Traditional vs. Roth 401(k): Which Is Better for Retirement?
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- เผยแพร่เมื่อ 19 มิ.ย. 2024
- If you went all-in on a Roth 401(k) instead of maxing out your traditional 401(k), would you be better off?
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Timestamps
0:00 - Traditional vs. Roth 401(k)
1:23 - Beginnings of the Roth 401(k)
1:54 - Our assumptions
2:44 - Living expenses assumptions
3:38 - Current retirement savings
4:07 - Projected savings at retirement
4:56 - Expected income in retirement
6:47 - Tax rates make a difference
7:53 - Monte Carlo analysis results
8:29 - Traditional vs. Roth: deciding factors
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Patrick King is a fee-only financial advisor in Atlanta and the Founder of Prana Wealth. Over his career, Patrick has helped CEOs, all-star athletes, Grammy-winning artists, and many others build their wealth, retire sooner, and create a legacy. Patrick enjoys yoga, mountain biking, golf, travel photography, and Clemson football.
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The 401k is good, because retirement choices determine a lot of things. My parents both spent same number of years in the civil service, but my mom was investing through a wealth manager, and my dad through the 401k. My mom retired with about 4.2 million, but my dad retired with roughly 1.8 million. So it really does.
Effective management of personal finances is more important than the amount of money saved, regardless of whether one earns income through work or investment. To optimize financial outcomes, individuals can seek guidance from a qualified financial advisor who can provide tailored advice and strategies to minimize expenses and maximize income.
There's another tax not mentioned for Catch up Cathy. 85% of Social Security is taxed for those receiving over $44,000+ a year from a 401K or other non-Social Security sources. Roth distributions are not considered income, so Rachel Roth would also forego that tax expense as further increase the gap between her and Catch up Cathy.
Taxable income also affects IRMAA which increases Medicare fees. And the employer matching for Rachel Roth is taxable on withdrawal.
But the most fundamental difference is if both max out the contribution limits. Rachel Roth takes a bigger chunk out of her monthly cashflow, but she can put way more “spendable” money into her retirement plan. If you need to do this (and can), Roth yields far more retirement savings.
Do both, max the 401k and the Roth IRA. Then pull enough to fill the 12% tax bracket from the 401k and use the Roth for any extra you want.
That works until you reach RMD age. Roth is king
IRA is not involved in this discussion... It's Roth *401K* vs Pre-tax 401K.
My plan at this time is to continue my 401k contribution and match but mostly to stuff the hell out of my annuity while investing in long term stocks with my FA Olivia Rene Reyes who works hard to make sure the Wall St. casino goes the way my fantasies envision haha. I feel that etf is king, especially b/c I am retiring to South America so I’ll need all the dividends I can get. So I'll let the casino accounts; Roth, 401k, etc do their thing for many years and move them to safe ground when they top out. Already close to a million thanks to my fa. Goodluck to me!
wow ,that’s stirring! Do you mind connecting me to your advisor please. I desperately need one to diversify my portfolio
I’ve actually been looking into advisors lately, the news I’ve been seeing in the market hasn’t been so encouraging. who’s the person guiding you?
@michaelgraham The adviser I'm in touch with is ‘Olivia Rene Reyes’ she works with Merrill, Pierce, Smith incorporated and interviewed on CNBC Television. You can use something else, for me his strategy works hence my result. She provides entry and exit point for the securities I focus on.
@@JosephineGaule Thanks, I just googled her I'm really impressed with her credentials. I reached out to her since I need all the assistance I can get.
But you included the state tax rate in Cathy's and you didn't include the added state tax in the ROTH savings (plus the fact that she may have been in a different tax bracket at that time so her pre-ROTH taxes may have been at a higher rate), so they aren't really the same comparison... You have to run the numbers completely out... for each side, at both the deposite and the withdrawal points to have a better understanding of this.
For example, if you are in a high state tax location now, but may be in a lower state tax region when you retire, even if you intend to have the same income from your investments, you will likely be better off not in the ROTH. If you expect to have moved to a lower income tax state and also have lower income, you will almost certainly be better off to not be in a ROTH.
The cavieat to this is that if you have a high income and will have a high withdrawal, you will pay more tax on SS when you retire, but that is taxed at a lower rate anyway, (85% above $44K for married). However, if you have that much income in a retirement account, it my have been impossible to accomplish that without haing a substantial amount in social security anyway. So even if 100% of your money is in ROTH (which would have been hard to do unless you converted it all over at some point), you will have income and you wil have also had a high enough tax burden that ROTH becomes hard to justify.
ROTH makes perfect sense for a low earner early in their career and if you are in a low tax state or a combination of both, but mid or late career when you are earning considerably more and are in the 22-24% tax brackets, I think it is much less sensible for moost people.
State taxes: Does it make sense if working in a income tax state to use Traditional and pay no state income tax on contributions, then retire in a no income tax state and pay no state income tax on withdrawals?
So If I was told so many years back then that I would be able to live in my fully owned house at 37 years with my wife at 33 years alongside a combined net worth of over $1.5M in assets and savings with no debts. I may disagree heavily.
It wasn't easy sometime back,when I had 2 kids in school and had a lot of debts to settle.
This lifestyle that made us retire so early is only possible through efficient saving and key passive income processes.
good to know. Mind sharing any advice for me Van?
On these passive income practices
@@sonlee8066
It's a positive privilege that I have been working with an industry master who goes by the name, William Alex Jude.
He's credible and has been the reason I am able to get to this level in life. Surely you should get a coach yourself.
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Yes just use his full name now to look him up on the web and ensure to leave a message for him. He'll be in touch.
Rest assured he can work with anyone irrespective of your location.
@@vandrex234
William Alex Jude and I are in good contact now. Thanks just reached out to him using your direction.
I'd always be willing to do this and invezt for the long term as long as I'm assured of success. I think I've heard WILLIAM ALEX JUDE mentioned a few times before and I reckon this number of people talking about one person can't be wrong about their experiences.
Choosing a Roth IRA is advantageous as it uses after-tax funds and allows tax-free growth. When I retired, I had $3M million saved, and I won't be taxed on my withdrawals.
You're right, I used a financial advisor. Approaching retirement, I've benefited greatly from their guidance. Starting late, I knew index fund compound interest wouldn't be enough. It's funny how I've outperformed peers with more years of investing experience.
I certainly didn't achieve that on my own. My knowledge of finance was quite limited. A skilled financial advisor truly makes a significant difference.
Her name is Stacey Lee Decker and she' a genius at her field. You can easily confirm her expertise by searching for her online. She possesses extensive knowledge of financial markets.
Thank goodness . I just found her on the web. She seems well experienced.
Braindead comment.
As a soon-to-be retiree, keeping my 401k on track after a bumpy 2022 is a high goal. I've read about investors generating up to $250k ROI in this present sinking market; any suggestions for increasing my ROI before retirement would be greatly appreciated.
If you're new to investing or don't have much time, it's best to get advice from an expert. Investing without proper guidance can lead to mistakes and losses. I've learned this from my own experience.
Something that changed at the end of 2022 with Secure 2.0 is that Roth contributions to retirement accounts are no longer subject to required minimum distributions (RMDs) like their traditional/tax-deferred accounts.
Tax-deferred is great, lower the taxable income now and live below your means later to save even more, but Uncle Sam is still going to force you to take withdrawals and tax you on those forced withdrawals should you be so lucky to get to that age.
Good video
Thanks, @L Roberts ! I'm glad you enjoyed it!
Really helpful video, thank you! Couple of things to point out: 4:30 Roth 401k employer match is taxable, that initial $350,000 is also taxable. So that $1,536,090 Rachael Roth is not 100% tax free as indicated at 5:51.
A Financial Planner told me Saving at least 15% of your income in a 401(k) can help ensure that you have enough money to retire comfortably. How can one take advantage of compound interest and potentially grow your retirement savings/net-worth to about $3M over time?
I stopped listening and taking financial advise from these TH-camrs, because at the end of the day, I end up with a bunch of confusing stocks without knowing when to take profit, In reality, all I needed was professional advice.
How can I participate in this? I sincerely aspire to establish a secure financial future and am eager to participate. Who is the driving force behind your success?
As a matter of fact I always preferred to handle my own investing, but after my portfolio took a major hit in 2020, I really had to rethink my plans for the future, so I reached out to an F.A Kaitlin Rose Sternberg who really helped me balance up my losses.
I've come across a lot of recommendations but this one stands out. Kaitlin’s resume is pretty sophisticated, and shows she was active during the last bear market, I also emailed her. Thanks for the info!
Taxes are really the deciding factor. Are your taxes high at the moment? Will they be higher or lower when you are withdrawing money? Thing is if you only withdraw the minimum required meaning you don't need the retirement account money its better to do traditional. Never pay taxes because you're pretty much never using the money.
To me, the issue is so I want to pay the taxes now while I have a job and good cash flow. So for me I like the idea of my retirement being mostly tax free. So I am doing max conversations the next 3 years yes at higher than the recommended 24% tax rate. In retirement I will maje sure I do not have IRMA, SSA taxed and no RMD
To me the simplicity & flexibilty of a Roth is unmatched in retirement..
In terms of Traditional many things are income limit based in retirement..go over & you pay more..or pay more in taxes or this is reduced or cut off etc..
That aspect is not mentioned the cost of that.
Roths don't count.
Your outcome has Rachel coming out slightly ahead but that should not be the case. The two examples do not have the same starting point. The way that it was calculated, Rachel starts with $350k in after tax investments while Cathy has $350k pre-tax. Either Cathy should have more saved since Rachel already paid the taxes, or Rachel's $350k isn't after tax and she should be paying that in retirement.
*Derek Zielsdorf* @ 5:07 RR on line "Less: Taxes on Withdrawals" is *zero dollars* which suggests Rachel's $1.5 million balance is entirely *Roth 401(k)* with no traditional 401(k) amount. And as you state Rachel's *$350,000* [@ 3:54] is *Roth* 401(k) while Cathy's $350,000 appears to be *traditional* 401(K) --- this makes for a completely unbalanced and unfair comparison.
*PW* should clarify if the *$350k* is Roth and or traditional for both persons.
Great comments here. Again, this is the reason for my caveat at the end regarding the shortcomings of the 4% rule. All of these issues are accounted for in the Monte Carlo results, however.
One thought is to buy the dip and then wait to break even, another thought is: Will buying low during a recession work if I'm retiring in the next 3years, I'm no way near prepared for retirement and I just need strategies to scale up to atleast 2million by the time I'm set to retire
Since the crash, I've been in the red. I’m playing the long term game, so I'm not too worried but Jim Cramer mentioned there are still a lot of great opportunities, though stocks has been down a lot. I also heard news of a guy that made $250k from about $110k since the crash and I would really look to know how to go about this.
There are actually a lot of ways to make high yields in a crisis, but such trades are best done under the supervision of Financial advisor.
Thats true, I've been getting assisted by a FA for almost a year now, I started out with less than $200K and I'm just $19,000 short of half a million in profit.
@@hermanramos7092 Impressive can you share more info?
@@kenanporubsky2122 My advisor is ‘’Christine Jane Mclean’’ she’s highly qualified and experienced in the financial market. She has extensive knowledge of portfolio diversity and is considered an expert in the field. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market
Is this a fair comparison? We assumed that Roth Rachel had $350,000 in a ROTH account and Catch-up Cathy had $350,000 in a 401 account, but really Cathy would’ve had a much larger account if she was using pre-tax dollars the whole time. At least I think so…
Thank you
You're welcome, @D Walker!
So instead of throwing more money into the catch up contribution is it smart move to move that extra cash into a Roth ? Offset the taxes
Well done sir 🫡
Very clever to have 2 women with somewhat non-traditional vocation,a welder and a doctor! I must also add wealth.
Why not include the catch up into the Roth as well? Would be a better comparison wouldn’t it? Or are you not allowed to use “ catch up” in a Roth?
Great question, @b burcham -- here, the variable I wanted to compare was Roth vs. traditional savings. For that to make sense, I needed to hold after-tax spending constant for Cathy and Rachael. But you're absolutely correct. You can use the catch-up in a Roth 401(k). That's a lot of Roth savings in one year!
I'm in the 'catch-up phase' and our company recently started offering a Roth 401k. Since I don't have much in the way of write-offs, the 401K was a no brainer.. but now I'm not so sure. Is there a calculator that can estimate if I should stick with the 401K or start putting it into the Roth 401K? How much should you have in a traditional 401k before diversifying to a *Roth 401k*?
(I'll most likely be in a lower tax bracket when I retire in California)
Also, I heard if your don't qualify for a Roth IRA, then a "backdoor IRA" is recommended.. non-deductible IRA converted to Roth IRA) is the best. Is this hard?
For starters, DON'T retire in California! I know, I know, the climate, weather is the best in the US hands down but it is an expensive place. You caught how he indicated that state taxes could be a decider. I've lived most of my life in CA but I will cash out my home and move elsewhere. Backdoor Roth IRAs are awesome--do them every year or as often as my plan allows (once per year right now).
Thank you for producing a video with a single person. There are many of us that don't have spouses or dual incomes. I am at this point right now trying to decide if I should slowly over the next 10 years convert my IRA to a ROTH IRA. I have a company 401k that I contribute up to the match. But I also have 2 IRAs from former jobs and an HSA account I'm trying to build. Thank you again!
Since you end up with roughly the same net, wouldn’t you want to take advantage of immediate tax savings from using a traditional 401k?
All else being equal you would want the Roth account. But rarely is all else equal. For instance in my case I at least want to take advantage of the standard deduction with the traditional.
The only way to figure it out is to study your situation in detail
Mathematically only comparing scenarios for you, if you could max out contributions either way you would want to do the Roth 401K if your employer provides this option. All other things being equal the tax deferred would result in a higher amount of tax liability in the future. Let's simplify the video example just a small bit. I think he said 250,000 was contributed, but let's just look at the difference in taxes paid, the contributions made, retirement amounts at retirement and the 15 year timeline. Assuming tax rate was around 20% for both, Rachel's Roth amount was $19K annually so she pays $3.8K more in taxes for 15 years so she paid $57K taxes in 15 years. Cathy's amount was $27K with $7.9K more contributed.
Projected returns assuming 12%:
Rachel Roth $19K (1,583/mo) at 12% = $791K with total tax of $57K with no further taxes to pay on withdrawal
Cathy with tax deferred $27K (2,250/mo) at 12% = $1,124K with a tax liability on withdrawals is treated as regular income and RMD drawdown.
Let's assume this was 15 years ago and current tax rates apply and not the the unicorn 10% tax rate you'll pay at retirement. And that both want to live close to the lifestyle they did before they retire, $120K let's just make it $100K so that would put them somewhere between 22%-24% tax rate (single). So every year Cathy will pay around $22K in federal taxes and the amount could affect how much she is taxed on social security. So Cathy either has to withdraw additional money for taxes to cover her $100K or live on $78K and use $27K for taxes. So even if social security gets her up to $100K after taxes (don't forget the tax on social security benefits from 401K withdrawal income) she pays $27K each year assuming no inflation. In 2 years she pays $54K in taxes 3 years $82K ($24K more than Rachel Roth). Let's assume both retire and live 20 years later. If both manage to keep growing their retirement so they never drawdown all their funds then Cathy pays $540K (27×20) in taxes while Rachel Roth pays just $57K. Realistically there is a risk that Rachel may use up all of her funds or have to live on less. Even if Cathy lowered her withdrawal to 70K she would probably pay around $150K of taxes or more in 20 years.
I'm not an expert nor am I a financial advisor. I'm just doing simple math. The question you should really be asking is what what Cathy should be doing with the $7,900 annual tax savings? She should probably be putting as much as she can of that tax savings amount into a private Roth IRA to help with her future tax liability or use the tax savings each year and pay off her mortgage or other liabilities then after liabilities are gone put in Roth or taxable investments. That or a hybrid retirement plan and reduce her pretax: pay up to the $3K pretax match, max out to $7K private Roth IRA if possible then put whatever is left in 401K if pretax. So around 9K or whatever in the 401K pretax or 19K into Roth 401K if she has it.
Currently deferring 35% Federal tax and 10.3% CA income tax and retiring in a few years to Florida to withdraw the money at slower pace than than I earned it(24% Federal and zero state). Leaving everything to charity when it’s over. How is this not better? Change my mind.
@CBEDH -- I'm certainly not going to argue with you on this one. Those income tax free states are lookin' reeeeal nice right about now.
Why wasn't the Roth scenario also affected by state tax?
Can you do a video on how much someone in their 30's need to save for retirement? Also can they rely on getting SSI? I keep hearing young ppl won't get anything.
Joesy -- maybe try Our Rich Journey or the Financial Diet channels. Most of the people I work with are in their 50s and 60s, so that's where I tend to focus my attention. You're at a great age to start, so keep plugging away at it. It's a marathon, not a sprint! 🏃♂️
Did you factor state taxes on Rachel’s original contribution in your calculations?
So at 3:11 you are saying there is no catch up contributions for a Roth that is in a 401K?
What if you were younger? My intuition is to start out paying more into the roth and decreasing it to increase the traditional over the years.
That's good intuition assuming you're in relatively low FTB. Federal Tax Brackets: 10% 12% 22% 24% 32% 35% 37% Favor contributing to Roth 401(k) while in your lowest FTBs and favor contributing to traditional 401(k) while at your highest FTBs.
The earlier in life you can start, the more time your money doubles, With a Roth account, all that extra growth is tax free, and doesn't count against SS, and doesn't have required minimum distributions like a Traditional account.
@@alrocky Agreed. And if one expects to be in a lower income tax bracket at retirement, one could - at the minimum - in working years, put enough in traditional to have as little as possible income in one’s highest tax bracket.
What might be the advice, ......... for people expecting a State Pension, a 403b account, AND a 457 account, AND a Traditional IRA, AND a ROTH IRA?? There are Teachers around the country that are in that position mentioned above. My Parents are in their mid 50's; both Teachers, and looking to retire early: around 59 or so. My parents also want to leave something for my Sister and I when they pass on. Our family home won't be worth much, (Neighborhood has gone to shit !!) They plan on selling as soon as they reach their retirement goals and will probably move to Florida? Or somewhere consistently more temperate, and tax friendly than the Northeast corridor. I've been helping my Dad look for the most tax friendly States for Retirees, and there are not that many other than Florida, and Arizona. There are some States that don't tax Pensions apart from Florida and Arizona, but they come with their own Problems.
my dad had a state pension and he made more in retirement than he did working, so he was in a higher federal and state tax bracket. If you have large amounts of plans that require RMD, plus state or federal pension, retirement annuity, social security, and other sources of income (e.g. cap gains, interest, etc), you could very well be in the same or higher tax bracket from when you were working. Consider also that the US Government has been printing money out of ether, buying the fake money up using fake IOUs, US national debt is 130% of GDP, trend is less to no kids (especially among higher income earners) shrinking tax revenue pool, and the government can't just tax billionaires and companies out of national debt without cratering the US economy, so there is almost 100% certainty that individual tax rates must increase in the long run.
@@hanwagu9967 Yes 🙌🏽!!!! Everything you said is true!! And “Here is the Kool part” as The Leftist Anarchists say when they must swallow a particularly bitter pill 💊 from their own twisted agenda: Because of the Tax and Spend Crack that the Government simply cannot resist and Because of the Demographic Nightmare that You have so succinctly laid out, It is INEVITABLE that the US WILL Crater Regardless of whom they tax!!! Neither Individuals Nor Businesses will be able to sustain the Tax Burden of what Congress hath wrought!!! Therefore we can expect a complete and total Economic collapse sometime around 2040 maybe sooner, maybe a bit later. And if the Dems are successful in shutting out the Republicans indefinitely or making it so that Republicans become public enemy number One then that collapse will be even sooner!!!
And That event, presumably will start the New Civil war. OR it will signal the outright collapse of our once great Nation entirely!
The dollar 💵 is well on its way to becoming worthless!!
The only thread it hangs on is being the World’s Reserve currency.
Once China 🇨🇳 Russia 🇷🇺 and a few others figure out how to end the Dollar and replace it with a more viable Reserve currency, that will be Our undoing entirely!!!
The biggest thing to look for, have a diversified portfolio that reduces or eliminates taxes on Social Security! If you have both ROTH and a Traditional IRA you can leverage the account you need to stay in X tax bracket!
That's spot on! Always have to be mindful of the taxes on Social Security and Medicare means testing. Great comment! 🙌
I’m hedging my bets. I have a Roth 401k & split it down the middle I also max out my HSA. Taxes are finicky things & my magic 8 ball is stuck on “maybe” anytime I ask it a retirement question 😂. Great video.
Awesome! Thanks for the kind words! 🙏 I think it's a great idea to hedge with some Roth savings if you're not in too high a tax bracket.
Do you do personal consultations?
Best video I’ve seen breaking it down and explaining everything thank you!! Was trying to see which was better and going with the Roth after this video since I live in California
Seems like much of it comes down to tax brackets. If one is in the highest tax bracket currently during your contribution years, is it a no brainer to contribute to traditional 401k now vs. Roth 401k?
Tax brackets, or more correctly your effective tax rate, is the big unknown. If you assume your effective tax rate will be the same, it doesn't matter if you choose Roth or tax-deferred. But maybe the official rates will be the same but you will be able to reduce your income because you are spending less (not saving for retirement, for one thing!) and so your effective rate will be lower. That's the promise behind the tax-deferred account.
What if the official rates go up, or your spending doesn't go down as much as you thought, and your tax deductions are all gone, and your social security is taxable because you have so much income in order to meeting your spending needs, and your medicare premiums have no discount, so now your effective rate is even higher than when you were working? Or if you are married and your spouse dies your spending won't drop all that much but now you are not "married filing jointly" so your effective tax rate goes way up, you would be wishing for more Roth savings.
@ *davidjykim* yes you should favor contributing to traditional 401(k) when at your highest federal tax bracket and favor contributing to Roth 401(k) when at your lowest federal tax bracket.
@davidjykim , @Sylvan dB -- I have a few really high-earner clients where the Roth just doesn't make sense right now, unfortunately. For them, we'll take a look at strategic conversions when they retire and their effective tax rates drop like a rock.
Thanks for the video! I have a question though: When you changed the assumption to a state with income taxes, wouldn't that also have increased the amount of tax that Rachael had to pay during the 15 years, thus reducing her Roth contributions? With that reduction, I suspect they would have both ended up similarly again.
It means Rachel has lees money available to invest, as more of it is dedicated to taxes, but the scenarios assume both women have enough money available to invest equally.
Isn’t the employer match always put into a traditional/taxable account, even if all the employee’s contributions are Roth?
Yes
Does Rachael Roth receive a slightly larger Social Security benefit due to her higher AGI?
Taxes will not be any lower than they are now. I live in a state that doesn't have a state income tax. Under your example, worst case then Roth is basically even but again that is with taxes being 12%. An increase in that will make things better for Roth.
I started my Roth when I was 40 I turned 60 last year maybe some would not agree with this but I cashed it out bought myself a nice cabin in the mountains so when I sell my home I can retire their the nice part was I paid zero taxes on it I also have a teamster pension plus the cash from my home social security at 67 a Roth was the best investment I ever maid
PennTuckey -- if that works for you, it works for me. Living here in Atlanta, that cabin in the woods sounds really good right about now!
There are so many variables. Thanks for this analysis and explaining what you chose.
One of the biggest variables while saving is if Rachael Roth could have put aside more in spite of paying the additional taxes. That of course would tilt the end result more in favor of the Roth by dint of simply having more in the account, perhaps approaching the same balance as Cathy, but Rachael's would be mostly tax-free.
The big variable while spending your assets is one's effective tax rate vs the tax rate while saving. No way to predict the future, but if you could then a higher tax rate now would be tax deferred savings, while a higher rate in retirement means a Roth. Because I cannot predict the future I've tried to accumulate in both categories, but I'm starting to think my tax rate at present may make the tax deferred plan a better choice right now.
@Sylvan dB -- you're absolutely right. I think there's no way to know what the future will hold, so hedging a little by putting some in each bucket is wise if you can pull it off. There are so many variables in this analysis -- I did my best to show a comparison for one variable.
Thanks for the positive comment! 🙏
I just started my roth401k
NICE! Congrats, @Self love ! 🙌
@@PranaWealth thank you I have to wait to get match with my employer in 6 months
I have 3.4 million in trad 401k, Planning to convert all of it when I turn 59.5 and have the taxes withheld. This will save me $3 million over 30 years. Kids inherited tax free. I say use Roth. My mistake. I always thought I would be lower tax bracket I. Retirement. But instead I’m in a higher tax bracket. Who knew?!!
@M Lee -- each situation is different. If you do the conversion, you may want to think about spreading it out over a period of several years. That's a big ol' tax bill on a $3.4 million conversion. Also, don't forget to talk to your CPA. Something like a Donor Advised Fund may come in handy.
There is two other scenarios that I think would be helpful: 1) Maxing out 401k Roth and having a little less income pre-retirement. 2) Splitting 1/2 Roth 401k and 1/2 traditional 401k to reduce how much you are taxed in retirement. My bet is that option 2 and contributing the max is the safest bet, and it allows for more withdrawal flexibility in retirement.
That's a good thought. I'll have to make a follow-up video to this at some point. There are several interesting scenarios we can add. Thanks for the idea! 🙏
How about maxing out traditional 401k and investing additional money (tax saving) in taxable accounts. Would that make sense?
Doesn't Georgia not tax SS and has a retirement breaks: "Georgia offers a tax exclusion on up to $35,000 of retirement income earned by people 62 to 64, or up to $65,000 earned by those 65 and older." So for Trad they would be saving that 5ish% when working but in retirement not have to pay any taxes if all their income is SS or Trad 401k/IRA. Obviously they would still need to pay federal taxes on that SS and Trad income.
Also how does cash come into play, wouldn't that 25k be considered some type of emergency fund? What type of account is that 250k in, it changes the math a lot depending on if that is Trad or Roth?
Interestingly, FL, TX, NV, TN have increasing populations. But I suspect that due to those movements, businesses and their headquarters will also move, causing deflation in the outflow states. I also suspect that the taxes in the gaining states will swell to accommodate the voting policy of the new populace.
Interesting thought... I'm curious to see how this population shift plays out long term.
Love the breakdown. With what I’ve learned over a decade investing, given enough time, solid investments have the potential to double the initial principal amount, but many investors are instead attracted to the lure of high yields in short periods of time despite the possibility of unattractive losses before even getting out. So the onus is on newbies to beware.
@Vicky Basnight As long as you diversify your portfolio, any single stock that you own shouldn’t have too much of an impact on your overall return. If it does, buying individual stocks might not be the right choice for you, as you can also try out the Roth IRA or I series bonds. Even index funds will fluctuate, so you can’t get rid of all of your risk, try how you might. With help, these are achievable. LEVI CLEMANS, a pro Fiduciary oversees my portfolio. You can look him up online, and connect him.
You also need to know that it’s possible to lose money, since stocks don’t have principal guarantees. If you’re looking for a guaranteed return, perhaps a high yield CD might be better.
With Clemans' oversight, I’ve been able to select well run companies with strong finances and a history of shareholder friendly management practices that have made me good gains in the past months.
@@mendeleyborisov92 Right? I think I’ll have a look at that and maybe add it to my portfolio. But is it possible to beat the market?
Thankfully, my income is enough that I can dump a lot of extra money into the market. On the positive, I’m going to start investing since one of my goals is to be financially stable before the year runs out.
Out of idle curiosity, aren't most employer matches traditional and no roth? I contribute 10% to a roth 401K and my employer matches that, but in traditional.
Company 401(k) [or similar retirement plan] match is traditional and not Roth.
Great video, excellent food for thought!
Effect of state taxes, and legacy planning as Matthew mentions below.
I recently switched from 401k to Roth for work retirement accounts (until I reach $7k limit, im over 50). I find myself in the weird position of not minding that the markets are down, I'll get more shares for my $! Not sure I that's a strange point of view or not!
You can't really quantify it but you have much more flexibility with Roth money as you will still look poor on paper. This could impact somebody many different ways, especially if you need Obamacare or any other means tested assistance in retirement. A Roth also allows you take a large lump sum distribution in retirement for any reason without worrying about how a one time significant taxable event could cost you much more for that year.
Like everything else it depends on your situation. Traditional is better if you are in a lower tax bracket when you stop working. If you can keep the distributions at under 60K a year then you will pay very little tax.
Well put, @D Y !
I have a Traditional IRA, but my RMDs look to be under $20K annually. There were no Roths when I started retirement savings, and my employers never offered Roths, after they came along.
Another unknown is how long will you live? At least I know I got tax breaks while still living. Might not live long enough to recoup a significant tax savings in retirement with a Roth.
@@g0989 Totally agree! Best to start young on a ROTH for maximum tax free growth. If you're doing ROTH conversation after 65 it'll be really for the next generation. :)
Yes, on the 60k traditional withdrawal. But if you receive Social Security...that is added to the pot. Now that gets taxed, too! Keep all your "income" to $60k and I agree with you!
So If I make all my money in the United States and then retire in another country will my retirement plan (ROTH or traditional) still be taxable at the federal or state level?
If I’m not living in the U.S. anymore will I have to pay state tax?
Q1 Traditional = Yes : Roth = No
Rocky's right on the traditional / Roth question. I wish I could be more helpful on the state tax question, but I'll have to defer to a CPA on that. I *think* you'll have to have a state domicile (and thus pay state taxes), but I don't know for sure.
depends on the state. if you are planning on retiring in another country, best to setup domicile in an income tax-free state. most states would consider you a non-resident and you wouldn't have to file a return or pay taxes. There are four goofy states: CA, SC, NM, VA, which have broad residency definitions which could make you a resident and required to pay state income tax even though you aren't living in the state. keep in mind if you have something like a state pension plan, you would probably still have to file and pay state taxes.
But the company match is NOT Roth - that portion of your account IS taxable.
@JP Comp -- you're absolutely correct. That's not something that the 4% rule can account for, unfortunately. However, those numbers are included in the Monte Carlo analysis that I did at the end. Great catch! 🙌
what if the money you spent over the years for taxes in a roth 401K were invested for a normal return where would you be at retirement over a regular 401K
Ha! @Clem Zahrobsky -- that was the video I started to make, but I couldn't figure out an easy way to make the 4% rule work out for that calculation. I have it in my queue for a future video, I just need to figure out the best way to present it. Great question!
@@PranaWealth that would make a great video .
Perhaps using a pretax bucket for the contribution and a roth bucket for the tax savings.
This seems to be the equivalent of paying the tax upfront but if you happen to retire a lower tax bracket you will have more than enough in the roth bucket to pay the tax and spend the difference tax free .
It's an interesting thought. Let me figure out the best way to present this. These things can take some time to plan out, so give me a few weeks to put this together.
@@PranaWealth I just discovered your channel you have some great content that will keep me busy thank you for sharing your knowledge.
Thank you so much, Sergio! 🙏 Let me know if there are any topics you'd like to know more about!
What about the RMD of the 401K later? Doesn't the Roth have the benefit of being more-flexible about distributions and timing?
It totally does, Lee. Again, the 4% rule falls a little short in this case because of RMDs. That's one of the reasons I went back and did a higher-level look with the Monte Carlo analysis. That accounts for RMDs.
But you're totally right -- RMDs make the traditional 401(k) / IRA route less flexible. Great comment! 🙏
I know this is meant to be very simplistic, but you missed a MAJOR issue. Withdrawals from Traditional retirement accounts cause your AGI to go up, thus your Combined Income for the purposes of determining the taxability of SS goes up as well. With Roth withdrawals there is no such problem. In this particular scenario, the Roth person gets their SS completely tax free, and the traditional IRA person is going to be paying taxes on a very significant portion of their SS benefit, a full 85% of her benefit will be taxable if my quick mental math is correct. This makes the difference in favor of the Roth much more pronounced.
Also, forgot to factor in that employer contributions are ALWAYS to tax-deferred accounts, so even if your contributions are to a Roth 401k, the employer part will be in a separate traditional 401k. That amount is only going to equal 90k from this point forward based on your assumptions (3600 annual at 7% for 15 years) so not a big deal for tax purposes, especially if burned up early. However a bigger question is the existing 250k in retirement accounts. Your analysis is based on these being invested the same going backwards as going forwards (Roth for the Roth person and traditional for the Traditional person). If these are currently traditional for both and the Roth person is switching now, then that changes things. Again getting a little more complex than you are aiming for, but I think it should at least be mentioned as a caveat.
Personally I am hedging my bets since I have no crystal ball on which way taxes will go and contributing to both Traditional and Roth accounts, plus an HSA.
Great take on the finer points, Chris! In the Monte Carlo analysis, I did account for the employer match contributions going to the tax-deferred side of the 401(k). Again, this is where the 4% rule can be a bit too simplistic sometimes. Great call on the taxation of Social Security and Medicare premiums too. There's a 2-year look-back on those as well.
Ideally, I think it's great to have a little in each "bucket" (taxable, tax-deferred, & Roth) when you retire. Great call on the HSA too! 👍
Finally a point that is an absolute; the direct impact the AGI has on SS benefits and Roth is not part of those calculations. Thanks Chris!
AGI also affects IRMAA for Medicare Part B, and surtaxes like net investment income tax for your taxable investments.
@@headlibrarian1996 Yep. Burn down the Traditional 401k into income or Roth conversion a couple years before taking SS to maximize savings....That is my plan. Plus I don't want the gov't telling me when and how much to remove in RMD's....
I made the switch over to a Roth 401k when my grandmother was complaining that she's now forced to take money out of her retirement that she doesn't even need and pay taxes on it. I did some digging and realized that between the 40 grand I already put in and whatever my future employer contributions that are always traditional that it just made sense to put all my future contributions into a Roth 401k. I didn't dig too much into the nuances of taxes and just figured it's best to have the option. I figured I can pull out of the traditional account up to where my income would be taxed or a little past it because taxes really aren't bad until you get to that mid level tax range and then anything else additional I need I'll just pull tax free out of the Roth account. Like it we want to make a big purchase or take a major vacation ect.
The fact that all employer contributions are traditional is enough for me to always encourage people to put their contributions into Roth. You're already going to have plenty in the traditional account plus SS which is taxed to get to an amount of taxable income thqt is annoying to say the least. Best to have another tool in the pocket because none of us can see the future.
What’s missing here is that a Rachelle Roth could contribute more to her Roth 401k. She would have a lot more at retirement. Sure she would bring home less monthly.
High income earners can probably contribute the full catch-up to a Roth 401k now to maximize retirement benefits later.
I’d like to see this calculation if Rachelle Roth contributed the full amount. Over 15 years, how much did she reduce her income.
I agree. I tend to think most people will decide on a percent contribution, then choose Trad or Roth next, so the same amounts will be invested in either account type.
Why is this an either/or thing? Why not split it so you can withdraw from the traditional at zero or very low rates and supplement any further needs with Roth withdrawals.
I think you forgot that Cathy would also have to pay taxes on Social Security.
Michael -- good catch! I actually included their Social Security in the tax estimates, so it should be fairly close for both.
Can you do a video where both max out both traditional and roth 401ks. 19500 each. Which would come out in the end
That may be another good follow-up video, @armaliteAR10A4 . What state (for state tax calculations)?
@@PranaWealth Thanks for the reply. I'm interested in seeing the difference between two people that max out their 401ks every year. One traditional and one roth. In retirement, what will be the likely outcomes/differences?
That totally makes sense. However, different states tax rates may affect the outcome of the comparison. In this one, I think I used Georgia's state tax rate (which I assume is somewhat in the middle). I'm guessing that the difference between Florida (at 0% state income tax) and somewhere with really high state taxes like New Jersey would be pretty big.
@@armaliteAR10A4 "difference between two people that max out their 401ks every year. One traditional and one roth. In retirement, what will be the likely outcomes/differences?"
The quick and obvious answer is that the fully funded Roth 401(k) account results in much higher spendable balance at retirement than the traditional 401(k).
Your question however ignores important caveat regarding taxes at contribution.
@@alrocky im not really concerned about state taxes. I would like to see a video on what the portfolios would look like in the end. Ive had many discussions with folks regarding the differences. Some folks say they get a better tax break up front ans so on ans so on. We cant break down every scenario I know. I max my contribution in roth every year. Then my employer matches 6%. Some that I work with argue that the tax break now by going traditional and showing a lower income every year is more beneficial. However I think that going roth and paying the taxes now being as i have 6 dependents and paying a lower tax rate will be better as later the tax may be much higher for me and my wife by ourselves. I know i will have to pay taxes on the employer match anyway. But would be cool to see an actual video on this.
What continues to confuse me in the comparison between the two is that it’s not dollar for dollar equation. My 10% savings is net in Roth vs gross in 401and with the math of compounding, the 401’s growths is much greater even after paying taxes.Or to simplify, my $1 in Roth is actually $.72 investment vs $1 in 401.
It all comes down to tax brackets, which is the basic jist of what Patrick was saying. From a purely mathematical standpoint, assuming a constant tax rate, remember the rules of algebra. As an example we will say someone has 6k to invest every year for 40 years and gets a 7% return and has a constant 20% tax bracket. Pretax they will be investing 500/month and have approximately 1.2M in 40 years, or approx 958k after applying 20% tax rate. In a Roth they invest only 400/month but end up with the exact same 958k in after tax dollars in the account.
Great call, Chris! You can pay taxes before you put it in (Roth) or when you take it out (traditional). So, the question becomes, will your taxes be higher or lower in retirement? Unfortunately, it's not simple math. Does all this make sense, @Papa Shuk ?
@@chriskasprzyk6235 Thanks for the response but I must be missing something because when I used your assumptions through excel formulas, I came up with net $955 401 vs $795 Roth.
@@PranaWealth thanks again but still a little foggy. I get the taxes now or later but when I used Chris assumptions, I came up with $955 net 401, $795 Roth. In a sense aren’t we gaining the 7% return on the money we would have paid to taxes and compounding that though the 40 years? We don’t owe the gains, just the 20% on the gains? Am I overthinking this?
@@papashuk26 I think you are taxing the Roth money twice. Remember that when you withdraw money from a Roth account ALL of the withdrawal is tax free. Original money you put in, the gains, everything.
It wasn’t mentioned, but 3% of Rachel Roth’s 401K would be taxed, because that accounts for the company match. That wasn’t included in the spreadsheet at the 6:42 mark.
Great catch, Blake! Again, another limitation of the 4% rule. I did factor that in when estimating an effective tax rate, however. It's also included in the Monte Carlo results.
@@PranaWealth love your stuff and I’m a subscriber.
Thank you, Blake! 🙏
Rachael Roth would need to show her state taxes being removed prior to contributions...
I think Rachel Roth and ketchup Kathy need to get a online tax calculator. Then they need to figure out the best percentage that should go into a Roth and traditional. If you're saving about a million and a half dollars a combination of both would work best.
That would be a great way to do it!
It also does not show the tax savings today on the lowered income on the standard contribution.
It’s so situational and we can’t predict exactly all the variables. I’ve put money in each type of account, Traditional 401K, Roth IRA, HSA, and brokerage to be able to manipulate my tax situation in retirement. None of us know for sure what’s going to happen in the future so we go on what we know. For example, I’ve always assumed my pension and traditional 401K would be taxed at the state level. Now they are talking about making all pension and retirement account withdrawals tax free. That is huge! If I had put everything in Roths I would have paid state taxes on all of my contributions. You just don’t know what the future will really be and I’m glad I divided the accounts up into those types.
Stephen -- it totally makes sense to hedge between the types of accounts like you're doing. Tax laws always change -- although I don't have a lot of confidence about them going down! 🤣
Yeah, it's hard to say. I just figure the taxman is always looking to get paid.
Exactly what I'm doing.
Rachel's match will be subject to taxes as well
Correct! Again, another shortcoming of the 4% rule, but that is reflected in the Monte Carlo analysis numbers. Good catch!
So people come simply change their address to non-tax state
You didn’t tax the company match for Rachael Roth. Company
Match for a Roth 401k go into a traditional 401k or they would be required to be taxed so they wouldn’t be $3,600. You math is not quite right. Close, but not right.
I’ve always wondered about the math, thanks! Also I contribute to both traditional and Roth just in case the government wants to change the tax codes. What do you think the chances are for the government to find a way to tax Roth?
@Michael Davis -- I like the idea of hedging against future tax increases with the Roth option. Great call there. While I'm sure the government would love to tax Roth assets, I'm not sure they really could. I could see them limiting them in other ways, perhaps... 🧐
That what I do too. I have both.
An "income tax" on Roth assets seems unlikely. I expect we'd first see more changes to inherited Roths (like the recent change to a 10 year limit) such as adding a tax at that point. Another one I consider very likely is simply creating a new tax that would affect Roth spending, such as a VAT or national sales tax.
This is exactly how I view it. Roth is my hedge against future tax increases
@@PranaWealth Yeah, it'll be interesting to see if the backdoor Roth gets cut in the future.
Great analysis! One thing I think might have been overlooked is the effect of contribution limits. While there's no effective difference between Roth and Traditional retirement accounts assuming consistent tax rates pre and post retirement, if a person is going to contribute the maximum possible then Roth is the clear winner. The contribution limits for Roth and Traditional accounts are the same, but since the Roth contributions are made post-tax, they're able to essentially commit a bigger portion of their income towards the tax-deferred account.
For example, a person makes $100,000, has a tax rate of 20%, and wants to contribute the maximum amount to their 401k ($20,500 ignoring catch-up). A traditional would allow for $20,500 of their income to go towards both retirement and the taxes taken out later. However, the Roth would allow for $24,600 to go towards retirement: $20,500 into the account and $4,100 to taxes taken out now. If you look at it like that, then Roth is going to come out ahead most of the time.
Of course, this includes the assumption that the person in question can max out either a Roth or Traditional 401k, which is a large amount to save, and the Roth person will have less income to use for everyday expenses. However, if the money was just going to be saved anyways in a non-tax advantaged account, then the switch to Roth can lead to significant tax savings in the long term. This is why Roth IRAs are more frequently recommended than Roth 401ks; because it's a lot easier to hit that $6,000 limit.
What is a catch up amount?
401(k) = $6,500
IRA = $1,000
Assuming tax rates will be the same in the future is not a bet I am willing to take with the debt this country has
Having one person do all the catch up contributions and the other person do none, makes little sense, and seems to invalidate the entire case here.
I have recommended to my 3 children that they contribute their max match 6% plus the 3% match in their regular 401k other 8% in their Roth portion of the 401k. Just curious what others thoughts are on the option. I'm was on the board of our 401k and we are adding the 401k Roth option.
Sounds like your children are getting some wise advice! Glad to hear you have them saving that much at that age! 🙌
6% match + 3% regular + 8% Roth sounds like 9% traditional + 8% Roth. This may not be wise depending on their current tax bracket especially if in 12% federal tax bracket.
I view the Roth as a risk management tool, trading an unknown (future tax rates) for a known (current tax rates). There is no way to know what might happen but given the way the federal government is increasing our national debt I suspect tax rates in the future will rise and so we contribute the maximum to Roth IRA and 401k. That way we are untouched if/when future tax rates skyrocket.
Great point, Jesse -- if you're on the fence, the possibility of future tax increases (pretty likely) could push you toward the Roth option.
Do believe they'll get rid of standard deduction? Do you have something to fill that space? Do you believe the lowest tax brackets will sky rocket and will tax poor people heavily?
If we’re playing the uncertainty game, what might prevent a future Democratic government from deciding Roth is a place where the greedy rich have stolen from the poor, and charge taxes on withdrawals for growth? Then, the only certainty is the tax savings you get now on traditional. And if you don’t think that it could happen, the proposed Democrats’ Build Back Better bill was the first salvo against Roth, attacking things like the backdoor and mega backdoor Roth options.
Great topic and content!
Pay the taxes NOW! Here's why:
My argument in favor of Roth (conversions) is because I have the disposable income (while Im employed) to pay the taxes. In retirement, often referred to as living on a fixed income, I will not have extra money avail for paying taxes. Before you comment, consider that most of us budget and spend what we earn. Thus, if I get a bonus at work now (which I will never get in retirement) I'll do a Roth conversion and pay taxes now.
Beginning at ages 63 and 64, I'll keep my AGI low, living off Roths and traditional 401k withdrawals to obtain the lower Medicare premiums. I'll know the waterfall milestones for taxes...
Everyone should have both a ROTH IRA and a IRA or 401k. You can only contribute $6,000 a year to a ROTH.
Well, I currently pay no state income taxes. But I'll most likely retire to California (for many good reasons, trust me) so it's a clear benefit to go Roth and avoid state income taxes later. But I suspect the opposite is more common - most retirees probably aim for a lower-tax state upon retirement.
I'm not sure this example captured the value of the Federal and State income tax savings Cathy realized in the years before retirement due to having a lowered tax liability from the traditional 401k contributions. That could be factored in and make a better case for traditional 401k over the roth 401k? Thanks for the video, you do good work.
The federal and state tax savings are inside and part of the traditional contribution. If you contribute $20k to traditional 401(k) while in 22% Federal Tax Bracket, you save or don't pay [$20k * 0.22 =] $4,400 in federal tax but you don't get to spend or invest that $4,400 in taxable account.
We experienced the pinnacle of our era in a flash. Just like Rome, the corrupt administration will
bring this nation to an end. My condolences goes out to those close to retirement and may be
worried about pension, surviving the rising cost of living alongside poor regulatory policies
I’m 44 and looking to retire early. Very worried about the future of the economy and where we're headed, My wife finds it funny when I lament on inflation alongside rising rates. Would it be considered suicide to get into bonds now?
@@alyoshaivanovv I genuinely connect to that. When I began working with - Yvonne Annette Lively, a fiduciary financial counsellor my odds of profit consistency were certain. Currently hold a ptf of €372k averaging a 15% monthly roi. In circumstances like this, professional help is prominent in order to steer you through upturns, choppy markets & downturns as well.
@Joe Caruso Hold on, the portfolio manager with Morgan stanley? Was recently on a finup with Tate?
@@joecaruso06 Appreciate you. I'll look her up and send her a message. Hopefully, I could recover losses. Also mind me asking how trustworthy these coaches are?
Website show after I googlesd name. I call to meet soon. Tank info, insha allah.
But you’re forgetting to factoring in if tax rates would increase
Just started watching your channel and it's really good. But on this video, You forgot to account for taxes on Rachel Roth's Employer match portion. It probably doesn't change the numbers much but I assume it would change it in favor of catch-up Cathy slightly.
Kevin -- great catch! I did try to make an adjustment in the 4% calculations, but there's no way to make that simulate reality in any real way. However, the taxes were fully included in the Monte Carlo analysis. This is a great example of the limitations of the 4% rule. Great comment!
A Roth has an added benefit of encouraging people to effectively save more money since it's after tax, assuming contributions that are equivalent. Roth IRA is definitely the way to go, particularly for younger people in lower tax brackets, though having money in both is a good strategy to have more options.
No Roth isn't guaranteed for younger people be the best bet.
The deduction by using the traditional may make you eligible for the savers credit in some situations. Cookie cutter advice is useless and you need to look at all variables to make a good decision
@@johngill2853 Contributions to both traditional and Roth IRAs and 401Ks are eligible for the savers tax credit. But I agree that one should always look at all variables before making any decisions. Study after study however shows the benefits of Roth versus traditional for most people and cases. But, as I mentioned, it is good to have money in both buckets as well as in taxable accounts to offer the most flexibility in withdrawing money in retirement.
@@Kimmer and please name one study, I'm really curious
@@johngill2853 There are so many studies and comparisons of Roth vs Traditional IRAs, but to name a few that discuss why it's wise to have money in both buckets and particularly Roth are Kitces, Vanguard, Fidelity, Charles Schwab, Nerdwallet, The Money Guys, Forbes, Morningstar, and on and on. It really comes down to assumed tax rates before and after retirement which is impossible to accurately predict, but there is a reason why the government limits Roth Contributions since they know how good it is to have tax free money growing in investments. Another big reason is RMDs of traditional IRA withdrawals that can force a retiree into a higher tax bracket, especially if they have saved a lot of pre-tax money. The math is kind of a no brainer as these studies show, which is why most financial advisors recommend having both, and often recommend Roth conversions after retirement up until the age of RMDs to maximize investments.
@@Kimmer
Let's tackle this From another direction
I retire with no other income and have $1 million in a traditional IRA. I withdraw a safe withdrawal rate of 4% plus average social security
What is my effective tax rate at retirement? Please use a tax calculator online
But I'll save you the time it's a little over 8%,my 401k contributions are the 22% tax bracket
I'll actually have a little less than 1 million in traditional but I'll have Roth besides.
So you think A Roth is better for that million and pay 22% tax?
This video is so helpful!! Thank you! Would it be ok if I intentionally change to a job that pays tax at a lower bracket before my retirement?
Winnie, that's actually a good idea that combines a couple of positives. First, I like the idea of "easing" into retirement anyway. By working part-time or taking an easier, lower-paying job, you also have the opportunity to make strategic Roth conversions (or contributions) at a lower tax rate.
Great comment!!! 🙌
@ *Winnie* wouldn't suggest you intentionally quit a great job that pays well that you love just to get a lower paying job primarily because of perceived benefit of lower tax bracket.
Doing that would reduce your first year Medicare premium but there is no free lunch. I usually do a NPV analysis to make those kind of decisions.
Why isn't the Roth contribution the same as the non-roth for an apples to apples comparison?
@ 3:04 You referring to RR's $19,100 Roth 401(k) contribution vs C-uC's $27,000 traditional 401(k) contribution?
@@alrocky The contribution of $27K is the same for catch up contributions.
@@ameroamigo1 Are you asking why Rachael is only contributing $19,100 to Roth while Cathy is contributing $27,000?
@@alrocky Yes, that is my question. The different contribution wasn't explained in the video.
@@ameroamigo1 Note that Rachael paid $28,500 in tax (Cathy paid $17,900) or $7,900 more in tax. This video assumes Rachael needs ($19,100 Roth + $7,900 tax =) $27,000 *_pretax income_* in order to contribute $19,100 to Roth 401(k). This leaves both Rachael & Cathy with $75,100 Spendable Income and thus "an Apples to Apples comparison."
Unfortunately a proper apples to apples comparison breaks down later in video @ 4:00 with $350k Roth vs $350k traditional balances without accounting for differences in taxes paid or differences in Spendable Income those $350k balances require!
Nice analysis! I always get frustrated when these Roth vs Pre-Tax comparisons leave out key details like ignoring the effective tax rate. I appreciate you for putting in the work and taking a more thorough approach. However, I think this is still not quite a pure "apples to apples" comparison. We assume that the original $350,000 Cathy saved is inside a pre-tax account, while the original $350,000 Rachel saved is within a Roth account. In my opinion, this skews the results a bit. To make their starting points more even, I think we need to either make Cathy's initial saved amount larger (since her savings are assumed to be pre-tax we can assess that her lower taxes would have allowed her to save more than Rachel could have afford to save up to that point) OR classify the initial amounts of both Cathy and Rachel into the same category (i.e. Roth or Pre-tax). By giving them the same initial amount AND assigning these amounts to different types of accounts, Rachel starts in an advantaged position and thus the comparison is a bit off if the goal is for an even playing field.
Thanks, Trevor! You're right -- it's really hard to present a true apples-to-apples case, especially one that you want to distill into a 8 minute video. I think my goal here was to get everyone thinking about the different angles that would or wouldn't make a Roth conversion make sense. I may come back at some point and make an updated version of this...
@ *TG* "$350,000 Cathy saved is inside a pre-tax account, while the original $350,000 Rachel saved is within a Roth account." Using those amounts makes comparison completely unfair and thus any result meaningless. This apples to oranges favor Roth as it neglects to mention Rachel's take home pay is significant less than Cathy's take home pay.
Your numbers are not fair. Why did you have Roth safe less? I switched to all Roth abs still max out contributions to Roth 401k. These types of things are not right
can break these stuff down for me i’m 16 and tryna learn all this
Two individuals at full retirement age. They both apply for social security and Medicare benefits. One have 1 million in a traditional 401K and the other have 1 million in a Roth 401k. Will they be taxed the same on their social security and will their Medicare payments be the same? Thanks
I don't know if there is a great difference between a ROTh 401K and a ROTH IRA. I suspect that they are very similar in that you fund the ROTH IRA with after tax dollars which makes them quite similar if the ROTH 401K is treated the same way. I have both a ROTH IRA and a traditional IRA. For people like the ones in the example you have made here I find it unusual that you haven't brought up the significant tax obligation of investors with balances such as they should have accumulated. It doesn't seem far fetched for them to have amassed amounts like these based on their income and time for the assets to grow. IMHO, when RMD time rolls around, the investor who managed to invest their savings in the ROTH will have less money subject to taxes under the RMD rules. This amount could be a huge difference depending on several factors. For many of us starting in the early 60's could be a prime time to begin or accelerate ROTH conversions as tax income tax rates could be significantly less than during our prime earning years and if we are putting off claiming Social Security as well, it's a perfect time for many of us. Ultimately the RMD's could be high enough to trigger higher tax rates, Social Security taxes, and an increase in Medicare costs which will come at a time when there's little that could be done to offset our income unless someone is interested in continuing to work or run a business.
Good points here, George. As far as the differences between a Roth 401(k) and Roth IRA goes, there's the contribution limits and investment choices. As far as the taxes down the road when RMDs kick in, there could be other factors that could lean you one way or the other. Pension income would be one. Thanks for the thoughtful comment! 🙏
Nice comparison. When the two ladies retire they will not be saving such a large percentage of their income. Not working saves money as well. reducing their spending should not be a problem. When my income dropped after retirement I started to shift funds from the 401K to the Roth.
Good presentation & explanation. I think there is an important distinction here. catchup cathy is maxing out the 401k and rachel roth is not. Looks like the point of this analysis was to have rachel roth's take home match catchup cathy. I believe that the real benefit of the roth starts to show if you can max it out.
True, Tavaris! For the purposes of an apples-to-apples comparison, I needed to hold their expenses equal to see how it shakes out. If you can max out your Roth 401(k) in real life, that would be amazing. Great comment! 🙏
One thing to note (as it is probably out of scope here), is that ROTH beneficiaries enjoy the legacy of tax free withdrawals and capital gains benefits for 10 years (until RMD kicks in), after me and my wife kick da bucket. For me, that's a big deal for my descendants. I plan to do a multi-year ROTH conversion after my early retirement.
Good point! 🙌 I like that you're already thinking about legacy!
Why is one emoji a doctor and the other blue collar? LOL At least he mixed up the races.
I can tell you that at age 72 I wish I had Roth IRAs...
That's the rub, @V p -- once those RMDs start up, so do the taxes. It's hard to smooth out those taxes with Roth conversions earlier in retirement.
You're supposed to plan for rmds before you hit 72. Rmds are just part of the retirement puzzle and are supposed to be accounted for.
Most people rmds are not a problem but obviously you're not most people
Another benefit of Roth that I've never heard mentioned:
If you have money in stocks (outside of a retirement account), when you sell them more than a year later, your capital gains will be taxed at either 0%, 15%, or 20%, depending on your income. If most of your retirement income for any given year is untaxable, you can sell some of those stocks (up to the income threshold, currently $80,800 for a married couple) and be taxed at 0%! You may be able to buy a new car with cash and pay no income tax on the extra money required to make the purchase. I have an employer that provides matching incentives for purchasing their stock, so this can become an additional source of untaxable income in retirement.
That's what's truly magical about the Roth accounts!
That's awesome! Thank you for sharing. I would like to do investing outside retirement throughout my thirties in a couple of years and will keep this in mind.