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  • Roth 401k?

    The wife and I make a combined 1.2M gross. Our savings rate on that 22%. We are in our late 30s with 2 children (both under 2, with total 200K superfunded into 529s thanks for our contributions and family members). We max our 401ks and 457bs, backdoor Roths, HSA, the rest goes into taxable. I’m “worried” that our savings rate is high enough that we should contribute at least some to the Roth 401k option due to this high savings rate. I know this is all based on a lot of assumptions and read the blog posts about this as well, but what are some other factors to consider here?

  • #2
    Long-term tax planning, preferably some semblance of a financial plan or a financial checkup to get a long-term view and side-by-side scenario. You can always (at least, under today’s regs) make Roth conversions post-retirement, but, again, I wouldn’t recommend without some serious planning. You won’t get far beyond guesswork otherwise.

    The good news is that you’re going to be able to build a significant nest egg, regardless (unless you’re both planning to retire mid-40s or do something risky like skipping out on LTDI OO policies and b/c disabled). Income taxes may be a pain after retirement, but easily affordable at your current rate of earning & saving. Estate taxes, otoh, could be a different story.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Roth 401k seems reasonable for you. Even though your tax bracket in retirement will likely go down. At least you will have some tax free money, plus a little relief from RMDs. However there just be some future marginal rate threshold above which it might not make sense.

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      • #4
        Originally posted by ImpalerMD View Post
        The wife and I make a combined 1.2M gross. Our savings rate on that 22%. We are in our late 30s with 2 children (both under 2, with total 200K superfunded into 529s thanks for our contributions and family members). We max our 401ks and 457bs, backdoor Roths, HSA, the rest goes into taxable. I’m “worried” that our savings rate is high enough that we should contribute at least some to the Roth 401k option due to this high savings rate. I know this is all based on a lot of assumptions and read the blog posts about this as well, but what are some other factors to consider here?
        Honestly, I think your savings rate is low for your income, not high.

        Would help to know your spending, and plans for the next 20-30 years.

        Regardless, I don't see much benefit to going with Roth 401(k) at your current tax bracket. The vast majority of your money will be in taxable brokerage, which affords the greatest flexibility and is taxed at a comparatively low rate.

        Take the tax deduction for traditional 401(k), and consider Roth conversions down the line when you're in a lower bracket.

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        • #5
          Very rough back of napkin calculations...

          You make $1.2M.
          Federal taxes could be as high as $380k.
          State taxes could be up to $120k?
          You save $250k.

          Are you spending $450k annually? More? Does this include paying off massive student loans or is this number high because of the 529 super-funding, either of which will instead go toward savings in future years? If the answer to that last part is "no," then I would argue perhaps you should be saving more money.

          But that's not what you asked... so in my opinion the breakdown of tax-deferred, Roth, and taxable is important, and calculate what those balances might be in the future.

          For example if that 1.2M was on one income and a single 401k was your only tax deferred option, your numbers might be tax-deferred $61k, Roth $12k, and taxable $175k annually. I assume your numbers are quite different than that though, with a large amount in tax-deferred and very little in taxable. So what's the breakdown?

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          • #6
            When you say; "We max our 401ks and 457bs, backdoor Roths." How many 401k plans, 457b plans?

            If just one each, you will probably have sufficient Roth assets in retirement. Two each, maybe not so much.

            I am intentionally vague here. There are so many factors that go into the Traditional vs. Roth contribution dilemma. Not the least of which is personal choice.

            I'm with jfoxcpacfp on this. Without a complete financial plan of your specific facts and circumstances, it is just speculation.
            ​​​​
            ​​​​​​​Of course, "the best laid plans of mice and men" and all that. That is why this issues like this are best based based on defense (risk management) and not offense (the unknowable perfect plan).

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            • #7
              You’re saving plenty. Anything over 15-20% is good and you’re certainly doing that. I’d vote for roth 401k since you’re young and the roth contributions will have multiple decades to accumulate growth that can be withdrawn tax free. Traditional 401k may come out ahead if you were close to retirement since the roth contributions wouldn’t have as long to grow. Another factor to consider is what one does with the tax savings if he/she does traditional 401k contributions. There are several calculators

              https://www.bankrate.com/retirement/...ra-calculator/

              Comment


              • #8
                Originally posted by bovie View Post

                Honestly, I think your savings rate is low for your income, not high.

                Would help to know your spending, and plans for the next 20-30 years.

                Regardless, I don't see much benefit to going with Roth 401(k) at your current tax bracket. The vast majority of your money will be in taxable brokerage, which affords the greatest flexibility and is taxed at a comparatively low rate.

                Take the tax deduction for traditional 401(k), and consider Roth conversions down the line when you're in a lower bracket.
                i did misrepresent a bit with my post. That was last years’ data. We are at a rate of 31% this year (fyi both 22 and 31 are very high savings rates - maybe not for this board but overall arill
                very high). My question is not about the rate, but thanks for your response regardless. I guess the question is regarding assumptions going forward. Right now to assume that I would not be in the highest tax bracket (MFJ), we would have to make less than $647,850. Assuming a 4% withdrawal rate, that is a portfolio of greater than about 16M. So it def makes sense to continue with the tax-advantaged contributions right now, correct? Am I missing something here? I know there are assumptions based on inflation and markets. Also, the general cop out of “stick with your plan” is nice but we, as doctors, know that doesn’t work. If I did that in my career without adjusting to certain conditions, I would get sued multiple times per call shift so why do it in my investing life? I know it’s cliche and everyone likes to throw it around in this board and everywhere else because it sounds so good - I have a plan but it is important to acknowledge faults in that plan and change them if/when necessary (minimally so).
                Last edited by ImpalerMD; 05-09-2022, 08:02 PM. Reason: Several typos.

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                • #9
                  A lot is just a guess based on what your future tax brackets will look like among other things. I don’t know how much you’re spending now or how much you plan to spend in retirement but I’d guess either way you’re going to be fine. You won’t know what the ‘correct’ decision was until it’s passed.

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                  • #10
                    You could always do both. Half in traditional and half in Roth. The current tax saving would be pretty small overall at your income level. What % of gross would you be reducing your taxable income? Also, with Roth, probably not a big deal as most of your nest egg will be in taxable unless you go high risk high reward in the tax deferred spaces.

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                    • #11
                      Originally posted by ImpalerMD View Post

                      i did misrepresent a bit with my post. That was last years’ data. We are at a rate of 31% this year (fyi both 22 and 31 are very high savings rates - maybe not for this board but overall arill
                      very high). My question is not about the rate, but thanks for your response regardless. I guess the question is regarding assumptions going forward. Right now to assume that I would not be in the highest tax bracket (MFJ), we would have to make less than $647,850. Assuming a 4% withdrawal rate, that is a portfolio of greater than about 16M. So it def makes sense to continue with the tax-advantaged contributions right now, correct? Am I missing something here? I know there are assumptions based on inflation and markets. Also, the general cop out of “stick with your plan” is nice but we, as doctors, know that doesn’t work. If I did that in my career without adjusting to certain conditions, I would get sued multiple times per call shift so why do it in my investing life? I know it’s cliche and everyone likes to throw it around in this board and everywhere else because it sounds so good - I have a plan but it is important to acknowledge faults in that plan and change them if/when necessary (minimally so).
                      Yes, 20-30% is, in general, a healthy savings rate. But a couple points on that.

                      First, for a physician, 20% should be the floor. Late start on savings, high initial debt load, proclivity to “catch up” and “keep up” compared to peers, etc. Anything lower really wont cut it for comfort later in life.

                      Second, savings rate should scale with income. You make $1.2M and spend about $900k, including taxes. Don’t get me wrong, saving $300k is nothing to sneeze at. But if you made $12M you wouldn’t spend $9M, would you?

                      Getting back to what you were saying about “stick to your plan,” when I referenced your plan that it would depend on, I was talking about life trajectory.

                      You’re in your 30s—do you want to work until 45 and FIRE or are they going to carry you out of the clinic/hospital/OR feet first? Totally different scenarios with wildly different recommendations for the coming decade, and beyond.

                      One final point—you mention that you feel the advice to “stick with your plan” is a cop out and I’m not sure I agree that your medicine analogy makes any sense, but in personal finance, having a plan and sticking to it through market cycles is about the best general advice that exists to avoid doing something dumb, or even catastrophic and unrecoverable.

                      Comment


                      • #12
                        Originally posted by bovie View Post

                        Yes, 20-30% is, in general, a healthy savings rate. But a couple points on that.

                        First, for a physician, 20% should be the floor. Late start on savings, high initial debt load, proclivity to “catch up” and “keep up” compared to peers, etc. Anything lower really wont cut it for comfort later in life.

                        Second, savings rate should scale with income. You make $1.2M and spend about $900k, including taxes. Don’t get me wrong, saving $300k is nothing to sneeze at. But if you made $12M you wouldn’t spend $9M, would you?

                        Getting back to what you were saying about “stick to your plan,” when I referenced your plan that it would depend on, I was talking about life trajectory.

                        You’re in your 30s—do you want to work until 45 and FIRE or are they going to carry you out of the clinic/hospital/OR feet first? Totally different scenarios with wildly different recommendations for the coming decade, and beyond.

                        One final point—you mention that you feel the advice to “stick with your plan” is a cop out and I’m not sure I agree that your medicine analogy makes any sense, but in personal finance, having a plan and sticking to it through market cycles is about the best general advice that exists to avoid doing something dumb, or even catastrophic and unrecoverable.
                        I did not ask for your opinion regarding what you think is a good spending rate and a good savings rate. I’m not sure if you’re jealous or feel inadequate in some way but that was not my intention - and for that I apologize because it is clearly bothering you and you are neglecting to answer the question here. I simply asked about whether or not a Roth 401k vs a tax-advantaged 401k is more beneficial in a particular scenario. Regardless of your personal and/or emotional attachments to this thread, thank you for your input. I wish you the best of luck going forward and may you find peace.

                        Comment


                        • #13
                          Originally posted by ImpalerMD View Post
                          The wife and I make a combined 1.2M gross. Our savings rate on that 22%. We are in our late 30s with 2 children (both under 2, with total 200K superfunded into 529s thanks for our contributions and family members). We max our 401ks and 457bs, backdoor Roths, HSA, the rest goes into taxable. I’m “worried” that our savings rate is high enough that we should contribute at least some to the Roth 401k option due to this high savings rate. I know this is all based on a lot of assumptions and read the blog posts about this as well, but what are some other factors to consider here?
                          low savings rate. and why would you need family contributions for the 529s.

                          Comment


                          • #14
                            Originally posted by fatlittlepig View Post

                            low savings rate. and why would you need family contributions for the 529s.
                            Don’t “need” the family contributions but since our family decided to contribute definitely not going to turn it down! If our savings rate is so low wouldn’t we “need” the family contributions to the 529s? Please see the revised post regarding the savings rate. Also 22% is not low…and you did not address the initial question.
                            Last edited by ImpalerMD; 05-10-2022, 08:13 PM.

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                            • #15
                              Originally posted by Golfing Doc View Post
                              You’re saving plenty. Anything over 15-20% is good and you’re certainly doing that. I’d vote for roth 401k since you’re young and the roth contributions will have multiple decades to accumulate growth that can be withdrawn tax free. Traditional 401k may come out ahead if you were close to retirement since the roth contributions wouldn’t have as long to grow. Another factor to consider is what one does with the tax savings if he/she does traditional 401k contributions. There are several calculators

                              https://www.bankrate.com/retirement/...ra-calculator/
                              Thank you for your sincere reply. Appreciate it!

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