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[Wolf359]

I’ve been hearing a lot about Roth 401(k) versus traditional 401(k). My wife and I are in our 40s and have been doing the traditional 401(k).

Even Dave Ramsey the other day encouraged people to use the Roth 401K. Said it was a no brainer for most people.

However, I used three different calculators today and all three said in the long run the traditional 401(k) would be better for us.

anyone explore or shift to Roth 401k?

we also do a Roth IRA each year

Read the article I posted earlier about the guy who turned 70k into $264 million. He converted his traditional IRA into a Roth.

You're not actually anticipating future tax law changes. At one point long term capital gains was limited to 10%, then it started creeping up and now it's up even higher to 20%. Plus with an traditional IRA, you have mandatory withdrawals that start at 72. With a Roth, there is no mandatory withdrawal. The real reason for it is the belief that in the future the tax rate will just be higher than whatever it is now.

As the saying goes, a trillion here, a trillion there, soon you're talking real money. Got to pay for it somehow and that will be through higher taxes at some point.

 

[Doc8404]

I read that article.
had my head spinning.

I see you mentioned Roth IRA and traditional IRA. I am speaking of 401(k) specifically

 

[JHZR2]

I’ve been hearing a lot about Roth 401(k) versus traditional 401(k). My wife and I are in our 40s and have been doing the traditional 401(k).

Even Dave Ramsey the other day encouraged people to use the Roth 401K. Said it was a no brainer for most people.

However, I used three different calculators today and all three said in the long run the traditional 401(k) would be better for us.

anyone explore or shift to Roth 401k?

we also do a Roth IRA each year

It’s a good question. The near term tax advantage when you’re in high earning years is good. But so is the long term appreciation, assuming the timing offers enough good years. The theory that taxes will increase is a likely one. Of course, I don’t doubt that they will try to go after roth earnings at some point, some how too.

I personally havent done more than 1% into my Roth 401k, fwiw. We have done the backdoor Roth though since we aren’t eligible normally. I like the tax advantage at this point, but haven’t really done the math to see what the anticipated difference would be long term.

 

[Doc8404]

Sounds like we both stick with traditional 401k and each fund a ROTH IRA each year.
Significant difference in value, but something to offset.

 

[doitmyself]

LOL, never mind. Deleted the meat of this post. I already made up my mind what I'm doing (finally).

rsylvstr - I could not determine if there was an advantage for ME to invest more in my Roth IRA vs. 403B. I hope you fare better.

 

[Wolf359]

I read that article.
had my head spinning.

I see you mentioned Roth IRA and traditional IRA. I am speaking of 401(k) specifically

The Roth 401k and Roth IRA are basically similar in treatment. Technically you can contribute more to a Roth 401k because even though the limits are the same, you pay taxes on the Roth 401k with additional dollars so you're actually investing more dollars up front. Warren Buffet use to say things like do I want to spend $300,000 for this haircut? and he was referring to the compounded growth of money over a long period. I think 300k for a haircut is quite an exaggeration as maybe it will take 100 years for compounded growth to reach that kind of number or more. But the point is that the more you invest now, the more it will be worth later.

 

[Wolf359]

It’s a good question. The near term tax advantage when you’re in high earning years is good. But so is the long term appreciation, assuming the timing offers enough good years. The theory that taxes will increase is a likely one. Of course, I don’t doubt that they will try to go after roth earnings at some point, some how too.

I personally havent done more than 1% into my Roth 401k, fwiw. We have done the backdoor Roth though since we aren’t eligible normally. I like the tax advantage at this point, but haven’t really done the math to see what the anticipated difference would be long term.

I doubt they'll go after roth earnings. You never hear it mentioned and when they try something they usually throw out a hint to test the waters. I see it as something like the 3rd rail of Social Security. Highly unlikely.

It's hard to calculate because the main benefit is that there's no required minimum distribution. A traditional IRA would mean you have to take mandatory minimum distributions. If you don't need the money and reinvest the funds, that reduces what you can reinvest whereas the Roth continues on growing without taxes to drag down returns. Paying taxes now vs later might be a wash if you're in the same tax bracket. But the theory is that tax rates will go up so it protects you on the tax rate increase.

 

[Wolf359]

LOL, never mind. Deleted the meat of this post. I already made up my mind what I'm doing (finally).

rsylvstr - I could not determine if there was an advantage for ME to invest more in my Roth IRA vs. 403B. I hope you fare better.

I was going to reply to your post. Anyway what did you decide? Were you going to invest more in your Roth or not?

If you check the tables, at 72 you have to take about a 4% withdrawal from a traditional IRA and pay taxes on it. That's why that guy converted his $264 million to a Roth, he could take 1 million out and it wouldn't increase his tax bracket.

 

[Doc8404]

Doesn’t the state you retire in have a significant impact?

for example: TN.

 

[PandaBear]

I’ve been hearing a lot about Roth 401(k) versus traditional 401(k). My wife and I are in our 40s and have been doing the traditional 401(k).

Even Dave Ramsey the other day encouraged people to use the Roth 401K. Said it was a no brainer for most people.

However, I used three different calculators today and all three said in the long run the traditional 401(k) would be better for us.

anyone explore or shift to Roth 401k?

we also do a Roth IRA each year

I personally steer away from Roth for a few reasons:

1) I may be in a high tax state now and a low tax state in the future, or even live outside the US when retired, so I may only pay federal tax down the road.

2) As a tech bro I may make more money now early on in the midlife and unemployed and work for BestBuy after retirement.

3) The alternative to prepay your tax is to buy something that may appreciate in value down the road, like a home that I like to live in, or 2nd, 3rd home to pass down to children.

4) I do not trust giving out a cookie early, so that people will resist the urge of not taking another cookie from the jar later.

 

[Wolf359]

Doesn’t the state you retire in have a significant impact?

for example: TN.

In what sense? Some states have income taxes and some don't so yes, maybe it matters if you have a regular IRA but not if you have a Roth IRA. Of course we're just talking IRA of course the state matters in terms of cost of living and other things. I think you have to look at the whole package. I remember helping someone buy a house once, the no income tax state had property tax that was 5k higher than in an income tax state, but overall the income tax state was cheaper because property taxes were much lower such that the higher income tax didn't offset it. And of course there are many other states that are very friend to retirees. I think TN is #6 on most tax friendly.

https://www.marketwatch.com/story/t...es-and-surprise-its-in-the-midwest-2019-11-06

 

[RhondaHonda]

Anybody else doing as well as this guy? He turned 70k from 1989 into $264.4 million by 2018. Although he says he's underperformed the S&P since 2013. I guess if he had put it in the S&P 500 at the start of 2019, he'd be up over $452 million.

https://www.washingtonpost.com/business/2021/08/27/retirement-fund-millionaire/

https://dqydj.com/sp-500-periodic-reinvestment-calculator-dividends/

While I appreciate the underlying theme of the article (invest early and take advantage of employer matches and tax laws) that is a clickbait article if I’ve ever seen one. It doesn’t talk about any of the actual investments that got him astronomical returns and is no way indicative of a fraction of the return that one would expect. It’s akin to saying I bought $200 in Powerball tickets and turned them into $150 million.

 

[Wolf359]

While I appreciate the underlying theme of the article (invest early and take advantage of employer matches and tax laws) that is a clickbait article if I’ve ever seen one. It doesn’t talk about any of the actual investments that got him astronomical returns and is no way indicative of a fraction of the return that one would expect. It’s akin to saying I bought $200 in Powerball tickets and turned them into $150 million.

It's basically the difference between an actively managed account and a passive one. The only problem with an actively managed account is that yes, you won't be able to achieve the same results as the timing for purchase and sale of a particular asset varies greatly. He does mention that he stopped actively managing it in 2012 and at that point he under performed the S&P 500.

 

[Wolf359]

I personally steer away from Roth for a few reasons:

1) I may be in a high tax state now and a low tax state in the future, or even live outside the US when retired, so I may only pay federal tax down the road.

2) As a tech bro I may make more money now early on in the midlife and unemployed and work for BestBuy after retirement.

3) The alternative to prepay your tax is to buy something that may appreciate in value down the road, like a home that I like to live in, or 2nd, 3rd home to pass down to children.

4) I do not trust giving out a cookie early, so that people will resist the urge of not taking another cookie from the jar later.

One thing we don't really mention here is how much money you're talking about. If you're going to be in a high tax bracket, the Roth is better. If you're going to be in a lower tax bracket, it's a bit more mixed so it boils down to more of it depends on how much we're talking here.

1. You still have to deal with required minimum distributions no matter what the state tax rate may be which is basically the main advantage of a Roth, longer time period to grow tax free.

2. See RMD as mentioned above.

3. If you're saving 7k in a Roth vs an IRA, at the 22% tax rate, you're talking about $1540 in additional taxes. There is that old line about how it all adds up, but then the joke about that is that it doesn't if you don't add it up. If you're saving up to buy a home, is paying taxes on the Roth really going to be the difference between buying a house or not? The other old joke is that I doubt if you're going to be $1 short when buying a house. Although $1540 is a more decent amount and I guess over 10 years that would be over 15k+ plus any additional growth from compounding.

4. Being cynical can cost you money with this attitude. Realistically I don't see it happening although anything is possible. People have also talked about how the mortgage interest tax deduction is basically a giveaway to the rich because of course the poor who rent don't have that deduction to take advantage of. But there's too many interests to get rid of it. Same with Roth, too much love for the product out there, any talks of raiding the cookie jar would probably be met with a big hue and cry. The way to raid the cookie jar is through higher tax rates hence the appeal of the Roth to begin with, lock in your current tax rate now as the new tax rates in retirement may be higher. I point to the max long term capital gains tax rate, that one has been creeping up, used to just be 10%, then 15% and now 20%.

 

[Doc8404]

To me, it also makes a difference that I am not speaking of an IRA.

we are talking maximum contributions into a 401k.

19k me + 19k employer contributions
19k wife + 3k employers

compounded over the years, I would think that plays a role.

 

[doitmyself]

I was going to reply to your post. Anyway what did you decide? Were you going to invest more in your Roth or not?

If you check the tables, at 72 you have to take about a 4% withdrawal from a traditional IRA and pay taxes on it. That's why that guy converted his $264 million to a Roth, he could take 1 million out and it wouldn't increase his tax bracket.

I decided to increase my Roth contributions, but it won't influence my retirement income planning. I am treating my Roth as some of my emergency fund money that potentially can earn more interest vs. sitting in a bank account (also adds a bit more plan diversification - eggs in many baskets). It could also lose, so I am not going to run it up a huge amount (
I am NOT going to roll over a huge chunk of my 403B into Roth IRA like the article you linked. I agree with RhondHonda that the article is click bait, devoid of important details. I.E., he only paid 29 million taxes to rollover 264 million - 11% tax (vs. 22%+ that an average Joe might pay). Glad to see that you followed up with the comment that high income earners benefit more from these Roth conversions. Investopedia articles state 2 minimum criteria for the Roth model to work: 1.) you will retire in a higher tax bracket and 2.) you pay that tax payment (huge, if doing conversion) out of different savings account, NOT your retirement account.

Most of the pros that I have talked to in the past year are not alarmed that if I or my spouse dies during retirement, the remaining person will jump from the 12% tax bracket to the 22% bracket. I inquired about loop holes to reduce my 403B tax burden in retirement and came up with no concrete solutions. Don't die is my plan, LOL.

I'm actually going to annuitize a portion of my TIAA portfolio. YES!, numerous financial planners down play Dave Ramsey's hate for annuities and demonstrate that they work for SOME people. I won't follow up with my personal details, but MUCH thought went into it - it results in me getting the cake AND eating it too. https://epmez.com/could-ramsey-be-wrong

There are lots of "ifs" and "mights" in these discussions, which is why it is better to get personally adjusted advice from professionals vs. these internet threads. That article you linked, interesting as it is, probably does not apply to most people.

 

[doitmyself]

Poop, another double post. I hate getting old and it's inflictions! Is there no thread delete button here?

 

[PandaBear]

One thing we don't really mention here is how much money you're talking about. If you're going to be in a high tax bracket, the Roth is better. If you're going to be in a lower tax bracket, it's a bit more mixed so it boils down to more of it depends on how much we're talking here.

1. You still have to deal with required minimum distributions no matter what the state tax rate may be which is basically the main advantage of a Roth, longer time period to grow tax free.

2. See RMD as mentioned above.

3. If you're saving 7k in a Roth vs an IRA, at the 22% tax rate, you're talking about $1540 in additional taxes. There is that old line about how it all adds up, but then the joke about that is that it doesn't if you don't add it up. If you're saving up to buy a home, is paying taxes on the Roth really going to be the difference between buying a house or not? The other old joke is that I doubt if you're going to be $1 short when buying a house. Although $1540 is a more decent amount and I guess over 10 years that would be over 15k+ plus any additional growth from compounding.

4. Being cynical can cost you money with this attitude. Realistically I don't see it happening although anything is possible. People have also talked about how the mortgage interest tax deduction is basically a giveaway to the rich because of course the poor who rent don't have that deduction to take advantage of. But there's too many interests to get rid of it. Same with Roth, too much love for the product out there, any talks of raiding the cookie jar would probably be met with a big hue and cry. The way to raid the cookie jar is through higher tax rates hence the appeal of the Roth to begin with, lock in your current tax rate now as the new tax rates in retirement may be higher. I point to the max long term capital gains tax rate, that one has been creeping up, used to just be 10%, then 15% and now 20%.

Yes and no, I see Roth being just a loan to the taxman, so your growth in after tax money is going to be with a lower principal. You are paying tax up front instead of growing it pretax anyways, and it may boot you from a lower tax bracket now to a higher tax bracket now, then your tax bracket in the future may be lowered, but it all depends on how much you make or not. You can argue buying a bunch of forever first class stamp up front is a good deal as well, or is just being an inflation fool, it all depends on how you look at it.

We lost property tax deduction in high tax state already, something unimaginable 5 years ago, but it happens. So call me whatever you want but I don't trust Roth not being touched, it is a middle class cookie jar so it is easy to rob, unlike the super wealthy one with lobbying and offshore safe haven, or the lower income one that has an empty cookie jar.

Anyways, in the grand scheme of things 1500 a year isn't much. I think we are making way too big of a deal out of it.

 

[ArrestMeRedZ]

...I don't trust Roth not being touched, it is a middle class cookie jar so it is easy to rob...

They will attack it in an indirect way. Your Roth distributions won't be taxed, but they well might change tax laws so that Roth distributions increase your effective tax rate on other income (to include Social Security). You know, just pay your fair share....

My biggest worry in retirement is the threat of hyper inflation (like '78-82 or worse) combined with low market returns. PandaBear, your real estate investments will help a lot if that scenario comes to pass.

 

[Dave Hess]

I agree with Panda about them wanting to go after Roth IRAs.

Especially if the person dies and it goes to their kids Tax Free.