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[tokkun]

Here are two calculators that do factor in reinvesting your tax saving for the traditional 401k:

http://www.bankrate.com/calculators/retirement/401-k-or-roth-ira-calculator.aspx
https://www.calcxml.com/calculators/ret10?skn=#top

Compare a 33% current marginal rate and a 20% marginal rate in retirement. If the average rate of return on your investments is 8% and you reinvest the tax savings from the traditional IRA, you still end up getting slightly more money from the Roth account.

 

[Randolph Freelander]

Here are two calculators that do factor in reinvesting your tax saving for the traditional 401k:

http://www.bankrate.com/calculators/retirement/401-k-or-roth-ira-calculator.aspx
https://www.calcxml.com/calculators/ret10?skn=#top

Compare a 33% current marginal rate and a 20% marginal rate in retirement. If the average rate of return on your investments is 8% and you reinvest the tax savings from the traditional IRA, you still end up getting slightly more money from the Roth account.

I don't have any information about how they calculate taxes to know if those are reliable. As a matter of fact, I have some serious doubts about at least the second calculator. Consider this example:

Consider the top section for a moment, and the red boxed portion of it. It's telling me 30 years of investing $18000 annually, with a 9% rate of return grows to 2.67 million, but 30 years at $27000 at the same rate of return only grows to 3.25 million? I plugged those same values into Excel (calculating the FV of a series of payments at a given rate) and came to a $2.45 million and $3.68 million, respectively. Given the inputs, this set of values is more realistic. I can arrive at their $2.67 million for the left figure by changing how the gains accrue (beginning of period, versus end), but that change also allows the right side to grow to $4 million.

The other problem I have is the bottom section. No matter how I've played with the values, the tax (red box on the right) has always been 28% (my input tax rate, or basically the marginal since their charts show marginal rates) of the green box on the left. In reality, it should be some percentage of the value directly above, which would take into account ordinary income tax (401K distributions) and capital gains (side account). But, again, the value directly above is also not something I trust, given that it is based on the top portion of the image, which I already rule as incorrect.

(I will tell you I put in 50% for the pre-retirement income tax just to get at a big number, but if I put in a more reasonable 28%, I get the same type of discrepancy with account values. The Roth value still matches theirs, of course, but the traditional values differ the same way as the image above (3.14 mllion for them, whereas I calculate 3.42 million).

 

[tokkun]

Here's another one that gives a small advantage to Roth:
https://www.americanfunds.com/individual/planning/tools/traditional-vs-roth-401k-403b-analyzer.htm

Here's one that gives a small advantage to traditional:
https://www.dinkytown.net/java/Compare401k2.html

I think it's fair to say that the consensus of these calculators is that there negligible difference even when going from 33% -> 20%.

 

[Randolph Freelander]

Here's another one that gives a small advantage to Roth:
https://www.americanfunds.com/individual/planning/tools/traditional-vs-roth-401k-403b-analyzer.htm

Here's one that gives a small advantage to traditional:
https://www.dinkytown.net/java/Compare401k2.html

I think it's fair to say that the consensus of these calculators is that there negligible difference even when going from 33% -> 20%.

That second one is the closest to realistic.You still have to plug in the applicable marginal rate for pre-retirement (the rate you're avoiding on those dollars right now) and then plug in an expected average rate for retirement, but it (unlike the others) has some rational values at an initial glance. And it does favor traditional, which is entirely expected given basic mathematical realities. Basically, it should hold that if you're avoiding 28% marginal rates now and invest the savings, you would have to pay 28% average in the future in order for the Roth to be on equal ground. Any average tax rate less than that is a feather in the traditional 401K's cap.

-----------------------------------

Edit: Here is the result of the second calculator that aimed for equality, for explanation:

-----------------------------------

Edit 2: I'll redact part of the above, including all of edit 1. I noticed a variable I did not account for which impacts the result. It still favors traditional (with a sensible future tax rate), but not by as much as previously forecast. Flip the current contribution type over to Roth and it will be evident. It's probably due to the combination of income taxes due on the current excess if switching to traditional, and then the capital gains rate on earnings in side investments. These are reasonable adjustments.

-----------------------------------

Edit 3: After further analysis, and in the interest of kind of me eating a little crow, I think that the "dinkytown" calculator is fairly spot on, and if I played with some of the other calculators (forget that one that has wrong calculations in it), perhaps I could get them in the right ballpark, as well. Here is the calculation that aims for the break-even point, given some income assumptions:

This goes with an income level that could put all of the 401K into the 28% marginal rate [update: in reality, income level doesn't even matter in this exercise, put it at 0 for all its worth]. It holds the current tax to be avoided at 28% (the marginal rate), and the retirement rate at the break-even average rate (the tipping point between favoring one side or the other). I had forgotten this, but I had arrived at similar numbers in the past when performing my own calculations, and this brought that back to memory. Not explicitly shown here, but the things I mentioned in edit 2 can reasonably be assumed to be included in here, and the takeaway is that based on maxing out a 401K traditionally, you would funnel the tax savings into a taxable investment account, you would pay roughly 20% capital gains on proceeds there, you would progress through the marginal rates on the income from the 401K, and you would need to stay at or below ~23% taxes on average in order to come out ahead of just paying the 28% up front and going with the Roth. (Not shown: how state and local income taxes factor in and move the numbers.) It's an interesting exercise, I'll give you that.

So uh, look at your own effective tax rates. Make your call. I've looked at mine, and it's actually in the teens, and not even close to 20. I'm comfortable with my pre-tax choice, but then, I itemize a lot. Your mileage may vary.

 

[tokkun]

Thanks for taking the time to validate the calculators. Another wrinkle in doing an accurate comparison is the issue of required minimum distributions. If we take that $3.4M pre-tax balance and assume it is flat by the time you reach age 70, you are going to have to take $170K as a RMD. By 80, it's over $300K. At 90, over $500K. Of course we don't know what tax brackets will look like in 30 years, but it may be tough to keep a sub-20% effective rate with those RMDs + whatever you may be getting in dividends and capital gains from your taxable accounts. With Roth, you don't need to worry about RMDs. As soon as you retire, just roll your Roth 401k into a Roth IRA (which has no RMDs) at no tax penalty. If you have enough in taxable accounts and would like to maximize the money you leave to your beneficiaries, just live off the taxable account and let that Roth continue to grow tax free for the rest of your life.

But either way, I'm fine with those numbers; even ignoring RMDs and with the least Roth-friendly calculator we are looking at a single-digit percentage difference in total return for a rate transition from 33%->20%.

To reiterate my basic premise in brief: If you are a high earner who is already on track to save more money than you realistically need in retirement, you may find that the greater simplicity, flexibility, and stability of Roth accounts brings you more happiness than the additional 5% total return you might get if tax rates are the same in the future as they are today.

This is advice tailored specifically for big savers. If you are someone who is worried about having enough to scrape by and are not maxing out your contribution limits, this is not meant for you.

 

[PantherLotus]

Jesus at you dudes making more than 100K right now

 

[whatsinaname]

Damn, Scotttrade account fell 6% from what it was a month ago. I might be able to tighten the belt a bit and add more money now. I know I should be doing it but I have that irrational fear thing going...

 

[morch]

I have UK SIPP (self investment pension plan) going I set up before I came to China, since im outside the UK I can only put in £2-3k a year, but for every £80 I put in, the government tops it up by £20 as repaid income tax, even though I don't pay income tax in the UK currently.


Only got £1000 in there currently, got £300 in BAT shares because of the nice dividends and stable share price long term, and I have a purchase of £500 of an Oil etf going through right now, because I can't see it lowering by more than 10%, but I can see it increasing by more than 10% over the next few months/years once some of the alternative oil extractors have been forced out

 

[zerolus]

It's true, you can effectively put more into your 401K by contributing Roth, but it's costing you a lot more when you do that, and that effective gain is more than negated by the extra taxes incurred.

That is a common misconception that you can effectively put more into a Roth since you are contributing after tax dollars. The tax dollars you are spending to put it in the Roth is not the same as an additional contribution. People fail to take into account the current tax savings when they contribute to a traditional 401K. The maximum amount in a 401K receiving the tax benefit is EXACTLY the same regardless of whether it's a traditional or Roth contribution.

 

[GhaleonEB]

Damn, Scotttrade account fell 6% from what it was a month ago. I might be able to tighten the belt a bit and add more money now. I know I should be doing it but I have that irrational fear thing going...

Look at it this way. Buying now means a 6% discount over last month!

 

[tokkun]

That is a common misconception that you can effectively put more into a Roth since you are contributing after tax dollars. The tax dollars you are spending to put it in the Roth is not the same as an additional contribution. People fail to take into account the current tax savings when they contribute to a traditional 401K.

Had you continued reading before hitting reply, you would see that we did account for that.

The maximum amount in a 401K receiving the tax benefit is EXACTLY the same regardless of whether it's a traditional or Roth contribution.

Prior to taxes. The future value of the Roth account is higher than that of the traditional account after taxes. Moreover, tax rates being equal, it is higher than the sum of the traditional account and the taxable account funded by the tax savings. That is what people mean when they say you can pack more money into the Roth account.

 

[Wellington]

To reiterate my basic premise in brief: If you are a high earner who is already on track to save more money than you realistically need in retirement, you may find that the greater simplicity, flexibility, and stability of Roth accounts brings you more happiness than the additional 5% total return you might get if tax rates are the same in the future as they are today.

This is advice tailored specifically for big savers. If you are someone who is worried about having enough to scrape by and are not maxing out your contribution limits, this is not meant for you.

The only problem for high earners is that they can't contribute to a Roth IRA through a normal vehicle and have to use backdoor methods. Not sure why the restrictions are there tbh.

 

[LocknessMobster]

Gaf I'm looking for some opinions. If you were 50yrs old and had a few hundred dollars to invest a month what'd be a good/safe bet to invest in? Thanks.

 

[anonymous_abc]

Gaf I'm looking for some opinions. If you were 50yrs old and had a few hundred dollars to invest a month what'd be a good/safe bet to invest in? Thanks.

I suggest you have a look at the OP, it's still relevant.

A broad, cheap, whole market ETF.

 

[Y2Kev]

The only problem for high earners is that they can't contribute to a Roth IRA through a normal vehicle and have to use backdoor methods. Not sure why the restrictions are there tbh.

I've done this each of the last three years. It's painless. Just seems stupid to have to do.

Thanks for the insight, gentlemen. It's kind of a surprisingly complex decision. I don't know that I consider myself an "elite saver." I guess I have to think about that. I definitely save a lot, but maybe that isn't even enough to make this comparison worthwhile.

 

[whatsinaname]

Look at it this way. Buying now means a 6% discount over last month!

True. This is just an additional account I put unexpected income into and is composed completely of low cost mutual funds. It is a small account but I invested a chunk in July and August. 'Don't time the market' stands true but it is difficult to follow when everything looks red.

 

[Original Famous Ray]

Not sure if I'm ready to see my Roth and 401k sink like a rock again. LOL It is what it is I guess.

Its gonna be pretty bad today. I still need to educate myself on what other opportunities there are for investing (and read the OP a bit more thoroughly) as my Roth is maxed and my 401k gets its usual weekly contribution. It won't be max this year but it will next. I won't take a peek at my stuff for awhile.

 

[giga]

Can't take it anymore. Pulling all my assets and transferring them to gold and Bitcoin. In terms of allocation, treating gold as bonds and Bitcoin as equities.

 

[demosthenes]

Can't take it anymore. Pulling all my assets and transferring them to gold and Bitcoin. In terms of allocation, treating gold as bonds and Bitcoin as equities.

This is a joke right? Bitcoin?

 

[Darren870]

I haven't even followed whats going on and I don't even really check my balances besides once every few months. Usually only because I have to log into the account for other non retirement reasons.

No reason to get upset and worried over money you can't touch for another 30 years anyways

 

[giga]

This is a joke right? Bitcoin?

My retirement is not a laughing matter, demo.

 

[tokkun]

I keep a small amount in Bitcoin just for entertainment value. I keep expecting it to be up each time there is another big stock market loss since it is supposed to be a haven currency, but it has actually done worse than a lot of the broader markets. It's down > 30% month-on-month and almost 20% week-on-week.

The only problem for high earners is that they can't contribute to a Roth IRA through a normal vehicle and have to use backdoor methods. Not sure why the restrictions are there tbh.

If you have a 401k, you can put more than 3X the IRA maximum into a Roth 401K without using any backdoor methods.

 

[Original Famous Ray]

Dow is already down 1000. My retirement savings are crying in agony. lol

 

[anonymous_abc]

Dow is already down 1000. My retirement savings are crying in agony. lol

Do you plan on retiring within the next year? If yes, then you will have to re evaluate your plan, if no then don't worry be happy.

 

[Original Famous Ray]

Do you plan on retiring within the next year? If yes, then you will have to reevaluate your plan, if no then don't worry be happy.

Hence the "lol" I'm not concerned one bit since I'm not touching that stuff for almost 20 years. I'm actually gonna boost up my 401k contribution to try and max it when I get back from vacation. Just crazy looking at something just drop in value so quickly.



edit: oh boy! My first avatar quote!!!! I'm kinda stoked about that. Thanks!

 

[RuGalz]

If you have a 401k, you can put more than 3X the IRA maximum into a Roth 401K without using any backdoor methods.

How does this work?

 

[Eighty Deuce]

So I just setup my 403(b) today, 5% contribution I have no idea how this works

 

[shem935]

So I have nothing saved right now but I am young (<20) and thought that this recent downturn might be a good place to start. Index funds obviously as outlined in the OP but is there anything I should be aware of before starting? Any ways I can take advantage of the market with the downturn? Or is it simply just a discount on buying compared to previous months?

 

[AP90]

I haven't even followed whats going on and I don't even really check my balances besides once every few months. Usually only because I have to log into the account for other non retirement reasons.

No reason to get upset and worried over money you can't touch for another 30 years anyways

This. All I did was shift my deferred comp percentages back to stable (money essentially sits and makes peanuts worth of gains or nothing) and left all my large cap vanguard and balanced shares/$ money in because it will eventually rebound (have 30years till I retire)

However, after the market bottoms out, I will take a good chunk of my stable and dump it into the market and shift my percentages so that I buy vanguard shares again.

Now the question is whether or not the DOW will bottom out at 10,000 or 5,000...

 

[Boards of Canada]

Hi all. Let's say I came across $23,000 CDN and am wondering what to do with it. I am a Canadian resident. My plan was to pay off our line of credit and my car. That will lower our monthly bills by $750 and free up credit, which we don't really need.

The thing is, we currently don't have a problem paying those off monthly. So I'm wondering if it could be put to better use by investing. And if so, any recommendations? Remember: Canadian.

 

[Wellington]

If you have a 401k, you can put more than 3X the IRA maximum into a Roth 401K without using any backdoor methods.

You're right, good point.

How does this work?

Through your employer. For example with my company, we use Fidelity, right on the contribution page it has two small windows, one for the Traditional 401k and right below it one for the Roth.

https://www.fidelity.com/viewpoints/retirement/roth-or-non-roth-401k

 

[TheRagnCajun]

Hi all. Let's say I came across $23,000 CDN and am wondering what to do with it. I am a Canadian resident. My plan was to pay off our line of credit and my car. That will lower our monthly bills by $750 and free up credit, which we don't really need.

The thing is, we currently don't have a problem paying those off monthly. So I'm wondering if it could be put to better use by investing. And if so, any recommendations? Remember: Canadian.

Money is cheap in Canada, and I believe it will stay that way for a few years yet. Assuming your interest rate is close to prime, it is better to invest the money and use your regular cashflow to pay off the loans slowly. You can earn 6%-7% return annualy on the invested money, beats saving the 3% on the loaned money. This is all assuming you are resonponisble with money and bugets and can make this happen.

Put it all in TFSA (pay no taxes on your gains) and create a balanced portfolio of 20% Canadian, 20% US, and 20% International Equity ETFs (no mutual funds). You should probably keep about 40% of your money in the safe stuff (bonds, fixed income etc.) until your debt load is lighter.

 

[giga]

Thisisfinecomic.jpg

 

[RuGalz]

Through your employer. For example with my company, we use Fidelity, right on the contribution page it has two small windows, one for the Traditional 401k and right below it one for the Roth.

https://www.fidelity.com/viewpoints/retirement/roth-or-non-roth-401k

Ah ok. My wife's has that option but mine never did through our 401k. So I thought it was strange that she has that option. Didn't know that's pretty normal...

 

[Cels]

Thisisfinecomic.jpg

just stay the course, you don't realize any losses until you sell, which you shouldn't.

 

[GhaleonEB]

Thisisfinecomic.jpg

I invested through 2000 and 2008, so I guess I'm jaded to this stuff at this point. It'll bounce back. This time around I'm actually glad the bubble burst so I can buy more at a relative discount.

 

[Randolph Freelander]

Friday's thrill ride dropped me negative for the year, and today looks to deepen that hole.

Fun fact: I was negative last year as late as 10/17. I finished the year up 10.26%.

 

[giga]

just stay the course, you don't realize any losses until you sell, which you shouldn't.

Too late dude I'm already balls deep in precious metals and crypto currencies now.

 

[Bit-Bit]

I've got $10,000 in betterment with the "Build Wealth" option. 90%stocks and 10% bonds.

I'm adding $1,000 every month into it. The goal is to increase that number to $2,000 a month and have enough in 10 years to retire.

Smart or no?

Edit: to clarify, my emergency fund is currently $6,000. I thought about it the other day and decided to bring that up to $10,000 by the end of year.

January of 2016, I'll be able to start contributing $2000 a month into Betterment since I'll have a raise then and won't need to keep adding to my emergency fund.

 

[Cels]

Too late dude I'm already balls deep in precious metals and crypto currencies now.

 

[Randolph Freelander]

I've got $10,000 in betterment with the "Build Wealth" option. 90%stocks and 10% bonds.

I'm adding $1,000 every month into it. The goal is to increase that number to $2,000 a month and have enough in 10 years to retire.

Smart or no?

Edit: to clarify, my emergency fund is currently $6,000. I thought about it the other day and decided to bring that up to $10,000 by the end of year.

January of 2016, I'll be able to start contributing $2000 a month into Betterment since I'll have a raise then and won't need to keep adding to my emergency fund.

Is this account in addition to a 401K and Roth IRA, or instead of them? You'll want to take advantage of each of these due to the tax advantages -- either now, later, or both -- before doing side investments.

But just for the sake of it and plugging in some values [Excel: =FV(8%/12,10*12,-2000,-10000,0)], if you started with $10000, added $2000 per month, earned about 8%* for 10 years, you'll grow your asset to just about $388K. That's not going to be enough to retire on, unless maybe you move to a lower cost of living country.

(*I knocked the rate down to 8% instead of 9 or 10 because with 10% in bonds, you have your foot on the brake just a bit.)

 

[Chris R]

If I've maxed my Roth IRA contribution and already contribute to my workplace SEP plan it's ok if I have a side mutual fund right?

 

[Bit-Bit]

Is this account in addition to a 401K and Roth IRA, or instead of them? You'll want to take advantage of each of these due to the tax advantages -- either now, later, or both -- before doing side investments.

But just for the sake of it and plugging in some values [Excel: =FV(8%/12,10*12,-2000,-10000,0)], if you started with $10000, added $2000 per month, earned about 8%* for 10 years, you'll grow your asset to just about $388K. That's not going to be enough to retire on, unless maybe you move to a lower cost of living country.

(*I knocked the rate down to 8% instead of 9 or 10 because with 10% in bonds, you have your foot on the brake just a bit.)

This is in addition to a Roth IRA.

 

[Randolph Freelander]

This is in addition to a Roth IRA.

Are you eligible for an employer's retirement plan such as a 401K?

If I've maxed my Roth IRA contribution and already contribute to my workplace SEP plan it's ok if I have a side mutual fund right?

All things held equal, if you're maxing your tax-advantaged retirement accounts first, you're setting yourself up better for your retirement years. If you do not max those out and instead do side investments, then you're giving yourself greater flexibility in the present and perhaps pre-retirement age future. So you'd be making a trade, in other words.

If you're maxing the advantaged accounts and you also maintain side investments, you're getting the best of both worlds.

 

[Bit-Bit]

Are you eligible for an employer's retirement plan such as a 401K?

I am but the employer has a shitty plan and they don't match so I decided to forego it completely.

 

[Randolph Freelander]

I am but the employer has a terrible plan and they don't match so I decided to forego it completely.

Well, that could be to your detriment. Even if the fund options are terrible, you're still getting a tax advantage which translates into very real dollars. You're either avoiding taxes now on funds you put into the plan, which allows you to invest more, or you're avoiding taxes on gains, which means you keep all of the growth. This former is a traditional 401K approach, the latter is a Roth 401K, and each is separate from what you might be doing in your IRA.

By maintaining a side account instead, you're paying taxes both now (you're taxed on your income before you can start making investments) and later (you're taxed on your gains). With an employer plan, you defer one or eliminate the other.

So the question is, how terrible is your employer plan? Terrible enough where it's sensible to submit to maximum taxation? (It could be! But without seeing your fund options, I have a reasonable degree of skepticism.) Even if your employer plan is bad now, you might not be with that employer forever. If you leave your job, you can roll your tax-advantaged account into an IRA and have access to a plethora of funds.

 

[PantherLotus]

Everybody keeps talking about 'maxing' their Roth or 'maxing' their 401k. Is that the $15K per year max? Or is there something else?

To the younger (20-25) folks reading this: The difference between you starting to save and invest now and waiting until you're 30 is literally millions of dollars. (When I figure mine just adding 2 years to retire at 67 instead of 65 nearly doubles my take. Imagine what those 5-6 extra years on the front end could do for you.)

When figuring out what you can afford with you bad ass new job, treat your 401K like a bill, like taxes. Take 20% off the top for taxes and 10-15% for your retirement. THEN figure out where you can afford to live.

 

[Randolph Freelander]

Everybody keeps talking about 'maxing' their Roth or 'maxing' their 401k. Is that the $15K per year max? Or is there something else?

With the Roth or traditional IRA, we're talking about the IRS limit, which is $5500 for 2015.

With the 401K, we're more often speaking of the full IRS limit ($18000 for personal contributions in 2015), but some might say "max" while speaking of the employer match. ("I'm maxing my employer match" [but could not be maxing the account overall.])

 

[PantherLotus]

With the Roth or traditional IRA, we're talking about the IRS limit, which is $5500 for 2015.

With the 401K, we're more often speaking of the full IRS limit ($18000 for personal contributions in 2015), but some might say "max" while speaking of the employer match. ("I'm maxing my employer match" [but could not be maxing the account overall.])

Aha, thanks for this. (i didn't know 401 was at 18k -- does that change yearly or does it just go up over time?)

Re: employer match -- my understanding is that most companies match 4-5%. If you have a nice option with your company's retirement planning partner (fidelity for me) and it includes decent, low-fee index funds (mine is Spartan® 500 Index Fund - Fidelity Advantage Class) ... you might as well dump as much as you can up to 10-15%.

 

[Randolph Freelander]

Aha, thanks for this. (i didn't know 401 was at 18k -- does that change yearly or does it just go up over time?)

Re: employer match -- my understanding is that most companies match 4-5%. If you have a nice option with your company's retirement planning partner (fidelity for me) and it includes decent, low-fee index funds (mine is Spartan® 500 Index Fund - Fidelity Advantage Class) ... you might as well dump as much as you can up to 10-15%.

Yes, the limits adjust with inflation, typically in increments of $500. It might not adjust every year, just whenever cost of living has grown enough over time for the $500 (minimum) adjustment.