401K vs Back-door Roth 401k Forum

[helpplease]

I've researched both pretty extensively, but still can't decide which way to go.

Assuming you'd also be starting at 180k in NYC where taxes are freaking bullshit, would you do regular 401k or Roth? Are we to assume that our tax bracket after retirement will be less than they are now? I'm hoping that'll be the case since they're currently ridiculous - if so, regular would be better, yes?

So for all you roth people - why pass up the current deduction? Is avoiding the taxes on the earnings of these contributions really worth it? Can't we just hire an estate planner when we're 70 and get them to figure out how to not pay ~40% that we would be paying now....seriously.

[dixiecupdrinking]

I don't think I've ever known anyone to do a roth 401k. You're right, a bit benefit is to get that tax advantage now. What I have done, and I think is more typical, is max out the pre tax (traditional) 401k and then do a backdoor Roth IRA in addition.

[bopqod]

First, a clarification: the Roth 401k you're looking isn't "backdoor," it's just a Roth 401k contribution. 401k plans don't have income limits so you don't have to jump through the same hoops as you would to put money into a Roth IRA.

The main consideration between the two is whether you think you'll be in a higher income tax bracket in retirement than you are currently -- if you're in the exact same tax bracket now and in retirement, the two options yield the same take-home result. Roth is better if your tax rate will be higher in retirement, and the traditional is better if your tax rate will be lower. Because the smart money is on a first year NY biglaw associate being in a lower bracket in retirement, the deductible (traditional) 401k makes sense.

The math gets fuzzier if you're maxing out the $18k / year. Because Roth contributions are after-tax, you're actually saving more maxing a Roth than maxing the traditional (at 40% combined fed/state taxes, you lose out on $30k to max a Roth 401k, but only lose out on $18k to max a traditional). $18k in a Roth is worth more than $18k in a traditional when you pull the money out, making the Roth the better option if you'll be in the same tax rate in retirement, or even in a slightly lower bracket, but there's quite a bit of math to do.

[Danger Zone]

You can do both if you want to be the most risk averse lawyer person ever.

[Anonymous User]

First, a clarification: the Roth 401k you're looking isn't "backdoor," it's just a Roth 401k contribution. 401k plans don't have income limits so you don't have to jump through the same hoops as you would to put money into a Roth IRA.

The main consideration between the two is whether you think you'll be in a higher income tax bracket in retirement than you are currently -- if you're in the exact same tax bracket now and in retirement, the two options yield the same take-home result. Roth is better if your tax rate will be higher in retirement, and the traditional is better if your tax rate will be lower. Because the smart money is on a first year NY biglaw associate being in a lower bracket in retirement, the deductible (traditional) 401k makes sense.

The math gets fuzzier if you're maxing out the $18k / year. Because Roth contributions are after-tax, you're actually saving more maxing a Roth than maxing the traditional (at 40% combined fed/state taxes, you lose out on $30k to max a Roth 401k, but only lose out on $18k to max a traditional). $18k in a Roth is worth more than $18k in a traditional when you pull the money out, making the Roth the better option if you'll be in the same tax rate in retirement, or even in a slightly lower bracket, but there's quite a bit of math to do.

Awesome post man!

[WhiteCollarBlueShirt]

First, a clarification: the Roth 401k you're looking isn't "backdoor," it's just a Roth 401k contribution. 401k plans don't have income limits so you don't have to jump through the same hoops as you would to put money into a Roth IRA.

The main consideration between the two is whether you think you'll be in a higher income tax bracket in retirement than you are currently -- if you're in the exact same tax bracket now and in retirement, the two options yield the same take-home result. Roth is better if your tax rate will be higher in retirement, and the traditional is better if your tax rate will be lower. Because the smart money is on a first year NY biglaw associate being in a lower bracket in retirement, the deductible (traditional) 401k makes sense.

The math gets fuzzier if you're maxing out the $18k / year. Because Roth contributions are after-tax, you're actually saving more maxing a Roth than maxing the traditional (at 40% combined fed/state taxes, you lose out on $30k to max a Roth 401k, but only lose out on $18k to max a traditional). $18k in a Roth is worth more than $18k in a traditional when you pull the money out, making the Roth the better option if you'll be in the same tax rate in retirement, or even in a slightly lower bracket, but there's quite a bit of math to do.

Awesome post man!

I won't claim to have done the math or research without doing it, but did you take earnings into account?

I had heard from others that if you're young and planning on working for a number of years that you get more benefit from tax-fee earnings on the Roth 401K than you do from the tax deferral benefits of a typical 401K. Likewise, in the grand scheme of things, aren't tax rates relatively low on a historical basis?

[Actus Reus]

I love when people complain about "high" taxes. It's my favorite part of top-law-schools.com/forums

[bruinfan10]

First, a clarification: the Roth 401k you're looking isn't "backdoor," it's just a Roth 401k contribution. 401k plans don't have income limits so you don't have to jump through the same hoops as you would to put money into a Roth IRA.

The main consideration between the two is whether you think you'll be in a higher income tax bracket in retirement than you are currently -- if you're in the exact same tax bracket now and in retirement, the two options yield the same take-home result. Roth is better if your tax rate will be higher in retirement, and the traditional is better if your tax rate will be lower. Because the smart money is on a first year NY biglaw associate being in a lower bracket in retirement, the deductible (traditional) 401k makes sense.

The math gets fuzzier if you're maxing out the $18k / year. Because Roth contributions are after-tax, you're actually saving more maxing a Roth than maxing the traditional (at 40% combined fed/state taxes, you lose out on $30k to max a Roth 401k, but only lose out on $18k to max a traditional). $18k in a Roth is worth more than $18k in a traditional when you pull the money out, making the Roth the better option if you'll be in the same tax rate in retirement, or even in a slightly lower bracket, but there's quite a bit of math to do.

Awesome post man!

I won't claim to have done the math or research without doing it, but did you take earnings into account?

I had heard from others that if you're young and planning on working for a number of years that you get more benefit from tax-fee earnings on the Roth 401K than you do from the tax deferral benefits of a typical 401K. Likewise, in the grand scheme of things, aren't tax rates relatively low on a historical basis?

I'm not sure you read her/his post. It squarely answered your question---depends on whether you're paying a higher tax rate now than you will be in retirement.

I mean I guess the post didn't answer your question about whether you should choose your retirement plan based on your handicapping whether Congress will appreciably increase taxes before you retire, but I'm not sure anyone can answer that q.

[unlicensedpotato]

First, a clarification: the Roth 401k you're looking isn't "backdoor," it's just a Roth 401k contribution. 401k plans don't have income limits so you don't have to jump through the same hoops as you would to put money into a Roth IRA.

The main consideration between the two is whether you think you'll be in a higher income tax bracket in retirement than you are currently -- if you're in the exact same tax bracket now and in retirement, the two options yield the same take-home result. Roth is better if your tax rate will be higher in retirement, and the traditional is better if your tax rate will be lower. Because the smart money is on a first year NY biglaw associate being in a lower bracket in retirement, the deductible (traditional) 401k makes sense.

The math gets fuzzier if you're maxing out the $18k / year. Because Roth contributions are after-tax, you're actually saving more maxing a Roth than maxing the traditional (at 40% combined fed/state taxes, you lose out on $30k to max a Roth 401k, but only lose out on $18k to max a traditional). $18k in a Roth is worth more than $18k in a traditional when you pull the money out, making the Roth the better option if you'll be in the same tax rate in retirement, or even in a slightly lower bracket, but there's quite a bit of math to do.

Awesome post man!

I won't claim to have done the math or research without doing it, but did you take earnings into account?

I had heard from others that if you're young and planning on working for a number of years that you get more benefit from tax-fee earnings on the Roth 401K than you do from the tax deferral benefits of a typical 401K. Likewise, in the grand scheme of things, aren't tax rates relatively low on a historical basis?

I'm not sure you read her/his post. It squarely answered your question---depends on whether you're paying a higher tax rate now than you will be in retirement.

I mean I guess the post didn't answer your question about whether you should choose your retirement plan based on your handicapping whether Congress will appreciably increase taxes before you retire, but I'm not sure anyone can answer that q.

On a traditional ira/401k you will pay tax on the amount of withdrawals, which will presumably consist of your contributions plus the increased value of the assets (plus dividends potentially if you weren't doing drip). On a roth you only pay tax on your contributions. I'm not sure you read either of the posts.

[AllDangle]

Tag for future

[bopqod]

First, a clarification: the Roth 401k you're looking isn't "backdoor," it's just a Roth 401k contribution. 401k plans don't have income limits so you don't have to jump through the same hoops as you would to put money into a Roth IRA.

The main consideration between the two is whether you think you'll be in a higher income tax bracket in retirement than you are currently -- if you're in the exact same tax bracket now and in retirement, the two options yield the same take-home result. Roth is better if your tax rate will be higher in retirement, and the traditional is better if your tax rate will be lower. Because the smart money is on a first year NY biglaw associate being in a lower bracket in retirement, the deductible (traditional) 401k makes sense.

The math gets fuzzier if you're maxing out the $18k / year. Because Roth contributions are after-tax, you're actually saving more maxing a Roth than maxing the traditional (at 40% combined fed/state taxes, you lose out on $30k to max a Roth 401k, but only lose out on $18k to max a traditional). $18k in a Roth is worth more than $18k in a traditional when you pull the money out, making the Roth the better option if you'll be in the same tax rate in retirement, or even in a slightly lower bracket, but there's quite a bit of math to do.

Awesome post man!

I won't claim to have done the math or research without doing it, but did you take earnings into account?

I had heard from others that if you're young and planning on working for a number of years that you get more benefit from tax-fee earnings on the Roth 401K than you do from the tax deferral benefits of a typical 401K. Likewise, in the grand scheme of things, aren't tax rates relatively low on a historical basis?

An example might help. Let's say you're willing to give up on $2,000 of income for retirement, and you put $1,000 into the Traditional and $600 into the Roth (your $1k after 40% taxes). 30 years later you're ready to retire and your accounts have increased in value 10x, $10k in traditional and $6k in the Roth. You pay no taxes on the Roth, so the $6k is yours free and clear, but you do pay taxes on the traditional -- if you're paying 40% taxes then, you'll get $6k as well. Both are the same in this example, $1k given up today for $6k in the future, but the result in the traditional will vary based on your future tax rate.

This is also why a maxed Roth is a bigger contribution. If you give up on $18k for a traditional, you're putting in the max $18k; if you give up on $18k for a Roth, you're putting in $10,800... and you can still put in more from there.

[Tiago Splitter]

I won't claim to have done the math or research without doing it, but did you take earnings into account?

The result is effectively the same if the person getting the tax deduction takes those tax savings and invests them. Roth guy pays no taxes on the distributions but pre-tax guy is distributing a bigger pile of money.

[kellyfrost]

I love when people complain about "high" taxes. It's my favorite part of top-law-schools.com/forums

Why is that? The only "high" tax I want to complain about are my property taxes.

[WhiteCollarBlueShirt]

To the above, gotcha ... didn't know how/if compound interest factored in, but that all makes sense. Tx

Edit, oh, to the people mad about my use of the word earnings, I meant earnings on the retirement account and not someone's salary, but someone in there got me.

[unlicensedpotato]

First, a clarification: the Roth 401k you're looking isn't "backdoor," it's just a Roth 401k contribution. 401k plans don't have income limits so you don't have to jump through the same hoops as you would to put money into a Roth IRA.

The main consideration between the two is whether you think you'll be in a higher income tax bracket in retirement than you are currently -- if you're in the exact same tax bracket now and in retirement, the two options yield the same take-home result. Roth is better if your tax rate will be higher in retirement, and the traditional is better if your tax rate will be lower. Because the smart money is on a first year NY biglaw associate being in a lower bracket in retirement, the deductible (traditional) 401k makes sense.

The math gets fuzzier if you're maxing out the $18k / year. Because Roth contributions are after-tax, you're actually saving more maxing a Roth than maxing the traditional (at 40% combined fed/state taxes, you lose out on $30k to max a Roth 401k, but only lose out on $18k to max a traditional). $18k in a Roth is worth more than $18k in a traditional when you pull the money out, making the Roth the better option if you'll be in the same tax rate in retirement, or even in a slightly lower bracket, but there's quite a bit of math to do.

Awesome post man!

I won't claim to have done the math or research without doing it, but did you take earnings into account?

I had heard from others that if you're young and planning on working for a number of years that you get more benefit from tax-fee earnings on the Roth 401K than you do from the tax deferral benefits of a typical 401K. Likewise, in the grand scheme of things, aren't tax rates relatively low on a historical basis?

An example might help. Let's say you're willing to give up on $2,000 of income for retirement, and you put $1,000 into the Traditional and $600 into the Roth (your $1k after 40% taxes). 30 years later you're ready to retire and your accounts have increased in value 10x, $10k in traditional and $6k in the Roth. You pay no taxes on the Roth, so the $6k is yours free and clear, but you do pay taxes on the traditional -- if you're paying 40% taxes then, you'll get $6k as well. Both are the same in this example, $1k given up today for $6k in the future, but the result in the traditional will vary based on your future tax rate.

This is also why a maxed Roth is a bigger contribution. If you give up on $18k for a traditional, you're putting in the max $18k; if you give up on $18k for a Roth, you're putting in $10,800... and you can still put in more from there.

Intuitively this doesn't make sense to me but if I'm wrong, I'm wrong. Does inflation wash out too because you're paying the tax on traditional in 2046 dollars (the implication being that in a roth you don't pay taxes on inflation or real earnings)? Why do they have an income limit for roth but not regular and why do wealthy with high tax rates backdoor to roth? Edit: Looks like there are several advantages to the Roth that would especially help the wealthy, like no required distributions, but you're right to say that any economic benefit in your example would depend on higher rates in the future.

[unlicensedpotato]

I won't claim to have done the math or research without doing it, but did you take earnings into account?

The result is effectively the same if the person getting the tax deduction takes those tax savings and invests them. Roth guy pays no taxes on the distributions but pre-tax guy is distributing a bigger pile of money.

Okay yeah, this is the key. I was like, one of those guys paid $400 in taxes, the other paid $4000. Plenty of that is real purchasing power because stocks are typically appreciating well above inflation. You have to set aside the $400 deduction you saved so that it also appreciates 10x. In an hypothetical example comparing a maxed roth and traditional, the ending balance for both is 180,000 so I think the traditional person has to have the tax payment sitting somewhere else to get the same output from the 401k. You may actually have to invest more than the $400 because it will have tax leakage because of dividends, for example, that wouldn't happen in the nontaxable account.

[Actus Reus]

I love when people complain about "high" taxes. It's my favorite part of top-law-schools.com/forums

Why is that? The only "high" tax I want to complain about are my property taxes.

Was kidding obviously. Taxes are not that high in this country relatively given all that we get for that money. I have no interest in getting into a tax policy debate so I'll hang up and listen.

[JusticeJackson]

.

[Danger Zone]

Does anyone else worry that some future president will decide haha, you actually have to pay taxes on your roth contribution?

Does anyone else think that taxes are going to go way fucking up in the next 40 years?

Mybe I should stop wearing this tinfoil hat.

Hard no on both of them because they'd both be political suicide

[unlicensedpotato]

Does anyone else worry that some future president will decide haha, you actually have to pay taxes on your roth contribution?

Does anyone else think that taxes are going to go way fucking up in the next 40 years?

Mybe I should stop wearing this tinfoil hat.

Yes and yes. They would probably grandfather prior roth contributions though.

IMO the best guess based on current trends is that there will be a decrease in corporate taxes coupled with a combination of higher marginal individual income tax rates (particularly on high earners) and higher consumption taxes.

[bopqod]

I won't claim to have done the math or research without doing it, but did you take earnings into account?

The result is effectively the same if the person getting the tax deduction takes those tax savings and invests them. Roth guy pays no taxes on the distributions but pre-tax guy is distributing a bigger pile of money.

Okay yeah, this is the key. I was like, one of those guys paid $400 in taxes, the other paid $4000. Plenty of that is real purchasing power because stocks are typically appreciating well above inflation. You have to set aside the $400 deduction you saved so that it also appreciates 10x. In an hypothetical example comparing a maxed roth and traditional, the ending balance for both is 180,000 so I think the traditional person has to have the tax payment sitting somewhere else to get the same output from the 401k. You may actually have to invest more than the $400 because it will have tax leakage because of dividends, for example, that wouldn't happen in the nontaxable account.

A way to think of this is that the traditional does have $400 set aside--inside of the 401k. A contribution of $1000 to the IRA has the same current year impact as a contribution of $600 to the Roth, and that extra $400 in the traditional will eventually be used for taxes (caveat future rates &c.), but only after appreciation inside the account, so the percentages will be the same with both paying 40%. Yes, 40% in 30 years is more dollars, put it's paid out of tax-deferred and appreciated assets with the same result as if 40% had been paid going in.

It's not intuitive at all because equal contributions to a Roth and traditional are different dollar amounts today (or different % allocations depending on how your employer does things).

[unlicensedpotato]

A way to think of this is that the traditional does have $400 set aside--inside of the 401k. A contribution of $1000 to the IRA has the same current year impact as a contribution of $600 to the Roth, and that extra $400 in the traditional will eventually be used for taxes (caveat future rates &c.), but only after appreciation inside the account, so the percentages will be the same with both paying 40%. Yes, 40% in 30 years is more dollars, put it's paid out of tax-deferred and appreciated assets with the same result as if 40% had been paid going in.

It's not intuitive at all because equal contributions to a Roth and traditional are different dollar amounts today (or different % allocations depending on how your employer does things).

Last point then I'll drop it -- it doesn't have any extra set aside (in fact, it can't possibly) if they're both maxed out because they both have $18k. Where the contribution limits are the same, your example doesn't hold. It only works if you can contribute an extra amount equal to (your tax rate * contribution limit) to the traditional 401k.

So you need to set aside $30k of pre-tax income to contribute $18k to a Roth if the tax rate is 40%. You set aside $18k to contribute to the traditional. 30 years and increases 10x. So you withdraw $180k from the Roth. For traditional, you withdraw 180k and owe 40% tax. 40% of that is 72k. So you end up with $108k from the traditional. The $18,000 deduction is worth $7200 at a 40% tax rate. You *could* put that in a taxable account and it could return 10x. But you're bleeding taxes on dividends throughout the 30 years so you don't actually end up with the full 72,000 difference. And you have to set this amount aside to even get close.

The roth person paid $12k taxes in 2016 dollars but the traditional person paid $72k taxes in 2046 dollars, some of which is attributable to inflation (so you don't care) but a lot of which isn't.

"In short, to match the benefit of the Roth 4o1(k), you need to invest the tax savings from the traditional 401(k) to cover that growing income tax liability." https://blog.wealthfront.com/roth-401k- ... onal-401k/

[bopqod]

A way to think of this is that the traditional does have $400 set aside--inside of the 401k. A contribution of $1000 to the IRA has the same current year impact as a contribution of $600 to the Roth, and that extra $400 in the traditional will eventually be used for taxes (caveat future rates &c.), but only after appreciation inside the account, so the percentages will be the same with both paying 40%. Yes, 40% in 30 years is more dollars, put it's paid out of tax-deferred and appreciated assets with the same result as if 40% had been paid going in.

It's not intuitive at all because equal contributions to a Roth and traditional are different dollar amounts today (or different % allocations depending on how your employer does things).

Last point then I'll drop it -- it doesn't have any extra set aside (in fact, it can't possibly) if they're both maxed out because they both have $18k. Where the contribution limits are the same, your example doesn't hold. It only works if you can contribute an extra amount equal to (your tax rate * contribution limit) to the traditional 401k.

So you need to set aside $30k of pre-tax income to contribute $18k to a Roth if the tax rate is 40%. You set aside $18k to contribute to the traditional. 30 years and increases 10x. So you withdraw $180k from the Roth. For traditional, you withdraw 180k and owe 40% tax. 40% of that is 72k. So you end up with $108k from the traditional. The $18,000 deduction is worth $7200 at a 40% tax rate. You *could* put that in a taxable account and it could return 10x. But you're bleeding taxes on dividends throughout the 30 years so you don't actually end up with the full 72,000 difference. And you have to set this amount aside to even get close.

The roth person paid $12k taxes in 2016 dollars but the traditional person paid $72k taxes in 2046 dollars, some of which is attributable to inflation (so you don't care) but a lot of which isn't.

"In short, to match the benefit of the Roth 4o1(k), you need to invest the tax savings from the traditional 401(k) to cover that growing income tax liability." https://blog.wealthfront.com/roth-401k- ... onal-401k/

Completely agreed; we're saying the same thing two different ways. In the traditional you're forced to put the future tax into the account and that counts against the $18k; in the Roth you pay the tax outside of the account and the entire amount is future distributions. Once you pass $10,800 (at 40% tax) in the Roth, you're making a bigger contribution than is possible in a traditional 401k, and the traditional would have to use non-tax-advantaged investments to save the same amount.

[unlicensedpotato]

Completely agreed; we're saying the same thing two different ways. In the traditional you're forced to put the future tax into the account and that counts against the $18k; in the Roth you pay the tax outside of the account and the entire amount is future distributions. Once you pass $10,800 (at 40% tax) in the Roth, you're making a bigger contribution than is possible in a traditional 401k, and the traditional would have to use non-tax-advantaged investments to save the same amount.

Okay yeah completely agree. I think the general advice online though just says: "it basically evens out, depending on the tax rate" so I think some people read that to mean saving $18k, whether you do it in a roth or a traditional, works out the same.