One of the most common, hotly debated questions I get from high-earning tech professionals is whether they should contribute to a Traditional pre-tax 401(k) or a Roth 401(k). The internet is full of generic advice screaming that "Roth is always better," but when you are sitting in a massive tax bracket today, the decision shouldn't be based on a simplified rule of thumb. It must be based on a strategic, mathematical understanding of how your income is actually taxed now versus later.
The goal is to pay the least amount of taxes on every dollar right? If you contribute to a traditional account, you're deferring taxes top down which means if your highest marginal rate is 32% for example, you're deferring that.
Let's say there's a VP of Engineering currently sitting in that painful 32% top federal tax bracket. By contributing to a Traditional account, she successfully avoids paying that high rate today. When she fills up income in retirement to spend, she’ll fill it up bottoms up which means she starts with 0%, 10%, 12%.
To put it simply, what if you can avoid spending 32% taxes on a dollar and instead pay 10% on that dollar later. It's about optimizing the spread between your current marginal rate and your future effective rate.
Off the Clock
Memory: I joined a choir - reconnecting with my creative, musical side feels life-giving.
Purchase: Wash and fold laundry service, including pick-up and drop-off.
Investment advisory services are offered through Fiduciary Financial Advisors, a registered investment adviser. This newsletter is for informational and educational purposes only and should not be construed as investment, legal, or tax advice, or as a recommendation to take any specific action. Any financial or tax outcome depends on individual circumstances and may change based on future law or guidance.
