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You are young and your income will most likely go up, hopefully even above the IRA contribution limits. Then you will have no choice but to contribute to Roth 401K if you want to make any Roth (post-tax) contributions
But seriously, I think your first priority should be to reduce tax bill, so contribute more to traditional 401K. Don't worry about tax laws 40+ years from now. If you put 16% of $70K in trad (pre-tax) 401K instead of 8% each in trad + Roth, you're putting in $1400 more per year in retirement savings, money that will grow to $30K (with 8%-ish compounding) in the next 40 years. Wouldn't you rather have an extra $30K per year in retirement?
A backdoor Roth is an option for the first paragraph is off a little
And your tax example is poor planning IMO. To tell people to make a decision based on 30-40 years but to also ignore potential tax laws is foolish. Certainly a true cfa wouldn't suggest this
ah, i hope not to be in the 25% when i am in the drawdown period.
Right. It's best to be in the 39.5% bracket ( plus the 3.8% ).
Of course, they'll ( the government ) will have jacked that max rate up and added to the complexity by quite a lot, but in any case, you want to be in the maximum bracket.
Quote:
Originally Posted by thefastlife
lastly, do i seem to be saving an OK percentage for a 28 year old?
Not only OK, but probably in the 1% of the best for a 28-year-old.
16% with 8% in a Roth is probably in the 1% of all people in the workforce.
“If you started investing at age 25 and put the same amount of money into stocks until age 35, you’d have more money at retirement than if you started saving at 35 and invested the same amount of money in stocks EVERY YEAR until retirement”
The link has more details. Note that I cited the website above, but this has been around for quite a while and you can see it all over the internet, but this predates the internet.
The quote is slightly wrong in that if you put that money away till 35 and stopped putting money away then at retirement ( at age 65 ) you would have more money than the person starting at age 35 would have. The assumption was that the stock investor, both of them, were the same age and earned 8% on their money.
You can easily build this model on a spreadsheet and use different earning assumptions, but the idea is the same. By starting just a decade earlier, you have a great advantage. It means that once you get into your 40's or later and the stress of working at a high level starts getting to you, you can tell your boss to "take this job and shove it" ( sorry for the 1977 Johnny Paycheck reference ) and go and bag groceries. The difference between you and the 70-year-old in the next checkout lane ( who didn't save for their retirement ) is that instead of begging for more hours, you will just be working the hours you want.
To tell people to make a decision based on 30-40 years but to also ignore potential tax laws is foolish. Certainly a true cfa wouldn't suggest this
Well I am not a true CFA (hence CFA-ish). Passed all levels but no charter yet.
Anyway, to your point - tax laws 30 years from now cannot be predicted. If you don't ignore them, how do you incorporate them? You have no idea what they will be. Unlike business realities (for example the importance of bottom line), political landscape and fashions change very fast. How do you calculate the probability that Roth will or won't be taxed 30 years from now? Or that soc sec full retirement age will be 70 or 80? It's so unpredictable that it is best to ignore it when making decisions.
Well I am not a true CFA (hence CFA-ish). Passed all levels but no charter yet.
Anyway, to your point - tax laws 30 years from now cannot be predicted. If you don't ignore them, how do you incorporate them? You have no idea what they will be. Unlike business realities (for example the importance of bottom line), political landscape and fashions change very fast. How do you calculate the probability that Roth will or won't be taxed 30 years from now? Or that soc sec full retirement age will be 70 or 80? It's so unpredictable that it is best to ignore it when making decisions.
A educated guess or hypothesis would be a better method than ignoring the variables altogether.
You are young and your income will most likely go up, hopefully even above the IRA contribution limits. Then you will have no choice but to contribute to Roth 401K if you want to make any Roth (post-tax) contributions
But seriously, I think your first priority should be to reduce tax bill, so contribute more to traditional 401K. Don't worry about tax laws 40+ years from now. If you put 16% of $70K in trad (pre-tax) 401K instead of 8% each in trad + Roth, you're putting in $1400 more per year in retirement savings, money that will grow to $30K (with 8%-ish compounding) in the next 40 years. Wouldn't you rather have an extra $30K per year in retirement?
I'm not following your logic about why traditional 401k equates to investing more per year. Aren't you investing the same amount but taxes are taken now if you choose roth?
Say you contribute 16% of $70k to a 401k.
If you choose it all to go to traditional you would add $11,200 to your 401k for investment.
If you choose it to all go to roth the $11,200 would become $8,400 after taxes to your roth 401k for investment.
Now assume a 5% return each year for 40 years. The $11,200 you put into the traditional would have grown to $75,093. Conversely if you had chosen roth the $8,400 you invested would have become $56,320.
To keep it simple say you take the entire balance out in a lump sum after those 40 years. If you had chosen all traditional the $75,093 would be taxed. Let's say it stayed 25% that would leave you with $56,320. If you chose roth then in 40 years your balance would be $56,320, with no taxes due. It is the same number.
I know there are other factors to consider that could make a difference like will your tax rate be higher or lower in 40 years. You could also say if you go traditional you may have a tax savings now and you could invest that tax savings and turn that into more money in the future. That would make sense.
I don't understand your question "Wouldn't you rather have an extra $30k per year in retirement?" Where are you getting the extra $30k?
I am in a higher tax bracket now than 5 years ago and I don't expect it to go down in my lifetime. So for me it would have been much better to have been roth early on, like the situation the op is in.
If you invest 100.00 pretax you invest 100.00 buy if you instead want to invest in a Roth or taxable account that 100.00 is reduced after paying taxes to less than 100.00 therefore you have lest to invest. What that overlooks is current tax liability vs future tax liability. Taxing the deduction now just pushes your liability down the road so while you had more available to invest now that won't necessarily equate to more spendable money later
people screw up the comparisons when the compare roths and traditional results.
they like to figure paying the taxes on the roth money with money from outside the ira. but then they want to pull the taxes out of the traditional money and not use outside sources .
If you invest 100.00 pretax you invest 100.00 buy if you instead want to invest in a Roth or taxable account that 100.00 is reduced after paying taxes to less than 100.00 therefore you have lest to invest. What that overlooks is current tax liability vs future tax liability. Taxing the deduction now just pushes your liability down the road so while you had more available to invest now that won't necessarily equate to more spendable money later
.... in theory.
In practice, after retiring, there are many ways to lower your taxable income without lowering your monthly cash flow. These are not available or impractical for a young single guy earning $70K. Tax write-offs for medicare premiums, for example. You are going to have higher medical and dental expenses in general anyway, and your AGI/MAGI could be low enough to make them deductible.
Failing all that seniors have a higher standard deduction than young single people. The government knows very well who is the loudest and the squeakiest wheel.
And this is the case today. If we (US) go Japan's route, with an ever-increasing and more powerful seniors' lobby, you can bet the young ones are going to get screwed even more than they are today. It's futile to predict what tax laws will be but if someone held a gun to my head, I would not predict the government putting tax breaks for young single guys earning good money at the top of the list.
A educated guess or hypothesis would be a better method than ignoring the variables altogether.
True this. We may not be able to predict future tax rates but it's probably a safe guess (call me crazy) that they'll be higher.
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