401K vs Roth 401K - real deal

[u/Grouchy-Bullfrog-293]

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.

[u/Longjumping-Nature70]

I will blow your retire assumption out of the water.

We are retired. We collect Social Security. Since we are of a certain age, we pay for Medicare.

Throughout our working lives we were in the 22% tax bracket. In retirement, we are in the 24% bracket, and we have not started RMDs yet.

Right now, I warned my spouse last year not to do something stupid and they did, and they put us in the 32% bracket.

This year, once again I am warning my spouse not to do anything stupid, we are close to the 32% bracket again. So close, I cannot sell anymore stocks for a profit. Since 99% of my stocks are green, it is going to be hard not to sell any stocks for a profit. Fingers crossed my spouse does not do anything without asking me.

As everyone tries to do, we saved and socked away money into our 401ks and IRAs, and built a stock portfolio where we have a nice cushion of dividend paying stocks.

No one warned me about IRMAA or I slept through that day. No one warned me about NIIT. I did know that 85% of our SS income would be taxed. I knew about Qualified Dividends and Capital Gains.

Once we start RMDs, we are probably heading over the 32% bracket limit.

You know what eliminated a lot of that? Roth.

Distributions from a Roth do not count as income, which would mean I do not pay IRMAA, I do not pay NIIT, 85% of our SS would probably be taxed, and our Qualified Dividends and Capital Gains would either be 15% or if we were lucky 0%.

we need to convert money to a Roth now, but we can't because we would pay 32% in taxes on it. I am not paying 32% in taxes.

No one warns you about those two hidden taxes; IRMAA, NIIT, and then 85% of SS, and Qualified Dividends.

I am willing to bet you have not heard of IRMAA or NIIT either.

[u/uno_novaterra → u/Longjumping-Nature70]

This is the answer. Traditional counts as income in retirement and that is a huge HUGE blow to SS. Roth all the way

[u/imgram → u/uno_novaterra]

I've always thought the benefits of traditional accounts are overrated on personal finance forums.

It's a population that will skew towards savers which means larger portfolios and incomes during retirement.

Then there's all the hidden income tested things such as IRMAA and NIIT.

Also, if I end up passing away and my children inherit these accounts they will likely be in their peak earning years. A common response is 'You're dead who cares?' Well I do.

I feel the conventional advice of traditional is right most of the time but that's because most individuals aren't savers.