educate me 401-k

[e30addict]

Is it really paid back exponentially, vs the growth on an extra 30% invested annually, every year until retirment? I'm not sure about that. I expect to be in a lower tax bracket in retirement, though I'm 15-20 years out, so who knows. Last year, I rolled over more than the max for pre-tax, into roth, so I'm putting a ton in roth, I just have trouble mentally turning down the 30% savings. I'm all for some more information on the topic.

Such a wild guess to me with soooooo many variables. Several years ago I would have said my taxable income in "retirement" would be lower for sure, even if we keep getting taxed to death more and more. Now, I'm not so sure.

I feel like an aggressive portfolio will compound greater then any tax increase will ever cover. Then again, I also like the idea of tax free withdrawals when I feel like it instead of RMDs forcing my hand and potentially effecting the tax liability year to year. Then you have to consider do you plan on burning through the bulk of it or leaving a nice nest egg for your kids. Are you gonna do that with a trust or let it go through probate etc...CPA level stuff, but I think if you go through a trust route any inherited IRAs receive a step up in basis that resets the tax consequences for your heirs.

Way too many variables to really know what''s best and that will also change over time as to what is the "right" way to do it.

My take on it now is to play both sides of the tax coin and not stress over it too much.

[nhbubba]

If my tax rate in retirement is as high as it is for me now, I worked way too long!
I defer the tax, thank you very much.
If you stop earning early there are strategies to convert in a "ladder". 5 years after conversion from trad => roth IRA you can pull the amount you converted (and paid taxes on) out tax and penalty free. My 401k is locked until I "separate" from employment. After that I can roll it into a traditional IRA.. then start the ladder conversions.

[boosten lebaron]

https://www.corebridgefinancial.com/...03b-calculator

Lots of nuances but I use this simple calculator.

[jimmycapp]

WTF. Typed this long thing then it crashed. Oh well. Not completely sold on roth but I'll still do what i'm doing. That calculator looks like it's missing the tax cost of the roth contribution to put $24,500 in costs about ~35k total (30%). I just put in same tax today as retirement for the below (thought I still think it will be lower in retirement, but that's a big maybe). Maybe that's what they're saying in the highlighted area? If you invest the tax savings in a trad contribution, it's about the same as roth? I'm missing a connection in my brain...

[ZX-12R]

That calculator looks like it's missing the tax cost of the roth contribution to put $24,500 in costs about ~35k total (30%).

That is showing a 30% tax rate in retirement and the same for your current tax rate. The plan for a normal 401K is by the time you retire, your overall cost of living expenses are lower so your withdrawals from your 401K will be low enough to drop you in a lower tax bracket. This can be further improved by other retirement funds too.

[jimmycapp]

Yea. I get that. Just showing worst case I had the same tax rate, Roth is slight advantage. Gets worse the lower your retirement tax rate is. That’s why I’ve been maxing pretax contributions then Roth.

[boosten lebaron]

That is showing a 30% tax rate in retirement and the same for your current tax rate. The plan for a normal 401K is by the time you retire, your overall cost of living expenses are lower so your withdrawals from your 401K will be low enough to drop you in a lower tax bracket. This can be further improved by other retirement funds too.

I have to look at it differently. My tax rate now is very low because I barely work but my 401k withdrawals will probably be massive as I set in motion things. Having a lower tax rate in retirement isn't guaranteed so I don't plan on it.

[e30addict]

I fully expect to land in the same, if not higher tax bracket. I don't buy the assumption my spending will go down. It will just be re-allocated.

[Bonk!]

RMDs may force you into a higher tax bracket when those come do at age 75. We're about 12 years or so from that, so part of our tax strategy (Roth conversions, donor advised funds, etc.) is to reduce those.

[jimmycapp]

How big are these rmd? Haven’t looked into that at all.

[ZX-12R]

With a mortgage, couple kids, wife, and helping support some older family members in hard times, I hemorrhage money like it's nobody's business. I probably won't fix the wife but the mortgage and kid expenses will be gone or greatly reduced in the not too distant future. The family support will likely wind down by the time I retire. I fully expect my income needs to drop considerably so it makes sense to continue maxing out the traditional 401K and have that as one pool of money. The wife and I both have backdoor Roth IRAs and a few other retirement mechanisms in play to keep things balanced.

[e30addict]

How big are these rmd? Haven’t looked into that at all.

Depends on your age and balance. The % starts at just under 4% and increases as you get older. So every million in that account will be 36k/yr JUST from RMDs.

[Bonk!]

There are lots of RMD calculators online that you can mess around with.

[nhbubba]

My thinking is even simpler; if I am living off X and saving Y and X+Y => my current income then it stands to reason that when I stop saving I will only need to take out X... ie my spending. Unless Y (the savings) is tiny, it stands to reason "income" is headed down. And if Y is tiny that stopping work isn't in the cards anyway.
In my case Y is a non-trivial portion of my total income.

[jimmycapp]

Depends on your age and balance. The % starts at just under 4% and increases as you get older. So every million in that account will be 36k/yr JUST from RMDs.

I was completely unaware how large these can be. Very interesting.

[RandyO]

Depends on your age and balance. The % starts at just under 4% and increases as you get older. So every million in that account will be 36k/yr JUST from RMDs.

that's how my variable annuity works, been increasing in value, even after taking out distributions, I'm about to jump up to the next tax bracket

[Bonk!]

I was completely unaware how large these can be. Very interesting.

Yep - that's the primary reason I'm doing Roth conversions now; this will help alleviate part of the RMD issue but counts as taxable income. Of course this could make Medicare IRMAA an issue! Retirement is one giant puzzle with 50 pieces. While I manage my own retirement funds I am hiring a tax guy to manage this all for me.

[nhbubba]

Honestly if I make it to 75 and have that "problem" with RMDs, I will run though that tape with pride. Not even on my radar as a "problem" to worry about.

Not to say I would not be looking to optimize conversions. Especially if I manage to punch out early as I would probably be looking to tap into a trad-IRA through a conversion ladder.

But I still don't see a persuasive argument for favoring ROTH over traditional unless you are in a pretty low bracket.