Traditional or Roth 401k for high earners in high tax area?
I [30F] live in NYC and between city, state, and federal taxes, about 40% of each paycheck goes to taxes. I’m maxing out my 401k, Roth IRA, and HSA this year. I spoke to an advisor from Empower (free first session) who said traditional 401k would be better than a Roth 401k in my situation to lower my tax burden. My salary is 140,000 annually with some RSUs (~20,000/yr, stock is volatile). My spouse and I file taxes jointly at a total $240,000.
I set my 401k contributions as Roth because I want to take advantage of tax free growth, but the advisor said since I will be pulling out significantly less than our current salary once we’re retired, I’ll be in a lower tax bracket in retirement vs now, so I would be paying less, which makes sense except when I try to think through this scenario: 100k invested in Roth 401k vs 100k invested in traditional 401k. Both grow to 1 mil in retirement. To invest 100k in the Roth means I had to earn $140k, pay 40k in taxes (40%), leaving $100k to be invested in the Roth 401k. To invest 100k in the traditional 401k, I only have to earn 100k, and I only pay taxes on the growth, in a lower tax bracket (let’s say $20%). 20% of 1 million dollars is 200k. With the traditional 401k, I’m spending an extra 160k on taxes.
So what am I missing because this doesn’t seem to make sense to me at all.
Posted Sep 12, 2023, 5:03 AM UTC