Switch to Roth 401k? (33%->24% fed + 9.3% state)

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The529guy
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Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by The529guy » Thu Dec 28, 2017 3:13 pm

Scenario:
- Dropping from 33% to 24% marginal rate for federal taxes
- Remaining in 9.3% marginal rate for state taxes

Any Californians (or fellow high-tax state dwellers) considering making a switch from deductible 401k contributions to Roth 401k contributions, given the lower rates? If so, what assumptions are driving your thinking?

dandinsac
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by dandinsac » Thu Dec 28, 2017 3:32 pm

I will continue to maximize my tax deferred 401K/IRA for 2 key reasons:

- I may move away from CA when I retire.
- I plan to wait until 70 to start social security and hopefully retire at 63 or earlier. This gives me 7 years to manage withdrawals and taxes before RMDs could push me up to a higher bracket.

The new tax law has also made prepaying my mortgage more attractive as I may not be itemizing after this year. (At best, I expect that I will itemize every other year.)

PFInterest
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by PFInterest » Thu Dec 28, 2017 3:33 pm

nope. not even close. also going from 33 to 24. also still 9.3% CA tax. thats still a tough marginal tax to give up a deduction on especially since we are losing itemized deductions (no house).
just because it is a better deal, doesnt mean its good.
there will be years for roth conversions.
still doing rIRAs.

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FiveK
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by FiveK » Thu Dec 28, 2017 8:09 pm

The529guy wrote:
Thu Dec 28, 2017 3:13 pm
...what assumptions are driving your thinking?
One would hope it's the assumption about withdrawal marginal rate vs. the marginal rate for traditional contribution savings.

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The529guy
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by The529guy » Thu Dec 28, 2017 8:33 pm

FiveK wrote:
Thu Dec 28, 2017 8:09 pm
The529guy wrote:
Thu Dec 28, 2017 3:13 pm
...what assumptions are driving your thinking?
One would hope it's the assumption about withdrawal marginal rate vs. the marginal rate for traditional contribution savings.
Yes, thank you, those are the assumptions I’m looking for.

HenrySouthernCal
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by HenrySouthernCal » Thu Dec 28, 2017 8:36 pm

The529guy wrote:
Thu Dec 28, 2017 3:13 pm
Scenario:
- Dropping from 33% to 24% marginal rate for federal taxes
- Remaining in 9.3% marginal rate for state taxes

Any Californians (or fellow high-tax state dwellers) considering making a switch from deductible 401k contributions to Roth 401k contributions, given the lower rates? If so, what assumptions are driving your thinking?
What a coincidence! I was pondering the same question today and I am glad you asked. I am still debating myself, probably not do it or just try it with very small amount like $5K to Roth 401K and the rest to traditional 401K. The CA tax is big killer to me, I don't know if I stay in state during retirement. Even if I stay, my state bracket should be lower then. The tax rate for the money put into Roth is federal 24% + state 9.3% +Obama 0.9% = 34.2%, still quite high. If I really like CA for retirement, I can keep my home in CA, and move out of state for 2 years to start my retirement life, convert 401K to Roth out of state, then come back to CA.

JGoneRiding
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by JGoneRiding » Thu Dec 28, 2017 9:05 pm

I am not as dramatic. We will be going from 25% to 22%. I am going to do my best this year for tIRA and next year we will do simple IRA for us both then fill up the Roths. I think I will prioritize the Roths over full simple after the matches

Outafter20
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Location: New York for now.

Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by Outafter20 » Thu Dec 28, 2017 9:08 pm

Sticking with pretax 457 and 401K. Our Federal Tax went from 25% to 22% but our NYS Tax is still 6.65% and NYC Tax is 3.876%. We plan on relocating to Florida in the next 4-5 years where there is no state or city tax. Even if our Federal tax goes back to 25% we still make out going the pretax route.

letsgobobby
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by letsgobobby » Thu Dec 28, 2017 9:51 pm

The529guy wrote:
Thu Dec 28, 2017 3:13 pm
Scenario:
- Dropping from 33% to 24% marginal rate for federal taxes
- Remaining in 9.3% marginal rate for state taxes

Any Californians (or fellow high-tax state dwellers) considering making a switch from deductible 401k contributions to Roth 401k contributions, given the lower rates? If so, what assumptions are driving your thinking?
Your marginal rate is still 33% so I don’t think it’s a close call. Stick with traditional.

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The529guy
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by The529guy » Fri Dec 29, 2017 9:06 am

letsgobobby wrote:
Thu Dec 28, 2017 9:51 pm
The529guy wrote:
Thu Dec 28, 2017 3:13 pm
Scenario:
- Dropping from 33% to 24% marginal rate for federal taxes
- Remaining in 9.3% marginal rate for state taxes

Any Californians (or fellow high-tax state dwellers) considering making a switch from deductible 401k contributions to Roth 401k contributions, given the lower rates? If so, what assumptions are driving your thinking?
Your marginal rate is still 33% so I don’t think it’s a close call. Stick with traditional.
Yeah, it would take a lot to decide otherwise. It's pretty certain we won't be retiring to a lower-cost area.

dandinsac
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by dandinsac » Fri Dec 29, 2017 10:49 am

HenrySouthernCal wrote:
Thu Dec 28, 2017 8:36 pm
If I really like CA for retirement, I can keep my home in CA, and move out of state for 2 years to start my retirement life, convert 401K to Roth out of state, then come back to CA.
From what I’ve read, that may be a lot trickier than simply moving if you don’t sell your house. CA is a “sticky” state and wants to keep getting its share. This page touches on it...http://www.nomadfinance101.com/home-sta ... state-tax/a

HenrySouthernCal
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by HenrySouthernCal » Fri Dec 29, 2017 12:30 pm

dandinsac wrote:
Fri Dec 29, 2017 10:49 am
HenrySouthernCal wrote:
Thu Dec 28, 2017 8:36 pm
If I really like CA for retirement, I can keep my home in CA, and move out of state for 2 years to start my retirement life, convert 401K to Roth out of state, then come back to CA.
From what I’ve read, that may be a lot trickier than simply moving if you don’t sell your house. CA is a “sticky” state and wants to keep getting its share. This page touches on it...http://www.nomadfinance101.com/home-sta ... state-tax/a
Yes. California is good at hunt people trying to evade state tax. But for people really moved, there is nothing they can do. In out-of-state new location, all the address changed on records: driver's license, vote registration, bank account, federal tax return, and even the utility bill of new residence. The worst is selling the CA home for tax-free gain before move-out, then move back after 2 years out-of-state life where I can do Roth conversion and unload some appreciated stock or mutual fund.

PFInterest
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Re: Switch to Roth 401k? (33%->24% fed + 9.3% state)

Post by PFInterest » Sat Dec 30, 2017 12:36 pm

HenrySouthernCal wrote:
Fri Dec 29, 2017 12:30 pm
dandinsac wrote:
Fri Dec 29, 2017 10:49 am
HenrySouthernCal wrote:
Thu Dec 28, 2017 8:36 pm
If I really like CA for retirement, I can keep my home in CA, and move out of state for 2 years to start my retirement life, convert 401K to Roth out of state, then come back to CA.
From what I’ve read, that may be a lot trickier than simply moving if you don’t sell your house. CA is a “sticky” state and wants to keep getting its share. This page touches on it...http://www.nomadfinance101.com/home-sta ... state-tax/a
Yes. California is good at hunt people trying to evade state tax. But for people really moved, there is nothing they can do. In out-of-state new location, all the address changed on records: driver's license, vote registration, bank account, federal tax return, and even the utility bill of new residence. The worst is selling the CA home for tax-free gain before move-out, then move back after 2 years out-of-state life where I can do Roth conversion and unload some appreciated stock or mutual fund.
depends on prop 13 but i wouldnt sell the house.

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