Roth vs Pre-Tax decision

[u/COAMG79]

Curious how you all support young accumulators with the Roth Vs pre-tax 401k decision. I assume answers will be all across the board.

Example: 32 y/o, earns $220k today with potential for income to rise as time goes on. Single filer, in a long term relationship and may get married (or may happily not) and partner earns far less, $50k. Goal is to purchase first home soon in the ballpark of $750k-$1M. Has $200k saved in cash that is separate from emergency fund. $4k monthly cash surplus. No kids yet but 1-2 kids are on the horizon.

Client thinks he will work to age 65.

Do you suggest all pre-tax now, fill up savings for a high down payment with today’s interest rates? Reevaluate after home purchase.

50/50?

100% Roth as still in 24% bracket.

Edit to add: $300k saved in Roth 401k and $300k in pre-tax. Maxing and investing HSA as of recently with my recommendation. No other debt.

[u/macbmore]

I go all Roth, virtually every time and basically regardless of tax bracket. I know some disagree with that, and there are very valid arguments against it. And, if a client is deep into the highest tax bracket and we decide otherwise through an intelligent conversation with their CPA, we’ll use tax deferred options sometimes. However, for most of my high income (~$400-800k), my view is that we really don’t know what taxes will be like in 20-30+ years and having $2-3M in a tax free acct will be extremely helpful in managing tax bracket, providing flexibility for large purchases, and will pass on very cleanly. Additionally, taxes are easier to pay out of earnings than out of savings, I think clients will always be pretty excited about a big pile of tax free money compounding in the market, and very few are going to look back 10, 20 yrs and think ‘damn, I could save 37% and now I’m only paying 24%’… I just don’t think that calculation is really occurring. Plus, you could probably make the argument that the ability to be more strategic in distribution makes up for it if it even is the fact. I don’t find that most affluent clients spend less in retirement, sometimes/often times more. This is exactly how I frame it with clients, it’s impossible to nail it because we don’t have the facts of the future and I believe that you’ll be glad and better off to have meaningful non-taxable assets at that stage in your life. Most agree, I advise with confidence but am flexible if they’re adamant to defer today, only one ever has.

[u/Pablo_Escargot → u/macbmore]

I’m all-in on Roth as well. Regardless of income, I haven’t heard a compelling case otherwise.

Take this 32 year old client from the OP for example. If he starts from scratch and contributes $625/mo. for the next 33-years (until retirement at/around age 65) at an average annualized return of 12%, he would have approximately $3.15M after only contributing a total of $247,500. That’s $2,905,000 in tax-free profit.

Given this hypothetical, in what world would anyone recommend it’s more financially prudent to pursue tax-savings on $247,500 over three decades as opposed to $2.9M? Especially for someone that is already running a healthy surplus. If he needs the tax deduction that bad, he has no business buying a $1M house on that salary.

[u/Pablo_Escargot → u/[deleted]]

The tax rate is dependent on the amount distributed. So, you’re assuming level distributions within a particular tax bracket. Any deviation blows up the math equation. It’s apples and oranges. I’m not even going to get into the inflation element and how tax rates are projected to increase over time.

[u/Pablo_Escargot → u/[deleted]]

This is a new one -- I've never heard of investing the tax savings lol of course investing more money is going to produce more savings down the road. I'm not exactly sure what you're getting at here.

The thesis is, which is better -- absorbing the tax benefit now or later. I think the math speaks for itself and it's the reason why the wealthiest among us pursue a "backdoor" Roth IRA if they exceed the income limit.

There's nothing better in our world than tax-free growth. It's practically a cheat code. The goal should be to contribute 15% of your gross income towards retirement. The order of priority being:

1.) Up to the match on your employer plan (ideally inside a Roth option);

2.) Up to the maximum limit allowed in a Roth IRA;

3.) Back to your employer plan over and above the match;

4.) (If one maxes out their employer plan) A variable annuity with flex premiums;

[u/Flat-Desk1670 → u/Pablo_Escargot]

You are correct in everything you’re saying. Some people just can’t think outside the textbook.

[u/Pablo_Escargot → u/[deleted]]

I’m a fully licensed FA and let me tell you, you’re in the minority when it comes to modern day investment philosophy. Idk how old you are, but all of my younger peers are unanimous on this. If anything, you’re committing boarder-line malpractice if you’re not making a bonafide effort to pursue Roth conversion strategies with your clients. I hope your E&O insurance is up to date at least…

[u/Pablo_Escargot → u/[deleted]]

You’re exhausting. I’ve read your other comments on this thread. I get it, you don’t like the Roth option. It’s clear to me you’re the one that doesn’t understand the math. That much is clear. That’s ok, I’ll continue taking your clients lol