To Roth or not to Roth. That is the question.

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

To Roth or not to Roth. That is the question.

Post by Busdrvr »

Soon to be 60, approaching retirement and looking for wisdom/ advice on current year 401k strategy.
Plan allows Roth contributions, but currently set up for all pretax.

If I think I may want/ need to do some Roth conversions later( 93% is pretax) am I foolish to not put at least a portion, or all of my contributions in Roth?

MFJ and have room to place some if not all in Roth and not exceed the 24% bracket. Looking to take advantage of new C/U to 34.75K this year.
User avatar
Wiggums
Posts: 7598
Joined: Thu Jan 31, 2019 7:02 am

Re: To Roth or not to Roth. That is the question.

Post by Wiggums »

Some things to consider:

Would your tax rate be much lower in retirement?

Medicare has a two year look back on the IRMAA premiums.

Tax rates set to revert higher in 2026 without congressional intervention.

Would you be able to pay taxes from cash if you move forward with a Roth conversion?
"I started with nothing and I still have most of it left."
KlangFool
Posts: 34880
Joined: Sat Oct 11, 2008 12:35 pm

Re: To Roth or not to Roth. That is the question.

Post by KlangFool »

OP,

1) What is your current tax deferred account's balance?

2) Will you have a pension when you retire?

3) When you will retire?

4) You will need to have 225X 25 = 5.625 M in your tax deferred account in order not to defer at 24% without a pension.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
User avatar
FiveK
Posts: 17233
Joined: Sun Mar 16, 2014 2:43 pm

Re: To Roth or not to Roth. That is the question.

Post by FiveK »

What do you make of the first several sections in the Traditional versus Roth article?
steadyosmosis
Posts: 2414
Joined: Mon Dec 26, 2022 11:45 am

Re: To Roth or not to Roth. That is the question.

Post by steadyosmosis »

When I retired early, my tax bracket dropped from 22% down to 12%.
I would have felt foolish to put my last year(s) of working contributions into Roth 401k, paying 22% tax,
when the very next year I could begin converting to Roth IRA paying no more than 12% tax.
I believe most people who do Roth 401k (not MBDR) are paying unnecessary tax.
Credibility ... some posters have it.
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question.

Post by Busdrvr »

KlangFool wrote: Sat Feb 01, 2025 2:14 pm OP,

1) What is your current tax deferred account's balance?

2) Will you have a pension when you retire?

3) When you will retire?

4) You will need to have 225X 25 = 5.625 M in your tax deferred account in order not to defer at 24% without a pension.

KlangFool
Thanks
1)2M

2)No

3)1-5 years

4)Understand. Probably more of a diversification and legacy decision, although projected RMD’s may be a consideration as well.
I’ve split the contributions in the past and might consider again this year. Would like to project 10k/ month. If converting would pay tax out of taxable acct.
KlangFool
Posts: 34880
Joined: Sat Oct 11, 2008 12:35 pm

Re: To Roth or not to Roth. That is the question.

Post by KlangFool »

Busdrvr wrote: Sat Feb 01, 2025 2:49 pm
KlangFool wrote: Sat Feb 01, 2025 2:14 pm OP,

1) What is your current tax deferred account's balance?

2) Will you have a pension when you retire?

3) When you will retire?

4) You will need to have 225X 25 = 5.625 M in your tax deferred account in order not to defer at 24% without a pension.

KlangFool
Thanks
1)2M

2)No

3)1-5 years

4)Understand. Probably more of a diversification and legacy decision, although projected RMD’s may be a consideration as well.
I’ve split the contributions in the past and might consider again this year. Would like to project 10k/ month. If converting would pay tax out of taxable acct.
Unless the law changes, your catch up contribution will be in Roth 401K. So, you do not get to choose for that part. You should put the rest in pre-tax 401K.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question.el

Post by Busdrvr »

FiveK wrote: Sat Feb 01, 2025 2:25 pm What do you make of the first several sections in the Traditional versus Roth article?
Good stuff. It would seem that I should be able to convert later at 22% if rates remain. I feel that most of the savings now is padding and we’re not very diversified so I tend to think about it more. My Fido 401k advisor did not discourage sending some to Roth, but didn’t feel strongly either way.
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question.

Post by Busdrvr »

KlangFool wrote: Sat Feb 01, 2025 2:59 pm
Busdrvr wrote: Sat Feb 01, 2025 2:49 pm

Thanks
1)2M

2)No

3)1-5 years

4)Understand. Probably more of a diversification and legacy decision, although projected RMD’s may be a consideration as well.
I’ve split the contributions in the past and might consider again this year. Would like to project 10k/ month. If converting would pay tax out of taxable acct.
Unless the law changes, your catch up contribution will be in Roth 401K. So, you do not get to choose for that part. You should put the rest in pre-tax 401K.

KlangFool
I believe that Roth C/U provision takes effect in 2026. My benefits dept wouldn’t commit that the new higher amount is in effect for this year, but I’d be surprised if it doesn’t get done. The plan is through Fidelity..
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question

Post by Busdrvr »

steadyosmosis wrote: Sat Feb 01, 2025 2:30 pm When I retired early, my tax bracket dropped from 22% down to 12%.
I would have felt foolish to put my last year(s) of working contributions into Roth 401k, paying 22% tax,
when the very next year I could begin converting to Roth IRA paying no more than 12% tax.
I believe most people who do Roth 401k (not MBDR) are paying unnecessary tax.
This makes a lot of sense. If I had a larger taxable acct balance I might get there.
User avatar
cosmos
Posts: 811
Joined: Thu Oct 16, 2008 4:11 pm
Location: Third rock from the Sun

Re: To Roth or not to Roth. That is the question.

Post by cosmos »

Busdrvr wrote: Sat Feb 01, 2025 3:11 pm
KlangFool wrote: Sat Feb 01, 2025 2:59 pm

Unless the law changes, your catch up contribution will be in Roth 401K. So, you do not get to choose for that part. You should put the rest in pre-tax 401K.

KlangFool
I believe that Roth C/U provision takes effect in 2026. My benefits dept wouldn’t commit that the new higher amount is in effect for this year, but I’d be surprised if it doesn’t get done. The plan is through Fidelity..
That is correct as of now it starts in 2026 if nothing changes. This impacts me so I have been following it but this year my catch ups are still going to trad 401k.
It's 106 miles to Chicago, we've got a full tank of gas, half a pack of cigarettes, it's dark... and we're wearing sunglasses. Hit it.
KlangFool
Posts: 34880
Joined: Sat Oct 11, 2008 12:35 pm

Re: To Roth or not to Roth. That is the question

Post by KlangFool »

Busdrvr wrote: Sat Feb 01, 2025 3:21 pm
steadyosmosis wrote: Sat Feb 01, 2025 2:30 pm When I retired early, my tax bracket dropped from 22% down to 12%.
I would have felt foolish to put my last year(s) of working contributions into Roth 401k, paying 22% tax,
when the very next year I could begin converting to Roth IRA paying no more than 12% tax.
I believe most people who do Roth 401k (not MBDR) are paying unnecessary tax.
This makes a lot of sense. If I had a larger taxable acct balance I might get there.
I do not understand your statement above. You are above 59 1/2 years old. You can access your Roth IRA account.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question

Post by Busdrvr »

KlangFool wrote: Sat Feb 01, 2025 3:38 pm
Busdrvr wrote: Sat Feb 01, 2025 3:21 pm

This makes a lot of sense. If I had a larger taxable acct balance I might get there.
I do not understand your statement above. You are above 59 1/2 years old. You can access your Roth IRA account.

KlangFool
I’m just stating that with our planned spending and current lack of Roth savings it would be difficult to stay in the 12% bracket, much less so if we’re trying to do conversions.
KlangFool
Posts: 34880
Joined: Sat Oct 11, 2008 12:35 pm

Re: To Roth or not to Roth. That is the question

Post by KlangFool »

Busdrvr wrote: Sun Feb 02, 2025 8:16 am
KlangFool wrote: Sat Feb 01, 2025 3:38 pm

I do not understand your statement above. You are above 59 1/2 years old. You can access your Roth IRA account.

KlangFool
I’m just stating that with our planned spending and current lack of Roth savings it would be difficult to stay in the 12% bracket, much less so if we’re trying to do conversions.
Busdrvr,

I am not sure that your statement is correct. You may want to start a new topic and provide some numbers for others to verify this.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Navillus1968
Posts: 1126
Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: To Roth or not to Roth. That is the question.

Post by Navillus1968 »

Busdrvr wrote: Sat Feb 01, 2025 3:11 pm believe that Roth C/U provision takes effect in 2026. My benefits dept wouldn’t commit that the new higher amount is in effect for this year, but I’d be surprised if it doesn’t get done. The plan is through Fidelity..
IRS says higher catch-up for ages 60-63 is a done deal for 2025-

"Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.
https://www.irs.gov/newsroom/401k-limit ... mains-7000

IRS has delayed until 2026 the rule forcing companies to use Roth 401k catch-up for employees making >$145k from one employer (2024 amount, indexed for inflation).
Navillus1968
Posts: 1126
Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: To Roth or not to Roth. That is the question.

Post by Navillus1968 »

Busdrvr wrote: Sat Feb 01, 2025 1:51 pm If I think I may want/ need to do some Roth conversions later( 93% is pretax) am I foolish to not put at least a portion, or all of my contributions in Roth?

MFJ and have room to place some if not all in Roth and not exceed the 24% bracket.
When you retire, how will you generate income for living expenses & what tax bracket will you be in?
In a perfect world, you would have a huge pile of cash & high basis shares in taxable, which would provide for living expenses and allow you to Roth convert using the 10%/12%/maybe 22% OI brackets, while incurring minimal OI & LTCG taxes.

If you use Roth 401k while working, all your Roth contributions will be taxed at your marginal rate of 24%. It's much better to Roth convert after W-2 income goes away in retirement, which opens up the lower brackets for Roth conversion income. Your marginal rate under this scheme might be in the low-mid teens, quite a bit better than 24%.

Play around with this 1040 calculator & see what happens when you add $50-$100k or more of Roth IRA conversions to your normal income in retirement.
https://www.dinkytown.net/java/1040-tax-calculator.html#

PS- If you plan to move to a low/zero income tax state in retirement, the needle moves decisively in favor of Roth conversions vs Roth 401k contributions. Not paying an additional 4%-10% tax to your state is a big deal.
User avatar
FiveK
Posts: 17233
Joined: Sun Mar 16, 2014 2:43 pm

Re: To Roth or not to Roth. That is the question.

Post by FiveK »

Navillus1968 wrote: Sun Feb 02, 2025 11:16 am Play around with this 1040 calculator & see what happens when you add $50-$100k or more of Roth IRA conversions to your normal income in retirement.
https://www.dinkytown.net/java/1040-tax-calculator.html#
That can work.

For those who can use Excel, generating something like this annotated chart using the personal finance toolbox can be even more useful. That tool provides the marginal rate curve - annotations are up to the user. ;)
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question.

Post by Busdrvr »

Navillus1968 wrote: Sun Feb 02, 2025 10:18 am
Busdrvr wrote: Sat Feb 01, 2025 3:11 pm believe that Roth C/U provision takes effect in 2026. My benefits dept wouldn’t commit that the new higher amount is in effect for this year, but I’d be surprised if it doesn’t get done. The plan is through Fidelity..
IRS says higher catch-up for ages 60-63 is a done deal for 2025-

"Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.
https://www.irs.gov/newsroom/401k-limit ... mains-7000

IRS has delayed until 2026 the rule forcing companies to use Roth 401k catch-up for employees making >$145k from one employer (2024 amount, indexed for inflation).
Hey thanks, yes I was referring to the Roth provision of the higher catchup. It would appear that with planned spending we would be converting in the 22% bracket. So will probably continue with 100% tax deferred this year and if I continue through 2026 will have forced Roth contributions. I can try to focus more on building our brokerage acct in the meantime. The state tax issue is certainly germane here as we are domiciled in WI, but have a FL property that we both use and rent so there is opportunity there as well.
Navillus1968
Posts: 1126
Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: To Roth or not to Roth. That is the question.

Post by Navillus1968 »

Busdrvr wrote: Mon Feb 03, 2025 7:09 am The state tax issue is certainly germane here as we are domiciled in WI, but have a FL property that we both use and rent so there is opportunity there as well.
After working in VA, we moved to FL in 2021. I still work part-time, but after maxing out my 401k, my W-2 income is <$40k, which allowed me to do fairly sizable Roth conversions (sizable for me, anyway!) over the last 4 years without paying 5.75% to VA.
At that time, the sunset of the TCJA brackets was considered very likely, so I opted to convert into the 24% bracket to avoid the future 25%/28% brackets. I never thought a GOP trifecta in 2024 was going to happen, go figure.

Luckily, for most of that period IRMAA was not a factor.
bsteiner
Posts: 10485
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: To Roth or not to Roth. That is the question.

Post by bsteiner »

It's worth considering. The width of the 24% bracket goes up to $394,600. However, in addition to the rates being schedule to revert to the pre-2018 rates in 2026, the doubling of some additional brackets for joint returns through the 32% bracket is scheduled to expire at the end of 2025.
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question.

Post by Busdrvr »

Navillus1968 wrote: Mon Feb 03, 2025 11:04 am
Busdrvr wrote: Mon Feb 03, 2025 7:09 am The state tax issue is certainly germane here as we are domiciled in WI, but have a FL property that we both use and rent so there is opportunity there as well.
After working in VA, we moved to FL in 2021. I still work part-time, but after maxing out my 401k, my W-2 income is <$40k, which allowed me to do fairly sizable Roth conversions (sizable for me, anyway!) over the last 4 years without paying 5.75% to VA.
At that time, the sunset of the TCJA brackets was considered very likely, so I opted to convert into the 24% bracket to avoid the future 25%/28% brackets. I never thought a GOP trifecta in 2024 was going to happen, go figure.

Luckily, for most of that period IRMAA was not a factor.
That all sounds great. We’re across the peninsula from you. Yes IRMAA plus the potential for ACA subsidies will complicate things as I see it. Most of my WI income is taxed at 5.3% but would be nice to delete that for conversions. Even more painful considering I work in WA for a WA based company. I’m hopeful they get the brackets extended before years end!
heyyou
Posts: 4732
Joined: Tue Feb 20, 2007 3:58 pm

Re: To Roth or not to Roth. That is the question.

Post by heyyou »

At 20 years past retiring at 55, now in my RMD years, my annual Roth conversions that were, and still are, invested 100% in equity funds, have been the golden part of my early retirement years. For you, RMDs seem far away, but when you do get there, more Roth conversions will look to have been ideal due to their continuing tax free growth since then. The growth of their all-equity allocation has been more than the compounding of the costs of those conversions. Bond funds are left in the tIRA account with its RMDs.
Topic Author
Busdrvr
Posts: 234
Joined: Fri Jan 29, 2016 10:56 am

Re: To Roth or not to Roth. That is the question.

Post by Busdrvr »

FiveK wrote: Sun Feb 02, 2025 12:20 pm
Navillus1968 wrote: Sun Feb 02, 2025 11:16 am Play around with this 1040 calculator & see what happens when you add $50-$100k or more of Roth IRA conversions to your normal income in retirement.
https://www.dinkytown.net/java/1040-tax-calculator.html#
That can work.

For those who can use Excel, generating something like this annotated chart using the personal finance toolbox can be even more useful. That tool provides the marginal rate curve - annotations are up to the user. ;)
It’s not as simple as we want to make it and I didn’t really even understand the nuances to your reply until the algorithm served up this to me just a day ago. I’d watched many of Eric Sadjak’s of Safeguard YT videos in the past and am impressed by his tax planning acumen. I’ve watched it several times and I can’t find any flaws in the logic. It’s all about the marginal rate and its components.

https://youtu.be/JWrJ69CkJvo?si=ka74TtjFlQp6uxQD
User avatar
FiveK
Posts: 17233
Joined: Sun Mar 16, 2014 2:43 pm

Re: To Roth or not to Roth. That is the question.

Post by FiveK »

Busdrvr wrote: Tue Feb 04, 2025 9:39 pm
FiveK wrote: Sun Feb 02, 2025 12:20 pm That can work.

For those who can use Excel, generating something like this annotated chart using the personal finance toolbox can be even more useful. That tool provides the marginal rate curve - annotations are up to the user. ;)
It’s not as simple as we want to make it and I didn’t really even understand the nuances to your reply until the algorithm served up this to me just a day ago. I’d watched many of Eric Sadjak’s of Safeguard YT videos in the past and am impressed by his tax planning acumen. I’ve watched it several times and I can’t find any flaws in the logic. It’s all about the marginal rate and its components.

https://youtu.be/JWrJ69CkJvo?si=ka74TtjFlQp6uxQD
Re: "It’s all about the marginal rate and its components" - yes, indeed! Links below to several articles that reinforce this point.

The decision between deductible traditional vs. Roth contributions hinges primarily on a comparison between your known marginal tax rate now vs. an estimated marginal tax rate at withdrawal.

The first misconception is sometimes described as "contributions are taken from the top tax rate and are withdrawn later at the average rate".

Deciding between Traditional and Roth contributions is another use for marginal rates.

Marginal Vs Effective Tax Rates And When To Use Each
Post Reply