Comment by malfist
4 hours ago
My friend, I'm not sure you've thought through this all the way.
Historically, tax rates have gone down over time, not up. Especially in recent history.
You do pay a reduced tax in retirement because you're able to blend your income. You defer taxes on the 401k until requirement, but you pre-pay taxes on a mega backdoor/roth, so if you need 100k of income in retirement you pull 50k from 401k and 50k on the roth and only pay taxes on half of it, putting you in a lower bracket.
Having the pretax money to grow before paying taxes on it is greater than having post tax money and having less to compound.
The alternative to tax advantaged places to park your money for retirement is strictly worse than non-tax advantaged. In a 401k you pay taxes only in retirement, for roth's you pay taxes only with your paycheck. In a brokerage, you pay taxes at your paycheck and then you pay taxes on withdraw for your cost basis.
Not sure if there's a US equivalent, but in Canada, "having the pretax money to grow before paying taxes on it" is a worse deal. In an RRSP/401k you pay full tax on any investment earnings. Meanwhile a normal non-registered investment account is classified as "capital gains" and only taxed at 50% of your marginal tax rate.
At the end of the day though, I'm sure it boils down to having both instead of trying to minmax it. Being able to liquidate a portion of your investments to, say, purchase a house is probably a good idea, which you can't do if you've been putting everything you have into a retirement account.
Idk about Canada - but in the US most people are going to be in a lower tax bracket in retirement (sometimes substantially lower). Is that not the case in Canada? You only pay your marginal tax rate on what you withdraw.
For example - if my wife and I max out our 401k’s - that’s about 50k we are deferring taxes on. If our pre-tax household income is 300k - then that 50k would have been taxed at 24% marginal rate.
In a year of retirement - let’s say we withdrawal that 50k but now it’s doubled (probably more than that since it only takes 9 years to double at 8% annual growth via compound interest). Now we pay 12% and end up with 88k. (Technically we’d have more than that because of the 24k standard deduction - but we’ll ignore that for the sake of simplicity)
Let’s take the non-tax advantaged comparison. We’d have paid 24% up front and invested 38k. It doubles to 76k. We’d pay 0% capital gains - but even then we end up with less investment income.