2018 401k

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adaml30
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2018 401k

Post by adaml30 » Sat Dec 30, 2017 6:09 pm

With the new tax laws, does it now make sense to make 401k post tax? I know it probably depends a lot on many variables for each family, but I would assume taxes will be going back up eventually. Spouse and I combined at 230k with 3 ESAs for our children. If we did a Roth it would probably take us over the max to contribute to those. I am sure there is already a topic on this, if so please direct me there. If not, I would love to hear peoples input. Thanks!

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Tyler Aspect
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Re: 2018 401k

Post by Tyler Aspect » Sat Dec 30, 2017 6:32 pm

For high income earners a traditional 401k makes more sense than a Roth 401k. You should check if your income level makes you not eligible to contribute to a Roth IRA.
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livesoft
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Re: 2018 401k

Post by livesoft » Sat Dec 30, 2017 6:34 pm

Traditional makes more sense.

See also: viewtopic.php?t=79510
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gilgamesh
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Re: 2018 401k

Post by gilgamesh » Sat Dec 30, 2017 7:58 pm

With the new tax law with lowered rates, combined with the fact it is temporary, I think this needs to be reevaluated. Especially with the 20% small business deduction for professionals' with taxable income of less than $315k (MFJ, phased out over $100k).

With the 199A tax deduction marginal tax rate could be as little as 19.2%, which would have been 33% in 2017. Besides these might expire...So, one could be deferring 19.2% taxes to end up paying more if tax cuts elapse...

The way I see it, with the new tax cuts and them being temporary, definitely makes me re-evaluate my plans....why am I deferring taxes when it's low now and it could be higher later?

Engineer250
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Re: 2018 401k

Post by Engineer250 » Sun Dec 31, 2017 2:27 am

livesoft wrote:
Sat Dec 30, 2017 6:34 pm
Traditional makes more sense.

See also: viewtopic.php?t=79510
I don't see how that thread proves anything. Other than people are willing to pay more money to anything and anybody so long as they don't pay a dime in taxes.
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Ketawa
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Re: 2018 401k

Post by Ketawa » Sun Dec 31, 2017 10:42 am

The main benefit of Traditional contributions is the ability to deduct income at your top rate now and fill up lower tax brackets in retirement with withdrawals or conversions to Roth. 24% is still a lot higher than 12% or 15%, even if the lower rates expire as in the current law.

gilgamesh
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Re: 2018 401k

Post by gilgamesh » Sun Dec 31, 2017 11:37 am

Only one thing changed with the new bill that impacts this decision ...many may have drastically lower marginal tax rate now and if it elapses (with the less generous inflation adjustment) a higher average tax rate than it was in 2017.

Everything else, including Roth conversion etc. is the same...

It's prudent to check, whether the only change (lower marginal tax bracket now, and higher average tax rate later ) still matches to all the other aspects why you chose a tax deferred plan.

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AndrewXnn
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Re: 2018 401k

Post by AndrewXnn » Sun Dec 31, 2017 12:06 pm

Traditional (deductible) contributions make sense to the extent that they may push you into a lower bracket.

After that, one needs to know ones expected tax situation in retirement.
Unfortunately, there is the uncertainty of possible future changes, which are of course unknown.
However, even assuming that the new law remains the same, it still depends on how much
taxable income one will have once retired.

There is potentially a window of time from initial retirement to age 70.5 when ones taxable income could be very low.
This is especially true if one does not take SS or a Pension until age 70.
During that window, it might be possible to take pre-tax funds from a IRA or 401k and place them into a Roth
at the lowest possible rates.

For MFJ, the key income level is $77,400. Below that is of course the 12% marginal rate.
If you can move all of your after tax funds into a Roth at $77.4K/year, then you are set.
If you have more than that, then the next key income level is $165K/year for MFJ.
If you can not move all of your after tax funds into a Roth at the 12% rate, then you have to
contend with the 22% rate.

If you are looking at the max SS of ~3.6K/year per person, then you are looking at about $86K/year of SS.
That only leaves about $79K/year that you can put into a Roth in the 22% bracket.

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FiveK
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Re: 2018 401k

Post by FiveK » Sun Dec 31, 2017 2:43 pm

adaml30 wrote:
Sat Dec 30, 2017 6:09 pm
I am sure there is already a topic on this, if so please direct me there.
See Traditional versus Roth.

It boils down to your marginal saving rate if you make traditional contributions now, vs. the marginal rate you would pay when withdrawing amounts based on those contributions later.

There will always be some uncertainty in estimating that future marginal rate, but whatever it is will determine whether your choice now was correct. See Investment Order for a quick 'n' dirty way to make such an estimate. Dartboards may also be employed.

Unless you have an extreme case (e.g., 10% marginal now vs. expecting 35% marginal in retirement) the difference in outcomes won't be extreme, so take your best guess and good luck!

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