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re: Basic math of Roth vs Traditional many get wrong
Posted on 5/18/26 at 1:44 pm to TorchtheFlyingTiger
Posted on 5/18/26 at 1:44 pm to TorchtheFlyingTiger
quote:
I think a rollover traditional IRA counts as a traditional IRA. Never heard of an exception for that.
It does
quote:
But as the graphic mentions (step 3 of graphic) you may be able to roll it into your 401k
Yes. But keep in mind many people roll 401(k) to IRA because 401(k) plans typically have high fees and poor choices. However if a plan has low fees and open architecture, it can work well.
0
Posted on 5/18/26 at 1:45 pm to proger
No, the rollover IRA balance doesn't matter for your annual contribution limit. It isn't a contribution just a pre existing account.
Where ir matters is the conversion from traditional to Roth. Because you have traditional rollover IRA that is pre tax it triggers "pro rata rule" and you would pay tax on the conversion (unless you roll it into your 401k first)
Where ir matters is the conversion from traditional to Roth. Because you have traditional rollover IRA that is pre tax it triggers "pro rata rule" and you would pay tax on the conversion (unless you roll it into your 401k first)
This post was edited on 5/18/26 at 1:46 pm
Posted on 5/18/26 at 1:46 pm to KWL85
quote:
Having diversity in how income is taxed is a good option for the future
The best set retirees are the ones who can pull from:
Traditional
Roth
After tax qualified rate
After tax ordinary rate
Cash
Posted on 5/18/26 at 1:50 pm to igoringa
quote:
Being marginally in a top bracket now, I just cannot rationalize to myself to do Roth at this time.
It’s hard to rationalize it above 24%
Unless…
1) you will be above 24 at retirement / your heirs will be in the 10 year period after your death
2) you are overly concerned about IRMAA
3) your heirs will also be in very high brackets
4) you will have an estate tax (including state)
Posted on 5/20/26 at 10:00 am to TorchtheFlyingTiger
quote:
quote:
The length of time that earnings can grow is a high criteria in these decisions
Again, this misconception is why I shared the video. Time is a constant in the Roth vs Traditional choice. Length of compounding doesn't change the math (assuming you have same investment duration & growth rate whether you choose to go Roth or Trad).
Eta: of course timeline of withdrawal has effect on complexities such as RMD, widow penalty, inheritance etc
Disagree. Roth gains are tax free. Having more time for gains to grow into larger amounts results in more money that is not taxed. I didn't watch the video, but this is my understanding and logic on why more time for earnings to grow is a consideration for funding a Roth.
Posted on 5/20/26 at 10:23 am to KWL85
That's the thing, given same growth period and tax rate on contributions and withdrawals it is break even. You start with a smaller net contribution in Roth after accounting for taxes up front. Of course if you selectively ignore that reality and assume equal net contribution you'd always be better off paying no tax at the end. Time in this equation is a constant. Just watch the video and perhaps you'll understand instead of disagreeing based on flawed logic and misunderstanding.
Posted on 5/20/26 at 11:32 am to TorchtheFlyingTiger
quote:
I encounter this often from the "almost always choose Roth crowd." I'm a big proponent of Roth myself but it isnt always optimal. That said, when in doubt probably go Roth.
I think you're simultaneously strawmanning and arguing with yourself here.
There are reasons to do traditional, but they are narrow cases, IMHO.
And ROTH versus traditional isn't always purely about math. It is about flexibility, uncertainty and a certain amount of hedging (it's a risk balancer on top of the scenarios where it is clearly mathematically better).
Posted on 5/20/26 at 11:57 am to Ace Midnight
I think too there are a lot that are basically using the argument, if you are able to save whatever $ amount you need to for retirement and live the lifestyle you want pre-retirement, going either route, there really is no downside witht he Roth. Obviously we can dive into the "optimal" strategy for any scenario, but end of the day nobody is going to be upset their retirement income is tax free, no matter what the rates are now vs then when their money is most exposed to tax risk . Traditional accounts bring in RMD's and some other things, while obviously not that big of a deal for most here to deal with, it is a different story for the average person who doesn't really pay that much attention to their finances or understand how things work that much. Roth keeps things very, very simple for them in retirement.
As you said though, nobody is advocating Roth is the best scenario always.
. Traditional accounts bring in RMD's and some other things, while obviously not that big of a deal for most here to deal with, it is a different story for the average person who doesn't really pay that much attention to their finances or understand how things work that much. Roth keeps things very, very simple for them in retirement. As you said though, nobody is advocating Roth is the best scenario always.
This post was edited on 5/20/26 at 12:01 pm
Posted on 5/20/26 at 12:36 pm to GoCrazyAuburn
Yet it's that "average person who doesn't really pay that much attention to their finances or understand how things work that much" that is most likely to have underfunded retirement and find themselves paying a lower tax rate in retirement. Plenty of folks are in 22-24% bracket today and not putting enough away on the road to a paltry retirement in the 10-12% bracket.
I thought the point of forums like this was to share advice/persoectives to better optimize not just repeat the same mantras and rules of thumbs to do good enough.
I thought the point of forums like this was to share advice/persoectives to better optimize not just repeat the same mantras and rules of thumbs to do good enough.
Posted on 5/20/26 at 12:44 pm to TorchtheFlyingTiger
quote:
Yet it's that "average person who doesn't really pay that much attention to their finances or understand how things work that much" that is most likely to have underfunded retirement and find themselves paying a lower tax rate in retirement. Plenty of folks are in 22-24% bracket today and not putting enough away on the road to a paltry retirement in the 10-12% bracket.
This is a completely different discussion than what is presented in your OP though. If you want to discuss savings rates, we absolutely can, but don't conflate that with what this thread has been about. The post you just responded to even qualifies the statements being made "if the person is saving enough for retirement".
quote:
I thought the point of forums like this was to share advice/persoectives to better optimize not just repeat the same mantras and rules of thumbs to do good enough.
I mean we have a three page thread discussing not only the mathematics and optimizing strategies (not to mention the other thread the spawned this response thread by you), but also other considerations that are valid to take that factor into routes that may not be a the mathematical perfect route. Not entirely sure what else you are wanting out of a forum. Seems this is more of a you issue. I think someone reading this thread would have gotten a pretty wide breath of scenarios to draw and consider when trying to form an opinion.
This post was edited on 5/20/26 at 12:47 pm
Posted on 5/20/26 at 1:00 pm to GoCrazyAuburn
My issue which spawned this thread is frustration with the over confident folks that repeatedly espouse notions such as Roth beats Traditional because of time value of money, the longer you have for growth better Roth is vs traditional (someone disagreed with me for this reason just this am and said they didnt bother watching the video), or 22% on smaller contributions beats paying 12% on withdrawals.
You cant get the nuanced optimization complexities right starting from a flawed foundation. My intent was to share a tool that helps illustrate that critical math foundation instead of debating what people think is best which most of us can agree is highly situational dependent.
You cant get the nuanced optimization complexities right starting from a flawed foundation. My intent was to share a tool that helps illustrate that critical math foundation instead of debating what people think is best which most of us can agree is highly situational dependent.
Posted on 5/20/26 at 1:03 pm to KWL85
quote:
Disagree. Roth gains are tax free. Having more time for gains to grow into larger amounts results in more money that is not taxed. I didn't watch the video, but this is my understanding and logic on why more time for earnings to grow is a consideration for funding a Roth.
The growth/outcome between the two is a wash if the taxes are the same. They will be invested in the same portfolio and grow at the same rate. One results in a larger total that gets taxed. One results in a smaller total that doesn't get taxed but they come out the same in the end. The only difference in net outcome comes from any tax differences.
EDIT: I see this was already covered earlier. sorry.
This post was edited on 5/20/26 at 1:04 pm
Posted on 5/20/26 at 3:27 pm to notsince98
quote:
The growth/outcome between the two is a wash if the taxes are the same.
Well, this is misleading. Even if taxes are the same, Roth likely wins in control, flexibility, certainty. Traditional only wins if you are above 24 now, AND don't have enough runway to outgrow the current tax hit (or some other niche, typically tax or novel situations).
It is safe enough for me to say, without doing granular math and a deep dive, that if you are 24 or below, now, Roth will likely win in the end. However, as always, YMMV.
This post was edited on 5/20/26 at 3:29 pm
Posted on 5/20/26 at 6:25 pm to lsuconnman
The Roth IRA/401k is great. But, unfortunately most people are in a lower tax bracket in their retirement years.
Posted on 5/22/26 at 9:40 am to TorchtheFlyingTiger
quote:
That's the thing, given same growth period and tax rate on contributions and withdrawals it is break even. You start with a smaller net contribution in Roth after accounting for taxes up front. Of course if you selectively ignore that reality and assume equal net contribution you'd always be better off paying no tax at the end. Time in this equation is a constant. Just watch the video and perhaps you'll understand instead of disagreeing based on flawed logic and misunderstanding.
So you are assuming different contributions and same tax rates. I wasn't assuming either. We didn't have Roth as an option thru employer, and made our decisions based on equal contributions. I get that the numbers change using your assumptions. I think Roth early on, switching to traditional once in higher income bracket is a good option for most. I do assume that the longer length of time results in higher gains that are tax free vs tax deferred. It has been a busy week and still haven't watched the video. I will eventually to see if that changes my thinking.
Posted on 5/22/26 at 9:57 am to KWL85
Assuming exact same contribution is cheating. To be accurate, you start both scenarios with an equal amount of $ available to invest. Then account for up front taxes on Roth (lower net contribution) versus 100% going into traditional but account for taxes on back end.
When you do this the growth period and rate.of return are the same constant for both scenarios and the outcome is predicated on the variable tax rate not growth period.
Many think the longer it grows the better outcome for Roth but that's just inaccurate. (until you layer in complexities such as IRMAA, RMDs etc where Roth has distinct advantages later in life not because of the growth period itself)
When you do this the growth period and rate.of return are the same constant for both scenarios and the outcome is predicated on the variable tax rate not growth period.
Many think the longer it grows the better outcome for Roth but that's just inaccurate. (until you layer in complexities such as IRMAA, RMDs etc where Roth has distinct advantages later in life not because of the growth period itself)
Posted on 5/22/26 at 10:47 am to TorchtheFlyingTiger
quote:
Assuming exact same contribution is cheating. To be accurate, you start both scenarios with an equal amount of $ available to invest. Then account for up front taxes on Roth (lower net contribution) versus 100% going into traditional but account for taxes on back end.
I agree with you. You have to account for the upfront taxes paid which decrease your total amount of $ you can invest. Now the other way to look at it is have both 401ks types invest the the same amount. However, you take the income tax savings from the trad 401k & invest that in a taxable account.
Imo that combination of trad 401k & taxable account is a better way to go (along with roth ira & hsa). Then you still have the option to do Roth conversions with the trad 401k at a low tax rate in the future to further optimize.
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