patrick.net

The advantage of tax deferred accounts is you can change the investments with no tax consequence.

There is an argument that making changes is counter productive however.

My favorite fund is Vanguard Tax Managed Capital Appreciation. This is designed to produce no or a small 1099 for the investor.

I don't believe future tax rates will go down, rather up.

Convert to Roth if you can afford the tax and agree.

clambo says

I don't believe future tax rates will go down, rather up.

I am hoping to move to a state with no state income taxes in retirement. That alone should make the taxes lower. Plus I will be in a lower tax bracket.

Roths are not all that great as you can't contribute much to them. Matching is the only factor that matters, if you get matching a 401 is worth it. Otherwise not. Most used to get matching and many still do. The main issue with 401k and later rolled over IRA money are the many limits, penalties and taxes on you handling that money.

That's what I have been trying to tell everyone for years!

Today on X I even saw Charles Payne give his number one investing tips.
First Save up money, and live like a skinflint until you save up a nice cushion.
While he does eventually say to invest for life but also make the saving and being a cheapskate a life long goal.
He's the first money guy to suggest saving money.

mell says

Roths are not all that great as you can't contribute much to them. Matching is the only factor that matters, if you get matching a 401 is worth it. Otherwise not. Most used to get matching and many still do. The main issue with 401k and later rolled over IRA money are the many limits, penalties and taxes on you handling that money.

Or just be Somalian, collect millions in fraud, retire in Caligulan splendor as both worthless political parties do nothing about fraud.

Best to invest in roth in early years when your pay is low so very little upfront tax and you are eligible for roth. Over years roth will grow but when you cash out its tax free.
I took my kids income and putting it all in roth.

401 k is good for employee match and also for most people who will not have income after they retire so lower tax bracket.

You might be able to invest in business or property n lower RMD. Open trust n pass.it down also.

It wasn’t mistake Patrick. You diversified, that’s not a bad thing.

Just come to terms that you’ll never make as much as those grifting the system like African and Middle East refugees with fake daycares.

I didn't realize Roth's didn't start until 1998, which I did at the advice of a co-worker who also got me into day trading during the dot com thing until I read above.

Otherwise I don't know what you folks are talking about. I shoved $77,500 into my Roth in 2025, a bit more than I did last year but similar to the 3 years prior to that.

I'm fortunate that my employer allows Mega Backdoor Roth contributions through Fidelity.

Every Jan 1st (or as close as possible) I calculate net-worth. Sadly, this year I realized I made a $160K mistake when I threw in Wealthfront while doing these calcs last year and I'm actually that much poorer than I thought I was. Wealthfront total includes what it sees in one of my back accounts - doh!

As far as gains this past year: Let's just say I can tell I sold that condo in Maui 14 months ago and that with a hit to my employer RSU's doesn't look very good at all... But I am up and my Roth is really starting to rock so there is that.

Why didn't Grok mention the mega backdoor roth?

KgK one says

401 k is good for employee match and also for most people who will not have income after they retire so lower tax bracket.

Yes, I shouldn't complain because I did get a fair amount of employer matching over the years, and now when I start pulling money out of the 401(k) and converting that amount to Roth, my tax rate on that money will be lower than it was when I had a high income, because it all would have been paid at a high marginal rate, but now only some will have to be paid at that high rate.

Though it's still pretty painful because I had a lot of capital gains, and now I'll have to pay regular income taxes on all of it rather than the much lower capital gains tax.

And when I started working, the tax on capital gains was basically the same as on regular income. I remember Bush I constantly campaigning to lower the capital gains tax, but when it happened, I should have really noticed and put more in plain stock and less in the 401(k). I opened a Roth in 1998, when I first heard about it, but wasn't consistent about maxing out the Roth. Should have done that.

This all started because I thought it "fuck it, time to buy a house, We've got enough to pay cash, even in CA" but most of our money is in my 401(k). Turns out a sufficient lump sum withdrawal, even without the 10% penalty (because I'm old enough now) would hit a top marginal tax rate of 53.5%.

That's more than halfway to communism, which is simply a 100% income tax.

ChatGPT:

For high income, the top marginal tax rate is 37% on ordinary income, and the 3.8% Net Investment Income Tax (NIIT) often applies to IRA/401(k) withdrawals once your modified AGI is high.

So the top federal rate you’re likely to hit on big withdrawals is effectively:

37% federal income tax

+ 3.8% NIIT (if your MAGI is above the NIIT threshold)
→ ~40.8% total federal tax on the highest dollars (ordinary income)

California income tax

California taxes retirement distributions as ordinary income too, with a top marginal rate of 13.3% on taxable income above about $1,000,000 (plus a 1% mental health surcharge effectively included in that 13.3% figure).

So as a top earner in California, you may face:

up to ~40.8% federal

+ 13.3% California
→ ~54% combined marginal tax on dollars you pull from a traditional retirement account

As I understand it, the backdoor Roth means putting after tax money into an IRA, then rolling that into a Roth.

Maga_Chaos_Monkey says

Why didn't Grok mention the mega backdoor Roth?

I asked about that, but the pro-rata rule makes it impracticle for me:

The BIG trap: the pro-rata rule

This is where most people get burned.

The rule

When you convert any Traditional IRA money, the IRS looks at ALL your Traditional, SEP, and SIMPLE IRAs combined.

You cannot isolate just the after-tax dollars.

Example (bad outcome)

You have:

$93,000 pre-tax in a rollover IRA

$7,000 after-tax contribution

Total IRA balance: $100,000
After-tax percentage: 7%

You convert $7,000:

7% is tax-free

93% is taxable 😬

Result: you owe tax on ~$6,500

But I can directly roll arbitrary amounts from my 401(k) into my Roth, as long as it's done directly, without my ever taking possession of the money. I'll owe regular income tax on the amount converted, but no pro-rata rule:

The correct mechanism: a Roth conversion

What does work is a Roth conversion, which is not a contribution.

How a conversion works

Money moves directly from:

401(k) → Roth IRA

The converted amount is:

Included in taxable income

Not subject to contribution limits

You can convert any amount, even millions

Key rule

Converted money must move directly from the pretax account into the Roth.

If you take possession of the money first, it’s no longer a conversion.

Maga_Chaos_Monkey says

Why didn't Grok mention the mega backdoor roth?

I can't speak for GROK, but don't make it sound like we are all illiterate because we never took advantage of the MBR. You are in a small and lucky club in that you CAN do one and make enough money to do one.

Trust me, when I first learned about the MBR I couldn't wait to do my first one.

However, it's plan dependent. I worked for 3 fortune 50 companies and none of those fuckers had 401k plans that allowed for the mega backdoor roth. Sadly, I was never able to do one.

Also see Patricks' comments on pro-rata. If you have already establised and contributed to a traditional IRA before you do your first Mega Backdoor Roth then it becomes "complicated". Just what you want when dealing with the IRS.

What's the absolute limit for the MBR up to now? It used to be employee contribution, + catch up, + employer match = ????? Google says $70,000 for 2025 but that seems low.

Best way is to use the stock market, glad I got so much trading in already over the years. Real estate used to be good not so much anymore. Nasdaq will soon be 24/7 and with worker optimizations investing will become more important vs day job though you can't beat a solid day job in terms of security. Always side hustle!

I think there is something wrong with the GROK analysis. It ignores compounding in the tax free 401k (after a while, compounding is like jet fuel on the savings). The 'after tax' money outside of 401k is taxed on investment returns but not inside the 401k.

I seriously doubt that any but a few absolutely wealthy people wind up paying 37 percent on RMD. It's probably closer to 21-24 percent for both Fed and State against the total. Also, RMD requirement is just about 3.8 percent of the total savings required to be withdrawn at first and increasing in percentage as the saver ages. If you consider 7 or 8 percent return compounding in the account, the 401k can still increase in value above the withdrawals for RMD.

Hasn't anyone had their contribution to a 401K matched by their employer?
That's free money, how can you pass that up?

Yes, I did get some matching, but it wasn't huge, a couple thousand dollars per year.

Now it feels like it was just bait to get me to trap my stocks where they would be taxed at the maximum rate rather than the capital gains rate.

Patrick says

Yes, I did get some matching, but it wasn't huge, a couple thousand dollars per year.

Now it feels like it was just bait to get me to trap my stocks where they would be taxed at the maximum rate rather than the capital gains rate.

Yeah I only contributed to 401ks when there was matching, otherwise 0%. But you can once a year take any amount out of an IRA penalty and tax free as long as you pay it back within 60 days.

Thanks @mell didn't know that.

Ceffer says

I think there is something wrong with the GROK analysis. It ignores compounding in the tax free 401k (after a while, compounding is like jet fuel on the savings). The 'after tax' money outside of 401k is taxed on investment returns but not inside the 401k.

@Ceffer

The compounding is tax free if you simply hold a stock in a taxable brokerage account and do not sell for years or decades. There is zero tax on unrealized gains. And then when you finally sell, you get taxed at 15% or 20% capital gains rate, and I think even the first $80K of gains is excluded and tax free.

But the same stock held for the same amount of time in a 401(k) gets screwed with regular income taxes when you sell.

There is another factor I forgot: I had more money to invest in the 401(k) than I would have had on my own after paying taxes and investing.

Outside of 401k, you would still be paying taxes on distributions as they are generated (lower compounding). Only the appreciation remains tax free until you cash out. Also, I believe California taxes capital gains as income, so the 15 or 20 percent is raised by your income bracket for state tax purposes.

One would need the usual Monte Carlo comparisons. Your 401k contribution also reduces your tax on earned income to the extent of the contribution.

Maga_Chaos_Monkey says

sold that condo in Maui 14 months ago

Why did you sell?

stfu says

I can't speak for GROK, but don't make it sound like we are all illiterate because we never took advantage of the MBR.

Sorry man, I didn't mean to imply that. Quite the opposite, I admitted I didn't even realize that it had just come out the year I bought into it (Roth in general) when I wrote that. I'm early 50s and still feel like a beginner when it comes to investing so I didn't mean to throw shade on you or anyone else.

Maybe Grok.

But we've discussed this before on patnet even recently and it's just not true that the Roth limit is so low. " and had pitifully small contribution limits (they still do)" <- I agree mostly this is true though but not entirely. Your follow up points are valid.

stfu says

You are in a small and lucky club in that you CAN do one and make enough money to do one.

Trust me, when I first learned about the MBR I couldn't wait to do my first one.

However, it's plan dependent. I worked for 3 fortune 50 companies and none of those fuckers had 401k plans that allowed for the mega backdoor roth. Sadly, I was never able to do one.

Correct too! I bitched about it though to companies I worked for asking them to allow it. They still didn't. A huge reason why I quit my last job to hire on with my current is that they allow it. In fact, that's the main reason I'm staying. I'm starting to get sick of the place but I'm staying at least 2 more years and still dumping whole paychecks into this as much as possible to reach a goal.

But that's the reason I always point that out when I hear people say that. I'd like others to bitch at HR and/or finance at their companies to allow this for their slaves er, I mean employees like me. Not because I think someone online is dumber than me about investing. (haha see below)

Yeah, the pro-rata stuff. I've done rollovers too in the past. This is a way to get a huge amount of $ into a tax shelter though so I was okay paying the taxes. I then made some bets some people might think are risky. Like a decent bitcorn ETF investment that paid off handsomely at the end of 2024. I didn't get anywhere near the peak but it bought me a nice new truck with plenty left over for a new car that I've yet to spend.

I don't think I would have been so aggressive in a regular 401K. In fact, I'm sure I would not have been, so it changes my behavior too.

It's awesome once you get a pile in the Roth b/c no more taxes after that. It doesn't even effect your social security benefits assuming that's around still when I retire and am eligible. (I will probably get in early) I sold the ETF and kept the proceeds in the Roth for obvious reasons and used a regular bank account to buy the truck because money is fungible.

I didn't even really think Patrick could even do a MBR because afaik it has to come through an employer plan like you mentioned and he's retired, because he made better investments than I have. (and he's slightly older but not by much so had more time)

mell says

Always side hustle!

Yes! And to your point my real estate hasn't been all that great lately, but it did provide a decent inflation hedge over the past few years. But then property taxes etc., have gone up and I haven't been able to raise rents to match that. In fact in one case I actually lowered quite a bit to get a decent renter in there. I'd rather accept lower rent for a great renter than vice versa.

Ceffer says

I think there is something wrong with the GROK analysis. It ignores compounding in the tax free 401k (after a while, compounding is like jet fuel on the savings). The 'after tax' money outside of 401k is taxed on investment returns but not inside the 401k.

This is always the main argument for trad vs. roth and it's a hard decision.. I plan to retire rich and have a high tax rate but who knows if that'll be true. Either way I do think we'll all have fucking unbelievably high taxes eventually with our debt, the commies taking more and more ground etc.,. so tax shelter - tax shelter - tax shelter is my motto. Assuming they don't change the effing laws on Roths down the road and screw me...

zzyzzx says

Plus I will be in a lower tax bracket.

That is what I thought as well. But thanks to inflation, I will be in a high tax bracket in a few years when I have to do the RMDs. I suspect the same will happen to you.

HeadSet says

zzyzzx says

Plus I will be in a lower tax bracket.

That is what I thought as well. But thanks to inflation, I will be in a high tax bracket in a few years when I have to do the RMDs. I suspect the same will happen to you.

That's the crux of it. Also if you are talented or have a strong business and work ethic you keep working and your income never comes down so you can never withdraw any of the money for a low tax burden. It's mostly an instrument to prevent people who can't manage money from withdrawing and going broke early, for everybody else it's just shackles

You know, one thing I miss about trading chats, in the bay area at least. When I lived there EVERYONE at work had an angle on this stock or that stock and had info from their 2nd cousin's wife that worked for whatever.

I moved to SoCal / San Diego about 15 years ago and that sort of chat at work was frowned upon. I dunno why but nobody wanted to talk about investing or stocks so I assumed it was just the SoCal culture. Mostly I just got empty stares when I brought things up.

I've been working in the SF bay area again for the past 5 years and it's the same. It seems like partly a generational shift or something but nobody really has any faith in the future and sell all of their RSU asap.

There used to be a bunch of Mell's I knew around there.

It's prudent to assume that your tax rate in retirement will be less than when you're working. If it turns out to be false, you got lucky. Also tax savings now beat tax savings later because you might die before that "later" arrives.

And I don't give a fuck how much tax my heirs would need to pay on the inheritance: they should be grateful they're getting anything at all.

Ceffer says

Outside of 401k, you would still be paying taxes on distributions as they are generated (lower compounding). Only the appreciation remains tax free until you cash out. Also, I believe California taxes capital gains as income, so the 15 or 20 percent is raised by your income bracket for state tax purposes.

What distributions? My biggest hit was Shopify, and as with most tech stocks, they don't pay any dividend. It's all appreciation that would have been taxed at capital gains rates, but now will be taxed at the normal income rate.

I don't own mutual funds, but do have some stocks that pay dividends, but even those in my 401(k) will now be taxed at the normal income rate instead of the qualified dividend rate.

Yes, California taxes everything as normal income, so I'm just talking about federal taxes here.

One bright spot: when Shopify fell a few years ago, I sold a bunch of SHOP in my 401(k) and then bought the same amount of SHOP in my Roth, because I suspected it would come back up, and had figured out enough at that point to know that holding in my Roth is better. And it did come back. So at least some of my gains there will benefit from that.

Somebody would have to go point by point with their private investment gambling vs. having used the same investments in a 401k. There seems to be periodic negative publicity against 401k, without really looking at all parameters. I don't know if it's Wall Street trying to keep investors stoked on churning their hunches for commissions or what for turnover, but 401k can be good as a routine vehicle for passive retirement savings.

Looking back at coulda shoulda woulda on returns seems to be a philosophical black hole. Too many changing circumstances in life.

401k was great for my wife. There were several years when we could put half her pay into them. She has more in her retirement funds than I have in mine because I had more restrictive contributions.

I think of my friend who gambled himself into a hole with day trading. He lost fuck all with his day trading and 'hunches', stoked by an 'investment club'. He wouldn't pay his payroll taxes and pay the penalties on the 'theory' that he could do better than the penalties with his day trading.

Give me boring and regular/gradual any day.

HeadSet says

zzyzzx says

Plus I will be in a lower tax bracket.

That is what I thought as well. But thanks to inflation, I will be in a high tax bracket in a few years when I have to do the RMDs. I suspect the same will happen to you.

Quite possible, but if I stop working AND move to a state with no state income taxes, I'm pretty sure my total rates (currently over 50%) are going to go down. I'm already paying 35% marginal rates, plus Obamacare taxes (another 3.8%), plus Medicare tax of another .9%, plus state and local income taxes
35 + 3.8 + .9 + 5.75 + 3.2 = 48.65, plus Social Security taxes,
In retirement, I won't pay Social Security taxes or the 9% state income tax (if I move), which all by itself would bring be down to ~ 40% marginal income tax rates. But minus my salary, my marginal federal income taxes would probably drop to the lower end 32% bracket, or possibly the upper end of the 24% bracket, leaving me no room to do Roth conversions. I have dividend and capital gains distributions in taxable accounts enough to get me to around that point. So even if I do the math and add in Social Security income (at some future point) and then RMD's (also again at a later date future point) I figure those two will at least offset inflation (because I probably won't take Social Security for another 10 years). Yes, that could put me into the same tax bracket I am in now, but it won't go past that unless I do a mega Roth conversion, or something. Yes I know I'm going to get hit with IRMMA, I'm planning on that as well.

TDLR: Already in a high income tax bracket, so Social Security and RMD's will only keep me there, but I don't see how it's possible for them to put me in a higher tax bracket because I'd need income over $626,351 for that to happen.

I remember something about rolling your 401k to your Roth and collecting all the interest and then rolling the principal back into the 401k/Ira.

But why would you ever move money in a Roth back to a 401k? The Roth is far superior, because all gains are completely untaxed.

You don't think the Guv has gamed out the Roths on the basis of life expectancies? They tend to be a null proposition unless you live to a pretty old age into a higher tax bracket, and then in your dotage it's not that great.

You can't really put that much into them without lots of up front tax liability. I don't know why people are so obsessed by them. Just plunk whatever spare after tax money you have into one to the allowable limit and let it grow for whatever it is.

It's the company match that makes it attractive. "Free" money *

* Terms and Conditions Apply

Ceffer says

You don't think the Guv has gamed out the Roths on the basis of life expectancies? They tend to be a null proposition unless you live to a pretty old age into a higher tax bracket, and then in your dotage it's not that great.

You can't really put that much into them without lots of up front tax liability. I don't know why people are so obsessed by them. Just plunk whatever spare after tax money you have into one to the allowable limit and let it grow for whatever it is.

Most people can’t put anything in them because income limits are low.

Ceffer says

You don't think the Guv has gamed out the Roths on the basis of life expectancies? They tend to be a null proposition unless you live to a pretty old age into a higher tax bracket

What's the game though? I don't see any downside to a Roth. OK, the contribution amounts are limited, but the no-tax-forever on earnings is spectacular.

401(k) and IRAs suck by comparison, because you trade away the low capital gains rate for the high regular income rate, which will be the very highest rates if you have any big gains.

The basic Roth contribution for after tax money is fine for investment parking, but many talk about rolling over entire or large amounts of IRA's, in which taxes become due at rollover. That is a long run for a short slide and too much of a gamble against future prospects.

I don't see any possible way to lose by converting as much as possible from a 401(k) or IRA to a Roth. There is no gambling involved at all.

You pay taxes on the conversion, but you'll have to pay taxes anyway no matter when you take it out. Just pick a low tax year to do it.

The key is that the money converted to Roth grows tax-free forever. Roth is the better deal than 401(k) or IRA by miles.

zzyzzx says

leaving me no room to do Roth conversions

@zzyzzx I don't know what you mean by this.

401(k)/IRA conversion to Roth is unlimited (well, limited to the funds you have in those tax-deferred accounts).

Do you mean that your tax rate will be really high? Probably going to be really high anyway if you have a lot in your 401(k) like I do.