transition to Roth401k?

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Topic Author
AllAboard
Posts: 33
Joined: Fri Jan 15, 2016 7:40 pm

transition to Roth401k?

Post by AllAboard »

Hi,

My relevant details (I think) are below.

Details:
Income: $150K, may go down to $50-70K in 10 years as I think about down-shifting.
Age: 40, married (wife: 39)
401k + tIRA = $450K
our combined Roth = $200K

My concerns revolve around the $450K in the tax-deferred accounts and RMDs at age 70. If I don't contribute another dime to it, in 30 years, assuming 5% growth, it'll be about $2M. This would make the RMDs about $88K. If I add in SS, that could be about $36K/year. So, I'm looking at about $124K in taxable income (true?). This would put me in the same tax bracket as I am now (i.e. 22%).

My company has a roth401k option. I'm wondering if I should start contributing to that instead of the regular 401k?

I have seen other threads on this topic, but wanted to query my situation specifically.

Thanks
lakpr
Posts: 6215
Joined: Fri Mar 18, 2011 9:59 am

Re: transition to Roth401k?

Post by lakpr »

22% tax bracket now, and 22% projected tax bracket in retirement = toss up. Whichever option you choose, you are likely to not go wrong (at least not too much). The only thing that makes me still advocate a Traditional 401k is your next statement of "downshifting" and "$50k to $75k" income, at which time there will be much more attractive Roth conversion opportunities than the 22% tax hit now. The 12% (or even the 15% bracket when the tax rates revert to 2017 levels, in 2026) will easily afford you another $45k to $20k head room. For a couple filing MFJ, I remember the 15% bracket topping out around $96k of income if you include personal exemptions and standard deductions.

I suppose for now you can do a 50:50 split to hedge your bets
HomeStretch
Posts: 5155
Joined: Thu Dec 27, 2018 3:06 pm

Re: transition to Roth401k?

Post by HomeStretch »

The 22% tax bracket is scheduled to revert to 24% in 2026. If you project that you will remain in the same tax bracket going forward, then consider some/all Roth 401k employee deferrals through 2025 as your tax bracket currently has a lower tax rate.

However, you mentioned your income may decrease by 2/3 in 10 years. At that time, at age 50 you would not have SS income nor be required to take RMDs. In this scenario your marginal tax rate in 10 years is likely to be lower than your current rate for a period of time. In this case, I would continue to make traditional (pretax) deferrals now and do Roth conversions during your lower income/lower marginal tax rate years.
Topic Author
AllAboard
Posts: 33
Joined: Fri Jan 15, 2016 7:40 pm

Re: transition to Roth401k?

Post by AllAboard »

Thank you lakpr and HomeStretch. Your insights are helpful.
User avatar
Watty
Posts: 20908
Joined: Wed Oct 10, 2007 3:55 pm

Re: transition to Roth401k?

Post by Watty »

AllAboard wrote: Fri Nov 20, 2020 2:45 pm Age: 40, married (wife: 39)
It sounds like you are 25+ years from being in a high retirement tax bracket. A lot can happen before then. Especially going through my 50s I saw a lot more people than I would have expected run into things like health problems, career problems, lay offs, burnout, death of a spouse, etc that caused them to have less in retirement than they planned on.

You might also decide to retire early in a lower than bracket than expected. In a lot of areas it might not cost as you might think to live a comfortable retirement lifestyle if you have a paid off house.

At least under the current laws if you are in the 22% federal tax bracket then the next higher tax bracket is only 2% higher at 24%. While tax rates can change it would take a real compelling case to pay your taxes 25+ years early if you are only going to get a 2% discount.

I would use traditional then use the tax savings for something else like paying off your mortgage.
RyeBourbon
Posts: 154
Joined: Tue Sep 01, 2020 12:20 pm
Location: NJ/Philly

Re: transition to Roth401k?

Post by RyeBourbon »

AllAboard wrote: Fri Nov 20, 2020 2:45 pm Hi,

My relevant details (I think) are below.

Details:
Income: $150K, may go down to $50-70K in 10 years as I think about down-shifting.
Age: 40, married (wife: 39)
401k + tIRA = $450K
our combined Roth = $200K

My concerns revolve around the $450K in the tax-deferred accounts and RMDs at age 70. If I don't contribute another dime to it, in 30 years, assuming 5% growth, it'll be about $2M. This would make the RMDs about $88K. If I add in SS, that could be about $36K/year. So, I'm looking at about $124K in taxable income (true?). This would put me in the same tax bracket as I am now (i.e. 22%).

My company has a roth401k option. I'm wondering if I should start contributing to that instead of the regular 401k?

I have seen other threads on this topic, but wanted to query my situation specifically.

Thanks
In 30 years, I doubt that $124k will be a high tax bracket.
02nz
Posts: 5714
Joined: Wed Feb 21, 2018 3:17 pm

Re: transition to Roth401k?

Post by 02nz »

AllAboard wrote: Fri Nov 20, 2020 2:45 pm Hi,

My relevant details (I think) are below.

Details:
Income: $150K, may go down to $50-70K in 10 years as I think about down-shifting.
Age: 40, married (wife: 39)
401k + tIRA = $450K
our combined Roth = $200K

My concerns revolve around the $450K in the tax-deferred accounts and RMDs at age 70. If I don't contribute another dime to it, in 30 years, assuming 5% growth, it'll be about $2M. This would make the RMDs about $88K. If I add in SS, that could be about $36K/year. So, I'm looking at about $124K in taxable income (true?). This would put me in the same tax bracket as I am now (i.e. 22%).

My company has a roth401k option. I'm wondering if I should start contributing to that instead of the regular 401k?

I have seen other threads on this topic, but wanted to query my situation specifically.

Thanks
I would stick with traditional given the possibility of down-shifting. That would be the time to switch to Roth and probably even do conversions.

You're misunderstanding how SS income is taxed. It's not like regular income: https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Also, 5% returns is on the optimistic side. You should use real not nominal returns, because income tax brackets are indexed for inflation. You'll also want to be conservative, as you're likely to shift more towards bonds as you age. That means even if the stock market returns 5% real, you're not going to capture all of that.

If you really want to read a ton, search the forum for "asymmetric risk." Short version: Traditional can better mitigate downside risk for those situations where life doesn't turn out as well as you hoped.
rkhusky
Posts: 10545
Joined: Thu Aug 18, 2011 8:09 pm

Re: transition to Roth401k?

Post by rkhusky »

AllAboard wrote: Fri Nov 20, 2020 2:45 pm My concerns revolve around the $450K in the tax-deferred accounts and RMDs at age 70. If I don't contribute another dime to it, in 30 years, assuming 5% growth, it'll be about $2M. This would make the RMDs about $88K. If I add in SS, that could be about $36K/year. So, I'm looking at about $124K in taxable income (true?). This would put me in the same tax bracket as I am now (i.e. 22%).
You need to do everything either in today's dollars or estimate inflation and do everything in tomorrow's dollars. Tax brackets increase with inflation.

In today's dollars, your first-year RMD would be about $17K at age 72 (I get a first-year RMD of $73K for $2M). Is $36K your expected SS if you continue working until 65? Or if you stop working now?

With $17K in additional income, only a small fraction of your SS would be taxed. If your other income was much larger, the most that would be taxed is 85% .
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