There is no argument the Roth is phenomenal, however, you guys missed one thing in the original Roth Ralph and Pre-Tax Patty comparison. The future value of Pre-tax Patty's account is not simpy the account value with taxes taken out on the entire amount; I assume Patty will only need a small amount of that money per year, and will only pay taxes on a small portion of that on year 1 of retirement. The additional $765k will continue to compound, for example at 5%/year (conservatively). 5% of $765k is ~$38k. This additional compounding could cover any tax liability for the year depending on lifestyle. I know this may seem nitpicky, but it's a significant and relevant variable here. If Patty didn't touch that $795k and only withdrew from the pre-tax 401k, that $795k in the after-tax account would be worth somewhere around $2.16 million after 20 years of retirement (at 5% with no additional contributions).
I agree! This makes a significant difference to their example. The other huge miss in my opinion is the 22% marginal tax rate while working and the 24% marginal rate in retirement. Retirement should be their EFFECTIVE tax rate. They would have to double their expenses in retirement to get to a 24% marginal tax rate. Especially with a 20% savings rate while working.
Totally agree. When you are making the decision to contribute to the retirement account you are making a decision on the last dollar you earn so the tax savings you get would be your marginal rate. When you go to spend your savings at retirement you are looking at how much you take out as a total which, if it is coming out of a traditional account would be the effective tax rate based on your total annual withdrawal. So if you expect your effective tax rate when you retire to be higher than your marginal rate when you are contributing then you should go with Roth... otherwise Traditional would be a better choice (assuming you invest the difference)
2:22 Choose ROTH if you expect to be in higher tax bracket.... Wouldn''t your bracket be determined by how much you withdraw each year? My balance shouldn't affect my bracket; however, a large balance may become an issue for certain beneficiaries.
Love this channel. The part everyone always misses, what if you only need $40k per year in retirement from your traditional, but your RMDs are $140k because you've done a great job saving? Sure would suck to be forced into a higher tax bracket and higher medicare premiums when you don't even need the money, just because you chose traditional. Oh, and when you die, your heirs are forced to liquidate the traditional, within 10 years! Inheritance is nice, but it could totally mess up their tax situation as well.
I am ok with the simple example but a few things to consider 1. If you are going to go from the 22% today to the 24% in retirement, that means you are likely going to be in the 32% or 35% bracket later in your career. Since RMds don’t kick in until 10 years after retirement (at age 65) there is no other way you would be in 24% at retirement. 2. State taxes impact the analysis. Are you in a high tax state today are may retire to Florida or another zero tax state. 3. Time value of money. $1 of tax paid today is worth more than $1 paid in 53 years. 4. With Roth you pay all tax currently. Traditional RMDs are spread out over many years and you likely will never pay tax on the full value (although your heirs will). 5. You assume tax on the money in the taxable account that the traditional person accumulated. If in a brokerage account you can defer gains, harvest losses and your heirs get a step up in basis and don’t have to empty the account in 10 years. I have had a brokerage account for over 40 years and never paid $1 of tax. There are items that go the other way such as the widow trap and IRMAA but I wanted to provide some balance to the example
This is one of your best videos. I talk about this, until I’m blue in the face, and I can’t get the point across. I’m going to start showing this video to people.
Thank you! Just moved from traditional 401k and contributing to Roth 401k from now on :-). I Anticipate taxes to increase and hopefully an increase in my career 🙏
Am I thinking wrong? I contribute to my 401k to my company matching percentage then I max out my Roth IRA limit. I can still contribute more money so I add more to my 401k.
I think another big consideration is that roth contribution limits are effectively higher, so if you are a saving well above the contribution limits, doing roth and less in a taxable account is preferable in many situations
Did I hear that employer contributions are added to the max you can contribute individually and will exceed that amount nullifying it??…I gotta research that (edit: I must have misunderstood or they stated incorrectly because you can contribute the max amount independent of employer contribution)…(edit #2…the max for both combined contribution for 2023 is 66k…ok, not a problem lol )…edit#3: it’s actually 73k combined over 50
At least for the IRA,and probably also for the 401/457 if they are offered by your employer,Roth "wins every time" almost almost always,not sure if that applies to conversions but conversions would be sort of "the earlier the better" especially if they allow you to bypass rules saying that your income is too high or something and that you are not allowed to contribute to the Roth remember the Required Minimum Distributions,IRMAA penalties,and Social Security taxation issues,all of which are less of a threat if you are going into retirement with Roth instead of Tax Bomb balances. Even perhaps issues pertaining to trying to get an Obamacare subsidy. I saw a novel argument for Roth Conversions that seems novel but I think it is correct,that money you spend on the taxes for the conversion (might need to pay both State and Federal in the form of estimated tax payment at the same time the conversion is done),provided that money comes from payroll or other non "tax protected" funds such as taxable savings or checking represents another sort of way to "sneak" a little bit more into your total tax protected funds since a dollar in Roth is worth more to you than a dollar in Tax Bomb I believe I have seen fallacious arguments against Roth put up by other "Finance Gurus" on RU-vid including a "mathematical proof" sort of thing that I suspect is invalid perhaps if you had a windfall such as "winning the lottery" in a particular year and a one time massive annual income just that one year skipping the Roth in favor of tax deferred would be appropriate for just that one year
At first i thought you guys were too dorky for me. Reminded me of church summer camp counselors. But I kept watching bc the content was pretty solid. Now I'm on my 15th video in just 4 days of knowing about this channel. I've been binge watching y'all like Netflix. So now i gotta say the content is extremely solid, y'all are earnest and genuine, and only slightly dorky. Lol. Just kidding. Keep up the great work. A lot of people like me are eternally grateful.
I have generally put money in both conventional and Roth IRA's and 401k's with , roughly 70-80% conventional and the balance being Roth. I kind of view it as hedging my bets. We don't know what the tax policies will be when we retire... That is at the whim of Congress. Right now, one suspects tax rates will have to go up in future years to pay for all the pandemic-driven deficit spending. If so, then one would have been better off putting as much as you could into Roth type IRA's and 401k's. But that this was what was going to happen over the last 20 years... Not really.
I work at a retirement company & my team processes retirement withdrawals. The Roth earnings ARE taxable when they are withdrawn. I am curious if this talk of Roth growth being tax free is indicating some type of refund from the IRS, because they definitely take federal tax out of Roth funds when they are withdrawn? Or if this is just a common myth. So many participants will write « Roth - no tax » on their withdrawal forms, but when we are processing them out, a minimum tax is applied to the earnings, so this is either a common misconception or there is a misunderstanding or miscommunication about what tax free growth actually means in terms of Roth
I know this is Ramsey-esque but there’s something so emotionally freeing to having a large sum that you know is fully yours and you don’t owe any tax on. Also no RMD’s for Ralph if he doesn’t end up spending his $4M before 72. I think income taxes will raise and RMD age will reduce in the future (theory). I find myself leaning towards Ralph even if I have a low income in retirement.
Aaron Josephs: Looks legit. According to a Charles Schwabb article I read on the topic, sounds like the only precaution you need to take when converting a Roth 401k to a Roth IRA is to make sure the time period from your first Roth IRA contribution to your 1st Roth IRA withdrawal is at least 5 years. Otherwise, you may have to pay additional taxes. Thanks for the tip
That's their advice, but it's a rule of thumb. I think it should also depend on how much you expect to make in the future. They're making the assumption that 30% is about your career high income.
Where do you get 7- 9% compound interest on a 401k or Roth? You guys are always talking about an average 8% compound interest on a retirement plan but no info on where or how. I went to my bank and was told they pay around 3%. That was disappointing. Please share where, how to get the 8%. Thanks
I’m 22 and making around $76k as an MRI technologist. My healthcare company has a Roth 401k and they match 50% of contributions up to 6% of my income. I plan on retiring at 65. I’m currently contributing 15% of my income to my Roth 401k. Is Roth for me, or should I switch back to traditional? Edit: just finished the video and it looks like I’m probably better off with Roth. Good video
Depends on if you have the opportunity to max out other retirement options. For example at my current employer, I have access to a 401k, 457b, and HSA. If you’re disciplined enough to take the extra money you saved in the current tax year due to deferring taxes into the future and place that money into your other tax advantaged retirement accounts, you may be better off with a tax deferred/traditional account depending on the factors previously discussed in this video. However if you’re not going to invest extra money you saved in the current tax year due the tax deferral, you are almost certainly better off going with a Roth account. Don’t forget even high income earners have access to Roth IRAs due to backdoor Roth IRAs/Roth conversion strategies.
