Ok, but your “assume for the sake of argument” condition is almost always false. The only exception would be a self-employed consultant. Which does exist, but is not super common, and probably even rarer a self-employed consultant with $0 in employer retirement contributions.
I acknowledged later in my post that you have to also consider the ER contributions that are potentially out of your control, so I’m not really sure what you’re getting at here.
My point stands that the decision between Roth/Traditional needs to be made marginally, and that the key inputs to that decision are the marginal tax rate today and the assumed projected value of Traditional accounts (to understand your marginal tax rate in retirement on currently invested assets). I provided that example as a framework for how you should be evaluating that decision, because it is fundamentally wrong to say the only comparison you need to make is today’s marginal rate vs a singular marginal rate in retirement … Different contributions receive different marginal rates.
That your statement might be true but it’s irrelevant because it describes zero people who are actually reading this.
If you don’t know how to separate a very specific example from the concepts being used in that example, I don’t know what to tell you. Pick any numbers you want.
What about a new actuary beginning their career for an employer that allows all matches to be made to Roth accounts? Seems like that example would be relevant to them.
I don’t know, but the first year is April 1, but he might have to double 2nd year which might push him over the yearly limit.
Here’s an MFJ scenario in today’s dollars (it might need some altering, as I don’t know what typical SS payments are) -
You and your partner receive a monthly total of $5K in SS of which 85% is taxable (the maximum) - this comes to $51K that is taxable annually. The current 12% (likely soon to go up to 15%) band cuts off at $89.5K. That gives you $38.5K annually that’s more likely to be coming from a Traditional.
Using the 4%pa rule, that’s a nest egg of $962.5K in Traditional 401K if retiring today. Anything above that should be in Roth. Other income streams may reduce this $962.5K figure. Anything I’m missing?
Are you saying your SS plus your spouse’s SS = $5,000?
I don’t know what it will be. I know I won’t have the full 35 years of working in the US. What would be a typical amount for people on this forum?
Less than 35 years doesn’t hurt your benefit too much. It hurts a little. Depending on factors $5,000 is not a ridiculous assumption for your combined Social Security.
I wasn’t asking because I thought it sounded off; I just wanted to make sure I understood correctly.
Anyway, so assuming the $5k is combined, what you are missing is the standard or itemized deduction.
If you & your spouse are both over 65 that’s a minimum of $27,300 (the standard deduction).
So your AGI can be $116,750 and you’re still in the 12% bracket (under current rules). Of which $51,000 is taxable Social Security, leaving $65,750 from other taxable sources.
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But I certainly wouldn’t want to save 12% now on the assumption that I’ll pay 12% in the future. That 12% is likely to go up… at least to 15%. Maybe higher.
Now if you’re saving 22% or more it might be worth it.
To answer the original question I am 75% Traditional, 13% Roth and 12% HSA. I anticipate roughly maintaining this distribution but if my investments do better than expected I’ll put more effort into increasing the Roth.
Generally I expect a lower tax rate in retirement.
I was late to the HSA game (I didn’t want to put a lot of money away just for healthcare, not realizing until a few years ago that at age 65 it can function like an IRA) so I’m
19.1% Taxable
43.9% Traditional/Deferred
33.4% Roth
3.6% HSA
our projection for age 62 benefits is $5600 (150% of mine). If we wait to 67 it’s $9200. I’ve been at SS base max income or above for a bit (and assume many credentialed actuaries are also).
Have read the thread, but don’t recall if this was directly discussed. I get that theoretically the math should work out the same, so it’s primarily a tax question - will I pay a higher tax rate now, or in retirement.
But I’ve been thinking about this a lot lately, and have re-decided that I should be putting as much into ROTH as I can. (I’ve come to that conclusion a couple of different times in my career, and don’t exactly recall why.)
For me, it’s three main reasons that the simple math question misses.
- The idea that you would simply invest the tax savings in the traditional scenario is a false one. Money that is not in retirement accounts is not reliably “invested for retirement”.
- (1a) I still have 15 years+ to retirement / collecting, and that is a significant amount of time for earnings to grow tax-free.
- My ability to pay taxes is much better now. I am earning an income and still have ample ability to earn future income or decide when to stop / dial back. So I’d rather pay the taxes now when I can afford it more.
I recently elected to roll over a significant amount from traditional 401k to ROTH 401k. It’s going to be a hefty tax bill next year. And I will certainly not be in a higher tax bracket in retirement (ignoring the possibility of all brackets going up, which I’m not interested in predicting). So I hesitated to do it, but then came to that same conclusion.
I don’t understand this. You can’t spend that percentage that is due for tax now (or later if traditional) anyway. It’s not yours to afford now and never will be, although the percentage might change a bit depending on when you take the hit.
Perhaps you shouldn’t (with traditional), but you certainly can.
ETA: And I bet most people do, or at least do not set up any explicit liability for future taxes.
I think HSA as a savings account is overrated. You only get the full benefit of HSA tax deductibility if you spend withdrawals on qualified medical expenses so I figure that if you have significant medical I would be inclined to take the funds from HSA. Otherwise you are paying for the medical expenses with money taxed at your marginal tax rate.
There is a strategy of saving up all your receipts and you can claim from the HSA at a later date, even years later. In this way significant medical expenses that have not been reimbursed from the HSA can be part of your general emergency fund.
I’ve not been excited about investment programs at my employer sponsored HSA but going back several years I have been transferring funds out so most of the HSA is invested similarly to my IRA.
Well you deduct the HSA contributions when you make them. In retirement if you spend the HSA on non-medical stuff then it simply functions the same as a traditional IRA (minus the RMDs). But with the added benefit that if you spend it on medical then you get the distributions tax-free. Meaning you paid no tax at any point on that money. Not when you earned it, nor when you withdrew it, nor at any point in between.
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Right, but you only get the full tax benefit if you spend the withdrawals on medical expenses.
There is a school of thought going around that we should pay medical expenses out of pocket (not with HSA funds) to prolong the tax deferral. I think this idea is based on faulty logic.