roth vs traditional (tax on seed vs tax on harvest?0

[Turf Doc]

hey everyone,

So, theoretically, my understanding is that if the marginal tax savings on a traditional contribution are the same as the marginal tax you're paying in retirement on those withdrawals, there is no difference in roth vs. traditional. i was speaking to a family member about this and he was convinced that there was more to it, i.e. the expected return on investment and the length of the investment.

So I tried to put in an example where youre paying 25% either now (roth), or a 25% tax break now (and investing the difference) and 25% rate in retirement, but the numbers actually ended up different?

What am i missing here?

https://www.investor.gov/financial-t...est-calculator

5000 invested now, compounded over 30 years at 8% is 50,313.28 tax free. 6250 invested now, compounded over 30 years at 8% is 62,891.61. Multiply that by .75 for taxes and you get 47,168 which is obviously less than 50k...?


edit:

nvm, was lazy/wrong with the math. mistakenly took the taxes off of the already taxed amount. Should be comparing 6666.66666 (spooky) pretax to 5000 post-tax. Then the numbers are the same.

[Nysoz]

How'd you get the $5000 vs the $6250?

[jz-]

Tax Diversification Limits And Roth Optimization Benefits (kitces.com)

Michael Kitces agrees with you. Roths can be exploited during years of tax bracket changes. Includes years of residency, one spouse retires, sabbaticals, illness, and low income years prior to RMDs.

[Turf Doc]

How'd you get the $5000 vs the $6250?

corrected my previous post, i wrongly took the taxes from the already taxed money. Doing it correctly yields the expected result. Knew i was making a mistake!

[Turf Doc]

Although, doing the math, I realize its actually ridiculously complicated almost to the point where the debate is useless. Assuming the difference goes into a taxable account whats the benefit of tax-free growth in retirement account vs. taxable dividends? Or the fact that capital gains and/or income taxes change? Or capital gains being tax free below x income? Or qualifying for various subsidies? It honestly seems impossible to model out because any change in assumptions totally changes things.

[White.Beard.Doc]

Contributing to tax deferred accounts is basically a tax arbitrage play.

The goal is to contribute to tax deferred accounts in your highest tax years, such as peak earning years, and to then withdraw in retirement when taxable income and thereby income tax rates may be lower. Of course, no one knows what their future income or future tax rates will be.

It is also good tax arbitrage to pay taxes and contribute to Roth accounts in lower tax years, and to thereby play the tax arbitrage game in reverse. That is what we did this year. I put 500k into a Roth account via a rollover to pay taxes up to the top of the 24% bracket (~$300k in federal taxable income), due to a one time deduction that would have otherwise made our taxable income a negative number this tax year.

[SLC OB]

Contributing to tax deferred accounts is basically a tax arbitrage play.

The goal is to contribute to tax deferred accounts in your highest tax years, such as peak earning years, and to then withdraw in retirement when taxable income and thereby income tax rates may be lower. Of course, no one knows what their future income or future tax rates will be.

It is also good tax arbitrage to pay taxes and contribute to Roth accounts in lower tax years, and to thereby play the tax arbitrage game in reverse. That is what we did this year. I put 500k into a Roth account via a rollover to pay taxes up to the top of the 24% bracket (~$300k in federal taxable income), due to a one time deduction that would have otherwise made our taxable income a negative number this tax year.

Tell me more... did you have a huge loss? How did you make this work?

[White.Beard.Doc]

Tell me more... did you have a huge loss? How did you make this work?

Yes, we had a 7-figure, one-time tax deduction in 2021 due to the bonus depreciation on a large multi-family apartment building along with other real estate investments.

[SLC OB]

Yes, we had a 7-figure, one-time tax deduction in 2021 due to the bonus depreciation on a large multi-family apartment building along with other real estate investments.

Interesting... thanks for sharing.