undefined | Better HN

0 pointsmywittyname9y ago0 comments

If you're a high income earner with low deductions: 401k.

If you have a fairly low AGI (thus low overall tax rate): Roth.

If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA).

If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

0 comments

jaredsohn9y ago

>If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

Assuming the money you invest goes up in value, aren't you better off in this scenario with a 401k over a Roth so that you can make gains on the money that would go toward taxes? You still have to pay taxes on the principal and the gains but compared to paying taxes on the money immediately, you're in effect borrowing money from the government at 0% to gamble with and keeping a portion of the return.

(Similarly, the expression tax_rate x (principal^gains) = (tax_rate x principal)^gains isn't true (beyond not being the right expression)).

.7 * (100000^1.07) != (.7 * 100000)^1.07 (assuming paying 30% in taxes and making 7% gains)

berberous9y ago

When people say it's the same, they are assuming you are investing the tax savings from using a traditional 401k. In other words, you could invest $10,000 in a Roth 401K, or $10,000 + ($10,000 * marginal tax rate) in a Traditional 401k. Then the numbers work.

jaredsohn9y ago

Another difference I just thought of (which may have been what I was originally thinking of but I said it wrong.)

I think an advantage of a Roth is that you don't have to pay tax on the money you earn via investing. For example, if your money in a Roth doubles then you only need to pay tax on the half of it that was there when you added money to the fund. Whereas for a traditional 401k you pay tax on money as it comes out which includes money earned via the investment.

jaredsohn9y ago

I made my prior (incorrect) analysis based on the math from this expression, despite saying the expression was wrong:

(i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

Gains should be multiplied rather than an exponential factor here. (I think this expression was created because gains are calculated as roughly (1+rate)^(number years) but at this higher level it should just be multiplied by the tax rate and the principal.

jrs2359y ago

> If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

I would split 50/50 in this case to hedge against what and where tax rates/brackets might be in retirement.

wakkaflokka9y ago

Not to sound stupid, but I have the option for a 401k Traditional vs 401K Roth.

When you say 'Roth', do you mean Roth 401K or Roth IRA? This is what had me confused the entire part of a year - Roth IRA vs Roth 401k.

jrs2359y ago

>If you have a fairly low AGI (thus low overall tax rate): Roth.

>If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA).

I'm not the original commenter but in regards to the advantages and situations mentioned, they apply to both Roth IRAs and Roth 401k's.

Although, check your company's plans as to when you can take early distributions. If you can't unless you retire or leave the company then "If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA)." might be moot. I know with my companies plan I don't believe I can even withdraw my Roth 401k contributions without quitting or retiring. With most Roth plans you are allowed to withdraw your contributions tax and penalty free, but you won't be able to "re-add" above and beyond the yearly annual contribution limits, which is why you shouldn't withdraw them.

j / k navigate · click thread line to collapse

0 comments

jaredsohn9y ago

(Similarly, the expression tax_rate x (principal^gains) = (tax_rate x principal)^gains isn't true (beyond not being the right expression)).

.7 * (100000^1.07) != (.7 * 100000)^1.07 (assuming paying 30% in taxes and making 7% gains)

berberous9y ago

jaredsohn9y ago

Another difference I just thought of (which may have been what I was originally thinking of but I said it wrong.)

jaredsohn9y ago

I made my prior (incorrect) analysis based on the math from this expression, despite saying the expression was wrong:

(i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

jrs2359y ago

> If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

I would split 50/50 in this case to hedge against what and where tax rates/brackets might be in retirement.

wakkaflokka9y ago

Not to sound stupid, but I have the option for a 401k Traditional vs 401K Roth.

When you say 'Roth', do you mean Roth 401K or Roth IRA? This is what had me confused the entire part of a year - Roth IRA vs Roth 401k.

jrs2359y ago

>If you have a fairly low AGI (thus low overall tax rate): Roth.

>If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA).

I'm not the original commenter but in regards to the advantages and situations mentioned, they apply to both Roth IRAs and Roth 401k's.

j / k navigate · click thread line to collapse