I would hate to be "that guy" but this just occurred to me while I was researching 401(k) Roth options.
I am assuming that everyone includes their 401(k) in the NW calc, I do. In doing my research into The Roth 401(k), I realized that the Roth 401(k) would have a smaller value than a traditional 401(k) because the traditional has not had the taxes withheld yet. So now I'm thinking that some of us my have some apples (traditional) and others have oranges (Roths), so to speak.
I don't think it's really a big deal in the grand scheme, but I thought it was interesting that you could be a millionaire with a traditional 401(k) then no longer be a millionaire once the taxes hit.
I'm starting to wonder if a Roth has any benefit at all over a traditional. As long as your deductions/exemptions equals your withdrawals, your taxes on the traditional will be $0. So enjoy the tax benefits of the traditional now in your high earning years and don't pay any taxes later. Win win.
This assumes that all your income in retirement is under deductions/exemptions. Standard deduction for married plus 2 exemptions is 12,400 + 3,950 + 3,950 = $20,300 for 2014. When you consider regular 401k has minimum withdraw plus maybe some income from hobbies plus maybe some rental income plus SSI it would be easy to be over $20,300 in income in retirement. Also don't forget the taxes on growth! Look at scenario below
Regular 401k: contribute $17,500; taxes -$4,375
- wait 40 years at 11%
- Balance $1,397,104
- Potential taxes @ 15% = $209,566
Roth 401K: contribute $17,500; taxes $0
- wait 40 years at 11%
- Balance $1,397,104
- Potential taxes @ 15% = $0
Your numbers there again are assuming that you withdrawl the entire 401k at once, rather than over a period of time, and doesn't include the current tax savings which then gets invested into non-tax advantaged accounts. Since the $4,375 in savings would then go towards other investments here is how the example should work out:
Regular 401k: contribute $17,500; taxes -$4,375
- wait 40 years at 11%
- Balance of 401k $1,397,104
- Balance from investing the tax savings $349,276
- Potential taxes @ 15% = $258912 *note long terms capital gains currently around 10%, but just keeping the example simple, also you forgot to exclude the $20,300 deduction from your original calculations
- Total Balance after $1,487,468
Roth 401K: contribute $17,500; taxes $0
- wait 40 years at 11%
- Balance $1,397,104
- No investment of tax savings
- Potential taxes @ 15% = $0
- Total Balance $1,397,104
Difference
$90,364That is without any optimizations in withdrawal, such as doing roth conversions during low earning years, and taking advantage of long term capital gains taxes being lower. This is a per year example, so bring this over a 10 year working period and suddenly we are looking at possibly an extra million dollars or more.
Topic: Race from 10 to 100k!! (Read 1317738 times)
