Lower tax rates for 7 yrs.-Are you switching to Roth 401K

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luke123
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Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by luke123 » Fri Jan 12, 2018 7:38 am

With the personal tax rates lowering in 2018 (but only for the next 7 yrs), is anyone going to start contributing more to their Roth 401K vs Traditional 401K? If you invest in the Roth 401K for the next 7 years you know you will be in a lower tax bracket, at least until 2025. After 2025, we know the tax rates will go back up to the 2017 levels, so you could start contributing more to Traditional 401K.

livesoft
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by livesoft » Fri Jan 12, 2018 7:57 am

What does a lower tax bracket have to do with it if you are not going to be withdrawing the money in 2026 especially if you are still working?

I think most people will still be in a lower tax bracket when they withdraw the money in retirement even after tax rates go up.
Last edited by livesoft on Fri Jan 12, 2018 7:58 am, edited 1 time in total.
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Bacchus01
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by Bacchus01 » Fri Jan 12, 2018 7:58 am

We don’t know anything about what they will Be in 8 years.

annielouise
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by annielouise » Fri Jan 12, 2018 9:52 am

About half of 401k plans do not offer a Roth option, so, for us at least, it makes no difference.

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mhc
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by mhc » Fri Jan 12, 2018 9:56 am

I think the recent tax change strengthens the argument for not using a Roth 401k. People continuously say tax rates are going up in the future so use the Roth 401k. Guess what, they just went down. Predicting the future is difficult.

luke123
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by luke123 » Fri Jan 12, 2018 9:59 am

If someone is expecting to be in the same tax bracket when they retire, why not pay 22% taxes for the next 7 years when we know it will go back up to 25% in 2025? Yes, the tax laws could change in 2026, but as of today we know taxes will increase in 7 yrs.

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teen persuasion
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by teen persuasion » Fri Jan 12, 2018 10:00 am

The phaseout rate of 21% for EITC (compounded by state matching up to 30%) was not changed. This is the largest component of our relatively high marginal rate, so no shift to Roth 401k for us, traditional all the way.

retiredjg
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by retiredjg » Fri Jan 12, 2018 10:02 am

luke123 wrote:
Fri Jan 12, 2018 7:38 am
After 2025, we know the tax rates will go back up to the 2017 levels, so you could start contributing more to Traditional 401K.
Unfortunately, we don't know that. In the past, some of these things have been made permanent instead of reverting to previous levels as originally legislated.

LiterallyIronic
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by LiterallyIronic » Fri Jan 12, 2018 10:06 am

I like doing a Traditional 401k alongside the Roth IRA. That way I have some money in both kinds. This: 1) hedges my bet either way; and 2) allows me to take out some money in retirement that would be taxed at a low rate and supplement that with money that won't be taxed at all.

livesoft
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by livesoft » Fri Jan 12, 2018 10:08 am

luke123 wrote:
Fri Jan 12, 2018 9:59 am
If someone is expecting to be in the same tax bracket when they retire, why not pay 22% taxes for the next 7 years when we know it will go back up to 25% in 2025? Yes, the tax laws could change in 2026, but as of today we know taxes will increase in 7 yrs.
We were in tax brackets as high as 33% when working, but now in retirement we pay practically no taxes. That's all because Roth 401(k) were not available to confuse us into making the wrong decision.

Also note that different kinds of income get taxed differently ... especially in retirement.
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Whakamole
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by Whakamole » Fri Jan 12, 2018 10:13 am

I still like the idea of definitely not paying taxes now as opposed to maybe not paying taxes later.

missingdonut
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by missingdonut » Fri Jan 12, 2018 10:13 am

For me, yes. In 2017 I was in the 28% tax bracket, but for 2018 my marginal rate drops to 19.2%.
livesoft wrote:
Fri Jan 12, 2018 7:57 am
I think most people will still be in a lower tax bracket when they withdraw the money in retirement even after tax rates go up.
Generally, I'd agree with this as a general rule. However, the younger you are, the less likely this would probably be true.

Runner01
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by Runner01 » Fri Jan 12, 2018 10:15 am

We will continue using a traditional 401(k) due to the EITC. We also contribute $2k to an IRA so my wife (SAHM) can qualify for the saver's credit and that will likely be Roth unless we are close to moving up a tier of the saver's credit.

wrongfunds
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by wrongfunds » Fri Jan 12, 2018 10:17 am

retiredjg wrote:
Fri Jan 12, 2018 10:02 am
luke123 wrote:
Fri Jan 12, 2018 7:38 am
After 2025, we know the tax rates will go back up to the 2017 levels, so you could start contributing more to Traditional 401K.
Unfortunately, we don't know that. In the past, some of these things have been made permanent instead of reverting to previous levels as originally legislated.
I am actually shocked that nobody has challenged the assertion that tax rates will NOT change between now and 2025! You DO understand that next administration COULD change it either UP or DOWN if they have the votes to do it.

But for some reason, my hands get slapped anytime I try to even raise this for discussion.

wrongfunds
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by wrongfunds » Fri Jan 12, 2018 10:19 am

Whakamole wrote:
Fri Jan 12, 2018 10:13 am
I still like the idea of definitely not paying taxes now as opposed to maybe not paying taxes later.
I am not sure if I understand you correctly. Are you saying a bird in hand is worth ...

mouth
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by mouth » Fri Jan 12, 2018 10:31 am

Even worse, I'm now in the higher 32% tax bracket making the choice even easier to make even if future rates still go up further or I retire to the same tax bracket. A good problem to have, but I'm in that small slice of income where I went from 25% to 32% with the same income :(

aristotelian
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by aristotelian » Fri Jan 12, 2018 10:40 am

No. The tax rate is lower but the delta between my marginal rate and the next one down is still 10% so I am continuing to max. My plan is early retirement with several years to pull from the employer account at approximately 0% so I can't imagine a scenario where I should not max.

an_asker
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by an_asker » Fri Jan 12, 2018 10:42 am

livesoft wrote:
Fri Jan 12, 2018 7:57 am
What does a lower tax bracket have to do with it if you are not going to be withdrawing the money in 2026 especially if you are still working?

I think most people will still be in a lower tax bracket when they withdraw the money in retirement even after tax rates go up.
livesoft:

With due - 58k vs 2k ;-) - respect, I don't think that is the right answer. The right answer is that the couple of percentage points (that the taxes got lowered by) should not be a deal maker. In other words, if at 28% marginal tax rate, it was not worth it to contribute to the Roth 401k, I don't see how 25% marginal tax rate would make it suddenly worth it.

Waitaminute though! It looks like if you are MFJ and had anywhere from $237950 to $315,000 in taxable income, your marginal tax rate would drop from 33% to 24% (unless I am reading the brackets wrong). That might make a case for contributing to the Roth 401k...

Also, folks who are making that much money - especially if they are in LCOL areas - might be in a higher tax bracket when they withdraw money in retirement as they would've put away a lot!

an_asker
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by an_asker » Fri Jan 12, 2018 10:44 am

mouth wrote:
Fri Jan 12, 2018 10:31 am
Even worse, I'm now in the higher 32% tax bracket making the choice even easier to make even if future rates still go up further or I retire to the same tax bracket. A good problem to have, but I'm in that small slice of income where I went from 25% to 32% with the same income :(
Please elaborate - I cannot see anyone going from 25% to 32%. Maybe you mean the opposite? :confused

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randomizer
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by randomizer » Fri Jan 12, 2018 10:44 am

mhc wrote:
Fri Jan 12, 2018 9:56 am
I think the recent tax change strengthens the argument for not using a Roth 401k. People continuously say tax rates are going up in the future so use the Roth 401k. Guess what, they just went down.
I'd suspect maybe reversion to the mean, then (ie. they'll go up). But yeah, nobody can predict the future.

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alvinsch
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by alvinsch » Fri Jan 12, 2018 10:50 am

I figure there's a good chance that my lower tax rate will only be good for 3 years so I plan to convert most if not all our 401k's to ROTH 401k's in the next 3 years up to the top of the 28.8% bracket (25+3.8). Previously if I wanted to do any significant conversions our margin tax bracket was 53.8% (28% AMT + 7% personal exemption phaseout +15% QDI/CG phaseout + 3.8% bummer tax).

While nobody know what future tax rates will be, the odds they are going to be lower for us are slim.
May the odds be ever in your favor.
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wolf359
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by wolf359 » Fri Jan 12, 2018 11:00 am

During the tax debate, they also came close to cancelling the traditional 401-k and forcing everyone into Roths. The lesson is that the future is uncertain, and nobody knows what tax changes may occur.

Therefore, I want to take my tax deduction now, while I know what my benefit is, and while I can.

The current tax deduction is based off my current income. In retirement, I'll have more control over exactly what my taxable income will be. Prior to RMDs, I'll tend to pull money only to meet expenses or to conduct Roth conversions. Since my expenses will be significantly below my current income, my tax bracket should also be lower than my current tax bracket.

No, I am not switching to the Roth 401-k. I may switch during my final years prior to retirement, but that will be for purposes of tax diversification (to make sure I have tax-free money to draw from if necessary.)

Ragnoth
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by Ragnoth » Fri Jan 12, 2018 11:19 am

The future is unknown, both in terms of tax rates and future income needs.

People usually frame the Roth vs. Traditional debate as "all-or-nothing," but a little tax diversification is a smart way to hedge your bets. For most people, this comes in the form of a traditional 401k + Roth IRA. For people with access to Roth 401k options, you can choose to split your 401k money into different accounts and increase your Roth allocation.

The changes in the tax code might tip you towards allocating slightly more into Roth accounts (assuming you are already splitting your 401k contributions between the Roth and Traditional options), but I don't think there is really an argument for drastically changing your allocation.

Congress adjusting the marginal tax rates doesn't really impact the underlying Roth/Traditional trade-offs (e.g., predicted income and tax rates in the future; RMDs; marginal vs. effective tax rates; etc.)

mouth
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by mouth » Fri Jan 12, 2018 11:22 am

an_asker wrote:
Fri Jan 12, 2018 10:44 am
mouth wrote:
Fri Jan 12, 2018 10:31 am
Even worse, I'm now in the higher 32% tax bracket making the choice even easier to make even if future rates still go up further or I retire to the same tax bracket. A good problem to have, but I'm in that small slice of income where I went from 25% to 32% with the same income :(
Please elaborate - I cannot see anyone going from 25% to 32%. Maybe you mean the opposite? :confused
First, my mistake I meant to say from 28% to 32% ... not 25% to 32%.
Second I should clarify, Single-filler

So with that said ...

pre-2018 if your taxable income was was between $91k and 191K you were in the 28% bracket. Now if you break $157K you are in the 32% bracket. That means anyone, like me, that was between $157k and $191K of taxable income last year went from the 28% bracket to the 32% bracket. I happen to be at the bottom end of that range so every dollar more I make taxable ... well you get the point. If I were at the top of that range (ie $191), then every extra taxable dollar would have put me into the 33% bracket but now just gets taxed at 32% up until $200k after which they are in the 35% bracket.

So, there is a little island of folks who ended up in a higher marginal bracket until they make enough to once again be in a "lower" bracket compared to the old tax law.

EDIT: not the greatest pic I found to illustrate, but if you look at the single filer where the black line sits outside the white area ... that is where I sit, right at the low end.
Image
Last edited by mouth on Fri Jan 12, 2018 11:30 am, edited 1 time in total.

livesoft
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by livesoft » Fri Jan 12, 2018 11:26 am

Re: tax diversification, I get it. I got it. We cheat on this. We tax defer the max we can to traditional 401(k)s, but also contribute the max we can to Roth IRA and make a decent sized traditional IRA to Roth IRA conversion each year that exceeds our 401(k) contributions. We can only do this because we were not confused by Roth 401(k) vs Traditional 401(k) when we were younger and in higher tax brackets.

I think I am seeing a dichotomy here: Older taxpayers with less time to retirement see their future tax rates better than younger taxpayers with more time to retirement.
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DVMResident
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by DVMResident » Fri Jan 12, 2018 11:33 am

There isn't a fundamental change in tactics here: try to drop into the lowest brackets and then start utilizing Roth.

Now it's easier to drop into the lowest bracket due the higher standard deduction. That 12% band is pretty wide: MFJ 12% tops at $77,400 with a $24,000 standard deduction. The 12% band tops out at $101,400 ($77.4k + $24k standard deduction). The 2017 MFJ 15% band capped out at $88,600 with standard deduction ($75.9k + $12.7k standard deduction). This is the most impactful band to talk about because of the +10% jump to the next brackets (22% in 2018 and 25% in 2017).

Locking in 12% ROTH is pretty tempting, especially if you already have large pre-tax account to fill up future lower brackets (never go 100% Roth). People in the $90k~$120k income range (maybe a little wider if itemizing) that should consider Roth 401(k) more then prior years. Just enough traditional 401(k) to stay within the 12% band and then switch to Roth.

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iceport
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by iceport » Fri Jan 12, 2018 11:37 am

randomizer wrote:
Fri Jan 12, 2018 10:44 am
mhc wrote:
Fri Jan 12, 2018 9:56 am
I think the recent tax change strengthens the argument for not using a Roth 401k. People continuously say tax rates are going up in the future so use the Roth 401k. Guess what, they just went down.
I'd suspect maybe reversion to the mean, then (ie. they'll go up). But yeah, nobody can predict the future.
I'm not sure reversion to the mean, exactly, applies here. But yes, I agree that the recent lowering of tax rates makes a future tax increase far more likely, not less.

The uncertainty makes a case for tax diversification, not tying your entire tax-treatment fate to one assumption.
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Buttery Lobster
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by Buttery Lobster » Fri Jan 12, 2018 11:52 am

The thing most interesting to me about a Roth 401(k) is that it has the same maximum contribution rate as a pre-tax 401(k), so it essentially allows you to put more into tax advantaged.

So what would be the best choice between the two if we assume someone is:
-Contributing the max to a Roth IRA
-Able to contribute the $18k max to EITHER a pre-tax 401(k) or a Roth 401(k)

Someone in the 22-24% bracket with a state income tax rate of 5% (give or take) maxing out their Roth 401(k) would be saving about the equivalent of $25,000 in a pre-tax 401(k), right? So if we don't make any predictions about whether taxes will go up or down in the future is it better to put $18,000 into pre-tax then put the difference into taxable account or max out a Roth 401(k)?

livesoft
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by livesoft » Fri Jan 12, 2018 12:01 pm

^That doesn't take into account putting any tax savings from making a traditional 401(k) contribution into a taxable account that is invested tax-efficiently. So one can always save/invest the same amount(s), just in slightly different locations.

I'll make a wild example: Suppose the Roth 401(k) has only craptacular funds like my spouse's old 401(k) with expense ratios of 2%. I would be taking out a loan from the traditional 401(k) and investing tax efficiently in a 529 plan or a taxable account under those circumstances instead of doing a Roth 401(k).
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CppCoder
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by CppCoder » Fri Jan 12, 2018 12:41 pm

I decided to switch to a Roth 401k this year. However, I've been on the fence for a few years, and the lowering of my current marginal rate pushed it over the edge. My situation is probably different than most, though. I already have a large traditional balance, I have a substantial pension, and I have restricted stock that will continue providing income for seven years even after I retire. Unless something drastic changes in my life (always possible), my RMDs will be large, and my need for money from my traditional sources will be $0 annually. I'm pushing more money into Roth now essentially as preparation for a legacy fund.

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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by gouverneur » Fri Jan 12, 2018 12:51 pm

LiterallyIronic wrote:
Fri Jan 12, 2018 10:06 am
I like doing a Traditional 401k alongside the Roth IRA. That way I have some money in both kinds. This: 1) hedges my bet either way; and 2) allows me to take out some money in retirement that would be taxed at a low rate and supplement that with money that won't be taxed at all.
Yup. I think for most people in the intermediate brackets (22-24) this will be the right answer. It's a close call as to whether you'll be in lower brackets during retirement, and subject to a huge host of factors that are both unpredictable and are not really appropriate discussion material here (i.e., contingent on future legislation). So have some of both. We're straddling the 22-24 bracket depending on how much we put into the traditional 401k, so we'll probably end up aiming to max out Roth IRAs, do some amount of Roth 401k, and then the rest traditional.

Engineer250
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by Engineer250 » Fri Jan 12, 2018 12:52 pm

My current Roth v. Pre-Tax balances are about 25% and 75% of my total retirement savings. I would like to get it closer to 50/50. So yes, as a combo of the new tax rates combined with the fact that I think in 2-3 years we'll bump up another tax rate due to increasing income, I plan to devote some portion to Roth 401k. Also, for me, maxing out both our pre-tax 401ks doesn't change our tax bracket right now, so that's another factor. And lastly, I have access to Mega Backdoor Roth, but can't afford it at this point. So to me it makes sense to do a 401k split for the next few years at least, then when my income goes up in a few years I can hopefully increase my after-tax contributions (and will go pre-tax for the 401k portion). But right now, with limits to how much I can afford to save, I'm probably going to do a 50/50 401k contributions for the next few years.

However, if there's a consensus on these boards, it's pre-tax no matter what. Assume taxes will always go down, assume Roth conversions will never get taken away, assume you will be in a lower tax bracket in retirement. I don't see how "certainty" of a tax break today is any different from a "certainty" of a pot of money I've already paid taxes on. It's probably heavily personality. I think a lot of young folks look at tax rates and the deficit and ponder what things will look like in 30 years. A lot of older folks who are close to retirement have been able to game their taxes in ways their younger versions couldn't have predicted, so to them they maybe wish they'd paid fewer taxes in their careers so they could have benefited even more.

Much like % in international or % in bonds, make the decision that you feel good about. Plenty hold bonds to help them sleep at night, even though theoretically long term they will make less money. So if more money in a Roth helps you sleep at night even if long term you might have paid a bit more in taxes, I don't see how that's any different from someone who holds a more conservative asset allocation.
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