I figured as much, was just addressing Rastilin’s questions. But I can totally see some folks short cutting 37% to 40% just to bitch about tax rates.
Never say never. I believe top marginal tax rates in the “good ole 50’s” were 80% and that capital gains were included. But I could be wrong I haven’t looked up historical tax rates recently or which types of income had better lobbiest at the time.
Again, some peoples investments are only inside of a retirement account which are subject to income tax, not capital gains tax.
Although there are lots of caveats, the tax rates in 1944 were more than just considered.
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That 40% applies to working-class-dog-fellowship money.
My point is that the traditional 401k lets you avoid some income taxes, on the assumption that the weighted average IT avoided on the contributions is higher than the weighted average tax paid on the dispursements.
The Roth option does not let you avoid income taxes, but the tax that it lets you avoid is capital gains tax. The benefit that you gain with a Roth contribution is that the taxes on the growth are 0%. If you had put that money into a regular investment account instead of a Roth, you would owe capital gains taxes on the growth.
I don’t agree with people who make the argument that a Roth allows you to avoid income taxes down the road. I don’t think that it does. It allows you to avoid cap gains taxes.
Please stop misusing the terms. There are no capital gains taxes levied on tax advantaged retirement accounts. You pay income tax when you withdraw your deferred income.
Capital gains tax and income tax are two completely different things
It’s hard to take you seriously when you keep crossing your wires and pooping your pants in public
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I am not misusing anything.
It’s not correct to compare the pre-tax money that you put into a traditional 401k to the post tax money that you put into a Roth.
It is a better comparison to compare post tax money you put into a post tax brokerage account to the post tax money that you put into a Roth.
If I put 22,500 into a post tax brokerage account and then leave it for 25 years, I will eventually owe capital gains tax on the capital gains.
If I put 22,500 into a Roth account and then leave it for 25 years, I will eventually owe no tax on the capital gains.
Due to the contribution limits on retirement accounts, typically traditional vs Roth is the comparison to make. If you decide that a Roth 401k isn’t for you, I can’t imagine you’re going to choose a taxable account over a traditional 401k unless there are unusual circumstances (crazy vesting period, exorbitant expenses, etc.), so you’ve presented a false choice.
Even if we’re talking about IRAs and you can no longer contribute to a traditional IRA because of the income limits, I’m not sure why you would choose to forgo the Roth IRA in favor of a taxable account considering you’re paying tax on the contributions either way.
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A Roth is (essentially) an after-tax brokerage account where LTCG are taxed at 0%. If you believe you can achieve a 0% LTCG tax rate in a brokerage account, then a Roth doesn’t present an advantage from that perspective.
That said, you don’t know that you’ll acheive a 0% LTCG tax rate, whereas the Roth 0% tax rate is locked in (other than a huge change to tax code). A Roth will also shield you from unwanted dividend income. Just about the only advantage of a brokerage account that I can think of is it’s more liquid, but since you can always withdraw Roth principal, I’m not sure that’s a huge advantage.
I can see why you’d pass up a Roth in favor of Traditional, but I can’t think of why you’d pass up a Roth in favor of an after-tax brokerage account.
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So… what I’ve gleaned from this discussion is that I’m going to keep contributing to my Roth 401k (I’m getting close to the max, but haven’t quite hit it yet), let my employer contribute to my Trad 401k, and call it a day.
Maybe when my house is paid off (~12 years) I’ll look into other stuff.
I have about 30 more years working left in me, though if I can manage to retire sooner I will.
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I think what you should be gleaning is that
Pre-Tax 401k >>>>>>> Roth 401k >> Post Tax Brokerage Account.
Since a Post Tax brokerage account is certainly worth having, the Roth isn’t a bad idea, but it falls short relative to a traditional 401k, but only if your long term goal is building wealth and tax avoidance & minimization.
I’m not sure this inequality holds in all cases. And probably not for high net worth folks. There are just too many variables to make this blanket statement.
Certainly for low net worth individuals who will be drawing only a small amount from pre-tax funds you statement is spot on.
If you’re like some of my clients whose RMDs alone will put them near the top marginal tax bracket in retirement, I’m not sure what you are proposing is accurate.
Oh and if you’re planning on passing wealth on to the next generation you can often escape a pretty good chunk of all capital gains taxes with the step up in basis on death. Doesn’t really help you, but it sure does help your heirs. Especially if you’re sitting on very large unrealized capital gains but are under the threshold for federal estate taxes kicking in.
And don’t forget even plenty of “growth” stocks do throw off annual dividends (at favorable tax rates but still taxable on going outside of tax qualified accounts) and sometime a stock has a corporate transaction outside your control that can trigger an immediate capital gain realization that you weren’t counting on if it’s outside a tax qualified account.
And there are certain income trigger such as IRMMA increases that might get triggered pulling from a Pre-tax account that would not if pulled from a ROTH account.
There are just so many moving parts that your statement isn’t always the best answer.
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Roth is superior to a regular brokerage in basically every single tax situation. The only issue are the IRS limits on your tax advantage contributions
Otherwise the super wealthy would have insane Roth retirement balances
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No. Absolutely not lol
Why would comparing a tax advantaged account to a non tax advantaged account be a better comparison
Please use your logic. This is a discussion regarding tax advantaged retirement accounts…..
I think I’m still in the camp that would suggest a Roth is better early in one’s career when the marginal tax bracket is low relative to your working career and shift to traditional accounts later as your marginal tax bracket increases. That gives you the most flexibility in retirement to manage taxable income.
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I think you are trolling me. I find it hard that someone is actually unintentionally being so obtuse.
There is no income tax advantage to a Roth Account. You pay income taxes on every penny that you put into a Roth account. Roth accounts are not untaxed. They are PRE-taxed.
It takes 37,500 of income to fund 22,500 into a Roth account if your marginal income tax rate is 40%.
And here’s a secret for everyone but BigBlackTroll…
If you have 37,500 and pay your 40% marginal income tax and put in into a post tax brokerage account, leave it for 20 years, and then sell it off to fund your retirement… you NEVER have to pay income tax on ANY of the proceeds.
Funds invested in a Roth 401k/IRA grow tax free for an eternity without ever triggering a capital gains tax payment event
That sounds like an annual tax advantage to me 
If there were no advantage the IRS wouldn’t limit contributions to these tax advantaged accounts
So why the hell would I compare them with funds in a traditional brokerage account that are funded with after tax dollars, subject to capital gains tax on dividend income, then additional capital gains tax on investment growth when you divest from you position?
Yeah! Light dawns on yonder dark face! He finally sees the effing point.
The tax that does not get triggered is the f’ing cap gains tax, not an income tax. That is the point I have been trying to make that you cannot seem to acknowledge.
Well there is no income tax on the annual growth or investment gain either. So I’m not sure what point you’re trying to make. Did you forget your initial augment?
The advantages of a traditional 401k outweigh the advantages of a Roth 401k.
Maybe not for everyone in every situation, but generally for most people and most of the time.
What does this mean? In a post tax account you paid taxes of the funds you invested and in ROTH same this. Guess what none of the GAINS, dividends, interest, realized gains, unrealized gains are ever taxed at any rate, barring a stunning change in future tax law. Assuming you meet the 5 years and after 59.5 rule.
But in a regular after tax account all of the dividends, interest, realized gains are taxed each year along the way when generated, and then when you sell to use to use funds you have capital gains, sure the basis is recovered tax free you paid tax on that money already, and even though CGs currently have favorable rates to earned income or W-2 wages, the rates aren’t generally 0% like a ROTH.
In a traditional pretax, you get a current tax deduction with is valuable and more valuable to some than others but you don’t ever get the favorable GC rates, it’s always ordinary income. The theory being your income will be lower in retirement than you working years which is probably true for the vast majority of rank an file employees, but might not be for high wage earners who may have significant sources of retirement income.
OH and as long as you met the 5/59.5 rule the ROTH will always be more favorable than a regular after tax account you maintain. Well there is one scenario where it is worse and that’s if you have long term losses in the ROTH account since there is no way to capture them or write them off.
As for ROTH v Pre-Tax that’s a more tricky discussion with a lot of moving parts. In theory they should be “the same” in practice they are not.
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