Tax Law Sunset 2025 - Roth vs Traditional

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
KlangFool
Posts: 8934
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 7:19 pm

saltycaper wrote:
Sat Dec 30, 2017 6:28 pm
KlangFool wrote:
Sat Dec 30, 2017 5:40 pm

B) If your income is low, you may contribute 100% to Trad. 401K and Trad. IRA in order to qualify for tax credits. In those cases, your tax will be zero or negative.

In summary, 100% to Trad. 401K and 100% to Roth IRA works for almost all income levels.
If you can go to zero but can't go negative, then you should do what you must to get to zero, and then you should put the rest in Roth.
saltycaper,

That is not true. Some tax credits are refundable. Aka, the government pays you even if you do not pay any tax. Aka, negative tax.

https://www.irs.com/articles/refundable ... ax-credits

EITC is a major one for low-income folks.

KlangFool

drk
Posts: 524
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by drk » Sat Dec 30, 2017 7:22 pm

iceport wrote:
Sat Dec 30, 2017 7:15 pm
drk wrote:
Sat Dec 30, 2017 7:01 pm
iceport wrote:
Sat Dec 30, 2017 6:51 pm
Your "fix" still ignores the inherent uncertainties in the analysis. The unfortunate truth is that for many (most?) investors, they simply won't know in advance whether they've made the optimum choice.
Personally, I take it as an axiom that none of us have perfect knowledge of the future. In light of that fact, the "right organization" will limit one-way doors in order to protect flexibility. Contributing to a Roth 401k when one has to pay income taxes always limits flexibility.

That being said, I'll accept your addition to the statement. :sharebeer
I'm also fond of preserving flexibility. However, the option for Roth conversions after the fact is not perfect flexibility. I also appreciate the spending flexibility that tax diversification affords, though it also comes with a cost.
That's true, and I agree, which is where the Roth IRA (whether direct, backdoor, or mega backdoor) comes into play.

User avatar
saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by saltycaper » Sat Dec 30, 2017 7:36 pm

KlangFool wrote:
Sat Dec 30, 2017 7:19 pm
saltycaper wrote:
Sat Dec 30, 2017 6:28 pm

If you can go to zero but can't go negative, then you should do what you must to get to zero, and then you should put the rest in Roth.
saltycaper,

That is not true. Some tax credits are refundable. Aka, the government pays you even if you do not pay any tax. Aka, negative tax.

https://www.irs.com/articles/refundable ... ax-credits

EITC is a major one for low-income folks.

KlangFool
Of course what I said is true. I said if you can go to zero but can't go negative. What you said is true also. :happy

I was just noting a specific instance where the general advice of using traditional 401k plus Roth IRA might not make sense. It might make sense to use some Roth 401k contributions, or in other instances, some traditional IRA contributions. Everyone's circumstances are different.
Quod vitae sectabor iter?

Engineer250
Posts: 974
Joined: Wed Jun 22, 2016 1:41 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Engineer250 » Sat Dec 30, 2017 7:41 pm

JBTX wrote:
Fri Dec 29, 2017 10:29 pm
Given that, seems Roth's have become comparatively more attractive than before.
You bring up a valid point but it doesn't matter. These boards are very pro-pre-tax investments. Any Roth vs Pre-tax 401k is always 80-90% in favor of the pre-tax.

You are right that the general assumptions are always that the tax rates won't change. ("well so-and-so is in the 25% marginal bracket today, but with their needed income they will be in the 15% marginal bracket in 30 years when they retire"). The possibility that tax rates might go up never enters anyone's heads.

It's just a bias around here, it is what it is. For me personally I don't see tax diversification any different than stock diversification. I can't predict the future in stocks and I can't predict the future in taxes. I like to have some amount in each bucket. Assuming I can convert in some hypothetical low tax years in the future assumes that a) I'll have low tax years in early retirement and b) there will be no changes getting rid of the ability to convert. The good news is, everyone gets to make their own decisions on what they want to do. Paying tax isn't a sin, but you might think it is here. I'm trying to maximize flexibility and money in my pocket in 30-35 years from now. Roth IRAs have only been around 20 years. But I'm sure nothing will change, everyone's tax rates will always be lower in retirement, conversions will be around forever, tax rates will only go down (forever!), and I'll never make any more money in my career than I am now. Also I'm going to lose my job and my house tomorrow so something something pre-tax 401k more bonds don't buy a house. Or, do what works for you.
Where the tides of fortune take us, no man can know.

Angelus359
Posts: 845
Joined: Tue Mar 04, 2014 12:56 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Angelus359 » Sun Dec 31, 2017 9:55 am

KlangFool wrote:
Sat Dec 30, 2017 5:40 pm
Angelus359 wrote:
Sat Dec 30, 2017 5:25 pm
KlangFool wrote:
Sat Dec 30, 2017 1:13 pm
tibbitts wrote:
Sat Dec 30, 2017 9:58 am

I have always felt that except for obvious situations (like a 0% marginal bracket, for example), a diversified approach to the type of IRA is valuable, but I don't think most discussions on the forum have taken that approach.
tibbitts,

I am not sure what do you mean by that.

A) My standard advice is to max out the Trad. 401K and put the tax savings into Roth IRA. I believe that is more tax diversified approach than Roth 401K only or Roth 401K + Roth IRA.

B) There is plenty of confusion in this kind of discussion when folks do not differentiate between IRA and 401K.

KlangFool
I actually have the option in my 401k to put any arbitrary amount in a roth 401k or traditional 401k

I could do 50/50

50/50 roth and traditional 401k, and 50/50 roth/traditional ira would actually be more diversified
Angelus359,

What is your gross income? If you give us the number, we could calculate and tell you why that is the wrong decision.

A) If your income is high, your contribution to Trad. IRA is not tax-deductible. Hence, you should contribute to Roth IRA. So, if you go 50/50 on the 401K side, you have too much Roth 401K/Roth IRA. And, you will pay more taxes.

B) If your income is low, you may contribute 100% to Trad. 401K and Trad. IRA in order to qualify for tax credits. In those cases, your tax will be zero or negative.

In summary, 100% to Trad. 401K and 100% to Roth IRA works for almost all income levels.

KlangFool
I didn't say it's the best idea.

It's the most diversified.

As to my income, my wife and I (that's still weird to me to say, I got married this month), make a total of 110k/yr

I'm actually doing pure traditional 401k and she's doing a tira
IT-DevOps System Administrator

KlangFool
Posts: 8934
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sun Dec 31, 2017 11:07 am

Angelus359 wrote:
Sun Dec 31, 2017 9:55 am
KlangFool wrote:
Sat Dec 30, 2017 5:40 pm
Angelus359 wrote:
Sat Dec 30, 2017 5:25 pm
KlangFool wrote:
Sat Dec 30, 2017 1:13 pm
tibbitts wrote:
Sat Dec 30, 2017 9:58 am

I have always felt that except for obvious situations (like a 0% marginal bracket, for example), a diversified approach to the type of IRA is valuable, but I don't think most discussions on the forum have taken that approach.
tibbitts,

I am not sure what do you mean by that.

A) My standard advice is to max out the Trad. 401K and put the tax savings into Roth IRA. I believe that is more tax diversified approach than Roth 401K only or Roth 401K + Roth IRA.

B) There is plenty of confusion in this kind of discussion when folks do not differentiate between IRA and 401K.

KlangFool
I actually have the option in my 401k to put any arbitrary amount in a roth 401k or traditional 401k

I could do 50/50

50/50 roth and traditional 401k, and 50/50 roth/traditional ira would actually be more diversified
Angelus359,

What is your gross income? If you give us the number, we could calculate and tell you why that is the wrong decision.

A) If your income is high, your contribution to Trad. IRA is not tax-deductible. Hence, you should contribute to Roth IRA. So, if you go 50/50 on the 401K side, you have too much Roth 401K/Roth IRA. And, you will pay more taxes.

B) If your income is low, you may contribute 100% to Trad. 401K and Trad. IRA in order to qualify for tax credits. In those cases, your tax will be zero or negative.

In summary, 100% to Trad. 401K and 100% to Roth IRA works for almost all income levels.

KlangFool
I didn't say it's the best idea.

It's the most diversified.

As to my income, my wife and I (that's still weird to me to say, I got married this month), make a total of 110k/yr

I'm actually doing pure traditional 401k and she's doing a tira
You could contribute to Roth IRA now in order to get some Roth space.

KlangFool

bsteiner
Posts: 3272
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by bsteiner » Sun Dec 31, 2017 11:51 am

Angelus359 wrote:
Sun Dec 31, 2017 9:55 am

As to my income, my wife and I (that's still weird to me to say, I got married this month), make a total of 110k/yr

I'm actually doing pure traditional 401k and she's doing a tira
Since you just got married I'm guessing you're relatively young. There's no way to predict what your situation and the tax law will be between now and when your beneficiaries take their last required distribution. So whatever you do may turn out not to have been the best choice.

In 2018 on a joint return the 12% bracket goes up to $77,000 and then it's 22% up to $165,000.

Ignoring any other items, if your combined income will be $110,000 and you take the $24,000 standard deduction, your taxable income before traditional 401(k) and IRA contributions would be $86,000.

A conservative approach would be to do traditional until it brings your taxable income down to the top of the 12% bracket and then Roth after that.

Angelus359
Posts: 845
Joined: Tue Mar 04, 2014 12:56 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Angelus359 » Mon Jan 01, 2018 1:12 am

bsteiner wrote:
Sun Dec 31, 2017 11:51 am
Angelus359 wrote:
Sun Dec 31, 2017 9:55 am

As to my income, my wife and I (that's still weird to me to say, I got married this month), make a total of 110k/yr

I'm actually doing pure traditional 401k and she's doing a tira
Since you just got married I'm guessing you're relatively young. There's no way to predict what your situation and the tax law will be between now and when your beneficiaries take their last required distribution. So whatever you do may turn out not to have been the best choice.

In 2018 on a joint return the 12% bracket goes up to $77,000 and then it's 22% up to $165,000.

Ignoring any other items, if your combined income will be $110,000 and you take the $24,000 standard deduction, your taxable income before traditional 401(k) and IRA contributions would be $86,000.

A conservative approach would be to do traditional until it brings your taxable income down to the top of the 12% bracket and then Roth after that.

I'm 30
IT-DevOps System Administrator

tibbitts
Posts: 7614
Joined: Tue Feb 27, 2007 6:50 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by tibbitts » Mon Jan 01, 2018 2:17 am

KlangFool wrote:
Sat Dec 30, 2017 1:13 pm
tibbitts wrote:
Sat Dec 30, 2017 9:58 am

I have always felt that except for obvious situations (like a 0% marginal bracket, for example), a diversified approach to the type of IRA is valuable, but I don't think most discussions on the forum have taken that approach.
tibbitts,

I am not sure what do you mean by that.

A) My standard advice is to max out the Trad. 401K and put the tax savings into Roth IRA. I believe that is more tax diversified approach than Roth 401K only or Roth 401K + Roth IRA.

B) There is plenty of confusion in this kind of discussion when folks do not differentiate between IRA and 401K.

KlangFool
I think the balance on the forum tilts toward assuming that Roth contributions will prove to be more beneficial in the long run, while I agree that a diversified approach is worthwhile.

bberris
Posts: 992
Joined: Sun Feb 20, 2011 9:44 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by bberris » Mon Jan 01, 2018 8:10 am

tibbitts wrote:
Fri Dec 29, 2017 10:34 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
You would think so, but I haven't gotten much traction trying to convince people to evaluate the take-or-delay social security decision based on current law and its resulting reduction in benefits.
That's because neither one of those things will happen. Social security can be funded by payroll tax hikes or through the general fund. The sunset on individual rates was a maneuver. There is no intention of letting income taxes rise in the future, although I suppose that is more likely than a SS cut.

MnD
Posts: 3440
Joined: Mon Jan 14, 2008 12:41 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by MnD » Mon Jan 01, 2018 11:34 am

JBTX wrote:
Fri Dec 29, 2017 10:42 pm
KlangFool wrote:
Fri Dec 29, 2017 10:41 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
JBTX,

Why do you assume

A) The law will expire and not extended.

B) Or, the law will be replaced by another law that lower the rate further.

(A) and (B) are equally likely to the possibility of the law expire and the income rate went up.

KlangFool
Because the policy of the forum is all decisions should be made according to current tax law.
Oh really? For years I've been anti-Roth given every dime I've saved has gone into t-401-K and t-IRA at 28% or higher, and I was hard pressed to come up with any scenario where it would coming out at anything higher than 25%. The Roth contingent's counter-argument was that "rates of course will be going higher" so I should consider splitting contributions now or do conversions to the top of the 25% bracket every year as soon as I retire. Now just the opposite is the case - marginal rates went lower on the cusp of retirement. I'm glad I didn't listen to the Roth crowd. Probably a blended deferral rate of 30% going in and I'm now looking at 22% coming out. :beer The old sage - "never pay taxes before you have to" certainly looks to be paying off again, as well as the traditional logic behind traditional 401-K"s and IRA's.

smitcat
Posts: 1377
Joined: Mon Nov 07, 2016 10:51 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by smitcat » Mon Jan 01, 2018 12:44 pm

MnD wrote:
Mon Jan 01, 2018 11:34 am
JBTX wrote:
Fri Dec 29, 2017 10:42 pm
KlangFool wrote:
Fri Dec 29, 2017 10:41 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
JBTX,

Why do you assume

A) The law will expire and not extended.

B) Or, the law will be replaced by another law that lower the rate further.

(A) and (B) are equally likely to the possibility of the law expire and the income rate went up.

KlangFool
Because the policy of the forum is all decisions should be made according to current tax law.
Oh really? For years I've been anti-Roth given every dime I've saved has gone into t-401-K and t-IRA at 28% or higher, and I was hard pressed to come up with any scenario where it would coming out at anything higher than 25%. The Roth contingent's counter-argument was that "rates of course will be going higher" so I should consider splitting contributions now or do conversions to the top of the 25% bracket every year as soon as I retire. Now just the opposite is the case - marginal rates went lower on the cusp of retirement. I'm glad I didn't listen to the Roth crowd. Probably a blended deferral rate of 30% going in and I'm now looking at 22% coming out. :beer The old sage - "never pay taxes before you have to" certainly looks to be paying off again, as well as the traditional logic behind traditional 401-K"s and IRA's.

I agreee we are seeing very simialr results with our situation now sitting on the cusp of early retire.
But not so sure we agree on thsi other point....
"The old sage - "never pay taxes before you have to" certainly looks to be paying off again,"
That would mean that we would avoid Roth conversions before full SS and RMD's and that is not likely a good plan at all for us anyway.

bberris
Posts: 992
Joined: Sun Feb 20, 2011 9:44 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by bberris » Mon Jan 01, 2018 3:33 pm

JBTX wrote:
Fri Dec 29, 2017 10:42 pm
KlangFool wrote:
Fri Dec 29, 2017 10:41 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
JBTX,

Why do you assume

A) The law will expire and not extended.

B) Or, the law will be replaced by another law that lower the rate further.

(A) and (B) are equally likely to the possibility of the law expire and the income rate went up.

KlangFool
Because the policy of the forum is all decisions should be made according to current tax law.
:!: The mods are going to be very busy approving or disapproving everyone's decisions.

jdilla1107
Posts: 588
Joined: Sun Jun 24, 2012 8:31 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by jdilla1107 » Mon Jan 01, 2018 4:10 pm

Engineer250 wrote:
Sat Dec 30, 2017 7:41 pm
The possibility that tax rates might go up never enters anyone's heads.
No. What enter's people's heads is that locking in savings now is better than the possibility of saving an indeterminate amount of money in the future. To have a higher marginal tax rate in retirement than one's working years is pretty unusual. To make the roth bet, you have to forgo an immediate benefit for the possibility of a later benefit that may never come. (A bird in hand...)

Second, even if rates do go up overall, most people will fall in lower brackets. For example, if I defer from a bracket range of 22-33% and into a bracket of 0-22%, I am likely to win no matter what happens to "rates". My prediction is that low income people will not be highly taxed in the future.

Many people assume their marginal income tax rates will be the same in retirement. For most, they are far lower.
Last edited by jdilla1107 on Mon Jan 01, 2018 4:20 pm, edited 2 times in total.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by DrGoogle2017 » Mon Jan 01, 2018 4:16 pm

I model my future taxes in TT. They do go up. Worse yet, if I become a single household, like one spouse dies, it’s a lot worse. I have a lot of hidden incomes now that are not counted. For example, rental depreciation. Not counted right now. Don’t tell me about recaptured depreciation when I sell, I won’t, my heirs will have a step up when my husband and I are no longer on this earth.

JBTX
Posts: 3228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Mon Jan 01, 2018 5:39 pm

Under the 2017 bracket (and 2026 sunset) if you have around $100k income you are in 25% tax bracket. Two professional working spouses could easily get $50k to $60k in social security which means you only need to get 40k to 50k to get to $100k.

40-50k would give you $1 - 1.25 million at 4.0% withdrawal rate.

$1million plus in traditional savings is not an extraordinary amount for people in this forum.

Not to mention to be apples to apples you have to put traditional tax savings in a taxable account if you max out your retirement savings.

Not to mention the current social security tax can drive your marginal retirement rate even higher especially if you have 2 above average social security incomes. Even more so if you defer social security to 70.

So if I contribute to Roth in the mid or even high 20s and withdrawal in the mid or even low 20s that isn’t a terrible deal. Even if you lose a few points in tax bracket there is something to be said for not having to worry about taxes at all, not having to worry about RMDs and having the ability to pass to heirs tax free.

Now if you are extremely frugal and plan to live on 40-50k and plan to retire 10 years prior to social security, yes obviously traditional is better. If you have rate 30 or over, with or without state income tax traditional is more than likely better. But if you plan on needing approx $100k per year with well into 7 figures of traditional savings then Roth should give you roughly comparable results and a lot more flexibility.

As I’ve said I’m about 50% traditional and 40-45% Roth. Everybody should have enough traditional to fill out the lower brackets in retirement.

KlangFool
Posts: 8934
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Mon Jan 01, 2018 5:58 pm

JBTX wrote:
Mon Jan 01, 2018 5:39 pm
Under the 2017 bracket (and 2026 sunset) if you have around $100k income you are in 25% tax bracket. Two professional working spouses could easily get $50k to $60k in social security which means you only need to get 40k to 50k to get to $100k.

40-50k would give you $1 - 1.25 million at 4.0% withdrawal rate.

$1million plus in traditional savings is not an extraordinary amount for people in this forum.

Not to mention to be apples to apples you have to put traditional tax savings in a taxable account if you max out your retirement savings.

Not to mention the current social security tax can drive your marginal retirement rate even higher especially if you have 2 above average social security incomes. Even more so if you defer social security to 70.

So if I contribute to Roth in the mid or even high 20s and withdrawal in the mid or even low 20s that isn’t a terrible deal. Even if you lose a few points in tax bracket there is something to be said for not having to worry about taxes at all, not having to worry about RMDs and having the ability to pass to heirs tax free.

Now if you are extremely frugal and plan to live on 40-50k and plan to retire 10 years prior to social security, yes obviously traditional is better. If you have rate 30 or over, with or without state income tax traditional is more than likely better. But if you plan on needing approx $100k per year with well into 7 figures then Roth should give you roughly comparable results and a lot more flexibility.

As I’ve said I’m about 50% traditional and 40-45% Roth. Everybody should have enough traditional to fill out the lower brackets in retirement.
JBTX,

<< Under the 2017 bracket (and 2026 sunset) if you have around $100k income you are in 25% tax bracket. Two professional working spouses could easily get $50k to $60k in social security which means you only need to get 40k to 50k to get to $100k.

40-50k would give you $1 - 1.25 million at 4.0% withdrawal rate. >>

Please be very precise in your statement. Only $1 - $1.25 million in the tax-deferred account will generate 40-50K of taxable income.

1) For the Roth account, you generate zero taxable income at withdrawal. It is counted as zero for this purposes.

2) For the taxable account, you pay tax on your capital gain, distribution, dividend, and interest income. Aka, not the full amount of the taxable account.

<<$1million plus in traditional savings is not an extraordinary amount for people in this forum. >>

3) Yes and no. There are a fair amount of Boglehead folks with $1 million plus in investment asset. But, only a subset of them has $1 million plus in the tax-deferred accounts.

<<As I’ve said I’m about 50% traditional and 40-45% Roth. >>

4) The irony of your situation is that with more money in Roth, you can afford to put more money into the tax-deferred account. You may not have $1 million to $1.25 million in the tax-deferred account yet.

I am an example of why 100% into Trad. 401K and 100% into Roth IRA and the rest into the taxable account work very well.

A) I am at about $1.25 million now.

B) But, I fully expect to pay less tax when I am FI / Retire

i) I will retire before 62 years old. Aka, before collecting social security.

ii) Only 50% of my portfolio is in the tax-deferred account.

iii) 10% are in Roth IRA that does not count as income at tax time

iV) 40% are in the taxable account with maximum 50% gain. If I sell 100K in my taxable account, at worst, it will generate 50K of long-term capital gain.

v) My annual expense is 60K. I do not need to generate a lot of money to cover my annual expense. I do not need 100K of retirement income.

KlangFool

KlangFool
Posts: 8934
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Mon Jan 01, 2018 6:23 pm

OP,

It is instructive and educational to go through an example. So, let's take me as a case study.

A) In my case, my spouse does not work long enough to get more than 50% of the spousal benefit. So, our projected social security benefit is only 36K per years with both spouses collecting. So, there are 100K - 36K = 64K gap.

B) For the taxable account, even at 25% marginal tax rate, the long-term capital gain tax rate is 15%. Assuming a 50% gain, if I sell 100K worth of stock, I pay 15% on the 50% aka 50K gain. So, for every 100K of stock sold, I only pay 50% of 15% = 7.5%.

C) If I retire before 62 years old, I have 100K to go before I hit 25% marginal tax rate. Even if I hit the 25% marginal tax rate, I only pay 15% on the long-term capital gain. So, I could do Roth conversion of 100K per year before 62 years old. I only have 500K to 600K in my Trad. 401K. It does not take long to get this done.

D) If I retire after 62 years old, I can defer collecting my social security until 70 years old. Still enough time for Roth conversion of a few hundred thousand up to 1 million.

E) If I collect social security at 62 years old and collect 36K per year, I have 64K per year for Roth conversion. On top of that, I can sell stock at my taxable account and pay 15% long-term capital gain tax.

F) Or at any time, if I have space below 25% marginal tax rate, I could sell stock at my taxable account and pay 0% long-term capital gain tax. Aka, "Tax Gain Harvesting".

It is very simple. Max up your Trad. 401K and put your tax savings into Roth IRAs and the taxable account work very well.

KlangFool

JBTX
Posts: 3228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Mon Jan 01, 2018 7:06 pm

KlangFool wrote:
Mon Jan 01, 2018 5:58 pm
JBTX wrote:
Mon Jan 01, 2018 5:39 pm
Under the 2017 bracket (and 2026 sunset) if you have around $100k income you are in 25% tax bracket. Two professional working spouses could easily get $50k to $60k in social security which means you only need to get 40k to 50k to get to $100k.

40-50k would give you $1 - 1.25 million at 4.0% withdrawal rate.

$1million plus in traditional savings is not an extraordinary amount for people in this forum.

Not to mention to be apples to apples you have to put traditional tax savings in a taxable account if you max out your retirement savings.

Not to mention the current social security tax can drive your marginal retirement rate even higher especially if you have 2 above average social security incomes. Even more so if you defer social security to 70.

So if I contribute to Roth in the mid or even high 20s and withdrawal in the mid or even low 20s that isn’t a terrible deal. Even if you lose a few points in tax bracket there is something to be said for not having to worry about taxes at all, not having to worry about RMDs and having the ability to pass to heirs tax free.

Now if you are extremely frugal and plan to live on 40-50k and plan to retire 10 years prior to social security, yes obviously traditional is better. If you have rate 30 or over, with or without state income tax traditional is more than likely better. But if you plan on needing approx $100k per year with well into 7 figures then Roth should give you roughly comparable results and a lot more flexibility.

As I’ve said I’m about 50% traditional and 40-45% Roth. Everybody should have enough traditional to fill out the lower brackets in retirement.
JBTX,

<< Under the 2017 bracket (and 2026 sunset) if you have around $100k income you are in 25% tax bracket. Two professional working spouses could easily get $50k to $60k in social security which means you only need to get 40k to 50k to get to $100k.

40-50k would give you $1 - 1.25 million at 4.0% withdrawal rate. >>

Please be very precise in your statement. Only $1 - $1.25 million in the tax-deferred account will generate 40-50K of taxable income.

1) For the Roth account, you generate zero taxable income at withdrawal. It is counted as zero for this purposes.

2) For the taxable account, you pay tax on your capital gain, distribution, dividend, and interest income. Aka, not the full amount of the taxable account.

<<$1million plus in traditional savings is not an extraordinary amount for people in this forum. >>

3) Yes and no. There are a fair amount of Boglehead folks with $1 million plus in investment asset. But, only a subset of them has $1 million plus in the tax-deferred accounts.

<<As I’ve said I’m about 50% traditional and 40-45% Roth. >>

4) The irony of your situation is that with more money in Roth, you can afford to put more money into the tax-deferred account. You may not have $1 million to $1.25 million in the tax-deferred account yet.

I am an example of why 100% into Trad. 401K and 100% into Roth IRA and the rest into the taxable account work very well.

A) I am at about $1.25 million now.

B) But, I fully expect to pay less tax when I am FI / Retire

i) I will retire before 62 years old. Aka, before collecting social security.

ii) Only 50% of my portfolio is in the tax-deferred account.

iii) 10% are in Roth IRA that does not count as income at tax time

iV) 40% are in the taxable account with maximum 50% gain. If I sell 100K in my taxable account, at worst, it will generate 50K of long-term capital gain.

v) My annual expense is 60K. I do not need to generate a lot of money to cover my annual expense. I do not need 100K of retirement income.

KlangFool
Yours and my situations are very different. You are single income, we are two. You are far more frugal than I to your credit. I have always worked in state with no income tax.

When I said 4% withdrawal rate, 1 million in traditional savings at 4% equals $40k this $40k in taxable income.

Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong.

I will say this. Probably both you and I extrapolate too much of our positions to others.

KlangFool
Posts: 8934
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Mon Jan 01, 2018 7:22 pm

JBTX wrote:
Mon Jan 01, 2018 7:06 pm

Yours and my situations are very different. You are single income, we are two. You are far more frugal than I to your credit. I have always worked in state with no income tax.

When I said 4% withdrawal rate, 1 million in traditional savings at 4% equals $40k this $40k in taxable income.

Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong.

I will say this. Probably both you and I extrapolate too much of our positions to others.
JBTX,

<< Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong. >>

https://www.financialsamurai.com/histor ... on-limits/

Historically, the employee contribution limit is very low. It started as $7,000 from 1987 until $18,500 for 2017. So, it is not easy for a person to reach a 7 figures traditional 401K balance. I max up my 401K whenever I am employed. 20+ years of working history with a single high income, my number is around 500K to 600K. So, it is possible but unlikely. Not many folks max up their 401K right from the start.

<<I will say this. Probably both you and I extrapolate too much of our positions to others.>>

My main goal is to educate. So, I would tell folks about my opinion. Then, I will show the calculation and reasoning behind my opinion. Others can do their own calculation and find out exactly how the numbers will work out for them.

KlangFool

JBTX
Posts: 3228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Mon Jan 01, 2018 7:41 pm

KlangFool wrote:
Mon Jan 01, 2018 7:22 pm
JBTX wrote:
Mon Jan 01, 2018 7:06 pm

Yours and my situations are very different. You are single income, we are two. You are far more frugal than I to your credit. I have always worked in state with no income tax.

When I said 4% withdrawal rate, 1 million in traditional savings at 4% equals $40k this $40k in taxable income.

Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong.

I will say this. Probably both you and I extrapolate too much of our positions to others.
JBTX,

<< Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong. >>

https://www.financialsamurai.com/histor ... on-limits/

Historically, the employee contribution limit is very low. It started as $7,000 from 1987 until $18,500 for 2017. So, it is not easy for a person to reach a 7 figures traditional 401K balance. I max up my 401K whenever I am employed. 20+ years of working history with a single high income, my number is around 500K to 600K. So, it is possible but unlikely. Not many folks max up their 401K right from the start.

<<I will say this. Probably both you and I extrapolate too much of our positions to others.>>

My main goal is to educate. So, I would tell folks about my opinion. Then, I will show the calculation and reasoning behind my opinion. Others can do their own calculation and find out exactly how the numbers will work out for them.

KlangFool
For one person $1 million may take a while for traditionals but for a 2 earning professional couple over much of a 30 year bull market it doesn’t seem that hard. We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years.

Some of the Roth is from regular Roth contributions, some is from Roth 401k but approx half is from Roth conversions done as far back as 20 years ago.

KlangFool
Posts: 8934
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Mon Jan 01, 2018 7:59 pm

JBTX wrote:
Mon Jan 01, 2018 7:41 pm
KlangFool wrote:
Mon Jan 01, 2018 7:22 pm
JBTX wrote:
Mon Jan 01, 2018 7:06 pm

Yours and my situations are very different. You are single income, we are two. You are far more frugal than I to your credit. I have always worked in state with no income tax.

When I said 4% withdrawal rate, 1 million in traditional savings at 4% equals $40k this $40k in taxable income.

Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong.

I will say this. Probably both you and I extrapolate too much of our positions to others.
JBTX,

<< Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong. >>

https://www.financialsamurai.com/histor ... on-limits/

Historically, the employee contribution limit is very low. It started as $7,000 from 1987 until $18,500 for 2017. So, it is not easy for a person to reach a 7 figures traditional 401K balance. I max up my 401K whenever I am employed. 20+ years of working history with a single high income, my number is around 500K to 600K. So, it is possible but unlikely. Not many folks max up their 401K right from the start.

<<I will say this. Probably both you and I extrapolate too much of our positions to others.>>

My main goal is to educate. So, I would tell folks about my opinion. Then, I will show the calculation and reasoning behind my opinion. Others can do their own calculation and find out exactly how the numbers will work out for them.

KlangFool
For one person $1 million may take a while for traditionals but for a 2 earning professional couple over much of a 30 year bull market it doesn’t seem that hard. We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years.

Some of the Roth is from regular Roth contributions, some is from Roth 401k but approx half is from Roth conversions done as far back as 20 years ago.
JBTX,

Just to complete the case study and comparison.

1) How old are you and your spouse?

2) Are you retired?

<< We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years. >>

We are not that far apart in term of recommendation. For a couple, I would recommend 100% into Trad. 401K until the tax-deferred portfolio size reached 1 million to 1.25 million level. After that, a person may add in Roth 401K contribution.

At these income level, a person will have Roth IRA account. So, Roth portion is not optional. It is just a question of how much tax-deferred contribution.

KlangFool

JBTX
Posts: 3228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Mon Jan 01, 2018 8:13 pm

KlangFool wrote:
Mon Jan 01, 2018 7:59 pm
JBTX wrote:
Mon Jan 01, 2018 7:41 pm
KlangFool wrote:
Mon Jan 01, 2018 7:22 pm
JBTX wrote:
Mon Jan 01, 2018 7:06 pm

Yours and my situations are very different. You are single income, we are two. You are far more frugal than I to your credit. I have always worked in state with no income tax.

When I said 4% withdrawal rate, 1 million in traditional savings at 4% equals $40k this $40k in taxable income.

Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong.

I will say this. Probably both you and I extrapolate too much of our positions to others.
JBTX,

<< Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong. >>

https://www.financialsamurai.com/histor ... on-limits/

Historically, the employee contribution limit is very low. It started as $7,000 from 1987 until $18,500 for 2017. So, it is not easy for a person to reach a 7 figures traditional 401K balance. I max up my 401K whenever I am employed. 20+ years of working history with a single high income, my number is around 500K to 600K. So, it is possible but unlikely. Not many folks max up their 401K right from the start.

<<I will say this. Probably both you and I extrapolate too much of our positions to others.>>

My main goal is to educate. So, I would tell folks about my opinion. Then, I will show the calculation and reasoning behind my opinion. Others can do their own calculation and find out exactly how the numbers will work out for them.

KlangFool
For one person $1 million may take a while for traditionals but for a 2 earning professional couple over much of a 30 year bull market it doesn’t seem that hard. We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years.

Some of the Roth is from regular Roth contributions, some is from Roth 401k but approx half is from Roth conversions done as far back as 20 years ago.
JBTX,

Just to complete the case study and comparison.

1) How old are you and your spouse?

2) Are you retired?

<< We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years. >>

We are not that far apart in term of recommendation. For a couple, I would recommend 100% into Trad. 401K until the tax-deferred portfolio size reached 1 million to 1.25 million level. After that, a person may add in Roth 401K contribution.

At these income level, a person will have Roth IRA account. So, Roth portion is not optional. It is just a question of how much tax-deferred contribution.

KlangFool
54 and 49. I’d say we will likely work another 5-10 years. Our situation is a bit unusual in that we will likely need to provide for autistic son when he reaches adulthood.

KlangFool
Posts: 8934
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Mon Jan 01, 2018 8:27 pm

JBTX wrote:
Mon Jan 01, 2018 8:13 pm
KlangFool wrote:
Mon Jan 01, 2018 7:59 pm
JBTX wrote:
Mon Jan 01, 2018 7:41 pm
KlangFool wrote:
Mon Jan 01, 2018 7:22 pm
JBTX wrote:
Mon Jan 01, 2018 7:06 pm

Yours and my situations are very different. You are single income, we are two. You are far more frugal than I to your credit. I have always worked in state with no income tax.

When I said 4% withdrawal rate, 1 million in traditional savings at 4% equals $40k this $40k in taxable income.

Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong.

I will say this. Probably both you and I extrapolate too much of our positions to others.
JBTX,

<< Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong. >>

https://www.financialsamurai.com/histor ... on-limits/

Historically, the employee contribution limit is very low. It started as $7,000 from 1987 until $18,500 for 2017. So, it is not easy for a person to reach a 7 figures traditional 401K balance. I max up my 401K whenever I am employed. 20+ years of working history with a single high income, my number is around 500K to 600K. So, it is possible but unlikely. Not many folks max up their 401K right from the start.

<<I will say this. Probably both you and I extrapolate too much of our positions to others.>>

My main goal is to educate. So, I would tell folks about my opinion. Then, I will show the calculation and reasoning behind my opinion. Others can do their own calculation and find out exactly how the numbers will work out for them.

KlangFool
For one person $1 million may take a while for traditionals but for a 2 earning professional couple over much of a 30 year bull market it doesn’t seem that hard. We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years.

Some of the Roth is from regular Roth contributions, some is from Roth 401k but approx half is from Roth conversions done as far back as 20 years ago.
JBTX,

Just to complete the case study and comparison.

1) How old are you and your spouse?

2) Are you retired?

<< We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years. >>

We are not that far apart in term of recommendation. For a couple, I would recommend 100% into Trad. 401K until the tax-deferred portfolio size reached 1 million to 1.25 million level. After that, a person may add in Roth 401K contribution.

At these income level, a person will have Roth IRA account. So, Roth portion is not optional. It is just a question of how much tax-deferred contribution.

KlangFool
54 and 49. I’d say we will likely work another 5-10 years. Our situation is a bit unusual in that we will likely need to provide for autistic son when he reaches adulthood.
JBTX,

1) Sorry to hear that. Many of my nephews are autistic. My family (my side and the in-law side) has a very high incidence rate of autism.

2) One of my nephews is withdrawing disability due to autism.

KlangFool

JBTX
Posts: 3228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Mon Jan 01, 2018 9:13 pm

KlangFool wrote:
Mon Jan 01, 2018 8:27 pm
JBTX wrote:
Mon Jan 01, 2018 8:13 pm
KlangFool wrote:
Mon Jan 01, 2018 7:59 pm
JBTX wrote:
Mon Jan 01, 2018 7:41 pm
KlangFool wrote:
Mon Jan 01, 2018 7:22 pm


JBTX,

<< Just based upon various threads in here it doesn’t seem uncommon for people to have well into 7 figure net worths and presumably a 7 figure traditional balance in here is not uncommon. But perhaps I’m wrong. >>

https://www.financialsamurai.com/histor ... on-limits/

Historically, the employee contribution limit is very low. It started as $7,000 from 1987 until $18,500 for 2017. So, it is not easy for a person to reach a 7 figures traditional 401K balance. I max up my 401K whenever I am employed. 20+ years of working history with a single high income, my number is around 500K to 600K. So, it is possible but unlikely. Not many folks max up their 401K right from the start.

<<I will say this. Probably both you and I extrapolate too much of our positions to others.>>

My main goal is to educate. So, I would tell folks about my opinion. Then, I will show the calculation and reasoning behind my opinion. Others can do their own calculation and find out exactly how the numbers will work out for them.

KlangFool
For one person $1 million may take a while for traditionals but for a 2 earning professional couple over much of a 30 year bull market it doesn’t seem that hard. We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years.

Some of the Roth is from regular Roth contributions, some is from Roth 401k but approx half is from Roth conversions done as far back as 20 years ago.
JBTX,

Just to complete the case study and comparison.

1) How old are you and your spouse?

2) Are you retired?

<< We are at about $1 million traditional and $800k Roth. I’ve been contributing max for about 30 years and my wife about 20 years. >>

We are not that far apart in term of recommendation. For a couple, I would recommend 100% into Trad. 401K until the tax-deferred portfolio size reached 1 million to 1.25 million level. After that, a person may add in Roth 401K contribution.

At these income level, a person will have Roth IRA account. So, Roth portion is not optional. It is just a question of how much tax-deferred contribution.

KlangFool
54 and 49. I’d say we will likely work another 5-10 years. Our situation is a bit unusual in that we will likely need to provide for autistic son when he reaches adulthood.
JBTX,

1) Sorry to hear that. Many of my nephews are autistic. My family (my side and the in-law side) has a very high incidence rate of autism.

2) One of my nephews is withdrawing disability due to autism.

KlangFool
He’s still a young tennager but it is hard for us to project him working during adulthood. What is tough is figuring out how much he may need down the road so it definitely changes the equation on how much to save.

TheHouse7
Posts: 290
Joined: Fri Jan 13, 2017 2:40 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by TheHouse7 » Wed Jan 17, 2018 7:35 pm

saltycaper wrote:
Sat Dec 30, 2017 6:28 pm
KlangFool wrote:
Sat Dec 30, 2017 5:40 pm

B) If your income is low, you may contribute 100% to Trad. 401K and Trad. IRA in order to qualify for tax credits. In those cases, your tax will be zero or negative.

In summary, 100% to Trad. 401K and 100% to Roth IRA works for almost all income levels.
If you can go to zero but can't go negative, then you should do what you must to get to zero, and then you should put the rest in Roth.
I'm(30) most interested in landing the most tax credits by low income (84k MFJ with our first kid due Feb).
We will Max 401k(18.5k), Tira(11k), and HSA(6.2k).
Does this sound like an optimal tax situation for 2018? Should we be contributing to Roth IRAs instead??
Thank you for any response. :beer
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

User avatar
FiveK
Posts: 4861
Joined: Sun Mar 16, 2014 2:43 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Wed Jan 17, 2018 8:46 pm

TheHouse7 wrote:
Wed Jan 17, 2018 7:35 pm
I'm(30) most interested in landing the most tax credits by low income (84k MFJ with our first kid due Feb).
We will Max 401k(18.5k), Tira(11k), and HSA(6.2k).
Does this sound like an optimal tax situation for 2018? Should we be contributing to Roth IRAs instead??
Thank you for any response. :beer
Easy question first: is a $700 employer contribution the reason for only $6.2K into the HSA?

The choice of traditional vs. Roth is more complex, and would require a working crystal ball to answer with certainty.

E.g., if each of you starts with $2K into Roth IRAs and then looks at the additional $25.5K of tax advantaged space, your marginal rate for various amounts of pre-tax contribution is below. Numbers are negative because they represent savings, not payments. Read "401k" as "combined 401k and tIRA." This works for your case because the Earned Income Credit is not a factor.

Reasonable choices include
a) contribute all traditional, because we aren't yet close to the $1 million in traditional assets needed to reach the 12% bracket on a 4% withdrawal rate from those alone.
b) contribute all Roth, because
- i) we expect much higher income later in life and will switch to traditional then, in plenty of time to reach that $1 million amount, or
- ii) we expect to have a pension or other guaranteed income that will put us in the 12% bracket on that alone
c) contribute just enough to traditional to reach the first saver's credit tier (that's the step change on the chart) and put the rest into Roth

Image

See the personal finance toolbox spreadsheet to enter your own numbers. Good luck!

kevinpet
Posts: 40
Joined: Fri Jan 13, 2012 1:27 pm
Location: CA
Contact:

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by kevinpet » Wed Jan 17, 2018 9:21 pm

JBTX wrote:
Sat Dec 30, 2017 12:27 am
I think the current law, and its sunset provisions, just puts more strain on the assumption that all decisions should be made based upon current tax law - which is the default forum recommendation.
Moderators correct me if this is incorrect, but it's not the forum's recommendation for how to actually do your finances. It's the forum's policy for discussions that what changes are likely is off limits, in order to avoid degenerating into political arguments.

I personally like a mix of Roth and traditional because over my time horizon, tax rates are uncertain. I also underweight the likely amount from social security. That's different from starting a thread on "how will congress fix social security when it runs out of money".

User avatar
LadyGeek
Site Admin
Posts: 45612
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by LadyGeek » Wed Jan 17, 2018 10:48 pm

The reasons for the forum policy are detailed here: Political comments and proposed tax plan remain off-topic

The point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed regulations change many times between the time they're introduced and signed into law.

Since Social Security is defined in US law, starting a thread on fixing Social Security becomes a discussion of a political process and is off-topic.

Discussing if you want to underweight / overweight your anticipated Social Security income for planning purposes would be OK.

If anyone has any further questions, please PM me.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

TheHouse7
Posts: 290
Joined: Fri Jan 13, 2017 2:40 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by TheHouse7 » Thu Jan 18, 2018 12:32 am

FiveK wrote:
Wed Jan 17, 2018 8:46 pm
TheHouse7 wrote:
Wed Jan 17, 2018 7:35 pm
I'm(30) most interested in landing the most tax credits by low income (84k MFJ with our first kid due Feb).
We will Max 401k(18.5k), Tira(11k), and HSA(6.2k).
Does this sound like an optimal tax situation for 2018? Should we be contributing to Roth IRAs instead??
Thank you for any response. :beer
Easy question first: is a $700 employer contribution the reason for only $6.2K into the HSA? Yes

The choice of traditional vs. Roth is more complex, and would require a working crystal ball to answer with certainty.

E.g., if each of you starts with $2K into Roth IRAs and then looks at the additional $25.5K of tax advantaged space, your marginal rate for various amounts of pre-tax contribution is below. Numbers are negative because they represent savings, not payments. Read "401k" as "combined 401k and tIRA." This works for your case because the Earned Income Credit is not a factor.

Reasonable choices include
a) contribute all traditional, because we aren't yet close to the $1 million in traditional assets needed to reach the 12% bracket on a 4% withdrawal rate from those alone.
b) contribute all Roth, because
- i) we expect much higher income later in life and will switch to traditional then, in plenty of time to reach that $1 million amount, or
- ii) we expect to have a pension or other guaranteed income that will put us in the 12% bracket on that alone
c) contribute just enough to traditional to reach the first saver's credit tier (that's the step change on the chart) and put the rest into Roth

Image

See the personal finance toolbox spreadsheet to enter your own numbers. Good luck!
Thanks for the link.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

JBTX
Posts: 3228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Thu Jan 18, 2018 9:14 am

kevinpet wrote:
Wed Jan 17, 2018 9:21 pm
JBTX wrote:
Sat Dec 30, 2017 12:27 am
I think the current law, and its sunset provisions, just puts more strain on the assumption that all decisions should be made based upon current tax law - which is the default forum recommendation.
Moderators correct me if this is incorrect, but it's not the forum's recommendation for how to actually do your finances. It's the forum's policy for discussions that what changes are likely is off limits, in order to avoid degenerating into political arguments.

I personally like a mix of Roth and traditional because over my time horizon, tax rates are uncertain. I also underweight the likely amount from social security. That's different from starting a thread on "how will congress fix social security when it runs out of money".
Two weeks before the tax law was passed it was specifically stated that financial decisions should be made on current tax law and not proposed legislation. Now whether that is defacto forum policy or moderators extrapolation of such policy i don’t know.

I agree it is good to have a mix of both. The recent changes probably tip the scales towards Roth in certain borderline situations.

User avatar
AtlasShrugged?
Posts: 547
Joined: Wed Jul 15, 2015 6:08 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by AtlasShrugged? » Fri Jan 19, 2018 7:30 am

Relative to the prior tax law, a Roth contribution under the new tax law is more attractive. (Similarly, as a recent retiree, a Roth conversion prior to 2026 just became more attractive.)
iceport...(or any other Boglehead, for that matter): I am trying to wrap my head around the implications of the new tax rates. Have you seen some very general rules of thumb anywhere that would tell investors something like this:

Example: If you are currently in the X% tax bracket, you will be in the Y% bracket under the new law and maxing a 401K/Traditional IRA would tend to be the better first choice.
Example: If you are currently in the X% tax bracket, you will be in the Y% bracket under the new law and maxing a Roth IRA would tend to be the better first choice.

After years, I am just now able to max out my Traditional 401K (Yay me!), and will max out my Roth this year. But now it seems, my employer is offering a Roth 401K option and that is provoking a lot of head scratching on my part. Do I let it ride on the traditional, or do I do both?

I just have not seen very much yet on these topics. It is probably too soon, since the tax law is barely one month old. But it sure would be nice to have some general rules of thumb to look at, think about, and then research and apply it to one's own unique situation.
“If you don't know, the thing to do is not to get scared, but to learn.”

Pharm91
Posts: 8
Joined: Thu Jan 11, 2018 9:44 am

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Pharm91 » Fri Jan 19, 2018 7:43 am

With a current income of roughly 140k/year I will be in the 24% tax bracket and putting away my money roth. I was putting my money away roth in the past as well. There are a couple of reasons for this. My longtime girlfriend and likely my wife someday makes 300k per year. Our tax bracket will certainly rise once we are filing jointly. I will consider pretax at that time. My salary puts me in HCE status because my company pays in company stock and pension not in a safe harbor match. So the limits annually do not discriminate between roth or pre-tax money, and roth allows me to save more. Ultimately, this is the last hoo-ra though. With the country likely to be in 20 trillion in debt by the end of this thing I can see my taxes going up substantially at some point in my life. So I will wait to contribute to pre-tax then.

26 y/o fyi

User avatar
FiveK
Posts: 4861
Joined: Sun Mar 16, 2014 2:43 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Fri Jan 19, 2018 10:26 am

JCE66 wrote:
Fri Jan 19, 2018 7:30 am
Example: If you are currently in the X% tax bracket, you will be in the Y% bracket under the new law and maxing a 401K/Traditional IRA would tend to be the better first choice.
Example: If you are currently in the X% tax bracket, you will be in the Y% bracket under the new law and maxing a Roth IRA would tend to be the better first choice.
To make an informed choice, one also needs to estimate Z%, the marginal rate at which any traditional contributions made this year would be withdrawn. See Traditional versus Roth - Bogleheads.

User avatar
AtlasShrugged?
Posts: 547
Joined: Wed Jul 15, 2015 6:08 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by AtlasShrugged? » Fri Jan 19, 2018 10:45 am

To make an informed choice, one also needs to estimate Z%, the marginal rate at which any traditional contributions made this year would be withdrawn.
FiveK...Great point. I am guessing the vast majority of Americans will either stay in the same bracket, or drop down a bracket. I do not think I will go up in a bracket, truthfully.
“If you don't know, the thing to do is not to get scared, but to learn.”

MrBeaver
Posts: 100
Joined: Tue Nov 14, 2017 4:45 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by MrBeaver » Fri Jan 19, 2018 4:11 pm

FiveK wrote:
Wed Jan 17, 2018 8:46 pm
TheHouse7 wrote:
Wed Jan 17, 2018 7:35 pm
I'm(30) most interested in landing the most tax credits by low income (84k MFJ with our first kid due Feb).
We will Max 401k(18.5k), Tira(11k), and HSA(6.2k).
Does this sound like an optimal tax situation for 2018? Should we be contributing to Roth IRAs instead??
Thank you for any response. :beer
Easy question first: is a $700 employer contribution the reason for only $6.2K into the HSA?

The choice of traditional vs. Roth is more complex, and would require a working crystal ball to answer with certainty.

E.g., if each of you starts with $2K into Roth IRAs and then looks at the additional $25.5K of tax advantaged space, your marginal rate for various amounts of pre-tax contribution is below. Numbers are negative because they represent savings, not payments. Read "401k" as "combined 401k and tIRA." This works for your case because the Earned Income Credit is not a factor.

Reasonable choices include
a) contribute all traditional, because we aren't yet close to the $1 million in traditional assets needed to reach the 12% bracket on a 4% withdrawal rate from those alone.
b) contribute all Roth, because
- i) we expect much higher income later in life and will switch to traditional then, in plenty of time to reach that $1 million amount, or
- ii) we expect to have a pension or other guaranteed income that will put us in the 12% bracket on that alone
c) contribute just enough to traditional to reach the first saver's credit tier (that's the step change on the chart) and put the rest into Roth

Image

See the personal finance toolbox spreadsheet to enter your own numbers. Good luck!
I'm in a similar situation to TheHouse7, but 7 years later (37) with ~15k more income (100k MFJ)

I see many opinions here, but my strategy has been:
  • If traditional tax-deferred contributions can reduce AGI to below savers credit threshold, do that.
  • If AGI cannot be reduced to savers credit threshold, contribute everything to Roth until I hit the 12/22% (formerly 15/25%) bracket line, then continue with traditional tax-deferred.
  • If taxable account capital gains can be harvested at 0% (instead of 15%) by increasing traditional tax-deferred percentage vs Roth percentage contributions, do that up until contributions are 100% traditional tax-deferred.
  • If 100% traditional tax-deferred contributions can't get me below the 22% (formerly 25%) bracket, it's easy: contribute 100% traditional tax-deferred (no Roth).
  • If income is below 12/24 bracket boundary (early retirement, low income year due to loss of job, etc.), tax gain harvest up to the bracket boundary at 0%. If there is still room left and there is earned income, see first bullet. If there is still room left and no earned income(likely in early retirement or extended job loss), convert traditional to Roth.
So far this strategy has worked well I think, but I'd welcome any constructive feedback. Current Roth/Trad/HSA mix is 256k/92k/142k (52%,19%,29%), and contributions are now about 50%/50% Roth/Traditional, likely changing to 0/100% about five years from now, ending with around 38%/38%/24% Trad/Roth/HSA at 60 years old at which point trad->roth conversions would commence and then later traditional MRDs, and HSA would have enough to pay for medicare premiums and self-fund long-term care as needed.

My main goals are to keep from being in the 22% bracket (or whatever the large 'bump' ends up being) during minimum required distributions while also preserving tax-free growth through holding assets in Roth as long as possible (no minimum required distributions, great to pass to children), and donating unused HSA funds at death to charity (since it would otherwise be taxable as regular income).

It seems many on this board have higher incomes and are squarely in the 24/32/35% brackets, so their main concern is to use traditional tax-deferred as much as possible, save enough taxable to sustain a high cost of living, and do a combination of backdoor roth/roth conversions to maximize tax-free growth with no MRDs.

User avatar
FiveK
Posts: 4861
Joined: Sun Mar 16, 2014 2:43 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Fri Jan 19, 2018 4:29 pm

7trumpets wrote:
Fri Jan 19, 2018 4:11 pm
I see many opinions here, but my strategy has been:
  • If traditional tax-deferred contributions can reduce AGI to below savers credit threshold, do that.
  • If AGI cannot be reduced to savers credit threshold, contribute everything to Roth until I hit the 12/22% (formerly 15/25%) bracket line, then continue with traditional tax-deferred.
  • If taxable account capital gains can be harvested at 0% (instead of 15%) by increasing traditional tax-deferred percentage vs Roth percentage contributions, do that up until contributions are 100% traditional tax-deferred.
  • If 100% traditional tax-deferred contributions can't get me below the 22% (formerly 25%) bracket, it's easy: contribute 100% traditional tax-deferred (no Roth).
  • If income is below 12/24 bracket boundary (early retirement, low income year due to loss of job, etc.), tax gain harvest up to the bracket boundary at 0%. If there is still room left and there is earned income, see first bullet. If there is still room left and no earned income(likely in early retirement or extended job loss), convert traditional to Roth.
So far this strategy has worked well I think, but I'd welcome any constructive feedback. Current Roth/Trad/HSA mix is 256k/92k/142k (52%,19%,29%),
That's a reasonable set of guidelines. Some things you might want to check:
- Will a 4% (or your choice) withdrawal rate from your traditional account balance, when added to any guaranteed income in early retirement, put you above the 10% bracket? If not, contribute more to traditional now. It takes a balance of ~$1 million for MFJ with that income alone.
- The choice of "tax gain harvest at 0%" vs. "convert traditional to Roth at 12%/15%", when that space is available for one or the other, is complex. In general, Roth conversions seem better when one expects to keep the money invested for a "longer" time (>10 years?).

MrBeaver
Posts: 100
Joined: Tue Nov 14, 2017 4:45 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by MrBeaver » Fri Jan 19, 2018 4:46 pm

FiveK wrote:
Fri Jan 19, 2018 4:29 pm
That's a reasonable set of guidelines. Some things you might want to check:
- Will a 4% (or your choice) withdrawal rate from your traditional account balance, when added to any guaranteed income in early retirement, put you above the 10% bracket? If not, contribute more to traditional now. It takes a balance of ~$1 million for MFJ with that income alone.
- The choice of "tax gain harvest at 0%" vs. "convert traditional to Roth at 12%/15%", when that space is available for one or the other, is complex. In general, Roth conversions seem better when one expects to keep the money invested for a "longer" time (>10 years?).
Excellent points. Thanks!

I haven't really hit a situation where I have to decide between tax gain harvesting and traditional -> Roth conversions, but that's good to keep in mind down the road.
.
I'm not sure I follow the logic for your first point though. During any early retirement, I figured I'd simply convert up to the bracket line regardless of what withdrawal rate that was, and use a combination of taxable/Roth to live on during that period. At a 6.5% effective growth rate (after inflation), my model has traditional tax-deferred at 1.25M of today's dollars in early retirement, so I think this satisfies your caution and contributing some to Roth now is prudent? I try not to worry TOO much about those specifics though, as the tax landscape will likely be much different in 20 years.

User avatar
FiveK
Posts: 4861
Joined: Sun Mar 16, 2014 2:43 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Fri Jan 19, 2018 5:12 pm

7trumpets wrote:
Fri Jan 19, 2018 4:46 pm
I'm not sure I follow the logic for your first point though. During any early retirement, I figured I'd simply convert up to the bracket line regardless of what withdrawal rate that was, and use a combination of taxable/Roth to live on during that period. At a 6.5% effective growth rate (after inflation), my model has traditional tax-deferred at 1.25M of today's dollars in early retirement, so I think this satisfies your caution and contributing some to Roth now is prudent? I try not to worry TOO much about those specifics though, as the tax landscape will likely be much different in 20 years.
Also, who knows what the growth rate will be? So yes, the best one can do is make defensible choices now and reevaluate every year or so.

Appears you are "in the ballpark" so I don't see a compelling reason to change - unless you want to allow for the possibility of retiring (by choice or force) earlier than 60. That would imply more use of traditional now.

WIthdrawal rate matters because you want some idea of how feasible a Roth Conversion Ladder will be. E.g., if one has so little in traditional accounts that the entire amount can be converted in low brackets at 33%/yr, that implies too little in traditional. The opposite conclusion occurs if, say, 2%/yr would put one in the 24% or higher bracket.

Genug
Posts: 1
Joined: Sat Jan 20, 2018 5:36 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Genug » Sat Jan 20, 2018 8:26 pm

This is a very interesting thread to me as I have been trying to decide if the new tax law provides a stronger case for me to do some Roth conversions.

I am 59 and retired, spouse and I have three pensions that total to $128k annual with a cola
We have $2 mill in tax deferred accounts and about $400k after tax accounts and $150k in cash equivalents
We have no Roth accounts currently. We will have annual SS of $34k at fra after adjustment for WEP.

Our annual income need has been about $160k over the last few years in retirement. This include mortgage , health insurance and State and Federal Taxes.

Going back to the new tax law, one post mentioned the broadening of the 24% tax bracket. I think that is where I fit. If the brackets stay the same I would likely stay in the 24% bracket for a very long time. I don't see a great advantage to doing Roth conversions in that case.

If I assume the rates will revert it makes sense for me to convert at 24% as I will be in the 28% or higher in the future.

A lot of the tax deferred went in at the 33% rate so I am still ahead whether I convert or not.

I put my numbers int ORP. It currently assumes the reversion in 2026 to the 2017 rates. Not unexpectedly it recommended heavy conversions through 2026. I also turned off the Roth conversion option and it still recommended tapping my tax deferred to the top of the 24% bracket and put it into taxable savings. The Driver being pay 24% now to avoid 28% later even with no Roth

I guess for the sake of diversification I should do at least some Conversions over the next ten years.

I would be interested to see comments from those that have studied this much deeper than I

User avatar
FiveK
Posts: 4861
Joined: Sun Mar 16, 2014 2:43 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Sat Jan 20, 2018 8:59 pm

Genug, welcome to the forum.

If you can pay the tax from taxable funds, converting now at X% to avoid paying taxes later at the same X% is still favorable, because you were able to take taxable funds and put them into a Roth account.

Post Reply