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You made compelling cases for the Roth 401k in your “lifetime taxation” comment on the How to Money Podcast #331 and earlier on the ChooseFI Podcast Episode 289.
I agree with you that the Roth 401k “feels” right. But a common message in the FI community is that if one has a high savings rate (over 50%) during the wealth accumulation phase the optimal tax move is to use the traditional 401k to lower your AGI now while you still have W2 income; and upon retirement, you will have a lower effective tax rate when you are withdrawing for just your living expenses.
Proponents of the Roth 401k frequently use qualitative terms like “it would be nice” to not be taxed later, but I believe messaging in quantitative terms would resonate better with the FI community.
Do you recommend any simulation tools to run a side-by-side comparison of the traditional vs Roth 401k during wealth accumulation and drawdown? And if you do not have any DIY tools to recommend, would you consider doing a case study for your blog to illustrate the metrics one should use to evaluate such an analysis?
I enjoy reading your posts and hearing your podcast interviews. Keep up the good work!
FI Designer, thank you for reading the blog and commenting, I appreciate it.
While none of this is tax advice for any particular person, I have three very broad thoughts:
1) For those in the “save over 50% of income, high earner, very early retiree” category, taking deductions while working makes a whole lot of sense, at least under today’s law. There’s a great hope that in early retirement that person will be in a low tax bracket. That person should also look at something like the Backdoor Roth IRA to get some money into a Roth while still taking advantage of all the available tax deductions (generally, 401(k) contributions).
2) My experience has been (and YMMV) that many in the FI community are not saving over 50 percent of income and not considering a very early retirement. Surely some are, but many are not. So to my mind, many in the FI community will benefit from the Roth 401(k) because perhaps they don’t need ever last deduction this year, and perhaps they will not have many years of early retirement.
3) Lastly, tax insurance. You don’t complain to the insurance company when you go years without a fender-bender. That is an element of what you are paying for with a Roth 401(k).
I don’t have any recommended quantitative tools to compare Roth 401(k) contributions versus traditional 401(k) contributions. Maybe one day I will do a hypothetical case study for a W-2 employee thinking of Roth versus traditional.
Thank you for those comments Sean.
I think that comparing the Roth 401(k) contributions versus traditional 401(k) contributions would make an excellent case study and blog post! Especially if taking things into account like the fact that the W2 employee with child tax credits may not have the child tax credit very long in early retirement.