Does a BackDoor Roth IRA beat a Traditional IRA in the end???
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None of this has anything to do with a backdoor Roth IRA anyway, which should be compared to a taxable account, not a traditional IRA. You can compare a Roth to a traditional IRA if you want, and assuming the same tax brackets now and later, they are exactly equivalent.
You are assuming your tax bracket today and in the future are the same. Let’s say 35%. Let’s say your expected return is 5% annually. Let’s do this calculation with a single year max contribution ($6000) for a 30 year time frame, assuming no change in the tax code or law about Roth accounts.
Roth option: you make $9230, pay taxes on it, and put $6k in a Roth account. In 30 years that is $25,932. All yours.
Traditional: you make $9320, put $6k in your traditional account, pay tax on the remaining $3320, and then invest $2158 in a taxable account with the exact same non dividendproducing 5% annual return. In 30 years you have $25,932, which upon withdrawal (and 35% taxes), is worth $16,505. Your taxable account has $9367, and paying 20% LTCG, is worth $7461. Total value of your original $9320 in this scenario is $23,966.
So if you are truly in the same tax bracket, and tax code doesn’t change and distribution rules don’t change, then yes, Roth is better for you. This is also ignoring some other things like Roth conversions later in your career but before RMDs at lower tax brackets, that may make a difference.
Thanks abds. This is the math that I was thinking about that suggests that Roth is better option. I appreciate your example.
Abds your math is not correct. TIRA would be 100% deductible and the net money in 35 years is exactly the same.
to the OP have you actually looked at how much pretax IRA money is needed to get to RMDs that put you in a high tax bracket?
you are starting from a base assumption that is not reality for most, and ignores the option of early retirement, and strategic Roth conversions between retirement and start of RMDs
The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA
this whole thread is not based on reality. moving on.
Abds your math is not correct. TIRA would be 100% deductible and the net money in 35 years is exactly the same.
Click to expand…My math is correct.
There is an IRA contribution limit of $6000. To get to that limit in a Roth takes more pretax money than $6000, since you know… taxes. So if you take that bigger number (that is required to max out a Roth (in my example $9230)), guess what? You can still only contribute/defer/deduct $6000 in a tIRA. So the remainder in the traditional IRA scenario ideally goes in taxable.
$6000 pretax, pay taxes, put the rest in Roth and withdraw taxfree… vs $6000 pretax, put all in traditional, and withdraw and pay taxes at same rate.. yes is the same number. But that wasn’t my example.
Math.
I recall a very nice blog by wci? published recently with a graph showing how a traditional 401k contribution was better then a roth 401k contribution for high income individuals but cannot find it anymore. I suppose that there are a lot of factors going into which one would be better for you (rate of return, time invested, rmd, etc). Dave Ramsey always says go for the Roth because most of your account will be growth rather the initial investment, particularly if you are young, but this blog showed a graph showing how it was different for high income earners. The other factor of roth vs nonroth is what you believe that tax rate will be in 2030 years. You could make the argument that they may change the characterization of the roth from nontaxable to taxable, but I can’t see them doing that. I can imagine our tax rate going up sometime in the next 2030 years to slow down these trillion dollar deficits which would make the roth more valuable. In any case, the original question should have been roth 401 k vs a traditional 401k as I don’t think that someone who would consider contributing to a traditional ira would need to do a back door conversion as they could just contribute to the roth ira directly if they were able to deduct a traditional ira. If you were contributing to a traditional ira but not able to deduct it due to your income and not converting it to a roth, it would either end up double taxed (post tax money going in, retaxed coming out) or it would take some complicated calculations/tax filings to take out the original contributions and not be retaxed I would imagine.
You introduced a new condition which is really not an apples to apples comparison. The math on OP’s question comparing x to TIRA or x minus taxes to Roth and then comparing down the road assuming the same tax rate is that the net result is exactly the same. It’s important OP understand this and he doesn’t. And again, to OP, this has nothing to do with backdoor Roth IRA.
Also, OP, how much money to contribute to an employer sponsored account has nothing to do with IRA, Roth IRA, or backdoor Roth contributions and such.
You introduced a new condition which is really not an apples to apples comparison. The math on OP’s question comparing x to TIRA or x minus taxes to Roth and then comparing down the road assuming the same tax rate is that the net result is exactly the same. It’s important OP understand this and he doesn’t. And again, to OP, this has nothing to do with backdoor Roth IRA.
Click to expand…Perhaps I misunderstood the OP’s question. That doesn’t mean my math is incorrect.
If you were contributing to a traditional ira but not able to deduct it due to your income and not converting it to a roth, it would either end up double taxed (post tax money going in, retaxed coming out) or it would take some complicated calculations/tax filings to take out the original contributions and not be retaxed I would imagine.
Click to expand…Im not suggesting tIRA contributions over Roth, but there would not be any double taxation. Form 8606 that we all fill out for our BD Roth keeps track of the cost basis for you. We’re used to it being zeroed out every year, but with a tIRA the basis would grow with each contribution. You would only be taxed on the growth. The downside of course is this is taxed as income rather than capital gains as in a taxable account.