Originally Posted by
Gunfighter
Lets pretend you have $79,365 budgeted for retirement. That would become $50,000 after 37% income tax for a Mega Roth. After 20 years at 8% returns, that is now worth $233,048 with no taxes due. All $233k is spendable cash.
Your argument was to put $50,000 in a pre-tax account and invest the rest, rather than prepay taxes. The $50,000 pretax grows to the same $233,048, but income taxes are due on withdrawals leaving you with $146,820 in spendable cash. Your $50k pretax contribution leaves $29,365 that is taxed and reduced to $18,500. Assuming that the remaining $18,500 is invested at 100% tax efficiency (Unicorn ETF with no annual dividends, distributions or investment exchanges) and earned the same 8% return, the account is now $86,228, which is reduced to $70,312 after long term capital gains tax on the growth. $146,820 + $70,312 = $217,132 or LESS than $233,048 of spendable cash in the Roth account.
A clarification. The circumstances forcing the $29,365 to be paid to tax is due to the fact that you choose to pay the tax “out-of-pocket” (as indicated in a previous post), in which case tax has already been paid on that amount, so the $29,365 doesn’t get taxed again.
This was the alternative to deducting the amount from the converted funds. In which case, in your example, it would reduce the “principle” by the tax due, thus reducing your basis and hence growth.
BUT, you must do one or the other. Thus, if you pay the tax “out-of-pocket”, there is no choice as to whether you keep the $29,365 or if you “would have” invested it or not. There is no alternative...it’s gone. Had you not paid out-of-pocket, again there is no choice, the $29,365 on top of the converted amount doesn’t exist. The very fact that we are talking about the $29,365 is because you chose to do a back door Roth.