The risk that favors Roth IRAs includes the risk that the tax code will change to include higher rates than the current tax code.

Also note that any increased or decreased "need" doesn't factor in to the calculation.

The rates would need to go up enough so that your overall tax rate in retirement is greater than the marginal rate you pay taxes at today. That would be quite the taxation increase, probably above the historical norm at any point in the US, unless you're well above the 33% bracket, in which case the probability of your rates increasing is a lot higher.

If you live in Silicon Valley, a new grad would probably be in the 28% or 33% bracket just to be able to afford renting a studio apartment on their own.

GP is talking about Federal brackets. 33% starts at $190,150 AGI (after deductions) which is well above what a new grad could expect (from their employer) or require to pay rent, even in the valley.

It's also worth noting that by historical standards tax rates are actually low. So if we assume the possibility of mean reversion they could well be higher.

I see the Roth/Regular as a bet-hedging opportunity - ideally, put some in each type and then you are ensured against either scenario.

US income taxes are at historically low levels too.

There is a difference between nominal rate and effective rate. The effective rates are fairly close to the past for high wage earners, lower for low wage earners.

>...In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes.

>In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s.

http://www.wsj.com/articles/SB100014241278873247051045781516...

I would disagree - prior to WWI there was no income tax. Further, not every state implanted income taxes (some still don't have any)

Some states (Texas) don't have income tax but have very high property taxes to offset this. Or they have high sales tax.

undefined != 0

Seems like in the case of tax, it does. They weren't taking a random % of income in income tax based on what was in the memory cell from the previous call stack. They were taking 0%.

This is an interesting point, but not something we can solidly plan on. Vs we can absolutely say what the best way to play the game is based on todays rules.

It's a pretty safe bet that the next 30-40 years is going to explode in entitlements spending and infrastructure costs.

If the government folks don't pay them, then it's going to basically be Mad Max and your IRA (whatever the type) won't really help you much.

If the government folks do pay them, then the money for that has to come from somewhere. It's very unlikely to come from businesses, because the little ones don't make enough and the big ones pay very bright lawyers and accountants to keep the .gov away (cough Apple cough). So, it's probably going to come from income tax.

Get a Roth.

If you consider the risk of massive tax rate increases over 30-40 years significant, due to the need to pay for massive entitlement and infrastructure spending, also consider the risk that they will tax Roth capital gain withdrawls to pay for it as well.

In which case you've lost nothing since that money wouldve been in a conventional account and taxed to hell anyways.

Put it in the IRA and if things don't go to shit, your money is fine. Don't put it in the IRA and of things go to shit, lose the tax advantage.

Do either and things go to shit, it doesn't matter which you did.

No, that money would have been in a 401k, so you would lose out on the initial benefit of not having paid taxes when you contributed if they raid Roths.

But, if you've already maxed out your other tax-advantaged space, and you have more money to contribute, there is no reason not to put it in a Roth instead of a regular taxable account, assuming you are eligible, because then you can have tax-free growth at least(worth less than tax-free contributions, but still worth a lot).

In the same scenario that Roth IRAs are at risk of extra taxation (or fees), 401(k)s are as well. That doomsday scenario isn't worth planning for with money, but with physical assets (property, food, tools) and skills because that's the scenario where the US economy collapses (not a recoverable crash like 1929 or 2008, but a true, complete collapse where the USD value goes to zero).

Roth IRAs make sense if you make too much to contribute to a Traditional IRA with tax advantaged contributions and little enough to still qualify for the Roth.

They also (both traditional and roth) have an advantage over a 401(k): You get to manage the funds any way you want. You also get to contribute even when your employer doesn't have one, you just need income (capital gains don't count, as I understand it, so being semi-retired and living off your earnings does preclude you from contributing).

You're also limited on 401(k) investments to whatever your employer contracted for. Could be shitty, could be stellar, you don't control it.

That's what I try to be mindful of regarding Roth. How strong is the promise that it won't be taxed? Or maybe it isn't taxed, but new fees are introduced as a roundabout tax.

Like a lot of retirement thinking, it's unsettling to think about the negative scenarios.

I think it is unlikely, but the chance that they will tax Roth withdrawals is positively correlated with the very scenario that makes contributing to them advantageous, a massive tax hike in the future. If the government needs money that badly, everything is potentially on the table, down to a flat haircut tax on bank balances.

Income early in one's career is typically lower than incomes later in one's career. So even if retirement income is lower than final career income, there's still a good chance it's greater than entry-level income and would be taxed at a higher rate. You've also got to keep in mind that taxes may eventually rise. America's top rate today is much, much lower than the top rate historically--no reason to believe it couldn't swing back the other way.

oh i see the pattern like someone making $50k a year to start, but rises to $150k by end of career and whom is planning for a retirement income of the average (100k)... Then a Roth is a good deal when making $50k (at the beginning) and regular is better when making $150k (at the end)...

Tricky.

If you are making $50K/year - it does NOT make sense to save in order to push retirement income up to $100K/year.

On the other hand, saving when you have $150K/year income in order to push your retirement up to $100K/year could make sense.

(All numbers in this example are inflation adjusted to each other)

Keep in mind Roth is no longer an option after 120k.

I think it's incorrect to compare marginal rates as well. It makes more sense to compare your Effective Rate in retirement versus your Marginal Rate of today. This article explains the math: http://www.gocurrycracker.com/roth-sucks/

Your effective tax rate is likely to be much less than your marginal rate.

Also, for anyone interested in financial independence and simple investing with your 401k and IRAs, I'd like to recommend the Stock Series here: http://jlcollinsnh.com/stock-series/

This is a really good point. Now I'm pissed that I contributed to a Roth earlier in my career.

Another one that no one has mentioned: state income tax. I live in CA but would put a >50% chance that I will live in a lower tax state when I retire. Thus, Traditional > Roth.

If you are going to contribute to a Roth, it is better to do it earlier than not, while your earnings are lower, so at least you have that going for you. It can also make it easier if you ever decide to do a backdoor Roth in the future(for you know, when you have tons of money kicking around after you are contributing the max to your 401k and have your mortgage(s) paid off), since it could be hard to open a Roth account after you are over the income limit.

> I simply cannot fathom why he would state that.

Me either, unless he assumes:

    1) His audience is all tech workers, and
    2) all tech workers are making better than $62k (single earner) or
       whatever the higher married-jointly exclusion is.

That's not so unreasonable.

The only situations I can think of where Roth might make sense are 1) early stages of your career, before you hit the 28% marginal rate and 2) if you are still eligible for a Roth, but already maximized your other tax-advantaged space in 401(k)s and IRAs.

> if you are still eligible for a Roth, but already maximized your other tax-advantaged space in 401(k)s and IRAs.

Under what conditions could this occur?

If you make more than ~$62k (single earner) and have an employer 401(k) program, you're not eligible to deduct traditional IRA contributions. (Non-deductible traditional IRA contributions get a worse tax treatment than a taxable brokerage account.)

At very roughly $120k-$130k (single earner; I forget the exact figure) you're no longer eligible for Roth IRA contributions. However, you can make non-deductible Traditional IRA contributions and then do a Traditional-to-Roth conversion (not "recharacterization"). This is known as a "Backdoor Roth IRA contribution" and is legal and explained in nauseating detail on the internet.

So:

> Under what conditions could this occur?

If you make more than ~$62k, have an employer 401(k), and contribute the maximum to it, funding a Roth IRA is a good idea.

(Unless you have an existing traditional IRA balance which would make backdoor Roth funding counter-productive due to the pro rata …. blah blah. If you don't have an existing Traditional IRA balance it's not a problem.)

When you want to do a back-door Roth IRA for one.

http://www.rothira.com/what-is-a-backdoor-roth-ira

When you make under $132,000 but were still able to contribute $18,000 to your 401k.

One issue with the Roth is the amount you can contribute phases out with increasing income, to the point that you can't contribute if you file single and your income exceeds $132k (or $194k for joint filings).

That must be a nice problem to have. Realistically this probably doesn't hit many people, and the ones it does hit already afford accountants who conjure up ways to minimize their taxes. Yea, I know, this is HN, where everyone knows that buddy who's cousin's roommate makes $400K at Google. The average geek doesn't have to worry about this.

The Roth phaseout starts at $117k for single earners. That is a lot of money, more than most people in the US, let alone the world, make, but it is not a princely sum for most technologists, especially not ones on HN.

FWIW, Fidelity makes it very easy to make a "back door" Roth contribution, but only if you don't have a Traditional/Rollover IRA. You make a taxable contribution to a zero-balance Traditional, and then transfer it to the Roth. There aren't income limits on Roth transfers.

"Backdoor Roth."

Also neglects to mention you can have a 401k and a Roth IRA and that if you have a spouse with income they can open up a Roth as well. For financial advice I think it's really important not to miss details like that.

Also an HSA can be used to shelter a bit more income. If you don't consume much health care a HDHP may be the way to go.

There is also the backdoor Roth, but I never wrapped my head around it.

The gist of the backdoor Roth is that you make a traditional contribution and then roll it over into a Roth before tax season. There is no income limit on roll-overs and you aren't taking the benefit of a traditional IRA at tax time so the IRS doesn't care that you set it up in the first place.

Even if you can guarantee that your retirement income wouldn't be higher, you can't guarantee that your tax would be lower either. So I'd have both traditional and Roth IRA (e.g., 50/50)

A 50/50 traditional/roth allocation suggests you see it as even odds that your overall tax rate will be higher in retirement than your marginal rate today. That would require quite the rise in taxation rates, depending on exactly what your marginal rate is today. It is very easy currently to be married and make > $150k with a marginal rate of 25% and effective rate of < 15%. So, if you decided to draw exactly $150k each year in retirement, much more than you would be likely to need in any case, your effective rate would have to go up by over 10% to make it worth it to contribute to a Roth today. If you are drawing less than $150k, your effective rate on less income would have to go up 10%. This seems incredibly unlikely in our political environment, more like 80/20 or 90/10 odds.

> That would require quite the rise in taxation rates

Take a look at any of the Millenials working in any large-city downtown: they spend every single penny they earn, they have no savings; when they get older, either the State will let them starve to death, or taxes will be raised in order to take care of them.

I don't think the former is politically possible, so taxes will have to go up.

Meanwhile, the same spendthrifts are by-and-large refusing to have children early, which means that there will be fewer workers to pay those taxes.

That means that there will be tremendous political pressure to raid 401(k) plans and IRAs. I actually believe it's even odds whether Roths will end up taxed one way or another (perhaps with 'withdrawal fees' or some form of Social Security clawback or something): it'll be too much money for the State to leave alone.

While no one can predict the future, I tend to agree with your hypothesis.

The advantage of a 401K over the Roth is that since both can be raided, at least with the 401K your money is being taxed only on the way out. With the Roth you are being taxed on the way in for sure, and you run the risk of it being taxed on the way out as well.

Judging from the past my guess would be that we wont see something as obvious as a penalty or a fee. Instead what you may see is a more aggressive required minimum distribution schedule. Perhaps you could see the date of penalty free withdrawal pushed back from 59.5 to 65 or 67 years of age. Means testing of social security benefits has been mentioned before. If that gets put in place, and you fail the means test for social security, they will have effectively taxed you more your entire working life.

I agree that the risk of Roths being raided is quite high if we get to the point of taxes being raised that significantly to cause them to be valuable, so I don't really see a benefit personally of making significant contributions to one. I think raiding of 401ks is much less likely, as a lot more people have them and would be affected, and even if they do, you are still going to be better off than having contributed to a Roth unless they outright confiscate your balance, since you will have at least have avoided paying taxes in the past.

Or we could just continue doing what we are currently, and just keep piling up the debt :) No tax increase or Roth/401k raids needed.

> Take a look at any of the Millenials working in any large-city downtown: they spend every single penny they earn, they have no savings; when they get older, either the State will let them starve to death, or taxes will be raised in order to take care of them.

Don't forget the more politically expedient (and in my view most likely) choice: Print money to pay for it, causing inflation, which is essentially a silent tax on everyone with money.

You must know a different group of millennials than I do (anecdata at best).

Why should you compare using your overall rate in retirement? Is there some assumption here that most or all of your retirement income is coming from tax-advantaged accounts? That's probably the wrong calculation to make for high earners.

Depends on your definition of high earners, but most everyone that earns a living from W-2 income and is in the technology industry will be able to retire very easily by contributing as much as they can, preferably the max(currently $18,500) to their 401k and thereafter maximizing other tax-advantaged spaces such as Roth 401ks and IRAs over their working career. You would need to either be retiring exceptionally early, with less than 20 years of working life, or retire expecting to draw more than you earned in salary, to require after-tax investments to retire. Even if you do require after-tax investments, the preponderance of your income in retirement will most likely still come from those tax advantaged spaces, assuming you are a rational actor and wish to pay as little tax as possible. The only situation I can see where this doesn't apply is when you don't earn the majority of your income from W-2 wages and instead see it as long-term capital gains, in which case almost none of the advice in this entire comment thread is applicable and you should seek a fiduciary advisor.

> retiring exceptionally early, with less than 20 years of working life

This is an assumption I'm working under, but I've thought about it for a more normal case as well.

Still, the usual advice for saving for a normal retirement is 10%-15%, and you only have to break $185k before a 401(k) doesn't cover even the low end of that.

Well you have to consider matching numbers in that as well. My employer contributes 10%, which is on the high end of normal, but not that abnormal for most highly paid positions. It is easy to contribute 20%+ making over the 33% bracket and not even touch 401k total contribution limits that way(total limit is currently $53k). If you are making that much and your employer is not contributing a lot to your 401k it is definitely worth your while economically to convince them to do so(and when you are making that much you will have the clout to make them do so). Remember, the whole point of 401(k) plans initially was as a backdoor way to compensate high earners.

Also, if you're making that much, even if you want to retire early, the normal % rules of thumb don't necessarily apply, assuming you want to live a normal middle-class life in retirement. You should run the numbers on http://firecalc.com, you will find if you live frugally making that much and contribute the max you can easily retire in under 20 years with a >90% chance of success. If you want to retire to the high life you will either have to contribute more than normal(and invest well/be lucky) or work longer, no matter your income.

Edit: I will say that there is a potentially significant disadvantage, especially for high earners, in having a lot of your net worth tied up in a 401k. That is required minimum distributions, essentially forcing you to take out a certain percentage of your account balance when you reach certain age thresholds. You can somewhat easily get around this by rolling over into a Roth IRA(backdoor Roth), but that could offset many of the tax advantages of the 401k in the first place if you have significant traditional IRA holdings[1]. This is mostly deleterious if you are planning on bequeathing an estate in a tax-advantaged way, but you may be able to get around it with a irrevocable trust. Consult a fiduciary, this is not financial advice.

1. https://www.bogleheads.org/wiki/Backdoor_Roth_IRA#Caution

> and thus need less money.

Medical bills.

Medicare.

not mentioned is the income limits. Almost every engineer I work with is over the limit for Roth, and definitely over the limit for deductible tira. Non deductible has very little benefit, so might as well go with Roth, or back door into a Roth.

I look at it as diversifying against tax law going crazy though, siNce so much of my retirement income is in 401k and pretax. Also the limits are a third of 401k, so it's only a quarter of retirement savings, and principal can be pulled out if needed.

If you aren't contributing the max to your 401k and IRA I would do that before considering Roth contributions, unless you really believe tax rates will explode such that your overall rate in retirement is higher than your marginal rate today. If that is the case you should also consider the risk that the law will be changed to tax Roth on withdrawal of capital gains, which I believe has been floated in the past.

And the risk that the tax laws on 401k will change too. Also, I missed that's in the self employed section so I don't know much about that. But if you have and can afford to max out a 401k, you probably can't get a deductible tira so it's really a question of taxable account vs Roth.

How would 401k laws change, you are already taxed when you withdraw from a 401k normally? The risk with Roth laws changing is you get double-taxed because the government needs money, with a 401k you have gotten the benefit the moment you contribute money to it, after that all they can do is literally confiscate money from it, or change it to a regular taxable account, but you've still already come out ahead of contributing to a Roth in either case.

> How would 401k laws change, you are already taxed when you withdraw from a 401k normally?

I can imagine wealth taxes at some point ('those fat cats never paid taxes on all that money!').

Frankly, I don't think it's possible to be too pessimistic about the future.

If we end up with wealth taxes you are still more screwed by contributing to a Roth instead of a 401k, because at least with the 401k you avoided paying taxes in the past.

Depends on whether the tax is the same on Roth and Traditional accounts (Why are you comparing 401k and Roth? They are completely orthogonal concepts.). If there is a tax, deductions for past taxes paid on Roth accounts are likely.

> Why are you comparing 401k and Roth? They are completely orthogonal concepts.

Because the entire thesis of this thread is that it is better to contribute to a 401k and other pretax accounts before contributing to a Roth under nearly all circumstances(other than at the beginning of your career) that don't involve massive tax raises in the future.

Roth 401(k)s (and traditional IRAs) do exist, you know...

For taxation purposes, traditional tax-exempt IRAs are equivalent to 401(k)s, and Roth 401(k)s are equivalent to Roth IRAs. Whenever someone refers to contributing to one type of account or the other over another type of account, the ones that are equivalent are... equivalent(for taxation purposes).

Right, so the correct classification is traditional and Roth, not 401(k) and Roth.

> Non deductible has very little benefit, so might as well go with Roth, or back door into a Roth.

Non-deductible IRA actually gets a worse tax treatment than an ordinary taxable account, due to the long-term capital gains rate being lower than the income tax rate.

You can take your contributions (the principal, not the growth) out of a Roth account before you reach retirement age. The exact rules are complicated, but that's the big core benefit that has me putting money in a Roth. I can use it to retire at 40, or cash out some of it to make a down payment on a house.

You can also take your principal (and earnings) out of a traditional IRA penalty free if you work through the loopholes. http://www.madfientist.com/how-to-access-retirement-funds-ea...

This is info people should be aware of, but it doesn't help me if I only have money in a traditional IRA and want to use $100k for a down payment on a house.

Actually, I think buying a (first) house is one of the loopholes. From the linked article:

> "...you can withdraw retirement account money early to pay for education expenses, fund a first-time home purchase, ..."

Only up to $10k. I can withdraw $10k from my traditional IRA using that loophole, then a lot more from my roth.

If you decide to retire early you can always set up a Roth conversion ladder by rolling over IRAs and 401ks to Roth IRAs. It takes 5 years for those contributions to "season" so that you can take them out before 59.5, but you can take out capital gains that way as well. No need to contribute to a Roth today if that doesn't make sense otherwise.

Can you elaborate on this? I've been managing a post-tax account somewhat like a Roth IRA, though it is not an IRA because I plan to retire far before 59 1/2. I'm hoping for something in the middle of the two approaches with flexibility to withdraw early without penalty.

This is the most concise summary I've seen, but you can find some more discussion googling around for "Roth Conversion Ladder" - http://retireby40.org/roth-ira-conversion-ladder-minimize-ta...