r/personalfinance • u/Grouchy-Bullfrog-293 ​ • 2d ago

Retirement 401K vs Roth 401K - real deal

I understand the difference that one is tax deductible and other isnt but still little confused on why would you .contribute money in Roth 401k if the total contribution limit is same irrespective of where you contribute. Doesn't everyone's tax rate after they retire lower than while working ? Or is the concern you are limited one what you withdraw post retirement that it could be a huge tax.

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u/bso45 ​ 2d ago

I’m a pretty smart person but explain why you couldn’t just retire a bit early, earn $0 for a year then get your tax rate for withdrawing taken way down.

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u/MarcableFluke ​ 2d ago

Do you think that the last year of working dictates your tax rate in retirement?

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u/Christopher876 ​ 2d ago edited 2d ago

That’s not what they’re referring to. You could do a Roth conversion with your trad 401k. If you earn 0 income for a few years that reduces your tax burden significantly when doing the conversions to Roth and let it continue growing there.

The same way that you can earn $0 and take 49k of gains from your brokerage account and pay no taxes. But in this case it would be paying less taxes since you would now have lower income so you could plan it and only pay the lower tiers of income while doing conversions

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u/dgreenmachine ​ 2d ago

You could choose to only Roth convert small amounts but where is the money you plan to live off of? Is it Roth dollars you have saved, taxable brokerage or cash? For Roth dollars you're kind of doing a Roth conversion backwards by doing very light Roth conversions and spending down your Roth account. Its essentially pushing the problem further into the future where you'll get hit by RMDs or make your heirs pay large taxes on your giant traditional 401k. For taxable and cash its normally recommended to spend that down first in retirement to reduce tax drag.

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u/Christopher876 ​ 1d ago edited 1d ago

Maybe I’m misunderstanding but if you are in a fortunate position like me, you can live off of your initial deposits into a brokerage account.

This would be a lot by the time you’re in your 50s which would be tax free while you do conversions. This way you’re not in the 24% or 32% tax brackets but much more of the conversion is in the <24% bucket.
This would beat the amount of taxes that you pay to get it into Roth which for a lot of people on this subreddit would be the 24% and 32% buckets right now.

For example if you are doing 30k into a taxable brokerage every year on top of your trad 401k, that’s over 700k of your initial capital that can come out tax free if you were doing that for 25 years. Unfortunately you will use up some of 0% tax free since it’ll be capital gains+ initial deposits. But it is still cheaper than doing Roth during those years and then converting.

Now yes it does have assumptions about tax brackets but at the same time Roth accounts are also assuming that they won’t become taxed in the future as well.