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401k / IRA question
Posted on 5/9/21 at 11:06 am
Posted on 5/9/21 at 11:06 am
For anyone putting money into non Roth 401K / IRA, Why? I think I have done the math forwards / backwards / you name it. In what mathematical formula or application does the tax break outweigh the tax free growth in a Roth? Am I missing something?
The way I see it, even in the highest tax bracket (37%), you might get a deduction of:
Example: 523K * .37% = 193.5K in taxes. Minus the 19.5k deduction and you looking at 503.5K * .37% = 186.3K for a grand savings of ~ $7200 ONCE.
Example 2: 86K * .24% = 20.6K in taxes. Minus the 19.5k deduction and you looking at 66.5K * .24% = 15.9K for a grand savings of ~ $4600 ONCE.
A $19.5k investment growing in an account for YEARS tax free is AMAZING and the break even point, assuming 10% return; the worst case scenario is only 3.5 years.
The way I see it, even in the highest tax bracket (37%), you might get a deduction of:
Example: 523K * .37% = 193.5K in taxes. Minus the 19.5k deduction and you looking at 503.5K * .37% = 186.3K for a grand savings of ~ $7200 ONCE.
Example 2: 86K * .24% = 20.6K in taxes. Minus the 19.5k deduction and you looking at 66.5K * .24% = 15.9K for a grand savings of ~ $4600 ONCE.
A $19.5k investment growing in an account for YEARS tax free is AMAZING and the break even point, assuming 10% return; the worst case scenario is only 3.5 years.
10
Posted on 5/9/21 at 11:13 am to oneg8rh8r
After going through this same calculation, we now use the Traditional if we are trying to get under a certain AGI for a reason, and Roth otherwise.
ETA: didn’t check your math, I just think the arbitrage gain at times is not worth it as well depending on the likelihood of being in a lower bracket now versus in retirement.
ETA: didn’t check your math, I just think the arbitrage gain at times is not worth it as well depending on the likelihood of being in a lower bracket now versus in retirement.
This post was edited on 5/9/21 at 12:38 pm
Posted on 5/9/21 at 11:18 am to TigerGrad2011
Has there ever been a situation where the adjusted down AGI would work out better?
I'm listening.
I'm listening.
Posted on 5/9/21 at 11:32 am to oneg8rh8r
Was talking with my CPA and he was discussing the effects of AGI on Stimulus payments last year and other tax credits. We made a concerted effort to get as many above the line deductions as we could, which included our Traditional 401k contributions throughout the year to qualify for this.
Posted on 5/9/21 at 11:46 am to TigerGrad2011
Cool.
I don't think a lot of employer's offer a 401k Roth. Mine does. I am also trying to get all of my annual raises pushed through my 401k R matching vs my income. I don't know from a business stand point how that would affect them one way or another.
An business owners have any input to this?
What is the difference between giving an employee a 3% raise or taking that figure and increasing their 401K contributions by that amount of 401k R by that amount.
I don't think a lot of employer's offer a 401k Roth. Mine does. I am also trying to get all of my annual raises pushed through my 401k R matching vs my income. I don't know from a business stand point how that would affect them one way or another.
An business owners have any input to this?
What is the difference between giving an employee a 3% raise or taking that figure and increasing their 401K contributions by that amount of 401k R by that amount.
Posted on 5/9/21 at 11:47 am to oneg8rh8r
What I've always been told is put money into your 401k up to the company match, and then put the rest in Roth.
Posted on 5/9/21 at 11:49 am to oneg8rh8r
quote:
Example: 523K * .37% = 193.5K in taxes. Minus the 19.5k deduction and you looking at 503.5K * .37% = 186.3K for a grand savings of ~ $7200 ONCE.
That's not how taxes are calculated.
Posted on 5/9/21 at 12:42 pm to oneg8rh8r
Why not max both ?
Posted on 5/9/21 at 1:37 pm to oneg8rh8r
Invest up to the employer match in a traditional 401k then contribute the rest into a Roth 401k/IRA.
Posted on 5/9/21 at 1:40 pm to oneg8rh8r
No one is paying 37% of their total income.
Posted on 5/9/21 at 1:49 pm to oneg8rh8r
Deduction is saving on the marginal tax rate for the dollars in that bracket.
Posted on 5/9/21 at 2:03 pm to oneg8rh8r
Because there is a limit on Roth contributions with most plans.
Posted on 5/9/21 at 3:52 pm to oneg8rh8r
Bank rate calculator
Surprisingly, this calculator usually shows traditional being better. I think because it reinvests the tax savings, but that is a fair way to do it.
Also learned if you have a 401k, then when adding a IRA it’s not deductible you are likely phased out over 100k MFJ.
Surprisingly, this calculator usually shows traditional being better. I think because it reinvests the tax savings, but that is a fair way to do it.
Also learned if you have a 401k, then when adding a IRA it’s not deductible you are likely phased out over 100k MFJ.
Posted on 5/9/21 at 5:25 pm to oneg8rh8r
quote:
Has there ever been a situation where the adjusted down AGI would work out better?
I'm listening.
Public service loan forgiveness using income-based repayments would be a common example.
The lower the AGI, the lower the loan repayment equates to a bigger tax-free payoff sum at month 120.
There aren’t a ton of times you want to lower your AGI on paper, but knowing them can have a pretty dramatic impact if you are able to take advantage of them.
Posted on 5/9/21 at 5:29 pm to oneg8rh8r
quote:
What is the difference between giving an employee a 3% raise or taking that figure and increasing their 401K contributions by that amount of 401k R by that amount.
Mine generally don’t understand finances and weren’t super appreciative when we switched from a 3% match to a 4% gift. One asked for a raise less than three months later.
Posted on 5/9/21 at 9:43 pm to oneg8rh8r
Invest 18,000 per year. Rate of return 7%. Current tax rate at 25%.
Tax rate in retirement 15% (making less in retirement).
My calculation for someone doing that for 25 years has a return of $1.375 million in Roth 401k v. $1.435 million in regular 401k. What am I missing?
That’s the very first calculation I have done and it would benefit someone doing regular 401 v. Roth 401k. Presumably people are also reinvesting the tax savings, so that would be more money to invest. That’s where the benefit of regular 401k comes in.
Tax rate in retirement 15% (making less in retirement).
My calculation for someone doing that for 25 years has a return of $1.375 million in Roth 401k v. $1.435 million in regular 401k. What am I missing?
That’s the very first calculation I have done and it would benefit someone doing regular 401 v. Roth 401k. Presumably people are also reinvesting the tax savings, so that would be more money to invest. That’s where the benefit of regular 401k comes in.
This post was edited on 5/9/21 at 9:45 pm
Posted on 5/9/21 at 10:36 pm to OleVaught14
quote:
What I've always been told is put money into your 401k up to the company match
That part is always true.
quote:
and then put the rest in Roth.
Not always true
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