401k vs. Roth 401k

[kork13]

Not quite, traditional accounts are tax-deferred .... on withdrawal, you'll pay taxes on the entire amount (contribution & growth), and at your standard income tax rate to boot (not the LTCG rate). Honestly, recognizing that is one of the reasons I don't like traditional accounts... At least in a taxable account your growth is taxed at a lower rate. And in a Roth, not taxed at all. So yeah, unless/until I'm well out of the 25% (22% currently) tax bracket from some fantastically high income, the tie always goes to the Roth in my book.

Another strong argument for Roth over Traditional (and my 2nd major deciding factor) is money density. You can put more money into the Roth than you can a Traditional account. Admittedly this mostly just applies if you can max out your retirement accounts ... But again, as a personal consideration, I've been in a position to do that since I was ~25.

As an example:

- Assume you're in the 25% tax bracket (yes, currently 22% until the law changing it expires in a year or three), and stay there in retirement (likely the "worst case" scenario)
- Assume your income/expenses enable you to max out your retirement accounts. That's $22,500 into 401k & $6,500 into IRA, $29k total.

Using traditional accounts, your pre-tax contribution of $29k has the post-tax value of $21,750 in retirement (+growth). Using Roth, your post-tax contribution of $29k has the post-tax value of $29k (+growth).

Looking at it another way, a $2M Traditional account is only worth $1.5M after taxes, while $2M in a Roth account is worth $2M after taxes

As an added benefit, three non-taxable status of that Roth money allows you to keep your taxable income lower in retirement, allowing any other taxable income (from taxable investments/RE, pension, part-time work, etc.) to be taxed at a lower rate.

This final point is perhaps the only one that really makes sense to support the use of both Roth & Traditional accounts, as the OP article suggests... Having alot available in Roth can help you keep your tax rate in retirement lower, allowing the traditional money to be taxed at a lower rate.

[LivingAlmostLarge]

I fully disagree with the article.

The power of tax free growth outweighs any arguments of tax brackets I've seen.

this is incorrect actually. Your bracket really matters. I can honestly say that about 24% is the breakeven point. 32% is pretty high MFJ $364k. So if you are pulling down $364k income in retirement you are doing well. That being said 24% is $190k starting. That is ALSO a very large retirement number and where IRMAA (extra medicare premium payments are definitely going to hit). So you are also living on a very high retirement income.

So but in order to do that you had to have been likely earning more than 24% or $190k when you were working. More likely in the 32% bracket so YES it is a big deal to use the pre-tax 401k because it's likely when you retire you'll be under $364k.

I see very few people living on $364k income in retirement. Dual income couples hit that pretty easily if they are both working professionals.

$190k is even a lot for a retirement income. Most are around $100k. That's a much lower bracket.

So to me it's not a no brainer that you do. It really depends on your income and where you are landing.

Personally we've always used 401k pretax. But our situation has been above we've been substantially over income in earnings. Right now we are borderline. I'm debating doing a roth 401k versus a traditional. I'm not sure whether it makes sense to pay 24%. I am not sure we'll be above $190k retirement income because some of it will be tax free, some will be just taxable income no capital gains. So I can see it depends even for us.

[myrdale]

this is incorrect actually. Your bracket really matters. I can honestly say that about 24% is the breakeven point. 32% is pretty high MFJ $364k. So if you are pulling down $364k income in retirement you are doing well. That being said 24% is $190k starting. That is ALSO a very large retirement number and where IRMAA (extra medicare premium payments are definitely going to hit). So you are also living on a very high retirement income.

So but in order to do that you had to have been likely earning more than 24% or $190k when you were working. More likely in the 32% bracket so YES it is a big deal to use the pre-tax 401k because it's likely when you retire you'll be under $364k.

I see very few people living on $364k income in retirement. Dual income couples hit that pretty easily if they are both working professionals.

$190k is even a lot for a retirement income. Most are around $100k. That's a much lower bracket.

So to me it's not a no brainer that you do. It really depends on your income and where you are landing.

Personally we've always used 401k pretax. But our situation has been above we've been substantially over income in earnings. Right now we are borderline. I'm debating doing a roth 401k versus a traditional. I'm not sure whether it makes sense to pay 24%. I am not sure we'll be above $190k retirement income because some of it will be tax free, some will be just taxable income no capital gains. So I can see it depends even for us.

I am having a very difficult time making sense of your reply.

[disneysteve]

I am having a very difficult time making sense of your reply.

She’s saying that for high income earners, it’s better to do a traditional and save the taxes. Then in retirement your taxes are much lower when you draw the money out.

[LivingAlmostLarge]

Basically 401k pretax and roth depends on your current income. It is a big deal when you are paying 37% or something, the reality is you are unlikely to paying that much in retirement. Of course if you are FABULOUS problem to have because you've won the lotto in retirement and are living seriously well.

[disneysteve]

Basically 401k pretax and roth depends on your current income. It is a big deal when you are paying 37% or something, the reality is you are unlikely to paying that much in retirement. Of course if you are FABULOUS problem to have because you've won the lotto in retirement and are living seriously well.

Of course, only about 0.5% of taxpayers are in the 37% bracket, so this is an issue that applies to very few people. For the other 99.5%, or at least maybe 95%, the Roth is going to be the better choice.

Personally, I'm in a traditional 401k. If I had to do it over again, I'd probably pick the Roth but I'm not going to change now as I'm too close to the end of my working time for it to matter.

[LivingAlmostLarge]

Of course, only about 0.5% of taxpayers are in the 37% bracket, so this is an issue that applies to very few people. For the other 99.5%, or at least maybe 95%, the Roth is going to be the better choice.

Personally, I'm in a traditional 401k. If I had to do it over again, I'd probably pick the Roth but I'm not going to change now as I'm too close to the end of my working time for it to matter.

Actually anyone above 22% is better in the traditional. Most people in the 24% brack up to $330k won't be living on $330k. Likely they will be under $180k. So the chances are you'll be paying only 22% or lower.

I think I read IRMAA only affects like less than 10% of retirees so those are the people for whom the Roth would have been a better deal. Otherwise it's highly likely better to use the traditional. Also with the traditional you can use it against medical and nursing home care expenses

[Petunia 100]

Not quite, traditional accounts are tax-deferred .... on withdrawal, you'll pay taxes on the entire amount (contribution & growth), and at your standard income tax rate to boot (not the LTCG rate). Honestly, recognizing that is one of the reasons I don't like traditional accounts... At least in a taxable account your growth is taxed at a lower rate. And in a Roth, not taxed at all. So yeah, unless/until I'm well out of the 25% (22% currently) tax bracket from some fantastically high income, the tie always goes to the Roth in my book.

Right, taxable on withdrawal. No tax on the growth while it is growing.

[Petunia 100]

I am having a very difficult time making sense of your reply.

She's saying that your tax bracket does matter, and she is completely correct.

If your tax bracket remains constant, then traditional vs Roth is moot, because your results are exactly the same with either one; the Commutative Property of Multiplication says so. If your tax bracket does not remain constant, then one method will have a better result than the other. Therefore, your individual tax bracket situation matters.

[Petunia 100]

Of course, only about 0.5% of taxpayers are in the 37% bracket, so this is an issue that applies to very few people. For the other 99.5%, or at least maybe 95%, the Roth is going to be the better choice.

Personally, I'm in a traditional 401k. If I had to do it over again, I'd probably pick the Roth but I'm not going to change now as I'm too close to the end of my working time for it to matter.

I disagree, the traditional is the better choice for most people, at least until they are on track to have 300k or so per person. Remember, the standard deduction means your first 13k of taxable income is taxed at 0%. If you are married, your spouse gets the same. Most people retire on nest eggs which are smaller than that.

[Fishindude77]

Truth is, putting money away in either a Roth or Traditional is a wise decision.
You can nitpick over the taxes, etc. later but putting your money to work and taking advantage of time in the market is what's important.

[srblanco7]

Offering up another rule of thumb (which I heard today on the Money Guy podcast) is invest in Roth if tax rate (Federal + State) is less than 25%. Generally consistent with what many wrote - but had not seen anyone mention factoring State taxes into the assessment.