patrick.net

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.

You don't lose money over the long term converting to a Roth, but keep your conversion down to an amount which won't impact your overall tax picture in the year(s) that you do the conversion.

But, over time the tax result to you of not converting may be the same as converting; this is assuming tax rates do NOT go up.

E.G. Convert $100,000 to Roth, (20% tax) pay $20,000 tax=$80,000 left to keep invested. Let it ride for 10 years=$160,000 (owe no tax on withdrawal).
Do not convert $100,000, keep it invested. Let it ride for 10 years=$200,000. (20% tax) $40,000 tax liability=$160,000 after taxes.
The example above assumes a total withdrawal after 10 years which you won't likely do.

I'm only converting a little bit each year ($10,000).

The advantages of the 401K are 1. sometimes free money from employer match 2. encourages saving/investing 3. changes of the investments are not taxable events 4. grows tax deferred; no 1099 every year.

I used to look at an investing website and almost nobody mentioned taxes although taxes are what really impact the money you end up with.

clambo says

Convert $100,000 to Roth, (20% tax) ...
Do not convert $100,000, keep it invested. Let it ride for 10 years=$200,000. (20% tax)

Here's the rub:

If you convert $100K right now, your top marginal tax rate may be 20%.

But if you convert $200K later, your top marginal tax rate is likely to be much higher than 20%.

So the right thing to do is always convert every 401(k) or IRA to Roth if you can do it below maximum regular income tax rates which will hit you later because of growth.

Roth also gives you protection from future regular income tax rate increases.

zzyzzx says

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.

Inflation. Let's say you are anticipating a $500k income when you retire in 12 years or so. But during those 12 years, we have inflation that pushes up prices in your stock portfolio and raises your SS COLA. So, along with your RMDs, SS, and other inflated income you are now puling in $700k, even though that $700k won't buy anything near what $500k would buy in 2026.

clambo says

I used to look at an investing website and almost nobody mentioned taxes although taxes are what really impact the money you end up with.

That is because in the days before heavy inflation, people anticipated the retirement years would be interest and dividends on accumulated savings, and thus below high tax thresholds. A guy in 1990 planning to retire in 2026 was imagining living a in a paid-for $250k dream home while living well on his $50k per year income.

HeadSet says

RMDs

That's the other thing I don't like about a 401K. But when I do I'll be converting it to my Roth in a small amounts as possible. That's the plan anyway.

Forced selling...

I don't like the RMDs either.

The smaller amounts you convert, the lower your income and the lower your taxes, but if you don't convert enough, you're screwed with RMDs at high tax rates anyway.

The brackets are not kind to single filers. I’m into the 22% bracket with $66K of income taking into account the standard deduction. The usual advice to use Roth conversions to fill the 12% bracket feels like a cruel joke to me.

I plan to use the 22% and 24% brackets for conversions in retirement, even though it’s not obviously a good deal, tax-rate-wise.

It’s simply hedging against policy changes.

I believe there are significant changes for taxes for 2026.

People over 65 get a $6000 addition to the standard deduction (single), so $12,000 for a couple.
Income limits apply and I don't remember the amount.

This means the standard deduction I recall is about $23,000 for single, so $46,000 for a couple.

Enjoy low tax rates while you can; Uncle Sam is in deep debt and he knows where the money is.

My 401K (not self employed 401K) had an employer match of up to 5%. So I contributed 5% to ensure I received the 5% match.

I did not contribute any more than 5%, as I wanted to invest it in something other than what was in the Thrift Savings Plan.

And also as Patrick mentions, I realized at age 60 that I was going to be in a high tax bracket and that traditional/rollover IRA is taxed at an ordinary income tax rate.

When I used 401k to Roth 401k calculator, I remember it make sense only if you have low income and not near retirement age otherwise it makes no sense to convert! Again, your parameters could be different.

For most people having average middle class income that can last for let’s say 25 years after the retirement is a great goal while fighting with unstoppable inflation. In this scenario, tax rates would be much lower.

But if you end up lots of money in pretax accounts like 401k, then you have a good to have problem. You can just live on RMD, SS and kick the remaining stuff down to kids, charity etc.

Patrick says

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.

Every 10 years or so there is a quite vocal group of people (funded by billionaires, of course) that really push the idea of doing away with income taxes altogether and going with a national sales tax. If this ever gets passed, it would make the conversion look silly.

Just like the tax code changed with capital gains, it can change in other ways too.

Misc says

it would make the conversion look silly.

That's my feeling as well. We are discussing strategies (Roth Conversions, Back Door Roths) that typically won't break even for 20 or 30 years in a best case scenario - knowing full well predicting future tax rates is akin to predicting the weather.

And no one has even brought up the net effects on ACA PTC, IRMMA, and NIIT. It's so complicated you need a Pralana subscription to figure it out.

Seems like the biggest problem of PatNetters is having too much money!

Patrick says

I don't like the RMDs either.

The smaller amounts you convert, the lower your income and the lower your taxes, but if you don't convert enough, you're screwed with RMDs at high tax rates anyway.

Leaving me no room at a lower tax rate.

stfu says

We are discussing strategies (Roth Conversions, Back Door Roths) that typically won't break even for 20 or 30 years in a best case scenario

I will save vast amounts of money by doing Roth conversions every year starting now, to avoid forced withdrawals at higher rates later.

Unless somehow income tax rates fall a lot within the next 10 to 20 years, which seems unlikely to me.

Misc says

Every 10 years or so there is a quite vocal group of people (funded by billionaires, of course) that really push the idea of doing away with income taxes altogether and going with a national sales tax. If this ever gets passed, it would make the conversion look silly.

If that happens, then indeed the conversion would be silly.

Blue says

When I used 401k to Roth 401k calculator, I remember it make sense only if you have low income and not near retirement age otherwise it makes no sense to convert! Again, your parameters could be different.

Those are exactly my parameters. Low income now, and retired.

But yes, I suppose it's a good problem to have a lot of money trapped by ruinous taxes in a 401(k) rollover.

Patrick says

Blue says

When I used 401k to Roth 401k calculator, I remember it make sense only if you have low income and not near retirement age otherwise it makes no sense to convert! Again, your parameters could be different.

Those are exactly my parameters. Low income now, and retired.

But yes, I suppose it's a good problem to have a lot of money trapped by ruinous taxes in a 401(k) rollover.

It’s good to have problem then!
Now, you need to slow down and find optimal solution(s).

Here is some gambling involved!
Like I mentioned above, plan for next 2 to 3 decades of both growth to offset inflation that’s underestimated by many and withdraw at not too high tax ranges.
I need to mention one thing here that in my observation even in states like CA, majority won’t hit the 13% rate particularly year over year basis.
Stop hating too much on this basis alone.

The other option is convert it in few years at much higher rates. To regain those excess taxes paid on investments needs quite a few years or decades in moderate investment choices. At the same time, it’s not really worth chasing fancy stocks late in retirement except some minor percentage.

It’s not quite trivial but by exploring some strategies including contacting reputed financial experts can help minimize taxes.
Be careful as we all know most “experts” are stupid people before making any changes.

I used to list to Steve Peasely invest stock show 1220AM that he kept saying ‘Experts are always wrong’!

Blue says

plan for next 2 to 3 decades

One issue is that I probably don't have three decades left, maybe not even two. So I'm inclining toward spending some money soon.

stfu says

Seems like the biggest problem of PatNetters is having too much money!

More money than was expected or planned for in retirement.