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 :(

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

Post by togb » Sat Jan 20, 2018 8:16 pm

Initially I thought I would aggressively convert money from IRA to ROTH while the rates were lower. I'm still trying to figure this out. I have more than 90% of my retirement money in tax deferred accounts, and my ROTH is tiny.

I have no crystal ball to say whether taxes will be lower or higher in 10 years, 20 years. My expenses won't be much different in retirement than they are now, and the expenses will be high enough that there no chance of avoiding a tax bite. I'm working on theory that I should have a target for what my RMD should be in order to add to SS to cover most expenses. So desired $$, less SS, tells me what I hope my RMD will be. SInce that's too complicated, I just assume 4% withdrawal rate-- so targeted IRA RMD x 25 is how much I'd like to have in my IRA at age 70.

I want my ROTH to be for travel, fun, unexpected expenses. So target for that x 20 created my target for my ROTH.
The target for my brokerage account is pulled out of thin air, and it's a cushion, as is any equity in real estate.

This methodology shows that yep, I have too much in IRA and not enough in ROTH. I can use the next 5-7 years to pull money out of IRA and convert to ROTH, and rebalance. It makes each account hit the target buy man I hate the tax part of it. I also am contributing to my ROTH at the max, and doing some ROTH contributions through 401K.

Anyone smart enough to figure out a less offensive way with regard to taxes? (Marginal rate will be 25%).

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

Post by Ron Ronnerson » Sat Jan 20, 2018 8:25 pm

luke123 wrote:
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.
Actually, per advice on Bogleheads, I'm planning to contribute more to traditional and less to Roth since my tax bracket has gone up from 15% to 22%. viewtopic.php?t=236049

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

Post by peseta » Sat Jan 20, 2018 10:03 pm

One additional thing to consider: even assuming taxes “go up” in the future, does that mean that it will be *income* taxes that are hiked? A future Congress may try to raise taxes in a more opaque way, like a VAT. In fact, one could easily envision a future Congress lowering marginal income tax rates as the “sweetener” for a VAT, making a Roth a very bad choice in such an environment. If you look at Europe, this is the direction many countries have gone down the past few decades, as have some U.S. state governments by raising sales taxes instead of income tax rates. (A border adjustment tax like the one recently floated in the recent tax reform negotiations might be another possibility.)

The point is, who knows what will happen, even if the government needs more revenue. The need for more government revenue does not necessarily militate that marginal income tax rates will increase. That said, I personally do diversify between pre-tax and Roth saving, myself.

peseta

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

Post by Seal the Deal » Sat Jan 20, 2018 10:43 pm

Yes, I have switched from traditional to Roth TSP for 2018. My estimate shows for MAGI of $77K, MFJ with 3 kids, our federal tax owed will be less than our total child tax credit. Seems to be the ideal time to max Roth contributions!

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

Post by willthrill81 » Sat Jan 20, 2018 11:05 pm

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.
+1

"A bird in the hand is worth two in the bush."

Once our mortgage is paid off, the lion's share of our savings will go into tax-deferred accounts (e.g. 401k, 457, HSA) with the remainder going into Roth IRAs for myself and my DW. I cannot deduct traditional IRA contributions, and while my DW has in the past, we'll probably go the Roth route for her going forward. I have no doubts at all that we'll be at least in the 12% bracket in retirement, and as such, I'd rather have money in Roth accounts mainly due to them being preferable when inherited. But for the most part, I think that tax deferred is the way to go. If you have available 'space' to make it worthwhile, you can just do Roth conversions in retirement.
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Re: Lower tax rates for 7 yrs.-Are you switching to Roth 401K

Post by limeyx » Sat Jan 20, 2018 11:39 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.
I've just started this too. Vast majority in the 401k, a little in Roth401 and fill the RothIRA (for now)

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

Post by JBTX » Sat Jan 20, 2018 11:43 pm

Engineer250 wrote:
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.
While there are quite a few divergent views on here on this and other issues, I agree among the board “Illuminati” you are viewed as pretty much an idiot for doing anything other than traditional when you actually have a choice. I will agree if all of their assumptions hold true, then traditional will usually be better. Among those assumptions:

1. You will have no other material sources of income in retirement.
2. Social security impact on income tax will not come into play.
3. You will always reinvest traditional tax savings, tuck it away in a “lock box” and hold it until early retirement
4. You will always be in a situation that you can comfortably retire many years in advance of social security such that you can tap traditonal balances or do Roth conversions.
5. You will always be able to do Roth conversions per future tax law
6. Tax rates having been going down for many years. Therefore they will likely never go back up.
7. You will have enough liquidity (taxable account savings) during pre social security years to pay for your living expenses and pay the tax bills for Roth conversions.

How one views this issue seems to be a matter of belief system. For most, a change in tax rates of a few points will not change that core belief system.

15-20 years ago when tax rates were higher I remember reading some articles by academics that said Roth’s were superior and even went on to say that you are better off being in taxable accounts with low capital gains rates vs in traditional when income tax rates were surely going to go up and taxability of social security would drive you into a 50% marginal rate of retirement withdrawal. I recall doing some spreadsheets and confirming the result. In retrospect they were wrong, given where we are now. The conclusion by some in here is “see they were wrong, traditonal is always going to be better”. My conclusion is things changed significantly over the last 2 decades, and it is more likely than not they will change significantly again.

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

Post by Osprey » Sun Jan 21, 2018 12:15 am

I am switching to Roth 401k this year as we have moved from 32% to 24% marginal rate and most of our current retirement savings is pretax. We will have pension income in retirement and thus don't foresee being in a lower bracket then and if one of us dies, the single bracket will be worse. So hedging our bets.

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

Post by BigMoneyNoWhammies » Sun Jan 21, 2018 12:22 am

luke123 wrote:
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.
The tax breaks are set to expire, but Congress only set a time limit on them for procedural reasons. If history is any guide, Congress will reauthorize them when the time comes just like they did with the Bush tax cuts.

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

Post by Agggm » Sun Jan 21, 2018 1:05 am

luke123 wrote:
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.
In theory yes. In current law some (not all) people have a temporary reduction in personal federal income taxes. For those people who have lower tax rates it may make sense to invest in Roth instead of traditional if the new lower rates fall below their "expected" future rates. If the new lower rates are still higher than their "expected" future rates, they may still want to favor traditional. For those who now have a higher tax liability (especially those in NJ, NY, CA, some parts of PA etc), it may make more sense to shift from Roth to trad all else equal.

Something I don't see discussed here much is the change in how tax brackets are indexed to chained cpi vs just cpi. CCPI method includes the switch to cheaper substitute goods and services when the original supplier increased the price. This invariably has the effect of always producing a lower inflation value vs cpi. So, tax bracket levels will adjust more slowly. This means (assuming the same sequence of wage increases) that we'll move up the tax brackets more quickly and therefore have increasing taxes year over year in excess of what we would have experienced under the cpi adjustment method. So this would dictate a gradual shift towards traditional over roth.

To be complete though, there is an equivalence between roth and trad. Roth ~= trad + W, where W = invest the tax savings in a taxable account. What makes this funky is the different tax drag on W can vary semi-independently from ordinary income rates.
Last edited by Agggm on Sun Jan 21, 2018 1:14 am, edited 1 time in total.

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

Post by willthrill81 » Sun Jan 21, 2018 1:10 am

JBTX wrote:
Sat Jan 20, 2018 11:43 pm
15-20 years ago when tax rates were higher I remember reading some articles by academics that said Roth’s were superior and even went on to say that you are better off being in taxable accounts with low capital gains rates vs in traditional when income tax rates were surely going to go up and taxability of social security would drive you into a 50% marginal rate of retirement withdrawal. I recall doing some spreadsheets and confirming the result. In retrospect they were wrong, given where we are now. The conclusion by some in here is “see they were wrong, traditonal is always going to be better”. My conclusion is things changed significantly over the last 2 decades, and it is more likely than not they will change significantly again.
In the absence of a working crystal ball with which to know one's portfolio balance during retirement and tax brackets and rates throughout retirement, I view going with the guaranteed benefit of tax reduction today as preferential to the hope of preferential tax treatment later. But that is a personal assessment.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by Agggm » Sun Jan 21, 2018 1:18 am

Bacchus01 wrote:
Fri Jan 12, 2018 7:58 am
We don’t know anything about what they will Be in 8 years.
We have a law that says what will happen in 8 years. Unless the law is changed (but we can't speculate about that on this forum).

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

Post by go140point6 » Sun Jan 21, 2018 1:31 am

CppCoder wrote:
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... 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.
Yes, this was exactly my thought too (also on the fence for a few years) and I switched a portion of my retirement to 401k Roth starting this year. I absolutely will be in a larger tax bracket in retirement, especially after 70, due to a pension (probably 75% of gross when I retire at 58), social security and RMD's. I'm in my early 40's, have been maxing my traditional 401k for several years, have a traditional 457 that I have been contributing too as well. Plus mostly maxing my Roth IRA every year, with the occasional traditional IRA depending on the circumstances. And I have a wife 8 years younger who plans to work forever (loves what she does), likewise has a 401k and Roth IRA.

I decided I wanted a 35% pre-tax, 30% post-tax, and 35% taxable mix to hedge for any situation in a couple decades, and as of today I'm at 53%, 10% and 37%. So I moved my 401k (max) to Roth, and will decide if my 457 (1/2 max) should go in about a year to try to meet my goals.

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

Post by Agggm » Sun Jan 21, 2018 1:35 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. Predicting the future is difficult.
Consensus among economists and other math scientists is that future taxes have to increase to cover our debt that is projected to continue to grow rapidly. Currently US d/gdp ~ 1.06.
Japan's d/gdp ~2.45.
Since Japan hasn't imploded yet, I think we're still fine and can still get away with lower taxes in the short term.
But at some point credit worthiness goes down as that ratio goes up. And borrowing costs would increase in response (ie govt bond interest rates rise). The U.S. is unlikely to default (lol) so they will make those higher payments. They have to get that money through taxes. One easy way to quickly tax all wealth is to print more cash than is destroyed (driving up inflation). The hard way to tax is by changing a law that taxes us at higher rates.

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

Post by JBTX » Sun Jan 21, 2018 11:41 am

Agggm wrote:
Sun Jan 21, 2018 1:35 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. Predicting the future is difficult.
Consensus among economists and other math scientists is that future taxes have to increase to cover our debt that is projected to continue to grow rapidly. Currently US d/gdp ~ 1.06.
Japan's d/gdp ~2.45.
Since Japan hasn't imploded yet, I think we're still fine and can still get away with lower taxes in the short term.
But at some point credit worthiness goes down as that ratio goes up. And borrowing costs would increase in response (ie govt bond interest rates rise). The U.S. is unlikely to default (lol) so they will make those higher payments. They have to get that money through taxes. One easy way to quickly tax all wealth is to print more cash than is destroyed (driving up inflation). The hard way to tax is by changing a law that taxes us at higher rates.
From what I understand Japan hasn’t imploded because it’s citizens are heavy personal savers. You can run a higher debt if your own citizens are willing and able to fund it. But the result, combined with unfavorable demographics is perpetual economic stagnation. If Japan’s interest rate ever went back up to a “normal” level the debt service payments would be crippling.

We don’t save anywhere near the level of the Japanese.

I like you tend to think they will have to up eventually. Could be income tax rates, could be a consumption tax, could be increased taxes on retirement savings or means testing of entitlements, or all of the above.

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

Post by libralibra » Sun Jan 21, 2018 11:09 pm

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
There are different bands of income where the bracket went up 2% or 4%. The biggest I noticed was Head of Household 200k-216.7k where the rate went from 28% to 35%.

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

Post by KlangFool » Sun Jan 21, 2018 11:19 pm

alvinsch wrote:
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.
alvinsch,

I disagreed with that statement. In fact, globally, individual and corporate income tax has been going down over the past 10 to 20 years. USA is playing catch up with the global trend. What has been going up is some form of consumption tax like VAT/GST/Sales Tax.

KlangFool

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

Post by Bastiat » Mon Jan 22, 2018 12:18 am

Agggm wrote:
Sun Jan 21, 2018 1:35 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. Predicting the future is difficult.
Consensus among economists and other math scientists is that future taxes have to increase to cover our debt that is projected to continue to grow rapidly. Currently US d/gdp ~ 1.06.
Japan's d/gdp ~2.45.
Since Japan hasn't imploded yet, I think we're still fine and can still get away with lower taxes in the short term.
But at some point credit worthiness goes down as that ratio goes up. And borrowing costs would increase in response (ie govt bond interest rates rise). The U.S. is unlikely to default (lol) so they will make those higher payments. They have to get that money through taxes. One easy way to quickly tax all wealth is to print more cash than is destroyed (driving up inflation). The hard way to tax is by changing a law that taxes us at higher rates.
The issue is on the expense side, not the revenue side. The government has been taking record tax revenues for quite some time. They are getting plenty of money; they a spending even more. If you lower spending to a reasonable number taxes do not need to go anywhere.

I don't think we can discuss which is the more likely outcome, but both are possibilities; you can't say it has to be one or the other.

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