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re: 401k tax advantages - am I calculating correctly?
Posted on 3/26/23 at 7:08 pm to NBR_Exile
Posted on 3/26/23 at 7:08 pm to NBR_Exile
quote:
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
NBR, I'm not arguing math at all. Your calculations are correct. See some of my other posts regarding forced savings.
Regardless of how much salary it takes to fund Roth 401k of Traditional 401k, at the end of the day my goal is to have the max amount in a retirement plan, be it a Roth or a Traditional. I'm not looking at whether it cost me $39,600 to max out 401k Roth at $30,000 or a Traditional IRA at $20,400 to fund $30k.
I'm simply stating that hardly anyone is taking that additional $9.600 in savings and investing it somewhere. They're buying a boat or paying for the kids' college.
I used a hypothetical in another post:
A guy we all know is terrible with money but he does do one thing: he maxes out his 401k. At retirement he has nothing saved but his 401k.
If this guy has a Roth 401k, will he be better off financially in retirement if he doesn't have the burden of 20% more in taxes? Since he was a bad money manager, he wouldn't have done the math and said "oh, I'm in the 32% marginal rate, so I am going to prudently invest my tax savings.:
Again, the math for a traditional 401k makes sense for higher tax brackets. Not everybody is good at math (see exhibit A, our government).
1
Posted on 3/26/23 at 7:13 pm to NBR_Exile
quote:
. 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.
I might not be explaining what I'm thinking in my head very well.
If I'm maxing out my 401k, it will be $30k for the traditional 401k and it will be $30k for the Roth 401k. They both will have the same yearly contribution amounts. I am reading your quote as the Roth 401k contribution being less than the traditional 401k contribution.
Maybe I'm missing something.
This post was edited on 3/26/23 at 7:47 pm
Posted on 3/26/23 at 7:47 pm to furrydogs
quote:
If this guy has a Roth 401k, will he be better off financially in retirement if he doesn't have the burden of 20% more in taxes?
No he will not be better off. He will have lost the gains on the higher, initial contribution. That tax money has to come from somewhere. So less disposable income to top off to meet the same end dollar amount. So the Trad 401k person is the only one susceptible to spending money? The Roth person is just as likely to buy that boat.
Posted on 3/26/23 at 7:52 pm to furrydogs
quote:
If I'm maxing out my 401k, it will be $30k for the traditional 401k and it will be $30k for the Roth 401k. They both will have the same yearly contribution amounts. I am reading your quote as the Roth 401k contribution being less than the traditional 401k contribution.
The Trad 401k contribution comes with a 32% discount in the OP's example. So it only costs him 20,400. The Roth requires additional income to get 30k into the Roth. $9600 extra in this exercise.
Posted on 3/26/23 at 8:00 pm to NBR_Exile
quote:
No he will not be better off. He will have lost the gains on the higher, initial contribution.
Where is the higher initial contribution? This hypothetical guy is putting the same absolute dollar amount in his 401k: $30k. It doesn't matter if it is in pre-tax or Roth, it is still in the 401k.
$30k per year in a Roth 401k or pre-tax is going to grow at the same rate. The assumption is that outside of the 401k, there is no other investing being done.
Just so I'm not missing something, what do you mean by "Higher initial contribution?"
Posted on 3/26/23 at 8:10 pm to furrydogs
Maybe I didn't word it correctly. To get 30k into the Roth requires extra money that comes out of income. I'm factoring in the loss of the earning potential of that money. There is no such thing as forced savings. For the Roth investor he will have to intentionally cough extra income to reach the same outcome of the goal as the Trad investor.
Bottom line is with all things being equal they will reach the same amount of money. But the Trad offers a chance to beat the 32% initial hit.
Bottom line is with all things being equal they will reach the same amount of money. But the Trad offers a chance to beat the 32% initial hit.
This post was edited on 3/26/23 at 8:12 pm
Posted on 3/27/23 at 6:35 am to furrydogs
quote:
Got any more context besides a pat, four word response?
The chances that a single dollar comes out of that 402k and is taxed at 32% (which is what he’s saving going in), is essentially nil. Roth makes no sense at his income level.
Posted on 3/27/23 at 9:20 am to NBR_Exile
quote:
The Trad 401k contribution comes with a 32% discount in the OP's example. So it only costs him 20,400. The Roth requires additional income to get 30k into the Roth. $9600 extra in this exercise
I defintely get that. My angle is if I'm making $200k, I want to diversify my sources of income in retirement to have some tax free and some taxable. If I was this single filer, I'd probably defer $20k pre tax and then do $10k in Roth or some combination. If I want to access the principal before age 59.5, I'd have some flexibility to use that as well.
As a joint filer my marginal tax bracket stays in low 24% with effective in low teens so I've done Roth 401k last 15 years or so with plan to access before 59.5 possibly. If I would have done the pre tax 401k I probably wouldn't have invested that tax savings and the lower take home pay hasn't been a concern. For all I know they'll institute some sort of "fee" for my Roth withdrawals as they search for more income.
Posted on 3/27/23 at 9:44 am to furrydogs
quote:
I want to diversify my sources of income in retirement to have some tax free and some taxable
Other notes:
I fear they will come for the gains in the Roth. This whole conversation could be pointless.
I agree on different streams of income. I live off my taxable brokerage right now (dividends, cash and some cap gains.) I convert my Trad IRA to Roth to fill up to the 22% bracket. I've been advised to go a little higher but I am particularly tax averse. RMD's do not start for another 16 yrs for me so I have plenty of time to get as much as I can into the Roth space.
Again
Posted on 3/28/23 at 11:22 am to Im4datigers
I think in a perfect world you contribute to a 401K Roth then switch to a conventional 401K when your tax margin increases to 20+%.
The beauty of the Roth is the money is taxed going in and grows without additional taxation. The standard 401K grows faster with untaxed $ (because it isn't cut) but it is taxed coming out.
You dont want to pay 28% taxes on income and put it in a Roth IMO.
The beauty of the Roth is the money is taxed going in and grows without additional taxation. The standard 401K grows faster with untaxed $ (because it isn't cut) but it is taxed coming out.
You dont want to pay 28% taxes on income and put it in a Roth IMO.
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