The rib and I both have 401ks … is there good wisdom in having one pre-tax and the other post-tax?

Is there a risk that in 30 years tax rise to such levels that outweigh pre-tax money building additional wealth?

For instance… let's say today's post-tax level is 25%, what if the withdrawal level is 40% in 30 years - is it worth it?

Generally it's good to have tax diversification in your assets. After tax, Roth and pre-tax. On a 30 year timeline Roth starts to have a lot of advantages. Still want some pre tax money to take advantage of lower marginal rates as well.

This is a great question and something that seems to be rarely discussed in personal finance.

Ideally, you would have a taxable 401K (or IRA), so that in retirement your 4% withdrawal plus social security equates to a middle class income. This way you're not forced to take mandatory withdrawals on pre-tax accounts in retirement and be taxed at the top marginal bracket.

Based on being a married couple in your 30s….

100% of you and your wife 401K should be Roth

Then…

100% of you and your wife IRA should be traditional

When you get to retirement then draw down on the traditional in years the market is down (less tax liability) and draw on the Roth balance in years the market is up.

The limit on IRA contributions are low enough that you and your wife are unlikely build up a large enough balance that you're pushed into the higher marginal brackets on mandatory withdrawals. If you happen to pick the next Tesla in your portfolio then that's a good problem to have!

I think you are implying that pre-tax money is a better bet in normal conditions because it affords more money for growth in the account - which I don't think is correct. Ultimately, it depends on many factors, but if tax rates are the same, then they would yield the same effect. Example:



So, if tax rates go up, then post-tax is the clear winner. As mentioned, tax diversification is a good thing. Also consider - your employer match will always be pre-tax, so depending on how much they contribute, all the more reason to consider post-tax for your elections. There are benefits/drawbacks to both, and income ranges that make or the other ideal, but I think people tend to lean post-tax, myself included.

Appreciate the response.

My only comment is that the marginal tax rate in 2021 for a married couple is 12% up to $81K of income whereas you're assuming 25%.

If the future tax brackets are similar, I think it's advantageous to have a pre-tax retirement account with a sufficient balance, so that the annual withdrawal plus social security benefit amount to $81K (taxed at 12%)

I'm loosing my a$$ on crypto tonight, so maybe the OP should skip my financial advice haha.

Sorry - initial response was to clarify OP's post, using simple example with the tax rate that they provided.

However, I'm totally on board with you regarding mixed distributions to maximize your tax savings during retirement. And it's a good point to compare effective tax rate during retirement to top tax bracket today, which are not the same. It would be good to consider many factors when finding the right balance of pre/post-tax investing, including:

• Income today vs target income tomorrow
• Other investments/pensions
• Risk tolerance (Roth provides a known amount, traditional are more susceptible to political conditions)
• Some liquidity pre-age 65 (Roth IRAs allow you to take out the money you put in penalty free)

As for me, since my employer kicks in a decent match, I go all Roth on my contributions to both my IRA and 401k. A - Probably the biggest motivator, Roth effectively allows you to put more money in when you max out your contributions. B - it allows for mixing distributions. C - It lowers the risk in case tax rates rise in the future. D - some baked-in liquidity on the IRAs. If I were to change tax brackets, I'd at least re-think the numbers.

Roth is by far the best answer but any answers have to consider future congressional tax actions. For example my plan for my 401 was to convert to IRA's (which I did), and the final beneficiaries were my kids. They would have to take distributions until 59 then they'd have a regular IRA. The rule changed, now they have to take all the $ out in 10 years, a significant tax hit. Who's to say the government won't renege on the Roth rules sometime in the future, and your tax free Roth suddenly won't transfer tax free. Or the distributions suddenly become taxable in some form. Don't tell me it's not possible.

I think its a good idea to have a mix but there is no one size fits all. You have to consider your current marginal and effective tax rates and what you expect them to be in the future. What state you live in now and what state you plan to retire in can also play a factor since some states have income tax and some states tax retirement plans differently.

I have a relative that is retired and has both a traditional and roth and he pulls from the traditional up to the top of the 12% bracket then switches over to roth savings. So he is essentially pulling the IRA money at 12% effective rate even though most all of it went in at over a 20% marginal rate.

This assumes you have the same marginal and effective tax rate. i.e. a family in the 24% marginal rate likely pays around 17-18% effective tax on all their income because of the progressive tax structure. Assuming 100% of their retirement savings go in pre-tax and 100% of their retirement is funded from said account, the money would have gone in at the marginal rate, but come out at the effective rate. So if taxes stayed the same you are better off doing pre-tax.