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I am trying to decide how much to contribute to tax-deferred retirement accounts vs. pay the income tax now and save in a taxable account. If tax rates stay the same, this is a no-brainer (better to defer taxes), but I expect that tax rates wil be much higher 10, 20 or 30 years from now.

So how to calculate the best strategy? The variables are:
- current marginal tax rate
- rates of return in taxable vs non-taxable accounts
- number of years to withdrawl
- marginal tax rate when the funds are withdrawn in the future

Obviously, the future tax rates are unknown, but does anyone know of a program or spreadsheet that would allow me to pay with the variables and see under what circumstances it is better to save pre-tax or post-tax dollars?

Thanks.
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So how to calculate the best strategy? The variables are:
- current marginal tax rate
- rates of return in taxable vs non-taxable accounts
- number of years to withdrawl
- marginal tax rate when the funds are withdrawn in the future


Your variables are incorrect, or at least incomplete. It is unfortunate, but most financial information has led people to believe that they need to compare today's marginal rate with their future marginal rate. This is an eggregious error.

When you take the tax break today, you receive that break at your marginal rate (with some of the money possibly even being higher than your 1040 marginal rate since you could have been in a higher tax bracket without the tax-deferred contribution). However, when you later pay taxes, it is highly unlikely that your other forms of income will already put you in your marginal tax bracket...therefore much of the money you are withdrawing will be taxed at lower rates.

For this reason, even if the marginal rates are higher in retirement, it is very possible for the tax-deferred investing to come out ahead.

A more appropriate set of variables would be:
-- current tax schedule
-- estimated returns
-- estimated inflation
-- number of years to retirement/needing the funds
-- amount of funds needed each year
-- expected future tax schedule (I would build this using the current schedule and inflation for the number of years you want to investigate. ..this will give you the bracket points and you can set the rates to whatever you like.)

Even this list is only a start to a complete analysis.



but does anyone know of a program or spreadsheet that would allow me to pay with the variables and see under what circumstances it is better to save pre-tax or post-tax dollars?

I think your best bet is to build something yourself for your specific situation...the process of building the tool will help you think through all the things you want to consider more thoroughly.

That said, when I read this line, I need to ask -- by post-tax are you referring to a Roth-type account or just a standard investment account? If the former, then this is a good exercise; if the latter, you are unlikely to be in a situation where you are better off avoiding tax-deferred investing in favor of fully-taxable investing.

Acme
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Easy answer.

Both

The worst enemy of a good plan is the dream of the best plan.

buzman
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Easy answer.

Both


I'd say that's the easy/ideal answer! For someone that does not have enough to max their 401k and IRA, I'm not sure both is a viable answer, unfortunately.



The worst enemy of a good plan is the dream of the best plan.

This might be the best statement made on this board in a long time. For a while, I was going crazy trying to determine what the best allocation was...and what the best type of account was...etc. Then I realized that this can just cause paralysis in trying to be too perfect. Getting 95% of the way there and sticking with it is far better than waiting to get all the way there and never actually getting anything done!

Acme
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Thank you.

There are advantages for each, so the best is to try to do both.

Didn't say it was easy.

buzman
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Isn't it interesting how we can have such a great, beneficial, and civil discussion in this thread...

...while in another thread, we each think the other is a complete moron...

Acme
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I have only about 25% at most of my overall portfolio in tax-deferred investments. On the other hand, I maxed what I could put in my 401k until I left my firm 7 years ago. I think it almost always makes sense to max tax-deferred opportunities, since they don't really amount to all that much any way. Few people can retire on their IRA or 401k, so investing substantial additional after-tax funds is virtually essential to a successful retirement. Trying to figure out what the tax laws will be in the future is like trying to figure out if the Dem Party will ever move from insanity to sanity.
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So how to calculate the best strategy? The variables are:
- current marginal tax rate
- rates of return in taxable vs non-taxable accounts
- number of years to withdrawl
- marginal tax rate when the funds are withdrawn in the future


Other variables to consider are capital gains tax rate and dividend tax rate and interest tax rate vs regular tax rate.

I like having a variety of kinds of income so that I can choose my tax rate to a certain extent.

Vickifool
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The worst enemy of a good plan is the dream of the best plan.
---------------
This might be the best statement made on this board in a long time. For a while, I was going crazy trying to determine what the best allocation was...and what the best type of account was...etc. Then I realized that this can just cause paralysis in trying to be too perfect. Getting 95% of the way there and sticking with it is far better than waiting to get all the way there and never actually getting anything done!

Acme


Given that we cannot predict future tax rates with an certainty, a good guess is the best we can do.

Analysis paralysis was invented to describe my family.

Vickifool
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I have only about 25% at most of my overall portfolio in tax-deferred investments.

If you have more than ~10 years to withdrawal (note that this is different than retirement), tax-deferred is clearly the way to go. DW & I have about 30% of our net worth in tax deferred investments, which has come from maxing out my 401(k) for the past 20 years. We are not eligible for a Roth due to income limitations. Retirement is less than 6 months away for me and less than 5 years for her. They just added a 403(b) where she works and we are going to max that out for the next 5 years.

We want a high-end retirement, and we have worked for it over the years. I don't believe you can ever achieve that with only tax deferred investments. The limits are too low.

Put all you can into tax-deferred for as long as you can. A big advantage I have not seen mentioned yet is that you can trade at will in a tax-deferred account with no tax consequences. This makes rebalancing a lot easier.

But, if you want any luxuries at all, you will need to have more than you can accululate in a tax-deferred account. There are two choices here, the incredible no-frills LBYM lifestyle, or something I have advocated for years, but there isn't even a board for this on the Fool -- work harder now to save more. We have put a lot of time & effort into a sideline, which now accounts for more than 40% of our net worth.

I have spent a lot of effort on rental real estate, and DW has built up a nice consulting business. The extra money from consulting goes into real estate, and I add sweat equity. The savings isn't in a traditional account, but shows up as equity in a number of buildings. There are significant tax advantages, and a lot of diversification over just holding financial instruments.
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