Kranky, this is the conversation I was really craving from this thread. Thanks for not glossing over my posts.

That's it, this retirement crap is too difficult. I'm just going to buy hookers and blow until my bank account gives up, then I will become a ward of the state.

quote:

Originally posted by Keystoner:
I'm not a financial adviser--just an engineer who makes spreadsheets for just about everything. I finally got around to this one.

"If the tax is the same in the future, a 401(k) is the same as a Roth IRA," right?

I don't know if I've ever heard, "if the tax is the same in the future, the values will be the same."

But from a time value of money perspective, your analysis does not make sense.

You took the Income minus 401(k) minus Roth minus Tax Now plus Investment value in n years minus Tax in n years minus Brokerage Investment plus Value in n years minus Tax in n years equals Net Worth in n years.

Biggest difference is you can't add or subtract dollars toady with dollars n years from now when you're dealing with Time Value of Money. That's the first error.

Secondly, when comparing a 401(k) and a Roth IRA, only the money in the two accounts should be compared. The money that's outside has nothing to do with the accounts themselves if you're trying to understand the difference.

The right way would be (assuming $5,000 in the Roth IRA) is determining what the equivalent amount is to the opportunity cost of $5,000 in the Roth IRA. For a Roth IRA contribution of $5,000 at a marginal rate of 25%, the opportunity cost is $6,666.67. You took $6,666.67, paid 25% tax of $1,666.67 and contributed $5,000.0025 into your Roth. The opportunity cost of contributing $5,000 to your Roth IRA is equivalent to contributing $6,666.67 to your 401(k) account. So that's what you should compare: $6,666.67 in the 401(k) versus $5,000 in the Roth IRA.

The future value of a 401k account of $6,666.67 in 40 years at 10% interest is $301,728.37 (if Grok is correct; I'm too lazy to use Excel) before taxes. Subtracting 25% tax gives you $226,296.28.

The future value of $5,000 given the same parameters is $226,296.28.

So it appears the saying is true mathematically. The future value equation is pretty standard. But that's not how the decision should actually be done which is probably why I've never heard of the saying before.

The considerations are: early in your life is when you're getting paid the lowest and getting taxed the lowest. So, if financially able, you should contribute to a Roth IRA because the money is getting taxed at low rates and presumably when you start taking withdrawals, your income will be higher which would put you into higher tax bracket IF your Roth withdrawals are taxed.

But if you need the cash flow when you're young and still want to save for retirement, putting it in a 401k gives you positive cash flow. Contributing $5,000 only cost you $3,750 because the $5,000 reduces your tax liability by $1,250. You can use that $1,250 however you wish.

But more importantly, the tax implications and money impact is even greater during retirement. With a 401k, when you hit age 75 (I think that's the latest), you start getting Required Minimum Distributions meaning you have to withdraw a certain minimum percentage of your 401k savings. Those minimum withdrawals can force you into higher marginal tax brackets and instead of getting taxed at 25%, you could end up with a marginal tax that is higher.

Also, in old age, there are means testing or thresholds for Medicare, IIRMA, subsidies for retired people like electricity, clawbacks, etc. Roth withdrawals do not show up as income while 401k withdrawals do show up as income. You have a lot more financial advantages with a Roth IRA assuming you're able to swing the contributions throughout your career.

quote:

Originally posted by Fly-Sig:
Your spreadsheet is wrong for several reasons.

He's paying taxes on the Roth. See my explanation above. I think you had the same trouble I had in understanding his spreadsheet. When I finally figured out what numbers he added and subtracted to get to the bottom line Net Worth in n years, then I was able to explain the mistakes he was making.

I think we agree in the end. It's just in deciphering how his numbers worked together.

quote:

Originally posted by BigSwede:

quote:

it's often worth exploring doing a backdoor conversion anyway

Please Splain yourself. I contributed a good chunk of money to a Roth only later to find out I am not eligible


My job dropped the 401k because it was only me and another person using it, they never matched anything anyway. I am not allowed to put money in it on my won.

I did also open a traditional IRA and am mostly investing in Fidelity's funds

A backdoor conversion is when you have a traditional 401k then you convert an amount from your 401k into a Roth IRA. When you do this, you trigger a taxable event because of the withdrawal from the 401k. But, the benefit is that you start a Roth IRA account with its 5 year rule (there are several 5 year rules for Roth accounts).

Here's the tactic if you want to do a back door conversion: Suppose for the year your Adjusted Gross Income is $75,000. Let's say that puts you in the 20% tax bracket and the next tax bracket is 30% at $125,000. That means, you can convert $50,000 from your 401k to a Roth IRA and pay only 20% taxes. You don't want to convert $60,000 because you'll pay 30% on that last $10,000.

This message has been edited. Last edited by: Rey HRH,

quote:

Originally posted by Skins2881:


Seems almost like it might be a good idea to split your eggs into three baskets. Trad/401-k, Roth, and brokerage?

Maybe that way you have ultimate flexibility to chose if you want to draw down monies subject to LT cap gains; tax def/ordinary income; and tax free.

I'm just a dumb electrician, but it seems like to a idiot like me, that the most important thing is that you save something and remain flexible.

It's all about not leaving any money on the table. If you can afford to pay the tax and are at a low tax rate, max your Roth. If there's matching contributions on the 401k, pick up that free money first then put the rest in Roth. You should also have a brokerage because you want some higher returns for your emergency savings, your next car purchase, your next vacation. Plus there's favorable tax rates in a regular brokerage for qualified dividends and long term capital gains. You get zero tax for Treasuries and also your in state bonds.

quote:

Originally posted by konata88:
I'm just dumb, regardless of vocation. Or avocation.

I only have a 401k (index and bond funds). Retirement is imminent. I'm planning to talk to a financial planner soon. I'm under the impression that I should just stick w/ the 401k at this point. It's hard for me to follow the above and this backdoor stuff with various types of Roths.

Should I be considering moving some of my 401k into a type of Roth (I will be subject to RMDs someday that will likely be larger than my target annual expenses).

It depends on how big your 401k savings will be.

Here's what you would do. Project your annual income after retirement. Figure out what your adjusted Gross Income will be. Understand how your social security gets taxed as part of your adjust gross income depends on your total tax. But for simplicity, take 85% of your social security to the rest of your income in retirement. Then determine what tax bracket you are in.

Figure out the difference from your current tax bracket to the next tax bracket and the next one after that. for 2025, it's $96,951 at 22%, $206,701 at 24%, 394,601 at 32% and so on.

Next, you can look at the required minimum distribution tables. There's like three different tables depending if your spouse is no more than 10 years younger than you or more than 10 years younger or if the beneficiary isn't your spouse.

Here is the link to the overview. Overview

I'll assume your spouse is less than 10 years younger than you then you'll use the Uniform Lifetime table. I don't know if that table is the latest. It's the easiest to understand that I could find. I couldn't find it on the IRS site.

But at age 73, you're expected to take out a minimum of 1/16.8 of the total value of the 401k and other tax deferred retirement accounts in your name.

By age 81, the minimum requirement is one tenth of the total value at that time. So if you expect your total IRA value to be $1 million when you're age 80, you're expected to withdraw a minimum of one tenth or $100,000. So you look at what $100,000 added to your retirement income will do to your marginal tax rate. If it will push you to higher tax rates, then you should consider doing tax conversions and convert the amount you don't need into a Roth as I explained above. You don't want to leave it outside because you'll presumably invest it and you'll still incur taxable events like dividends and capital gains and your tax issue will compound.

quote:

Originally posted by sourdough44:
Even if one decides to enlist the services of a ‘professional’ it can still be helpful to ask the right questions.

Definitely. Going to a financial advisor without having sufficient understanding of the basics yourself is like a young woman going into a auto shop for an oil change and road test. You know she's going to be sold services and parts she doesn't need. No one is going to care more about your money than you.

Rey HRH,

I appreciate the deep dive you made into my spreadsheet.

You dismissed the premise of my analysis and ran your own numbers. In your scenario, you fund the 401(k) with more than the Roth. I’m fine with that! It’s a different analysis, but I agree, it’s practical. There is a much lower limit on a Roth, and no investor, who can afford to invest more, would cap their contribution to a 401(k) because of the limit on a Roth, and if you have the opportunity to contribute to a 401(k) vs. a taxable brokerage account, definitely top off the 401(k).

quote:

Originally posted by Rey HRH:

quote:

Should I be considering moving some of my 401k into a type of Roth (I will be subject to RMDs someday that will likely be larger than my target annual expenses).

It depends on how big your 401k savings will be.

Here's what you would do. Project your annual income after retirement. Figure out what your adjusted Gross Income will be. ....... (complexity through the rest of your description)

I am quite familiar with what you posted, and though I consider myself informed and mathematically astute, that kind of analysis is very complex! Especially when comparing what-if scenarios.

The good financial planners have slick software to do all that modeling. The results can be quite surprising, and frequently those are negative surprises. I'd recommend people seek out one of those good planners who really understand the retirement landscape, not just building a 60/40 portfolio.

Waiting until one is in or just a couple of years prior to retiring is too late to build an optimal plan. I wish that when I was 20, or even 50, someone had explained to me what you've posted in this thread.

This message has been edited. Last edited by: Fly-Sig,

Max out 401k and if anything left over, do Roth and if you make too much, do a backdoor Roth. I really like Roth because of the lack of RMDs and beneficiaries can inherit it tax-free without RMDs and only have the 10yr withdrawal deadline. Roth is far superior over IRA to transfer generational wealth for those reason.

I had a rollover IRA from a previous employer and when the market went down this year I took the tax hit to convert that to Roth, but saved some in taxes due to the lower investment value. Yes, you could invest those tax dollars and make more money with it and yes my tax rate may be lower in retirement, but after inheriting some Roth funds from my mom when she passed, I really like how Roths work as opposed to inheriting IRAs.

quote:

A backdoor conversion is when you have a traditional 401k then you convert an amount from your 401k into a Roth IRA.

quote:

if you make too much, do a backdoor Roth

Converting bypasses the income caps? What about the contribution cap?

quote:

Originally posted by Keystoner:
Rey HRH,

I appreciate the deep dive you made into my spreadsheet.

You dismissed the premise of my analysis and ran your own numbers. In your scenario, you fund the 401(k) with more than the Roth. I’m fine with that! It’s a different analysis, but I agree, it’s practical. There is a much lower limit on a Roth, and no investor, who can afford to invest more, would cap their contribution to a 401(k) because of the limit on a Roth, and if you have the opportunity to contribute to a 401(k) vs. a taxable brokerage account, definitely top off the 401(k).

As you said, I did a deep dive into your spreadsheet and, in order for me to understand your spreadsheet, I had to understand and consider your thoughts, premises, and formulas that went into it that you didn't show, right?

At this point, you can't be bringing up "lower limit on a Roth, cap their contribution, etc., etc." because you did not bring that up in your OP. We're discussing your OP in which you analyze 401(k) vs Roth IRA. So please let's stick with that.

As you said, I did a deep dive in your spreadsheet. Let's look at it one premise at a time.

As you can see, I took your picture, I highlighted the items that you added together in green and highlighted the items in red that you subtracted to get the sum at the bottom "Net Worth in n years." I also notated the values with plus and minus signs along with the equal sign at the bottom. I have this correct, yes? When I do the math to each of the values, I get the Net Worth in n years at the bottom.

I also used blue arrows and yellow arrows to point to the numbers and identified them as Today's dollars and Tomorrow's dollars respectively with Tomorrow standing for 40 years from now.



Here's the first premise incorporated in your analysis which I addressed and did not dismissed: "You can't add or subtract dollars today with dollars n years from now when you're dealing with Time Value of Money. That's the first error. This is a basic money concept that I have trouble explaining because I've not put much thought into it. It just isn't done. I'll let Grok explain it, okay? Can you add or subtract dollars today with dollars 40 years from now and make sense? "$100 today plus $100 in 2065 isn't $200 in any practical sense—it's like adding apples and oranges unless you convert both to a common time frame."

Your second premise that I addressed and did not dismiss is that in your analysis in comparing 401k versus Roth is that you included monies outside of the 401k and Roth accounts. As an engineer, you should be familiar with the idea of Ceteris Paribus. When trying to analysis the effect of a single variable (401k versus Roth), you hold all other things equal or constant.

The problem with including the monies outside of the account to get to your net worth 40 years from now is you assume a lot of unreasonable and invalid things.

Why would you add the remaining income after net of taxes and retirement savings to money 40 years from now? For the 401k, that's $71,250 and for the Roth, it's $70,000. Are you going to stick those monies under a mattress? You don't need them to live on? "Because I want to analyze the difference between a 401k and a Roth." But those monies are not in a Roth or 401k. Did you do a sensitivity analysis as to the percent difference if you use different income amounts and still keep the same contributions? or vice versa? What if you hold the contribution amounts the same and triple or halve the income? I'm thinking your net worth in 40 years difference between the two will be different percentage-wise and that should indicate to you that the differences is also being affected by factors outside the mechanics of a Roth versus a 401k.

Your third premise is that you could invest the post contribution and post tax difference of $1,250 into a brokerage account earning the same 10% for 40 years and then paying taxes on it. Let me repeat that: You assume investing an amount, letting it grow compounded, and paying taxes after 40 years. Isn't that what a tax deferred retirement account is? Except in this case, you had the initial amount taxed first and then deposited the net $1,250 into the brokerage account. Well, guess what the pre-taxed value of $1,250 is? $1,666.67. And added to $5000 gives you $6,666.67 - the same number that I and Fly-Sig gave you independently. The difference between putting in $6,666.67 directly into the 401k and putting in $5000 in the 410k and letting the post-taxed $1,250 into an account that you allow to compound annually and then paying taxes in the end is that you miss out on the compounding on the $416.67 that was taken out in taxes at the beginning.

So, the $6,666.67 is not a "different" analysis. It's the same analysis as you did except, in my case, I simply invested the original $6,666.67 directly into a tax deferred account while you took the $6,666.67 and invested $5,000 into a 401k then had the remaining $1,666.67 taxed leaving you with $1,250 which you then invested effectively into another tax deferred account.

quote:

Originally posted by BigSwede:

quote:

A backdoor conversion is when you have a traditional 401k then you convert an amount from your 401k into a Roth IRA.

quote:

if you make too much, do a backdoor Roth

Converting bypasses the income caps? What about the contribution cap?

When I studied Roth conversions, I didn't have to worry about income caps since I wasn't working anymore.

But I understand that doing Roth conversions while still working and in your 50s (> than 5 years) is a very viable strategy. You convert up to the ceiling of your tax rate and in five years or more when you're retired, you have income that doesn't get taxed and doesn't show up as income.

I understand there are income limits that prevent contributing to a Roth IRA but a quick google / ai search says the "backdoor Roth" strategy is named specifically for this instance - income limit that limits or prevents a Roth contribution.

But since this is your money, I would suggest you do a deep dive on it yourself, and then if you need to, engage the services of a professional.

quote:

Originally posted by Fly-Sig:


I am quite familiar with what you posted, and though I consider myself informed and mathematically astute, that kind of analysis is very complex! Especially when comparing what-if scenarios.

The good financial planners have slick software to do all that modeling. The results can be quite surprising, and frequently those are negative surprises. I'd recommend people seek out one of those good planners who really understand the retirement landscape, not just building a 60/40 portfolio.

Waiting until one is in or just a couple of years prior to retiring is too late to build an optimal plan. I wish that when I was 20, or even 50, someone had explained to me what you've posted in this thread.

Not complex but step by step. My advantage is I know Excel and I don't trust the assumptions baked into those Financial planning software programs.

I definitely agree with you about being prepared before hand and not waiting.

Case in point: My wife and I retired before 60. Did the standard calculations even with financial planners, conclusion was she and I can both wait until 70 to get social security. We adjusted that to her getting it at full retirement age because her family has a record of dying off early. This is the basic should I take it early versus wait until full retirement age or longer, right? If you take it early at 62, then you start losing money in later years because of the reduced benefits.

Here's the mistake: only recently after I took a closer look did I realize her Social Security was exactly half of mine. So she could have taken hers early at 62. Then when I start collecting at age 70, she gets half of my benefit which is exactly her full benefit at full retirement age. She would never be at risk of losing money. So all that money from age 62 was free money that we could have gotten. And that's not pocket change.

quote:

Originally posted by Rey HRH:
It depends on how big your 401k savings will be.
...
By age 81, the minimum requirement is one tenth of the total value at that time. So if you expect your total IRA value to be $1 million when you're age 80, you're expected to withdraw a minimum of one tenth or $100,000. So you look at what $100,000 added to your retirement income will do to your marginal tax rate. If it will push you to higher tax rates, then you should consider doing tax conversions and convert the amount you don't need into a Roth as I explained above. You don't want to leave it outside because you'll presumably invest it and you'll still incur taxable events like dividends and capital gains and your tax issue will compound.

Thanks. I needed to read this several times but I think I'm starting to get the gist. Still not sure what I should do but I'll discuss w/ the FA. But sounds like I should consider a conversion of some amount at some point before RMD's hit.

^^^ Talk to your accountant and make conversion every year until you reach 73. He'll let you know just how much you can convert without affecting your overall bracket. You'll pay tax, but you don't want to affect your SS and Medicare. Your overall return including itemized deductions all come into play.

quote:

Originally posted by 6guns:
^^^ Talk to your accountant and make conversion every year until you reach 73. He'll let you know just how much you can convert without affecting your overall bracket. You'll pay tax, but you don't want to affect your SS and Medicare. Your overall return including itemized deductions all come into play.

Interesting. Yikes. Okay, looks like lots of details and planning to do and I'm late already.

quote:

Originally posted by konata88:

Interesting. Yikes. Okay, looks like lots of details and planning to do and I'm late already.

The starting point in the strategy is to "fill the bucket" of whatever marginal tax bracket you are in. (This presumes that in the future your expected tax rate will be at least as high because of starting Social Security, or RMDs, or selling your home for a taxable gain, or having gains in your regular taxable brokerage accounts.) If your current marginal tax rate is 22% because your taxable income is $50k, you can have an additional $53,350 of income and still stay within that 22% bracket. If, in the future, you expect to have higher taxable income, you shift it into this year's taxes at 22%.

First, note that you also may have state income taxes that complicate what a bucket is.

Second, note that this is taxable income, so this is after your standard or itemized deductions, etc. Many retirees will be in lower tax brackets.

Third, project what your RMD situation might be, and what tax bracket those withdrawals will be in.

Now once you've determined how big your bucket is that you might fill, consider the IRMAA cliff and your social security. Nominally you need a pretty healthy modified adjusted gross income to trigger IRMAA. The thing is, if you go $1 over the limit you pay the entire penalty which starts at $74/month and can be as high as $440/month. (An easy way to trigger this is by selling your home for a taxable capital gain, so consider selling before age 63).

Most of us won't trigger IRMAA, but we can easily trigger higher Social Security taxes. Take your gross income (such as 401k withdrawals and stocks sold for gain), add income from municipal bonds, and add half your social security. If you're over $25,000 then half of your SS is taxable. If you're over $34,000 then 85% of your SS is taxable income. (Those are for single filers. For married/joint the numbers are double).

You can see that once you're 63 or older, ROTH conversions bring in several additional considerations. Sometimes it makes sense to delay starting SS so that you can make ROTH conversions. Sometimes it makes sense to take an IRMAA hit one year by doing a larger ROTH conversion.

A CFP on YouTube that I like is James Conole https://www.youtube.com/@RootFP who shows how things like this work, and where the traps and cliffs are.

Rey,
Again, thanks for another deep dive. It’s much appreciated.

An iron worker once told me that he suspected the things that make me a good engineer, make me bad at other things in life. I was struck by how astute this observation was about me. We’re probably in a case of that right now.

I used to be a baseball umpire. The rule book was my Bible. I’ve always been a ‘show me the rule’ guy. As an engineer, it’s AASHTO, or the Bridge Manual, or the Standard Specs. I hate gray areas. So it is for this, I’m not conceding my position. (Just wait, though.)

You’ve shown me my mission is stupid. The claim, which you say you’ve never heard, is stupid. I modeled the claim to the letter and proved it’s not right. But it’s a poorly worded, constrained, and impractical way to look at it.

You’ve put a lot of time into this. I’ll respond to your comments.

quote:

Originally posted by Rey HRH:
At this point, you can't be bringing up "lower limit on a Roth, cap their contribution, etc., etc." because you did not bring that up in your OP.

I had to bring that up. You changed the premise of the analysis, the black letter law of the claim. My original model compares equal contributions to a Roth and a 401(k). You expanded the scenario by contributing more to the 401(k), which is perfectly valid and aligns with real-world investor behavior. Once you reframed it, I acknowledged your version because you're right: if you have the capacity to contribute beyond the Roth limit, which we do, and which the claim restricts, it's better to allocate those dollars to a 401(k) than to a brokerage account. That’s a different, but more practical, analysis.

quote:

Originally posted by Rey HRH:
We're discussing your OP in which you analyze 401(k) vs Roth IRA. So please let's stick with that. As you said, I did a deep dive in your spreadsheet. Let's look at it one premise at a time. As you can see, I took your picture, I highlighted the items that you added together in green and highlighted the items in red that you subtracted to get the sum at the bottom "Net Worth in n years." I also notated the values with plus and minus signs along with the equal sign at the bottom. I have this correct, yes? When I do the math to each of the values, I get the Net Worth in n years at the bottom. I also used blue arrows and yellow arrows to point to the numbers and identified them as Today's dollars and Tomorrow's dollars respectively with Tomorrow standing for 40 years from now. Here's the first premise incorporated in your analysis which I addressed and did not dismissed: "You can't add or subtract dollars today with dollars n years from now when you're dealing with Time Value of Money. That's the first error. This is a basic money concept that I have trouble explaining because I've not put much thought into it. It just isn't done. I'll let Grok explain it, okay? Can you add or subtract dollars today with dollars 40 years from now and make sense? "$100 today plus $100 in 2065 isn't $200 in any practical sense—it's like adding apples and oranges unless you convert both to a common time frame."

Your second premise that I addressed and did not dismiss is that in your analysis in comparing 401k versus Roth is that you included monies outside of the 401k and Roth accounts. As an engineer, you should be familiar with the idea of Ceteris Paribus. When trying to analysis the effect of a single variable (401k versus Roth), you hold all other things equal or constant.

The problem with including the monies outside of the account to get to your net worth 40 years from now is you assume a lot of unreasonable and invalid things.

Why would you add the remaining income after net of taxes and retirement savings to money 40 years from now? For the 401k, that's $71,250 and for the Roth, it's $70,000. Are you going to stick those monies under a mattress? You don't need them to live on? "Because I want to analyze the difference between a 401k and a Roth." But those monies are not in a Roth or 401k.

All the above is TVM, and of course you’re right about the principle. I didn’t address this in my first response to you but I didn’t ignore it in my mind either. I included today's income in both scenarios purely for structural balance. Both of our models, on both sides of the comparison, have $70,000 in today’s dollars (not $71,250 in my model for 401(k); $1,250 was invested). That washes out 40 years later. But yes, from a strict TVM perspective, adding today’s income to future values is not correct.

quote:

Originally posted by Rey HRH:
Did you do a sensitivity analysis as to the percent difference if you use different income amounts and still keep the same contributions? or vice versa? What if you hold the contribution amounts the same and triple or halve the income? I'm thinking your net worth in 40 years difference between the two will be different percentage-wise and that should indicate to you that the differences is also being affected by factors outside the mechanics of a Roth versus a 401k.

Absolutely—I ran many ‘what if’ scenarios in the spreadsheet, including varying income and contribution levels. You’re right: the percentage difference between the 401(k) and Roth outcomes isn’t fixed. I wouldn’t suggest otherwise because I know it. It clearly depends on the ratio between contributions, income, and tax assumptions.

quote:

Originally posted by Rey HRH:
Your third premise is that you could invest the post contribution and post tax difference of $1,250 into a brokerage account earning the same 10% for 40 years and then paying taxes on it. Let me repeat that: You assume investing an amount, letting it grow compounded, and paying taxes after 40 years. Isn't that what a tax deferred retirement account is? Except in this case, you had the initial amount taxed first and then deposited the net $1,250 into the brokerage account.

I’ll keep conceding this. Contributing to a 401(k) rather than to a brokerage account is clearly preferable when available. But that wasn’t the focus of my original analysis. I don’t claim my model beats maxing out a 401(k).

quote:

Originally posted by Rey HRH:
Well, guess what the pre-taxed value of $1,250 is? $1,666.67. And added to $5000 gives you $6,666.67 - the same number that I and Fly-Sig gave you independently.

I mentioned the $6,667 figure on page 1.

quote:

Originally posted by Rey HRH:
The difference between putting in $6,666.67 directly into the 401k and putting in $5000 in the 401k and letting the post-taxed $1,250 into an account that you allow to compound annually and then paying taxes in the end is that you miss out on the compounding on the $416.67 that was taken out in taxes at the beginning. So, the $6,666.67 is not a "different" analysis. It's the same analysis as you did except, in my case, I simply invested the original $6,666.67 directly into a tax deferred account while you took the $6,666.67 and invested $5,000 into a 401k then had the remaining $1,666.67 taxed leaving you with $1,250 which you then invested effectively into another tax deferred account.

It is a different analysis, and I appreciate it. It’s more practical than my analysis, because it illustrates clearly that still being able to contribute to a 401(k) is advantageous compared to a brokerage account. The $1,250 I put in the brokerage account wasn’t enough to close the gap between the two. If I didn’t consider it, just look at the difference in the Frank and Ray story. I didn’t consider over funding the 401(k) as an option because I wanted to hold to the black letter claim.

I wish I had Googled this before I started the thread, but SIGforum is like Google anyway. I Googled a little now and I found that, without having a purposeful intention, what I did was an equal-pre-tax framework, and what you did was an equal-after-tax framework. They’re both valid.

I found this article (https://pdfs.semanticscholar.org/cd24/b0e5731cbd10465fc2d28cc7778956a1cd17.pdf) and cherry-picked the following:

quote:

One cannot compare equal dollar investments in a qualifying Traditional and Roth IRA because investments in the Roth are after-tax, but are pre-tax in a Traditional IRA. Most literature comparing the two performs an adjustment to put the two on the same after-tax basis. An exception is Horan (2003) who compares equal pre-tax investments as well as equal after-tax investments. The pre- or after-tax method of comparisons are equivalent assuming that the tax deductions generated by the Traditional IRA are invested in the pre-tax case. Thus, one need only compare an equivalent pre-tax investment amount in the Traditional and Roth IRA and vary whether the deduction is invested.

I need “an equivalent pre-tax investment.” I have one. Still have room in the 401(k). Done.

Maybe I’ll take a deeper dive into what my guy Horan says. Maybe I’ll tweak the spreadsheet and fix the TVM, but that would just be my engineering OCD kicking in. I’ve long maxed out both vehicles anyway. This was all just mental masturbation.