Comments on: The Case Against Roth 401(k)

By: TFB

TFB — Fri, 03 Feb 2012 22:26:22 +0000

@Simon Martins – The money to pay tax has to come from somewhere. If you are able to do $10k in Roth 401k, you have enough money to do $13k in Traditional 401k. That’s an apples-to-apples comparison, not $10k in each.

By: Simon Martins

Simon Martins — Fri, 03 Feb 2012 21:14:34 +0000

@ogd: I’m not sure where you got the $7500 value. John is comparing investing $10k in both traditional and Roth, not putting different values into one and the other.

By: ogd

ogd — Fri, 03 Feb 2012 07:43:46 +0000

OMG @John and other guys. He’s said this 100 times already…

Really — multiplication is commutative. If you pay tax now, there will be less to invest, less basis for that growth, and a much lower amount to be withdrawn tax-free. How much smaller? Exactly today’s tax rate.

@John: the upfront taxes are paid *before* the investment. That’s why they’re upfront. So instead of 10K, there’s only $7500 left to invest each year. Do the math, and it will be identical to the last digit. It’s a simple identity:

$X * ReturnRateOnEachDollar * (1 – TaxRate) = $X * (1 – TaxRate) * ReturnRateOnEachDollar

Where $X is the amount of disposable income you have to invest. So the differences are, 1) are you bumping against the limits with the $X, or 2) will the TaxRate be different due to various circumstances?

TFB: this is an excellent article, thank you so much. Lots of things to think about. I am in fact bumping againt the contribution limitation, so one option is to hedge (large-ish company match would go to Trad 401k).

By: John

John — Thu, 26 Jan 2012 18:55:44 +0000

I am surprised that the author of this article ignored earnings. I ran a simple modle in which a 25 year old contributed $10,000 per year for 40 years. I assumed a 6% rate of return over those years. His nest egg would be $1,640,477 at 65 years old. During those 40 years, he would have contributed $400,000 and saved $100,000 in taxes for pre-tax or paid $100,000 in taxes for contributing to a Roth (assuming a 25% tax bracket). Withdrawals of the pre-tax account would be taxed at $410,119 (again, assuming a 25% tax bracket). The Roth account would be withdrawn at $0 in taxes. To sum it up:

Traditional: Contributions – $400,000 – Up front Taxes – $0 – Withdrawal Taxes $410,119
Roth: Contributions – $400,000 – Up Front Taxes – $100,000 – Withdrawal taxes $0

I don’t know about you, but I would prefer to pay $100,000 versus $410,119

At a 4% return on investment, the numbers are as follows:

Traditional: Contributions – $400,000 – Up front Taxes – $0 – Withdrawal Taxes $247,066
Roth: Contributions – $400,000 – Up Front Taxes – $100,000 – Withdrawal taxes $0

At an 8% return on investment, the numbers are as follows:

Traditional: Contributions – $400,000 – Up front Taxes – $0 – Withdrawal Taxes $699,453
Roth: Contributions – $400,000 – Up Front Taxes – $100,000 – Withdrawal taxes $0

The majority of your nestegg shold be earnings. It is silly to have this argument without considering earnings.

By: Lovey

Lovey — Tue, 10 Jan 2012 03:25:00 +0000

My employer now offers a Roth 401K along with the traditional 401k as well.

I contribute 8% of my salary while my employer contributes 6.5% of my salary as a match. To get the matching contribution, I only need to put in 4% of my salary.

Should I take that 4% above what I need to get the match and redirect it to the Roth 401K?

My husband and I both have Roth IRAs. We were not contributing the max allowed but will be able to starting this year.
His 401k is the gov’t TSP.

We are 21 & 25 years from retirement.

Lovey

By: Steve

Steve — Tue, 27 Dec 2011 19:34:48 +0000

I put $6k into a Roth in 2008, and another $6k in 2009 for a total of $12,000. Since that time my Roth which is at Interactive Brokers has grown to a value of about $25k, (it was as high as $36k several months ago, but I’m not worried). All of the $12k+ is in short term capital gain. The beauty of the Roth for me is I don’t have to pay it! Even better, I don’t even have to track it for IRS purposes. The freedom to do short term investing alone has long since far exceeded the taxes that I paid on the initial $12k to start with. If you enjoy playing with stock, and enjoy buying and selling, being able to do so without having to pay Capital gains is quite wonderful and at least in my case, quite remunerative.

By: bill

bill — Tue, 27 Dec 2011 18:37:22 +0000

If you consider time value of money and depreciating $, paying tax at a later time makes sense (sorry guys, i haven’t read all 142 comments yet)

By: dd

dd — Mon, 28 Nov 2011 05:33:35 +0000

Good reading..
This analysis includes factors that I had not considered.

By: Celtic

Celtic — Wed, 23 Nov 2011 15:21:54 +0000

There are a lot of comments here, so if this has been covered, my apologies for the spam.

My annual gross income is too high for a Roth, but this year I’ll have significant real estate investment losses that will push me down into the range where I’m eligible. I was simply investing in a TIRA until I realized this, so wasted $4k in taxable contributions (couldn’t reverse it without converting my entire IRA to a Roth – bummer). However, the remaining $6k for me and my wife’s $5k will all go into the Roth.

The point? Be opportunistic in seizing on Roth situations if your year-to-year taxable situation varies. Good luck to all, and thanks to TFB for all the posts and insights.

By: David

David — Tue, 09 Aug 2011 01:04:07 +0000

Dear TFP,
I am amazed as how you simplify and hit home the most important points. Big thanks for you!! to spend your time to explain to us this is truely appriciated. I am higly litrate but buisness illitrate individual who have little understanding of how the traditional IRA, Roth IRA, Roth 403(b) and all other modes of investment work. in my work I have the advantage of 403(b) which is matched one to one up to 6% and then Roth 403(b) option. I was wondering if I should continue with the 403(b) after matching the 6% or to jump to the Roth 403(b). you have answered most of my questions. after reading your article and the comments, I am now a proud and much more knowledgable individual. Thanks to you.
if I may ask you particular question:
I am a 41 years old married with total house hold income of 150k. this I hope will remain so till around age of mid 55-60. after that it will be part time job earning probably half to 30% of this. considering this and knowing I started saving late to retirment, after maxing the matching, should you still say only 403(b) only? even after reading your article, I was thinking of contributing some to Roth 403(b) incase to either supplement income after 59, or even to transfer to beneficiaries.
of all though, it is a breath to know that the world is full of people like you who truely like to enlighten and help!!
David.