Hi,

I am trying to figure out whether to do a partial Roth 401k contribution, or make it fully in traditional 401k. I am in the cusp of the 24%/32% tax bracket. I am trying to see if I can make a partial Roth and still be in the 24% bracket. I am in the 15% LTCG tax rate.

MAGI beyond $326,600 (MFJ) is taxed at the 32% rate. Our W2 income+interest is ~365k. Hypothetically, if I have dividends + LTCG distributions at 30k, that puts our total income at 395k. With a $39,000 traditional 401k contribution and 24,800 standard deduction, it puts our taxable income at 331,200, which is in the 32% bracket. If I decide to do Roth 401k, then I will be increasing the taxable income.

But is it really taxed at 32%? If I remove the 30k div+LTCG which will be taxed at 15%, then my taxable income would only be 301,200, which gives me about 25k that can be in a Roth 401k and still be in the 24% bracket.

Which is the correct scenario?

## Question on marginal tax rate when dividends/LTCG are included

### Re: Question on marginal tax rate when dividends/LTCG are included

You generally only get a different marginal rate if some dividends/LTCG are being pushed into a higher bracket. The LTCG rate of 20% kicks in at a MAGI > $496,600.

There is also the Net Investment Income Tax (NIIT) of 3.8% that kicks in with a MAGI > $250K for MFJ.

Does the AMT affect you?

What percent of your dividends are qualified?

It is probably best to run your numbers through tax software.

edit: If you look at the Qualified Dividends and Capital Gain Tax Worksheet, you will see that you subtract off the QD/LTCG from your taxable income, compute income tax on the remainder, compute CG tax on the QD+LTCG, and add the two together. So, the 24%/32% rates do not apply to the QD/LTCG amounts of your taxable income, and you would have extra room to do some Roth 401k before the 32% rate was applied. Whether you want to do Roth 401k in the 24% bracket is another matter.

There is also the Net Investment Income Tax (NIIT) of 3.8% that kicks in with a MAGI > $250K for MFJ.

Does the AMT affect you?

What percent of your dividends are qualified?

It is probably best to run your numbers through tax software.

edit: If you look at the Qualified Dividends and Capital Gain Tax Worksheet, you will see that you subtract off the QD/LTCG from your taxable income, compute income tax on the remainder, compute CG tax on the QD+LTCG, and add the two together. So, the 24%/32% rates do not apply to the QD/LTCG amounts of your taxable income, and you would have extra room to do some Roth 401k before the 32% rate was applied. Whether you want to do Roth 401k in the 24% bracket is another matter.

Last edited by rkhusky on Mon Sep 14, 2020 7:01 am, edited 6 times in total.

### Re: Question on marginal tax rate when dividends/LTCG are included

This long thread is highly recommended. Look for useful links in it, too.

viewtopic.php?f=10&t=320854&hilit=Roth

viewtopic.php?f=10&t=320854&hilit=Roth

### Re: Question on marginal tax rate when dividends/LTCG are included

This is correct. With your assumptions, RoCK, you can reduce your traditional IRA contribution $25,400 (and thereby increase your AGI by that amount) before reaching the 32% tax bracket. Note below the difference between "Taxable income" and "Ordinary income taxable".

Code: Select all

```
Floor: ord income 10% bracket 0 ------>
Floor: ord income 12% bracket 19,750 ------>
Floor: ord income 22% bracket 80,250 ------>
Floor: ord income 24% bracket 171,050 ------>
Floor: ord income 32% bracket 326,600 ------> - -
Floor: LTCG & QDI 15% bracket 80,000 ------>
Wages + Interest 365,000 365,000
Traditional IRA contrib (39,000) (13,600)
Net wages + interest 326,000 351,400
LTCG & QDI 30,000 30,000
Adjusted gross income 356,000 381,400
```

Code: Select all

```
Standard deduction 24,800 24,800
Taxable Income 331,200 356,600 <===
LTCG & QDI Taxable 30,000 30,000
Ordinary income taxable 301,200 326,600 <===
Taxable: ord income 32% bracket 0 0
Taxable: ord income 24% bracket 130,150 155,550
Taxable: ord income 22% bracket 90,800 90,800
Taxable: ord income 12% bracket 60,500 60,500
Taxable: ord income 10% bracket 19,750 19,750
Taxable: LTCG & QDI 15% bracket 30,000 30,000
Taxable: LTCG & QDI 0% bracket 0 0
```

Code: Select all

```
Tax: ord income 32% bracket 0 0
Tax: ord income 24% bracket 31,236 37,332
Tax: ord income 22% bracket 19,976 19,976
Tax: ord income 12% bracket 7,260 7,260
Tax: ord income 10% bracket 1,975 1,975
Tax: LTCG & QDI 15% bracket 4,500 4,500
Total tax 64,947 71,043
Increased income 25,400 -
Increased tax 6,096
Marginal tax rate 24.00%
```

### Re: Question on marginal tax rate when dividends/LTCG are included

Thanks. I am discounting the NIIT since I will be over the 250k limit even with traditional 401k, and from what I understand, W2 income isnt subject to NIIT even if above 250k. Only a small % of my dividends is non-qualified. I plan to look at my last years 1040 as a guide to the NQD/QD/LTCG amounts from funds. I havent been subject to AMT yet, so hopefully it stays that way.rkhusky wrote: ↑Mon Sep 14, 2020 6:36 am You generally only get a different marginal rate if some dividends/LTCG are being pushed into a higher bracket. The LTCG rate of 20% kicks in at a MAGI > $496,600.

There is also the Net Investment Income Tax (NIIT) of 3.8% that kicks in with a MAGI > $250K for MFJ.

Does the AMT affect you?

What percent of your dividends are qualified?

It is probably best to run your numbers through tax software.

edit: If you look at the Qualified Dividends and Capital Gain Tax Worksheet, you will see that you subtract off the QD/LTCG from your taxable income, compute income tax on the remainder, compute CG tax on the QD+LTCG, and add the two together. So, the 24%/32% rates do not apply to the QD/LTCG amounts of your taxable income, and you would have extra room to do some Roth 401k before the 32% rate was applied. Whether you want to do Roth 401k in the 24% bracket is another matter.

I plan to do a lot of travelling and other activities in the early years of retirement, assuming financial plans and health hold up, so expect to be in the 24% or higher tax bracket at least during the early years. Hence, I like to diverisfy on my contributions also to have some freedom in where I take my withdrawals from. As of now, that diversification has come from a backdoor Roth over the last few years and traditional 401k, but would like to have more in my roth bucket.

Thanks, will take a look.crefwatch wrote: ↑Mon Sep 14, 2020 6:39 am This long thread is highly recommended. Look for useful links in it, too.

viewtopic.php?f=10&t=320854&hilit=Roth

Thanks, that will be very useful. This year since I have already contributed a bunch to traditional, my roth 401k will be a small amount, but I plan to do the same exercise next year and do some of the 401k as Roth.#Cruncher wrote: ↑Mon Sep 14, 2020 7:16 amThis is correct. With your assumptions, RoCK, you can shift $25,400 from a traditional to a Roth IRA contribution before reaching the 32% tax bracket. Note below the difference between "Taxable income" and "Ordinary income taxable".Code: Select all

`Floor: ord income 10% bracket 0 ------> Floor: ord income 12% bracket 19,750 ------> Floor: ord income 22% bracket 80,250 ------> Floor: ord income 24% bracket 171,050 ------> Floor: ord income 32% bracket 326,600 ------> - - Floor: LTCG & QDI 15% bracket 80,000 ------> Wages + Interest 365,000 365,000 Traditional IRA contrib (39,000) (13,600) Net wages + interest 326,000 351,400 LTCG & QDI 30,000 30,000 Adjusted gross income 356,000 381,400`

Code: Select all

`Standard deduction 24,800 24,800 Taxable Income 331,200 356,600 <=== LTCG & QDI Taxable 30,000 30,000 Ordinary income taxable 301,200 326,600 <=== Taxable: ord income 32% bracket 0 0 Taxable: ord income 24% bracket 130,150 155,550 Taxable: ord income 22% bracket 90,800 90,800 Taxable: ord income 12% bracket 60,500 60,500 Taxable: ord income 10% bracket 19,750 19,750 Taxable: LTCG & QDI 15% bracket 30,000 30,000 Taxable: LTCG & QDI 0% bracket 0 0`

Most of these figures are from the Compare sheet of my Marginal Tax Rates Excel workbook.Code: Select all

`Tax: ord income 32% bracket 0 0 Tax: ord income 24% bracket 31,236 37,332 Tax: ord income 22% bracket 19,976 19,976 Tax: ord income 12% bracket 7,260 7,260 Tax: ord income 10% bracket 1,975 1,975 Tax: LTCG & QDI 15% bracket 4,500 4,500 Total tax 64,947 71,043 Increased income 25,400 - Increased tax 6,096 Marginal tax rate 24.00%`