Comment by itake
5 days ago
I’ve always followed this advice as well, but rolling a 401(k) to an IRA limits your ability to do a backdoor Roth.
Unless your Vanguard has a 401(k) account and it already then your golden, I’d advise rolling your previous balance into your current employers account first
A backdoor Roth isn’t the be all end all people think it is. It only matters if you think your tax rates will be higher in retirement than they are now for most people that won’t be the case.
The other case is when you are trying to manage IRMAA in retirement and it helps that you can withdraw from Roth accounts. But you can also just contribute to a Roth 401K or a Roth. Yes I know Roth limits for married and single.
But wait. If I take pretax $1000 this year and put it in a Trad IRA and buy some stock, and in 20 years I retire and it’s worth $3000, then I should owe income tax on the $1000 and 15% capital gains on the $2000 gain. If I did the same to a Roth though, I’d pay tax on the $1000 now, so, it’s now $600, but in 20 years it’s $1800, and all of it tax free. (Forgive me if I’ve screwed that up) if I’m right then it kinda seems to depend not only on future tax rates (def a huge question mark) but also on how much the stock may appreciate, as if the stock has more than that modest appreciation the capital gains tax avoided could be huge.
I’m not claiming expert status so I’m happy to be set straight.
Sorry but you don't get to claim capital gains on retirement distributions, they are entirely taxed as ordinary income. If your tax rate later will be 40%, you get the exact same result: 3000-1200=1800.
If your tax rate will be lower in retirement, favor pre-tax contributions. If higher, favor after-tax. The trick is knowing what tax rates will be years (decades?) from now.
You wouldn’t pay tax on the $1000 you put in a traditional IRA. It would be pretax.
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> for most people that won’t be the case.
I've had the same belief, but I've started questioning it. In retirement, your income (mostly) matches what you spend. Someone in their 20s or 30s may have both lower income and lifestyle costs (roommates, cheaper cars, no kids, etc) than they will at age 65.
At age 65, you're probably maintaining 1 or more homes, supporting a partner (and kids), maybe drive a more expensive car and have much higher healthcare costs.
If your lifestyle costs are more comfortable than your ramen noodle 20s and higher lifestyle costs put you in higher tax brackets, wouldn't most people actually have higher taxes in retirement?
How many people retire with minor kids or even kids in college?
And if you are retiring with high fixed expenses and worrying about buying new expensive cars - you’re doing it wrong.
Anecdotally, at even 51, we (wife 49) have been focusing on reducing our expenses since 2022. Our youngest son (my stepson) graduated in 2020. I slightly pivoted to a career that is mostly remote first (strategy cloud consulting + app dev). We sold our house in the burbs in 2024 that we had built in 2016 for twice the price we paid for it, downsized to one car that is below the median price of a new car in the US, downsized to a condo 1/3 the size of our old house (and less maintenance), moved to state tax free Florida, paid off some lingering debt.
I “retired my wife” in 2020 because of a combination of not wanting her to be in the school system at the height of Covid, so she could explore her passion projects, so we could travel after Covid lifted and I started making significantly more working at BigTech remotely (no longer there).
Our fixed expenses - money we have to spend to live - is around $8K a month all in and that’s going to go down some in 2028.
We don’t live “miserly” at all. Our flexible expenses include lots of travel between short getaways and longer month long stays away from home, concerts etc.
My entire idea is to do most of our expensive traveling while I’m working and healthy instead of waiting until I retire. I see retirement as us staying in another country for extended periods of time - we are starting that next year while I’m working.
It’s also the last thing we want to do is have more than one home. Why would we do that and give up the optionality of just renting an AirBnb for long stays in different places both domestically and internationally?
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