Planetrain

A 140% increase would be 9 hours/day. A 40% increase would be 5:15.

Gunfighter

One aspect of Roth that has been overlooked, yet is the reason for this thread's existence, is that there is a finite amount of money you can put into tax advantaged accounts. 55K is the max limit this year. By investing in Roth accounts, you are prepaying your income taxes and effectively raising the retirement contribution limit by the amount of those income taxes.

The following example assumes that contributions are invested identically whether in Roth or Traditional accounts. You max out the 55K limit annually and have $3.3 Million in the account at retirement. Your retirement tax rate is only 25% You plan on taking $220K out per year during retirement. This equates to roughly 7% per year and should get you to 90 years or older.

Under the DC and Traditional 401K option, your $220,000 withdrawal will cost $55,000 of income taxes and leave you $165,000 to live on.

If you took advantage of the MBD Roth option and put 45K in via Roth and only 10K via DC contributions each year, you would still have the same $3.3 Million. The annual $220,000 withdrawal would include $180,000 of Roth funds and $40,000 from traditional funds, triggering $10K of income tax. Your net spendable income would be $210,000.

If your tax rate in retirement is higher than 25%, the difference is even greater. You may even find that RMDs push you into a higher tax bracket.

People who are against the Roth often overlook that prepaying taxes during the working years is equivalent to investing more money. It is the financial equivalent of having a higher contribution limit. This is especially true for pilots who are currently in the 24% tax bracket (Married <315K AGI)

sailingfun

How does it compare if you stayed conventional and invested the money you would have paid upfront for taxes in a S&P500 fund?

Planetrain

Its not a fair comparison to say you can invest $55k either in Roth or traditional. Since you "prepay" tax in MBD Roth, its really $55k traditional or $41,800 MBD Roth ($55k+24%tax). In your example of $45k Roth, you would need to back out the taxes in your PV to legitamatly analyze the tax benefits in FV.

Another wrinkle for Roth is if you live in a high tax state like NY and retire to a no income state like FL.

Gunfighter

If you retire in the same tax bracket, you lose out by the amount of capital gains taxes and any income taxes paid on dividends during the holding period. If you move down about 5-6% in tax bracket you come out even. If you move down more than 6-8% in tax bracket, you start to see some advantage with investing the income taxes vs prepaying retirement taxes in a Roth.

As a general rule, if you are in the 24% marginal tax bracket the MBD makes sense. If you are in the 35% it may not. At 32% you fall in the middle, but would benefit from the flexibility of investing outside of a retirement plan.


Points to Ponder
-If you are in a married tax bracket now, becoming single (not qualifying widower) in retirement would put you in a higher bracket on lower income.
-Do you think the recent reduction in income tax rates will hold through retirement?
-Do you anticipate a return to higher tax rates?
-300K was taxed at 33% last year, now 300K is taxed at 24%
-What if your income tax bracket is higher in retirement?
-What if we implement a national consumption tax vs an income tax?

There are so many variables, that no one answer is always right.

Gunfighter

You missed the point, yet grasped it all at the same time. Look at the numbers in reverse. Putting $55,000 in a MBD is equivalent to $72,368 in a Traditional. With only a 55K contribution limit, you can't do it. The MBD Roth is equivalent to having a higher contribution limit. This whole R&I Roadshow is about finding a way to shelter money above the 55K limit. Retaining the MBD option does that for a large segment of the pilot group, yet they are presenting a plan that effectively holds those funds hostage in a 5% MBCBP.

If your retirement tax rate is the same as your working tax rate, using a traditional plan and investing the "prepaid taxes" leaves you behind by the amount of capital gains taxes you pay. Disparate tax rates while working in retirement change the equation. It takes about a 5% drop in retirement tax rate to balance out.

If you live and work in NY, but plan to retire in FL, it is probably better to pay taxes in retirement. If you live in FL, but plan to retire in NY, you have bigger problems to worry about.

Gooner

I am fully onboard with more. I care less about hitting some magical ROR or if I can buy toys that a 80 year old shouldn’t have in retirement. But I feel as we have broken the wrong issue down with this debate.

If we are sitting at the negotiating table with the company and the offer is 20% DC and the rest status quo or 17% DC and 7% towards a tax deferred plan, that the company says let’s them give more money to us than Uncle Sam, isn’t the argument moot.

I get that there are Trip7 among us who are gifted investors and and want more money to leverage to make millions, but if you’re that savvy you’ll find a way with the new deal as well.

That said; it must be in my name with transparency about how much is mine at all times, and as far from union control as can be, trust runs thin with a big pot of money.

FL370esq

Always wondered why I landed with so much gas. Public schooling and that poli sci major fail me again. 😁

Trip7

I am a pilot, not a gifted investor. A pilot does not need to be gifted investor to a beat a low risk MBCBP plan that is not under your control. A simple lazy portfolio of 60% S&P 500 index and 40% Bond Index would likely beat the after tax returns of the MBCBP. And best part is its all under your control.

Thankfully I think there's already been enough backlash to kill of further pursuit of the MBCBP. One very sharp pilot posted on FB Widget page how little extra return you need to beat the MBCBP. He even included formulas to back up his work, something the R&I Committee failed to do.

JamesBond

Investing in bonds is lunacy, especially if you are under the age of 65. dyodd, ymmv, etc etc etc