401k tax advantages - am I calculating correctly?

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What am I missing?

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Nothing. The person is an idiot.

You choose. Pay income tax now or pay it later.

The whole argument centers around your retirement income tax bracket being lower, or the same, or higher at distribution (and no one has this answer because we don't write tax law).

Too much AGI to back door Roth unfortunately. Maxing out 401k, maxing out $7500 HSA. So fully taking advantage of tax advantages. Between those two and a little to 529, I’m kind of maxed out with what I need to then take home. Would love to build up and invest in a CRE deal here and there.

Unless you have a preexisting traditional IRA backdoor Roth shouldnt be an issue. There is no income limit.

I wouldnt shift to Roth 401k with your tax bracket and likelihood of lower bracket at retirement. Are you paying out of pocket for health expenses (keeping receipts for future tax free withdrawals) and fully using HSA as a long term tax advantaged account?

Next, I'd put as much away in taxable brokerage since long term gains are favorably taxed and you may even be able to optimize some withdrawals in the zero LTCG rate to fund bridge years before RMDs from traditional kick in. It's feasible to withdraw a pretty large sum from taxable brokerage with zero LTCG tax under nearly $90k of taxable income married/joint (more considering standard deduction) and of course basis isnt taxed.

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Would love to build up and invest in a CRE deal here and there.

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I was listening All-In podcast while out on a run yesterday and they were predicting a CRE crunch with falling rents due to decreased demand. Their perspective was largely California focused but hypothesis was also driven by reduced demand for CRE space due to post pandemic trends. I immediately wondered what your perspective might be in the VA market. CRE may be a good play after fully funding tax advantaged in your case given your industry insight. On otherhand,if CRE takes a dive you're already dependent on that sector for income so it might pose too much risk ifmore than small portion of your portfolio.

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I would highly recommend that a portion of your contribution go to Roth 401k.


I thought about this as well. Even putting in 4% to Roth 401k and the 10% to pretax, that still is almost $3k year in tax savings I’m giving up.

Agree with someone above, no way I’ll be in the same tax bracket in retirement that I’m in now. I won’t be pulling nearly the same income in retirement as I’m behind on my overall contributions at the moment and will be working to 100 at this point before I can retire.

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The black and white answer for Roth versus Traditional 401k is simply looing at today's tax bracket versus your retirement tax bracket. And of course we all say we'll be in a lower bracket in retirement so take tax break right now. Let's dig into that a little more beyond black and white.
-Since you are getting that 30% tax savings now, are you truly investing that savings or are you consuming it now? This tax bracket math for paying now or later implies that you are taking that 30% savings and reinvesting it. I don't know one person that does this math in real life:

[i]"Oh, I put $30k in my 401k and at a 30% marginal rate that means I will invest the $9k in savings that I received"[i] Nope, I'd argue that happens in 5% of the situations.

-Now, if I'm doing the Roth option and maxing out at $30k in my 401k, I am forcing myself to invest all of that contribution. And guess what, 25 years from now I will have all of that money and won't pay a nickel in taxes. 25 years from, now with all tax deferred money, I will have no idea what I blew than $9k in savings on.

-I see folks who are retired now, and with the bulk of their savings in tax deferred retirement accounts, it drives them nuts when they need to withdraw $50k to buy a car and in reality withdraw $70k in order to net $50k after taxes. And, if they are getting SS and some other income, they now have to worry about the ordinary income kicking them into higher Medicare premiums along with inevitable higher tax bracket.

-Also, if you aren't going to truly invest your current tax savings from your tax deferred 401k, then you technically will have to save longer to retire. By having more Roth assets, you don't have to account for the pending tax burden of your traditional 401k when you make withdrawals.

-Here's another strategy. I have Roth assets and some pretax assets from my younger days when Roth 401k wasn't available. My plan at 58 or 59 is to withdraw about 4% from my Roth which should be about $52k a year. Then, withdraw about 3% from from pre tax IRA which should be about $24k a year. I now will basically be able to withdraw my pre-tax IRA tax free since my standard deduction will wipe out all of my ordinary income. Roth withdrawals won't hit my AGI (not now anyway) so I'll be able to stay in a super low tax bracket and could also sign up for Medicaid (just kidding) but I would be eligible for almost all of the Obamcare subsidy as they don't add back Roth withdrawals in the income calculation. I'm pretty sure I can live on $76k tax free per year.

Sorry for long post, but thought it was worth getting some feedback as maybe I'm missing something big.

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At the 32% effective tax rate?

Lulz, that’s terrible advice.

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Got any more context besides a pat, four word response?

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[i]"Oh, I put $30k in my 401k and at a 30% marginal rate that means I will invest the $9k in savings that I received"[i] Nope, I'd argue that happens in 5% of the situations.

-Now, if I'm doing the Roth option and maxing out at $30k in my 401k, I am forcing myself to invest all of that contribution. And guess what, 25 years from now I will have all of that money and won't pay a nickel in taxes. 25 years from, now with all tax deferred money, I will have no idea what I blew than $9k in savings on.

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I am no math wiz so please let me know if I'm off.

Furry, the fact is the math works out the same. Where you are off is you are assuming the 30k into the Roth only costs 30k. In fact after the 32% tax hit you are only getting the growth on 20,400. It would take 39,600 of income to match the 30k in the Trad 401k.

30,000 @ 7% for 25 years is $162,823
20,400 @ 7% for 25 years is $110,720

So a delta of $52,103

So what is the tax liability assuming the tax bracket is the same at retirement?

162,823 x .32 = $52,103

To summarize the numbers work out the same with all things being equal. My stance is the unknown is the tax bracket at retirement. It could be higher, lower or the same. Therefore I will take the risk that I will find a way to lower my tax burden when I'm in retirement and my earned income will be lower.

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A question back to you: If a worker was horrible with money, and did not save or invest outside of his 401k, would it be better for that person to do a Roth 401k so that he technically had less in his take home pay to mismanage?

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Great conversation. I am far from a black and white kinda guy. I see plenty of grays which makes life so fun or harrowing depending on outcomes. What I was trying to demonstrate with the math problem was to say the result is the same. You seem to expect the traditional 401k investor to do something extra while giving the Roth investor a virtuous break. The tax deferred investor will get the benefit of the growth of his/her higher contribution and pay the same amount of tax with all things being equal. It seems to me the Roth investor is the one that would need to be more disciplined to come out ahead. Bottom line is pay now or later. In a high earner's bracket, I would pay for the hamburger later instead of today because it might be cheaper then.