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oneg8rh8r
LSU Fan
Port Ludlow, WA
Member since Dec 2003
2030 posts

401k / IRA question
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.

Member since Aug 2016
1239 posts

re: 401k / IRA question
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.
This post was edited on 5/9 at 12:38 pm

oneg8rh8r
LSU Fan
Port Ludlow, WA
Member since Dec 2003
2030 posts

re: 401k / IRA question
Has there ever been a situation where the adjusted down AGI would work out better?

I'm listening.

Member since Aug 2016
1239 posts

re: 401k / IRA question
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.

oneg8rh8r
LSU Fan
Port Ludlow, WA
Member since Dec 2003
2030 posts

re: 401k / IRA question
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.

OleVaught14
Member since Jun 2019
1387 posts

re: 401k / IRA question
What I've always been told is put money into your 401k up to the company match, and then put the rest in Roth.

Mingo Was His NameO
LSU Fan
Brooklyn
Member since Mar 2016
17478 posts

re: 401k / IRA question
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.

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whiskey over ice
Texas Fan
Member since Sep 2020
691 posts

re: 401k / IRA question
Why not max both ?

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USA
Member since 2001
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hob
LSU Fan
Member since Dec 2017
1589 posts

re: 401k / IRA question

Invest up to the employer match in a traditional 401k then contribute the rest into a Roth 401k/IRA.

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hottub
Florida State Fan
Member since Dec 2012
2288 posts

re: 401k / IRA question
No one is paying 37% of their total income.

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lynxcat
Rutgers Fan
Member since Jan 2008
21899 posts

re: 401k / IRA question
Deduction is saving on the marginal tax rate for the dollars in that bracket.

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CecilShortsHisPants
New Orleans Pelicans Fan
One Foty Fo uh uh Magnolia Screet
Member since Oct 2012
2093 posts

re: 401k / IRA question
Because there is a limit on Roth contributions with most plans.

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Rust Cohle
Baton rouge
Member since Mar 2014
1479 posts

re: 401k / IRA question
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.

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Hopeful Doc
LSU Fan
Member since Sep 2010
12648 posts

re: 401k / IRA question
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.

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Hopeful Doc
LSU Fan
Member since Sep 2010
12648 posts

re: 401k / IRA question
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.

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go ta hell ole miss
New York Yankees Fan
Member since Jan 2007
9822 posts

re: 401k / IRA question
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.
This post was edited on 5/9 at 9:45 pm

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kciDAtaE
Member since Apr 2017
9839 posts

re: 401k / IRA question
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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