Roth v Traditional 401k (again)

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Topic Author
PeanutButter
Posts: 17
Joined: Tue Oct 09, 2018 11:14 am

Roth v Traditional 401k (again)

Post by PeanutButter »

I know this topic in general has been covered countless times.

I am in the 24% tax bracket and max out my Roth 401k. I ran the numbers and if I switch to a traditional 401k and then put the amount in a taxable account to equal the amount I put towards my Roth 401k I would need to be in a ~20% tax bracket in retirement to break even. If I am in a higher tax bracket I would come out behind, lower tax bracket and i would be ahead. Obviously the capital gains tax rate, stock market performance and dividend rate of my investment will change the math. I am 100% stocks (mostly S&P 500 index) and for now my plan would be the same. My numbers are below.

Based on this I am ok with my plan, but I am sure if my calculations are wrong or there is something I may not be factoring into my decision ya'll will point it out!

Thank you



initial amount $19,500.00
current tax bracket 24%
current capital gains tax rate 15%
Dividend Rate 2.00%
Final tax bracket 25%
Tax bracket needs to be below this for Roth not to be a good option 19.825%


roth tax defered taxable dividend
$19,500.00 $19,500.00 $6,157.89
yr 1 7% $20,865.00 $20,865.00 $6,588.95 $19.77 $6,569.18
yr 2 7% $22,325.55 $22,325.55 $7,050.17 $21.15 $7,029.02
yr 3 7% $23,888.34 $23,888.34 $7,543.69 $22.63 $7,521.05
yr 4 7% $25,560.52 $25,560.52 $8,071.74 $24.22 $8,047.53
yr 5 7% $27,349.76 $27,349.76 $8,636.77 $25.91 $8,610.86
yr 6 7% $29,264.24 $29,264.24 $9,241.34 $27.72 $9,213.62
yr 7 7% $31,312.74 $31,312.74 $9,888.23 $29.66 $9,858.57
yr 8 7% $33,504.63 $33,504.63 $10,580.41 $31.74 $10,548.67
yr 9 7% $35,849.95 $35,849.95 $11,321.04 $33.96 $11,287.08
yr 10 7% $38,359.45 $38,359.45 $12,113.51 $36.34 $12,077.17
yr 11 7% $41,044.61 $41,044.61 $12,961.46 $38.88 $12,922.57
yr 12 7% $43,917.74 $43,917.74 $13,868.76 $41.61 $13,827.15
yr 13 7% $46,991.98 $46,991.98 $14,839.57 $44.52 $14,795.05
yr 14 7% $50,281.42 $50,281.42 $15,878.34 $47.64 $15,830.71
yr 15 7% $53,801.12 $53,801.12 $16,989.83 $50.97 $16,938.86
yr 16 7% $57,567.19 $57,567.19 $18,179.11 $54.54 $18,124.58
yr 17 7% $61,596.90 $61,596.90 $19,451.65 $58.35 $19,393.30
yr 18 7% $33,504.63 $33,504.63 $10,580.41 $31.74 $10,548.67
yr 19 7% $35,849.95 $35,849.95 $11,321.04 $33.96 $11,287.08
yr 20 7% $38,359.45 $38,359.45 $12,113.51 $36.34 $12,077.17
yr 21 7% $41,044.61 $41,044.61 $12,961.46 $38.88 $12,922.57
yr 22 7% $43,917.74 $43,917.74 $13,868.76 $41.61 $13,827.15
yr 23 7% $46,991.98 $46,991.98 $14,839.57 $44.52 $14,795.05
yr 24 7% $50,281.42 $50,281.42 $15,878.34 $47.64 $15,830.71
yr 25 7% $53,801.12 $53,801.12 $16,989.83 $50.97 $16,938.86
yr 26 7% $57,567.19 $57,567.19 $18,179.11 $54.54 $18,124.58
yr 27 7% $61,596.90 $61,596.90 $19,451.65 $58.35 $19,393.30
yr 28 7% $65,908.68 $65,908.68 $20,813.27 $62.44 $20,750.83
yr 29 7% $70,522.29 $70,522.29 $22,270.20 $66.81 $22,203.39
yr 30 7% $75,458.85 $75,458.85 $23,829.11 $71.49 $23,757.62

Total value $75,458.85 $56,594.14 $14,959.77 $71,553.90
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grabiner
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Re: Roth v Traditional 401k (again)

Post by grabiner »

This does make sense. If you aren't maxing out, and you retire in the same tax bracket, then traditional versus Roth is break-even; you can invest $10,000 in a traditional account and lose 24% of it to tax when you withdraw it, or $7600 in a Roth account for the same out-of-pocket cost. But when you max out, using the traditional account forces you to hold more in a taxable account.

Another alternative would be to use the traditional 401(k), then convert it to a Roth account after you retire in a slightly lower bracket, using the taxable account to pay the taxes. This may make sense if you are close to retirement. I worked out some math (using the old tax rates):Roth 401(k) in a 28% bracket thoughts
Wiki David Grabiner
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth v Traditional 401k (again)

Post by FiveK »

PeanutButter wrote: Sat Oct 23, 2021 7:45 pm Based on this I am ok with my plan, but I am sure if my calculations are wrong or there is something I may not be factoring into my decision ya'll will point it out!
If your calculations match either of the tools mentioned in the first of the More complicated situations described there, then your calculations are most likely correct.
Topic Author
PeanutButter
Posts: 17
Joined: Tue Oct 09, 2018 11:14 am

Re: Roth v Traditional 401k (again)

Post by PeanutButter »

thanks for all the help!
babystep
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Joined: Tue Apr 09, 2019 9:44 am

Re: Roth v Traditional 401k (again)

Post by babystep »

You are missing that you can withdraw in very low tax brackets e.g. you retire at age 60 and then can withdraw up-to 12% tax bracket from 60-70.
Admiral
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Joined: Mon Oct 27, 2014 12:35 pm

Re: Roth v Traditional 401k (again)

Post by Admiral »

How old are you? What are your expected retirement expenses?

This is a 30 year projection. It's pretty much impossible to know what tax bracket one will be in three decades in the future (not to mention what those will be).

Remember that most of your funds are likely to be withdrawn in the lower brackets.

Unless you expect a large pension or will have a T-IRA that's well over $1m, fully Roth is probably not the optimal choice. At least tax wise.

Have you considered maxing your pre-tax 401k and then using a Roth IRA? What about a combination of Roth+Traditional?
aristotelian
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Joined: Wed Jan 11, 2017 7:05 pm

Re: Roth v Traditional 401k (again)

Post by aristotelian »

You are in one of the highest tax brackets. Do Traditional. Switch to Roth if you are getting close to retirement and your 401k is so big that you would need to withdraw $172k annually. You're not there yet.
Topic Author
PeanutButter
Posts: 17
Joined: Tue Oct 09, 2018 11:14 am

Re: Roth v Traditional 401k (again)

Post by PeanutButter »

Admiral wrote: Tue Oct 26, 2021 6:02 am How old are you? What are your expected retirement expenses?

This is a 30 year projection. It's pretty much impossible to know what tax bracket one will be in three decades in the future (not to mention what those will be).

Remember that most of your funds are likely to be withdrawn in the lower brackets.

Unless you expect a large pension or will have a T-IRA that's well over $1m, fully Roth is probably not the optimal choice. At least tax wise.

Have you considered maxing your pre-tax 401k and then using a Roth IRA? What about a combination of Roth+Traditional?
Thanks for the input. I agree on the not knowing future tax rates! I aslo am not sure I will know my expenses in 30 years, but I am sure they will be above some of the more thrifty numbers seen on this site. I am 41, my wife is 38 and we have two kids (5 and 6). We both max out our Roth 401k's, our (backdoor) Roth IRA's, an HSA and we contribute monthly to a taxable account. I am planning to switch back to traditional in ~2025 when the current tax cuts expire. We currently have $1.35MM invested with the following approximate breakdown:

Roth..............$470k, 35%
Traditional.......$770k, 58%
Taxable..........$65k, 5%
HSA...............$25k, 2%
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