Sep 05

Back in July, I wrote a post “Loving That Roth” where I discussed why the Roth account was a great deal for a select portion of savers. I went on to discuss how few people could save their way into a higher tax bracket and that the use of a Roth 401(k) should be considered very carefully as it would ignore the lower rate most of us will retire into. A fellow blogger posting under the moniker jIM_Ohio shares my view, offering his own brief post last month, “The 15% tax retirement account“. As I look at Jim’s post, I realize its brevity is its strength. I tend to offer much data to support my views and often that obfuscates the issue at hand. To the other extreme, I offer the article, “Thinking About a Roth 401k Think Again” from the Journal of Financial Planning.

The JFP article closes with “Those properties [of Roth compared to traditional 401(k)] indicate that for most moderately affluent wage earners, today’s marginal tax rates and the associated government subsidy for retirement contributions are likely to markedly exceed effective tax rates tomorrow, when that subsidy must be cashed out.”

Anyone interested in the Roth vs Traditional 401(k) or IRA discussion should read the article from JFP, and decide how to approach their own situation. As I’ve stated prior, their are few absolutes in financial matters. When I shared my thoughts in one forum and suggested that Roth was appropriate for maybe 5% of people currently working, I was told that the particular forum only contained a selection of high income people who saved above average, that most of that group would benefit from Roth. It reminded me of surveys that showed that 10% of people believed they were in the top 1% of earners. And all of their children were above average.

Joe

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4 Responses to “More Roth Lovin’”

  1. Augustine Says:

    Joe, the link to the JFP article is broken.

    Yet, I wonder about the certainty of tax rates now and some decades from now. True, the tax rates have remained fairly flat over the past few decades, but with SS busting, an aging population, fall in births, the real possibility of Socialism creeping in, all factors that were not present in the past, at least not as present as nowadays, one cannot be certain of such predictions.

    In light of this, isn’t Roth a good tool to hedge such risks along side pre-tax savings?

    TIA

  2. JOE Says:

    Thanks! I fixed the link. JFP seems to only have current month available. I reposted the article as the PDF I saved.
    I think the 28% and 33% are a risk, but I really don’t see that the 0%/10%/15% brackets will be worse off years from now. Sorry about the link, see that article and the math they offer, they project tax bracket cutoffs and even higher numbers than I offered in my posts regarding pre vs post tax savings.
    Again, thanks for visiting, your comments are always welcome.
    Joe

  3. Augustine Says:

    Joe,

    What do you advise about traditional vs. Roth IRA for supplementary savings (to stash bonuses or anything over the $15500 401k limit)?

    When considering a supplementary IRA, in addition to a 401k, Roth has the advantage that it can also be used as a rainy day fund, thus allowing to save with a single vehicle for both retirement and security.

    TIA

  4. JOE Says:

    Good question, and the right answer for one may differ for someone else.
    If one’s income is high enough to max out their 401(k), they are likely in the 28% bracket, in which case I favor pretax savings. If they can fund the 401(k) but still have no emergency fund savings, and they are not comfortable with the prospect of a 401(k) loan, then I agree (and posted about) the dual use Roth IRA. What I strongly believe is that one doesn’t get through 40 years of a working career with no ups and downs of income. I suggest using the low (say 15%) years to convert from IRA or old 401(k) accounts to Roth. As I continue to post, it takes quite a high saving level to ‘save your way to the next tax bracket.’
    Joe

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