sailingfun

Rerun the numbers with the 3700 you are paying in taxes now going into the investment account and growing tax deferred. You will get a very different result. The same with your real world example and the 12,700 you are paying upfront.
The reality of the Roth verses traditional argument is that it comes down to tax rates at retirement which are unknown. If you live in a state with a income tax that also changes the equation more in favor of a traditional IRA especially if you plan on retirement in a tax free state.

Gunfighter

Setting aside unique situations regarding estate planning, the Roth vs Traditional math problem comes down to several basic assumptions and limitations.

What is the tax rate in your contribution year vs your withdrawal year?
-Assuming you are below the contribution cap and can invest your savings in the same tax deferred manner, this is likely your only concern. Make your assumptions regarding tax rate and move on.

Are you limited by the contribution cap?
- Congratulations, you are rich enough to have a money problem. Your "tax savings" from a traditional IRA/401k can't be invested in the same vehicle. You are investing in a taxable account.

What is the tax efficiency of the non-deferred account?
-If you have hit the contribution cap and the "tax savings" is invested in a taxable account, the tax efficiency of the underlying investments matters. BRK would be 100% tax efficient since they pay no dividend. An index ETF is highly efficient, but not 100%. A mutual fund will be even less efficient. Trading in and out of positions also hurts the tax efficiency. 95% Efficiency means you are deferring taxes on 95% of the gains, but pay taxes on 5% of that year's gains each year.

Finally once you have made the above determinations,
-What is your current income tax rate?
-What is your current capital gains tax rate?
-What is your assumed income tax rate in retirement?
-What is your assumed capital gains tax rate in retirement?

In general, after modelling several scenarios, the benefits of 100% tax free growth in a Roth are enough to overcome a 9% income tax drop in retirement when the "tax savings" amount is invested in a taxable account with 95% efficiency. All models included 20% LT Capital Gains tax and 3.5% Net Investment Income Tax on the taxable account portion.

Summary: The government has been bought off by financial institutions to create plans that incent wage earners to hand over their money for decades of management fees, before seeing any return. If your goal is financial independence vs a large pile of money to look at, buy a business, buy income producing real estate or invest passively in commercial real estate. The End.

notEnuf

We are supposed to be getting another tax deferred vehicle soon. The MCBP is going to be for excess 401k retirement money. I plan to max my contribution (19,500) and that will in turn max my MCBP money. 2021 will be a good earnings year and hopefully 2022 will have a PS contribution as well. 58,000 + 6500 (catch up) + excess to MCBP could end up being 75,000ish in tax advantaged retirement savings per year.

Gunfighter

58,000 and 6,500 for 2021 (That's what resurrected this thread)

The low rate of return on the MBCBP makes in suitable for those within 5 years of retirement who are looking to increase their cash position. Pilots with a longer time horizon would do better by investing elsewhere. My personal preference would be direct ownership of real estate or a share of a syndication that pays the sponsor only on performance, not acquisition, disposition, etc...

notEnuf

Yup, I edited it. The MCBP is going to be a conservative vehicle which allows for higher risk in the other vehicles to adjust for your total risk tolerance. If you have bonds in your diversified portfolio, the MCBP replaces that conservative investment.

Gunfighter

Yep it's a good conservative vehicle to shelter some money from taxes. I may even put in a few dollars myself a decade down the road. My view of risk doesn't fit within the constraints of the investments available at Fidelity. I stick to either equities or cash to buy equities when they go on sale. Rather than investing in bonds, I chose real estate for stability and income because it has a built in hedge against inflation. A little bit of leverage actually tips the odds in your favor when it comes to inflation.

notEnuf

I agree with this for non-retirement investments. Ultimately I guess all wealth can be used for retirement but I am planning to maximized the retirement accounts because of the tax advantages. Taxed investments I prefer to hold and pay capital gains on at sale, instead of income tax. Real estate is only one way to do that, which I will defer to your expertise on. My experience has been marginally successful with real estate but the level of effort has become excessive for the return. Even green slips and stocks require less effort IMHO. Mutual and hedge funds even less. I guess my point is "to each his/her own." Any tax advantage available should be considered, including the MCPB. A rebalancing based on risk can be done by those in the overage range because they are earning in excess of the $240,625 you mentioned earlier. Those individuals are probably captains or senior FOs and over or soon to be 50 and most likely have a conservative element in their retirement portfolio. This is a way to keep uncle Sam at bay or save 20+% of that money.

JamesBond

https://taxfoundation.org/joe-biden-tax-plan-2020/

sailingfun

Nothing, filler

Gunfighter

If Biden is successful at lowering the estate tax threshold, an inherited IRA could take a serious haircut. Paying 37% income tax now could save 45% estate tax later. After the estate tax is paid, non-spousal heirs still owe income tax from RMDs on the inherited traditional IRA. The RMDs will likely keep heirs in a higher bracket, so forget the tax rate arbitrage.

Just for fun lets say you leave behind 1 million in life insurance, 1 million in real estate and 3 million in an IRA. Under the proposed plan, you owe 45% estate tax on 1.5 million or 675K due and payable upon death. This leave a net estate value of $4.325 million. Assuming you paid the estate taxes out of the life insurance proceeds, your heirs are left with a McMansion, $325K cash and an IRA worth 3 million. Income taxes are due on the IRA, which must be distributed over 10 years, adding 300k per year to your non-spousal heirs annual income. Even a college student working part time is in a high tax rate now.

-$1 million house
-$325k cash after estate taxes paid from life insurance
-$3 million IRA 10yr RMD with income taxes due

If you converted your 3 million IRA into a Roth it shrinks by 37% to $1.89 million. Added to the insurance and Mc Mansion, your estate is now 3.89 million, with an estate tax bill of 175K leaving a net estate of $3.715. You have left behind a house, $1 million of cash from life insurance and 1.89 million in the Inherited Roth IRA. The life insurance and Roth IRA are 100% spendable cash. The 10yr RMD from the inherited Roth does not get taxed.

-$1 million house
-$825K cash after estate taxes paid from life insurance
-$1.89 million Roth IRA 10yr RMD, no taxes due, doesn't increase heirs taxable income

610K or 20.3% income tax on the Inherited Traditional IRA/401K is the break even point compared to the Roth example.

WB SC is so engaging that I had time to do all this math. Back to being productive on my side hustle, so I can create the aforementioned problem.

Under the proposed Biden plan, the responsible approach is to spend most of what you have. Buy a Corvette, so it isn't taxed down to a Miata for your heirs.