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You are not missing anything. The scenario you lay out will be the case for many, but not all. You just need to make some effort to assess your facts. For example if you will have a pension, that combined with SS security and RMDs may put you in a higher bracket. If you do traditional, make sure you invest the current tax savings though. If not, Roth will likely be better.
I’ve always questioned that chart… preferably, It’s really income dependent. Ie, saving for a house will come before a mega back door when you make $120k
If you are still young, a Roth makes 1000x more sense since you are getting taxed on the principal investment now but all of your future earnings from the investment will essentially be tax free. And since most of your lifetime savings will come from the magic of compounding over time (assuming young), it makes more sense to pick Roth. With a traditional, you get a tax break on the principal investment now but all your future earnings from the investment will be taxable.
Even ignoring the 1000x, saying Roth is better is wrong. Neither is better for everyone. I understand how it works very well. It boils down to taxes and not age. That is why these definitions are created in the tax code. I will give the same advice to you as you gave me. Maybe we both will learn something new.
I think most people in here (myself included) would advocate for going with a Traditional 401k and a Roth IRA. Assuming you make
more now than you will need in retirement, it’s best to reduce your current tax burden via a traditional 401k and then hedge against the possibility that you’ll need more in retirement than you currently make with a Roth IRA. Also, many of the people on this app make too much to get the Traditional IRA deduction, so there’s no point in having one (except to use as a pass-through for a Backdoor Roth).
I recommend using Traditional 401k.
You can use the Roth IRA conversion ladder to pull money from it and if you retire early and live off your Roth IRA for a few years, you should be in a lower tax bracket than when you were working (e.g., living off $30-$40k from your Roth IRA).
Watch this video for more info:
https://youtu.be/MoipP27KFG0
This was helpful in making my decision to switch to traditional 401K from ROTH 401K, thank you.
You are assuming that tax rates stay the same over time. That may not be the case. Tax rates are at historic lows currently. Who knows what they will be when you or I retire.
Chief
This. Tax rates are at historic lows and most likely will go up a lot to pay for more and more social safety nets, military, government salaries, etc.
My thinking has always been to contribute to a Roth when you're younger and not necessarily making as much. Then taper to a Traditional as you get older and your income (and tax bracket) go up. I've set up Roths for my daughters who are teenagers and making money during the summer. They have pretty much no tax liability so no benefit to a Traditional IRA.
You should definitely have retirement accounts that are both tax free and taxable at retirement. So it’s not one or the other. Generally early in your career you should go with a Roth 401k, and then switch to a traditional at some point.
Thank you, makes sense and helpful
Chief
Taxability of SS benefits and amount paid for Medicare premiums is based on taxable income so being able to draw from Roth funds allows you to minimize those. For example, current Medicare premiums range ~$170-$578 per month based on taxable income.
Meh, the government could just as easily change the law to be able to touch your Roth.
Your assumption would be correct if you believed tax rates would stay consistent for the next 40 years. But entitlement spending and our national debt is such that I think they can only go up.
I assume brackets limits will be higher, standard deduction will be higher and if you delay ss you will have a lot of income space in lower brackets for withdrawals or conversions. Not sure why you find that funny, but OK
You may find this table useful. Though it’s for an IRA, the ‘Roth vs Traditional’ comparison as far as tax savings is concerned, would also be applicable to a 401k.
https://www.troweprice.com/content/dam/iinvestor/Forms/RothIRAsMoreEffective.pdf
This is a great depiction that perfectly captures the intuition I was envisioning (though I expect Traditional is much better in later years for the UMC relative to this which is below income of many on here). Should be higher up in the replies!
Everyone's financial situation is different. At retirement you may have only 401K or a combination of many other income sources (pension, other tax-advantaged accounts, rental income etc.) Therefore it is not a given that your total income post retirement will be lesser than total income today. It might be the other way around.