new tax plan, do we think about roth 401k differently?

[q-school]

should we take the lower marginal tax rates and pay the taxes now?

were there any changes to roth 401k?

thanks

[hightower]

I asked this question recently too.  From what I've been reading it sounds like it still wouldn't make a lot of sense for high earners to contribute to a roth 401k over a traditional because it would like result in you still paying higher taxes on money now than what you could pay in retirement.

[Dr. Mom]

hightower wrote:

I asked this question recently too.  From what I’ve been reading it sounds like it still wouldn’t make a lot of sense for high earners to contribute to a roth 401k over a traditional because it would like result in you still paying higher taxes on money now than what you could pay in retirement.

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Exactly.  Marginal rate now versus effective rate in retirement.  You'll have to make some assumptions on the size of your portfolio at retirement and your needed withdrawals.  The closer you are to retirement the easier it is to have more confidence in the numbers.  If your retirement withdrawals will have you at a lower effective rate than your highest marginal rate now, favor not doing Roth unless you just want some tax diversification beyond Backdoor Roths.

[Hatton]

I have started converting small amounts from SEP/IRA to roth.  My reasons are 1. tax diversification and 2. lower RMDs. I managed to bump myself from 28% to 33% with my first try.  This year I converted and then contributed a like amount to a new DAF.  I hope the IRS interprets this the same way I do.  Not sure about this going forward.

[PhysicianOnFIRE]

Too many variables that will differ from person to person to make anything close to a blanket statement, but I would say there are some factors that make it a bit more favorable now than before.

For example, if you're going to be in the 24% bracket as I expect to be, that's not a terrible rate at which to pay the tax to have Roth money. If you are retiring soon to an even lower tax bracket, it might not make sense. But if you already have a 7-figure traditional 401(k) and won't be retired for at least eight years after which the tax cuts could expire or be altered by a different party in charge, Roth might be a great option now.

[VagabondMD]

PhysicianOnFIRE wrote:

Too many variables that will differ from person to person to make anything close to a blanket statement, but I would say there are some factors that make it a bit more favorable now than before.

For example, if you’re going to be in the 24% bracket as I expect to be, that’s not a terrible rate at which to pay the tax to have Roth money. If you are retiring soon to an even lower tax bracket, it might not make sense. But if you already have a 7-figure traditional 401(k) and won’t be retired for at least eight years after which the tax cuts could expire or be altered by a different party in charge, Roth might be a great option now.

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This (above) is the best response to the oft asked question (pre-tax vs. Roth). It depends.

There is an excellent chance that tax laws and rates will be different by the time you are taking the bulk of your distributions.

[Rotish]

Is it dumb to do Roth just starting out?

I can’t imagine I’ll be paying a 20% effective tax rate for the bulk of my career like I will under this bill. I like the idea of putting the extra money from this tax cut directly into tax advantaged retirement accounts...

[billy]

Gone back and forth on this this past week, and I've decided to hedge my bets and put in 13000 in traditional 401k and 5000 in roth 401k next year (wife will put all 18000 in her traditional bc no roth space in her 401k).  No one can predict future tax rates, so I figure the more options/buckets I have later in life the better off I'll be.

[Slav4ikMD]

"I can’t imagine I’ll be paying a 20% effective tax rate for the bulk of my career like I will under this bill."

Are you saying you will likely pay more or pay less? (I personally have been in very low 20's since residency and hope to keep it that way and certainly pay way less in retirement.)  So just curious...

[Rotish]

27 this year to 21% next year with the tax cut

[Slav4ikMD]

Lucky you!  I suspect I will pay a tiny bit more with the tax "cut."  Unless I can find some other loopholes that are not apparent yet.

[PhysicianOnFIRE]

Rotish wrote:

I can’t imagine I’ll be paying a 20% effective tax rate for the bulk of my career like I will under this bill.

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I would focus on the marginal tax rate when making this decision. The $18,500 you can defer will be at your marginal rate (or rates if it straddles two brackets). If you're well into the 32% bracket, it doesn't matter if your effective tax rate is 20%. Foregoing the deferral prevents you from taking a tax savings of 32% of $18,500 = $5,920.

 

 

[q-school]

i'm still going back and forth on this.

i'm expecting to be in highest tax bracket in retirement due to combination of (fortunate) factors.

 

my financial guy hates the roth 401 option because the thought of losing 1/3 of investing money off the bat hurts too much, but really at this point the biggest feature i'm considering is lack of rmd and perceived opportunity to take a slightly lower tax bite temporarily.  i guess if i'm in the highest bracket no matter what i do, it doesn't matter and i can always convert to roth in retirement if estate planning is a focus.

i think hanging out here is making me crazy.    or at least making my craziness worse.  i'm letting the tax tail wag the investment dog.

 

[The White Coat Investor]

Really no change in how you should calculate this unless you believe brackets will be higher later, in which case Roth is a little more attractive than it was before.

[VagabondMD]

q-school wrote:

i’m still going back and forth on this.

i’m expecting to be in highest tax bracket in retirement due to combination of (fortunate) factors.

 

my financial guy hates the roth 401 option because the thought of losing 1/3 of investing money off the bat hurts too much, but really at this point the biggest feature i’m considering is lack of rmd and perceived opportunity to take a slightly lower tax bite temporarily.  i guess if i’m in the highest bracket no matter what i do, it doesn’t matter and i can always convert to roth in retirement if estate planning is a focus.

i think hanging out here is making me crazy.  ?  or at least making my craziness worse.  i’m letting the tax tail wag the investment dog.

 

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I perceive myself to be in a similar situation, going back and forth, etc. Since you have all of the available information and knowledge, and it’s still difficult to discern which is better, probably neither is clearly better and either decision acceptable. Or, you could do what I have done and split the contributions between pretax and Roth.