mispoken

I think that ultimately the Roth vs Traditional debate comes pretty close. I've seen case studies to support both. The issue is that we are using present-day numbers to calculate future numbers or just simply using hypotheticals.

For me, it comes down to control. I don't want all of my money subject to RMDs. And I don't want to be subject to the possibility of higher tax rates in 30 years. Of course, I have to make the assumption that the gutterment won't pillage Roth accounts but all of this future planning comes down to a series of (hopefully) educated guessing.

tennisguru

It's only a wash if you invest different amounts of money. In your example the person is only investing 70k/yr in the Roth vs 100k/yr in the non Roth. The reality is, especially in our situation, people are putting the max amount in either one. 18k non Roth investment is not the same as 18k Roth investment. The true pre tax comparison is 18k traditional vs ~24k Roth.

Gunfighter

A $5-7 million balance is reasonably attainable over a 25-30 year period using 415C limits and S&P 500 historical returns. The RMD on an account that size is in the range of $200,000 - $275,000 per year. If you expect income from other sources in retirement, it is very likely you will still be in the top tax bracket. Suppose you wanted to pull out $500k for a vacation home, that would count as income for the year if it came from a traditional account.

If you invested for 15 years vs 25 years, the balance is probably only $2-3 million and less likely to put you in the top tax bracket from RMD alone. If you developed a source of retirement income other than just a 401k account, it is possible the two combined would keep you over $300k.

What you are missing is that many pilots invest outside of traditional retirement plans and are building up equity through income property investments, income from owning a profitable business and taxable stock/mutual fund investments. There is also the possibility of pension income, military retirement income and spousal income. This combination makes a high tax bracket likely in retirement even after walking away from a 300k job. Not everyone will be in that position, but we can all try our best to get there.

Tummy

This is correct. It's extremely important that people understand this fundamental concept, and it's obvious that many in this thread don't understand this.

If you expect to be in a lower tax bracket in retirement (almost everyone flying for a legacy will be), then the traditional 401k makes more sense.

For someone who is presently in the 35% tax bracket and expects to be in the 12% tax bracket in retirement ($77,400 + $24,000 = $101,400 per year in the 12% tax bracket).

Non Roth
100,000 x 10 = 1M x .88 = $880,000

Roth
100,000 x .65 x 10 = $650,000

Gunfighter

You will receive some money as employer match along the way, making it impossible to put all 55k in 401a, before hitting the 415C limits. If your goal is maximizing 401a contributions for a mega BDR. Start the year at 75% into 401a while company puts 16% into DC funds. After earning a little more than 60k for the year, the 415C limit is reached with a split that is roughly 10k DC and 45k in 401a.

m3113n1a1

Thank you. I wonder why 401a isn't subject to the same individual limits as 401k (traditional and roth)...

tennisguru

Read my post #42. Your math is correct but your fundamental concept is completely wrong. You're looking at someone investing 65k per year vs someone investing 100k per year. The reality is people put the exact same amount in (the max) regardless of whether it's traditional or Roth.

Here's the real math:

18k/yr = $1500/month. That done over 25 years at an 8% rate of return nets 1.43 million. It's going to be 1.43 million no matter whether it's in a roth or traditional, since you're maxing it out either way. Either way you would have paid in 18k/yr X 25 years, or $450,000.

Now the real comparison:

If you went the traditional route that whole 1.43 mil would be taxable. Assuming a 25% tax bracket, the tax bill on that would be 357k.

If you go the Roth route, you would have paid taxes on the 450k up front, which at a 40% rate = $180k. The other 1 million bucks growth is all tax free.

Again, paying a higher rate up front on a smaller amount is better in the long term than paying a smaller rate on a much larger sum later. Naturally as you get closer to retirement the scales start to tip the other way just because there isn't as much time for the tax free growth of the Roth to take effect.

tennisguru

Also, as you mentioned the 12% tax bracket only goes up to a little over 75K of income (100k with deductions) and someone used to earning 400k+ a year and with 5-7 million in retirement income it's probably not going to live on that small of an income stream,-so realistically they will be at least in the 20% bracket if not higher, as some people have already mentioned. A lot of retirement advisers recommend planning on a 4% withdrawal rate. 4% of 5 million is 200k/yr.

Schwanker

Apples to apples my friend. Starting with same amount. Question was when to pay the taxes. It took $100,000 income to invest $70,000 to the Roth in the given example. It also took $100,000 to invest $100,000 in traditional. Not going to quibble. Just the facts if you are interested in an honest comparison. I was simply responding to your post below as the numbers don’t support it.


“Because while you are paying a higher rate now, it is on a much smaller sum of money. After 20-30 years of steady investing the vast majority of money in your account will be growth, not what you actually put in. All that growth money is tax free at a cost of paying taxes on a much smaller amount up front.”

All that growth money is also much smaller. Again, it’s a wash at the same tax rates.

mispoken

In the end this is all a guess, isn't it? The fact that we are discussing this and people are truly weighing the pros and cons is a great thing.

To this point;

"For someone who is presently in the 35% tax bracket and expects to be in the 12% tax bracket in retirement ($77,400 + $24,000 = $101,400 per year in the 12% tax bracket)."

This is doable provided you have Roth money to live off of. Otherwise, if it's all traditional funds, by the time you hit retirement the RMDs on your account SHOULD far surpass that and force you into a much higher tax bracket. It's all about control of my money in retirement.

Play with the numbers here; https://www.bankrate.com/calculators...alculator.aspx

based on a 25 year career investing $55,000/yr, 7% return, 2.9% inflation I get $3.8 million. I think that is a VERY conservative estimate.

Then go here;
https://www.schwab.com/public/schwab...alculators/rmd

I'm showing around $140,000 in RMDs starting at age 70 1/2.

So, if you're doing it right, investing systematically every month, maxing out your retirement accounts and investing in a simple index, the likelihood of being in the 12% tax bracket is pretty slim (assuming this is all traditional funds and not Roth)....And that doesn't include the possibility of having other income sources (frozen pension, military pension etc).