re: Switch to 100% post tax retirement contributions into a Roth at midpoint of career?

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He’s arguing that doing it pretax, you get an instant 15-35% return on savings on taxes. It’s dumb.

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He does have a point, I think. It is not an absolute decision maker but I think I see what he is getting at.

Lets do an example and assume a marginal tax rate of 25%.

We have $5k of our salary to invest in either traditional or roth and we currently pay a 20% effective tax rate and will maintain income level during retirement.

Traditional
If we do traditional, we put in the full $5k w/out paying taxes. When we pull out the money during retirement, we pay income taxes on the distribution. The tax applied to this will not be 25% marginal tax since it is subject to the effective tax rate and not just the marginal tax rate. This is 20% instead of 25%. Just saved 5% in taxes without considering the reduced tax burden from putting it into a traditional at the start. So the savings is guaranteed to be >5%.

Roth
If we do Roth, we end up putting in $3,750 after marginal tax rate. You are forced to pay 25% no matter what and you do not reduce your current tax burden either.

This example only applies to people who are well into the 25% tax bracket even after the standard deduction ($12/24k). The numbers will clearly change as the effective tax rate varies by income levels.

This is intriguing. I'll have to sit down and look at this closer for my situation.


I would never use this information to say ignore Roths. I would personally always put significant amounts into a Roth so I could access the invested money in a retirement account before the retirement age.

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If we do Roth, we end up putting in $3,750 after marginal tax rate.

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I would put the $5000 in with your example.

And your income tax rate after retirement is 0% while you withdraw from the Roth. Plus you can use Roth distributions to lower you tax rates on pre-tax disbursements, capital gains, and social security.

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It's should I put $10k into a trad 401k or $7500-8000 into a Roth.

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I don’t follow this statement?

My plan would be to put the same percentage of my salary into a Roth as I would pre-tax 401k, understanding that the additonal amount for taxes will make the total amount greater.

But the later Roth distributions would reduce the taxes on my pretax funds I think? In other words the Roth could get that 20% down even lower. And eliminate capital gains and social security taxes up to a certain point.

At least that is what my finance guy was telling me. I am still wrapping my head around all of this and I appreciate your comments.

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Using his example of being able to invest 20% more, I did 10000 per year in Roth vs 12000 in traditional 401k. Both grew at 8% for 35 years.

10000 grew to 1,871,021 tax free
12000 grew to 2,245,226 taxable with 493,950 due in taxes (22%)

Which one do you want?

He is not wrong that there are times that traditional makes more sense than a Roth. He is 100% wrong that it should always be the first option over a Roth.

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First, the bolded part is not what he said. It wasn't an absolute claim. He was saying it in reference to people who make well into the 25% tax bracket because he assumes that most on this board will fall there and not below there.

Second, I think he was saying 25% more as that is likely the marginal rate for many.

The initial cost for that $10k was actually $13,333

So to have the same starting point you'd have to invest $13,333 instead of $12k and is now quite a bit more money than the Roth account when it comes to take home.

Again, this is a limited application example. It isn't blanket for everyone everywhere.

My man. Need more of your posts here to educate. Showing out some fools. .

Good to see you my man. Been a while. Got burnt out on this world lol. Nice to get back into.

This guy’s isn’t a fool though, and I don’t mean it to come off that way. He isn’t wrong in some instances. He is just grossly oversimplifying something to the point it makes it wrong.

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This is just ignorant. A higher $ amount in a retirement account doesn’t make it better, depending on tax liability.

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Ok sure. So are you going to argue a lower amount of money is better, depending on tax liability?

You have 3 options basically:
1.) Roth is better
2.) Roth is worse
3.) Roth is the same

You are wrong 2/3s of the time. Because if they are the same tax wise, who would rather 20% less money? Not me.

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So are you going to argue a lower amount of money is better, depending on tax liability?

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I’m not arguing anything. $990,000 tax free is better than $1,000,000 taxable every day of the week. So as I said, claiming that a higher $ amount in your retirement account is always the best is plain ignorance.

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You have 3 options basically:
1.) Roth is better
2.) Roth is worse
3.) Roth is the same

You are wrong 2/3s of the time. Because if they are the same tax wise, who would rather 20% less money? Not me.

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Huh? I’m still confused where you are getting the 20% number from, but whatever. How am I wrong 2/3 of the time if there is one correct answer depending on the individual situation and their tax liability? I’m literally arguing it depends on the situation.