I want to hear the other side

[riverwed070707]

I've read quite a few articles on the debate between contributing to retirement pre-tax or post-tax. It seems to me that on any sort of financial forum, the general consensus is Roth is better; however, as I mentioned last week DH and I are reading Smart Couples Finish Rich, and in the retirement chapter he talks about how to contribute 10% without reducing your income 10%. I am presently contributing 10% to a Roth (with 6% company match). After reading it, I played with my retirement contributions (my company offers traditional 401(k) as well as a Roth 401(k)) and I calculated that I could contribute 10% to my traditional 401k AND 3% to my Roth still without spending more money.

I realize I will pay taxes on the pre-tax contributions when they are distributed but I guess that's where it gets a little too complex for me. He had a chart in the book but it was very biased because it illustrated what you would have in a traditional vs roth account at retirment age at a variety of return rates -- what it did not show, however, is how much of the traditional would be left after taxes. Very misleading if you ask me. Anyway I know how most of you feel about Bach and that's not really what I wanted to ask about. My question is, the recommendation is always to try to contribute 15-20% to retirement. I can't afford to contribute more than we already are at this point (until debt is repaid), so is it better to contribute 10% entirely to a post-tax account or to contribute 13% to a mix or roth and traditional? Of course it would be an option to put it all in the traditional as well and at that point I might be up to 15%.

What would saving advice do?

[bjl584]

Is there a match with your company sponsored plan? If so, contribute at least to the match. You can't get a much better return on your money than that.

Both options have their merits. Pretax lowers your tax exposure today, while post tax prevents you from paying taxes later.

I like my Roth because I have freedom to invest in it whatever I choose. My 401K limits me to the preset fund choices. I'm currently building my Roth around the idea of receiving regular dividends that are tax free, so I'm investing in dividend paying stocks and funds. I also believe that tax rates will have to increase in the future to pay for our country's debt, so the more money that I can get paid to me tax free the better.

However, I do have a traditional 401K, because of the match and to lower my tax exposure today.

I do a little bit of both. I'm happy with that arrangement.

[riverwed070707]

Originally Posted by bjl584

Is there a match with your company sponsored plan? If so, contribute at least to the match. You can't get a much better return on your money than that.

Both options have their merits. Pretax lowers your tax exposure today, while post tax prevents you from paying taxes later.

I like my Roth because I have freedom to invest in it whatever I choose. My 401K limits me to the preset fund choices. I'm currently building my Roth around the idea of receiving regular dividends that are tax free, so I'm investing in dividend paying stocks and funds. I also believe that tax rates will have to increase in the future to pay for our country's debt, so the more money that I can get paid to me tax free the better.

However, I do have a traditional 401K, because of the match and to lower my tax exposure today.

I do a little bit of both. I'm happy with that arrangement.

Yes I get a match -- but I get it regardless of whether I contribute pre- or post-tax.

ETA: I should clarify. I get the 6% match regardless of which way I choose to contribue; however, the company match goes into a traditional account even if I'm not putting my contributions there. Company match cannot be contributed to the roth.

[Petunia 100]

I think it makes sense to have both.

Everyone gets to have some taxable income tax free every year. Right now, the standard deduction for a single person plus 1 personal exemption equals a little over 9k. So you can pull 9k income from a pre-tax account and pay no income tax. If ALL of your money is in a Roth, you will lose this benefit (assuming you have no other taxable income).

[feh]

I never had a Roth 401K available to me until this year, so I crunched the numbers...given the number of years I have until retirement and our anticipated income (and therefor tax rate) in retirement, it was pretty much a wash. That being said, if I had more years until retirement, the Roth would've won.

Which is "best" will depend on your particular situation.

[riverwed070707]

Originally Posted by feh

I never had a Roth 401K available to me until this year, so I crunched the numbers...given the number of years I have until retirement and our anticipated income (and therefor tax rate) in retirement, it was pretty much a wash. That being said, if I had more years until retirement, the Roth would've won.

Which is "best" will depend on your particular situation.

I'm hoping to retire in 35 years; however, I won't be of "retirment age" for 41. My DH is 6 years older than me and we're planning to retire at the same time. I'm sure plans may change but at present that's what I'm trying to plan for.

Do you know of a good calculator for this? Most of the ones I have tried are still showing it as a wash for me.

[feh]

Originally Posted by riverwed070707

I'm hoping to retire in 35 years; however, I won't be of "retirment age" for 41. My DH is 6 years older than me and we're planning to retire at the same time. I'm sure plans may change but at present that's what I'm trying to plan for.

Do you know of a good calculator for this? Most of the ones I have tried are still showing it as a wash for me.

I did find and use an online calculator, but I didn't record its URL. Sorry.

[paul_btam]

for some reason I keep getting an error

[paul_btam]

For tax diversification, do both. The Roth is good for hedging against having a higher tax rate later in life, while the 401k is good for hedging the opposite. It's impossible to know if your rate will be higher or lower in the future unless your fairly close to retirement.

I personally fund both a Roth IRA and a traditional 401k.

[cschin4]

Originally Posted by riverwed070707

I'm hoping to retire in 35 years; however, I won't be of "retirment age" for 41. My DH is 6 years older than me and we're planning to retire at the same time. I'm sure plans may change but at present that's what I'm trying to plan for.

Do you know of a good calculator for this? Most of the ones I have tried are still showing it as a wash for me.

Wow? 35 years? A lot can happen in 35 yrs. I would advise that the best plan is to plan that your plans are not always your plans. You need life insurance and disability insurance. And, save money for a rainy day. The vehicle of roth versus ira not as important.

[riverwed070707]

Originally Posted by cschin4

Wow? 35 years? A lot can happen in 35 yrs. I would advise that the best plan is to plan that your plans are not always your plans. You need life insurance and disability insurance. And, save money for a rainy day. The vehicle of roth versus ira not as important.

I know, I know. I have time. I just feel like one of the best things we can do for our future is to put away a decent amount right now. My spouse and I both have life insurance (him $500k and me $250k) and I have disability as well. Its so amazing to me how much of a difference it can make to save even $5k/year when you're in your 20s compared to starting in your 30s though so its important to me to do this even though we do have other financial hurdles as well.

My point in asking the question was just whether one option was obviously more beneficial than the other.

[snshijuptr]

Obviously first get any match you can, but since in your case it doesn't matter, I did the calculation once and here were the lessons I learned:

1) If your tax bracket will be equal Roth is way better if you have over 25 years until retirement.
2) If you are in a higher tax bracket now, then put into a traditional any money you are over the bracket line. (For instance if the bracket line between 15% and 25% is $66,000 and you have making $68,000, but $2,000 in a traditional and the rest in a Roth).

DH and I are young and solidly in the 15% tax bracket so everything we have is going into a Roth IRA.

Riverwed, your timeline and the fact that your match goes into a traditional means that you are nicely tax diversified and have many many years of growth potential. I'd way, until you are close to retirement and can get a better picture of your retired life, keep contributing to your Roth.

[feh]

Found the calculator I had used:

Traditional vs. Roth 401(k) Calculator

[jpg7n16]

Originally Posted by feh

Found the calculator I had used:

Traditional vs. Roth 401(k) Calculator

I always have issues with these online calculators because they ignore one HUGE factor:

You can invest the tax savings if you use the traditional version.

If you invest exactly as this calculator is set up, using the traditional 401k would give you tax savings of $1,250. Where did that money go in the calculation??

Every calculator I've seen just assumes you spend that money. But what if you invest that money? (For instance in a Roth IRA)


The Roth calculators are flawed. They always give this unfair advantage to Roth IRAs. The true advantage is in the change in tax rates.

If taxes will be lower in retirement, traditional for the win. If taxes will be higher, Roth for the win.

And don't forget that if it's your only income, you get to apply deductions and exemptions against some of the Traditional IRA/401k money - turning some of it into tax free income (both today and tomorrow). The more I think about it, the more I like the traditional 401k.


The best answer is do both. You get the benefits of both worlds.

[jpg7n16]

Originally Posted by jpg7n16

The Roth calculators are flawed. They always give this unfair advantage to Roth IRAs. The true advantage is in the change in tax rates.

Just because I'm a nut about that just take that calculator and mess around with the numbers to see if you can ever find a combination where the traditional version wins.

It can't be done (due to the huge flaw in the calculator's design)

[jpg7n16]

Originally Posted by dougm

Most savers don't realize there is a saving strategy which is far superior to traditional and Roth IRAs and 401(k)s.

That greatly depends on how you define 'superior.'

Also, keep in mind, you will likely pay 10 times as much tax as the amount of the tax that you defer. So with a traditional IRA if you defer $10,000 over the life of your contributions, expect to pay $100,000 in tax when you take those distributions. I will be glad to show you proof of that.

Classic misrepresentation: only focusing on the cost - not the value. Sure you'll pay much much more in taxes - because you'll have made much much more money!

What that means in real numbers: if you are able to defer $10k (we'll say 20% bracket for easy calcs), then you contributed $50,000.

If you are paying $100,000 in taxes (also 20% easy calc), then you are withdrawing $500,000.

I'm sorry you now have 10x the money.

The product I recommend is a life insurance policy which eliminates downside risk (your investment is never subject to loss), you have access to your money for any purpose after 1 year without penalty and all the distributions are taken out tax free.

Again, another misrepresentation. You would be able to take out your contributions tax free, but any earnings withdrawn would be considered income; or by taking loans against the policy - on which you'd be charged interest.

From: Cash Value Life Insurance - Tax on Withdrawals

One way to avoid this and still access your money is to take a policy loan from the insurance company, using the cash value in the policy as collateral. The amount you borrow is generally not treated as taxable income as long as you repay the loan, and there are no surrender charges because you're not actually withdrawing your money. But you'll have to pay interest on the loan, which is not tax deductible.

From: Publication 17 (2010), Your Federal Income Tax

Surrender of policy for cash. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.

You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A.

More information. For more information, see Life Insurance Proceeds in Publication 525.