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PostPosted: May 10 19, 12:58 pm 
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Arthur Dent wrote:
Theoretically, if you knew you'd have a lower marginal tax rate in retirement than today you'd do pre-tax and do post-tax if the reverse were the case. Given that you probably don't know what your future tax rate is, I think the hedge your bets plan splitting between the two is sensible.

If you're contributing enough to get any available 401k matching, I'd do any post-tax contributions in a Roth IRA, as in an emergency you'd have the option to withdraw those contributions (though not any interest/gains) penalty free. That said, as I believe Michael suggested when this came up before, the 401k has the advantage of being a payroll deduction, which ensures you actually end up doing your planned saving, and that is way more important than Roth vs traditional.

Edit: One aspect of this choice I don't see discussed much is with how the max contribution limits are not equivalent. The same $6,000 limit applies to annual traditional Roth & Traditional IRA contributions, for example, but $6,000 in a post tax account is clearly worth substantially more than $6,000 pre-tax. If you're bumping against the limits, switching to the Roth side gets you more retirement income if not more nominal dollars in your account.


I've been playing footsie with a financial advisor for a little while and he seems very much to prefer the Roth option to the 401K. One reason being that with the 401K you will eventually be forced to take distributions later in life, whether you need to or not, which sucks if the market is tanking when you have to start doing that. Just having a clearer idea today of what your tax liability will be in the future seems to be a selling point of the Roth.

I already have a Roth IRA but my wife started a new job a few months ago with a 403B that can be set up as a Roth, with automatic after tax payroll deduction, and they will match after she's been there long enough. The Roth seems like the way to go for her as best I can tell.

Speaking of having a financial advisor, I've been hesitant to do this because the low-cost method of investing is all the rage these days. Just get a bunch of low cost funds across a few different asset classes and let them do their thing, right? The thing is though, I don't feel confident enough in my financial wherewithal to manage all of this on my own, nor do I really want to spend the time doing loads of online research to make sure I'm always on trend. I think I'm willing to let someone else who does this for a living help me plan for retirement, even if his cost will cut into my earnings a bit over the years. Am I wrong?


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PostPosted: May 10 19, 1:22 pm 
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Quote:
prefer the Roth option to the 401K. One reason being that with the 401K you will eventually be forced to take distributions later in life, whether you want to or not, which sucks if the market is tanking when you have to start doing that. Just having a clearer idea today of what your tax liability will be in the future seems to be a selling point of the Roth. 


I don't understand broker's logic with being forced to take distributions. The required distribution starts at 70.5, and then it's not like you have to take it all, maybe 6% of it. Market-timing withdrawals? When the heck do you take this money out if not by 70.5? -i hope to have 5-10 years of withdrawal by then.

So many variables, hard to say. General rule of thumb is younger you are the more likely you should be in Roth. Tax planners and brokers used to make a big deal about Roth vs 401k and pretax contributions, and switch back and forth. Seems like that has died down -in the whole scheme of things it isn't that major in the scheme of things that could affect finances.

I am not an expert, but main thing is participate as much as you can without incurring consumer debts.

Personally I defintely do the retirement saving, but don't fret saving for the magic day. If something happens important in life where the money is needed, I am going to pay penalty and tax and cash it out, and be happy now, figure out the rest out.


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PostPosted: May 10 19, 1:48 pm 
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Freed Roger wrote:
Quote:
prefer the Roth option to the 401K. One reason being that with the 401K you will eventually be forced to take distributions later in life, whether you want to or not, which sucks if the market is tanking when you have to start doing that. Just having a clearer idea today of what your tax liability will be in the future seems to be a selling point of the Roth. 


I don't understand broker's logic with being forced to take distributions. The required distribution starts at 70.5, and then it's not like you have to take it all, maybe 6% of it. Market-timing withdrawals? When the heck do you take this money out if not by 70.5? -i hope to have 5-10 years of withdrawal by then.

So many variables, hard to say. General rule of thumb is younger you are the more likely you should be in Roth. Tax planners and brokers used to make a big deal about Roth vs 401k and pretax contributions, and switch back and forth. Seems like that has died down -in the whole scheme of things it isn't that major in the scheme of things that could affect finances.

I am not an expert, but main thing is participate as much as you can without incurring consumer debts.

Personally I defintely do the retirement saving, but don't fret saving for the magic day. If something happens important in life where the money is needed, I am going to pay penalty and tax and cash it out, and be happy now, figure out the rest out.


To be clear, he is not suggesting market timing, just mentioning that not being forced to take a distribution with the Roth is an advantage of the Roth.


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PostPosted: May 10 19, 4:25 pm 
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Freed Roger wrote:
I don't understand broker's logic with being forced to take distributions.

I suspect financial advisers are geared toward the type of people who are worried about passing assets to heirs.

With financial advisers, I have no experience, but I think you're supposed to get the fee only with a fiduciary duty to you kind as the field is jam packed with scammers taking giant commissions to sell you terrible crap. Even with the fee-only people, compounding of seemingly small fees may ultimately cost you in the hundreds of thousands of dollars.

If you need advice on 401k stuff, what do they actually do? Do you hand them your password to go through the list and pick the low-cost index funds or do you have a meeting where they tell you do that yourself afterwards?

I think the main retirements savings errors people make are:
1) They don't save enough
2) They try to pick stocks or beat the market
3) Maybe fail to reduce risk with age?

You should absolutely take advantage of the various retirement tax avoidance vehicles available, but I don't know that getting this perfect should be a top priority.

To the extent having an adviser gets you to do these things, and you likely won't do them without one, it's probably worthwhile, but do it yourself doesn't require loads of online research either. Save enough, and buy the low cost index funds in line with the three fund system balanced about like Vanguard has here:

https://investor.vanguard.com/mutual-funds/target-retirement/#/mini/overview/0306


Last edited by Arthur Dent on May 10 19, 5:01 pm, edited 1 time in total.

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PostPosted: May 10 19, 4:44 pm 
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G. Keenan wrote:
To be clear, he is not suggesting market timing, just mentioning that not being forced to take a distribution with the Roth is an advantage of the Roth.

I understand that, at least I think so. In effect still wanting flexibility to not take mininmum withdrawals at 70.5 is for market timing. Really, at 70.5 the flexibility to hold back a 6% ish distribution due the market conditions isn't a relevant reason to go Roth, compared to others.


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PostPosted: May 10 19, 5:04 pm 
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Arthur Dent wrote:
Freed Roger wrote:
I don't understand broker's logic with being forced to take distributions.

I suspect financial advisers are geared toward the type of people who are worried about passing assets to heirs.

That is possible. Sort of a presumptuous and trivial benefit to promote though, no?

I am seeing wealthy older people that have a IRA required mininimum distribution they don't need just doing their charity donation with it. Especially if they aren't itemizing with new tax laws (10k cap on tax deductions and no mortgages generally). If one is position to not need their RMD for themselves, then they have all sorts of options, and not many financial problems frankly.

Fwiw- I don't have an employer Roth 401k option. However if I were seeking advice from an advisor on a choice of pre-tax (traditional) vs Roth (pay tax now not later) I would want to see side by side scenarios. What theoretically grows the best based on this rate of return vs this tax rate etc. Those spreadsheet templates used to be out there, but haven't looked in a long while.
I have no opinion on the actual portfolio decision, whether broker is worth it. It all depends.

And also FWIW, I suspect Geen is completely fine in vetting his financial advisor. ...funny things that draw my attention. .....maybe I care about my line of profession after all :wink: ...I deserve a beer!


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PostPosted: May 10 19, 5:47 pm 
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Freed Roger wrote:
Arthur Dent wrote:
Freed Roger wrote:
I don't understand broker's logic with being forced to take distributions.

I suspect financial advisers are geared toward the type of people who are worried about passing assets to heirs.

That is possible. Sort of a presumptuous and trivial benefit to promote though, no?
...
If one is position to not need their RMD for themselves, then they have all sorts of options, and not many financial problems frankly.

I Agree.

To me, the big advantage of the Roth IRA (not 401k), is that you can withdraw the contributions penalty free if needed, so it can work as an emergency fund as well as for retirement. Regarding other differences, why not just hedge and split between both? Differences are not so significant and depend on guessing future tax and legal changes decades out in any case.

Edit: The one caveat I would make to this is the right way is to select how much spendable funds you want and then split the remainder in retirement account. Don't just say you want to contribute x% to retirement as x% 401k is quite a different amount as x% Roth 401k.

For example, suppose for easy math you make $100k and have a 25% marginal tax rate. A 10% Roth 401k contribution does not change your current taxes. The approximate equivalent to that is a ~13% traditional 401k contribution as the traditional contribution gives you an immediate tax break of $13k * 25% = $3250. This is balanced on the other end by the fact that the larger apparent traditional 401k balance gets taxed on withdrawal.

Rule is x% Roth is the approximately the same as x/(1-tax_rate) traditional. In the above example, that's 10%/(1-0.25) ~= 13%.


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PostPosted: May 10 19, 11:28 pm 
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Arthur Dent wrote:
I think the main retirements savings errors people make are:
1) They don't save enough
2) They try to pick stocks or beat the market
3) Maybe fail to reduce risk with age?

#3 is relevant here, because when you're 70+ years old, you really shouldn't be 100% invested in the stock market. That directly addresses the original concern that you'll be forced to distribute IRA/401k funds when the market is depressed. There are some simple rules of thumb, like "100 minus your age" for equity allocation, that it's easy to get carried away with. But the fundamental notion is important that as you age, you need to start shifting focus from "best ways to accumulate retirement savings" to "best ways to spend retirement savings." This is why I'm a big fan of income annuities, even though the word "annuities" makes some people apoplectic.


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PostPosted: July 5 19, 2:10 pm 
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Okay, having gotten some great advice in the recent past from the GRB Investment Advising Team, I have another foolish newbie question because I still know basically nothing.

So my dad just retired from his post-retirement part-time job. He has something like $45,000 in a pension from that job that he needs to do something with. He doesn't want to take a lump sum payout and be taxed on all of it, so he was thinking about rolling it into an IRA or something. However, from what I understand, if he rolls it into a traditional IRA, he has to start taking disbursements at the age of 70.5 (he's almost 69 now). I think I read that the minimum disbursement is the balance divided by his life expectancy. This is contrary to his goal, which is to leave as much money in there as possible for my mom when he dies - he has a defined monthly pension from his "real" job that they get by on just fine; unfortunately, that ends when he dies.

It seems like the best option could be a Roth IRA, which (again from my limited understanding) would not require him to take any disbursements before he dies. This doesn't really appeal to him as he doesn't want that big tax hit up front, but it seems to me like it might be the best thing in the long run. But, whether he does the traditional or the Roth, what would be the best way to invest to actually earn a little bit while being very safe (he's very risk-averse and we're only talking maybe 10-15 years)? With the traditional, would it be possible to get enough return to basically offset the required distribution amount and keep pretty much the same amount in there? Or is there something aside from an IRA altogether that might be a better idea?

Thanks for any input or advice you (anyone) can provide! I'm pretty ignorant to investing in general, but am young enough that I think I've at least got myself moving in the right direction, while my dad has never invested a dollar in his life. Not that I can blame him; raising 4 kids on a single middle-class income, there was just enough to give us a decent upbringing with a lot of penny pinching. I'm glad he had a solid government job with a decent pension, but wish it had some kind of survivor benefits.


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PostPosted: July 5 19, 7:55 pm 
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Your questions are out of my depth, but I'll take a shot at it. Converting a pre tax pension to a roth is going to incur a hefty tax hit. My gut says an IRA with the lowest distros as possible would be the most wealth building option assuming they don't buy terrible securities.

That said, I'm really not sure. Give me another 30 years. This is a great question for the bogleheads.org message board because they have so many retirees on there. I wouldn't be shocked if you search the forums you'd find threads on this very topic. Just keep in mind tax laws change so old threads might not be correct. Obviously, a professional tax lawyer is another great option, but that might be pricey.


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