76.8% Return on 401K

[drssg]

Put 10,00 in the ROTH and see what happens.

Hmmm. I'm more of a numbers guy. I could go to Vegas and put it all on black and see what happens!

 

[drssg]

Tried to make a quick copy of your spreadsheet with the Roth. Since the Roth is tax free, you should have more funds then AND your distributions won't be conflicting (tax wise) with your social security, pension (if you have one) or rental income or any other income that might then bump you up a bracket.

What I illustrate to the people I talk to (who get a pension) is since they're going to have a pension (lifetime income that's 100% taxable), Social Security (lifetime income that's 100% taxable) "to me" it makes a lot of sense for them to also build a bucket of tax free money. What I urge them to consider is doing the Roth....and when they retire, to NOT dip into it to "fix their roof" type thing....but rather to maybe put it into INCOME PRODUCING investments and then simply peel the income off....tax free to augment their other/taxable income. If they can keep the 'golden goose' alive for the rest of their life, then they'll have that extra tax free income for the rest of their life.... if they need to dip into the golden goose, they can do so but now, it might only be a golden chicken with golden eggs.....then I'll ask if they'd rather have a gold goose egg or a gold chicken egg.

Invest	10000​
Post Tax:	0.8​
Return	1.07​
	Year	IRA	Roth
	1​	10,000.00	10,000.00
	2​	10,700.00	10,700.00
	3​	11,449.00	11,449.00
	4​	12,250.43	12,250.43
	5​	13,107.96	13,107.96
	6​	14,025.52	14,025.52
	7​	15,007.30	15,007.30
	8​	16,057.81	16,057.81
	9​	17,181.86	17,181.86
	10​	18,384.59	18,384.59
	11​	19,671.51	19,671.51
	12​	21,048.52	21,048.52
	13​	22,521.92	22,521.92
	14​	24,098.45	24,098.45
	15​	25,785.34	25,785.34
	16​	27,590.32	27,590.32
	17​	29,521.64	29,521.64
	18​	31,588.15	31,588.15
	19​	33,799.32	33,799.32
	20​	36,165.28	36,165.28
	Post Tax	28,932.22	36,165.28

That table doesn't make sense to me. On the last line, you promote the tax savings on the back end with the ROTH, but you ignore the additional taxes that were paid up front in order to get the $10,000 to invest in the ROTH.

If you account for the initial taxes, and you account for not having those initial taxes invested for 20 years, the two options come out identical.

 

[Richard]

I don't disagree that the end investment amount would be the same (presuming same dollars invested up front)

I guess one question might be would you rather pay tax on $10,000 (the initial investment) or on $36,000. It really is that simple. I don't personally care what someone chooses as they have to decide what fits them best. I am biased (and freely admit it to people when going over this) towards the Roth but that doesn't mean it's the best fit for them. I personally think it's loony to put your funds in and "give" the IRS a portion of all your earnings too.... I'm dumb, stupid, arrogant enough to think that over the years, I can earn more through growth than the initial tax savings of the Traditional contribution.

 

[Hay Dude]

I’m paying mid 30’s for taxes.
With trillions in new programs being suggested or passed, that will have to go up unless “quantitative easing“ is the method of payment. ....wonderful

Go Roth with taxes going up. Note the latest promise “no one making over $400,000 per year will pay more taxes”.
A betting man researching that decree a little deeper and you’ll probably find its really “no household making over $400,000 per year will pay more taxes”, effectively cutting in half the previous claim.

Thereafter, we will have a wave of inflation.

 

[MoKelly]

I have to admit that's a fair question and not one that has escaped me. I would (hope to) think that if (WHEN) they see this pool of money as a taxable opportunity they might think twice and if they did decide to attack it, grandfather those who might have their 5 years in.

Point being, I would think it would be political suicide for someone to vote to tax something that will impact each individual so directly. I would (want) to think that they'd hold back fearing the repercussions of such an idiotic move....but alas, they are politicians.

It will be a tax “on the rich”. If your RMD is over a certain amount you will get taxed.

The masses will cheer.

MoKelly

 

[lman]

I worry more about accelerated inflation with current government policies than taxes.

 

[PuffyC]

That table doesn't make sense to me. On the last line, you promote the tax savings on the back end with the ROTH, but you ignore the additional taxes that were paid up front in order to get the $10,000 to invest in the ROTH.

If you account for the initial taxes, and you account for not having those initial taxes invested for 20 years, the two options come out identical.

You're right. Here's how I look at it:

Putting $5000 in a Roth IRA would cost me about $7500 in gross pay if I'm in the highest bracket. Net cost would be $5000 of course because that's after tax money.

Putting $5000 in something like a 401k would cost me $5000 in gross pay if I'm in the highest bracket. That assumes no employer match. Net cost there would be only around $3300 because that's what I'd otherwise get if that $5000 in income was taxed, which it isn't in this case.

In this scenario, the accounts would always be worth the same (assuming like investments) but with the 401k it would require $1700 less out of pocket today. Obviously the catch is you pay taxes on the backend with the 401k, and for the simplicity of this example, if you're in the same bracket it would be a wash ($1700), which is what you found. Discounting all other details and scenarios, and assuming you plan on actually having to live on that money, the gamble is simply whether you think your top bracket when you retire will end up being higher or lower than it is today. If it's higher you'll be taxed more than that $1700 difference, making the Roth IRA the better choice. If it's lower you'll be taxed less than $1700, putting you ahead with the 401k.

IMO the 401k is nice because it allows you to invest "cheaper" when you're young and you're not making a lot and you need cash for other things, but everyone's situation is different. Also IMO, there's not one right answer that will fit everyone so you can't really make a blanket statement that one is always better than the other. There's no free lunch when it's the government's money and they usually get theirs in the end.

 

[LD1]

The thing with comparing Roth vs traditional is everyone is comparing them at TODAYS tax rates. Weather you pay taxes on the front end or the back end.....if the interest rates and tax rates are the SAME.....the end investment is going to be the SAME.

NO ONE is investing today and also cashing out today.

ITs simply a question of weather you believe YOUR taxes are higher NOW.....or you think they will be higher LATER. Assuming the same investments and same rate of return between the two......the tax rate is the only thing that is going to make one worth more than the other.

No one can predict the future. Whats the Govt gonna do......are you gonna have more income now vs later, how is it gonna be taxed in the future, etc etc etc. No one can answer these questions TODAY. Therefore no one can honestly know for sure what is the better bet 20 years down the road.

Which is why I always suggest people invest in both. This is provided you are at least taking full advantage of employer match. Whatever you do.....first and foremost get the maximum match that your employer provides.

 

[Richard]

Here's a flip/flop for you.... (maybe I should run for political office, HA!)

When my (now deceased) mother retired.... her condo was paid, car paid and had about $500K in her IRA.

She was literally saving money on her social security.....she had no bills, didn't drive anywhere and didn't spend money.

Every year (in November/December) I'd do a dry-run of her (and my) taxes to get a feel for where we stood with time to react.

I'd run various calculations in the tax software trying to figure out how much of her IRA (which she wasn't needing to spend but was now required to take some out)

How much can I take out and keep her UNDER the trigger for owing taxes?

For 14 out of 15 years, I got her IRA distributions out of her account, kept her under the tax limits so it didn't add any tax burden to her. She essentially got a tax break when she put the money in and got 14 years of it out tax free.

She bought a car the year she had a tax bite so we took out $30K to buy a car. Other than that, her (taxable) distributions came out but she didn't owe tax on them.

A clear example where a traditional account was much better than the Roth account.

 

[Larry Caldwell]

You can make direct charitable contributions from your tax deferred account without increasing your gross income. Talk to your account manager or accountant. I think all of us probably make charitable contributions. There's no reason to let it count against your SS.