After tax 401k

[echod]

My employeed friend has an after tax 401k where he can contribute 10% of his income. This is in addition to the 6k roth and 20.5k pretax 401k.

How do I set up something similar myself in PP?

Thanks.

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[RadRadRad]

My employeed friend has an after tax 401k where he can contribute 10% of his income. This is in addition to the 6k roth and 20.5k pretax 401k.

How do I set up something similar myself in PP?

Thanks.

I”d look at defined benefit plan if you are in true private practice. The recommended contributions are age dependent so if you have partners of different ages you have to have a way to balance out via salary adjustments…or let the boomers have higher contributions

 

[CaesarRO]

My employeed friend has an after tax 401k where he can contribute 10% of his income. This is in addition to the 6k roth and 20.5k pretax 401k.

How do I set up something similar myself in PP?

Thanks.

You just have to go to a company that allows custom features in your 401k. Are you solo or in a group? 1099 or W2? I think simplest would be if you are 1099 and can open a solo 401k, you can "employer contribute" up to a total of $61k including the employee contributions for 2022

Whitecoatinvestor recently went through the process of getting one.

The New WCI 401(k) | White Coat Investor

Six months ago we began the process of creating the World's Best 401(k) Plan. See my wish list of features, compromises, and final result!

www.whitecoatinvestor.com

 

[echod]

I am doing locums.

How do you set up in plan Roth conversion to convert the after tax 401k into Roth?

My employeed friend also has in plan roth conversion to convert his 10% after tax into Roth. So he gets to put 60k plus 10% after tax into Roth each year.

 

[seper]

The goal of such a maneuver would be to let your investments grow tax free.
Unfortunately, over the next 1-2 years both stocks and bonds are not gonna grow much at all. You will be lucky if you stay flat.
Therefore, consider simply adding your surplus income to a brokerage account

 

[SneakyBooger]

We need an investing thread. I have been heavy energy and small cap value the past year so I am doing ok. My BABA is killing me though!

 

[CaesarRO]

The goal of such a maneuver would be to let your investments grow tax free.
Unfortunately, over the next 1-2 years both stocks and bonds are not gonna grow much at all. You will be lucky if you stay flat.
Therefore, consider simply adding your surplus income to a brokerage account

Retirement contributions are capped annually, you are better off taking advantage of tax advantaged space when you can rather than waiting.

I am doing locums.

How do you set up in plan Roth conversion to convert the after tax 401k into Roth?

My employeed friend also has in plan roth conversion to convert his 10% after tax into Roth. So he gets to put 60k plus 10% after tax into Roth each year.

By locums, am I right to infer you are getting paid on a 1099? (Independent contractor, not employed on a W2?)

If so I think you can just directly make an employer contribution beyond your employee contribution with a solo 401k. Sounds like you have some reading to do

Best Retirement Savings Plans for the Self-Employed | White Coat Investor

An independent contractor has plenty of excellent options for retirement savings -- an i401(k), SEP IRA, Roth IRA, HSA, Defined Benefit/Cash Balance plan, and even a taxable brokerage. Which is best for you?

www.whitecoatinvestor.com

To clarify, employees get $20.5k limit to contribute to 401k. The total IRS 401k limit is $60.5k this year. To contribute beyond $20.5k, either the employer matches/adds to it beyond $20.5k or the plan has a provision for adding after tax money beyond your tax advantaged contributions.

Bonus points are if the plan allows for in plan Roth conversions, then you can contribute after tax beyond $20.5k and automatically Roth convert. This is known as a "mega backdoor Roth".

All these features depend on the 401k plan itself, which is usually decided by your employer. But if self employed, you are the employee and employer. I think the technical limit is 20% of profit, so you have to make $40k/0.2 = $200k profit as an employer, not counting what you contribute yourself ($20.5k) in order to max it out.

 

[medgator]

To clarify, employees get $20.5k limit to contribute to 401k. The total IRS 401k limit is $60.5k this year. To contribute beyond $20.5k, either the employer matches/adds to it beyond $20.5k or the plan has a provision for adding after tax money beyond your tax advantaged contributions.

Correct. Many PP groups are doing safe harbor 401k plans where you are putting away close to $60k a year potentially.

We looked at cash balance/defined benefit plans like @RadRadRad mentioned but it didn't work out for us given different ages in the group as well as the start up/actuary and maintenance fees involved

Why Some Business Owners Choose a Safe Harbor 401(K) over a traditional 401(k) - Windgate Wealth Management

A Safe-Harbor 401(k) plan provides a minimum level of contributions to all employees, freeing owners and highly compensated employees to receive larger profit-sharing payments. A successful business owner knows that finding and retaining top talent is one of the keys to building team unity and...

windgatewealth.com

 

[2brads]

A little off topic, but why do post tax contributions now? Do you feel you’re going to have a higher tax burden in retirement? Backdoor Roth makes sense because you’ll be taxed on that either way, but I’m not sure post tax 401k does.

 

[Burt Radnolds]

A little off topic, but why do post tax contributions now? Do you feel you’re going to have a higher tax burden in retirement? Backdoor Roth makes sense because you’ll be taxed on that either way, but I’m not sure post tax 401k does.

In general, agree that makes most sense to contribute pre tax, given likelihood of being in lower tax bracket at time of withdrawal.

However, reasons to consider otherwise could include concerns that tax code and brackets are completely redone in 20-30 years. Or, as you mentioned, you may have other income flows in retirement that also put you at risk at risk of being equivalently or additionally taxed. Lastly, there is some degree of asset protection strategy in contributing post tax dollars instead of less valuable pre tax dollars into retirement accounts that are in general protected from creditors.

 

[2brads]

I’m W2 and we have option to do 401k post tax, but no one does. Being in the top tax bracket currently, I don’t foresee me having taxable retirement income to put me even near the top tax bracket. We will probably live low for a few years right after retirement and then convert the 401k to Roth with the remaining available headspace.

 

[maxxor]

A little off topic, but why do post tax contributions now? Do you feel you’re going to have a higher tax burden in retirement? Backdoor Roth makes sense because you’ll be taxed on that either way, but I’m not sure post tax 401k does.

Post tax is functionally the same as a brokerage account.

However, if you have inservice rollovers, you can back door Roth.

 

[2brads]

Post tax is functionally the same as a brokerage account.

However, if you have inservice rollovers, you can back door Roth.

Kind of, except no cap gains tax.

Agree best thing would be deferred comp with Roth rollover option.

 

[RadRadRad]

A little off topic, but why do post tax contributions now? Do you feel you’re going to have a higher tax burden in retirement? Backdoor Roth makes sense because you’ll be taxed on that either way, but I’m not sure post tax 401k does.

If you actually do the math and use excel spreadsheet assuming reasonable rate of return you will find that Roth style contributions will out perform pre tax contributions if you are younger / have a long time for compounding . The older you get the more the math favors putting in money pre tax. The crossover point varies depending on anticipated length of your career. For most people it’s probably around age 50

 

[echod]

The pretax 401k limit is 20.5k only correct? Rest of the 401k has to be post tax.

 

[medgator]

The pretax 401k limit is 20.5k only correct? Rest of the 401k has to be post tax.

Nope. All tax deferred

 

[maxxor]

Kind of, except no cap gains tax.

Agree best thing would be deferred comp with Roth rollover option.

But aren’t the gains on distributions taxed as ordinary income? That’s worse than taxable brokerage in a way.

I never quite understood the point of the after tax 401k unless it was a bridge to Roth conversion.

 

[2brads]

But aren’t the gains on distributions taxed as ordinary income? That’s worse than taxable brokerage in a way.

I never quite understood the point of the after tax 401k unless it was a bridge to Roth conversion.

I thought you meant to get to Roth. 401k gains are taxable (I'm not sure if it's as regular earned income or cap gains though).

 

[2brads]

If you actually do the math and use excel spreadsheet assuming reasonable rate of return you will find that Roth style contributions will out perform pre tax contributions if you are younger / have a long time for compounding . The older you get the more the math favors putting in money pre tax. The crossover point varies depending on anticipated length of your career. For most people it’s probably around age 50

This assumes that you don't eventually plan to convert all (or a portion) of the 401k to a Roth down the road. I plan to be part time/retired by 50.

 

[jondunn]

This assumes that you don't eventually plan to convert all (or a portion) of the 401k to a Roth down the road. I plan to be part time/retired by 50.

agree, rad oncs should not work past age 50.

 

[maxxor]

I thought you meant to get to Roth. 401k gains are taxable (I'm not sure if it's as regular earned income or cap gains though).

Traditional - no taxes now. Ordinary income on distributions in retirement.

Roth - taxes now. No more tax in future.

After tax - taxes now. Tax again on gains at ordinary income (not capital gains) rates on distributions.

Taxable brokerage - taxes now. Cap gains taxes on sales. Dividends can be income or other rates. But you aren’t gonna get hit with ordinary income tax unless you sell in less than a year.

That’s why I don’t understand why someone would do after tax unless it was with the explicit plan goals to roll it into a Roth account of some sort.

 

[2brads]

Traditional - no taxes now. Ordinary income on distributions in retirement.

Roth - taxes now. No more tax in future.

After tax - taxes now. Tax again on gains at ordinary income (not capital gains) rates on distributions.

That’s why I don’t understand why someone would do after tax unless it was with the explicit plan goals to roll it into a Roth account of some sort.

I'm on your side here...

 

[Burt Radnolds]

Traditional - no taxes now. Ordinary income on distributions in retirement.

Roth - taxes now. No more tax in future.

After tax - taxes now. Tax again on gains at ordinary income (not capital gains) rates on distributions.

Taxable brokerage - taxes now. Cap gains taxes on sales. Dividends can be income or other rates. But you aren’t gonna get hit with ordinary income tax unless you sell in less than a year.

That’s why I don’t understand why someone would do after tax unless it was with the explicit plan goals to roll it into a Roth account of some sort.

This is mostly correct except many plans allow post tax contributions to 401k that follow Roth rules. It's actually called a Roth 401k. So you pay the up front tax and gains are not taxed ever. Same yearly contribution cap though pre versus post tax ($20500 in 2022). This is what I was referring to in my earlier post.

What Is a Roth 401(k)?

A Roth 401(k) is an employer-sponsored retirement savings account that is funded with post-tax money. Withdrawals in retirement are tax-free.

www.investopedia.com

 

[maxxor]

This is mostly correct except many plans allow post tax contributions to 401k that follow Roth rules. It's actually called a Roth 401k. So you pay the up front tax and gains are not taxed ever. Same yearly contribution cap though pre versus post tax ($20500 in 2022). This is what I was referring to in my earlier post.

What Is a Roth 401(k)?

A Roth 401(k) is an employer-sponsored retirement savings account that is funded with post-tax money. Withdrawals in retirement are tax-free.

www.investopedia.com

That’s option 2 in my post. Options 1-3 are specifically talking about 401ks.

 

[Burt Radnolds]

That’s option 2 in my post. Options 1-3 are specifically talking about 401ks.

Got it, if you read through the posts, it's pretty clear that not everyone is on the same page in regards to what the options are. For example, the initial post (see below) only mentions the 6k Roth IRA option, and "post tax 401k" kept getting thrown around by multiple people without clarification on what that can entail. Really everyone who hasn't should just go read WhiteCoatInvestor.

My employeed friend has an after tax 401k where he can contribute 10% of his income. This is in addition to the 6k roth and 20.5k pretax 401k.

How do I set up something similar myself in PP?

Thanks.

 

[DoctwoB]

Correct. Many PP groups are doing safe harbor 401k plans where you are putting away close to $60k a year potentially.

We looked at cash balance/defined benefit plans like @RadRadRad mentioned but it didn't work out for us given different ages in the group as well as the start up/actuary and maintenance fees involved

Why Some Business Owners Choose a Safe Harbor 401(K) over a traditional 401(k) - Windgate Wealth Management

A Safe-Harbor 401(k) plan provides a minimum level of contributions to all employees, freeing owners and highly compensated employees to receive larger profit-sharing payments. A successful business owner knows that finding and retaining top talent is one of the keys to building team unity and...

windgatewealth.com

I’m in a big multi specialty group and we have the cash balance plan option.

Between 401k/profit sharing (“employer 401k” though really it’s our earnings) and cash balance plan can put away over 100k pre tax. When marginal tax rate is ~50% that’s a big bonus.

 

[RSAOaky]

If you actually do the math and use excel spreadsheet assuming reasonable rate of return you will find that Roth style contributions will out perform pre tax contributions if you are younger / have a long time for compounding . The older you get the more the math favors putting in money pre tax. The crossover point varies depending on anticipated length of your career. For most people it’s probably around age 50

I don't think it's as simple as that but since you've done the math would you care to show it to us?

 

[2brads]

I think this is the answer: Taxable Versus Tax Deferred Calculator From AARP

Everything hinges on whether the "Tax Deduction" button is checked or not, but that button's description is confusing to me. Let me know if y'all figure it out.

 

[HolySmokes]

I think this is the answer: Taxable Versus Tax Deferred Calculator From AARP

Everything hinges on whether the "Tax Deduction" button is checked or not, but that button's description is confusing to me. Let me know if y'all figure it out.

Pretty sure it's saying that your tax-deferred contributions will be higher to "match" the amount of income required to make the same taxable contribution. So if you want to contribute $5k in taxable account you'd need $7.7k in income with a 35% marginal tax rate. If you check the button it's saying you contribute the entire $7.7k to the tax-deferred.

 

[evilbooyaa]

IRA is better to do Roth because the growth you obtain is not taxed, and you won't pay taxes when it is time for approval. It lets you effectively put more in your retirement at the cost of having less now. However, employer match at least for me is always pre-tax, so I have a mix of Roth IRA and non-Roth IRA.

A post-tax retirement account that is not IRA.... isn't that just the stock market?

 

[RSAOaky]

I think this is the answer: Taxable Versus Tax Deferred Calculator From AARP

Everything hinges on whether the "Tax Deduction" button is checked or not, but that button's description is confusing to me. Let me know if y'all figure it out.

Still interested to hear @RadRadRad's math. In essence, it's not a one size fits all solution and there is a lot of uncertainty with future taxes. The law could change at any time, pushing one way or another.

Roth 401k is post-tax, traditional 401k is pre-tax. My marginal tax rate is 44% (federal, state, city). Max 401k contribution is $20,500.
In order to contribute $20,500 to a Roth 401k, I have to spend $20,500/.56 = $36,607 in pre-tax money.

If instead I take $36,607 and put it into a traditional 401k, I have $20,500 in pre-tax 401k dollars and ($36,607 - $20,500) * 0.56 = $9,020 in post-tax dollars.

Assuming I'm 35 and plan to retire at 60, at the end of 25, with a 7% rate of return, these returns look as follows. There's going to be a bit of tax drag on the taxable account so the taxable total will probably be a bit less but it's not super critical here.

	Roth 401k	401k	Taxable Total	Taxable Basis	Taxable Gains
60​	$ 1,407,867.64	$ 1,407,867.64	$ 619,461.76	$ 234,520.00	$ 384,941.76

So this is the simple part. For my situation, at the end of 25 years I have about 44% more saved going with a pre-tax 401k. However, whether the pre-tax route was better than the post-tax (Roth) route depends entirely on how efficiently I am able to access this money. Things that impact this include:

Where you retire to
How old you are when you retire
Other income streams in retirement
Married vs. Single
How much money you require at retirement
Changes in tax law

If you're married, making $350k in Florida with a 24% marginal tax rate and plans to retire somewhere with a bigger tax burden, you don't benefit nearly as much as someone like myself with my 44% marginal tax rate and plans tor retire to Florida or Texas.

One other BIG component to this all is tax diversification. A lot of our money (401k, 457b, employer contributions) tends to be wrapped up in pre-tax dollars which puts you at risk of getting screwed over by required minimum distributions (RMDs) at 72. If you plan to retire at 55, you have 17 years to drain those accounts through some combination of roth conversions and spending. If you retire at 65, these account values can get to be massive and you start getting hit with huge tax bills.

So in sum, it all depends and everyone's scenarios are slightly different. High earners in high tax states with low volumes of pre-tax savings who plan to retire early to low tax states will benefit the most from a pre-tax 401k. Low earners in low tax states with large volumes of pre-tax savings who plan to work forever before retiring to high tax states will benefit the most from a Roth 401k. Everyone else will fall somewhere in the middle. Even in an extreme case like mine, once taxes are factored in, the benefit is not massive, so it's probably mostly a wash for most.

 

[Lamount]

IRA is better to do Roth because the growth you obtain is not taxed, and you won't pay taxes when it is time for approval. It lets you effectively put more in your retirement at the cost of having less now. However, employer match at least for me is always pre-tax, so I have a mix of Roth IRA and non-Roth IRA.

A post-tax retirement account that is not IRA.... isn't that just the stock market?

I am pretty sure, assuming the the same income tax bracket now vs retirement, it is identical. Let’s assume, for simplicity, that you pay 50% income tax… which clearly, you don’t.
0.5A*e^(1.07*t)=(A*e^(1.07t))/2

The only question is, do you anticipate your effective tax rate to be higher now or when you retire?

 

[madchemist89]

Visit the bogleheads forum if you want to go down this rabbit hole

 

[RSAOaky]

I am pretty sure, assuming the the same income tax bracket now vs retirement, it is identical. Let’s assume, for simplicity, that you pay 50% income tax… which clearly, you don’t.
0.5A*e^(1.07*t)=(A*e^(1.07t))/2

The only question is, do you anticipate your effective tax rate to be higher now or when you retire?

You really can't assume your tax bracket will be the same though. If you want to make the assumption above, then the math works out as follows:

For simplicity, lets assume 401k (roth or otherwise) max is 20k. Lets assume 50% income tax now and when you retire.
Scenario 1: Roth 401k
You contribute the max. Since it's post-tax and your tax rate is 50%, it takes 40k in pre-tax money to do so.

Scenario 2: Pre-tax 401k
You contribute the max, so that's 20k pre-tax. You're also left with 20k pre-tax, which is taxed at 50%, so an additional 10k goes into a taxable account.

At the end of 31 years [because I realized I did 31 instead of 30 by mistake], assuming a 7% growth rate:

Scenario 1:
Roth 401k = $2,041,460. This money is yours.

Scenario 2:
Traditional 401k = $2,041,460, this money will be taxed at 50%
Taxable Account = $1,020,730 with a cost basis of $310,000. We will assume the capital gains are taxed at 15%
So at the end of this all you have $1,020,730 in the 401k and $914,120 in the taxable account

So scenario 1 leaves you with $2,041,460 post-tax money, scenario 2 leaves you with $1,934,851 left to play with, a difference of $106,609.

These scenarios are complicated and not quite as simple as you describe above!

 

[udrag14]

Visit the bogleheads forum if you want to go down this rabbit hole

Boggleheads? That is no fun. Wall Street bets is where it is at.

 

[Lamount]

You really can't assume your tax bracket will be the same though. If you want to make the assumption above, then the math works out as follows:

For simplicity, lets assume 401k (roth or otherwise) max is 20k. Lets assume 50% income tax now and when you retire.
Scenario 1: Roth 401k
You contribute the max. Since it's post-tax and your tax rate is 50%, it takes 40k in pre-tax money to do so.

Scenario 2: Pre-tax 401k
You contribute the max, so that's 20k pre-tax. You're also left with 20k pre-tax, which is taxed at 50%, so an additional 10k goes into a taxable account.

At the end of 31 years [because I realized I did 31 instead of 30 by mistake], assuming a 7% growth rate:

Scenario 1:
Roth 401k = $2,041,460. This money is yours.

Scenario 2:
Traditional 401k = $2,041,460, this money will be taxed at 50%
Taxable Account = $1,020,730 with a cost basis of $310,000. We will assume the capital gains are taxed at 15%
So at the end of this all you have $1,020,730 in the 401k and $914,120 in the taxable account

So scenario 1 leaves you with $2,041,460 post-tax money, scenario 2 leaves you with $1,934,851 left to play with, a difference of $106,609.

These scenarios are complicated and not quite as simple as you describe above!

I don't disagree, but you are assuming that, in both cases, you are contributing the maximum allowed. With the Roth scenario, this means you are contributing twice as much on a monthly than you would with traditional 401(k), since you are paying up front tax on your Roth.

In your scenarios, you are not ending up with twice as much in you Roth 401(k) because you are cleverly skirting the tax code with a Roth vs. Traditional strategy. Rather you are ending up with twice as much because... you contributed twice as much. Dollar for dollar, the tax benefits are identical

If the only limitation one has for contributing to retirement is the maximum allowable (i.e. you can afford the monthly contributions either way, and you only have one retirement account available), then the Roth strategy will indeed allow you to grow your post-retirement post-tax nest egg quicker.

However, if your situation is like mine -having 2 traditional 401(k)-like tax-deferred retirement accounts with an option to open a third, there really is no benefit to a Roth unless 1) my income will be higher in retirement than it is now (it won't), 2) Tax brackets will change such that the marginal rate is higher in the future (I hope it won't), or 3) I can harvest losses and create a backdoor IRA, tax-free (which I haven't quite figured out how to do yet)

 

[RSAOaky]

I don't disagree, but you are assuming that, in both cases, you are contributing the maximum allowed. With the Roth scenario, this means you are contributing twice as much on a monthly than you would with traditional 401(k), since you are paying up front tax on your Roth.

In your scenarios, you are not ending up with twice as much in you Roth 401(k) because you are cleverly skirting the tax code with a Roth vs. Traditional strategy. Rather you are ending up with twice as much because... you contributed twice as much. Dollar for dollar, the tax benefits are identical

You are correct! I redid the math and was wrong in some of my thinking. Assuming the same tax rate during working and at retirement it comes out the same.

 

[evilbooyaa]

Still interested to hear @RadRadRad's math. In essence, it's not a one size fits all solution and there is a lot of uncertainty with future taxes. The law could change at any time, pushing one way or another.

Roth 401k is post-tax, traditional 401k is pre-tax. My marginal tax rate is 44% (federal, state, city). Max 401k contribution is $20,500.
In order to contribute $20,500 to a Roth 401k, I have to spend $20,500/.56 = $36,607 in pre-tax money.

If instead I take $36,607 and put it into a traditional 401k, I have $20,500 in pre-tax 401k dollars and ($36,607 - $20,500) * 0.56 = $9,020 in post-tax dollars.

Assuming I'm 35 and plan to retire at 60, at the end of 25, with a 7% rate of return, these returns look as follows. There's going to be a bit of tax drag on the taxable account so the taxable total will probably be a bit less but it's not super critical here.

	Roth 401k	401k	Taxable Total	Taxable Basis	Taxable Gains
60​	$ 1,407,867.64	$ 1,407,867.64	$ 619,461.76	$ 234,520.00	$ 384,941.76

So this is the simple part. For my situation, at the end of 25 years I have about 44% more saved going with a pre-tax 401k. However, whether the pre-tax route was better than the post-tax (Roth) route depends entirely on how efficiently I am able to access this money. Things that impact this include:

Where you retire to
How old you are when you retire
Other income streams in retirement
Married vs. Single
How much money you require at retirement
Changes in tax law

If you're married, making $350k in Florida with a 24% marginal tax rate and plans to retire somewhere with a bigger tax burden, you don't benefit nearly as much as someone like myself with my 44% marginal tax rate and plans tor retire to Florida or Texas.

One other BIG component to this all is tax diversification. A lot of our money (401k, 457b, employer contributions) tends to be wrapped up in pre-tax dollars which puts you at risk of getting screwed over by required minimum distributions (RMDs) at 72. If you plan to retire at 55, you have 17 years to drain those accounts through some combination of roth conversions and spending. If you retire at 65, these account values can get to be massive and you start getting hit with huge tax bills.

So in sum, it all depends and everyone's scenarios are slightly different. High earners in high tax states with low volumes of pre-tax savings who plan to retire early to low tax states will benefit the most from a pre-tax 401k. Low earners in low tax states with large volumes of pre-tax savings who plan to work forever before retiring to high tax states will benefit the most from a Roth 401k. Everyone else will fall somewhere in the middle. Even in an extreme case like mine, once taxes are factored in, the benefit is not massive, so it's probably mostly a wash for most.

Can you show your math on a few of the numbers in the table? Are you accounting for the tax you will have to pay on the 1.4M from the pre-tax 401k when you withdraw? As opposed to the 1.4M Roth comes out straight, no taxes?

Would you see the 37k of your income taxed at 44% to justify your 20,500/0.56 number?

Part of this involves good stewardship I suppose that whatever money you would've put into a post-tax 401k, you immediately put into the stock market. I suppose as a new attending the draw to spend that money instead of investing is part of the reason I like the Roth 401k.

I will say you live in a very high tax region... or make way more than me to have that high of a marginal tax bracket. Maybe I'm a low earner in a low tax state (don't feel like it, but probably can't compete against some of the old guard!). Idk if I could not be bored retiring at 55. We'll see.

 

[RSAOaky]

Can you show your math on a few of the numbers in the table? Are you accounting for the tax you will have to pay on the 1.4M from the pre-tax 401k when you withdraw? As opposed to the 1.4M Roth comes out straight, no taxes?

My numbers are for the ending balance of those accounts. Taxes have not come into play for the 401k/taxable accounts and they are irrelevant for the Roth account because it's all post-tax. It's very hard to judge what your retirement taxes will look like but I will get creative. Excel Spreadsheet attached. The post-tax totals were taken from smartasset's income tax calculator.

Part of this involves good stewardship I suppose that whatever money you would've put into a post-tax 401k, you immediately put into the stock market. I suppose as a new attending the draw to spend that money instead of investing is part of the reason I like the Roth 401k.

It certainly involves good stewardship and there's some mental gymnastics involved. It's kind of like renting vs. owning. Owning a house may be more expensive overall, but your mortgage is also forced savings. At the end of 30 years, the money you saved from renting has likely been spent whereas with ownership you've got a lot saved up in equity. That being said, if you live within your means you're kind of blind to it. For example, if you budget to spend 200k a year and everything above that goes into savings, then it happens organically.

I will say you live in a very high tax region... or make way more than me to have that high of a marginal tax bracket. Maybe I'm a low earner in a low tax state (don't feel like it, but probably can't compete against some of the old guard!). Idk if I could not be bored retiring at 55. We'll see.

I live in the northeast (high taxes) and am in the highest tax bracket (just a kiss of that 37% federal this year). I'm not the old guard by any means (~5 years out). I will not work full time past 55 (maybe part time if it interests me). I will try to stay with my employer until 55 in some capacity because if you are working in the year you turn 55 you can begin drawing from your 457b penalty free.

 

[madchemist89]

I would say everyone is making this too complicated. If you are working as an attending, then you should max your pretax space 1st. Presumably you will make less income in retirement and hopefully it will be taxed more efficiently because it won't be w2 income. Then, fill your roth space next. This will also add some flexibility. Firstly, you can withdraw contributions penalty free at any age. Secondly, there are no rmds, so you can draw on this account to help keep your taxes low. After filling your roth space, then fill your taxable.

 

[evilbooyaa]

I would say everyone is making this too complicated. If you are working as an attending, then you should max your pretax space 1st. Presumably you will make less income in retirement and hopefully it will be taxed more efficiently because it won't be w2 income. Then, fill your roth space next. This will also add some flexibility. Firstly, you can withdraw contributions penalty free at any age. Secondly, there are no rmds, so you can draw on this account to help keep your taxes low. After filling your roth space, then fill your taxable.

The point I suppose I keep harping on, is that, I can either have a regular 401k or a Roth 401k. And perhaps part of it is a lack of good stewardship on my part to invest the 'saved' amount if we just put it in pre-tax.

@RSAOaky I appreciate the spreadsheet. What I'm struggling with, is that your 'Taxable gains' are solely based on the extra 8,609/year that you are putting into a post-tax account. I do not see anywhere that you consider the fact that, when the 1.4M in the Roth is supposed to come out, you will pay ZERO taxes on it, where as for the 1.4M in the regular 401k, you will be paying taxes on that money. Yes it will be a lower tax rate than the 44% originally, but let's say it's 25% (we're not going to be living middle class in retirement, right?) - that's (something less than due to the role of marginal tax brackets) $350k to the government right there. It does appear you would still come out somewhat ahead, but $60k over a 25 year career gained with a 44% marginal tax rate is a big difference to the ~$360k you're mentioning

Regular 401k - you put in money pre-tax. It grows. When you take it out, you pay taxes on what you're taking out. It's not tax free, it's tax deferred.I am not aware of anything that suggests "you only put in 20,500 * 25 = 512,500, so even though that money is now worth 1.4M, you don't have to pay taxes on 1.4M"?

 

[RSAOaky]

The point I suppose I keep harping on, is that, I can either have a regular 401k or a Roth 401k. And perhaps part of it is a lack of good stewardship on my part to invest the 'saved' amount if we just put it in pre-tax.

@RSAOaky I appreciate the spreadsheet. What I'm struggling with, is that your 'Taxable gains' are solely based on the extra 8,609/year that you are putting into a post-tax account. I do not see anywhere that you consider the fact that, when the 1.4M in the Roth is supposed to come out, you will pay ZERO taxes on it, where as for the 1.4M in the regular 401k, you will be paying taxes on that money. Yes it will be a lower tax rate than the 44% originally, but let's say it's 25% (we're not going to be living middle class in retirement, right?) - that's (something less than due to the role of marginal tax brackets) $350k to the government right there. It does appear you would still come out somewhat ahead, but $60k over a 25 year career gained with a 44% marginal tax rate is a big difference to the ~$360k you're mentioning

Regular 401k - you put in money pre-tax. It grows. When you take it out, you pay taxes on what you're taking out. It's not tax free, it's tax deferred.I am not aware of anything that suggests "you only put in 20,500 * 25 = 512,500, so even though that money is now worth 1.4M, you don't have to pay taxes on 1.4M"?

Age	Roth	401k	Taxable	Taxable Basis	Taxable Gains
60​	$ 1,407,867.64	$ 1,407,867.64	$ 591,235.73	$ 223,834.00	$ 367,401.73

It's impossible to predict what taxes will look like in the future and I don't know what your annual spending looks like. There are many ways to optimize your draw down as well. For example, let's say you retire at 60. Your balances in these plans look like the above. Let's say you're married, retire to Florida, and start withdrawing 150k a year for retirement. You decide to do this exclusively from the taxable account (you probably wouldn't go this route but hypothetically). You actually wind up paying a big fat $0 in taxes based on the ratio of taxable gains to the basis. At the end of 4 years your accounts look like this:

64​

$807,867.64​

$1,407,867.64​

($8,764.27)​

In the roth scenario, your accounts look like the first column. In the pre-tax scenario, you've now completely drained your taxable account and haven't even touched your 401k. Now lets say you still require 150k a year. You have to draw down 190k from your 401k to equal 150k post-tax money in your IRA. You would run out of money between 69-70 in the Roth scenario and between 71 and 72 in the 401k scenario.

Age	Roth	401k
60​	$1,407,867.64​	$1,407,867.64​
61​	$1,257,867.64​	$1,407,867.64​
62​	$1,107,867.64​	$1,407,867.64​
63​	$957,867.64​	$1,407,867.64​
64​	$807,867.64​	$1,407,867.64​
65​	$657,867.64​	$1,217,867.64​
66​	$507,867.64​	$1,027,867.64​
67​	$357,867.64​	$837,867.64​
68​	$207,867.64​	$647,867.64​
69​	$57,867.64​	$457,867.64​
70​	($92,132.36)​	$267,867.64​
71​	($242,132.36)​	$77,867.64​
72​	($392,132.36)​	($112,132.36)​

This ****'s complicated. The example above is really my scenario and why it makes sense for me to do a 401k. If your marginal tax rate is lower, your savings and thus your taxable account gets smaller. If you plan to retire somewhere with higher taxes or spend more in retirement, the Roth becomes more appealing. The Roth also has some tax benefits in terms of tax diversification and protects you more from future changes in tax code. For you it sounds like the benefit of pre-tax over Roth is smaller and so the tax diversification/greater protection from future tax changes alone is probably worth it, but only you can project what your needs will be. Hope that's helpful.

 

[evilbooyaa]

Appreciate the response - really I do Roth for the simple fact that I wouldn't be good about saving the extra amount, and I suppose have a much less than 44% marginal tax rate during my money making time.

That being said... figuring out how to pay $0 in taxes when drawing out 150k a year x 4 years... that'd be the dream. Not sure I can base my financial decisions on that hypothetical in 25 years though...

 

[DoctwoB]

Appreciate the response - really I do Roth for the simple fact that I wouldn't be good about saving the extra amount, and I suppose have a much less than 44% marginal tax rate during my money making time.

That being said... figuring out how to pay $0 in taxes when drawing out 150k a year x 4 years... that'd be the dream. Not sure I can base my financial decisions on that hypothetical in 25 years though...

The key thing I haven't seen discussed is that when investing you are putting money in at the top marginal tax rate. My marginal tax rate is 50%. That means every dollar I'm putting in pre-tax is a dollar I am not paying .50 in taxes on.

When I withdraw the money, even if I match my income 1 to 1 so end up up at the same marginal tax rate, I first fill up all my lower tax rate buckets first. Meaning my effective tax rate on withdrawals may be 25 or 30 or 35%, even if I stay in my exact same location.

The reasons to do Roth IMO, are
1. your tax rate now is lower then expected in retirement (i.e. all residents should be doing roth contributions, it may be worth converting to roth before you move from texas to california, etc)
2. Tax rate diversification. 401k carries the risk that future taxes will be higher then current taxes in a way that more then wipes out the tax benefits of contributing pre-tax. You are essentially paying a cost to insure yourself partially against that risk.

 

[medgator]

The key thing I haven't seen discussed is that when investing you are putting money in at the top marginal tax rate. My marginal tax rate is 50%. That means every dollar I'm putting in pre-tax is a dollar I am not paying .50 in taxes on.

When I withdraw the money, even if I match my income 1 to 1 so end up up at the same marginal tax rate, I first fill up all my lower tax rate buckets first. Meaning my effective tax rate on withdrawals may be 25 or 30 or 35%, even if I stay in my exact same location.

The reasons to do Roth IMO, are
1. your tax rate now is lower then expected in retirement (i.e. all residents should be doing roth contributions, it may be worth converting to roth before you move from texas to california, etc)
2. Tax rate diversification. 401k carries the risk that future taxes will be higher then current taxes in a way that more then wipes out the tax benefits of contributing pre-tax. You are essentially paying a cost to insure yourself partially against that risk.

Roth has no RMDs in retirement

 

[seper]

It is 2022 and people are still projecting a 7% appreciation?

 

[Lamount]

It is 2022 and people are still projecting a 7% appreciation?

I would assume, yes (over the 30 years I have until retirement)

 

[Neuronix]

Please find somewhere else to discuss politics. Three posts deleted.

 

[NITRAS]

IRA is better to do Roth because the growth you obtain is not taxed, and you won't pay taxes when it is time for approval. It lets you effectively put more in your retirement at the cost of having less now. However, employer match at least for me is always pre-tax, so I have a mix of Roth IRA and non-Roth IRA.

A post-tax retirement account that is not IRA.... isn't that just the stock market?

Most plans do allow you to roll over your pre-tax match to an after-tax ROTH. I did it for the first time this past year. . . Was expensive. . . .. But at 36, my wife and I have like $400K in ROTH accounts.

 

[echod]

Is there a way to contribute all 60.5k pretax instead of only 20.5k pretax with the rest post tax for my 401k?