'm still a little hazy on how I can access the 401k funds once it's converted, though. Some of you seem to be saying that it's just like the funds had always been in the Roth IRA, i.e., I can immediately withdraw all contributions, but would be penalized for withdrawing growth. Others seem to suggest, as does the sticky post, that I would have to wait for five years to touch any of the converted funds. Just want to make sure I understand, as I don't want to dump a bunch into the 401k only to realize in 15 years it's harder to access than I thought.

Yes, this is confusing.

When you withdraw money from a Roth IRA, there is a set of ordering rules that determine what money you're actually withdrawing, which determines the tax (if any) that you owe on this money.
  • If you have any contributions (money that you moved directly from your bank account to your Roth IRA), these dollars come out first. This money is always tax-free and penalty-free.
  • If you have made any conversions (moving money from a traditional retirement account into your Roth IRA), these dollars come out next. You don't pay income tax when withdrawing this money. You already did that when you converted. Older conversions come out before newer conversions. If you withdraw converted money within five years of making the conversion, you will owe a 10% early withdrawal tax to the extent that you paid tax on this money when you moved it to the Roth IRA.

    Note that it's possible to move after-tax money from a traditional retirement account to a Roth IRA. This is commonly called the "backdoor Roth." In this case, you paid tax on this money before you put it in your traditional IRA/401(k). The move from traditional to Roth was a non-taxable event. These tax-free conversions can be withdrawn tax-free and penalty-free even within five years.
  • Any earnings that you accrue on your investments within the Roth IRA come out last. You need to pay your regular income tax rate plus 10% on this money when it's not a qualified distribution, so this is probably best avoided if at all possible.

The link I posted above clarifies what happens when you move money from a Roth 401(k) to a Roth IRA. The Roth 401(k) contributions go into the first bucket, and the earnings go into the third bucket. None of the Roth 401(k) -> Roth IRA money counts as a "conversion" for the purpose of Roth IRA withdrawal ordering rules.

Quote
Also, if I go traditional 401k with the goal of converting it to my Roth IRA in 15 years, I would need to have money set aside to pay the taxes on the conversion, right? We'd be talking about a tax bill somewhere in the neighborhood of $65k to $85k when I convert (assuming 6-8% yearly growth and 15% tax rate at time of conversion). I presume the mustachian way to handle this would be to simply invest all the tax savings I get from using the traditional 401k in the first place.

Yes, invest the money you don't need to spend. Fill up your tax-advantaged accounts first, then go with a taxable account with any remaining funds. Keep in mind that you don't need to pay the entire $85k tax bill all in one year; you can convert a little bit of money from traditional to Roth every year to spread the taxes over a longer time period and also avoid paying any high-bracket taxes.

Jack

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Quote
seattlecyclone covered the "pay me now or pay me later, for the same tax rate it's the same either way" math about traditional vs. Roth.  Make sure you understand that - ask if something is still unclear.
In your case you are making $145K/yr now but expect to need <$50K/yr in retirement.  The tax rate you pay on $50K gross is less than on $145K gross, so that makes traditional more favorable for you.

I used to think this way then realized that a guy the age of the OP, and with a sizable income, will likely be in a higher tax bracket in the future and thus the ROTH is a better deal. Don't believe me?

Lets say the OP maxed out his Roth 401k and one Roth IRA for a total of 23k contributed per year for the next 15 years. Lets also assume a real rate of return of 8.5%. The OP would have $694k in Roth accounts at the age of 43 not including the match. At this point the OP could withdraw 2k per month and the account would grow to $4 million by the time the OP was 70. If the OP used Roth accounts he has $4 million tax free, if he used traditional accounts he now has $4 million that is subject to RMDs which on $4 million are around $163k per year. That means he will be taxed on $163k per year plus 85% of social security income plus any other income including other investment income.


I agree that getting to age 70 with millions of dollars in a traditional IRA may not be the best idea because of the forced taxed withdrawals. However, consider an alternative scenario. Contribute to traditional retirement accounts throughout your career. During retirement, withdraw $2k/month and also convert another $2k/month to Roth instead of letting the money compound in the traditional IRA. Your income will be $48k/year, still putting you in a low tax bracket. By the time you get to RMD age, you won't have all that much left in your traditional IRA, meaning you get the best of both worlds. You save money on taxes during your high-income working years, you pay tax at a low rate during your early retirement, and you continue having a low tax rate once social security and RMDs kick in.

Not to mention, if RMDs are big enough to be worried about, it means I have too much money, and that's a good problem to have! If I'm getting $163k per year when I was planning for a fraction of that, do I really care how much my marginal tax rate is?!

Besides, that sort of "problem" can be managed by charitable donations, gifts to heirs, trusts and whatnot, even if you don't manage to get rid of it via Roth conversions.



Anyway, to summarize the general ER tax strategy as I understand it:
  • While working, save in traditional 401ks and IRAs (if eligible)
  • Also while working, save 5 years worth of expenses in a taxable account
  • Starting upon retirement, convert one year's worth of expenses to Roth each year
  • In years 0 to 5, live off of assets in taxable account
  • In years 6 to age 59.5, live off of assets in Roth account (specifically, the ones converted 5 years before)
  • After age 59.6, do whatever causes you to incur the fewest taxes because you can withdraw from any bucket without penalty

Gin1984

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Quote
seattlecyclone covered the "pay me now or pay me later, for the same tax rate it's the same either way" math about traditional vs. Roth.  Make sure you understand that - ask if something is still unclear.
In your case you are making $145K/yr now but expect to need <$50K/yr in retirement.  The tax rate you pay on $50K gross is less than on $145K gross, so that makes traditional more favorable for you.

I used to think this way then realized that a guy the age of the OP, and with a sizable income, will likely be in a higher tax bracket in the future and thus the ROTH is a better deal. Don't believe me?

Lets say the OP maxed out his Roth 401k and one Roth IRA for a total of 23k contributed per year for the next 15 years. Lets also assume a real rate of return of 8.5%. The OP would have $694k in Roth accounts at the age of 43 not including the match. At this point the OP could withdraw 2k per month and the account would grow to $4 million by the time the OP was 70. If the OP used Roth accounts he has $4 million tax free, if he used traditional accounts he now has $4 million that is subject to RMDs which on $4 million are around $163k per year. That means he will be taxed on $163k per year plus 85% of social security income plus any other income including other investment income.


I agree that getting to age 70 with millions of dollars in a traditional IRA may not be the best idea because of the forced taxed withdrawals. However, consider an alternative scenario. Contribute to traditional retirement accounts throughout your career. During retirement, withdraw $2k/month and also convert another $2k/month to Roth instead of letting the money compound in the traditional IRA. Your income will be $48k/year, still putting you in a low tax bracket. By the time you get to RMD age, you won't have all that much left in your traditional IRA, meaning you get the best of both worlds. You save money on taxes during your high-income working years, you pay tax at a low rate during your early retirement, and you continue having a low tax rate once social security and RMDs kick in.

Not to mention, if RMDs are big enough to be worried about, it means I have too much money, and that's a good problem to have! If I'm getting $163k per year when I was planning for a fraction of that, do I really care how much my marginal tax rate is?!

Besides, that sort of "problem" can be managed by charitable donations, gifts to heirs, trusts and whatnot, even if you don't manage to get rid of it via Roth conversions.



Anyway, to summarize the general ER tax strategy as I understand it:
  • While working, save in traditional 401ks and IRAs (if eligible)
  • Also while working, save 5 years worth of expenses in a taxable account
  • Starting upon retirement, convert one year's worth of expenses to Roth each year
  • In years 0 to 5, live off of assets in taxable account
  • In years 6 to age 59.5, live off of assets in Roth account (specifically, the ones converted 5 years before)
  • After age 59.6, do whatever causes you to incur the fewest taxes because you can withdraw from any bucket without penalty
I don't think I'll need five years in a taxable because I already have a year in my Roth.  So point two is not always accurate.  Also, if you have money in an HSA, and have had previous medical expenses (since the HSA has been open) you can also use that money.

MDM

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Is the goal to minimize taxes over the next few years or over your lifetime? If your goal is to minimize taxes over your lifetime Roth is the way to go.

Yes, but don't let that tax tail wag the net worth dog.

E.g., if someone receives an offer of a $1 million raise, it probably wouldn't be wise to say "no thank you, I prefer not to pay the extra $380K taxes on that."

For equal tax rates at contribution and withdrawal, the net spendable amount is ~identical for traditional and Roth:
Principal * Growth * (1 - WithdrawalTaxRate) = Principal * (1 - ContributionTaxRate) * Growth

Yes, if one looks at total dollars of tax paid, WithdrawalTaxRate * Principal * Growth (the traditional amount) is greater than Principal * ContributionTaxRate (the Roth amount), even if WithdrawalTaxRate = ContributionTaxRate.  But that is irrelevant to the amount of stash you have after withdrawal.

MDM

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This is not correct if you are maxing out a retirement account....

Can't argue with that, having said exactly the same thing a few posts back. ;)  That was the reason for the "~" in the statement "For equal tax rates at contribution and withdrawal, the net spendable amount is ~identical for traditional and Roth."

See http://forum.mrmoneymustache.com/investor-alley/should-i-focus-on-taxable-account-if-hoping-to-(semi)-retire-by-earlymid-40s/msg905256/#msg905256: "Roth is actually better for equal marginal rates at contribution and withdrawal if one can contribute the maximum amount - see https://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758#p2082294 for the math."

But it is a fine point, moving the traditional vs. Roth break even point only a few percent - not enough to overcome, for example, the difference between a 25% contribution tax vs. a 15% withdrawal tax.  Taking the Bob vs. John example, if Bob's withdrawal tax rate is 15% he will pay more tax in absolute dollars (over 23 times as much) but still have more spendable money at the end than John.  The Bogleheads' thread goes deep into the algebra.

Bogleheads' traditional vs. Roth wiki entry also notes the exception when one can maximize contributions.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth.

If you are saying "traditional isn't always better," we agree completely.  If you are saying "traditional is never better," we disagree. 

See more discussion at http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/ and http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845.

dandarc

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I would not say Roth is better in every situation but I would say the is Roth typically better. The traditional is however useful for manipulating AGI for certain tax thresholds.

The younger you are the more noticeable it is that the Roth is better than the traditional.
Better for what?  What problem are you trying to solve that you come to this conclusion?  Maximizing wealth at some point in the future?  Minimizing lifetime taxes paid?

To me, the goal is minimizing the time to reach your number.  I don't think that is all that unusual on this forum - this is an early retirement blog / forum after all.  And the traditional side helps with that a lot of the time.

I also disagree that Roth is clearly better when you are younger.  I also thought that Roth was better when I was younger, and I may have been right.  But not because I was younger.  It was because I was making a lot less money then.  Lower tax bracket = lean further towards Roth.  I was also not trying to retire early then - more of a 10% is enough savings guy at that point in my life.  I even chose my SoloK provider mostly because their standard plan offers a Roth 401K. 

All things being equal on the income / goals front, hitting your number and retiring at a lower age I think actually favors traditional over Roth.  You have more time to manage your withdrawals and force the withdrawal tax rate down.

So, while I agree that if your contribution and withdrawal tax rates are the same, Roth will come out ahead, I find that to be largely an academic point.  There is a lot you can do to ensure that your withdrawal tax rate is significantly less than your contribution rate.

sirdoug007

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Is the goal to minimize taxes over the next few years or over your lifetime? If your goal is to minimize taxes over your lifetime Roth is the way to go.

Yes, but don't let that tax tail wag the net worth dog.

E.g., if someone receives an offer of a $1 million raise, it probably wouldn't be wise to say "no thank you, I prefer not to pay the extra $380K taxes on that."

For equal tax rates at contribution and withdrawal, the net spendable amount is ~identical for traditional and Roth:
Principal * Growth * (1 - WithdrawalTaxRate) = Principal * (1 - ContributionTaxRate) * Growth

Yes, if one looks at total dollars of tax paid, WithdrawalTaxRate * Principal * Growth (the traditional amount) is greater than Principal * ContributionTaxRate (the Roth amount), even if WithdrawalTaxRate = ContributionTaxRate.  But that is irrelevant to the amount of stash you have after withdrawal.

This is not correct if you are maxing out a retirement account which is very normal for people on this forum and the OP. This is because the limit for a 401k and a Roth 401k are the same, but with a Roth you are putting more value today into a tax advantaged account.

Say two people put 18k in a 401k. Bob in a traditional and John in a Roth 401k. Bob invests the tax savings (tax rate of 25%) which is 4.5k in a taxable account. The Roth at retirement is worth $565k (9% over 40 years). The traditional is worth $565k (9% over 40 years) and the taxable account is worth $118k (8.5% [lower rate to account for taxes during growth] over 40 years) before taxes. After taxes assuming 25% on the traditional and 15% cap gains rate on the taxable results in $524k.

In this case with identical tax brackets now and in retirement the Roth makes you $41K richer! Even if you assume that the taxable account generated no taxes over the 40 years you still come out better going with the Roth by $21k.

Where the hell does the $74,900 for a married couple / $37,50 for a single person come from to get the traditional money to a 25% tax rate in retirement???

Unless you have a massive pension, most of your traditional withdrawals are going to be taxed much less than 25%.  That is the key point of the gocurrycracker post.

If your traditional 401(k) money is taxed at 10-15% average, which is much more likely, your math completely falls apart.

Schaefer Light

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The one thing about the Roth that I like better than the Traditional IRA is the ability to take out your contributions tax free at any age.  It's difficult for some of us to build up 5 years worth of savings in taxable accounts while also maxing out our tax-advantaged accounts, and the ability to access contributions to the Roth can be a big helper in the early retirement years.  If you've had a working career of 15 or 20 years, the contributions to the Roth could be 2-4 years worth of expenses.

Having said that, I completely understand the tax implications and the reasons that the MadFientist is right about the Traditional IRA leading to a bigger nest egg.  It's the part about having 5 years worth of expenses saved up outside of tax-advantaged accounts that's difficult.

Gin1984

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Is the goal to minimize taxes over the next few years or over your lifetime? If your goal is to minimize taxes over your lifetime Roth is the way to go.

Yes, but don't let that tax tail wag the net worth dog.

E.g., if someone receives an offer of a $1 million raise, it probably wouldn't be wise to say "no thank you, I prefer not to pay the extra $380K taxes on that."

For equal tax rates at contribution and withdrawal, the net spendable amount is ~identical for traditional and Roth:
Principal * Growth * (1 - WithdrawalTaxRate) = Principal * (1 - ContributionTaxRate) * Growth

Yes, if one looks at total dollars of tax paid, WithdrawalTaxRate * Principal * Growth (the traditional amount) is greater than Principal * ContributionTaxRate (the Roth amount), even if WithdrawalTaxRate = ContributionTaxRate.  But that is irrelevant to the amount of stash you have after withdrawal.

This is not correct if you are maxing out a retirement account which is very normal for people on this forum and the OP. This is because the limit for a 401k and a Roth 401k are the same, but with a Roth you are putting more value today into a tax advantaged account.

Say two people put 18k in a 401k. Bob in a traditional and John in a Roth 401k. Bob invests the tax savings (tax rate of 25%) which is 4.5k in a taxable account. The Roth at retirement is worth $565k (9% over 40 years). The traditional is worth $565k (9% over 40 years) and the taxable account is worth $118k (8.5% [lower rate to account for taxes during growth] over 40 years) before taxes. After taxes assuming 25% on the traditional and 15% cap gains rate on the taxable results in $524k.

In this case with identical tax brackets now and in retirement the Roth makes you $41K richer! Even if you assume that the taxable account generated no taxes over the 40 years you still come out better going with the Roth by $21k.

Where the hell does the $74,900 for a married couple / $37,50 for a single person come from to get the traditional money to a 25% tax rate in retirement???

Unless you have a massive pension, most of your traditional withdrawals are going to be taxed much less than 25%.  That is the key point of the gocurrycracker post.

If your traditional 401(k) money is taxed at 10-15% average, which is much more likely, your math completely falls apart.

See my other post on RMDs. If you pull all your money out in a year or two you will be above a 25% tax rate. If you just pull out 4% a year through a Roth pipeline there is a high chance your money will continue to grow to be an excessively large size and you will likely be above the 25% tax rate when you reach RMDs.
But there will be multiple years where it will be lower and why in the world would someone pull out all their money in a year or two.  My mom has a high pension and still as a single person is rolling $3000/year into a Roth in the 15% bracket.  Yes, at some point she will be pushed into the 25% but since she was putting money in in the 25% and higher, she still comes out ahead.

MDM

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See my other post on RMDs. If you pull all your money out in a year or two you will be above a 25% tax rate. If you just pull out 4% a year through a Roth pipeline there is a high chance your money will continue to grow to be an excessively large size and you will likely be above the 25% tax rate when you reach RMDs.

Any alternative can be made to look sufficiently good by comparing it with one sufficiently bad. 

You can take "too much" from traditional accounts - either by choice or by RMD fiat - and have a high withdrawal tax rate, causing you to wish it was in Roth accounts.
You can have "too much" in Roth accounts, providing a very low withdrawal tax rate, causing you to wish it was in traditional accounts.

And if you retire early enough, and take appropriate care, you can withdraw more than is needed from your traditional accounts in a given year - but still at a low tax rate - and convert that into Roth accounts.  Of course, if you have the "problem" of a high pension, etc., this route may be unavailable....

Gin1984

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Is the goal to minimize taxes over the next few years or over your lifetime? If your goal is to minimize taxes over your lifetime Roth is the way to go.

Yes, but don't let that tax tail wag the net worth dog.

E.g., if someone receives an offer of a $1 million raise, it probably wouldn't be wise to say "no thank you, I prefer not to pay the extra $380K taxes on that."

For equal tax rates at contribution and withdrawal, the net spendable amount is ~identical for traditional and Roth:
Principal * Growth * (1 - WithdrawalTaxRate) = Principal * (1 - ContributionTaxRate) * Growth

Yes, if one looks at total dollars of tax paid, WithdrawalTaxRate * Principal * Growth (the traditional amount) is greater than Principal * ContributionTaxRate (the Roth amount), even if WithdrawalTaxRate = ContributionTaxRate.  But that is irrelevant to the amount of stash you have after withdrawal.

This is not correct if you are maxing out a retirement account which is very normal for people on this forum and the OP. This is because the limit for a 401k and a Roth 401k are the same, but with a Roth you are putting more value today into a tax advantaged account.

Say two people put 18k in a 401k. Bob in a traditional and John in a Roth 401k. Bob invests the tax savings (tax rate of 25%) which is 4.5k in a taxable account. The Roth at retirement is worth $565k (9% over 40 years). The traditional is worth $565k (9% over 40 years) and the taxable account is worth $118k (8.5% [lower rate to account for taxes during growth] over 40 years) before taxes. After taxes assuming 25% on the traditional and 15% cap gains rate on the taxable results in $524k.

In this case with identical tax brackets now and in retirement the Roth makes you $41K richer! Even if you assume that the taxable account generated no taxes over the 40 years you still come out better going with the Roth by $21k.

Where the hell does the $74,900 for a married couple / $37,50 for a single person come from to get the traditional money to a 25% tax rate in retirement???

Unless you have a massive pension, most of your traditional withdrawals are going to be taxed much less than 25%.  That is the key point of the gocurrycracker post.

If your traditional 401(k) money is taxed at 10-15% average, which is much more likely, your math completely falls apart.

See my other post on RMDs. If you pull all your money out in a year or two you will be above a 25% tax rate. If you just pull out 4% a year through a Roth pipeline there is a high chance your money will continue to grow to be an excessively large size and you will likely be above the 25% tax rate when you reach RMDs.
But there will be multiple years where it will be lower and why in the world would someone pull out all their money in a year or two.  My mom has a high pension and still as a single person is rolling $3000/year into a Roth in the 15% bracket.  Yes, at some point she will be pushed into the 25% but since she was putting money in in the 25% and higher, she still comes out ahead.

Not necessarily as if she built a substantial amount of money she will be above the 25% bracket when she hits RMDs.
"why in the world would someone pull out all their money in a year or two" There are many reasons why people would want to take out a large chunk or all of traditional retirement account in retirement:
Rental house purchase
Vacation house purchase
Once in a lifetime trip
Pay for grandchild to go through medical school
Major medical expense which is not or is not fully covered by insurance
Nursing home care
They decide the want a 60k gas guzzling clown car

Are stock options free? Ignoring the flexibility or options a Roth gives you during the withdrawal stage of retirement is ignoring one characteristic of the value of a Roth.
No one is ignoring the Roth.  It is just that in most cases the traditional is better.  Did you miss that she is moving money into her Roth now?  Which is what many people on here recommend when you retire. 
Even now, I put some money in a Roth but compared to my traditional it is quite small.  But between it and my HSA we have flexibility. 

Frugalman19

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If the OP is only paying $1,100 a month on a $120,000, they will still have the debt when they plan on retiring.

Max retirement accounts, and start paying off that debt, it's not linked to an appreciating asset like a home, it's just negative net worth that's costing money.

I'm surprised more people haven't brought this up, it's much more important than Roth vs traditional.

If you have some agreement that your loan is forgiven after x years than never mind.

Jack

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The one thing about the Roth that I like better than the Traditional IRA is the ability to take out your contributions tax free at any age.  It's difficult for some of us to build up 5 years worth of savings in taxable accounts while also maxing out our tax-advantaged accounts, and the ability to access contributions to the Roth can be a big helper in the early retirement years.  If you've had a working career of 15 or 20 years, the contributions to the Roth could be 2-4 years worth of expenses.

In that situation, you're not really choosing between traditional and Roth IRA contributions. Traditional IRA contributions aren't a choice because they'd cause you to have nothing to live on between your FIRE date and when the Roth pipeline kicks in 5 years later.

Instead, in that situation you're really saying that you won't be maxing your traditional accounts (full stop) and that for your "five year money" you're really choosing between a Roth or taxable account. In that case, the Roth option is obviously going to be better.

If the OP is only paying $1,100 a month on a $120,000, they will still have the debt when they plan on retiring.

Max retirement accounts, and start paying off that debt, it's not linked to an appreciating asset like a home, it's just negative net worth that's costing money.

I'm surprised more people haven't brought this up, it's much more important than Roth vs traditional.

If you have some agreement that your loan is forgiven after x years than never mind.

What the debt is for is, in my opinion, mostly irrelevant. The important factor is the interest rate, which in the OP's case is 3.855%. As long as he's investing aggressively enough that he expects to significantly outperform that rate, he's better off keeping the debt and investing more instead.