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Traditional 401k vs. Roth 401k, should I be doing Roth instead?

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Great question. Your crystal ball is as good as mine, nobody knows. Thats is in part why I would not want to put it in a Roth (bird in the hand + time value of money). I’ll take a known over an unknown. The future is a murky place which could see all sorts of reform such as taxes on Roth gains in the future, perhaps at LTCG rates but all guesses are just as valid. Top marginal rate is only one piece of the tax equation. Its my best estimate that taxes are most likely to become more progressive which is a lot of the reason the t401k outperforms the Roth in that every year you have the ability to capture quite a bit of money at low to no tax rate, the power of that year over year is what tips the scales. All of this is somewhat besides the point in many ways, it is my view that the taxable brokerage account should be the vehicle from which we intend to fund retirement, anything from the 401k or IRA should be considered extra in my opinion and running the numbers backwards shows traditional to be more valuable much more frequently using tax structures of the past. Though personally I took a different approach to retirement altogether and earned FI quite a while back.

What if I told you that the top marginal tax rate reverts to the same rates in the 1950s (90%+) and that Roth does not get taxed twice? Why do you automatically assume that scenario is not part of the “unknown”? I can almost guarantee you that whatever number you are using for your bottom line calculation will end up being wrong and that there is no way to “know” which one will be better. The point is you are claiming that the traditional is better and just assuming in your scenario that everything plays out perfectly in favor of traditional and that Roth payees get screwed and taxed twice instead. My personal opinion on the matter is that if you truly want to balance out your risk you should invest in both as you, as I repeat again, do not know the future. You do not know if perhaps the top marginal tax rate when you retire is 90% for example. If you can admit that there exists a world out there where Traditional underperforms Roth I think we can come to an agreement. I will say right now that I personally think it is also possible that traditional ends up doing better than Roth. I simply do not know and neither do you. The best course of action is to hedge and contribute to both and adjust accordingly as new laws and information are created.

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Roth is better. SM advice is bad

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Actually, I recommend on having both. You never know what your tax situation will be when you retire, so better to hedge and have both a pre tax and post tax retirement plan. Every year I max out my 401K and my IRA. I then do an annual roll over of my IRA to a Roth. Also, I've rolled over prior employer 401Ks to my Roth whenever I've had the opportunity.

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A2: Roth 401k doesn’t work out when you do the math. You’re comparing Marginal Tax Rate At Contribution Vs Marginal Tax Rate At Withdrawal, your contribution rates are always going to be higher (and likely substantially so). If you spend the same amount on t401k + invest the tax savings in a normal brokerage account you come out MUCH further ahead in the long run. Not to mention it gives you the benefit of a more rapid wealth accumulation offering greater early retirement options. Investing more money for a longer duration will always win.

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Disagree- I'd go with Roth as tax rates are historically low and must rise in the future to pay off the deficit. Above 90ish is when it starts to make more sense to go traditional

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SM1 — just to be clear, you understand that multiply A*B*C is equal to A*C*B, right? That’s the only difference in Roth and regular 401k. Principal contributed = A. 1-tax rate = B. And (1+interest rate)^time it compounds = C.

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So it’s just a question of when will your marginal tax rates be lower. And also keep in mind Roth has HIGHER effective limits, because contribution limits are same, but Roth is after tax contribution not pre. Generally I agree with posted who said have a mix of both. I back door into Roth and contribute normally into regular. Gives me like 60/40 mix

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McK1: because in earning years you are earning for all of your expenses and all of your savings, in withdrawal years you only need to pull your expenses. Additionally, withdrawal strategies can allow you to side-step most, if not all, of your tax burden. Where as during the accumulation phase income tax will be unavoidable so long as you’re earning any sort of W2 income. To look at it another way, t401k allows you to defer W2 income to a point where your marginal rate is lower or structured in such a way as to not have a tax obligation.

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Sounds like MCK is used to everyone telling him he's right all the time and is butthurt that someone is challenging him. If you're right, you don't need to go around calling everyone dense and slow.

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I’ve laid out the numbers, you run them and prove me wrong. Both traditional and roth investments cost OP EXACTLY THE SAME amount. He/she spent exactly as much on both. I would hardly consider 150k in the first year and $353k in 2018 dollars in the final year, of take home money ‘meager’. Furthermore, I actually modeled MORE spending in retirement than income during peak earning years. Year one retirement is 150k spending, age 65 earning was $142k. You are correct in that low earning years that Roth has the advantage, but OP has already surpassed that threshold.

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Probably not. Unless you are making very little (under $50k), it is best to max your traditional 401k and invest the extra you would have paid in those taxes into a Roth IRA. If you have maxed that then invest in your brokerage account.

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I maxed out my Roth 401k till about $150k then switched to traditional. Haven’t done the analysis on whether tax savings from traditional would’ve grown faster... but it’s possible. SM1 may be right but I just max everything lol

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You know that expenses vary, right? Like you might spend more when 55 after a long successful career than when 22 and fresh out of school not even making 6 figures? Have you considered that?

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And what are these withdrawal strategies? Sounds vague and smells like BS. I worked in wealth management before business school and while you can play with mix or Roth and regular withdrawals, if all your money is in regular as you say...not sure what your withdraw strategy is that allows you to shelter income

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McK1: Roth actually has a LOWER effective limit as you are able to invest more with a traditional by applying the tax savings to a taxable brokerage account for the same outlay as the investment into a Roth. In the OPs example here, he would be able to max out his 401k and add an additional $2200 into a taxable brokerage account for the same amount of money he would spend fully funding a Roth 401k.

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McK1: these are common and well documented strategies any FA would advise you on. Read up on Roth laddering, utilizing a Bond tent, and using LTCG to fund retirement. Lots of great reading on this in the FIRE community.

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You really think 401k is taxed as capital gains not income? I’m clearly being trolled

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You have 10K. Option 1: pay income tax now, invest, compound, withdraw tax free. Option 2: invest it now, compound, pay income tax when you withdraw. Assuming tax rate is the same and investment is the same, which is better?

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Please go read up on Roth laddering. It allows you to side-step paying taxes on your 401k. It will allow you to roll over $38k annually from your 401k (married filing joint) with $3k tax burden, then you use the available $77,200 of LTCG gains at 0% to live out of a taxable brokerage and 401k account for $115k annual cash with a tax burden of ~$3k. This is FIRE 101.

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I don’t care to follow the logic, but both sides kept it fairly cordial except for McK dropping mck twice. I for one at least plan on researching this magical loophole SM1 is talking about to see if there’s any validity. It’s a bit ironic that MCK1 says SM1 wasn’t willing to debate, but didn’t really acknowledge what SM1 was saying either.

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McK, I’m sorry but you’re the one not listening. Go way up to the top and do the math as I said early on. I completely understand what you are saying and on the surface Roth sounds appealing but there simply are more optimum strategies to retirement planning. 401k shouldn’t be the only tool you use and when a t401k is used in conjunction with other tools it has an advantage over the Roth.

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