Great content…. The software is a ‘must have’ for anyone considering early retirement, but isn’t currently working with a certified financial planner. The Roth conversion calculations are simply too complicated to create on your own, for 99% of the population.
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account. I'm now seeking best possible areas or ways to gain wealth in today's economy.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as in an individual investment account or employing the services of a retirement planner/investment advisor.
Private investing is the best way to go about the market right now, especially for near retirees, I've been in touch with a wealth manager, netted 370K the last downturn, made it clear there's more to the markets than we average joes know.
I'm cautious about giving specific recommendations as everyone's situation varies. Consider independent financial advisors like "Sophia Maurine Lanting" I've worked with her since the pandemic and highly recommend her. You can check if she meets your criteria.
Hi. This was a lot easier for me to follow. The information as usual is very valuable. It’s very helpful to my situation. Thank you. There are times when you go tangents, like my husband liked to do, and my brain stops working. Just me.👍
I have been investing in the stock market since early 2000. I am 42 now. I could not invest as much back than , as I can now. But I am really glad that I did! I am now contributing 100% to the Roth 401k. And now have 40% of my entire balance in Roth , through contributions and In Plan Roth Rollovers. My plan is to have 75% of my entire 401K balance in Roth. Because having some taxable income can be beneficial financially.
Really enjoyed this video. Much appreciated. I have been planning on retiring at 55 for 12 years now. I am 47. I'm part of a union so 55 is the earliest I can leave and qualify for medical. At 55 I'll have 31 years service and will receive about 24k a year pension (30% decrease leaving 5 years prior to 60). The pension is inflation adjusted but it never keeps up it's like 1%. Currently holding approximately 100k in a Roth IRA, 525k in regular brokerage account(mainly dividend paying stocks)and 1.5M in a 401k. Also started for first time in 2024 contributing to Roth 401k instead which is maxed out. No RMD's)..I intend to take SS at 62 as well but not sure what that will be so I use $1500 a month as a guesstimate. I'm hoping to have 12000$ a month pre tax income when I retire in 7.5 years. Lately I have been kicking myself for not starting Roth 401k earlier. I do Max out a Roth IRA using back door method. CT resides as well so state tax will always be a problem on that 401k.
@@cutehumor I hear ya. Another way I think may combat this possible huge tax issue when RMD hits on the 401k is to take from the 401k at 55(rule of 55 no 10% penalty) and delay taking SS until later .possibly 70. Not sure what that number is though. I figure taking heavily from 401k to sustain retirement prior to when RMDs hit(75 years old I believe)then scale back when SS kicks in at 70. This way the pre tax funds don’t grow too big causing a real tax nightmare. I agree though. Need to get my Roth game up for sure.
I love the software Ari, it is a must if you’re planning your retirement. Thanks for this Video, my husband and I were just talking last night about doing the Roth 401K now, I wish you can take a look at our file and give suggestion. I can volunteer our info for your case study. Just change our names.
Great video and discussion Ari. Question - How should a pension be valued and included in a net worth statement and financial plan? Or should it not be included at all and simply treated as income, thus lowering the draw required to cover expenses?
Oh man. I'm just a dude who was saving in his pre-tax retirement plan for years because that's what I thought I was supposed to do. Set it and forget it. I never really thought much about Roths, because those weren't part of my available plan when I started it. Now I'm less than 5 years from retirement and my wife and I will have a combined $140k of annual pensions along with $17-$20k of other income at age 57/55 when we do retire. The hammer is that we also have over $1.5 million in pre-tax accounts AND we live in a high income tax state (where we LOVE living). My recent realization was that we should NOT be contributing to the pre-tax account any longer, and now I think I might want to move to the no-income tax State 5 miles away in retirement to do Roth conversions (or withdrawals to live it up) up to the top of the 24% (28% by then) bracket for 5 years just to avoid the major RMD bomb staring us in the face when we turn 75. Those pre-tax accounts could rise to $2 million by the time we do retire. It's a 457b plan, so I won't have trouble with the 10% penalty, so I've got that going for me, which is nice. There are other weird tax rules where I live (Portland, OR) that complicate things. The problem with that plan is I really don't want to leave my current home, but it would literally be worth hundreds of thousands of dollars in tax savings to move. I really just didn't recognize how big the account balance was and connect that with the pension and other income being enough to fund our lifestyle, or at least to the point where we wouldn't be pulling more from the pre-tax account annually than it will be likely to earn. So what am I saying? I should have paid more attention to the difference between Roth and traditional accounts 10 or more years ago, especially with guaranteed income.
I think your biggest problem is you live in Portland and enjoy it! Just kidding my son lives in Kelso after living in Beaverton and he loves it. I would probably move across the line. Anyway the good news is you have LOTS of money. Good luck to you
@@GP-fw8hn Yes, there are bigger problems to have. Many people do it the way I did very intentionally BECAUSE they know they'll be moving to a lower tax state in retirement. I may have forced my own hand with the way I did it. :) IF I do that, I'd probably keep my home here, and move back after converting, renting out in the interim. I still have 3.5 years to figure it out.
Great Case study that is giving me a lot to think about. However I'm curious why you didn't talk about tax brackets as part of the decision making. If I heard what you were suggesting correctly if you have additional cash flow you should consider contributing to Roth 401k. What is that true regardless of your tax bracket?
I've been subscribed for a couple months now. Love your content and the look of this tool. Have a question, and I don't mean to devalue the software you've created (it looks incredible)... but when might you offer a coupon code to reduce the cost? As a young(er) investor every dollar I put into retirement accounts is working very hard for me right now :)
Question: I have a Roth 401k at work. I also have 2 separate Roths and 1 traditional ira in a outside account at one of the major brokerages. I'm over 50. I know you can contribute 8k per year. The part that is confusing me is, doesn't the work Roth 401k fall under the 8k limit with all my OUTSIDE accounts combined? OR DOES THAT FALL UNDER SEPARATE CATEGORIES. I WAS INFORMED ALL YOUR ROTHS AND TRADITIONAL IRAS CANNOT EXCEED 8K PER YEAR. I called a tax professional they state that's true. The Irs charges a 6% penalty if you over contribute.
401k limits are independent of IRA limits so you can max both. So if you and your spouse are both 50 you can each do $8k into IRAs and $30,500 to 401ks.
I’m 24 and very interested in personal finance. I’ve listened to your podcast/channel for the past couple of months. Are there any discount codes to your course materials?
"If your cash flow allows for it, do Roth", what exactly does that mean? If you can tough it out and do 3% Roth instead of 3% Trad, then you could have toughed it out and done 3.85% in Trad. Comparing 3% Roth to 3% Trad is not comparing apples to apples, you would need to increase the trad contribution to where the take home income (while working and contributing) is equivalent between the two comparisons. It only gets complicated when you are at the max and then need to compare max Roth to max Trad + investing the difference to a taxable brokerage. Or am I misunderstanding something you are saying?
Generally speaking since Roth IRA offers more investment options at lower costs and greater accessibility, you should contributing $7,000 to Roth IRA before considering contributing to Roth 401(k).
Can someone who's already retired and subject to RMD, and doesn't already have a Roth IRA, still be allowed open a new Roth IRA to do Roth conversions? I always thought you must already have a Roth IRA set up prior to retirement, otherwise there is no "income" for you to establish one.
You may convert money from your traditional 401(k) and money from your traditional IRA to a Roth IRA. You do no need an existing Roth IRA balance to do so.
You act like the benefit of Roth over Trad is time horizon, but that’s completely wrong. Putting in 3% for each smuggles in the extra expense of investing in the Roth with after tax money. If you add the tax difference back into the Trad investment amount, the only difference is a change in tax rates, which you can’t predict.
Would you still suggest doing a Roth 401k when in the 37% income tax bracket? I’m 57 and plan on working another 7 years. My plan was to have my wife and I contribute the max each to our solo 401k’s and then do Roth conversions when retired and in a lower tax bracket. This does bring up the dilemma of IRMAA though from these conversions. I have 2.7mill in my current 401k and have been debating wether to do Roth for at least one of our 401k’s this last seven years.
37% is highest federal tax bracket so you should favor traditional 401(k) as default. For tax diversification contribute $8k to his Roth IRA and $8k to her Roth IRA.
If one has a large amount of contributions to Roth IRAs and is planning on retiring around 57, is there any reason that person should save in a brokerage account rather than a Roth 401k?
@@gbski43 Yes the 59.5 rule is the main reason, Another reason would be if you don't have enough cash in your emergency fund or if you plan to buy real estate, gold bullion or some other asset that you cannot or do not want to hold in your retirement account.
We do Roth 401k and backdoor roth IRA. No debt. We are mid 40s and have been doing this since the start. We don’t want to face taxes in RMD. With discipline for 30-40 years we will have substantial amount in these accounts. We have employer contribution which would be pre tax. So outside the pre tax, post tax, we also have brokerage account.
Am I missing something? Here is my assumption, at current working with high income and high income tax at 30%; however, at retirement, the income is lower and income tax is at 20%. With those assumptions, if I set aside $1,000 for retirement and invest with 6% return. At 20 year later, for regular 401K and $1,000 investment, I should get $3,207. At withdraw and pay 20% income tax, I would take home $2,566. If I choose Roth 401K, I have to pay 30% tax of $1,000. Therefore, I only have $700 for retirement investment. At 20 year later and 6% return, when I withdraw (with no income tax), I would get $2,245. Based on this math, it looks like Traditional 401K is better than Roth 401K ($2,566 versus $2,245). If people think that their overall income at retirement is lower and their income is lower compared to while they are working, maybe traditional 401K get a better return than Roth 401K. Am I missing something in my calculations?
This is true if you were paying taxes out of your contribution money, most people contribute to a 401K a set amount of money per week or a percentage so the amount invested in a roth or a traditional 401(k) would be identical, but your take-home pay would be less. So at the end of the 20 years if both roth and traditional earned the same return, the money in the account will be identical, but the Roth would be tax free. Now the key part no one talks about is the tax money not paid on traditional 401k also needs to also be invested, and then the traditional 401(k), for the most part becomes more tax efficient. Also The biggest downfall with traditional 401(k) is RMD’s that could cause you to go into a higher tax bracket but most the time you’re still low enough income to save money with a traditional 401(k). I think the biggest benefit for roth is from legacy planning and passing on money to children tax free.
Taxes will be going up. I'm at the top of the 22 percent tax bracket, wife just got a 20 percent raise, when the trump tax cuts expire end of 2025, we will be in the bottom of the 28% old tax bracket. We started doing roth 401k a few months ago and will stay there. retiring in 7 years and 4 months with irs rule of 55. I'm retiring due to health reasons plus the longer I work the more taxes we will have to pay!
If you are retiring at 55 you will have a long time to potentially pull from your tax deferred accounts in the 10% and 15% brackets. Why do Roth when your in the 28% bracket today?
@@ericrosenberg5844 wife will be in 39 percent tax bracket after I die. She will be taking rmd from my 401k and her 401k, capital gains from brokerage accounts, ss income, irmaa taxes, niit taxes, Rightcapital software has her in 33 percent tax bracket after I die if I do Roth now. That is if the tax brackets stay the same for the next 40 years which it will not. Taxes going up across the board. This is with 7 percent returns for the next 40 years. If I had to do it all over again, I would done Roth because I’m a saver not a spender. The secure act 2.0 makes my kids pay taxes in ten years after we die off
Anyone who has reviewed the USA public debt and unfunded liabilities knows that higher tax rates in the future are a certainty. Inflating the debt isn't going to solve the problem as most entitlements are indexed for inflation.
Its not entirely clear but in your scenarios you appear to be contributing an equal amount to Roth or Traditional which would naturally tend to favor Roth contributions. Since a Traditional contribution would impact your after tax pay less then a Roth contribution for a better comparison shouldn't you increase your Traditional contribution so the net effect on your after tax pay is the same? Meaning if you are in the 32% tax bracket and want to contribute 5% to your 401, putting 5% in Roth would be equivalent to 7.35% in Traditional with respect to your net pay.
I totally agree with you. Pretax will have more balance than Roth. Assuming they are in the same tax rate, pretax and Roth will give them exactly the same amount of money after tax
100% agree. I keep doing the math and based on my calculation it keeps coming out with traditional is slightly better in my situation. Did roth for a while but when I shot up into the 35%/37% brackets reducing the tax liability through pre-tax was a better long term play as I can still do the roth conversion when I retire early so benefit now of tax reduction and benefit later through the roth conversion when I drop out of the very high brackets
It would be a challenge for me to even reach the $25K a month spending required to need 300K. You don't mention your age so if you're 20, $300K in 45 years isn't going to be worth the same as now and may be the typical retirement income in 2070.
@@earlyretirementari -- Thanks. I didn't mean that there were literally none; just that it was true the vast majority of the ones I'd seen. On the other hand, I wonder if the percentage of couples without children is associated with them having portfolios over $2M. That wouldn't surprise me.
@@enonknives5449 agree - I have 2 in high school and covering their college costs and their health insurance are definitely a big consideration as I plan for retirement. A lot of people will still have 'adult' dependents all the way up to medicare, given that ACA doesn't age them out until 26. I've never seen a case study on any channel that included dependent adult kids as part of the healthcare equation. It's usually a quick "they have 529s so everything is good" and move on.
@@lindsaynewell6319 -- My kids are out of college, but still on our healthcare a bit longer. I don't expect them to need any other support. One has already paid off all student loans, and the other is getting close. They are starting to invest younger than I was when I started. They'll probably be better off than my wife and me when their retirement rolls around.
@@lindsaynewell6319 True. I intend to retire a.) before medicare, b.) while my kids are ages 19 and 21. Healthcare costs for the kids under 26 is going to be a concern. I think Ari is one of the best at showing these case studies, but it seems that dependent health insurance is often glossed over/ignored by everyone.
Great content…. The software is a ‘must have’ for anyone considering early retirement, but isn’t currently working with a certified financial planner.
The Roth conversion calculations are simply too complicated to create on your own, for 99% of the population.
Agreed
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account. I'm now seeking best possible areas or ways to gain wealth in today's economy.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as in an individual investment account or employing the services of a retirement planner/investment advisor.
Private investing is the best way to go about the market right now, especially for near retirees, I've been in touch with a wealth manager, netted 370K the last downturn, made it clear there's more to the markets than we average joes know.
Who is this Adviser or investor you use? I lost over 35000 already this year, I’m in need of a planner going forward.
I'm cautious about giving specific recommendations as everyone's situation varies. Consider independent financial advisors like "Sophia Maurine Lanting" I've worked with her since the pandemic and highly recommend her. You can check if she meets your criteria.
Love when a video is perfectly timed to my life. Great analysis, Ari.
So glad!
Hi. This was a lot easier for me to follow. The information as usual is very valuable. It’s very helpful to my situation. Thank you. There are times when you go tangents, like my husband liked to do, and my brain stops working. Just me.👍
HA!
I have been investing in the stock market since early 2000. I am 42 now. I could not invest as much back than , as I can now. But I am really glad that I did! I am now contributing 100% to the Roth 401k. And now have 40% of my entire balance in Roth , through contributions and In Plan Roth Rollovers. My plan is to have 75% of my entire 401K balance in Roth. Because having some taxable income can be beneficial financially.
Really enjoyed this video. Much appreciated. I have been planning on retiring at 55 for 12 years now. I am 47. I'm part of a union so 55 is the earliest I can leave and qualify for medical.
At 55 I'll have 31 years service and will receive about 24k a year pension (30% decrease leaving 5 years prior to 60). The pension is inflation adjusted but it never keeps up it's like 1%. Currently holding approximately 100k in a Roth IRA, 525k in regular brokerage account(mainly dividend paying stocks)and
1.5M in a 401k. Also started for first time in 2024 contributing to Roth 401k instead which is maxed out. No RMD's)..I intend to take SS at 62 as well but not sure what that will be so I use $1500 a month as a guesstimate. I'm hoping to have 12000$ a month pre tax income when I retire in 7.5 years. Lately I have been kicking myself for not starting Roth 401k earlier. I do Max out a Roth IRA using back door method. CT resides as well so state tax will always be a problem on that 401k.
you need to do roth as much as possible. you are the same age as me, I'm freaking out because taxes will only go up.
@@cutehumor I hear ya. Another way I think may combat this possible huge tax issue when RMD hits on the 401k is to take from the 401k at 55(rule of 55 no 10% penalty) and delay taking SS until later .possibly 70. Not sure what that number is though. I figure taking heavily from 401k to sustain retirement prior to when RMDs hit(75 years old I believe)then scale back when SS kicks in at 70. This way the pre tax funds don’t grow too big causing a real tax nightmare. I agree though. Need to get my Roth game up for sure.
I love the software Ari, it is a must if you’re planning your retirement. Thanks for this Video, my husband and I were just talking last night about doing the Roth 401K now, I wish you can take a look at our file and give suggestion. I can volunteer our info for your case study. Just change our names.
Great Video!
Great video and discussion Ari. Question - How should a pension be valued and included in a net worth statement and financial plan? Or should it not be included at all and simply treated as income, thus lowering the draw required to cover expenses?
I discuss using my pension analysis tool in the academy: ari-taublieb.mykajabi.com/early-retirement-academy
Oh man. I'm just a dude who was saving in his pre-tax retirement plan for years because that's what I thought I was supposed to do. Set it and forget it. I never really thought much about Roths, because those weren't part of my available plan when I started it. Now I'm less than 5 years from retirement and my wife and I will have a combined $140k of annual pensions along with $17-$20k of other income at age 57/55 when we do retire. The hammer is that we also have over $1.5 million in pre-tax accounts AND we live in a high income tax state (where we LOVE living). My recent realization was that we should NOT be contributing to the pre-tax account any longer, and now I think I might want to move to the no-income tax State 5 miles away in retirement to do Roth conversions (or withdrawals to live it up) up to the top of the 24% (28% by then) bracket for 5 years just to avoid the major RMD bomb staring us in the face when we turn 75. Those pre-tax accounts could rise to $2 million by the time we do retire. It's a 457b plan, so I won't have trouble with the 10% penalty, so I've got that going for me, which is nice. There are other weird tax rules where I live (Portland, OR) that complicate things. The problem with that plan is I really don't want to leave my current home, but it would literally be worth hundreds of thousands of dollars in tax savings to move. I really just didn't recognize how big the account balance was and connect that with the pension and other income being enough to fund our lifestyle, or at least to the point where we wouldn't be pulling more from the pre-tax account annually than it will be likely to earn. So what am I saying? I should have paid more attention to the difference between Roth and traditional accounts 10 or more years ago, especially with guaranteed income.
Don’t beat yourself up!
I think your biggest problem is you live in Portland and enjoy it! Just kidding my son lives in Kelso after living in Beaverton and he loves it. I would probably move across the line. Anyway the good news is you have LOTS of money. Good luck to you
@@GP-fw8hn Yes, there are bigger problems to have. Many people do it the way I did very intentionally BECAUSE they know they'll be moving to a lower tax state in retirement. I may have forced my own hand with the way I did it. :) IF I do that, I'd probably keep my home here, and move back after converting, renting out in the interim. I still have 3.5 years to figure it out.
Great Case study that is giving me a lot to think about. However I'm curious why you didn't talk about tax brackets as part of the decision making. If I heard what you were suggesting correctly if you have additional cash flow you should consider contributing to Roth 401k. What is that true regardless of your tax bracket?
Making a mental bookmark. Will this current day thought exercise be the same 10+ years from now?
I've been subscribed for a couple months now. Love your content and the look of this tool. Have a question, and I don't mean to devalue the software you've created (it looks incredible)... but when might you offer a coupon code to reduce the cost? As a young(er) investor every dollar I put into retirement accounts is working very hard for me right now :)
Shoot me an email ari@rootfinancialpartners.com
Question: I have a Roth 401k at work. I also have 2 separate Roths and 1 traditional ira in a outside account at one of the major brokerages. I'm over 50. I know you can contribute 8k per year. The part that is confusing me is, doesn't the work Roth 401k fall under the 8k limit with all my OUTSIDE accounts combined? OR DOES THAT FALL UNDER SEPARATE CATEGORIES. I WAS INFORMED ALL YOUR ROTHS AND TRADITIONAL IRAS CANNOT EXCEED 8K PER YEAR. I called a tax professional they state that's true. The Irs charges a 6% penalty if you over contribute.
401k limits are independent of IRA limits so you can max both. So if you and your spouse are both 50 you can each do $8k into IRAs and $30,500 to 401ks.
@@ericrosenberg5844 Thank you. It was hard getting and finding an answer.
I’m 24 and very interested in personal finance. I’ve listened to your podcast/channel for the past couple of months. Are there any discount codes to your course materials?
Send me an email ari@rootfinancialpartners.com explaining the reason you deserve a discount.
"If your cash flow allows for it, do Roth", what exactly does that mean? If you can tough it out and do 3% Roth instead of 3% Trad, then you could have toughed it out and done 3.85% in Trad. Comparing 3% Roth to 3% Trad is not comparing apples to apples, you would need to increase the trad contribution to where the take home income (while working and contributing) is equivalent between the two comparisons. It only gets complicated when you are at the max and then need to compare max Roth to max Trad + investing the difference to a taxable brokerage. Or am I misunderstanding something you are saying?
agree. the video seemed flawed because of that.
Since I do have a 401k and a Roth 401k do I need to start a Roth IRA ? Or can I just raise my Roth 401k contribution to the max.
Raise
Generally speaking since Roth IRA offers more investment options at lower costs and greater accessibility, you should contributing $7,000 to Roth IRA before considering contributing to Roth 401(k).
Can someone who's already retired and subject to RMD, and doesn't already have a Roth IRA, still be allowed open a new Roth IRA to do Roth conversions? I always thought you must already have a Roth IRA set up prior to retirement, otherwise there is no "income" for you to establish one.
You may convert money from your traditional 401(k) and money from your traditional IRA to a Roth IRA. You do no need an existing Roth IRA balance to do so.
You act like the benefit of Roth over Trad is time horizon, but that’s completely wrong. Putting in 3% for each smuggles in the extra expense of investing in the Roth with after tax money. If you add the tax difference back into the Trad investment amount, the only difference is a change in tax rates, which you can’t predict.
Would you still suggest doing a Roth 401k when in the 37% income tax bracket? I’m 57 and plan on working another 7 years. My plan was to have my wife and I contribute the max each to our solo 401k’s and then do Roth conversions when retired and in a lower tax bracket. This does bring up the dilemma of IRMAA though from these conversions. I have 2.7mill in my current 401k and have been debating wether to do Roth for at least one of our 401k’s this last seven years.
How long will you be in a lower tax bracket in the future?
37% is highest federal tax bracket so you should favor traditional 401(k) as default. For tax diversification contribute $8k to his Roth IRA and $8k to her Roth IRA.
If one has a large amount of contributions to Roth IRAs and is planning on retiring around 57, is there any reason that person should save in a brokerage account rather than a Roth 401k?
No tax on gains in a ROTH
Yes better access to funds prior to 59.5
@@gbski43 Yes the 59.5 rule is the main reason, Another reason would be if you don't have enough cash in your emergency fund or if you plan to buy real estate, gold bullion or some other asset that you cannot or do not want to hold in your retirement account.
We do Roth 401k and backdoor roth IRA. No debt. We are mid 40s and have been doing this since the start. We don’t want to face taxes in RMD.
With discipline for 30-40 years we will have substantial amount in these accounts.
We have employer contribution which would be pre tax. So outside the pre tax, post tax, we also have brokerage account.
Am I missing something? Here is my assumption, at current working with high income and high income tax at 30%; however, at retirement, the income is lower and income tax is at 20%. With those assumptions, if I set aside $1,000 for retirement and invest with 6% return. At 20 year later, for regular 401K and $1,000 investment, I should get $3,207. At withdraw and pay 20% income tax, I would take home $2,566. If I choose Roth 401K, I have to pay 30% tax of $1,000. Therefore, I only have $700 for retirement investment. At 20 year later and 6% return, when I withdraw (with no income tax), I would get $2,245. Based on this math, it looks like Traditional 401K is better than Roth 401K ($2,566 versus $2,245). If people think that their overall income at retirement is lower and their income is lower compared to while they are working, maybe traditional 401K get a better return than Roth 401K. Am I missing something in my calculations?
I see it much the same way. Everyone seems so excited about Roth but I wonder what I'm not seeing to not want to go down that path.
This is true if you were paying taxes out of your contribution money, most people contribute to a 401K a set amount of money per week or a percentage so the amount invested in a roth or a traditional 401(k) would be identical, but your take-home pay would be less. So at the end of the 20 years if both roth and traditional earned the same return, the money in the account will be identical, but the Roth would be tax free. Now the key part no one talks about is the tax money not paid on traditional 401k also needs to also be invested, and then the traditional 401(k), for the most part becomes more tax efficient. Also The biggest downfall with traditional 401(k) is RMD’s that could cause you to go into a higher tax bracket but most the time you’re still low enough income to save money with a traditional 401(k). I think the biggest benefit for roth is from legacy planning and passing on money to children tax free.
Better advice…1. Max out the company match on 401k. 2. Max out HSA every year 3. Then Roth IRA
Taxes will be going up. I'm at the top of the 22 percent tax bracket, wife just got a 20 percent raise, when the trump tax cuts expire end of 2025, we will be in the bottom of the 28% old tax bracket. We started doing roth 401k a few months ago and will stay there. retiring in 7 years and 4 months with irs rule of 55. I'm retiring due to health reasons plus the longer I work the more taxes we will have to pay!
If you are retiring at 55 you will have a long time to potentially pull from your tax deferred accounts in the 10% and 15% brackets. Why do Roth when your in the 28% bracket today?
@@ericrosenberg5844 wife will be in 39 percent tax bracket after I die. She will be taking rmd from my 401k and her 401k, capital gains from brokerage accounts, ss income, irmaa taxes, niit taxes, Rightcapital software has her in 33 percent tax bracket after I die if I do Roth now. That is if the tax brackets stay the same for the next 40 years which it will not. Taxes going up across the board. This is with 7 percent returns for the next 40 years. If I had to do it all over again, I would done Roth because I’m a saver not a spender. The secure act 2.0 makes my kids pay taxes in ten years after we die off
Does your analysis include assumptions that tax brackets would change in the future?
Yes.
Anyone who has reviewed the USA public debt and unfunded liabilities knows that higher tax rates in the future are a certainty. Inflating the debt isn't going to solve the problem as most entitlements are indexed for inflation.
Its not entirely clear but in your scenarios you appear to be contributing an equal amount to Roth or Traditional which would naturally tend to favor Roth contributions.
Since a Traditional contribution would impact your after tax pay less then a Roth contribution for a better comparison shouldn't you increase your Traditional contribution so the net effect on your after tax pay is the same? Meaning if you are in the 32% tax bracket and want to contribute 5% to your 401, putting 5% in Roth would be equivalent to 7.35% in Traditional with respect to your net pay.
I totally agree with you. Pretax will have more balance than Roth. Assuming they are in the same tax rate, pretax and Roth will give them exactly the same amount of money after tax
100% agree. I keep doing the math and based on my calculation it keeps coming out with traditional is slightly better in my situation. Did roth for a while but when I shot up into the 35%/37% brackets reducing the tax liability through pre-tax was a better long term play as I can still do the roth conversion when I retire early so benefit now of tax reduction and benefit later through the roth conversion when I drop out of the very high brackets
I've heard Roth 401k isnt great for folks who want to retire early since it cant be tapped early penalty free unlike a Roth IRA.
I would hope you don’t touch your Roth first since it’s the best account for long term tax free growth.
What…no mention of the widows penalty? You could be in a way higher tax bracket if one spouse passes away…always do Roth 😁
Yellow teeth
My plan is to pull out 300k per year after taxes in retirement
Enjoy it!
It would be a challenge for me to even reach the $25K a month spending required to need 300K. You don't mention your age so if you're 20, $300K in 45 years isn't going to be worth the same as now and may be the typical retirement income in 2070.
I've noticed that in all these examples, that no one ever has children.
2 kids in this one! th-cam.com/video/L5bhAwfVxp8/w-d-xo.htmlsi=kJ9lkeNT13QxH-Gb
@@earlyretirementari -- Thanks. I didn't mean that there were literally none; just that it was true the vast majority of the ones I'd seen. On the other hand, I wonder if the percentage of couples without children is associated with them having portfolios over $2M. That wouldn't surprise me.
@@enonknives5449 agree - I have 2 in high school and covering their college costs and their health insurance are definitely a big consideration as I plan for retirement. A lot of people will still have 'adult' dependents all the way up to medicare, given that ACA doesn't age them out until 26. I've never seen a case study on any channel that included dependent adult kids as part of the healthcare equation. It's usually a quick "they have 529s so everything is good" and move on.
@@lindsaynewell6319 -- My kids are out of college, but still on our healthcare a bit longer. I don't expect them to need any other support. One has already paid off all student loans, and the other is getting close. They are starting to invest younger than I was when I started. They'll probably be better off than my wife and me when their retirement rolls around.
@@lindsaynewell6319 True. I intend to retire a.) before medicare, b.) while my kids are ages 19 and 21. Healthcare costs for the kids under 26 is going to be a concern. I think Ari is one of the best at showing these case studies, but it seems that dependent health insurance is often glossed over/ignored by everyone.