Explain like I'm 5... maxing out retirement

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I feel like I am smarter than this post will make me sound, but I cannot figure out what maxing out retirement means.

Let's say I have access to four retirement vehicles:
Traditional 401k through work
Roth 401k through work
Roth IRA
Traditional IRA

My income puts me out of the running for a Roth IRA, so I'm down to three options.

I can put $6k into my Traditional IRA, right? Regardless of any 401k investments?

Now where I'm really stuck... $20,500 is the maximum for the TOTAL of my traditional and Roth 401ks, right? Or can I contribute that in EACH?

So if I'm understanding correctly, the absolute maximum I can contribute in a given year is $26,500?

(for the sake of this question let's ignore Backdoors, that feels like a problem for another day...)

- 401K - $20,500 is the max you can contribute to a 401K - Regular or Roth. If you are over 50, you can contribute another $6500. At your income level, a Roth 401K does not make sense.
- 401K - Check if your company has a mega-401K. This allows you to contribute after-tax $$ in addition to the 20,500 to your 401K and convert that to a Roth (aka mega-backdoor Roth).
- IRA - You can contribute to either a traditional or Roth IRA. At your income level, you can contribute to a Traditional IRA and convert that to a Roth (backdoor Roth). $1000 more if you are over 50. You cannot deduct contributions to a Traditional IRA so kinda pointless unless you do plan on converting to a Roth.

This is a good explanation. The recommendation if you can afford to do this is max out: traditional 401k, HSA (if eligible), back door Roth IRA, and mega back door Roth IRA (if available to you).

Most people are eligible for 20,500 (401k), 6000 (back door Roth IRA).
Some are married so can double that number
Some are over 55 so can contribute additional catch up amounts
Some have access to HSA and mega-back door Roth IRA so can contribute more after tax up to 61,000 total in each 401k.

It depends on your situation, maxing means putting the most you can in all of the available options you have.

This is a good summary, although the catch-up trigger age is 50, not 55.

DP. It is 55 for HSA (extra $1000)

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

You are so confidently wrong. But not interested in debating.

Please go look up order of operations, and then get back to me using the parameters in my earlier post. Oh, but you're "not interested in debating" - translation, not quite so sure of yourself.

Lol @ order of operations. Thanks for your concern but I am sure of myself. Anyone who thinks there is only one right answer is wrong 99% of time.

Math doesn't change, PP. FFS.

As I said, there are reasons to chose a Roth option over a traditional 401k/IRA. But believing that your Roth portfolio will be bigger isn't one of them (again, assuming you devote the same amount of money to retirement savings, and your tax rates remain the same.)

You're just making yourself look stubborn and not very bright. Please stop.

So using your "order of operation" how big is your porfolio? 1 mil? 5 mil? or more than 10 mil?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

You are so confidently wrong. But not interested in debating.

Please go look up order of operations, and then get back to me using the parameters in my earlier post. Oh, but you're "not interested in debating" - translation, not quite so sure of yourself.

Lol @ order of operations. Thanks for your concern but I am sure of myself. Anyone who thinks there is only one right answer is wrong 99% of time.

Math doesn't change, PP. FFS.

As I said, there are reasons to chose a Roth option over a traditional 401k/IRA. But believing that your Roth portfolio will be bigger isn't one of them (again, assuming you devote the same amount of money to retirement savings, and your tax rates remain the same.)

You're just making yourself look stubborn and not very bright. Please stop.

New PP here (not one of the two of you arguing about this).

Respectful suggestion: why don't you each show your math and governing assumptions, rather than talking about it? That should make it very easy to sort out where the disconnect is.

DP but look at the “tax rates stay the same” example of this link—

https://smartasset.com/financial-advisor/traditional-ira-vs-roth-ira

[Anonymous]

I started using the Roth 401k late and regret it. I now put everything into the Roth and have done a conversion. Here are my reasons, which I do not believe are universally applicable but rather things that are part of the considerations:

1. In no way did I factor RMDs into my post retirement income. Once I did, I found that they are high enough to push me into a higher tax bracket than I am today.
2. The above is compounded as DH's health is poor, and my chances of many years of having to pay at high single rates rather than married filing jointly rates are quite high.
3. One of my savings goals is to leave money behind for me kids subject to as little tax as possible. Both a 401k and 401k Roth are factored into estates for tax purposes. I live in a state with a low threshold. All things being equal, the untaxed 401k amounts will be higher than the taxed Roth 401k amount, making the estate smaller and, thus, less subject to estate taxes.

It all comes down to a personal choice about one's particular circumstances and risk appetite, particularly with respect to where tax rates might go.

[Anonymous]

Anonymous wrote:I started using the Roth 401k late and regret it. I now put everything into the Roth and have done a conversion. Here are my reasons, which I do not believe are universally applicable but rather things that are part of the considerations:

1. In no way did I factor RMDs into my post retirement income. Once I did, I found that they are high enough to push me into a higher tax bracket than I am today.
2. The above is compounded as DH's health is poor, and my chances of many years of having to pay at high single rates rather than married filing jointly rates are quite high.
3. One of my savings goals is to leave money behind for me kids subject to as little tax as possible. Both a 401k and 401k Roth are factored into estates for tax purposes. I live in a state with a low threshold. All things being equal, the untaxed 401k amounts will be higher than the taxed Roth 401k amount, making the estate smaller and, thus, less subject to estate taxes.

It all comes down to a personal choice about one's particular circumstances and risk appetite, particularly with respect to where tax rates might go.

May I ask what your marginal tax rate is now? Ours is 35% and I just can't make the math work in choosing Roth v. Trad'l.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I started using the Roth 401k late and regret it. I now put everything into the Roth and have done a conversion. Here are my reasons, which I do not believe are universally applicable but rather things that are part of the considerations:

1. In no way did I factor RMDs into my post retirement income. Once I did, I found that they are high enough to push me into a higher tax bracket than I am today.
2. The above is compounded as DH's health is poor, and my chances of many years of having to pay at high single rates rather than married filing jointly rates are quite high.
3. One of my savings goals is to leave money behind for me kids subject to as little tax as possible. Both a 401k and 401k Roth are factored into estates for tax purposes. I live in a state with a low threshold. All things being equal, the untaxed 401k amounts will be higher than the taxed Roth 401k amount, making the estate smaller and, thus, less subject to estate taxes.

It all comes down to a personal choice about one's particular circumstances and risk appetite, particularly with respect to where tax rates might go.

May I ask what your marginal tax rate is now? Ours is 35% and I just can't make the math work in choosing Roth v. Trad'l.

Marginal rate is 35%. Rate in retirement with RMDs would be 37%. If my spouse died, income would be less but I would still be in the 37% bracket filing as single.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I started using the Roth 401k late and regret it. I now put everything into the Roth and have done a conversion. Here are my reasons, which I do not believe are universally applicable but rather things that are part of the considerations:

1. In no way did I factor RMDs into my post retirement income. Once I did, I found that they are high enough to push me into a higher tax bracket than I am today.
2. The above is compounded as DH's health is poor, and my chances of many years of having to pay at high single rates rather than married filing jointly rates are quite high.
3. One of my savings goals is to leave money behind for me kids subject to as little tax as possible. Both a 401k and 401k Roth are factored into estates for tax purposes. I live in a state with a low threshold. All things being equal, the untaxed 401k amounts will be higher than the taxed Roth 401k amount, making the estate smaller and, thus, less subject to estate taxes.

It all comes down to a personal choice about one's particular circumstances and risk appetite, particularly with respect to where tax rates might go.

May I ask what your marginal tax rate is now? Ours is 35% and I just can't make the math work in choosing Roth v. Trad'l.

Marginal rate is 35%. Rate in retirement with RMDs would be 37%. If my spouse died, income would be less but I would still be in the 37% bracket filing as single.

The single vs married is a point worth considering but it looks like Congress will push back the RMD starting date again.

On the other hand, if you have retirement assets in excess of $15 M with an RMD of $500k the marginal benefits of a Roth conversion at 35% aren’t going to be too meaningful.

There are some academic papers that look at this and they find in practice the benefits of Roth conversion are less than expected.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

You are so confidently wrong. But not interested in debating.

Please go look up order of operations, and then get back to me using the parameters in my earlier post. Oh, but you're "not interested in debating" - translation, not quite so sure of yourself.

Lol @ order of operations. Thanks for your concern but I am sure of myself. Anyone who thinks there is only one right answer is wrong 99% of time.

Math doesn't change, PP. FFS.

As I said, there are reasons to chose a Roth option over a traditional 401k/IRA. But believing that your Roth portfolio will be bigger isn't one of them (again, assuming you devote the same amount of money to retirement savings, and your tax rates remain the same.)

You're just making yourself look stubborn and not very bright. Please stop.

New PP here (not one of the two of you arguing about this).

Respectful suggestion: why don't you each show your math and governing assumptions, rather than talking about it? That should make it very easy to sort out where the disconnect is.

Sure.

To make the math easy, let’s assume $20,000 devoted to tax advantaged retirement savings (I’m only going to do the math for one year’s contribution, because it’s an easier illustration), a 10% rate of return, a 5 year accumulation phase, and a 10% tax rate (which is the same during the accumulation and withdrawal phases). I am hoping we can all agree that the amount of the contribution, number of years in the accumulation phase, the precise rates of return and the tax rates used are irrelevant to the fundamental question – they just need to be consistent across the two examples? Super.

Person 1 - traditional 401k, so the contribution is tax deferred, and she is able to deposit the entire $20,000 into the account.
Initial Contribution: $20,000
Year 1: $22,000
Year 2: $24,200
Year 3: $26,620
Year 4: $29,282
Year 5: $32,210.20

Withdrawal: $32,210.20
Application of 10% tax: $32,210.20 - $3,221.02 = $28,989.18
Total available: $28,989.18

Person 2 - Roth 401k, so must pay 10% taxes on the initial contribution ($20,000 - $2,000 = $18,000)
Initial Contribution: $18,000
Year 1: $19,800
Year 2: $21,780
Year 3: $23,958
Year 4: $26,353.80
Year 5: $28,989.18

Withdrawal: $28,989.18
There are no taxes, so . . .
Total available: $28,989.18

Feel free to check the arithmetic.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I started using the Roth 401k late and regret it. I now put everything into the Roth and have done a conversion. Here are my reasons, which I do not believe are universally applicable but rather things that are part of the considerations:

1. In no way did I factor RMDs into my post retirement income. Once I did, I found that they are high enough to push me into a higher tax bracket than I am today.
2. The above is compounded as DH's health is poor, and my chances of many years of having to pay at high single rates rather than married filing jointly rates are quite high.
3. One of my savings goals is to leave money behind for me kids subject to as little tax as possible. Both a 401k and 401k Roth are factored into estates for tax purposes. I live in a state with a low threshold. All things being equal, the untaxed 401k amounts will be higher than the taxed Roth 401k amount, making the estate smaller and, thus, less subject to estate taxes.

It all comes down to a personal choice about one's particular circumstances and risk appetite, particularly with respect to where tax rates might go.

May I ask what your marginal tax rate is now? Ours is 35% and I just can't make the math work in choosing Roth v. Trad'l.

Marginal rate is 35%. Rate in retirement with RMDs would be 37%. If my spouse died, income would be less but I would still be in the 37% bracket filing as single.

The single vs married is a point worth considering but it looks like Congress will push back the RMD starting date again.

On the other hand, if you have retirement assets in excess of $15 M with an RMD of $500k the marginal benefits of a Roth conversion at 35% aren’t going to be too meaningful.

There are some academic papers that look at this and they find in practice the benefits of Roth conversion are less than expected.

I didn't know this was under consideration; thanks for pointing out. Obviously, we will have to see how this develops, but it is worth keeping an eye out for.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I started using the Roth 401k late and regret it. I now put everything into the Roth and have done a conversion. Here are my reasons, which I do not believe are universally applicable but rather things that are part of the considerations:

1. In no way did I factor RMDs into my post retirement income. Once I did, I found that they are high enough to push me into a higher tax bracket than I am today.
2. The above is compounded as DH's health is poor, and my chances of many years of having to pay at high single rates rather than married filing jointly rates are quite high.
3. One of my savings goals is to leave money behind for me kids subject to as little tax as possible. Both a 401k and 401k Roth are factored into estates for tax purposes. I live in a state with a low threshold. All things being equal, the untaxed 401k amounts will be higher than the taxed Roth 401k amount, making the estate smaller and, thus, less subject to estate taxes.

It all comes down to a personal choice about one's particular circumstances and risk appetite, particularly with respect to where tax rates might go.

May I ask what your marginal tax rate is now? Ours is 35% and I just can't make the math work in choosing Roth v. Trad'l.

Marginal rate is 35%. Rate in retirement with RMDs would be 37%. If my spouse died, income would be less but I would still be in the 37% bracket filing as single.

The single vs married is a point worth considering but it looks like Congress will push back the RMD starting date again.

On the other hand, if you have retirement assets in excess of $15 M with an RMD of $500k the marginal benefits of a Roth conversion at 35% aren’t going to be too meaningful.

There are some academic papers that look at this and they find in practice the benefits of Roth conversion are less than expected.

I didn't know this was under consideration; thanks for pointing out. Obviously, we will have to see how this develops, but it is worth keeping an eye out for.

Also don't forget to consider state taxes and states that don't tax RMD distributions. Assuming you live in VA and move to Florida, that would be a saving of 5.75%.

[Anonymous]

I'd never heard of, but really like the HSA idea on the order of operations. But with a family those high deductible plans to qualify really seem like a risk that could wipe out any potential tax savings and more. Any creative ways to fund an HSA?

[Anonymous]

Anonymous wrote:I'd never heard of, but really like the HSA idea on the order of operations. But with a family those high deductible plans to qualify really seem like a risk that could wipe out any potential tax savings and more. Any creative ways to fund an HSA?

You’re paying for the medical expenses either way, consider how much lower your premiums are for the HSA eligible plan versus your other options. The savings in premiums can fund your HSA and you get a tax break. If you have a lot of medical expenses one year you use all the HSA money, if you don’t then it adds to your savings for the future.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

You are so confidently wrong. But not interested in debating.

Please go look up order of operations, and then get back to me using the parameters in my earlier post. Oh, but you're "not interested in debating" - translation, not quite so sure of yourself.

Lol @ order of operations. Thanks for your concern but I am sure of myself. Anyone who thinks there is only one right answer is wrong 99% of time.

Math doesn't change, PP. FFS.

As I said, there are reasons to chose a Roth option over a traditional 401k/IRA. But believing that your Roth portfolio will be bigger isn't one of them (again, assuming you devote the same amount of money to retirement savings, and your tax rates remain the same.)

You're just making yourself look stubborn and not very bright. Please stop.

New PP here (not one of the two of you arguing about this).

Respectful suggestion: why don't you each show your math and governing assumptions, rather than talking about it? That should make it very easy to sort out where the disconnect is.

Sure.

To make the math easy, let’s assume $20,000 devoted to tax advantaged retirement savings (I’m only going to do the math for one year’s contribution, because it’s an easier illustration), a 10% rate of return, a 5 year accumulation phase, and a 10% tax rate (which is the same during the accumulation and withdrawal phases). I am hoping we can all agree that the amount of the contribution, number of years in the accumulation phase, the precise rates of return and the tax rates used are irrelevant to the fundamental question – they just need to be consistent across the two examples? Super.

Person 1 - traditional 401k, so the contribution is tax deferred, and she is able to deposit the entire $20,000 into the account.
Initial Contribution: $20,000
Year 1: $22,000
Year 2: $24,200
Year 3: $26,620
Year 4: $29,282
Year 5: $32,210.20

Withdrawal: $32,210.20
Application of 10% tax: $32,210.20 - $3,221.02 = $28,989.18
Total available: $28,989.18

Person 2 - Roth 401k, so must pay 10% taxes on the initial contribution ($20,000 - $2,000 = $18,000)
Initial Contribution: $18,000
Year 1: $19,800
Year 2: $21,780
Year 3: $23,958
Year 4: $26,353.80
Year 5: $28,989.18

Withdrawal: $28,989.18
There are no taxes, so . . .
Total available: $28,989.18

Feel free to check the arithmetic.

DP. I am considering a Roth conversion and I understand this point but what about the money I use to pay the taxes? I'm going to pay from other cash, not from the IRA balance. Is there an opportunity cost to that money? If it didn't go to taxes, I would put it in maybe a brokerage account or throw some in a 529, which would compound over the next however many yrs instead.

[Anonymous]

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

It's not that clear cut, the tax they pay now at 32% could be invested and compound into the future..and if they plan it well, they can withdraw it at a much lower tax bracket when they retire. It's almost impossible to say which has clear advantage over the other without knowing the future tax code and market performance

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

You are so confidently wrong. But not interested in debating.

Please go look up order of operations, and then get back to me using the parameters in my earlier post. Oh, but you're "not interested in debating" - translation, not quite so sure of yourself.

Lol @ order of operations. Thanks for your concern but I am sure of myself. Anyone who thinks there is only one right answer is wrong 99% of time.

Math doesn't change, PP. FFS.

As I said, there are reasons to chose a Roth option over a traditional 401k/IRA. But believing that your Roth portfolio will be bigger isn't one of them (again, assuming you devote the same amount of money to retirement savings, and your tax rates remain the same.)

You're just making yourself look stubborn and not very bright. Please stop.

New PP here (not one of the two of you arguing about this).

Respectful suggestion: why don't you each show your math and governing assumptions, rather than talking about it? That should make it very easy to sort out where the disconnect is.

Sure.

To make the math easy, let’s assume $20,000 devoted to tax advantaged retirement savings (I’m only going to do the math for one year’s contribution, because it’s an easier illustration), a 10% rate of return, a 5 year accumulation phase, and a 10% tax rate (which is the same during the accumulation and withdrawal phases). I am hoping we can all agree that the amount of the contribution, number of years in the accumulation phase, the precise rates of return and the tax rates used are irrelevant to the fundamental question – they just need to be consistent across the two examples? Super.

Person 1 - traditional 401k, so the contribution is tax deferred, and she is able to deposit the entire $20,000 into the account.
Initial Contribution: $20,000
Year 1: $22,000
Year 2: $24,200
Year 3: $26,620
Year 4: $29,282
Year 5: $32,210.20

Withdrawal: $32,210.20
Application of 10% tax: $32,210.20 - $3,221.02 = $28,989.18
Total available: $28,989.18

Person 2 - Roth 401k, so must pay 10% taxes on the initial contribution ($20,000 - $2,000 = $18,000)
Initial Contribution: $18,000
Year 1: $19,800
Year 2: $21,780
Year 3: $23,958
Year 4: $26,353.80
Year 5: $28,989.18

Withdrawal: $28,989.18
There are no taxes, so . . .
Total available: $28,989.18

Feel free to check the arithmetic.

DP. I am considering a Roth conversion and I understand this point but what about the money I use to pay the taxes? I'm going to pay from other cash, not from the IRA balance. Is there an opportunity cost to that money? If it didn't go to taxes, I would put it in maybe a brokerage account or throw some in a 529, which would compound over the next however many yrs instead.

For Roth conversions the question is can you get a lower tax rate on that money now or in the future. If your situation has you temporarily in a lower bracket than usual it may be a good idea to do Roth conversions.