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@Social Work Hey guys! Attached is a job posting. The job (Social
Worker at Sheppard Pratt school) pays 34-41/hr which is 70-85k a year depending on experience. It’s a full time job. So benefits included (insurance, 401k, paid time off, sick days) And also bc it’s a social work position at a school, you get at least 4 supervision hours a month. This recruiter sent it to me. So if you’re interested please reach out to me or her. https://www.indeed.com/job/licensed-social-workercounselor-33455f2e7d917b37
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Chief
OP let’s use my scenario above but then assume you retire at 55 with $2.4M in your pre-tax 401k (let’s assume you have a multiple of that in taxable savings as well since you are a high saver).
From 55 to 72 you can Roth convert $183k per year and stay within the 24% tax bracket. That will fully deplete your pre-tax 401k before you have to take a single dollar of RMD. Let’s assume you contributed all those pre-tax dollars at 32% or higher tax bracket. Pre-tax wins.
Rising Star
That’s exactly my point. And when you say “within the 24% tax bracket” the average on that is going to be a lower than 24%. So there’s a big benefit between the 32% saved and the effective rate on those conversions which is about 20%.
I have almost all on traditional 401k/IRA. I wish I knew to save in Roth early on, but I’m not planning to work till 65 though, maybe till 55 or 50, which is only 5-10 yrs from now. I’m planning to covert a little bit of my traditional savings into Roth each year when I start retiring so I pay the least tax.
Chief
I do both
You should balance the 2 out, more Roth when younger and more traditional when incomes higher for the max tax benefit. Also, not sure where 8-12M comes from unless you assume very large returns over the long run.
I do not know whether it will become that much. It $3- $4 M is doable. Assuming there will be sow major market event and some mistakes along the way. ROTH is more trouble and more paying around. Dumb index mutual funds way better
Chief
In what sense are Roth and Index funds opposing concepts?
Chief
First off, let’s keep all numbers real instead of nominal. That way we can use today’s tax brackets.
Second, most professional asset managers are forecasting only 4% real return for global equities. Let’s say that’s too pessimistic and go with 5% real return.
Third, let’s assume you are saving $30k per year including employer match.
43 years of savings will get you to $4.3M in today’s dollars at age 65. RMDs don’t start until 72, so $4.3M becomes $6.0M.
$6M yields a $220k RMD. Add $30k in Social Security and we get to $250k in gross income.
That puts you in the 35% Single Fed tax bracket at retirement, assuming standard deduction.
So as long as you are below that bracket during your working years, Roth makes more sense. So I agree with you!
Tons of assumptions in here though. Biggest one being working for 43 years straight, most professionals will retire before 65 and have an opportunity to Roth convert much of their pre-tax accounts.
But what if you are making $65k now but know you will make $800k later. (Like a doctor). At the start, you have nothing in your 401k so that marginal 401k savings in even at 10% is better than the marginal value of that first dollar in the 401k. BUT later when you have $7M in your 401k and start making withdrawals, and paying 22% average rate, wouldn’t it have been better to have done Roth on those first contributions?
The ideal answer is to focus on Roth earlier in your career since you’re in a lower tax bracket and don’t hit the Roth income restrictions.
As your income grows, you transition from Roth to 401K as the tax benefits become more meaningful.
Ideally, you’re maxing out both, including backdoor and mega backdoor Roth.
“Transition from Roth to 401k” makes no sense. Do you mean roth to traditional?
How on earth? What is the federal max one may contribute to a retirement account each year?
Chief
$20.5k plus whatever your company matches plus after-tax 401k (if available) for a maximum of $61k.