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Using a Roth 401K to minimize RMDs - Good idea?
Posted on 4/3/24 at 2:33 pm
Posted on 4/3/24 at 2:33 pm
I'm 50 and my wife (no pics) is 48. We have currently about $2.5M in traditional 401Ks. We plan to work and aggressively save for 10-12 more years. A few years ago, we started a side gig that has done pretty well (~$100K/year). The side gig is an LLC and we are deciding how best to add to our retirement. A financial advisor that I work with is concerned about RMDs triggering crazy high taxes since all of our money is going into tax-deferred accounts.
After modeling various scenarios, he is convinced we should start contributing as much as we can into Roth 401Ks instead of traditional 401Ks. Remember that starting this year, Roth 401Ks are not subject to RMDs. His logic is that even though we'd be paying high taxes on the contributions now, the taxes paid in our 70s would be significantly more. After all, we'd be paying income tax and IRMAA on the 401Ks that have grown for 25 years more. The math makes sense, but it's contrary to the common belief that taxes will be lower in retirement.
TLDR: Should we use the new Roth 401K rules to minimize RMDs at the expense of our current tax bill?
After modeling various scenarios, he is convinced we should start contributing as much as we can into Roth 401Ks instead of traditional 401Ks. Remember that starting this year, Roth 401Ks are not subject to RMDs. His logic is that even though we'd be paying high taxes on the contributions now, the taxes paid in our 70s would be significantly more. After all, we'd be paying income tax and IRMAA on the 401Ks that have grown for 25 years more. The math makes sense, but it's contrary to the common belief that taxes will be lower in retirement.
TLDR: Should we use the new Roth 401K rules to minimize RMDs at the expense of our current tax bill?
5
Posted on 4/3/24 at 4:30 pm to FortunateSon
Did he model Roth conversions after you retire in 10-12 yrs? Aggressive Roth conversions for 10 years could reduce RMDs.
Another consideration, if one of you passes the tax burden on the remaining single filer might be even higher.
Another consideration, if one of you passes the tax burden on the remaining single filer might be even higher.
Posted on 4/3/24 at 6:18 pm to FortunateSon
I mean historically we are in one of the lowest tax rates, and our government cannot stop spending money. The only solution whether we like it or not is to likely raise taxes in the very near future..
Posted on 4/3/24 at 9:19 pm to TorchtheFlyingTiger
quote:
Did he model Roth conversions after you retire in 10-12 yrs?
Yes - he showed me the effect of switching to Roth now and it was surprisingly significant. He has pretty cool software that lets you adjust various investments so that you can see the effects on RMDs and IRMAA in 25-30 years.
Posted on 4/3/24 at 10:35 pm to FortunateSon
What is your marginal rate?
Posted on 4/4/24 at 7:29 am to FortunateSon
We are in our early 40s and our guy is advising the same thing. When he first mentioned it, I thought he was crazy, but the model has us thinking it’s the right thing to start doing. I was a difference of about 3 million in taxes paid over the model to age 90.
I switched this year to Roth 401k contributions from traditional, and will start converting our traditional 401k over the next decade or so at the top of each bracket.
Couple things we are considering to pay taxes now:
Already mentioned potential loss of spouse and impact on tax brackets
Tax free (with no 10 year RMD) for heirs
Lower bracket for Medicare and health insurance
I switched this year to Roth 401k contributions from traditional, and will start converting our traditional 401k over the next decade or so at the top of each bracket.
Couple things we are considering to pay taxes now:
Already mentioned potential loss of spouse and impact on tax brackets
Tax free (with no 10 year RMD) for heirs
Lower bracket for Medicare and health insurance
This post was edited on 4/4/24 at 6:37 pm
Posted on 4/4/24 at 11:16 am to slackster
quote:
What is your marginal rate?
I believe it's 35%, but if I were to contribute all 401Ks as Roth, it would probably push us into 37% territory.
Posted on 4/4/24 at 11:36 am to FortunateSon
Fortunate son indeed! 
Posted on 4/4/24 at 11:38 am to Tygermanjohn
quote:
We are in our early 40s and our guy is advising the same thing. When he first mentioned it, I thought he was crazy, but the model has us thinking it’s the right thing to start doing. I was a difference of about 3 million in taxes paid over the model to age 90.
I switched this year to Roth 401k conversions from traditional, and will start converting our traditional 401k over the next decade or so at the top of each bracket.
I appreciate you weighing in on this. This seems to be a paradigm shift in the way to consider retirement savings.
quote:
Tax free (with no 10 year RMD) for heirs
IIRC, the spouse is the only one that doesn't have a 10 year RMD window. I'm fairly sure that heirs would still have the 10 year window.
quote:
Lower bracket for Medicare and health insurance
Good point there.
Thanks again
Posted on 4/4/24 at 11:56 am to FortunateSon
What bracket are you projecting in retirement? I have a hard time believing An extra $61k into traditional 401ks each year for 10 years is going to make that much difference for RMDs especially if you have ~10 years to draw them down/convert to Roth before RMDs kick in. 37% differed tax rate would be tough to pass up.
If you're facing top marginal rate today anyway couldnt you just take a huge withdrawal in one year just before Medicare eligibility (I think IRMAA is a 2 year look back at MAGI so might need to pull it a couple years sooner.) That way you dont lock in top marginal rate in case drawdown strategy can reduce tax rate. Of course there is risk the top marginal rate is higher by then.
You're in the top bracket, really? $647,851+ after deductions?
If you're facing top marginal rate today anyway couldnt you just take a huge withdrawal in one year just before Medicare eligibility (I think IRMAA is a 2 year look back at MAGI so might need to pull it a couple years sooner.) That way you dont lock in top marginal rate in case drawdown strategy can reduce tax rate. Of course there is risk the top marginal rate is higher by then.
You're in the top bracket, really? $647,851+ after deductions?
This post was edited on 4/4/24 at 12:10 pm
Posted on 4/4/24 at 12:13 pm to TorchtheFlyingTiger
quote:
What bracket are you projecting in retirement?
Using today's numbers, probably the 32% bracket, maybe 35%. This is not factoring in any conversions.
quote:
I have a hard time believing An extra $61k into traditional 401ks each year for 10 years is going to make that much difference for RMDs especially if you have ~10 years to draw them down/convert to Roth before RMDs kick in
I have thought that as well. Although I admittedly haven't paid attention to my entire retirement like I should have. When my FA modeled our RMD years, my opinion changed. This is because our 401K balances will likely be much higher than today and therefore the RMDs would trigger a gigantic tax bill. Couple that with the benefit that Roth provides our heirs, it seems like a worthy idea to consider.
Posted on 4/4/24 at 1:40 pm to FortunateSon
Correct, heirs would have the 10 year draw down but would not be a taxable “event” as far as I understand it.
Posted on 4/5/24 at 9:24 am to FortunateSon
quote:
We have currently about $2.5M in traditional 401Ks
I just dropped in to say nice.
Posted on 4/9/24 at 4:55 pm to FortunateSon
Why not contribute to the Roth 401k as most likely the employer match will continue pre-tax. Also, in addition to the 401k consider a SEP IRA for the new LLC if it’s just you and your wife. You can contribute to a 401k and a SEP if you have a side hustle LLC.
Posted on 4/9/24 at 8:00 pm to FortunateSon
quote:
I believe it's 35%, but if I were to contribute all 401Ks as Roth, it would probably push us into 37% territory.
I would never recommend a client contribute to a Roth 401k at a 35-37% marginal rate. It is highly, highly unlikely you’ll ever sniff that rate in retirement, not to mention most of these models fail to account for what you’re doing with the $10k+ per person in tax savings each year along the way.
ETA- MAYBE with IRMAA concerns I could see it, but it’s still such a massive hurdle to climb a known 35-37% marginal rate.
This post was edited on 4/9/24 at 8:05 pm
Posted on 4/9/24 at 8:02 pm to FortunateSon
quote:
This is because our 401K balances will likely be much higher than today and therefore the RMDs would trigger a gigantic tax bill.
Let me know when you’re paying 35-37% on every dollar like you were when it was going into the account.
You literally cannot pay higher taxes on it now that you are, so you’re banking on considerable tax increases.
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