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URL:  http://boards.fool.com/my-we-do-get-off-on-tangents-at-tmf-dont-we--20691511.aspx

Subject:  Re: 401(k) vs. Roth IRA Date:  4/27/2004  10:06 AM
Author:  2old4bs Number:  40708 of 74759

My, we do get off on tangents at TMF, don't we ;-)

We make over $100K per year. However, I've done the math and see no way we'll have over $2M saved in the next 15-20 years, even putting away 25% of our pay. (Or, am I just being pessimistic about returns?) That said, assuming we can withdraw about $50-70K per year "safely", won't this put us in a lower bracket? Wouldn't this be an argument for fully funding the 401(k) BEFORE contributing any to a Roth?

I assume that I will be in a much lower tax bracket during retirement. I am currently saving 30% of my gross income toward retirement, or 44% of my after-tax net. Based on these numbers, I can assume that I will need 56% of my after-tax net to live on in retirement and (hopefully) SS will pay a portion of that. I also intend to move from a high-tax city and state to a low tax state. That's how I arrive at the conclusion that I'll be in a much lower tax bracket after I retire. And I do fully fund my 401K, but I'm not eligible for a Roth. The balance of my retirement savings after 401K goes into a non-deductible TIRA, an annuity, and a taxable account. These accounts should give me some flexibility in retirement as to the most tax-effective way to make withdrawals.

assuming we can withdraw about $50-70K per year "safely", won't this put us in a lower bracket?

My assumptions are also based on the fact that I have no children (and therefore no tax savings from them now). To do this assessment properly, one really has to determine their current overall tax rate and compare that to an estimated future overall tax rate, taking into account the fact that many of the deductions/allowances that you're saving taxes with now won't be available during retirement (i.e. home mortgage interest, 401K contribution and children).

Wouldn't this be an argument for fully funding the 401(k) BEFORE contributing any to a Roth?

You really have to do the analysis above with 'real' numbers to determine the answer to this question in your individual case--generalizations are never true for everyone.

2old




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