Roth vs. Traditional 401K?

[Anonymous]

I've been roughly splitting my contributions equally between the two but wondering if I need to start shifting? HHI is about $250K, putting us in the middle 24% bracket. If we're only living off of retirement, then presumably we will be in a lower bracket than that (if we can even predict what things will be like that far out), meaning a traditional is starting to make more sense? How do you game it out?

[Anonymous]

There is discussion on this on this still active thread: https://www.dcurbanmom.com/jforum/posts/list/1100597.page

It is being dominated right now by pro Roth IRA advocates, but there are good arguments for both depending on your situation and your financial objectives.

[Anonymous]

If you are maxing out (and doing a backdoor Roth IRA) then splitting (leaning towards Roth) puts more money away for retirement and gives you more flexibility in retirement.

If you are asking whether for a given amount you will pay less tax overall if you lean towards Roth or lean towards traditional then the answer is that in the 24% bracket you would very likely save on taxes by using traditional.

So I would start by trying to max out traditional and doing a backdoor Roth and if you want to put more away then shift to Roth.

[Anonymous]

Anonymous wrote:I've been roughly splitting my contributions equally between the two but wondering if I need to start shifting? HHI is about $250K, putting us in the middle 24% bracket. If we're only living off of retirement, then presumably we will be in a lower bracket than that (if we can even predict what things will be like that far out), meaning a traditional is starting to make more sense? How do you game it out?

Don't forget the state tax as well as the surcharge on capital gains/dividends that you may be paying (not sure when that kicks in). Even assuming your federal tax rate is the same in retirement, you could move to one of about 10 states and not pay tax on 401K withdrawals.

The only real issue for high earners would be RMD. Do you want to be forced to withdraw money in retirement or avoid that by paying slightly higher taxes now?

[Anonymous]

I wonder if RMDs age could change in the future given life expectancy is only going up.

[Anonymous]

Anonymous wrote:I wonder if RMDs age could change in the future given life expectancy is only going up.

Yes— it’s something politicians can agree on because it’s a tax cut that is sold as enhancing “retirement savings”. It’s already gone up from 70 to 72 recently and it might well go up to 75 in the omnibus, or if not this year then another year.

I actually think the smarter move is to go all traditional now and then, if you are still concerned about having too much in traditional, use the years between when you stop working and when SS and RMDs kick in to do partial conversions to Roth.

It’s possible at some point Congress will get wise and shut that strategy off, but I think that’s less likely than extending the sate for RMDs (especially as Biden already tried once and had to give up).

[Anonymous]

Sounds like the RMD age is now 75 if Congress passes this giant bill.