traditional or roth 401k?

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inarodgersitrust
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traditional or roth 401k?

Post by inarodgersitrust »

Hello, I'm dumb as a box of rocks when it comes to these things, so I could use some advice from people regarding my situation.

Is it better for me to have a traditional or roth 401k?

I'm 34 years old, make around $60k per year, and contribute 25% to a roth 401k.

I expect to make around the same salary until I decide to retire.

Any input is appreciated.

Edit- I'm married filing jointly, and in the 22% bracket. I also have an IRA that I contribute the full $6k to yearly. Between my roth 401k and IRA, I have about $140k saved already.
Last edited by inarodgersitrust on Sun Apr 18, 2021 11:41 am, edited 2 times in total.
chrisdds98
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Re: traditional or roth 401k?

Post by chrisdds98 »

if tax rates stay the same you should do traditional. hard to predict the future though.
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Re: traditional or roth 401k?

Post by chrisdds98 »

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Re: traditional or roth 401k?

Post by KlangFool »

OP,

Max up your Trad 401K and put the tax savings into Roth IRA. You get the best of both worlds: tax-deferred account plus Roth IRA.

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02nz
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Re: traditional or roth 401k?

Post by 02nz »

If you are a single filer, contributing only to a Roth 401k is probably a mistake, esp. if you do not have a pension. That's because you're "locking in" tax rates that are as high as 22% federal (although that only applies to a portion of your income). I would probably contribute at least enough to traditional 401k to get out of the 22% bracket, below (at 12%) Roth makes sense.

You'll need to spend some time with your pay stub, tax brackets, and standard deduction to understand what's taxable income and what's not, but that will be time VERY well spent.
Last edited by 02nz on Sun Apr 18, 2021 12:53 pm, edited 1 time in total.
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ruralavalon
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Re: traditional or roth 401k?

Post by ruralavalon »

Welcome to the forum :).

You contribution rate of 25% is very good in my opinion. Maintaining a high contribution rate is the most important investing decision you can make.


inarodgersitrust wrote: Sun Apr 18, 2021 8:08 am Hello, I'm dumb as a box of rocks when it comes to these things, so I could use some advice from people regarding my situation.

Is it better for me to have a traditional or roth 401k?

I'm 34 years old, make around $60k per year, and contribute 25% to a roth 401k.

I expect to make around the same salary until I decide to retire.

Any input is appreciated
What is your tax filing status? What is your current tax bracket, both federal and state? Will you be eligible for both a significant pension and Social Security benefits? About how much do you currently have in traditional tax-deferred accounts?

Do you have any other investing accounts, like an IRA?

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

For most people traditional tax-deductible 401k contributions are likely to be better.
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Re: traditional or roth 401k?

Post by water2357 »

You need to consider what your "effective marginal tax rate" is now vs what you think your "effective marginal tax rate" will be at retirement. Note that there are additional "taxes" that can kick in after retirement that will cause your "effective marginal tax rate" to potentially be much higher than the federal income tax marginal rates listed for 2021.

IRMAA is one of these additional retirement "taxes". If your MAGI is above the IRMAA thresholds by $1, you must pay various stages of higher Medicare premiums amounting to potentially thousands of additional dollars in "tax" per year.

The amount of your Social Security that will be taxable is also dependent on a version of MAGI, so as your modified adjusted gross income increases you will be required to pay federal income tax on more of your Social Security.

RMDs on a traditional IRA will up your income at age 72 and thus up your marginal tax rate.

Distributions from Savings Bonds that you haven't paid tax on that mature after retirement will up your marginal tax rates.

And there are other "taxes" that may cause your retirement "effective marginal income tax rate" to actually be higher than your pre-retirement "effective marginal income tax rate"

Bottom line is don't count on your retirement "effective marginal tax rate" to be lower than what it is now. And if you have any reason to believe that your "effective marginal tax rate" will be higher in retirement, you may want to lean more heavily to a ROTH. There are plenty of tax gotchas in retirement.
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Re: traditional or roth 401k?

Post by stan1 »

Personally I would be perfectly fine with doing 50% Roth 401K and 50% Traditional 401K contributions in the situation you describe, although I'd also look at what your spouse is doing with her 401K contributions and income.

Does your state also have an income tax?
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inarodgersitrust
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Re: traditional or roth 401k?

Post by inarodgersitrust »

stan1 wrote: Sun Apr 18, 2021 1:06 pm Personally I would be perfectly fine with doing 50% Roth 401K and 50% Traditional 401K contributions in the situation you describe, although I'd also look at what your spouse is doing with her 401K contributions and income.

Does your state also have an income tax?
Yes it does (WI)

I think my wife contributes in the 10-15% range to roth.
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inarodgersitrust
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Re: traditional or roth 401k?

Post by inarodgersitrust »

water2357 wrote: Sun Apr 18, 2021 12:43 pm You need to consider what your "effective marginal tax rate" is now vs what you think your "effective marginal tax rate" will be at retirement. Note that there are additional "taxes" that can kick in after retirement that will cause your "effective marginal tax rate" to potentially be much higher than the federal income tax marginal rates listed for 2021.

IRMAA is one of these additional retirement "taxes". If your MAGI is above the IRMAA thresholds by $1, you must pay various stages of higher Medicare premiums amounting to potentially thousands of additional dollars in "tax" per year.

The amount of your Social Security that will be taxable is also dependent on a version of MAGI, so as your modified adjusted gross income increases you will be required to pay federal income tax on more of your Social Security.

RMDs on a traditional IRA will up your income at age 72 and thus up your marginal tax rate.

Distributions from Savings Bonds that you haven't paid tax on that mature after retirement will up your marginal tax rates.

And there are other "taxes" that may cause your retirement "effective marginal income tax rate" to actually be higher than your pre-retirement "effective marginal income tax rate"

Bottom line is don't count on your retirement "effective marginal tax rate" to be lower than what it is now. And if you have any reason to believe that your "effective marginal tax rate" will be higher in retirement, you may want to lean more heavily to a ROTH. There are plenty of tax gotchas in retirement.
I appreciate the in-depth and detailed response, but I respectfully have no idea what any of that means lol
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Re: traditional or roth 401k?

Post by willthrill81 »

inarodgersitrust wrote: Sun Apr 18, 2021 1:47 pm
water2357 wrote: Sun Apr 18, 2021 12:43 pm You need to consider what your "effective marginal tax rate" is now vs what you think your "effective marginal tax rate" will be at retirement. Note that there are additional "taxes" that can kick in after retirement that will cause your "effective marginal tax rate" to potentially be much higher than the federal income tax marginal rates listed for 2021.

IRMAA is one of these additional retirement "taxes". If your MAGI is above the IRMAA thresholds by $1, you must pay various stages of higher Medicare premiums amounting to potentially thousands of additional dollars in "tax" per year.

The amount of your Social Security that will be taxable is also dependent on a version of MAGI, so as your modified adjusted gross income increases you will be required to pay federal income tax on more of your Social Security.

RMDs on a traditional IRA will up your income at age 72 and thus up your marginal tax rate.

Distributions from Savings Bonds that you haven't paid tax on that mature after retirement will up your marginal tax rates.

And there are other "taxes" that may cause your retirement "effective marginal income tax rate" to actually be higher than your pre-retirement "effective marginal income tax rate"

Bottom line is don't count on your retirement "effective marginal tax rate" to be lower than what it is now. And if you have any reason to believe that your "effective marginal tax rate" will be higher in retirement, you may want to lean more heavily to a ROTH. There are plenty of tax gotchas in retirement.
I appreciate the in-depth and detailed response, but I respectfully have no idea what any of that means lol
Your marginal tax rate is the percentage you would have to pay in taxes on one additional dollar of income.

If your marginal tax rate will be lower in retirement than it is now, which is the case for most people, then the traditional 401(k) is likely the better choice for you. If your marginal tax rate will be equal or higher in retirement than it is now, then the Roth 401(k) is likely the better choice.

For instance, if you're in the 22% bracket now and believe that you will be in the 12% bracket in retirement, then a traditional 401(k) will result in greater after-tax wealth.

The trouble with this is that it can be difficult to predict with accuracy what your effective marginal tax rate in retirement will be, due to the weird taxation of SS benefits, IRMAA premiums, etc., which is what water2357 was trying to point out.

If you're far out from retirement and don't expect much non-portfolio income (e.g., real estate income, pension), it's almost certain that going with the traditional 401(k) is the better choice for you. If you get to the point that you've saved over a million in the traditional 401(k), you might want to revisit this issue then.
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Re: traditional or roth 401k?

Post by FiveK »

inarodgersitrust wrote: Sun Apr 18, 2021 1:47 pm
water2357 wrote: Sun Apr 18, 2021 12:43 pm You need to consider what your "effective marginal tax rate" is now vs what you think your "effective marginal tax rate" will be at retirement. ...
I appreciate the in-depth and detailed response, but I respectfully have no idea what any of that means lol
ETA: I see willthrill81 also answered similarly. At least you are getting some consistent replies. :)

See the wiki article chrisdds98 suggested: Traditional versus Roth - Bogleheads.

Although some use the terms "effective marginal" or "marginal effective" or "incremental" or "cumulative", etc., the term marginal tax rate simply means (change in tax)/(change in income). E.g., if you contribute $1000 to a traditional 401k and your federal tax becomes $220 less than it would have been without that contribution, the federal marginal tax rate on that contribution is $220/$1000 or 22%.

It's easy enough to calculate your current marginal tax rate for traditional 401k contributions. You could do so with whatever tax software you use now, by changing the W-2 box 1 amount and seeing how much your tax changes, then doing the division as above, and repeating as many times as desired. Or a tool such as the Personal finance toolbox (if you can use Excel) can do this for you all at once.

Where it gets more difficult is predicting the future marginal tax rate. In the extreme, however, if you will have no pension, won't have started social security, and will have made no contributions to traditional accounts, that rate will probably be 0%. Tax-free retirement! Woo-hoo! Except, that would mean you should have been making traditional contributions instead of paying the tax to make Roth contributions....

If you go through the exercise of Estimating your future marginal tax rate, what do you get and what does that suggest to you about what you should do now?
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Re: traditional or roth 401k?

Post by ruralavalon »

inarodgersitrust wrote: Sun Apr 18, 2021 1:46 pm
stan1 wrote: Sun Apr 18, 2021 1:06 pm Personally I would be perfectly fine with doing 50% Roth 401K and 50% Traditional 401K contributions in the situation you describe, although I'd also look at what your spouse is doing with her 401K contributions and income.

Does your state also have an income tax?
Yes it does (WI)

I think my wife contributes in the 10-15% range to roth.
For purposes of the traditional versus Roth decision you need to know what your wife is doing in her accounts, how much in total is in traditional tax-deferred accounts, the level of contributions, and your ages.

If married filing jointly, then as far as the IRS is concerned you are a unit for tax purposes.

You will get better ideas if you post all information on both of you, like this: Asking Portfolio Questions. Everyone offering ideas is operating with only part of the necessary information.

You can simply add all this to your original post using the edit button.
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Re: traditional or roth 401k?

Post by DoubleComma »

Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement. In our case we are on the 35% bracket, but I don’t think I’ll ever need all the money we are projecting to have saved before retirement. We don’t count on it, but it very likely we will inherit from both DW and My families. So we want to have money I don’t have to touch and can pass to my kids with out creating a tax liability for them, or have access to cash that won’t create an additional liability to us n retirement.

So tax rates matter, but think about the bigger picture in your personal financial world when making these choices.

Also, it’s very unrealistic your income will remain flat for 30 years.
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Re: traditional or roth 401k?

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DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement. In our case we are on the 35% bracket, but I don’t think I’ll ever need all the money we are projecting to have saved before retirement. We don’t count on it, but it very likely we will inherit from both DW and My families. So we want to have money I don’t have to touch and can pass to my kids with out creating a tax liability for them, or have access to cash that won’t create an additional liability to us n retirement.
Bequeathing Roth accounts to your children doesn't necessarily mean that they will have greater after-tax wealth. And the latter situation you describe involving cash doesn't mean that Roth is the best way to get there either.
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Re: traditional or roth 401k?

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DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement.
Correct. For a full analysis, it would be tax rates on contributions (or conversions) now vs. tax rates on withdrawals later. If you won't be doing all the withdrawals, then you would need (if you care) to estimate also the tax rates your heirs would pay.
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Re: traditional or roth 401k?

Post by DoubleComma »

FiveK wrote: Sun Apr 18, 2021 3:33 pm
DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement.
Correct. For a full analysis, it would be tax rates on contributions (or conversions) now vs. tax rates on withdrawals later. If you won't be doing all the withdrawals, then you would need (if you care) to estimate also the tax rates your heirs would pay.
Maybe I’m wrong and could use some education, but I believe I can pass a ROTH account as an inheritance and they will receive it 100% tax free. Depending on who I leave it to, they may or may not have RMD, but either way it’s tax free.

My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
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Re: traditional or roth 401k?

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DoubleComma wrote: Sun Apr 18, 2021 8:48 pm
FiveK wrote: Sun Apr 18, 2021 3:33 pm
DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement.
Correct. For a full analysis, it would be tax rates on contributions (or conversions) now vs. tax rates on withdrawals later. If you won't be doing all the withdrawals, then you would need (if you care) to estimate also the tax rates your heirs would pay.
Maybe I’m wrong and could use some education, but I believe I can pass a ROTH account as an inheritance and they will receive it 100% tax free. Depending on who I leave it to, they may or may not have RMD, but either way it’s tax free.

My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
Yes, Roth (not an acronym but a former legislator's last name) accounts pass on to heirs tax-free, but that requires that you pay taxes on Roth contributions. If your heirs' marginal tax rate at the time of the inheritance or within the 10 year window that they have to liquidate the account after inheriting it is lower than your marginal tax rate at the time you contribute to the account, a tax-deferred account will result in greater after-tax wealth for them.
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Re: traditional or roth 401k?

Post by DoubleComma »

willthrill81 wrote: Sun Apr 18, 2021 3:21 pm
DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement. In our case we are on the 35% bracket, but I don’t think I’ll ever need all the money we are projecting to have saved before retirement. We don’t count on it, but it very likely we will inherit from both DW and My families. So we want to have money I don’t have to touch and can pass to my kids with out creating a tax liability for them, or have access to cash that won’t create an additional liability to us n retirement.
Bequeathing Roth accounts to your children doesn't necessarily mean that they will have greater after-tax wealth. And the latter situation you describe involving cash doesn't mean that Roth is the best way to get there either.
I’m not following.

If I left someone an amount of money that didn’t create a tax liability why would that not mean they have a greater after tax wealth? Leaving a ROTH account for my heirs would do that, wouldn’t it?

Secondly, is there another way to save and have access to that cash tax free in retirement other than a Roth? I guess maybe a whole life policy, but that’s something I don’t see the cost/benefit value of.

Let’s say I want $100k to buy a boat in retirement. Who do I get that $100k without having to take more than a $100 from a taxable or traditional account I order to cover the taxes on the $100?
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Re: traditional or roth 401k?

Post by DoubleComma »

willthrill81 wrote: Sun Apr 18, 2021 8:51 pm
DoubleComma wrote: Sun Apr 18, 2021 8:48 pm
FiveK wrote: Sun Apr 18, 2021 3:33 pm
DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement.
Correct. For a full analysis, it would be tax rates on contributions (or conversions) now vs. tax rates on withdrawals later. If you won't be doing all the withdrawals, then you would need (if you care) to estimate also the tax rates your heirs would pay.
Maybe I’m wrong and could use some education, but I believe I can pass a ROTH account as an inheritance and they will receive it 100% tax free. Depending on who I leave it to, they may or may not have RMD, but either way it’s tax free.

My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
Yes, Roth (not an acronym but a former legislator's last name) accounts pass on to heirs tax-free, but that requires that you pay taxes on Roth contributions. If your heirs' marginal tax rate at the time of the inheritance or within the 10 year window that they have to liquidate the account after inheriting it is lower than your marginal tax rate at the time you contribute to the account, a tax-deferred account will result in greater after-tax wealth for them.
Thank for the correction on Roth vs ROTH.

In your analysis are you assuming the traditional account that is passed would be greater in value than a Roth account? If so maybe I see your point.

In my simple mind if I leave $500k Roth vs $500k traditional, the Roth would definitely create more after tax wealth.

I guess it the scope of all things this is a real first world problem. I’m currently passing up on tax deferral of $10k @ 35% bracket (much smaller actual rate) so its potentially a $3500 gamble paying taxes today will be worth it. I’m Ok with that gamble, if I’m wrong I hope it’s the biggest financial mistake I make.
Last edited by DoubleComma on Sun Apr 18, 2021 9:05 pm, edited 1 time in total.
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Re: traditional or roth 401k?

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DoubleComma wrote: Sun Apr 18, 2021 8:48 pm My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
Put yourself in your FIL's place: if he had wanted to provide your DW with the most spendable amount after tax, he should have compared the tax rate for him to convert trad to Roth, vs. the tax rate for DW to withdraw from the inherited tIRA.

Similarly, if you won't be spending all your money and want to provide your heirs with the most spendable amount after tax, you would compare your tax rates on the amounts you won't spend, vs. the tax rate for your heirs to withdraw from the inherited IRA.

Personally, worrying far more about one's own situation than one's heirs' situations seems reasonable, but if one wants to follow the analysis all the way to the end, the heirs must be considered. Does that make sense?
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Re: traditional or roth 401k?

Post by willthrill81 »

DoubleComma wrote: Sun Apr 18, 2021 8:56 pm
willthrill81 wrote: Sun Apr 18, 2021 3:21 pm
DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement. In our case we are on the 35% bracket, but I don’t think I’ll ever need all the money we are projecting to have saved before retirement. We don’t count on it, but it very likely we will inherit from both DW and My families. So we want to have money I don’t have to touch and can pass to my kids with out creating a tax liability for them, or have access to cash that won’t create an additional liability to us n retirement.
Bequeathing Roth accounts to your children doesn't necessarily mean that they will have greater after-tax wealth. And the latter situation you describe involving cash doesn't mean that Roth is the best way to get there either.
I’m not following.

If I left someone an amount of money that didn’t create a tax liability why would that not mean they have a greater after tax wealth? Leaving a ROTH account for my heirs would do that, wouldn’t it?
Again, you have to compare your marginal tax rate at the time you contribute to the account to your heirs' marginal tax rate at the time they withdraw the funds. If your marginal tax rate at the time you contribute is higher than your heirs' marginal tax rate at the time they withdraw the funds, then tax-deferred contributions will come out ahead. Only if the opposite is true will Roth result in more after-tax wealth for your heirs. For instance, it's better for your heirs to pay 12% than for you to pay 22%.
DoubleComma wrote: Sun Apr 18, 2021 8:56 pm Secondly, is there another way to save and have access to that cash tax free in retirement other than a Roth? I guess maybe a whole life policy, but that’s something I don’t see the cost/benefit value of.

Let’s say I want $100k to buy a boat in retirement. Who do I get that $100k without having to take more than a $100 from a taxable or traditional account I order to cover the taxes on the $100?
Why do you need cash tax-free in retirement? Similar to the above situation, if your marginal tax rate at the time you withdraw the funds is less than your marginal tax rate at the time of the contribution, tax-deferred contributions will result in greater after-tax wealth.
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Re: traditional or roth 401k?

Post by willthrill81 »

DoubleComma wrote: Sun Apr 18, 2021 9:02 pm
willthrill81 wrote: Sun Apr 18, 2021 8:51 pm
DoubleComma wrote: Sun Apr 18, 2021 8:48 pm
FiveK wrote: Sun Apr 18, 2021 3:33 pm
DoubleComma wrote: Sun Apr 18, 2021 3:16 pm Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement.
Correct. For a full analysis, it would be tax rates on contributions (or conversions) now vs. tax rates on withdrawals later. If you won't be doing all the withdrawals, then you would need (if you care) to estimate also the tax rates your heirs would pay.
Maybe I’m wrong and could use some education, but I believe I can pass a ROTH account as an inheritance and they will receive it 100% tax free. Depending on who I leave it to, they may or may not have RMD, but either way it’s tax free.

My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
Yes, Roth (not an acronym but a former legislator's last name) accounts pass on to heirs tax-free, but that requires that you pay taxes on Roth contributions. If your heirs' marginal tax rate at the time of the inheritance or within the 10 year window that they have to liquidate the account after inheriting it is lower than your marginal tax rate at the time you contribute to the account, a tax-deferred account will result in greater after-tax wealth for them.
Thank for the correction on Roth vs ROTH.

In your analysis are you assuming the traditional account that is passed would be greater in value than a Roth account? If so maybe I see your point.

In my simple mind if I leave $500k Roth vs $500k traditional, the Roth would definitely create more after tax wealth.

I guess it the scope of all things this is a real first world problem. I’m currently passing up on tax deferral of $10k @ 35% bracket (much smaller actual rate) so its potentially a $3500 gamble paying taxes today will be worth it. I’m Ok with that gamble, if I’m wrong I hope it’s the biggest financial mistake I make.
Your comparison is flawed because you wouldn't have equal amounts in Roth or traditional because you have to pay taxes on Roth contributions, whereas you don't with traditional. If you're in the 35% bracket, I can virtually guarantee you that tax-deferred contributions now will result in greater after-tax wealth for both you and your heirs. Reaching the 35% bracket in retirement is very difficult.
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Re: traditional or roth 401k?

Post by DoubleComma »

FiveK wrote: Sun Apr 18, 2021 9:04 pm
DoubleComma wrote: Sun Apr 18, 2021 8:48 pm My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
Put yourself in your FIL's place: if he had wanted to provide your DW with the most spendable amount after tax, he should have compared the tax rate for him to convert trad to Roth, vs. the tax rate for DW to withdraw from the inherited tIRA.

Similarly, if you won't be spending all your money and want to provide your heirs with the most spendable amount after tax, you would compare your tax rates on the amounts you won't spend, vs. the tax rate for your heirs to withdraw from the inherited IRA.

Personally, worrying far more about one's own situation than one's heirs' situations seems reasonable, but if one wants to follow the analysis all the way to the end, the heirs must be considered. Does that make sense?
Thank you.

Yes, it makes sense, however it’s far more than I want to consider. I see my parents getting killed by taxes in retirement because, quite honestly they saved to much and my mom has a seizable pension. So the first thought is how do I prevent that myself, Roth is part of the answer even as I’m in a high tax bracket today. Secondly, my parents plan is to leave their estate to my brother and I, which could change so I’m not counting on it, but if it does come it will exacerbate my potential tax liability on retirement.

As far as trying to understand ones heirs tax rate, I see the point, but it’s nearly impossible as my oldest child was still in elementary school when I started using a Roth 401k personally. I sure hope all of my kids exceed my wife and my financial accomplishments...buts that is hard to tell looking at a 10 year old.
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Re: traditional or roth 401k?

Post by FiveK »

willthrill81 wrote: Sun Apr 18, 2021 9:10 pm
DoubleComma wrote: Sun Apr 18, 2021 9:02 pm In my simple mind if I leave $500k Roth vs $500k traditional, the Roth would definitely create more after tax wealth.
Your comparison is flawed because you wouldn't have equal amounts in Roth or traditional because you have to pay taxes on Roth contributions, whereas you don't with traditional. If you're in the 35% bracket, I can virtually guarantee you that tax-deferred contributions now will result in greater after-tax wealth for both you and your heirs. Reaching the 35% bracket in retirement is very difficult.
While I agree with willthrill81 from a probability perspective, the ability to "put more into" a Roth account does benefit Very high earners. See that wiki section (and the rest of that wiki) for reasons. Doesn't mean Roth will or will not be better - that still needs to be estimated on a case by case basis.
DoubleComma
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Re: traditional or roth 401k?

Post by DoubleComma »

willthrill81 wrote: Sun Apr 18, 2021 9:10 pm
DoubleComma wrote: Sun Apr 18, 2021 9:02 pm
willthrill81 wrote: Sun Apr 18, 2021 8:51 pm
DoubleComma wrote: Sun Apr 18, 2021 8:48 pm
FiveK wrote: Sun Apr 18, 2021 3:33 pm Correct. For a full analysis, it would be tax rates on contributions (or conversions) now vs. tax rates on withdrawals later. If you won't be doing all the withdrawals, then you would need (if you care) to estimate also the tax rates your heirs would pay.
Maybe I’m wrong and could use some education, but I believe I can pass a ROTH account as an inheritance and they will receive it 100% tax free. Depending on who I leave it to, they may or may not have RMD, but either way it’s tax free.

My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
Yes, Roth (not an acronym but a former legislator's last name) accounts pass on to heirs tax-free, but that requires that you pay taxes on Roth contributions. If your heirs' marginal tax rate at the time of the inheritance or within the 10 year window that they have to liquidate the account after inheriting it is lower than your marginal tax rate at the time you contribute to the account, a tax-deferred account will result in greater after-tax wealth for them.
Thank for the correction on Roth vs ROTH.

In your analysis are you assuming the traditional account that is passed would be greater in value than a Roth account? If so maybe I see your point.

In my simple mind if I leave $500k Roth vs $500k traditional, the Roth would definitely create more after tax wealth.

I guess it the scope of all things this is a real first world problem. I’m currently passing up on tax deferral of $10k @ 35% bracket (much smaller actual rate) so its potentially a $3500 gamble paying taxes today will be worth it. I’m Ok with that gamble, if I’m wrong I hope it’s the biggest financial mistake I make.
Your comparison is flawed because you wouldn't have equal amounts in Roth or traditional because you have to pay taxes on Roth contributions, whereas you don't with traditional. If you're in the 35% bracket, I can virtually guarantee you that tax-deferred contributions now will result in greater after-tax wealth for both you and your heirs. Reaching the 35% bracket in retirement is very difficult.
Fair point on balances. I guess I’m thinking I will exclusively spend the deferred accounts in retirement and leave the Roth untouched which I why I believe it could reach parity with the deferred accounts. Today your right, my deferred accounts are nearly 5x higher than Roth. I also have a non-qualified deferred Comp plan I have to manage in this equation and my wife has a pension. I’m not complaining, but I won’t be able to control my income as much as many others on this forum seem to be able to.

My parents are well into the 35% bracket which is what woke me up a little. I just assumed it was easy to manage income in retirement; but my parents are getting their from my moms pension, RMDs on their and some inherited accounts plus social security. Dividends is also an issue for them on their taxable accounts.
Last edited by DoubleComma on Sun Apr 18, 2021 9:26 pm, edited 1 time in total.
KlangFool
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Re: traditional or roth 401k?

Post by KlangFool »

DoubleComma wrote: Sun Apr 18, 2021 3:16 pm
Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement. In our case we are on the 35% bracket, but I don’t think I’ll ever need all the money we are projecting to have saved before retirement. We don’t count on it, but it very likely we will inherit from both DW and My families. So we want to have money I don’t have to touch and can pass to my kids with out creating a tax liability for them, or have access to cash that won’t create an additional liability to us n retirement.
DoubleComma,

What is there to stop you from giving your money now and contributing to your kids' Roth IRA every year? They could use it for their retirement and/or paying for their kids' college education. Or, let it compounded tax-free for 30+ years or more.

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DoubleComma
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Re: traditional or roth 401k?

Post by DoubleComma »

KlangFool wrote: Sun Apr 18, 2021 9:25 pm
DoubleComma wrote: Sun Apr 18, 2021 3:16 pm
Personally I don’t think it’s as simple as tax rates today vs tax rates in retirement. In our case we are on the 35% bracket, but I don’t think I’ll ever need all the money we are projecting to have saved before retirement. We don’t count on it, but it very likely we will inherit from both DW and My families. So we want to have money I don’t have to touch and can pass to my kids with out creating a tax liability for them, or have access to cash that won’t create an additional liability to us n retirement.
DoubleComma,

What is there to stop you from giving your money now and contributing to your kids' Roth IRA every year? They could use it for their retirement and/or paying for their kids' college education. Or, let it compounded tax-free for 30+ years or more.

KlangFool
My oldest is 15 with no taxable income.

When they work and have income we will absolutely be funding Roth IRAs for them.
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willthrill81
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Re: traditional or roth 401k?

Post by willthrill81 »

DoubleComma wrote: Sun Apr 18, 2021 9:23 pm
willthrill81 wrote: Sun Apr 18, 2021 9:10 pm
DoubleComma wrote: Sun Apr 18, 2021 9:02 pm
willthrill81 wrote: Sun Apr 18, 2021 8:51 pm
DoubleComma wrote: Sun Apr 18, 2021 8:48 pm

Maybe I’m wrong and could use some education, but I believe I can pass a ROTH account as an inheritance and they will receive it 100% tax free. Depending on who I leave it to, they may or may not have RMD, but either way it’s tax free.

My direct experience is based on a single instance. My FIL passes leaving a small traditional IRA and Roth IRA to DW. Roth was tax free and with the traditional each distribution is taxed at our rate. So I’m not sure why I would estimate an heirs tax rate.
Yes, Roth (not an acronym but a former legislator's last name) accounts pass on to heirs tax-free, but that requires that you pay taxes on Roth contributions. If your heirs' marginal tax rate at the time of the inheritance or within the 10 year window that they have to liquidate the account after inheriting it is lower than your marginal tax rate at the time you contribute to the account, a tax-deferred account will result in greater after-tax wealth for them.
Thank for the correction on Roth vs ROTH.

In your analysis are you assuming the traditional account that is passed would be greater in value than a Roth account? If so maybe I see your point.

In my simple mind if I leave $500k Roth vs $500k traditional, the Roth would definitely create more after tax wealth.

I guess it the scope of all things this is a real first world problem. I’m currently passing up on tax deferral of $10k @ 35% bracket (much smaller actual rate) so its potentially a $3500 gamble paying taxes today will be worth it. I’m Ok with that gamble, if I’m wrong I hope it’s the biggest financial mistake I make.
Your comparison is flawed because you wouldn't have equal amounts in Roth or traditional because you have to pay taxes on Roth contributions, whereas you don't with traditional. If you're in the 35% bracket, I can virtually guarantee you that tax-deferred contributions now will result in greater after-tax wealth for both you and your heirs. Reaching the 35% bracket in retirement is very difficult.
Fair point on balances. I guess I’m thinking I will exclusively spend the deferred accounts in retirement and leave the Roth untouched which I why I believe it could reach parity with the differed accounts. Today your right, my differed accounts are nearly 5x higher than Roth. I also have a non-qualified deferred Comp plan I have to manage in this equation and my wife has a pension. I’m not complaining, but I won’t be able to control my income as much as many others on this forum seem to be able to.

My parents are well into the 35% bracket which is what woke me up a little. I just assumed it was easy to manage income in retirement; but my parents are getting their from my moms pension, RMDs on their and some inherited accounts plus social security. Dividends is also an issue for them on their taxable accounts.
FWIW, unless they enter public service, your heirs, assuming they are your children, are quite unlikely to get pensions in retirement. Private sector pensions are pretty rare already. And regarding RMDs, a married filing jointly couple aged 72, when RMDs begin, would need more than $10 million in tax-deferred accounts for RMDs alone to push them into the 35% bracket. And if you have multiple heirs, that's $10 million in tax-deferred per heir.
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DoubleComma
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Re: traditional or roth 401k?

Post by DoubleComma »

To the OP & Moderators, I’ve clearly hijacked this thread which wasn’t my intention. My only point, which I’m learning is wrong or a bit contentious, is looking at tax rate today vs predicted rate in retirement is NOT the only consideration when making Roth vs Traditional decisions.
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