Originally Posted by
Gunfighter
Unconstrained by contribution limits, your above comparison works. Suppose the tax man sets a maximum contribution of 6,300 and the remainder is in a taxable account. Your 10,000 option now becomes 6,300 in the tax deferred account, pay income taxes on the remaining 3,700, then invest 2,331 in a taxable non-retirement account. The answer is 58,070 traditional vs 63,000 Roth.
Scale the limit from 6,300 up to 19,500 and you have a real world comparison to 401k vs Roth 401k.
Scale the example up to 58,000 to be in sync with IRS 415C limits and you see where the MBDR becomes appealing.
But then you have to look at your tax rate upon withdrawal.
Assuming over 65 with a total retirement fund of $5M that you invested less than that amount at the marginal tax rate of 37%. you can safely withdraw 4% or $200,000 yearly
TaxYear2020 over 65 has a married standard deduction of $26,450
so you now have $173,550 being taxed
the first $19,750 is at 10% or $1,975
up to $80250 is at 12% or $7260
Then to $171050 is 22% or $19,976
And the final $2499 is now at 32% or $800
for a total tax bite of $30,011 on that annual $200,000 withdrawal or 15%
I admit my analysis comes from a Regional Pilots perspective who is only a 5%er without working with a tax advisor, so the Standard "Your mileage will vary", "everyone's situation is different" "consult a professional" comments hold true.
IMHO the best way is to contribute the maximum to Roth accounts when you're in the 0-12% brackets, and move to investing pretax money (max $26000 over 50, but $58000 with company plan"X") as you get into the 24% and higher brackets. That way in retirement desiring a $200,000 expense account, you can withdraw $106,700 from the accounts that are taxed, with the remaining $93,300 from the Roth accounts.
Better yet is to invest those pretax dollars when you live in a high tax rate state like California, then move to Texas or Florida in retirement and not have to pay state income taxes on the withdrawals. on second thought, if you're from California move to Washington instead of Texas