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

[Anonymous]

Anonymous wrote:

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.

If you retired early before taking your SS, there's a period when your tax rate is lower and you can do the conversion at a lower bracket. Let's say you retire early at 55 and start taking SS at 67, you would have 12 years of no earned income that put you in a lower tax bracket which you can do your conversion.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

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.

If you retired early before taking your SS, there's a period when your tax rate is lower and you can do the conversion at a lower bracket. Let's say you retire early at 55 and start taking SS at 67, you would have 12 years of no earned income that put you in a lower tax bracket which you can do your conversion.

Camel's hump.

[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?

HSAs are good for young adults and very healthy empty nesters looking to boost retirement savings. If you have a family with kids or young adults on your plan, get a regular health plan.

[Anonymous]

Anonymous wrote:

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?

HSAs are good for young adults and very healthy empty nesters looking to boost retirement savings. If you have a family with kids or young adults on your plan, get a regular health plan.

It depends on your plan options, I recommend running the numbers on a few different scenarios such as minimal medical issues, a few minor issues, a major issue. See what comes out ahead.