Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

Age: 24
Planned retirement age: 50
Current retirement savings: $80,000 across Roth IRA and 401K
Current income: $210K total compensation first year, $190k second year due to sign on bonuses. This includes company RSUs as well. My base salary is close to $150k.

I’m 2 years into working. My last job didn’t offer Roth 401K so I didn’t have to think about this and just maxed my pre-tax. I switched to my new job recently. This year is weird for taxes because I took a 2 month break after leaving my last job. Thus, I believe I will still be in the 24% income bracket this year. My last job paid me quite a bit less.

Next year I will be on the borderline of 24% and 32% tax brackets. If I max my pretax 401K next year, I will probably be right on the border of the $170k income line, which is the 32% tax bracket border. If I am just short of maxing my 401k, I will tip over into the 32% tax bracket if my math serves me correct.

I forgot to mention. My employer has a generous match and puts in $10,250 if I put in $20,500 (50% of whatever you put in up to the IRS limit). I will get that match no matter the type of 401K I choose. That match money is always given as pre-tax so no matter what I will have $10,250 in pretax 401K. Ie if I maxed and put 100% into Roth 401k, 66% would be in Roth and 33% would be in Traditional because match always goes in as pretax.

I know that as long as nothing bad financially happens I’m going to be maxing my 401K.

My new company also offers something called a “mega backdoor Roth IRA”, so I plan to max out my 401K and put extra money into that. Probably an extra $10-15k on top of maxing out my 401K so that I am putting at least 20% of my income into retirement.

I’m really lost on whether I should go traditional or Roth for my 401k. Or a split of some sort like 50% going into pretax and 50% post tax. Any advice is appreciated.
Chadnudj
Posts: 1269
Joined: Tue Oct 29, 2013 11:22 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by Chadnudj »

Traditional 401k. This really isn't hard. You're high income/high tax, you have no pension, and you're nowhere near having so much money in a traditional 401k that you need to worry about RMDs forcing you into higher brackets in retirement than you are now. Plus you have the mega backdoor Roth IRA option available, on top of being able to do just a normal backdoor Roth.
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

Gotcha, I didn’t realize the 24% tax bracket was considered high earner (the median income in my city is in the 24% tax bracket). Thought it was middle earner. I know 32% is considered high earner. I will note that I live in a state with no state taxes.
sailaway
Posts: 8219
Joined: Fri May 12, 2017 1:11 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by sailaway »

My husband ran into something similar, except he was so excited to finally have access to Roth 401k that he didn't consider if he should. So he did Roth contributions until I took over our finances.

Since you plan to retire early, you probably have a relatively low spend and will have a shorter time contributing. This will allow you to control your taxes over time. Traditional will likely be best.

The mega backdoor Roth will allow you to build a significant Roth balance to complement the traditional and optimize taxes throughout retirement.
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

Forgive me if this is bad advice, but this is what a friend of mine said:

“Roth all the way.

It’s basically two things:

1. What you expect your income tax rate at retirement vs now ? Assuming now tax rate is lower because you can claim deductions (dependents, kids, mortgage if you have ). At retirement, your withdrawals is income but you have no deductions. Most likely your tax rate is HIGHER at retirement.

2. With Roth you can withdraw anytime after 50 and required time to be in program. So your investment is more mobile and not locked in till 65.”

Is this not a valid point?
User avatar
rob
Posts: 5247
Joined: Mon Feb 19, 2007 5:49 pm
Location: Here

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by rob »

#1 - You usually have lower income at retirement so get into lower tax bands.
#2 - Your NOT locked into 401K or anything else - SEPP for example can access the money penalty free if you retire earlier.

In the end, your going to want a mix or Roth, Tax-deferred and taxable. Right now, the best path IMO is pre-tax in your 40K up to match, then Roth IRA if your income is low enough then max out the 401K pretax then taxable.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by randomguy »

blaire951 wrote: Sun Aug 14, 2022 10:11 pm Gotcha, I didn’t realize the 24% tax bracket was considered high earner (the median income in my city is in the 24% tax bracket). Thought it was middle earner. I know 32% is considered high earner. I will note that I live in a state with no state taxes.
Don't get hung up with labels.Given you situation, I would much rather save 20k in traditional and like 5k in the megaback door than to just save 20k in the Roth. Maybe you can never take money out in the future at 24% and you would have been better with the Roth. But if that happens, I think you will be Ok with that outcome. When you have like 2 million in traditional, you can debate if you want to get more aggressive with the Roth.
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by randomguy »

blaire951 wrote: Sun Aug 14, 2022 10:18 pm Forgive me if this is bad advice, but this is what a friend of mine said:

“Roth all the way.

It’s basically two things:

1. What you expect your income tax rate at retirement vs now ? Assuming now tax rate is lower because you can claim deductions (dependents, kids, mortgage if you have ). At retirement, your withdrawals is income but you have no deductions. Most likely your tax rate is HIGHER at retirement.

2. With Roth you can withdraw anytime after 50 and required time to be in program. So your investment is more mobile and not locked in till 65.”

Is this not a valid point?
1) Go to a tax calculator and calculate the taxes on 150k of income. Compare that tax rate to the marginal tax rate. There are a lot of issues with marginal versus effective rate comparison but you need to understand that basic concept before you move on to them.

2) I am not sure what he is talking about. Pretty sure the rules for Roth 401(k) is still 59.5 (can do contributions at anytime) but there are plenty aways around that.
User avatar
retired@50
Posts: 12830
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by retired@50 »

blaire951 wrote: Sun Aug 14, 2022 10:04 pm I’m really lost on whether I should go traditional or Roth for my 401k. Or a split of some sort like 50% going into pretax and 50% post tax. Any advice is appreciated.
Have you read the wiki page on Traditional versus Roth?

After reading the page, do you have questions? If so, post back.

This topic is frequently misunderstood.

It sounds like your friend who thinks their money is locked up until 65 is not aware of the current rules regarding IRAs and 401(k) penalty free withdrawals. They can start at 59.5 years old.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
User avatar
FiveK
Posts: 15742
Joined: Sun Mar 16, 2014 2:43 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by FiveK »

blaire951 wrote: Sun Aug 14, 2022 10:04 pm Age: 24
Planned retirement age: 50
Current retirement savings: $80,000 across Roth IRA and 401K
...
I forgot to mention. My employer has a generous match and puts in $10,250 if I put in $20,500...always given as pre-tax so no matter what I will have $10,250 in pretax 401K.
...
My new company also offers something called a “mega backdoor Roth IRA”, so I plan to max out my 401K and put extra money into that. Probably an extra $10-15k on top of maxing out my 401K so that I am putting at least 20% of my income into retirement.

I’m really lost on whether I should go traditional or Roth for my 401k. Or a split of some sort like 50% going into pretax and 50% post tax. Any advice is appreciated.
Assuming you now have $50K in the traditional 401k, you'll earn 5%/yr real on investments there, work for 26 years, don't contribute any more to traditional (other than the $10.25K employer match), and withdraw 4%/yr after retirement, you'll have a little over $700K (in today's dollars) in the traditional account and thus would have $28K/yr income. That would put you in the 12% tax bracket. Thus choosing a traditional contribution this year to save 24% would be a good idea. The mega-backdoor is also a great idea, because there you are deciding between Roth and taxable, and Roth almost always wins that comparison.

Does that all make sense?
HornedToad
Posts: 1130
Joined: Wed May 21, 2008 12:36 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by HornedToad »

If you are not planning on retiring in your 40s or have an expectation to move to a now/low state income tax state then I’d do Roth the next 3-4 years before switching to traditional. Particularly if you are in Washington and not CA/MY. Your income will go up and right now more on Roth will benefit in future. Alternatively if going to do the mega backdoor Roth then you could stay with traditional
invest4
Posts: 1905
Joined: Wed Apr 24, 2019 2:19 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by invest4 »

Admiral wrote: Wed Aug 10, 2022 3:51 pm
invest4 wrote: Wed Aug 10, 2022 2:30 pm Looking further ahead, I found the following post informative and enjoyable for this topic:

Asymmetric risk in the Roth vs Traditional question

viewtopic.php?t=318512
Right. That is a good (and v. long) thread. For the TL;DR crowd, basically since it's impossible to know which choice will be "better" (if "better" means having more money to spend in retirement) due to all the assumptions needed about the future, one should simply consider the risks.

To wit: The risk of saving too much in Roth potentially means not having enough money in retirement. The risk of saving too much in Traditional potentially means having too much money, some of which is going to be used to pay higher tax.

For most people, the latter is a better "problem," with the usual caveat that having a mix of taxable, tax free, and tax-deferred accounts is usually the best approach.
Please see recent post and link from a similar thread which Admiral has also kindly summarized.

Alas, I would still encourage people to read the whole bit in order to better understand and inform your decision accordingly.
dboeger1
Posts: 1411
Joined: Fri Jan 13, 2017 6:32 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by dboeger1 »

Arguably the most obvious thing that often gets overlooked is how you plan to go about deciding when to retire. For people who would rather retire earlier than save and invest more than they need to cover basic expenses, they will likely never reach high tax brackets in retirement because they will just retire before then. Therefore, Roth is suboptimal earlier in the accumulation phase, no matter which way tax brackets go over time.

Roth only really makes sense if you expect to pay higher taxes in retirement, and this roughly means more income (I know tax policy changes are another factor, but the best guideline we have is current policy). In order to get there, you have to be willing and able to save and invest quite a bit more than you need to cover current expenses, which is likely more typical of someone retiring at full retirement age rather than early, or higher earners like physicians and celebrities. Note that there's also a bit of nuance because many people would prefer to just spend earlier as income comes in rather than later in retirement. I remember searching online for a particular celebrity's net worth recently out of sheer curiosity, and was really surprised to discover that despite having very high earnings, their net worth was quite modest, something a typical Boglehead might aspire to. However, the more I thought about it, the more I realized net worth doesn't mean quite the same thing for higher earners, because they're not necessarily relying on that money to scrape by and survive, but rather to fund a life of luxury... and one can do that by just spending new income immediately, so you have to ask yourself if you really care more enough about spending in retirement to prioritize a higher retirement income, which would be the impetus for funding Roth. That sounds very atypical of aspiring early retirees, but I guess it's ultimately a personal decision.

Along those lines, Roth is the obvious choice for things like leaving a legacy, and you can always do Roth conversions opportunistically in years with lower earnings, should they occur.
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

rob wrote: Sun Aug 14, 2022 10:23 pm #1 - You usually have lower income at retirement so get into lower tax bands.
#2 - Your NOT locked into 401K or anything else - SEPP for example can access the money penalty free if you retire earlier.

In the end, your going to want a mix or Roth, Tax-deferred and taxable. Right now, the best path IMO is pre-tax in your 40K up to match, then Roth IRA if your income is low enough then max out the 401K pretax then taxable.
So since the match is the max (my employer does 50% of what you put in up to $20,500), then max pretax then do Roth after?
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

randomguy wrote: Sun Aug 14, 2022 10:43 pm
blaire951 wrote: Sun Aug 14, 2022 10:11 pm Gotcha, I didn’t realize the 24% tax bracket was considered high earner (the median income in my city is in the 24% tax bracket). Thought it was middle earner. I know 32% is considered high earner. I will note that I live in a state with no state taxes.
Don't get hung up with labels.Given you situation, I would much rather save 20k in traditional and like 5k in the megaback door than to just save 20k in the Roth. Maybe you can never take money out in the future at 24% and you would have been better with the Roth. But if that happens, I think you will be Ok with that outcome. When you have like 2 million in traditional, you can debate if you want to get more aggressive with the Roth.
By 20k traditional you mean what I put in before the match right? Cause if you mean 20k before match then I’m putting 30k total into traditional. Just wanted to clarify
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

HornedToad wrote: Sun Aug 14, 2022 11:36 pm If you are not planning on retiring in your 40s or have an expectation to move to a now/low state income tax state then I’d do Roth the next 3-4 years before switching to traditional. Particularly if you are in Washington and not CA/MY. Your income will go up and right now more on Roth will benefit in future. Alternatively if going to do the mega backdoor Roth then you could stay with traditional
I am planning on doing mega backdoor Roth I am just not sure I will be maxing it out. I will put $10k a year into mega backdoor, so if I go that route I assume traditional would be best since it sort of diversified by mixing pre and post?
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

invest4 wrote: Sun Aug 14, 2022 11:54 pm
Admiral wrote: Wed Aug 10, 2022 3:51 pm
invest4 wrote: Wed Aug 10, 2022 2:30 pm Looking further ahead, I found the following post informative and enjoyable for this topic:

Asymmetric risk in the Roth vs Traditional question

viewtopic.php?t=318512
Right. That is a good (and v. long) thread. For the TL;DR crowd, basically since it's impossible to know which choice will be "better" (if "better" means having more money to spend in retirement) due to all the assumptions needed about the future, one should simply consider the risks.

To wit: The risk of saving too much in Roth potentially means not having enough money in retirement. The risk of saving too much in Traditional potentially means having too much money, some of which is going to be used to pay higher tax.

For most people, the latter is a better "problem," with the usual caveat that having a mix of taxable, tax free, and tax-deferred accounts is usually the best approach.
Please see recent post and link from a similar thread which Admiral has also kindly summarized.

Alas, I would still encourage people to read the whole bit in order to better understand and inform your decision accordingly.
Since having a mix is usually the best approach, I guess maybe I should just do a 50/50 split? Since my employer matches $10k I could put $10k into the Roth 401k, $10k into pretax, and $10k into mega backdoor. That way I would have 50% of my funds going into pretax and 50% going post tax.

Or, I could just max my pretax, and put the rest into Mega backdoor. Ie if I put $10k into mega backdoor, 75% ($30k) would be going into pre and 25% ($10k) would be going in post tax.

I’m leaning towards the former since 50/50 sounds more risk averse but I could be wrong. Is that a good route to take? I’ll start reading up more on the links people sent me!
muffins14
Posts: 5529
Joined: Wed Oct 26, 2016 4:14 am
Location: New York

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by muffins14 »

Max pre-tax and do mega-backdoor with the remainder of the $61000 limit
Crom laughs at your Four Winds
dboeger1
Posts: 1411
Joined: Fri Jan 13, 2017 6:32 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by dboeger1 »

blaire951 wrote: Mon Aug 15, 2022 2:15 am
invest4 wrote: Sun Aug 14, 2022 11:54 pm
Admiral wrote: Wed Aug 10, 2022 3:51 pm
invest4 wrote: Wed Aug 10, 2022 2:30 pm Looking further ahead, I found the following post informative and enjoyable for this topic:

Asymmetric risk in the Roth vs Traditional question

viewtopic.php?t=318512
Right. That is a good (and v. long) thread. For the TL;DR crowd, basically since it's impossible to know which choice will be "better" (if "better" means having more money to spend in retirement) due to all the assumptions needed about the future, one should simply consider the risks.

To wit: The risk of saving too much in Roth potentially means not having enough money in retirement. The risk of saving too much in Traditional potentially means having too much money, some of which is going to be used to pay higher tax.

For most people, the latter is a better "problem," with the usual caveat that having a mix of taxable, tax free, and tax-deferred accounts is usually the best approach.
Please see recent post and link from a similar thread which Admiral has also kindly summarized.

Alas, I would still encourage people to read the whole bit in order to better understand and inform your decision accordingly.
Since having a mix is usually the best approach, I guess maybe I should just do a 50/50 split? Since my employer matches $10k I could put $10k into the Roth 401k, $10k into pretax, and $10k into mega backdoor. That way I would have 50% of my funds going into pretax and 50% going post tax.

Or, I could just max my pretax, and put the rest into Mega backdoor. Ie if I put $10k into mega backdoor, 75% ($30k) would be going into pre and 25% ($10k) would be going in post tax.

I’m leaning towards the former since 50/50 sounds more risk averse but I could be wrong. Is that a good route to take? I’ll start reading up more on the links people sent me!
"Usually the best approach" doesn't really apply in this context. It all depends on your goals, preferences, willingness and ability to save, etc. There will likely be a superior preference, either traditional or Roth, that will become apparent in your old age, but you won't know it until then. Having a mix is a decent approach that hedges your bets, but it's unlikely to be optimal. Also, a big part of why it's such a common recommendation is availability; simply put, past a certain level of income, Roth just becomes more accessible. Roth IRAs have no effective income limit because of the back door, unlike tax-deductible IRA contributions. There's also the mega back door Roth 401k that potentially provides access to a huge pool of additional Roth space. The combination of maxing out traditional 401k first and then putting the rest in Roth is as much about maxing out what's available as it is about choosing a sensible split. The decision to go traditional or Roth is more relevant for those who aren't maxing out tax-advantaged space, in which case I suspect the vast majority of those people aren't contributing and investing enough to be loaded in retirement to where the Roth would make sense, so they should just prefer traditional anyway.
Startled Cat
Posts: 709
Joined: Thu Apr 03, 2008 8:54 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by Startled Cat »

I will go against the grain here. You are early in your tech career and will probably look back with envy at your current 24% tax bracket in just a few years. I would do Roth for now and switch to traditional when you hit a higher bracket. It's a bit of a gamble, but a reasonable one to make.

Personally, I maxed out my traditional IRA at your age based on the conventional wisdom, but wish I had gone Roth back then.
Startled Cat
Posts: 709
Joined: Thu Apr 03, 2008 8:54 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by Startled Cat »

FiveK wrote: Sun Aug 14, 2022 11:32 pm Assuming you now have $50K in the traditional 401k, you'll earn 5%/yr real on investments there, work for 26 years, don't contribute any more to traditional (other than the $10.25K employer match), and withdraw 4%/yr after retirement, you'll have a little over $700K (in today's dollars) in the traditional account and thus would have $28K/yr income. That would put you in the 12% tax bracket. Thus choosing a traditional contribution this year to save 24% would be a good idea. The mega-backdoor is also a great idea, because there you are deciding between Roth and taxable, and Roth almost always wins that comparison.

Does that all make sense?
Rather than extrapolate this scenario to the full career, it probably makes more sense to model a switch to traditional 401k contributions starting in a few years. Between that and other potential sources of taxable income in retirement, I think starting with Roth contributions while in the 24% tax bracket could make sense.
yog
Posts: 659
Joined: Wed Jan 15, 2020 11:57 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by yog »

dboeger1 wrote: Mon Aug 15, 2022 4:14 am
blaire951 wrote: Mon Aug 15, 2022 2:15 am
invest4 wrote: Sun Aug 14, 2022 11:54 pm
Admiral wrote: Wed Aug 10, 2022 3:51 pm
invest4 wrote: Wed Aug 10, 2022 2:30 pm Looking further ahead, I found the following post informative and enjoyable for this topic:

Asymmetric risk in the Roth vs Traditional question

viewtopic.php?t=318512
Right. That is a good (and v. long) thread. For the TL;DR crowd, basically since it's impossible to know which choice will be "better" (if "better" means having more money to spend in retirement) due to all the assumptions needed about the future, one should simply consider the risks.

To wit: The risk of saving too much in Roth potentially means not having enough money in retirement. The risk of saving too much in Traditional potentially means having too much money, some of which is going to be used to pay higher tax.

For most people, the latter is a better "problem," with the usual caveat that having a mix of taxable, tax free, and tax-deferred accounts is usually the best approach.
Please see recent post and link from a similar thread which Admiral has also kindly summarized.

Alas, I would still encourage people to read the whole bit in order to better understand and inform your decision accordingly.
Since having a mix is usually the best approach, I guess maybe I should just do a 50/50 split? Since my employer matches $10k I could put $10k into the Roth 401k, $10k into pretax, and $10k into mega backdoor. That way I would have 50% of my funds going into pretax and 50% going post tax.

Or, I could just max my pretax, and put the rest into Mega backdoor. Ie if I put $10k into mega backdoor, 75% ($30k) would be going into pre and 25% ($10k) would be going in post tax.

I’m leaning towards the former since 50/50 sounds more risk averse but I could be wrong. Is that a good route to take? I’ll start reading up more on the links people sent me!
"Usually the best approach" doesn't really apply in this context. It all depends on your goals, preferences, willingness and ability to save, etc. There will likely be a superior preference, either traditional or Roth, that will become apparent in your old age, but you won't know it until then. Having a mix is a decent approach that hedges your bets, but it's unlikely to be optimal. Also, a big part of why it's such a common recommendation is availability; simply put, past a certain level of income, Roth just becomes more accessible. Roth IRAs have no effective income limit because of the back door, unlike tax-deductible IRA contributions. There's also the mega back door Roth 401k that potentially provides access to a huge pool of additional Roth space. The combination of maxing out traditional 401k first and then putting the rest in Roth is as much about maxing out what's available as it is about choosing a sensible split. The decision to go traditional or Roth is more relevant for those who aren't maxing out tax-advantaged space, in which case I suspect the vast majority of those people aren't contributing and investing enough to be loaded in retirement to where the Roth would make sense, so they should just prefer traditional anyway.
Max all pretax first, then save the remainder in Roth space. You can convert your pretax into Roth for less in retirement when you have lower taxable income if required.

Contributing/converting to Roth locks in your lifetime taxes removing uncertainty, but also locks in or foregoes any future opportunity. Capturing the largest possible change in marginal tax rates is the primary mechanism that creates the maximum possible lifetime after-tax wealth.

One of the better discussions on why voluntarily splitting contributions 50/50 and foregoing available pre-tax space is misguided can be found in this article from Michael Kitces, a wealth advisory practice leader with a tax background who writes tax & retirement planning articles intended for investment advisors.
Limits Of Tax Diversification And The Tax Alpha Of Roth Optimization

Kitces also has written a savings hierarchy guide for those in the upper income brackets, covering the usual tax advantaged savings vehicles available.
The Hierarchy Of Tax-Preferenced Savings Vehicles For High-Income Earners
CletusCaddy
Posts: 2678
Joined: Sun Sep 12, 2021 4:23 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by CletusCaddy »

Startled Cat wrote: Mon Aug 15, 2022 8:00 am I will go against the grain here. You are early in your tech career and will probably look back with envy at your current 24% tax bracket in just a few years. I would do Roth for now and switch to traditional when you hit a higher bracket. It's a bit of a gamble, but a reasonable one to make.

Personally, I maxed out my traditional IRA at your age based on the conventional wisdom, but wish I had gone Roth back then.
The question is not whether 24% is low relative to OP’s brackets while still employed (and I would agree with you that it is), but rather whether it is low relative to the bracket at retirement.

Assuming OP gets married by retirement age, their taxable income would need to be $178k (in 2022 dollars) to hit the 24% bracket. For a retired couple I find that hard to believe.
ThankYouJack
Posts: 5704
Joined: Wed Oct 08, 2014 7:27 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by ThankYouJack »

Another vote for traditional - and Roth optimizing when possible.

What I haven't seen mentioned is the Roth impact on taxable income at retirement. If the OP goes 100% Roth how would the OP get into the 32% tax bracket when the OP retires at 50? Seems like the OP would be paying 32% now to pull the money out at 0% (or maybe 12%). That makes no sense to me.
markcoop
Posts: 1516
Joined: Fri Mar 02, 2007 7:36 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by markcoop »

Given that tax rates currently are set to revert back to old rates, 24% tax rate will become 28%. I think a case can be made to contribute to a Roth through 2025 and then switch to Trad.

Some other points:
1) You can save more money in a Roth 401K because it's pre-tax with the same limits
2) You currently don't live in a state with income tax. That could change in the future.
3) Your plan to retire early could change
4) You may bump up a tax bracket at some point that would really make Roth a bad idea.
Mark
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by randomguy »

ThankYouJack wrote: Mon Aug 15, 2022 9:18 am Another vote for traditional - and Roth optimizing when possible.

What I haven't seen mentioned is the Roth impact on taxable income at retirement. If the OP goes 100% Roth how would the OP get into the 32% tax bracket when the OP retires at 50? Seems like the OP would be paying 32% now to pull the money out at 0% (or maybe 12%). That makes no sense to me.
Employer matches of 10k will fill up some of the lower brackets but yes that is a concern. If the OP is paying 32% it is a lot easier to say tIRA is the way to go. It gets pretty hard to get that high for most people if you are only working 30 years and given the contribution limits.

And while the state isn't mentioned, think about how those taxes are likely to factor in. If you live in CA (paying 9%) and plan on retiring in WA (0%), there is a big arbitrage opportunity.
User avatar
rob
Posts: 5247
Joined: Mon Feb 19, 2007 5:49 pm
Location: Here

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by rob »

blaire951 wrote: Mon Aug 15, 2022 2:04 am
rob wrote: Sun Aug 14, 2022 10:23 pm #1 - You usually have lower income at retirement so get into lower tax bands.
#2 - Your NOT locked into 401K or anything else - SEPP for example can access the money penalty free if you retire earlier.

In the end, your going to want a mix or Roth, Tax-deferred and taxable. Right now, the best path IMO is pre-tax in your 40K up to match, then Roth IRA if your income is low enough then max out the 401K pretax then taxable.
So since the match is the max (my employer does 50% of what you put in up to $20,500), then max pretax then do Roth after?
That would be an unusually high 401K match, so I would check - it's normally something like x% of the first y% you contribute... but this is free money you don't get any other way, so I would always grab the free money before using your own.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
deikel
Posts: 1616
Joined: Sat Jan 25, 2014 6:13 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by deikel »

There is no way to actually calculate what is best, there are too many uncertain events in the time span

However, it is a question of degree of tax savings and not all or nothing, so even getting it wrong is usually not a devastating problem either

Even if you over-contribute in IRAs, there is no downsite for a while since you will only 'not save taxes', you will not pay MORE taxes either for a large bandwidth - so even if you overshoot the IRA contributions, its not a big deal, its just less optimized

The overall goal should be to minimize taxes over your entire contribution years and retirement years till the end, which makes it ridiculously hard to guess right

If you follow the tax code along, you can clearly see the guidance that the tax code provides and intends, you don't need to trust the tax code, but there is a guidance written in (save in IRA tax advantaged vehicles until you get salaried out of them)

Since you currently do not have saved much in retirement yet and your income puts you in relatively high brackets, it seems more prudent to try to maximize what you can in IRA/401k for quite a while and until your retirement account are closer to a million dollars to really worry about IRA/RothIRA

For those who argue accessibility of funds, there are SEP IRA rules that allow early access, there is planning for more cash on hand closer to a possibly earlier retirement and there is paying a penalty to access funds, access for first time home buyers, access for education expenses - there are ways to access the money.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
Topic Author
blaire951
Posts: 84
Joined: Fri Jun 10, 2022 6:50 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by blaire951 »

rob wrote: Mon Aug 15, 2022 9:57 am
blaire951 wrote: Mon Aug 15, 2022 2:04 am
rob wrote: Sun Aug 14, 2022 10:23 pm #1 - You usually have lower income at retirement so get into lower tax bands.
#2 - Your NOT locked into 401K or anything else - SEPP for example can access the money penalty free if you retire earlier.

In the end, your going to want a mix or Roth, Tax-deferred and taxable. Right now, the best path IMO is pre-tax in your 40K up to match, then Roth IRA if your income is low enough then max out the 401K pretax then taxable.
So since the match is the max (my employer does 50% of what you put in up to $20,500), then max pretax then do Roth after?
That would be an unusually high 401K match, so I would check - it's normally something like x% of the first y% you contribute... but this is free money you don't get any other way, so I would always grab the free money before using your own.
I double checked with my employer. They put in $10,250 if I put in $20,500. The total would be $30,750 I can put into my 401k each year.
little_star
Posts: 673
Joined: Tue Jun 16, 2020 5:08 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by little_star »

OP - You have been provided very good advice on this thread. I suggest you share this thread with your friend, who appears to be confused about access to retirement accounts (there is nothing about age 50 in the current regulations; the standard age is 59.5, with a possible exception of the "Rule of 55" for employer sponsored accounts) and expectations for marginal tax brackets during retirement (most people have lower or similar tax brackets during retirement).

For your case, since you have access to MBR - so will be able to tax-diversify- I recommend 100% maximum contribution to the tax-deferred (traditional) 401k (currently $20,500) and as much as you can afford beyond that to Roth-space (either through MBR (401k) or regular backdoor Roth IRA). This will allow you to have immediate tax reduction (from the traditional 401k contributions) and the real possibility of converting those traditional $$ into Roth at a much lower marginal tax rate, particularly if you plan to retire at 50.
invest4
Posts: 1905
Joined: Wed Apr 24, 2019 2:19 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by invest4 »

I recommend the following:

* Roth vs Trad - take a decision
- Your savings rate will far outweigh whatever choice you make
- The future is unknown and circumstances may change...marriage, kids, job loss, etc.
- You can always change it!

* Continue to educate yourself
- This forum is the gift that keeps on giving
- No one cares about your money more than you do
- Contribute / help others

* Continue to live beneath your means and remember to enjoy life along the way!

Best wishes
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by DSInvestor »

Roth is great if you do not have to give up a Traditional benefit to get into Roth.

Roth 401k employee contributions reduce the amount of Traditional 401(k) employee contributions that you can make and you will lose an immediate tax benefit. Roth and Traditional 401(k) share an employee salary deferral contribution limit of $20,500. Note that since you switched jobs, you need to be careful not to exceed $20,500 in employee contributions in total across both 401(k) plans for 2022.

Given that you're covered by an employer plan at work and have high income, you are not eligible for any Traditional IRA deduction so Roth IRA using the backdoor is great. Contribute 6K to Traditional IRA and then convert to Roth IRA. At age 24, this would be 6K/yr. You are not losing any Traditional deduction in this case.

If your 401(k) plan allows for mega back door into Roth IRA, you can do that after maxing out Traditional 401k.

Traditional 401(k) contributions, with up front tax benefits, will mean more take home pay which may be helpful for other financial priorities - college debt, credit card debt, saving for house, saving for next car or paying off car.
Wiki
User avatar
teen persuasion
Posts: 2327
Joined: Sun Oct 25, 2015 1:43 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by teen persuasion »

OP, if you wish to retire early, have you seen this? https://www.mrmoneymustache.com/2012/0 ... tirement/

To retire in 25 or so years, you should be saving 35% of your income (not gross, per that website's formula, but after tax). You can save more $ by putting it in traditional 401k, due to the tax savings now. Fill your t401k, get the match in t401k, then fill a backdoor Roth IRA, then as much as possible into MBR utilizing the tax savings of the lower AGI from the t401k contributions.

Then, when you retire at 50, begin a Roth conversion ladder, shifting your trad balances over to Roth a chunk each year at a much lower tax rate because it fills up your lowest brackets first (those are now filled by employment income). Rinse and repeat for decades before RMDs arrive, moderating any tax torpedo. You can withdraw previous Roth contributions for spending, and also seasoned Roth conversions (after 5 years).

Another good resource on early retirement withdrawal: https://forum.mrmoneymustache.com/inv ... -age-59-5/
hoofaman
Posts: 973
Joined: Tue Jul 14, 2020 3:39 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by hoofaman »

I never understood why anyone in 22%+ tax bracket would choose Roth over Trad, to each their own. Although I understand everyone's situation is different, I like the approach of trying to balance out each bucket as much as possible to give flexibility (taxable / pre-tax / roth), while capturing todays benefits of pre-tax

Personally, I max out Traditional 401k + HSA contributions. I also max out Mega Backdoor Roth

If your company offers Mega Backdoor Roth, that gives you around 30k extra Roth contribution space per year, in addition to Roth IRA contribution/Backdoor. Technically you could allocate the tax savings from trad to mega backdoor roth if your not already maxing that
jj45
Posts: 165
Joined: Tue Jan 02, 2018 3:02 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by jj45 »

blaire951 wrote: Sun Aug 14, 2022 10:04 pm Age: 24

None of the details matter since they are unpredictable and uncertain. The big picture should guide your decision. And the big picture is that if, decades from now when you are withdrawing, you are wealthy, then Roth will have been a better choice but it won't matter since you are wealthy. If, decades from now when you are withdrawing, you are trying to live on a lower income, then Traditional gives you more after tax income. Traditional wins when it matters and Roth wins when it doesn't. Go with Traditional.
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by ruralavalon »

blaire951 wrote: Sun Aug 14, 2022 10:04 pm Age: 24
Planned retirement age: 50
Current retirement savings: $80,000 across Roth IRA and 401K
Current income: $210K total compensation first year, $190k second year due to sign on bonuses. This includes company RSUs as well. My base salary is close to $150k.

I’m 2 years into working. My last job didn’t offer Roth 401K so I didn’t have to think about this and just maxed my pre-tax. I switched to my new job recently. This year is weird for taxes because I took a 2 month break after leaving my last job. Thus, I believe I will still be in the 24% income bracket this year. My last job paid me quite a bit less.

Next year I will be on the borderline of 24% and 32% tax brackets. If I max my pretax 401K next year, I will probably be right on the border of the $170k income line, which is the 32% tax bracket border. If I am just short of maxing my 401k, I will tip over into the 32% tax bracket if my math serves me correct.

I forgot to mention. My employer has a generous match and puts in $10,250 if I put in $20,500 (50% of whatever you put in up to the IRS limit). I will get that match no matter the type of 401K I choose. That match money is always given as pre-tax so no matter what I will have $10,250 in pretax 401K. Ie if I maxed and put 100% into Roth 401k, 66% would be in Roth and 33% would be in Traditional because match always goes in as pretax.

I know that as long as nothing bad financially happens I’m going to be maxing my 401K.

My new company also offers something called a “mega backdoor Roth IRA”, so I plan to max out my 401K and put extra money into that. Probably an extra $10-15k on top of maxing out my 401K so that I am putting at least 20% of my income into retirement.

I’m really lost on whether I should go traditional or Roth for my 401k. Or a split of some sort like 50% going into pretax and 50% post tax. Any advice is appreciated.
For most people, without a pension or very large tax-deferred accounts, traditional tax-deferred 401k contributions will likely be better. Most people will likely be in a lower tax bracket during retirement.

TFB, "The Case Against Roth 401(k): Still True After All These Years", link. "Although there is no one-size-fits-all answer, I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."
TFB, Harry Sit wrote:Even if you assume your marginal tax bracket in retirement will be higher due to tax increases, a large portion of the 401(k) withdrawal may still be taxed at a lower rate than what it was when you contributed the money.

Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a pension, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth.

I do suggest that you also use the Mega Backdoor Roth feature.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
an_asker
Posts: 4903
Joined: Thu Jun 27, 2013 2:15 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by an_asker »

blaire951 wrote: Sun Aug 14, 2022 10:11 pm Gotcha, I didn’t realize the 24% tax bracket was considered high earner (the median income in my city is in the 24% tax bracket). Thought it was middle earner. I know 32% is considered high earner. I will note that I live in a state with no state taxes.
I can only think of Washington state that meets these criteria - "no state taxes; median income in city is 24% tax bracket."

Both DW and I are in IT and have worked since the 20th century in IT as well. Together, we barely make about what you make lol :-) And I believe we are the top 10% income earning households.
markcoop
Posts: 1516
Joined: Fri Mar 02, 2007 7:36 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by markcoop »

hoofaman wrote: Tue Aug 16, 2022 9:50 am I never understood why anyone in 22%+ tax bracket would choose Roth over Trad, to each their own.
At age 56, I recently switched from trad'l 401k into Roth 401k. Here are some of my reasons:

1) I don't want my 401K growing too large and cause my RMDs to create extra tax on my SS.
2) I want to max out all my tax-advantaged accounts and you are effectively saving more maxing out a Roth 401K since it's after-tax with the same limits.
3) Tax rates currently are set to revert back to old rates in 2026. If you do want to increase your Roth savings, then it certainly is better to do when rates are lower.
4) Eventually those RMDs could easily push a single survivor into the 22% tax bracket or higher and can even hit higher IRMAA levels as well as other break points.
5) Tax diversification is important. Many people my age and higher have more TDA compared to Roth. Roth conversions help but may not be enough to have sufficient diversification.
Mark
sailaway
Posts: 8219
Joined: Fri May 12, 2017 1:11 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by sailaway »

markcoop wrote: Tue Aug 16, 2022 1:40 pm
hoofaman wrote: Tue Aug 16, 2022 9:50 am I never understood why anyone in 22%+ tax bracket would choose Roth over Trad, to each their own.
At age 56, I recently switched from trad'l 401k into Roth 401k. Here are some of my reasons:

1) I don't want my 401K growing too large and cause my RMDs to create extra tax on my SS.
2) I want to max out all my tax-advantaged accounts and you are effectively saving more maxing out a Roth 401K since it's after-tax with the same limits.
1) Even if paying tax on SS means you actually have more funds available?

2) Why can't you save the tax savings and actually save 22% more via traditional?
an_asker
Posts: 4903
Joined: Thu Jun 27, 2013 2:15 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by an_asker »

sailaway wrote: Tue Aug 16, 2022 1:49 pm
markcoop wrote: Tue Aug 16, 2022 1:40 pm
hoofaman wrote: Tue Aug 16, 2022 9:50 am I never understood why anyone in 22%+ tax bracket would choose Roth over Trad, to each their own.
At age 56, I recently switched from trad'l 401k into Roth 401k. Here are some of my reasons:

1) I don't want my 401K growing too large and cause my RMDs to create extra tax on my SS.
2) I want to max out all my tax-advantaged accounts and you are effectively saving more maxing out a Roth 401K since it's after-tax with the same limits.
1) Even if paying tax on SS means you actually have more funds available?

2) Why can't you save the tax savings and actually save 22% more via traditional?
On this discussion, I am with markcoop.

Besides, I don't understand either of your points. And I don't especially get the 'save 22% more' aspect. Please elaborate!
markcoop
Posts: 1516
Joined: Fri Mar 02, 2007 7:36 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by markcoop »

sailaway wrote: Tue Aug 16, 2022 1:49 pm
markcoop wrote: Tue Aug 16, 2022 1:40 pm
hoofaman wrote: Tue Aug 16, 2022 9:50 am I never understood why anyone in 22%+ tax bracket would choose Roth over Trad, to each their own.
At age 56, I recently switched from trad'l 401k into Roth 401k. Here are some of my reasons:

1) I don't want my 401K growing too large and cause my RMDs to create extra tax on my SS.
2) I want to max out all my tax-advantaged accounts and you are effectively saving more maxing out a Roth 401K since it's after-tax with the same limits.
1) Even if paying tax on SS means you actually have more funds available?

2) Why can't you save the tax savings and actually save 22% more via traditional?
I just listed some items that should go into the equation about which to choose. If I have more money after paying SS taxes, than sure, the trad'l 401k is better. But you'd have to do the math and understand all the assumptions being made. I made a spreadsheet that has many variables (future returns, inflation, future tax rates, etc) and changing the variables yields some interesting results.

You can't take the 22% savings and invest it in more trad'l if you are maxing out those accounts.
Mark
sailaway
Posts: 8219
Joined: Fri May 12, 2017 1:11 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by sailaway »

markcoop wrote: Tue Aug 16, 2022 2:04 pm
sailaway wrote: Tue Aug 16, 2022 1:49 pm
markcoop wrote: Tue Aug 16, 2022 1:40 pm
hoofaman wrote: Tue Aug 16, 2022 9:50 am I never understood why anyone in 22%+ tax bracket would choose Roth over Trad, to each their own.
At age 56, I recently switched from trad'l 401k into Roth 401k. Here are some of my reasons:

1) I don't want my 401K growing too large and cause my RMDs to create extra tax on my SS.
2) I want to max out all my tax-advantaged accounts and you are effectively saving more maxing out a Roth 401K since it's after-tax with the same limits.
1) Even if paying tax on SS means you actually have more funds available?

2) Why can't you save the tax savings and actually save 22% more via traditional?
I just listed some items that should go into the equation about which to choose. If I have more money after paying SS taxes, than sure, the trad'l 401k is better. But you'd have to do the math and understand all the assumptions being made. I made a spreadsheet that has many variables (future returns, inflation, future tax rates, etc) and changing the variables yields some interesting results.

You can't take the 22% savings and invest it in more trad'l if you are maxing out those accounts.
You can still invest it, though. The average American might spend it, but you don't have to.
markcoop
Posts: 1516
Joined: Fri Mar 02, 2007 7:36 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by markcoop »

sailaway wrote: Tue Aug 16, 2022 2:07 pm
markcoop wrote: Tue Aug 16, 2022 2:04 pm
sailaway wrote: Tue Aug 16, 2022 1:49 pm
markcoop wrote: Tue Aug 16, 2022 1:40 pm
hoofaman wrote: Tue Aug 16, 2022 9:50 am I never understood why anyone in 22%+ tax bracket would choose Roth over Trad, to each their own.
At age 56, I recently switched from trad'l 401k into Roth 401k. Here are some of my reasons:

1) I don't want my 401K growing too large and cause my RMDs to create extra tax on my SS.
2) I want to max out all my tax-advantaged accounts and you are effectively saving more maxing out a Roth 401K since it's after-tax with the same limits.
1) Even if paying tax on SS means you actually have more funds available?

2) Why can't you save the tax savings and actually save 22% more via traditional?
I just listed some items that should go into the equation about which to choose. If I have more money after paying SS taxes, than sure, the trad'l 401k is better. But you'd have to do the math and understand all the assumptions being made. I made a spreadsheet that has many variables (future returns, inflation, future tax rates, etc) and changing the variables yields some interesting results.

You can't take the 22% savings and invest it in more trad'l if you are maxing out those accounts.
You can still invest it, though. The average American might spend it, but you don't have to.
I agree that for many people in the 22% tax bracket, and who will be in the 12% (or 15% after 2026) in retirement, they should be contributing to a trad'l 401K. But the other points I made can certainly change the equation enough for some people to do a Roth 401K.

Yes, you can save it and pay taxes on those savings. So, not as good as having that extra 22% in a Roth (remember, you don't really own your whole trad'l balance as you will be paying taxes on it later). And that is part of the equation too.
Mark
sailaway
Posts: 8219
Joined: Fri May 12, 2017 1:11 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by sailaway »

markcoop wrote: Tue Aug 16, 2022 2:14 pm
sailaway wrote: Tue Aug 16, 2022 2:07 pm
markcoop wrote: Tue Aug 16, 2022 2:04 pm
sailaway wrote: Tue Aug 16, 2022 1:49 pm
markcoop wrote: Tue Aug 16, 2022 1:40 pm

At age 56, I recently switched from trad'l 401k into Roth 401k. Here are some of my reasons:

1) I don't want my 401K growing too large and cause my RMDs to create extra tax on my SS.
2) I want to max out all my tax-advantaged accounts and you are effectively saving more maxing out a Roth 401K since it's after-tax with the same limits.
1) Even if paying tax on SS means you actually have more funds available?

2) Why can't you save the tax savings and actually save 22% more via traditional?
I just listed some items that should go into the equation about which to choose. If I have more money after paying SS taxes, than sure, the trad'l 401k is better. But you'd have to do the math and understand all the assumptions being made. I made a spreadsheet that has many variables (future returns, inflation, future tax rates, etc) and changing the variables yields some interesting results.

You can't take the 22% savings and invest it in more trad'l if you are maxing out those accounts.
You can still invest it, though. The average American might spend it, but you don't have to.
I agree that for many people in the 22% tax bracket, and who will be in the 12% (or 15% after 2026) in retirement, they should be contributing to a trad'l 401K. But the other points I made can certainly change the equation enough for some people to do a Roth 401K.

Yes, you can save it and pay taxes on those savings. So, not as good as having that extra 22% in a Roth (remember, you don't really own your whole trad'l balance as you will be paying taxes on it later). And that is part of the equation too.
But you aren't putting an extra 22% in Roth, you are putting the same amount in and saving taxes down the line. You are setting up a false equivalency by ignoring the up front savings in traditional.

I am not saying that means traditional is always better, but insisting you can get more into a Roth requires just ignoring part of the equation.
markcoop
Posts: 1516
Joined: Fri Mar 02, 2007 7:36 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by markcoop »

sailaway wrote: Tue Aug 16, 2022 2:17 pm But you aren't putting an extra 22% in Roth, you are putting the same amount in and saving taxes down the line. You are setting up a false equivalency by ignoring the up front savings in traditional.

I am not saying that means traditional is always better, but insisting you can get more into a Roth requires just ignoring part of the equation.
I don't agree. I think you are putting more into a Roth when you max it out. Sure you can invest the difference in non-tax-advantaged account and claim in both cases you are saving the same amount of money. But in the Roth case 100% of it is in a tax-advantaged account. In the trad'l case, most is in a tax-advantaged account and some (the 22% tax savings you invested in a taxable account) is in a non-tax-advantaged account.
Mark
Gronnie
Posts: 339
Joined: Sun Oct 19, 2014 2:08 pm

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by Gronnie »

I am also a tech worker with the mega backdoor option.

I max out the pretax and also contribute extra to the backdoor Roth portion. Best of both worlds.
markcoop
Posts: 1516
Joined: Fri Mar 02, 2007 7:36 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by markcoop »

Gronnie wrote: Tue Aug 16, 2022 2:37 pm I am also a tech worker with the mega backdoor option.

I max out the pretax and also contribute extra to the backdoor Roth portion. Best of both worlds.
Just to make sure I'm clear with all that I'm saying above. For the majority of people, this is the best strategy. I was doing it myself last year. I can even point out lowering your income by using pre-tax savings can also bring many other advantages such as financial aid. But early on in a career when you are making less and later on in a career when you have saved a decent amount (certainly over a $1M) in trad'l, I believe a Roth 401k may make more sense for some people. Maybe more so when tax rates are scheduled to go up in a few years.
Mark
fyre4ce
Posts: 2544
Joined: Sun Aug 06, 2017 11:29 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by fyre4ce »

I vote 100% traditional, based mostly on the early retirement. You'll have a lot of years of withdrawals before Social Security and RMDs start and you can use the traditional money to "fill up" those lower brackets.

One typical advantage of Roth is that you can effectively contribute more money into tax-advantaged accounts - the nominal amount is the same, but Roth is after-tax dollars and so is worth more. But in your case, I'm not sure that's true. You have access to a Mega Backdoor Roth through your 401k, and I'm guessing you won't be able to max that out too. So, contribute your $20,500 as traditional, and use the tax savings to contribute as much as you can into the Mega Backdoor Roth. It's like getting the best of both worlds.

My biggest hesitation with traditional is that you could end up in a higher-tax state (esp. California being a tech worker) and that would change the analysis. But unless/until you have a reason to think that's a possibility, I'd stick with your current assumptions.

There's also a chance, if the TCJA tax cuts are repealed, that you could be making withdrawals into the 25% bracket even in early retirement, which is 1% higher than you're paying now. But the potential upside, saving 9% (24% minus 15%) to 12% (24% minus 12%) is well worth the downside risk. You can reevalaute this in five years when there's less uncertainty in the future tax laws.

Next year, at a rate of 32%, the choice is easily traditional.

I ran your numbers through a software tool and it seems to agree: https://docs.google.com/spreadsheets/d/ ... ue&sd=true
fyre4ce
Posts: 2544
Joined: Sun Aug 06, 2017 11:29 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by fyre4ce »

Startled Cat wrote: Mon Aug 15, 2022 8:00 am I will go against the grain here. You are early in your tech career and will probably look back with envy at your current 24% tax bracket in just a few years. I would do Roth for now and switch to traditional when you hit a higher bracket. It's a bit of a gamble, but a reasonable one to make.

Personally, I maxed out my traditional IRA at your age based on the conventional wisdom, but wish I had gone Roth back then.
It doesn't matter whether his future tax rates while working/earning go up. The appropriate comparison is not current tax rate to future higher-salary rate while working. The appropriate comparison is the current tax rate to the future withdrawal tax rate. In this case, OP is setting an upper bound on that by only wanting to work until 50. That only leaves so many (26) years to bulk up the pre-tax accounts. Even if his salary goes up, it's not likely his pre-tax contributions will go up that much. At most, he could expect to have about:

FV(5%,26,-20500-10250,-60000) = ~$1.79M pre-tax by age 50

Let's say he withdraws 3.5% per year, which is ~$62,500 per year, minus a $12,950 standard deduction is about $49,500 taxable income. That's slightly pushing into the 22% bracket, so even in the best case he's still coming out ahead (24% > 22%). If his salary goes way up and traditional saves 32%, 37%, maybe more if he moves to an income-taxing state, the savings those years will be higher but the decision to invest traditional this year will still have been correct. Only if his match goes up, or his employer offers a cash balance plan, etc. would that change the calculus, but until those things happen I think traditional makes the most sense.
fyre4ce
Posts: 2544
Joined: Sun Aug 06, 2017 11:29 am

Re: Can’t decide between 401K types (Roth vs Trad) for Tech Worker

Post by fyre4ce »

blaire951 wrote: Sun Aug 14, 2022 10:18 pm Forgive me if this is bad advice, but this is what a friend of mine said:

“Roth all the way.

It’s basically two things:

1. What you expect your income tax rate at retirement vs now ? Assuming now tax rate is lower because you can claim deductions (dependents, kids, mortgage if you have ). At retirement, your withdrawals is income but you have no deductions. Most likely your tax rate is HIGHER at retirement.

2. With Roth you can withdraw anytime after 50 and required time to be in program. So your investment is more mobile and not locked in till 65.”

Is this not a valid point?
Point #1 is usually not valid. Most people have a lower tax rate when retired then while working. Think about it- when you're retired, there are a lot of major expenses that go away: saving for retirement itself, mortgage, child-related expenses, etc. And, the income you do draw when retired usually comes from a mix of sources with more favorable taxation than earned income. Payroll tax goes away completely, Roth withdrawals are tax-free, as are HSA withdrawals for medical expenses, Social Security is at least 15% tax-free, taxable account withdrawals are tax-free for the return of basis and gains are taxed at a reduced rate, etc. I made an example once where a family earned $300k/year in California, and only needed $80k/year in retirement to maintain their lifestyle. $55k/year would come from Social Security, so they only needed $25k/year from retirement accounts, which could be withdrawn at a very low tax rate.

Cases where people have a higher tax rate when retired than while working are uncommon, and that you want to retire "early" at 50 makes them even less likely for you. As I wrote earlier, the only plausible scenario I can foresee is if you relocate to a high-tax state like California. Even if you never work there, your eventual kids might, and you could move there to be closer to grandkids, etc. But that's too speculative to tax-plan around in my opinion.

I'm not sure what "With Roth you can withdraw anytime after 50 and required time to be in program." means. Roth doesn't have an early withdrawal option at age 50 that I'm aware of. Contributions can be withdrawal from a Roth IRA tax- and penalty-free at any time. But if you're planning to retire at age 50, you probably want a SEPP. SEPP withdrawals from a Roth account are taxable (albeit at a probably low rate), but that is double taxation, so that's why traditional is the clear better choice.

So, no, your friend's points are misguided and partly or completely wrong.
Post Reply