https://community-new.goactuary.com/t/traditional-vs-roth/2381/138?u=dara
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thanks, you all confirmed what i felt. NYer, so those taxes won’t get higher and see no way i have a higher tax bracket in retirement
This seems to be an argument for using a traditional 401k over a Roth.
A traditional 401k let’s you put pre tax dollars into the account. When you take the proceeds out, you pay federal tax on the disbursements, but you do not pay state tax on the disbursements in 38 states, if I read this right. You effectively never pay state tax on that money.
For a Roth, you pay state and federal taxes in the year you earnt he money and then transfer it to an account for later tax free withdrawals, but you will have paid state taxes on the contributions.
Did you also notice that they don’t tax DB pensions or Social Security benefits?
It’s possible for a retiree to be a millionaire and have a $100k income (or more, no limits) and pay $0 in Iowa income tax.
(Cut) You have to scale the numbers I gave. No one invests 1k then retires. Multiple by at least 100 or realistically 1000
How the fucck are you going to live on $10k in retirement? Be realistic, your SS earnings will probably exceed this amount
Hmm I suppose I could have phrased that in a more constructive manner
Anyways the Roth 401k is a superior investment vehicle for high earners who have a long time horizon to retirement and plan on continuing their high flying lifestyle in retirement
It’s also a good way to diversify away tax risk
If you’re retiring soon or plan on living off rice and beans in retirement then let me tell you about the traditional 401k
Ooh, another reason for a Roth is that since the money is after tax you can put slightly more into your account.
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This is irrelevant as multiplication is commutative.
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Do you mean (cut) or retired?
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Are you replying to me? I used your marginal tax rates and said nothing about total retirement income.
If you are expecting that your high flying retirement income will generate a higher marginal rate than you have now, and you have other sources of income to fill up the lower brackets, then Roth wins in the simple tax comparison.
Your example had a significant drop in taxes, and you ignored the investment gains you were passing up by investing after tax money.
But, it’s your money and I’m guessing you have plenty of years to refine your plan, so make your own choice today.
Yeah but not tax brackets though
You did when you implied a 10% fed tax rate in retirement
Edit: I see now that you’re using the 5k from my example. I should have picked a more realistic number
You’re assuming different tax rates. If you assume the same tax rate then you have exactly the same amount either way.
So some of the issues are:
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Do you think tax rates are generally going up or down or staying the same? If you think tax rates are going up (which seems likely to me) then better to pay the tax now and save via Roth.
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Are you going to spend more or less in retirement than you do now and what impact will that have on your tax bracket? (Historically the thinking was “less” in which case traditional is better, but if you’re planning on taking a luxury cruise every other month it might actually be more in which case Roth is better.)
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How lumpy will your retirement withdrawals be? If you’re going to have big purchases such as a brand new car in retirement then you can use the Roth to cover the big but occasional purchases and the traditional for day to day stuff and not get stuck with exorbitant income the one year you buy a new car.
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Do you trust the federal (and state & local if applicable) government to honor their promise to not tax the Roth withdrawals? If not, take the guaranteed tax break on the traditional.
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Where will your income be in terms of taxation of Social Security? If you know you’ll have none of your Social Security taxed, or you’ll have 85% of it taxed then ignore this one. But if you’re going to be on the slope where some but less than 85% is taxed then your marginal tax rate works out to something astronomical and you’re much better off using Roth withdrawals to keep your income down (if you trust that Congress won’t change the taxation formula to include Roth withdrawals in computing how much of your benefit will be taxed… which they obviously should do but so far have not).
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I like to do a mix of Roth and Traditional. A nice benefit of the Roth is that since you can withdraw tax-free you can use it for large infrequent purchases such as a car and not send your retirement income sky-high when those big ticket purchases occur.
Oh a 6th is if you’re maxing out your contributions you can save a bit more with Roth. Since $22,500 Roth is worth more than $22,500 Traditional, you might be able to save a bit more with Roth if you’re hitting the contribution limit.
I have always assumed that tax rates are super-low and they could only go up from here; hence the Roth. I’m only about 1/3 Roth so at the time I also viewed that as having flexibility.
If you’re a max saver looking to shelter as much as you can and are maxing out then Roth allows you to shelter more because you’ve set aside not just the savings but also prepaid the taxes.
That said I am about 80% Traditional and probably that’s about where I’ll stay but my accounts are not really huge.
I fully expect Roth earnings to be taxable in the future. It may be only above a certain amount, but I don’t trust your kids to ignore my fat stax.
Good list, all of those are relevant. I did some trad to Roth transfers when I first retired and thought about them.
I think there is another. You’ve got experience with taxes, what do you think about nursing home expenses? If one of us is in a nursing home and the other stays in our house, our annual spending could jump by $100k. That’s a big hit for money coming out of a traditional. But, if NH qualifies as “medical expense”, most of that would be tax deductible (recognizing that we would have to allow for the 7.5% and getting to the itemized threshold).
If the stay in the nursing home is medically necessary then all of it, including food, is deductible as a medical expense. As you say, subject to the threshold (currently 7.5%, but it’s been as high as 10% some years).
Medical expenses can be a reason for filing separately. If A & B are married and A has most of the medical expenses then if they file jointly they can only deduct the portion that exceeds 7.5% if their joint income whereas if they file separately then they can deduct the portion that exceeds 7.5% of A’s income, resulting in a bigger deduction.
Of course if A’s medical expenses are astronomical then the higher deduction might be of little benefit and then they might be better off filing jointly so that B can take advantage of A’s deduction. Just depends on where medical expenses fall relative to total income.
I certainly prepare returns where the AGI is 6 figures and the taxable income is negative due to nursing home stays.