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By Josh @HeritageWealthPlanning.com

I’ve attached a quick / short analysis that pits a Roth retirement approach versus a pre-tax 401 approach. I’m a bit surprised at the outcome.

Here are the assumptions.

1. Married employee in both cases.
2. An employee who is 55 years old invests $25,000 into the company’s retirement account.
a. $19,000 limit, plus
b. $6,000 over 50 catch-up
3. One employee pays the taxes up-front and invests the net of $16,088 into a Roth.
4. Another employee avoids / defers the taxes and invests the entire $25,000 into a 401.
5. Both investments earn the same return.
6. After 10 years the 401 will be converted over to a Roth.
c. This conversion signals the retirement of the individual in a non-income tax state which is one difference between the two approaches. Their working career was in an income taxed state while they both retire in a non-taxed state.
7. The analysis is taxing the 401 at the same tax-rate level minus any state income tax. If you execute your conversions at a lower tax rate, say 12% the results could even be more divergent.(emphasis mine).

d. Also, the reason I’ve taxed the entire Roth amount at 22% Federal is because that is the bracket the employee’s income tops out at. For the retiree when any Roth conversions is likely to take place the taxes would be on a stepped approach topping out at possible 12%.

Assessment

What am I missing here? If this analysis is correct it seems advantageous to invest in the 401 and convert to a Roth when you are either in a lower tax bracket, in a non-income tax state or both.

LINK: https://heritagewealthplanning.com/contribute-to-a-roth-401k-while-working-in-a-high-tax-state/

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