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Message
2
Posted on 3/1/23 at 8:00 am to oneg8rh8r
quote:
NOBODY who is actively talking about and is planning for their financial future will be in a lower tax bracket 25 years from now than they are today.
This is my thought as well. I’m 50 and switched to Roth for 401k several years ago but still have about 70% of retirement in traditional. I expect this to be 50/50 or so when I hit 60.
My retirement threshold is right when the shite will be hitting the fan for Medicare, SS, etc. and I won’t have the same deductions I do now. Our planner has suggested a conversion but I have a hard time writing a big check to Uncle Sam for a potential unknown benefit that could get yanked out from under us in the future.
Posted on 3/1/23 at 5:33 pm to bobdylan
I am still putting 100% of my contributions to trad 401k and I'm high into the 24% bracket. I doubt I'll have an effective tax rate near that in retirement. If I wait to retire till 65 then maybe but I'm planning to call it quits by 55. Even if my tax rate is similar, then it's a wash.
One thing that I'll point out is that even if someones go trad 401k now, you can still "make it" Roth later if you want. Many people don't know you can convert a trad IRA to a Roth IRA at any time. This Roth conversion amount counts as normal income and you pay taxes on it.
That's actually my plan but I'll do it when I retire so I can pay less in taxes.
For example, take a single person who is retired. If that person has no other taxable income, one could do a Roth conversion this year up to the top of 12% bracket which would be $44,725. Using the standard deduction, they'd only pay $3,485 in taxes that would be effective tax of 7.8%.
If I do a Roth 401k, I'm paying 24% tax on contributions.
In 5 years, that person could take out $44,725 tax free from the roth account if they want. Alot of Bogleheads follow this strategy and are converting even up to the 22% or 24% bracket. Though alot of these are people with high 7 figure ira balances and are doing it for inheritance etc.
Also you'll notice this allows you to get more into a Roth account. There are no limits on Roth conversions unlike contributions.
One thing that I'll point out is that even if someones go trad 401k now, you can still "make it" Roth later if you want. Many people don't know you can convert a trad IRA to a Roth IRA at any time. This Roth conversion amount counts as normal income and you pay taxes on it.
That's actually my plan but I'll do it when I retire so I can pay less in taxes.
For example, take a single person who is retired. If that person has no other taxable income, one could do a Roth conversion this year up to the top of 12% bracket which would be $44,725. Using the standard deduction, they'd only pay $3,485 in taxes that would be effective tax of 7.8%.
If I do a Roth 401k, I'm paying 24% tax on contributions.
In 5 years, that person could take out $44,725 tax free from the roth account if they want. Alot of Bogleheads follow this strategy and are converting even up to the 22% or 24% bracket. Though alot of these are people with high 7 figure ira balances and are doing it for inheritance etc.
Also you'll notice this allows you to get more into a Roth account. There are no limits on Roth conversions unlike contributions.
Posted on 3/1/23 at 6:16 pm to Asharad
quote:
Contribute to both. Max out contributions as early in life as possible.
This. ^^^
Especially for those who are many years or decades from retirement, basing retirement plans on complete unknowns, that you have no control over (future tax rates and government policies), is rolling the dice. Control what you can control: diversify and select age and circumstance appropriate paths.
Posted on 3/1/23 at 7:05 pm to gpburdell
quote:
One thing that I'll point out is that even if someones go trad 401k now, you can still "make it" Roth later if you want. Many people don't know you can convert a trad IRA to a Roth IRA at any time. This Roth conversion amount counts as normal income and you pay taxes on it.
But in this case you will pay taxes on the future value not your original investment so that could get expensive if you have good returns.
Posted on 3/1/23 at 7:39 pm to gpburdell
quote:
For example, take a single person who is retired. If that person has no other taxable income, one could do a Roth conversion this year up to the top of 12% bracket which would be $44,725. Using the standard deduction, they'd only pay $3,485 in taxes that would be effective tax of 7.8%.
I think having no other taxable income would be key. I suppose if you have existing roth funds, withdraw from it tax free, and convert a portion of the 401k?
Posted on 3/2/23 at 2:58 pm to Asharad
quote:
Contribute to both. Max out contributions as early in life as possible.
I take a hybrid approach.
My company matches up to 6.5% and has an option for both traditional and roth 401k. I contribute up to the match in a roth 401k and then max out the rest in a traditional 401k. I effectively have 13% of my annual salary going to the roth with that match and the rest goes to the traditional 401k for the upfront tax break.
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