Pretax vs Roth Contributions

[truenyer]

There have been a few recent posts discussing RMDs and they are making me nervous for my 25+ years away retirement. My wife and I have historically split contributions between pretax and Roth, but predicting RMDs is making me rethink the strategy. I put some numbers together and would like a sanity check.

Code: Select all

                       His     Hers
2021 Age           37      40
2021 AGI                   $450k
(Incl $35k LTCG)
Pre-Tax Balance    $490k   $320k
Annual Pre-Tax      $15k    $35k
Contribution
(Incl EC, ~2% inc)
Retirement Age      66      62
Annual Return             5%
Value at 70.5       $3.6M   $3.8M
1st RMD               $131k   $137k
RMD at 85           $250k   $260k
SS @ 70                $48k      $48k

Questions:
1) I think we should immediately stop all voluntary pre-tax contributions and switch to Roth. Obviously all employer match/contributions are pre-tax.

2) As we are planning to retire in our 60s and be in the 32/35 tax bracket until then, making in-plan Roth conversions now is not helpful tax-wise. Similarly, we won't have that many years to do the Roth conversion ladder between retirement and RMDs.

3) Does my math look sound? This assumes a 5% yearly appreciation. It also does *not* model pre-RMD distributions which might be too conservative, as we will have 5-7 years pre-RMDs where we are retired and can drawn down/convert. But these numbers show that our pre-tax savings and RMDs will be so large that not much will make a dent.

Look forward to your thoughts!

[lazynovice]

Just a small tweak. Under the Secure Act, RMDs start at 72 now.

[bloom2708]

I am 49 and not stopping pre-tax 401k. I turn 50 in 2021, so can do the extra $6k as well. We have ~$1.1 in 401ks. I will revisit at $1.5 million.

If you had $1.5 million+ in traditional, maybe. You are not there yet.

You don't get to shelter much. $19,500 x 2 out of $450k. 2 back door Roths. Family HSA maybe. All the rest of your savings is taxable/brokerage.

Your goal is to retire with a series of gap years before SS. That might be 55, 59, 62. If one of you takes SS at 70, then you do Roth Conversions on an "as needed" basis.

Look at the top end of the 24% (old 28%) bracket. It is very large. It is unlikely your retirement income will be to the top of 24/28.

All Roth is tough for me to swallow. You can't un-pay tax at 24+% (state tax too if it applies). Brackets get bigger with inflation. Tax policy changes.

I'd get to $1.5 million in pre-tax and then revisit. Plan Roth Conversions if it makes sense. Paying 24% now or 24% when you control the retirement income isn't so bad in my book.

[lazynovice]

A few thoughts-

Have you considered keeping all of your bond allocation in the 401(k)? That slows the growth of that account somewhat. Your equity allocation would be in the Roth.

You assume 5 % return all the way to 85? You don’t think you will ever shift your investments to a more conservative AA?

You don’t mention taxable investing. I assume you have reached that point yet?

[FiveK]

1) I think we should immediately stop all voluntary pre-tax contributions and switch to Roth. Obviously all employer match/contributions are pre-tax.

Are the assumed $15K/yr and $35K/yr the "unavoidable" employer match/contributions?

3) Does my math look sound? This assumes a 5% yearly appreciation.

The future value calculations, depending on exactly what you assumed for the various inputs, are plausible. The 5% assumption, without commenting on whether it is likely to be correct, should at least be the "real" or "in addition to inflation" return.

[truenyer]

Just a small tweak. Under the Secure Act, RMDs start at 72 now.

I’m pretty sure it will be back to 70.5 by the time I retire. Or something completely different. Nonetheless, that doesn’t really affect the magnitude of the numbers.

[KlangFool]

OP,


If you throw in a 2% to 3% annual inflation adjustment to the tax brackets, you would find that you have nothing to worry about.


KlangFool

[truenyer]

Thanks everyone. Few other notes.

-maxing HSA every year. At least while I still get HDHP.
-$1.5M taxable investments with ~$25k/year addition.
-above listed pre-tax contributions are all match and mandatory contributions. $19.5k x 2 is going to Roth.
-my wife has access to a 457b which we were fully finding, but want to stop because of the future RMDs
-$300k Roth balances with $51k/year contributions.
-have thought about increasing bond holdings, but not fully. That is a good idea.

We are at the bottom end of 32% today. Sounds like it might make sense to contribute pre-tax to keep us in 24% as best we can? The thing is even in our early retirement, before RMD, we estimate $150k income for expenses. Adding > $100k/year in conversion income still gets us up there in taxes and doesn’t look like it will really impact RMDs because our accounts are projected to be so large.

[truenyer]

If you throw in a 2% to 3% inflation adjustment to the tax brackets, you would find that you have nothing to worry about.

Well this year they only went up 1% but obviously this year is atypical. So should I split pretax and Roth, or...

[bloom2708]

At least do enough pre-tax to stay out of the 32% bracket. Maybe that means 1 pre-tax and 1 Roth 401k.

You will have plenty of taxable/cash to pay tax on Roth conversions, so you should be able to nicely manage what you pay.

Some end up with not a lot of taxable, that makes the Roth conversions a bit trickier.

Try to avoid paying 32% on those top dollars I guess.

[KlangFool]

If you throw in a 2% to 3% inflation adjustment to the tax brackets, you would find that you have nothing to worry about.

Well this year they only went up 1% but obviously this year is atypical. So should I split pretax and Roth, or...

I believe you made a fundamental mistake in your calculation.

A) Only tax-deferred accounts generate taxable income.


B) The taxable account are taxed at the long-term capital gain tax rate.

What is your tax-deferred account size? What is your projected future tax-deferred account size?

https://taxfoundation.org/2020-tax-brackets/#brackets

Using the current 2020 tax bracket, you need about 200K of income to reach 24%. To generate 200K of income, you need about 5 million in your tax-deferred account. You have only 800K. So, how can it become 5 million in x years? And, in the future, the tax bracket is higher and you need even more money.


Max up your Trad 457, and 2 x Trad 401K. If you have to spend down your taxable account in order to contribute, you should do it.


KlangFool


P.S.: At an average 2% annual inflation over 20 to 30 years, you would need about 10 million in your tax-deferred account when you retired to hit 24%.

[lazynovice]

I vote not yet...

You seem to be leaning toward all tax policy going against you in the future- low inflation to the brackets, moving RMDs earlier even with lengthening lifespans are two examples already in the thread. And you could be right. Ultimately Roth versus 401(k) is a bet about your current tax rate versus your future rates. Sounds like you are feeling pessimistic.

I would read a little more on asset location, qualified charitable donations from your IRA and the substantially equal payment method. I’d also consider the possibility that you won’t get to choose your retirement date for various reasons. Also you may be on track to retire earlier than planned. I’d do that before I got too excited about paying more taxes next year.

[lazynovice]

Thanks everyone. Few other notes.

-maxing HSA every year. At least while I still get HDHP.
-$1.5M taxable investments with ~$25k/year addition.
-above listed pre-tax contributions are all match and mandatory contributions. $19.5k x 2 is going to Roth.
-my wife has access to a 457b which we were fully finding, but want to stop because of the future RMDs
-$300k Roth balances with $51k/year contributions.
-have thought about increasing bond holdings, but not fully. That is a good idea.

We are at the bottom end of 32% today. Sounds like it might make sense to contribute pre-tax to keep us in 24% as best we can? The thing is even in our early retirement, before RMD, we estimate $150k income for expenses. Adding > $100k/year in conversion income still gets us up there in taxes and doesn’t look like it will really impact RMDs because our accounts are projected to be so large.

Do you have kids? If not, you are going to end up with a lot more money than you need. If you have college to fund still, then maybe not. I still don’t change my vote until you do some more reading. If the 457 is non-governmental beware of some of the vesting risks.

You are doing great for 37 and 40.

[jhawktx]

Of all the pitfalls and traps to avoid, RMDs fall pretty far down on the list of things to worry about. Worst case scenario is you are 72 (IF you are even alive then...nearly half of us won't be) and have to withdraw more $ from your IRA than you need. First of all, boo hoo. Second of all, so what? Say you were forced to take out $50k too much. Invest the $50k in broad market index funds in your taxable account. Most of your gains will be deferred until you sell (which apparently won't happen anytime soon since you're all twisted up about being forced to withdraw more money than you even need). You'll just be paying taxes on distributions which won't amount to that much.

The RMD boogeyman is way overhyped.

[FiveK]

We are at the bottom end of 32% today. Sounds like it might make sense to contribute pre-tax to keep us in 24% as best we can?

Avoiding the 32% bracket now seems a reasonable strategy.

The two biggest unknowns in your plans are the investment return rate and your retirement (voluntary or involuntary) ages. No good way to predict either of those 20-30 years ahead of time. Just take your best guesses now, act accordingly, and update every year or so. Good luck!

[trickshot]

Another thing to consider is potential increases in income in the next few years. You mentioned that you're in the 32% bracket now but if you see your income rising quickly to the 35% bracket and staying there until retirement, it might be preferable to contribute to Roth while you're in the 32% bracket and contribute pretax when you're in the 35%. This way, the pretax accounts will grow less if you postpone the pretax contributions by a few years.

[KlangFool]

Another thing to consider is potential increases in income in the next few years. You mentioned that you're in the 32% bracket now but if you see your income rising quickly to the 35% bracket and staying there until retirement, it might be preferable to contribute to Roth while you're in the 32% bracket and contribute pretax when you're in the 35%. This way, the pretax accounts will grow less if you postpone the pretax contributions by a few years.

trickshot,

That is a bad idea! OP is unlikely to reach 24% at retirement. So, why OP would not defer tax at 32%?


To reach 32% at retirement, OP would need 350K X 25 = 8.75 million. How can OP reach there with only 800K in the tax-deferred account now? Please do the calculation.

KlangFool

[trickshot]

Another thing to consider is potential increases in income in the next few years. You mentioned that you're in the 32% bracket now but if you see your income rising quickly to the 35% bracket and staying there until retirement, it might be preferable to contribute to Roth while you're in the 32% bracket and contribute pretax when you're in the 35%. This way, the pretax accounts will grow less if you postpone the pretax contributions by a few years.

trickshot,

That is a bad idea! OP is unlikely to reach 24% at retirement. So, why OP would not defer tax at 32%?


To reach 32% at retirement, OP would need 350K X 25 = 8.75 million. How can OP reach there with only 800K in the tax-deferred account now? Please do the calculation.

KlangFool

I have a few issues with the 8.75 million number. First, that doesn't take into account SS at 100k per year and any other possible sources of income. That would mean OP would need 250K per year past 70 to fill the 24% bracket, not 350K. Also, I'm not sure why the SWR of 4% is used in this scenario. OP has sizable Roth and taxable accounts so it's not like 8.75 million is needed in his pretax account alone for income purposes. And he doesn't need to use his entire pretax withdrawals for income. He can withdraw however much he needs for income and Roth convert the rest up to the 24% bracket and come out ahead tax-wise.

OP's concern is that his pretax accounts will become too large which, based on the information provided, I would agree with. If the OP were to split between Roth and pretax, it makes more sense to make the pretax contributions in a higher tax bracket. Other factors need to be considered as well such as tax implications from the inheritance of large pretax accounts for heirs, state taxes, contributing to the maximum, etc.

My point is that it's not so simple as just looking at the tax bracket and multiplying by 25. If OP will likely stay at the 32% bracket, then it won't make much of a difference if he contributes pretax now and Roth later or Roth now and pretax later. OP needs to analyze his personal situation taking all factors into account.

[KlangFool]

Another thing to consider is potential increases in income in the next few years. You mentioned that you're in the 32% bracket now but if you see your income rising quickly to the 35% bracket and staying there until retirement, it might be preferable to contribute to Roth while you're in the 32% bracket and contribute pretax when you're in the 35%. This way, the pretax accounts will grow less if you postpone the pretax contributions by a few years.

trickshot,

That is a bad idea! OP is unlikely to reach 24% at retirement. So, why OP would not defer tax at 32%?


To reach 32% at retirement, OP would need 350K X 25 = 8.75 million. How can OP reach there with only 800K in the tax-deferred account now? Please do the calculation.

KlangFool

I have a few issues with the 8.75 million number. First, that doesn't take into account SS at 100k per year and any other possible sources of income. That would mean OP would need 250K per year past 70 to fill the 24% bracket, not 350K. Also, I'm not sure why the SWR of 4% is used in this scenario. OP has sizable Roth and taxable accounts so it's not like 8.75 million is needed in his pretax account alone for income purposes. And he doesn't need to use his entire pretax withdrawals for income. He can withdraw however much he needs for income and Roth convert the rest up to the 24% bracket and come out ahead tax-wise.

OP's concern is that his pretax accounts will become too large which, based on the information provided, I would agree with. If the OP were to split between Roth and pretax, it makes more sense to make the pretax contributions in a higher tax bracket. Other factors need to be considered as well such as tax implications from the inheritance of large pretax accounts for heirs, state taxes, contributing to the maximum, etc.

My point is that it's not so simple as just looking at the tax bracket and multiplying by 25. If OP will likely stay at the 32% bracket, then it won't make much of a difference if he contributes pretax now and Roth later or Roth now and pretax later. OP needs to analyze his personal situation taking all factors into account.

trickshot,

<<OP has sizable Roth and taxable accounts so it's not like 8.75 million is needed in his pretax account alone for income purposes.>>

1) Roth generates ZERO taxable income at retirement.


2) Taxable account generates long-term capital gain tax rate.

Only the tax-deferred account tax at the ordinary income tax rate.

<<I have a few issues with the 8.75 million number. First, that doesn't take into account SS at 100k per year and any other possible sources of income. That would mean OP would need 250K per year past 70 to fill the 24% bracket,>>

Even if that is true, you still need 6.25 million.


<<OP's concern is that his pretax accounts will become too large which, based on the information provided, I would agree with.>>


If you do the math, you will find that it is impossible. How can OP's 800K become 6.25 million?

Please note that you are recommending OP to defer tax at 32%. Not 24%.

<<My point is that it's not so simple as just looking at the tax bracket and multiplying by 25.>>


It is very simple to show why it is impossible by calculation. Please note that this is based on 2020 tax brackets. The tax brackets are adjusted annually by inflation.

KlangFool

[truenyer]

I think I meant 33% bracket when that comes back in 2026. So maybe it does make sense to load up on Roth now while tax rates are at an all time low.

My main question in this post if $39k/year should go to pretax, Roth, or split. And if my wife should contribute $19.5k to her public 457b.

I’m aware of QCDs but don’t want to donate that much per year (see my other post on DAFs). I want to make the right decision on paying taxes now, knowing that tax rates will ultimately go up. Sure I want the net income now, but I also want to play the long game.

[FiveK]

I want to make the right decision on paying taxes now....

As do we all, but the only way to guarantee that is to know the future. Lacking that, the best you (or anyone) can do is make a reasonable guess.

People's definition of "reasonable" may vary.

[PhrugalPhan]

Just something that hasn't been pointed out... if the wife has a 457b, is there a pension on the horizon for her? Quite often, though not always, 457b participants get one. I know a pension was never mentioned, but if there is one that will majorly affect the analysis many people here are doing for you with regard to RMDs and taxes.

In my case Roth contributions make sense even at somewhat high tax rates due to a large pension in my future.

[truenyer]

Just something that hasn't been pointed out... if the wife has a 457b, is there a pension on the horizon for her? Quite often, though not always, 457b participants get one. I know a pension was never mentioned, but if there is one that will majorly affect the analysis many people here are doing for you with regard to RMDs and taxes.

In my case Roth contributions make sense even at somewhat high tax rates due to a large pension in my future.

She gets a 9% contribution that is called “pension.” (It’s really a defined contribution plan). It’s included in the pretax bucket in my calculations.

[truenyer]

<<OP has sizable Roth and taxable accounts so it's not like 8.75 million is needed in his pretax account alone for income purposes.>>

1) Roth generates ZERO taxable income at retirement.
2) Taxable account generates long-term capital gain tax rate.

But SS is taxed and I am in NIIT territory.

<<I have a few issues with the 8.75 million number. First, that doesn't take into account SS at 100k per year and any other possible sources of income. That would mean OP would need 250K per year past 70 to fill the 24% bracket,>>

Even if that is true, you still need 6.25 million.

<<OP's concern is that his pretax accounts will become too large which, based on the information provided, I would agree with.>>

If you do the math, you will find that it is impossible. How can OP's 800K become 6.25 million?

Which is totally feasible using simple fv math.

<<My point is that it's not so simple as just looking at the tax bracket and multiplying by 25.>>

It is very simple to show why it is impossible by calculation. Please note that this is based on 2020 tax brackets. The tax brackets are adjusted annually by inflation.

Using the 2017 brackets, 35% rate starts at $417k, minus $100k, is $317k. Which translates to a pretax balance of $7.9M. Which is right where I’m at.

My point is that I think I want to pay 32% today rather than risk 35% later.

[KlangFool]

<<OP has sizable Roth and taxable accounts so it's not like 8.75 million is needed in his pretax account alone for income purposes.>>

1) Roth generates ZERO taxable income at retirement.
2) Taxable account generates long-term capital gain tax rate.

But SS is taxed and I am in NIIT territory.

<<I have a few issues with the 8.75 million number. First, that doesn't take into account SS at 100k per year and any other possible sources of income. That would mean OP would need 250K per year past 70 to fill the 24% bracket,>>

Even if that is true, you still need 6.25 million.

<<OP's concern is that his pretax accounts will become too large which, based on the information provided, I would agree with.>>

If you do the math, you will find that it is impossible. How can OP's 800K become 6.25 million?

Which is totally feasible using simple fv math.

<<My point is that it's not so simple as just looking at the tax bracket and multiplying by 25.>>

It is very simple to show why it is impossible by calculation. Please note that this is based on 2020 tax brackets. The tax brackets are adjusted annually by inflation.

Using the 2017 brackets, 35% rate starts at $417k, minus $100k, is $317k. Which translates to a pretax balance of $7.9M. Which is right where I’m at.

My point is that I think I want to pay 32% today rather than risk 35% later.

Just assume 1% per year of inflation adjustment to the tax brackets and you will be surprised by the result.

KlangFool

[KlangFool]

Using the 2017 brackets, 35% rate starts at $417k, minus $100k, is $317k. Which translates to a pretax balance of $7.9M. Which is right where I’m at.

My point is that I think I want to pay 32% today rather than risk 35% later.

https://taxfoundation.org/2020-tax-brackets/#brackets

Using 2020 brackets, 35% starts at 415K + 24K = 439K. It translate to 8.475 million.


KlangFool

[TomatoTomahto]

Of all the pitfalls and traps to avoid, RMDs fall pretty far down on the list of things to worry about. Worst case scenario is you are 72 (IF you are even alive then...nearly half of us won't be) and have to withdraw more $ from your IRA than you need. First of all, boo hoo. Second of all, so what?

Well, I guess you belong in the class warfare group that thinks RMD concerns are unsuitable first world problems that are beneath consideration for BHs.

If OP doesn’t make it to 72, it’s a bigger issue for surviving spouse who will then have to file as single.

OP, we didn’t change contributions to Roth until late in the game. If I knew then what I know now, I would have done it sooner.

[Olemiss540]

What's your state tax rate?

No chance am I giving up a 30+% deduction NOW due to a PROJECTED 3% TAX INCREASE 30 years from now. That seems incredibly silly.

If there was a bear market tomorrow, your numbers would look much less concerning projected at a straight 5% growth. You are at all time highs and making a straight line projection to try to justify a 3% increase in marginal rates.

Take the deduction and count your blessings if you indeed continue to work fully employed at your amazingly high income rate for the next 20+ years.

I personally would retire at 50 or 55 which mitigates this entire issue. Get 10 years out and reassess.

[tibbitts]

Of all the pitfalls and traps to avoid, RMDs fall pretty far down on the list of things to worry about. Worst case scenario is you are 72 (IF you are even alive then...nearly half of us won't be) and have to withdraw more $ from your IRA than you need. First of all, boo hoo. Second of all, so what?

Well, I guess you belong in the class warfare group that thinks RMD concerns are unsuitable first world problems that are beneath consideration for BHs.

If OP doesn’t make it to 72, it’s a bigger issue for surviving spouse who will then have to file as single.

OP, we didn’t change contributions to Roth until late in the game. If I knew then what I know now, I would have done it sooner.

I also didn't change to Roth until too late, and contributed too much to deferred. I would just try for a balance to some degree - so far out you can't really know. It's not like there might not be some future way for Roth balances to work against you at least to the extent RMDs from deferred do today. Certainly filing status is a risk that probably gets too little consideration in general.

[celia]

The "problem" is that you currently have a large income. Have you considered retiring 10 years earlier than you are thinking?

One solution to the RMDs is being able for each of you to contribute $100K from your IRA to charity each year using QCDs. Or you can donate more now. You will likely also need to start thinking about estate taxes.

Contributing to Roth 401K now is a reasonable compromise. It's good to look for diversity (investment contributions) over time, variety of accounts with different tax impacts, various tax brackets (over time and as your Taxable income changes), besides a variety of asset classes (stocks/ bonds/ international/ real estate/ owning a (part of a) business/ etc).

You can also slow down the growth in tax-deferred by putting more bonds in there.

[truenyer]

What's your state tax rate?

0 (WA). Wife thinks she will stay here forever, but who knows if we move to a state with income tax.

I personally would retire at 50 or 55 which mitigates this entire issue. Get 10 years out and reassess.

Yeah, wife doesn’t want to retire that early. She thinks she will be bored. She might go to part time earlier rather than later, which would be fine also.

I would just try for a balance to some degree - so far out you can't really know.

Exactly. And with so much employer contribution/match, I think it makes sense to go Roth. Because if I put it in taxable I’d have to pay taxes on the income anyway.

[celia]

Of all the pitfalls and traps to avoid, RMDs fall pretty far down on the list of things to worry about. Worst case scenario is you are 72 (IF you are even alive then...nearly half of us won't be) and have to withdraw more $ from your IRA than you need. First of all, boo hoo. Second of all, so what?

Average life expectancy in the US is 76 for men and 81 for women according to SimplyInsurance.com, the first website returned in my search. It is also impacted by your education and income and where you live in the United States. Having these attributes also tend to correlate with being a Bogeleheads. We already know that we are not 'average' when it comes to the entire U.S. population. Learning how to make better choices with what we have is the entire point of Bogleheads. I assume you are interested in that, else you wouldn't be posting here.

[TomatoTomahto]

Learning how to make better choices with what we have is the entire point of Bogleheads. I assume you are interested in that, else you wouldn't be posting here.

Thank you Celia for saying it much more politely than I did.

[ResearchMed]

Of all the pitfalls and traps to avoid, RMDs fall pretty far down on the list of things to worry about. Worst case scenario is you are 72 (IF you are even alive then...nearly half of us won't be) and have to withdraw more $ from your IRA than you need. First of all, boo hoo. Second of all, so what?

Average life expectancy in the US is 76 for men and 81 for women according to SimplyInsurance.com, the first website returned in my search. It is also impacted by your education and income and where you live in the United States. Having these attributes also tend to correlate with being a Bogeleheads. We already know that we are not 'average' when it comes to the entire U.S. population. Learning how to make better choices with what we have is the entire point of Bogleheads. I assume you are interested in that, else you wouldn't be posting here.

Those 76 and 81 ages are figured "from birth", although I didn't check to see which birthyear they were using. Life expectancy in the USA has been increasing (possibly until recently?).
[2017 data]

Once one is already at age, say, 50 or 60, the future life expectancy is to a later age, as those dying at younger ages are no longer included in the future average age at death.
For example, that link shows these average life expectancies:

Male over 65: lifespan expectancy is 18.1 years.
Female over 65: lifespan expectancy is 20.6 years.

There are other tables for different birth years, but using those for our own planning purposes obviously is based upon predictions, and not actual "counts"... yet...

And those are "averages", as celia mentions, and aren't adjusted for any sub-groups who tend to live longer, for whatever reasons, such as levels of education/income, being non-smokers, other life-style choices, etc.

RM

[unclescrooge]

Of all the pitfalls and traps to avoid, RMDs fall pretty far down on the list of things to worry about. Worst case scenario is you are 72 (IF you are even alive then...nearly half of us won't be) and have to withdraw more $ from your IRA than you need. First of all, boo hoo. Second of all, so what?

Well, I guess you belong in the class warfare group that thinks RMD concerns are unsuitable first world problems that are beneath consideration for BHs.

If OP doesn’t make it to 72, it’s a bigger issue for surviving spouse who will then have to file as single.

OP, we didn’t change contributions to Roth until late in the game. If I knew then what I know now, I would have done it sooner.

That's a huge tax bomb for surviving spouse!

[TomatoTomahto]

That's a huge tax bomb for surviving spouse!

Yes. OP has the “advantage” of being younger than his wife which balances out the gender longevity issue somewhat, but in any case, it is not unusual for one member of a couple to predecease the other, who then presumably has to file single. Late in life marriages do occur, but who knows?

[ipdiddly]

I speak as one who has been there. Now at 71, I am facing humongous RMD's next year. Like you and your spouse, my wife and I were "savers" and regularly contributed to available pre-tax plans - 401k's and 403b's etc., subsequently converted to our respective t-IRA's. We thought it best to shelter some of our income, figuring our tax bracket would be lower in retirement. Plus, the Roth hadn't been created yet. Well, go figure. Our income went up, mainly because I have been converting some t-IRA to Roth, just to get the t-IRA's down to more modest levels. But I made the mistake of starting this process too late.
Unless you are absolutely convinced that your tax rate will definitely be lower in retirement, I think it makes eminent sense to put funds into Roth accounts now. There is nothing like the satisfaction of knowing you have some tax free funds. Also, be aware that your Medicare premiums are tied to your reported income two years prior to the year of the premium. I was shocked, when we first signed up for Medicare, to learn that our monthly premiums would be more than $300 each, now increased to about $500 each.

[hoffse]

Yep, that’s about what my projections look like.

Husband and I are a little younger than you and in the 24% bracket for at least one more year, due entirely to the TCJA and some seriously large write-offs we have. Under the pre-TCJA rules we would fall squarely in the 33% bracket, so I view it as getting a 9% discount on the Roth contributions that we will probably never see again once the rates revert in 2026. We are doing all Roth at least until we pop up into the 30’s brackets, at which time we will reassess.

Since you are already in a higher bracket and will have substantial employer-side contributions, either choice is probably ok. You may overpay your taxes now if you opt for Roth when all is said and done, but you can certainly afford to do so, and you will have other income to fill the very lowest brackets when withdrawing in retirement. Personally, I don’t view this as a bad outcome because the tax cost on the Roth contributions are just not that high relative to your overall AGI, and it shelters the money forever.

That being said, it may not be mathematically optimal to do Roth in your case. It’s very hard to know this early out and requires lots of assumptions about future rates and portfolio growth, at least some of which are sure to be wrong.

So I think you have to make this decision based partially on math/assumptions, but also based on your viewpoint about which outcome would be better for you emotionally if you happen to get it wrong. Quite a few people on this board subscribe to the viewpoint that having large RMDs is a good problem to have because it means you have a lot of money. Many of these folks evidently don’t worry about future tax rates or what might happen to their cash flow in retirement with a huge chunk taken out for taxes.

For me, personally, I would rather err on the side of overpaying during my working years because (1) I know I can afford it now and (2) Once I have paid for something I literally never think about that money again. I just spent $65k on a home renovation that was completed the week of Thanksgiving. Prior to paying my contractor I was tracking the budget daily, worrying over the final invoice, etc. After I actually paid him and the check cleared, I have not thought about it since.

Similarly, I view Roth contributions a bit like buying an all inclusive vacation - you might catch a good deal sometimes (the Roth equivalent being the TCJA or having a random low-income year), but you might also be overpaying a little vs if you waited to spend all your money once you are actually on vacation. But I don’t like feeling nickeled and dimed on vacation. It stresses me out, and I find myself checking my accounts to track my spending in real time instead of enjoying my time off. So I would much rather pay in advance and never have to think about it again, even if it ultimately costs me a little more.

YMMV, and this is very personal to each individual and family. Unfortunately, being as young as we are, we won’t know what the actual, mathematical optimization play should have been until it’s too late to change it. So consider how much it would bother you if you pay the taxes now and find out you were wrong in 30 years. It would not bother me because I won’t think about the taxes again, and I am very fond of my large pot of Roth money that is growing and is 100% mine. But if it would bother you to potentially overpay during your working years, then you may want to stick to pretax and try to frame RMDs as a “good problem” once you get there.

[trickshot]

YMMV, and this is very personal to each individual and family. Unfortunately, being as young as we are, we won’t know what the actual, mathematical optimization play should have been until it’s too late to change it. So consider how much it would bother you if you pay the taxes now and find out you were wrong in 30 years. It would not bother me because I won’t think about the taxes again, and I am very fond of my large pot of Roth money that is growing and is 100% mine. But if it would bother you to potentially overpay during your working years, then you may want to stick to pretax and try to frame RMDs as a “good problem” once you get there.

+1, couldn't have said it better myself.

[willthrill81]

I'd get to $1.5 million in pre-tax and then revisit. Plan Roth Conversions if it makes sense. Paying 24% now or 24% when you control the retirement income isn't so bad in my book.

This sounds like a good plan to me as well, especially since tax-deferred funds can be used to pay for sizable medical expenses, including LTC, in a very tax-efficient manner.

[willthrill81]

It would not bother me because I won’t think about the taxes again, and I am very fond of my large pot of Roth money that is growing and is 100% mine.

Keep in mind that tax law can be changed at any time. Speculating on future legislation is not allowed, but I'm just saying that nothing is set in stone, including Roth funds never being taxed again.

Some like Roth accounts because 'you'll never have to pay tax again'. But that's dependent on a future Congress abiding by the promise of a previous Congress. Conversely, tax-deferred accounts are a guaranteed benefit right now. IMHO, there's merit in both perspectives.