Any Reason not to Go 100% Roth 401K?

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LIGuy82
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Any Reason not to Go 100% Roth 401K?

Post by LIGuy82 » Sun Jul 07, 2019 2:39 pm

Question up front: Is there any reason I should NOT put 100% of retirement contributions into Roth TSP vs. Traditional?

I am 37, married, and our gross income is around $135,000 annually and we are in the 12% bracket. After deductions, our taxable income is around $75,000. We max out TSP (govt. 401K, two Roth IRAs, an HSA, and contribute around $30,000 per year to taxable accounts. Our housing is paid for by my job and we live in a very low cost of living location which permits the aforementioned savings. Right now I am putting 75% of TSP contributions ($14,248) into Roth TSP, and 25% into traditional ($4,758). I can retire at 50 with a pension and social security (total of approx. $62,000). Since we are in the 12% bracket, pay no state taxes, and have the ability to save a very large percentage of income, is there any reason NOT to go 100% Roth TSP so long as we stay in the 12% bracket.

For those of you doing the math, we own a rental which allows us approximately $10,000-$15,000 in writeoffs because depreciation, mortgage interest, condo and management fees less rent received amount to a "loss." We intend to keep the condo until death to provide additional income in retirement.

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rob
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Re: Any Reason not to Go 100% Roth 401K?

Post by rob » Sun Jul 07, 2019 3:04 pm

No one knows the future but IMO future tax rates are unlikely to be lower, so given your info I would tend to agree. The catch is any future changes in the tax code towards a consumption basis rather than income basis - you would be behind in such a scenario.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

rj342
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Re: Any Reason not to Go 100% Roth 401K?

Post by rj342 » Sun Jul 07, 2019 3:16 pm

Career upside you might not expect now might mean you end up in a higher tax bracket while working than what you expect later, so don't rule out the 401k categorically.

Bigger picture...

I always have in the back of my mind the fact that since my 401k is tax deferred, it can only my ever be taxed once, in the future.
OTOH Roth contributions have already been taxed... and a change to the law could always skim some tax in the future too.
Of course at the end of the day its always all subject to the whims of a future Congress... but that is what my gut tells me.

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Watty
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Re: Any Reason not to Go 100% Roth 401K?

Post by Watty » Sun Jul 07, 2019 3:20 pm

LIGuy82 wrote:
Sun Jul 07, 2019 2:39 pm
I can retire at 50 with a pension and social security (total of approx. $62,000). Since we are in the 12% bracket, pay no state taxes,.....
I am normally pretty lukewarm on Roths compared to most people that post here but in your situation the Roths look like an easy choice.

It would be good to do a dummy tax return though to make sure that you are not in an income range where the additional taxable income would cause a phase out of some tax credit.

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LIGuy82
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Re: Any Reason not to Go 100% Roth 401K?

Post by LIGuy82 » Sun Jul 07, 2019 3:24 pm

Watty wrote:
Sun Jul 07, 2019 3:20 pm
LIGuy82 wrote:
Sun Jul 07, 2019 2:39 pm
I can retire at 50 with a pension and social security (total of approx. $62,000). Since we are in the 12% bracket, pay no state taxes,.....
I am normally pretty lukewarm on Roths compared to most people that post here but in your situation the Roths look like an easy choice.

It would be good to do a dummy tax return though to make sure that you are not in an income range where the additional taxable income would cause a phase out of some tax credit.
Thanks very much - and also to other posters. Already have a dummy return done and we will come in just under the bottom end of the 22% bracket and will not adversely affect our ability to write off rental losses. Even if I’m off a little, I left plenty of wiggle room. I understand my situation is not typical, but neither is my job or benefits package - definitely a good deal, and I just want to be sure I am maximizing my current situation.

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LIGuy82
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Re: Any Reason not to Go 100% Roth 401K?

Post by LIGuy82 » Sun Jul 07, 2019 3:42 pm

rj342 wrote:
Sun Jul 07, 2019 3:16 pm
Career upside you might not expect now might mean you end up in a higher tax bracket while working than what you expect later, so don't rule out the 401k categorically.

Bigger picture...

I always have in the back of my mind the fact that since my 401k is tax deferred, it can only my ever be taxed once, in the future.
OTOH Roth contributions have already been taxed... and a change to the law could always skim some tax in the future too.
Of course at the end of the day its always all subject to the whims of a future Congress... but is what my gut tells me.
Thanks for the response. I do get a raise every year, and in the event of a promotion, a bigger raise. I would adjust the Roth to traditional to remain in the lower bracket in such a case.

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LIGuy82
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Re: Any Reason not to Go 100% Roth 401K?

Post by LIGuy82 » Sun Jul 07, 2019 3:43 pm

rob wrote:
Sun Jul 07, 2019 3:04 pm
No one knows the future but IMO future tax rates are unlikely to be lower, so given your info I would tend to agree. The catch is any future changes in the tax code towards a consumption basis rather than income basis - you would be behind in such a scenario.
Thanks for the response. In the event they changed it to a consumption tax...low consumption got me here, so I don’t think I’d be too adversely affected. Food for thought though. Thanks.

SimonJester
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Re: Any Reason not to Go 100% Roth 401K?

Post by SimonJester » Sun Jul 07, 2019 5:14 pm

My advice is to diversify your tax shelters as well, who known what the future holds. You could be at 0% tax bracket in the future or 60%, So do both... Max your Roth IRA and your 401k!
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

JBTX
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Re: Any Reason not to Go 100% Roth 401K?

Post by JBTX » Sun Jul 07, 2019 7:31 pm

Ultimately it's probably a good idea to have some in both long term. However at 12% I'd probably gamble that my marginal tax rate likely won't be much lower in the future (given your future pension) and very likely will be higher at some point, and at that point when it is higher put more in traditional.

You are really the poster child of the situation that clearly favors Roth.

peseta
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Re: Any Reason not to Go 100% Roth 401K?

Post by peseta » Sun Jul 07, 2019 9:08 pm

As a fellow fed, I thought I’d point you to this, as there’s some wisdom here:

https://thefinancebuff.com/most-tsp-par ... h-tsp.html

peseta

Topic Author
LIGuy82
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Re: Any Reason not to Go 100% Roth 401K?

Post by LIGuy82 » Sun Jul 07, 2019 11:27 pm

peseta wrote:
Sun Jul 07, 2019 9:08 pm
As a fellow fed, I thought I’d point you to this, as there’s some wisdom here:

https://thefinancebuff.com/most-tsp-par ... h-tsp.html

peseta
Thanks! This confirmed (concisely) what I have read elsewhere.

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LIGuy82
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Re: Any Reason not to Go 100% Roth 401K?

Post by LIGuy82 » Sun Jul 07, 2019 11:28 pm

JBTX wrote:
Sun Jul 07, 2019 7:31 pm
Ultimately it's probably a good idea to have some in both long term. However at 12% I'd probably gamble that my marginal tax rate likely won't be much lower in the future (given your future pension) and very likely will be higher at some point, and at that point when it is higher put more in traditional.

You are really the poster child of the situation that clearly favors Roth.
Glad to be the poster child for something! Thanks for the post.

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LIGuy82
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Re: Any Reason not to Go 100% Roth 401K?

Post by LIGuy82 » Sun Jul 07, 2019 11:29 pm

SimonJester wrote:
Sun Jul 07, 2019 5:14 pm
My advice is to diversify your tax shelters as well, who known what the future holds. You could be at 0% tax bracket in the future or 60%, So do both... Max your Roth IRA and your 401k!
The TSP is the same as a 401K. I am curious on whether to go 100% in Roth 401k or keep some in traditional. I also max a Roth IRA.

Fishing50
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Re: Any Reason not to Go 100% Roth 401K?

Post by Fishing50 » Mon Jul 08, 2019 12:08 am

LIGuy82 wrote:
Sun Jul 07, 2019 11:29 pm
SimonJester wrote:
Sun Jul 07, 2019 5:14 pm
My advice is to diversify your tax shelters as well, who known what the future holds. You could be at 0% tax bracket in the future or 60%, So do both... Max your Roth IRA and your 401k!
The TSP is the same as a 401K. I am curious on whether to go 100% in Roth 401k or keep some in traditional. I also max a Roth IRA.
I recommend 100% Roth in the 12% tax bracket. 12% taxes will probably be a bargain over your lifetime. Reconsider traditional contributions in the 22% tax bracket.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

Admiral
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Re: Any Reason not to Go 100% Roth 401K?

Post by Admiral » Mon Jul 08, 2019 10:29 am

How are you in a 12% federal bracket with $75k of taxable income? That puts you mostly in the 22% bracket, does it not? :?: (assuming married filing jointly)

I agree with a poster above that it's best to have a mix of account types in retirement.

I do think you need to consider what your income will be (that is, pension, assuming you have no other income, earned or otherwise) at age 60, or whenever you retire. You could conceivably be mostly in very low brackets, in which case you can convert to Roth, thus paying no tax now, and little or no tax later.

Also note that in some states pension income is non taxable.

02nz
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Re: Any Reason not to Go 100% Roth 401K?

Post by 02nz » Mon Jul 08, 2019 10:32 am

Admiral wrote:
Mon Jul 08, 2019 10:29 am
How are you in a 12% federal bracket with $75k of taxable income? That puts you mostly in the 22% bracket, does it not? (assuming married filing jointly)
No you must be looking at the single tax rates.

Admiral
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Re: Any Reason not to Go 100% Roth 401K?

Post by Admiral » Mon Jul 08, 2019 10:37 am

02nz wrote:
Mon Jul 08, 2019 10:32 am
Admiral wrote:
Mon Jul 08, 2019 10:29 am
How are you in a 12% federal bracket with $75k of taxable income? That puts you mostly in the 22% bracket, does it not? (assuming married filing jointly)
No you must be looking at the single tax rates.
Oops sorry you're right. :oops: Monday...

02nz
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Re: Any Reason not to Go 100% Roth 401K?

Post by 02nz » Mon Jul 08, 2019 10:49 am

LIGuy82 wrote:
Sun Jul 07, 2019 11:29 pm
SimonJester wrote:
Sun Jul 07, 2019 5:14 pm
My advice is to diversify your tax shelters as well, who known what the future holds. You could be at 0% tax bracket in the future or 60%, So do both... Max your Roth IRA and your 401k!
The TSP is the same as a 401K. I am curious on whether to go 100% in Roth 401k or keep some in traditional. I also max a Roth IRA.
Your situation argues for a significant amount of Roth TSP contributions. (You'll still have some traditional regardless, with the government's contributions.) But even in your situation, having some traditional is good; I'd probably aim to have about 60-70% (of overall tax-advantaged retirement savings, incl. IRAs) in Roth by the time of retirement. That doesn't necessarily mean it's optimal to make traditional contributions right now.

Is your projection of $62K of pension + social security today's dollars or future nominal dollars? Make sure you do your projections using real dollars, as tax brackets are indexed for inflation. Also, I assume by "pension + SS at 50," you mean the supplement that the government pays before you get SS. I believe that supplement ends when you first become eligible for (reduced) SS benefits, even if you elect to wait until FRA or later. That may mean that you could defer SS to 70 and have 8 years or so of only your pension income (no supplement and no SS), which may be low enough that you can take TSP distributions or do Roth conversions at lower than 12%. That depends also, of course, on what happens with the tax laws.

Perhaps it makes sense to take advantage of the lower tax rates, which are scheduled to sunset after 2025, and go all-Roth for your contributions until then. Re-assess around 2026, based on tax rates then and your retirement plans, on which you'll presumably have a bit more certainty. As your salary rises in real terms, you may also be in a higher tax bracket, in which making at least some traditional contributions will make sense.

Another consideration is that currently you pay no state income tax. I don't know your stateside domicile and whether you plan to be posted in the U.S. at any point, but if you do come back for an assignment in the DC area, you'll have to pay state income tax to DC/MD/VA even if you're currently domiciled in a state (e.g., CA) where you pay no state income tax. That could push your marginal tax rate closer to 20%, and it may make sense at that point to defer some with traditional. That adds to the arguments for paying 12% now with all Roth.

So, short version - probably do 100% Roth for now, at least while your marginal tax rate (fed + state) is just 12%.

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