Talking stocks, trading, and investing in general

[Texasmade]

Didn’t realize we had so many poors not making enough income to be priced out of making Roth contributions. I’m well below Manhattan middle income and I priced out of contributing to my Roth.

 

[gettoasty]

For non-business folks wouldn't it be better to put REIT stocks that won't be penalized with dividends being taxed?

REIT stocks in Roth IRA? Sure the dividend will not be taxed. On the other hand, Roth IRA is 100% tax free based on current tax code. Depending on risk tolerance, some may want the highest appreciating assets in a Roth. See Peter Thiel & Roths

Maybe REIT stocks in IRA can work since year-to-year dividend not taxed, then, upon withdrawal need said dividends can meet some of that outflow coupled with other income producing positions.

 

[gettoasty]

@Texasmade For the record, I was talking about Roth 401k (23.5 - 31k limit, or up to 70k).

The backdoor Roth IRA via nondeductible IRA is traditionally done for workers with only pretax 401k and want to build up the Roth bucket.

Workplace plans nowadays offer all three in one account with the separate IRA as a kicker.

 

[ValidusLA]

Not advice.
If you want to chase divvy in non taxed accounts, you can always look at BDCs.

 

[UnFacconable]

All good discussions, I resonate with the tax diversification i.e., leveraging pretax, Roth, and taxable investments/savings. However, this all still misses the mark to my OP.

If you're going to stay in the same marginal tax bracket pre- and post-retirement, and the objective is maximizing your employer's retirement plan, the numbers illustrate that a Roth 401k is preferrable to pretax 401k. This is quite contrary to popular belief where most is pretax, which I can only presume people want more take home pay today and knowing what the future holds is difficult.

This calculator does a better job teasing this out (no option to reinvest the additional take home pay or tax savings).

Roth 401(k) vs. Traditional 401(k)

If that's the case my mind is blown unless there's something I'm not accounting for besides budget i.e., most people would want more pay today. But at higher marginal tax rates, there's enough discretionary income to really consider this IMO. Less the second reason besides higher take home pay is a butt load of tax liability today that can be discouraging. Think about it--pretax savings = lower tax liability. Roth savings = higher tax liability (but more money/income in the future).

Factoring higher tax rates across the board in the US at some future date, this makes Roth 401k (or IRA) even more favorable today i.e., pay the relatively low rates now.

As mentioned, the best of both worlds per se with most flexibility is taking advantage of the pretax 401k + "after-tax-auto-conversion to Roth 401k" = $70k this year.

To frame it another way, pretax 401k seems most optimal if there is fair certainty future marginal tax rate is several rungs lower than today i.e., 24% to 12%. For households at higher marginal tax rate today, I have to assume they'll be at the same marginal tax rate in the future if not more due to pension and accumulation of other appreciating assets e.g., rentals that all fill in the income gap if not more vs. prime earning years.

tl;dr

• If you're at 24% marginal tax rate and below, I think pretax 401k is fine. (Big assumption is your future marginal tax rate will drop)
• If you're at 24% marginal tax rate and above, I think Roth 401k is better. (Big assumption is your future marginal tax rate will stay the same or go higher)
• The wildcard being if workplace offers the "after-tax" option that can auto convert to Roth, allowing building of both tax buckets.
• If US tax rates explode at a future date, this is all moot.

A lot of interesting assumptions. I don't think most people are planning to make more money in retirement than during their working years, nor do most people have pensions.

I think the biggest point here is that contributing to a roth vs trad while working comes at the expense of your applicable marginal tax rate. During retirement, your RMDs or other distributions are typically considered to be at your effective rate (which is always lower than your marginal rate). That alone makes the Schwab calculator pretty much useless (in addition to the fact that it caps income at Styfo middle class circa 2007).

I think a lot of the scheming around this is to convert trad to roth early in retirement (for middle class people) up until you max the 12% bracket (which is $94k for MFJ). It really depends on how much income you are planning to recognize early in retirement which depends in large part on how big your taxable assets are.

I don't know what taxes will look like in the future but I don't think it's a foregone conclusion that they will be higher. After all, our country is going to be so rich from tariffs, they are planning to abolish the IRS.

But honestly this just isn't the forum to ask these types of questions. This sort of stuff is bread and butter bogleheads 101.

 

[venividivicibj]

Didn’t realize we had so many poors not making enough income to be priced out of making Roth contributions. I’m well below Manhattan middle income and I priced out of contributing to my Roth.

Roth 401k and backdoor Roth bra. You’re missing out

 

[Texasmade]

Roth 401k and backdoor Roth bra. You’re missing out

I backdoor at Waffle House. That’s the best backdoor you can do.

 

[beargonefishing]

I backdoor at Waffle House. That’s the best backdoor you can do.

A curated list of participants at a bespoke fugeon is objectively the best, subjectively.

 

[otc]

It actually is as sexy as it sounds, because it's not limited by the usual 21-23k yearly maximum limit, but rather the 69k total limit

My company started allowing it a year or two ago, but it is capped at like an extra 8-9k.

They also refuse to call it a “mega backdoor” in any of the literature. They just use the dry technical terms.

 

[Texasmade]

A curated list of participants at a bespoke fugeon is objectively the best, subjectively.

A gentleman never tells but it's a long list of SF sh1tposters.

 

[gettoasty]

I may be beating a dead horse at this time, but to summarize.

I think the additional readings made things clearer to me why Roth 401(k) (for now) is not touted as preferrable to pre-tax 401(k). Though, I can see the conversation shifting as the Roth component in workplace plans get adopted more. I can also see why younger savers start with a Roth, upon entering employment, continue the same path with Roth 401(k). An undiscerning saver I think can just read "tax free" and stuff the Roth 401(k) without more thought. (I mentioned perhaps those in the highest marginal tax bracket are the exception.) Certainly, if you have the after-tax option in 401(k) with auto-conversion e.g., AAPL offers that, a saver can have the best of both worlds. But broadly speaking, life is just not as linear as the figures make things out to be. I believe someone here mentioned, too, how financial planning can be misleading per se in that respect (assumptions, assumptions, assumptions!)

I always like Kitces POV, so thanks for the Boglehead mention @UnFacconable
Sometimes Schwab or Fidelity brush too broad of a stroke

Tax Diversification Limits And Roth Optimization Benefits

Broad tax diversification will generally lag a more proactive approach of Roth optimization, as tax diversification doesn’t actually diversify the opportunity!

www.kitces.com

Why Pre-Tax Retirement Contributions Are Better Than Roth In Peak Earning Years

There's a common thinking that those saving for retirement should avoid pre-tax retirement accounts and contribute to Roth – regardless of tax bracket.

www.kitces.com

Effective vs. Marginal Tax Rate in Retirement: Why Taxes Don’t (Usually) Cause People to Go Broke — Oblivious Investor

obliviousinvestor.com

 

[jbarwick]

If someone can predict the tax rates in 25 years....let me know.

 

[venividivicibj]

My company started allowing it a year or two ago, but it is capped at like an extra 8-9k.

They also refuse to call it a “mega backdoor” in any of the literature. They just use the dry technical terms.

Yeah, ours is capped at 4% of salary. I think they call it a ‘post-tax 401k’ (which makes it confusing since we always allow Roth 401k)

 

[imatlas]

My company started allowing it a year or two ago, but it is capped at like an extra 8-9k.

They also refuse to call it a “mega backdoor” in any of the literature. They just use the dry technical terms.

I mean, it's clearly not "mega" if it's capped, and "very mid backdoor" just doesn't have the same ring.

 

[otc]

I don’t think anyone is gonna mind a “Tightly restricted back door” option.