Bingo. And I think a Roth should be part of that for virtually everyone. If the guy is in a low tax bracket today, it's a no-brainer, imo.

If the guy is in a "high" tax bracket today, because he's making $250k+, he's likely gonna be in a "high" tax bracket in retirement. Guys who make $250k while working are likely gonna be making decent six figures in retirement, unless then plan to keep it all inside their IRA and hand it off to the kids.

And considering our government's inability to balance its budget, and our populations general inability to save for retirement, the marginal tax bracket of today's $250k earner may or may not be higher than that same guy's marginal tax bracket in retirement, when he's pulling out $100k.

Diversification. Just something to think about.

Exactly, it is better to tax the seed instead of the harvest.

There is a great illustration out there about deferring taxes for 30 years by contributing to a 401k or IRA. The IRS ends up recouping all of the taxes that you defer after less than 4 years of distribution, after that point it is all profit for the IRS (and a loss for the investor).

Pay the taxes now, you will be very happy that you did.

I am not sure you can make the leap of logic you made here, but nonetheless, savers should do their best to plan to succeed rather than plan to fail. It remains very possible that the .gov can pull the rug out from under the best prepared.

That wasn't the point of my post. The point is to use the tools put in place by the "lawmakers" to minimize your taxes altogether.

Hmmm....would like to see that illustration as I think I am missing your point. Uncle Sugar gets paid one way or the other. If your effective tax rate is the same when you make the contribution as it is when you take the distribution, it doesn't matter which you contribute to (deductible or Roth), your tax bite will be the same. If your effective tax rate is higher when you retire, you'll pay less in total tax if you contribute to a Roth. If your effective tax rate is lower when you retire (true for most people), you're better off taking the deduction now.

My point a few posts above was that everyone just LOVES the Roth, and happily will contribute to one without even considering the tax implications of doing so. The whole point of contributing to a 401K/IRA/403b/whatever is legal tax avoidance. We want to pay Uncle Sugar as little as possible.

A low income individual should bias towards a Roth to minimize the payment of taxes over his/her lifetime. Higher income individuals should be biasing toward taking the deduction now by contributing to a deductible 401K (for example) while their effective tax rate is likely higher, rather than contributing to a Roth now and paying that higher effective tax rate when they could have paid less tax in the future when they're likely making less money during retirement.

If you're in the prediction business and think that taxes are going to be significantly higher in the future, then sure, do the Roth. To me, if I'm a high earner now and since I think it's impossible to predict the future, I'll take the sure thing deduction now while I'm definitely paying a lot in taxes. Sure, that current high earner will likely be a high earner during retirement, too, but most likely not nearly as high as he/she is now.

The point is......don't blindly contribute to a Roth just because it's all the rage and that's what all your friends are doing.

Eh, not exactly.

Technically, DALs is a %12 "DC" and a %3 401k contribution (no match required). Together it is %15.

In the last few years, it was all complicated because the two pre-merger groups and the post merger pilots were on different programs. It's all the same for everyone now.

Nu

Global,

The you are right about tax rates now and later in your logic. What you are forgetting is that your investments should grow.

So let's assume your tax rate does go down in retirement like you are assuming. Let's say your average tax rate in your earning years is 30% and it goes down to 25% in retirement. Let's say you save $1million during your working years at your 30% tax rate. That $1million grows to $2million by the time you start taking distributions in retirement at your new 25% tax rate. Would you rather pay 30% on your $1million now or 25% on your 2 million later? That is the argument for Roth.

"Tax the seed not the harvest" as another poster said.

The difference between the two is huge. In one case you contribute tax deferred and you pay tax on everything (your contributions plus the gains). In the other case your contribution is taxed but the gains are tax free.

401k's are not tax savings vehicles they are tax deferral vehicles.

I disagree. Most people will be making less in retirement therefore should be in a lower tax bracket. Unless he took good advantage of TVM and invested well whether thru luck or skill. I converted everything to a ROTH, and I now firmly believe it was a mistake. A newbie should probably have everything in a ROTH, but at some point (and everybody's point if a little different) those pilots should stop the ROTH contributions and go with a regular 401k and IRA.


Now THAT I agree with. I am still afraid that the morons in DC will become desperate at some point, and means test Social Security and might even go so far as to test the PBGC monies. But overall, you are right, diversify....

Except there is an extremely high likelyhood that will change. They will come after that money. Watch for it. One way or another. And no one will have any sympathy for you either, because they will structure it to only target "the rich" which is anyone who has more than the numerical majority, and you will have way, way more than that. They will either come after it directly, or at the very least use it to means test other things way, way down. They will get your Roth money one way or another.