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Yet Another Roth/Trad 401K Thread

Posted: Fri Mar 13, 2015 2:53 pm
by cmublitz
TLDR: 31 year old in 28% +8.7% bracket looking for recommendation on Roth vs Traditional 401K contributions.

edit: emptied so it doesn't linger as long on the Googles

Re: Yet Another Roth/Trad 401K Thread

Posted: Fri Mar 13, 2015 3:09 pm
by DSInvestor
Without a pension, I'd go 100% Traditional 401k, Roth IRA via backdoor if necessary and taxable investing. This way you're sure to have maxed out Tax deductible contributions, while adding Roth and taxable. You'll have lots of flexibility. You may even be able to convert some of the traditional to Roth later if a) your plan allows in plan conversion, b) change jobs, and/or c) find yourself in a year or years with lower income.

When you go Traditional 401k, you have options to switch or convert to Roth later.
When you contribute directly to Roth 401k, you lose the tax deduction and it is irrevocable.

If you marry your girlfriend, she may have high income but maybe not. She may or may not have a pension. My sister is an MD and for 13 yrs she had her own practice - no pension. She's joining a big outfit later this year and will have a pension after 10 yrs of service for about 40% of high three years of salary.

Re: Yet Another Roth/Trad 401K Thread

Posted: Fri Mar 13, 2015 3:15 pm
by retiredjg
I think it may matter in terms of how much money you end up with - but which is the better choice is not predictable in your situation. If you were not potentially poised to marry a physician, it might be more predictable.

I think it does not matter in terms of your threat of eating cat food in retirement - you will have plenty of money either way unless you start doing stupid stuff which seems unlikely.

You have clearly analyzed most of the ins and outs. If any answer is not clear to you at this point, just split it 50/50 (includes the money going to Roth IRA).

I would vote for traditional if the potential marriage were not on the table.

Have you seen this thread? I'm not sure it will help your decision, but you should have at least read everything that applies to your situation.

http://thefinancebuff.com/roth-401k-for ... e-max.html

Re: Yet Another Roth/Trad 401K Thread

Posted: Fri Mar 13, 2015 3:22 pm
by powermega
I think it's unlikely that your retirement tax bracket would be as high as your current bracket is now. 100% pre-tax 401k.

Re: Yet Another Roth/Trad 401K Thread

Posted: Fri Mar 13, 2015 3:35 pm
by cmublitz
Yeah, I had seen TFB's "maxing Roth 401K" page before and it was a big motivator to consider continuing the Roth 401K a bit longer. I thought it made a lot of sense and that I was a slam dunk for the case he was making. However, I've started second guessing myself a lot recently, hence the post. My parents came for a visit the other day and they reiterated maintaining the option of converting later. I do somewhat wonder if that backdoor provision of allowing anyone to convert at any time will ever dry up.

Thanks for the all the replies! I'm mostly a lurker but have gained immeasurably after discovering this forum a couple months ago.

Re: Yet Another Roth/Trad 401K Thread

Posted: Fri Mar 13, 2015 3:45 pm
by alex_686
cmublitz wrote:6.“Early” money favors Roth. And since I would like to leave some money to heirs when I kick the bucket, Roth money is the best kind to give.
This is a common misconception. There is no difference in after tax return between a traditional IRA and a Roth. This makes two assumptions.

The first assumption is that the taxes are the same. Invest in a IRA, compound over many years, withdraw and take the 36% tax hit. Invest in a Roth IRA, take the hit now, compound over many years, withdraw. Mathematically they yield the same result. Now all you have to do is predict what tax rate and bracket you will be in 40 years.

The second assumption, which is implied in the first, is that you invest the same amount after tax. That is, $,1000 contribution in a Roth is the same as a $1,563 Trad contribution. ($1,000 / (1-36% tax rate)). That is they both reduce current consumption by the same amount.

There is an argument that one should try to keep a equal balance between a Roth and IRA as a form of tax arbitration. Who knows what the tax rules will be 40 years from now?

Personally, I favor the Roth. I like the fact that I can withdraw contributions with a tax penalty. Who know when I will have an emergency? Plus I am pessimistic about future tax rates. On the flip side you are planning to have kids. Money is an IRA is a great way to fund a child's education. Better than a college fund in my opinion.

Re: Yet Another Roth/Trad 401K Thread

Posted: Fri Mar 13, 2015 9:39 pm
by bberris
Maybe we are venturing into verboten territory, but this speculation about future tax rates in the Roth/Trad decision involves also a speculation as to what will be taxed heavily in the future (assuming you think there will be high taxes on something or someone in the future). It might not be income. It could be property, or sales, or medical devices or .... If its a sales tax, there's no place to hide.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sat Mar 14, 2015 4:17 am
by BitDude
Since you max out your contributions and save additional funds in a taxable account, I would look into roth 401k since you're able to cram more money into a roth account, after tax is considered. Once the year has passed, the opportunity to contribute for that year is lost forever, so if your goal is to save as much as you can, then roth is more favorable.

But doing it this way will come at a higher cost though. Your portfolio (after tax) in retirement might be higher since you increase your max contribution ceiling, but you would have paid taxes less efficiently.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sat Mar 14, 2015 8:54 am
by basspond
Just like your allocations your tax accounts should be diversified. As long as each of your savings buckets, Roth, 401k, and taxable have at least 20% allocation of your savings contribution, if you are reaching the 401/Roth contribution limit you should be alright. But hey I can't predict the future. But once your taxable assets are 4-5 times your expenses than its contribution percentage can be reduced.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sat Mar 14, 2015 9:12 am
by Strayshot
Traditional 401k 100%, Roth IRA w/ the backdoor for the Roth form. If your girlfriend ultimately becomes Dr. Wife you'll have even more options for contributions. Looking over your balance sheet you're in great shape, just keep it up.

P.S. Not sure how far in medschool or what specialty she is considering, but in many specialties her residency will be hell on your relationship just a warning. If marriage is on the horizon, you seem financially saavy and should get involved in helping her manage her various loans now (unless she happens to be a member of the 10% of medstudents/residents who actually understand that stuff and pay attention to it). Often there are opportunities at the medschool->residency transition that people miss if they aren't paying attention.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sat Mar 14, 2015 9:37 am
by JW-Retired
cmublitz,
I'd hedge my bets and go 50/50 Roth/Trad 401k (if that is possible) for now. IMO, given your high salary, frugal ways, and probably a doctor wife, it's quite possible you will be in the 28% or higher bracket when you retire. You don't expect a pension but I'm thinking a doctor wife more than makes up for that. Very unlikely you are going to have less than 85% of your SS taxed.

However, nobody knows for sure so I wouldn't go all Roth 401k.

Good problem to have.
JW

Re: Yet Another Roth/Trad 401K Thread

Posted: Sat Mar 14, 2015 4:49 pm
by teddykgb55
You are dangerously close to the "It really doesn't matter" answer.

I mean that in a good way. You clearly will not be starving in retirement, so the real question becomes a pure wealth maximizing exercise. For that reason, I think you should pick 50/50 and stay the course on it, and sleep well knowing that you will retire relatively wealthy either way with some flexibility on your withdrawals.

FWIW I am in a similar situation but a slightly lower tax bracket (25%) and I've decided after much agonizing to go 100% Roth for two reasons: I'm getting more more money in tax-advantaged space and I believe tax rates will go up. If a VAT comes in then I've "lost" the game, but either way I know I'm saving enough to where it really doesn't matter. I can't take it with me anyway.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sat Mar 14, 2015 8:54 pm
by cmublitz
Thanks everyone for the responses and poll submissions! It is more split than I was expecting, albeit mostly in favor of a heavy Traditional allocation. If it finishes anything close to this, I'll definitely make a change. I do wonder if this kind of poll reveals the individual assumptions about potential future tax code changes that could happen in the next 35 years+. And it also might be more evidence for the "it doesn't really matter" camp.

My girlfriend is currently a 2nd year medical student and studying for Step 1. Her preferences include derm, cardio, and psych with anything surgery related pretty much ruled out before taking the rotation. The amount of work the school has them do is unbelievable to me. They are constantly tested and retested. The closest I can think of is the "drinking from the fire hose" analogy. She does occasionally say that the doctor path is the hard but reliable way to make a solid 100K+ income. Many lawyers and business folks make more than doctors but many also earn much less.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sun Mar 15, 2015 7:06 am
by retiredjg
cmublitz wrote: And it also might be more evidence for the "it doesn't really matter" camp.
Don't forget the "it may matter, but it is not predictable which will be better in this situation" camp.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sun Mar 15, 2015 7:33 am
by Carl53
You mention leaving something for heirs. In your case they may not be in as high as tax bracket as you. This would favor traditional. Also, should you ultimately decide to donate some of your accumulated wealth, having it in traditional would be better as you would not have paid the tax on it yet and may not have to.

There certainly arguments for doing the opposite too, but they seem less compelling.

Re: Yet Another Roth/Trad 401K Thread

Posted: Sun Mar 15, 2015 8:36 pm
by Bill M
The rational way to decide is to look at your current tax bracket, and guess at future tax bracket. But, I go irrational on this one. With interest/dividends in a taxable account, part of the earnings each year gets withdrawn to pay the taxes. But its not that way with withdrawals from pre-tax qualified plans. To get $x, you need to withdraw $x/(1-taxrate). I dislike the idea of withdrawing additional amounts from the account to pay taxes. I'd rather pay the taxes out of income, instead of from savings. So I go 100% Roth.