{ "media_type": "text", "post_content": "Is this reasonable or am I missing something? \n\nI started maxing my 401k from year 1 and I hope to have $5 million or more by the time I retire around 60. Wouldn’t it make sense to put all of my yearly $19,500 401k contribution to ROTH 401k instead of traditional 401k? \n\nMy reasoning is that I would pay 35% tax now and my remaining 65% would grow tax-free in ROTH 401k…. versus traditional 401k where I deposit 100% but every distribution will be taxed 35% assuming I make a lot in retirement.", "post_id": "61269654f455090023214918", "reply_count": 20, "vote_count": 1, "bowl_id": "5b3f7377ab53db00136f7b4c", "bowl_name": "FIRE Financial Independence Retire Early" }

Is this reasonable or am I missing something? I started maxing my 401k from year 1 and I hope to have $5 million or more by the time I retire around 60. Wouldn’t it make sense to put all of my yearly $19,500 401k contribution to ROTH 401k instead of traditional 401k? My reasoning is that I would pay 35% tax now and my remaining 65% would grow tax-free in ROTH 401k…. versus traditional 401k where I deposit 100% but every distribution will be taxed 35% assuming I make a lot in retirement.

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Please reserve questions in this bowl for those who won’t be making a lot in retirement, thank you.

likefunny

If tax rates are the same now and at retirement, then it comes out exactly the same if you run the numbers. But if you are in the 35% tax bracket now, I’d do the traditional IRA. Most likely in a lower bracket in your retirement.

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Got it, thanks

Biggest issue is: No one know why the tax brackets will look like in 30 years. If the Democrats get a few more years of the majority, we’ll be paying A LOT more in 30 years than now - even if in the lowest tax bracket at that time.

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I don’t think there’s a ton of room to increase rates at the top… maybe you see the 39.6/40% rate come back, but there aren’t a ton of countries that have top brackets higher than that. For people in the 22% and below brackets, rates will likely go up for the same level of income (24% is at risk as well, but a bit less pressure there for rate arbitrage generally due to the number of potential brackets below). All that said, for people who are planning to retire on the earlier side, there is a lot of planning and rate arbitrage to be done with pre-tax contributions.

I’d rather be taxed 35% on my contributions rather than be taxed 35% on my contributions + earnings. What am I missing?

No. With traditional, you defer taxes until later. But what you can do is a -roth conversion ladder- when you start making no income in early retirement. Those conversions are not taxed since you're making $0. Then you live off of the principal amount. So with traditional 401k and early retirement (and planning), you defer local taxes and can avoid income taxes later. You're not missing anything, you're simply not on the FIRE path.

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Agreed with above — very likely you’ll be in a lower bracket at retirement. I’d do traditional. I’ve done the math numerous times and traditional really makes the most sense — at least in my calculations.

What about for IRA then? Roth or traditional IRA - I’m 22. Is it the same principle as 401k? A little lost

At 105k, I’d go traditional for 401k. For IRA, you’re likely over deduction threshold, so Roth.

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