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Generally though, you should have less income in retirement overall, since you will not have a job. I suppose it depends on your eventual goals, but if you’re planning to retire and have a fairly laid back lifestyle, it should hold. Also, you can combine withdrawals from your Roth IRA and your 401k to minimize your overall tax burden. But for most people, I would anticipate a lower salary in retirement
1) Moot point not mute point
2) Not paying taxes on interest is huge. Let’s say you get paid $100, invest it, and then it grows to $1,000. You would pay income tax on $100 and capital gains on $900. The benefit of tax shelter isn’t avoiding the income tax on the $100 — you either pay that now (Roth) or later (traditional). The benefit of tax sheltering is not paying the capital gains!!
This is not a tax dodge!!!
@OP from what I was reading... there’s no limit to $5500. It can be even more than that right?
If the tax rate is exactly the same now as in retirement, and you ignore other effects like Required Minimum Distributions, then the two methods are equivalent because multiplication is commutative. Assume: P=principal, G=growth rate, T=tax rate. P*(1+G)*(1-T) = P*(1-T)*(1+G)
This also assumes P is equal in both cases. Since it takes more pre-tax income to max out a Roth, this may not be true
I sent in my deposit on the 1st. Backdoor baby!
Thanks OW1. I’ve been posting that exact formula for over a decade now. Glad to see it is catching on.
PWC3....bad logic again. I’ll have higher income in retirement than I did as a 24 year old analyst. Where you are in your career matters too. And your savings rate and expected income growth.
These comments only hold true if you make more money in retirement than you make now. If your a director paying the top income rate- it makes more sense to do a traditional IRA. The tax rate is progressive, it fluctuates with income brackets. Let’s say it’s unreasonable to expect to earn more income in retirement than as a consultant. It’s reasonable Tax rates could go up or down. And it’s reasonable that income brackets go up with inflation. At the end of the day- its normal to expect to earn less income in retirement and therefore pay less in taxes. So it depends on where your current tax bracket is.
SA1 — bad logic. See my post prior to this one.
Here’s how I would think of it: you should probably have a mix of Roth and traditional tax sheltered accounts to minimize tax risk. The proportion of that mix will vary with risk tolerance (Roth, where you pay now, can give a bit more assurance to people), your current income (if you’re in a top tax bracket then esa Roth), your savings rate (higher savings rate implies more retirement income) and your expected income growth
Isn’t this all a mute point anyway? when you’re above the income limit, you get zero benefit from traditional ira right? You can’t deduct your contributions from your taxes, and you can’t make pre-tax contributions.
It’s actually worse than a standard brokerage account, because you essentially get income taxed twice.
The only purpose would be to instantly convert it to a Roth IRA
Given current deficits, I think it’s reasonable to think tax rates may go up in the future. In any case, since future tax law changes and future income are uncertain, I think diversification is a reasonable strategy
OP — deficits can be paid in a variety of ways. Raising taxes is one potential approach.
@SM1, can you explain why my logic is bad? In reality, that $1 should grow to $8 over 30 years given a 7.2% average annual return which further enhances the benefit of a Roth. I've paid taxes on $1 and take out $7 tax free vs paying tax on be full $8 with a Trad IRA distribution.
See OW1’s post on the communicative property of multiplication, D2. If tax rates and brackets don’t change, they are exactly equal.
Since deficits and debt are at record highs and inflation at record lows, I don’t think we are going to inflate it away. And if you think we will, I hope you’re entirely invested in non-USD assets (or have negative net assets).
D2, your math failed to account for the fact that the post tax $1 you invested in Roth required more than $1 in pretax income to generate.
I’m not sure you guys read my post correctly.
To contribute to a traditional IRA when you are past the income limits (KEY POINT), your contribution will already be income taxed. When you withdraw your money, the gains will be income taxed again. So on part of your money you are income taxed twice.
Both Roth and traditional have no capital gains tax.
The situation is Completely different when you aren’t beyond the income limits... in that situation I would agree with you.
Mega backdoor Roth is again a separate topic.... it’s very different from normal backdoor since you start with 401k etc. btw can we do in-service distributions of our 401k to backdoor fund the Roth while still employed?
OW1 - Yep, fully agree with all of that.
Just didn’t understand why people were debating traditional vs Roth IRA for when you’re over the income limit.... traditional would make zero sense. Like SM1 talking about having a mix of traditional and Roth, or SA1 talking about the same, or even you. Seems like you all switched to talking about 401ks or were talking about a situation where you’re under the Roth Ira income limit.
Traditional and Roth is broader than IRA. For example, you can have traditional and Roth 401k.
Yeah obviously, but the topic of this post is about Backdoor Roth IRA strategies...
Really interested in this conversation as I continue to try figure out the best balance of 401k vs. Roth401k mix (we have both at Accenture and can mix any way we want up to the 18k limit; also no income limitations for Roth401k).
Sounds like it all comes down to speculation on future tax rates. Assuming no change from current - BIG assumption - then it's simply a function of how much you project to have in your nest egg upon retirement divided by # of years you expect to live (ignoring small growth of nest egg during retirement). Correct?
So if you have 3M when retire at 65 and expect to live 30 years you have an approximate 100k "income" per year while retired. If you make 150k now then you expect less taxes in retirement therefore allocating more towards Roth is advantageous (again - assuming same tax rates). At a high level is this a fair way to look at it or am I missing something material?
S&1, I think we are on the same page. At some point, people started claiming that Roth generally was better due to questionable logic around how growth works, and I was responding to that. But agree that’s off topic