RothConversion.org

Optimal Tax Environment to Save for Retirement (continued)

It’s not sound because it did not consider: “MTR when receiving distributions may impact tax later.”

Compare Pre-tax 401(k) to After-tax Savings considering distributions from the Pre-tax 401(k) at: 25% MTR, 15% MTR and 33% MTR 

Age	Pre-tax 401(k): $10k/5 yrs 7%	25% MTR Aft-tax Distribution	15% MTR Aft-tax Distribution	33% MTR Aft-tax Distribution	After-tax Savings: $7.5k/5 yrs @5.68%	After-tax Distribution
40	$10,350				$7,713
41	21,425				15,864
42	33,274				24,478
43	45,953				33,581
44	59,520				43,201
66	$263,698				$145,661
83	255,942	-19,661	-22,283	-17,564	153,935	-13,131
84	0	-19,661	-22,283	-17,564	0	-13,131
Total		$353,901	$401,088	$316,152		$236,365

Commentary  In the “pre-tax” environment, the individual receives a higher amount if her MTR remains static, dereases or increases.  I guess all the hype about the “Magic of Compounding Interest” in a pre-tax environment is true, but does that mean that “pre-tax” is the optimal environment to save for retirement?  Consider saving in an after-tax Roth environment to see what those numbers reveal… 

After-tax Roth 401(k): Contribute $7,500/year for 5 years (age 40-44); Distribute 18 equal payments (age 67-84):

Age	After-tax Roth 401(k) Contribution	Account Value @7%	Tax-free Distribution
40	$7,500	$7,763
41	7,500	16,068
42	7,500	24,956
43	7,500	34,465
44	7,500	44,640
45-66	0	$197,774
67-83		191,957	-19,661
84	Last Payment	0	-19,661
Total			$353,901

Compare Pre-tax 401(k) to After-tax Roth 401(k)11111

Age	Pre-tax 401(k): $10,000 for 5 years @7%	After-tax Distribution	After-tax Roth: $7,500 for 5 years @7%	Tax-free Distribution
40	$10,350		$7,763
41	21,425		16,068
42	33,274		24,956
43	45,953		34,465
44	59,520		44,640
66	$263,698		$197,774
83	255,942	-19,661	191,957	-19,661
84	0	-19,661	0	-19,661
Total		$353,901		$353,901

Commentary Perhaps you are surprised (I was) that the individual receives the exact same outcome saving $10,000 in the pre-tax 401(k) or $7,500 in the after-tax Roth 401(k); however, this outcome assumes that the individual’s MTR remains static at 25% when receiving distributions. What is the outcome if the MTR is lower or higher?

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