Basic question is this: there are a lot of strategies around choosing to make pre or post tax deferals based on whether you believe your tax braket will be higher or lower in retirement. But, your current deferals tax savings (assuming pre tax contribution) is at your marginal tax rate. Assuming your retirement income is from that same account, your taxes are lower because of the progressive nature of our income tax. Is that right? If so, why isn't this more commonly discussed. Seems like this makes pretax contributions a no brainier. What am I missing?

For example, today I save 25% by making pretax contributions. In retirement, the first $x are taxes 0%, then the next is taxes at 10%, then 12%, then finally 25%. That makes my effective tax rate sub 25%.

There is something personal about personal financial planning. Are tax rates (and tables) going to be more or less generous in the future? Do you expect your contributions to double 5 or 6 times before withdrawing them? Will you ever have a large expense that needs to be lump summed in the future?

Yeah now factor in what happens if you're single in the future when a spouse dies.

Or social security taxes and Irmaa penalties.

It's not that simple.

What will your non retirement investments income be in retirement?

This can be a big issue. Even though won't have w2 income, you will probably have some sort of dividend and interest income from taxable accounts

There is so much info on this topic and I still cannot figure it out

fulshearAg96 said:

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There is so much info on this topic and I still cannot figure it out

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I'm in the same boat. Even if you think you do have it figured out nobody knows what tax rates will do in the future.

So my thoughts are I put my money into a Roth. My company matches in a traditional so I'm fairly evenly spread out between the two.

is this more of a question for those that are only saving enough to invest in one or the other?

ARCHag08 said:

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Basic question is this: there are a lot of strategies around choosing to make pre or post tax deferals based on whether you believe your tax braket will be higher or lower in retirement. But, your current deferals tax savings (assuming pre tax contribution) is at your marginal tax rate. Assuming your retirement income is from that same account, your taxes are lower because of the progressive nature of our income tax. Is that right? If so, why isn't this more commonly discussed. Seems like this makes pretax contributions a no brainier. What am I missing?

For example, today I save 25% by making pretax contributions. In retirement, the first $x are taxes 0%, then the next is taxes at 10%, then 12%, then finally 25%. That makes my effective tax rate sub 25%.

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Your scenario is a bit confusing.While it's true deferral affects taxes at the upper margins, distributions (including earnings) generally are returned to you as regular income and also will be taxed at the upper margin. So every factor involved in reaching your taxable income lines in the current and anticipated tax years should be considered -- deductions, exemptions, etc. (do you have children now? Provide parent care?). Those probably won't exist after you retire.

The extra income through deferred distributions (including earnings) will also affect your Social Security (as the law now stands), putting more of that income under the tax hammer. Then there's the case of control -- deferred money isn't totally yours. (Need some early? Or too much? The penalties can be stiff.)

The income argument has other holes. While you can be expected to earn more in working years than in retirement (and thus face more taxes) you may build that deferral pie over 40-50 years and find you want to spend it in 10-15 expected lifespan, health issues ...).

Every case is different, of course, but having been through it heavy on the deferral side, I would go the other way in doing it over and pay the taxes up front.

In general if you have a reasonable mix you are probably going to be good. The more you plan to withdraw per year in retirement I'd lean towards more post-tax contributions. If you can afford to max out either, I'd shove as much in post-tax early on when your tax rate is low. Id begin altering that mix as you climb tax brackets. By the time you get into the highest tax bracket you'll likely be in during your career or in retirement, I'd be putting all or most in pre-tax. Over the course of a career you'll likely put more contributions in pre-tax but your post-tax contributions will have more time to grow.

Then in retirement you can plan how much pre-tax to take out each year to stay in a lower bracket and use post-tax for whatever you need over that.

Edit: corrected for me typing most of that backwards like a jackwaggon.

OP....its always something. Required Minimum Distributions once you reach the govts magic age can jack with your marginal tax rates in retirement putting you in a much higher bracket that what you were expecting. Many might argue that is a good problem to have and it can be somewhat softened by withdrawal strategies....but that is one of many variables in the future your stated scenario doesn't account for.

Trying to make this decision on current math just seems to be futile. we don't know what will happen in the future, and all we know for sure is the tax law of today.

I would reasonably do both - but don't miss your opportunity to save money today.

For those of you using a Roth 401k. If you contribute something like $500 in a paycheck, is the amount contributed $500 or is the amount contributed $500 minus your marginal tax rate? Are you expected to reduce the total amount put in for the year to the $23,000 cap to reflect the tax portion (pretend 32%, so $15,640), or can you put in $23,000 and the tax impact doesn't matter?

You can put in the max $23k, you are taking the tax hit pre-contribution.

Edit to add: obviously this is assuming you have the extra money within your budget to do that, not everyone will.

You can put the full 23k in a roth 401k, it just basically costs you 31,050 to do so

I am pretty much all in on Roth since I can afford it. Max the Roth 401k then do backdoor Roth IRAs, plus HSA. Company contributions all come in the form of regular 401k so I will have some taxable income out of the 401k plus whatever other income I have when I retire from non-tax advantaged accounts.

I think it is a given that the government will keep increasing taxes. The problem is it may not come in the flavor of an income tax so who knows if it plays out in my favor. And heck, there is a very real chance Congress comes back and taxes ROTH accounts over X dollars because I am white so who knows.

Common sense says taxes are only going to go up. They have to. Look at our massive debt problem. And income tax changes alone will do nothing to move the needle since the bottom 60% will continue to enjoy a free ride. No one is going to start making them pay tax.

They will have to get creative and tap into pools of money currently protected.

And each situation is a little different so there isnt an easy answer. Where you live will impact this. Some states are more burdensome than others. I stopped trying to figure this out on my own a long time ago and collaborate with my FA and CPA on it.

Earnings aren't taxed in Roth, only the contributions are taxed. However, both contributions and earnings will be taxed eventually in traditional 401k and IRAs. That's the only math you need to know. Future income marginal rates are anyone's guess. Future rate on Roth earnings is 0%, it's the only known quantity in the mix. Max your Roths as quickly as you can and then route extra savings into the traditional pretax vehicles.

can't speak for anyone else's situation but been maxing 401K for most of career even at startups without match (also maxing Roth IRA/backdoor), and pumping more into taxable on top, would absolutely megabackdoor if had access as well
plan is to FIRE at least 15-20 years before retirement age (the compounded appreciation on pretax funds will def contribute to that) and strategically Roth ladder convert some portion yearly to minimize taxes

A mix of both is probably the best bet to cover your basis. You can project based on today's taxes, but they will likely be very different when you actually retire.