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Roth 401k even as a high earner?

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  • StarTrekDoc
    replied
    Originally posted by jfoxcpacfp View Post
    AsMoneyMoth posted, this decision is not solely about the marginal tax rate, you also have to consider the intangible (i.e. unmeasurable) benefits of no RMDs and the utility of prepaying taxes for future generations. In my limited experience, the closer physicians get to retirement, the more they long for that tax-free space. At that point, they aren’t calculating the taxes they have saved in the earlier years, because it is often gone with the wind and no longer relevant.
    This. xraygoggles - the issue is you're at the beginning of your retirement journey, with high earnings already topping out the tax current bracket, AND well educated beyond a beginner and thinking about optimal efficiencies of a mid-career person already -- hence running into the tax efficiency question of Roth vs Traditional with a 30 year horizon.

    Marginal rates: historical lows: yes. as recent as 70s-80s the rates were crazy high. Back then no one would fathom rates now. Nor mortgage rates at 2-3% either. Will we return to the 70s-80s of 70%+ rates for the top 1%? We wrote a $3Trillion dollar IOU earlier this year (and entering a surge that we pay us docs so handsomely well apparently) that future generations cannot reasonable sustain current low rates.
    -- My bet is marginal rates will be higher for the top 1% as soon as next Congressional session.

    RMDs: is a very real issue for high savers and SOR types. Project that and it gets quite scary in your 80s so the tax efficiency does matter if you're planning beyond yourself and generational wealth transfer. I do NOT believe they will raise the age as Congress needs the money now. Just like recent inherit IRA reform, Congress looking to push for tax dollars now instead of future.

    --While it's hard to take a nearly 50% tax hit on last dollar earned right now, my bet is the future top dollar hit is only going to worsen.

    The one sure way to avoid top earning brackets is to NOT earn top dollar! -- enact FIRE plans a few years earlier (after 59.5) and draw down tax-deferred FIRST and defer pensions+SS later to avoid both RMDs and the top brackets <--- this is becoming our plan for sail date age 60.

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  • Dont_know_mind
    replied
    I don't really see why retirement accounts would be taxed more, but maybe they could be.

    I tend to think that if you stick with vehicles and strategies used by a large proportion of society, the tax risks are less.
    Once you get into esoteric structures and tax strategies used by the 1%, then there may be higher risk of tax legislative change that is not in your favor.

    Leave a comment:


  • Brains428
    replied
    I wasn't referring to the taxing of 401k plans. It's the tax credit vs deduction argument.

    But as I've said- lot's of ifs. My opinion is that it is totally feasible for Roth accounts to be taxed in some form in 30 years. But I'm not establishing my current investment strategy in my retirement accounts by my assumptions on tax policy in 30 years. I'm cognoscente of today's reality and future possibilities, but I can only play by today's rules.

    For many of us employed physicians, it looks like the primary tax/income diversification would be through actual real estate.

    Leave a comment:


  • jfoxcpacfp
    replied
    AsMoneyMoth posted, this decision is not solely about the marginal tax rate, you also have to consider the intangible (i.e. unmeasurable) benefits of no RMDs and the utility of prepaying taxes for future generations. In my limited experience, the closer physicians get to retirement, the more they long for that tax-free space. At that point, they aren’t calculating the taxes they have saved in the earlier years, because it is often gone with the wind and no longer relevant.

    The most emotionally palatable way to avoid this regret syndrome is (as someone mentioned above) to calculate taxes saved each year and use to build a “taxable” (i.e. brokerage) account to have that physical evidence of what you have saved over the years. How many of you are doing that? And investing in a portfolio for (potentially) the next generation as opposed to low-return holdings that you may not need for 30+ years, if ever?

    Otherwise, all of this theoretical talk about what you’re saving now v what you will pay when you begin RMDs will be fairly irrelevant when you are being forced to calculate and remove a certain amount of your IRA at age 72.5 b/c the IRS requires you to pay tax on it during your lifetime and you don’t want or need to.

    You can be very very smart and perfectly precise about the “math” today and still have regrets when reality hits at age 72.5. Think about it, at least.

    Leave a comment:


  • Tim
    replied
    Originally posted by CordMcNally View Post

    I'm pretty sure they were likely referring to reducing the amount put into a 401k that is deductible for high earners. Besides, just because a candidate hasn't said something doesn't mean it will never be on the table.
    Seriously, just because any candidate says something or even writes something doesn’t mean they have any intention of actually doing it.
    New facts and circumstances are always available.
    You ask Joe and Donald the same question, you get a scripted answer or a clarification later.

    Leave a comment:


  • MoneyMoth
    replied
    The Roth or traditional 401(k) decision can be complicated for high-income professionals. Consider these factors to best protect your income.


    I opted for the Roth 401k option as a high earner for some of the reasons listed in the article above:

    Estate Planning Considerations: "Roth accounts don't have Required Minimum Distributions (RMDs) starting at age 70."

    State Taxes: "If you plan to return to New York or California from your job in Florida or Nevada, however, you may wish to pay those taxes up front!"

    Leave a comment:


  • ENT Doc
    replied
    Originally posted by xraygoggles View Post
    I really don't know about retirement RMD and my tax situation at that time, since it's so far away. There's no way to even guess.

    I just wanted to know if anyone was hedging against future tax hikes, which seem more likely than not. Sounds like most are not, but I may still consider it, at least for a portion of my retirement savings.
    It’s not that no one plans on it. Heck, I fully plan on it and have planned accordingly. But what you are talking about here is at the extreme end of any prediction I’ve heard on this forum.

    Leave a comment:


  • CM
    replied
    Originally posted by Jack_Sparrow View Post
    4) No guarantee the Roth will remain tax free for the deca-millionaire in 30 years.
    This. If you're concerned about rising tax rates you should consider this possibility.

    Leave a comment:


  • CordMcNally
    replied
    Originally posted by White.Beard.Doc View Post

    Snopes.com reported that the claim that Biden would tax 401k plans was fake news, made up by someone trying to get more people to vote for one of his opponents.

    https://www.snopes.com/fact-check/biden-401k-tax/
    I'm pretty sure they were likely referring to reducing the amount put into a 401k that is deductible for high earners. Besides, just because a candidate hasn't said something doesn't mean it will never be on the table.

    Leave a comment:


  • White.Beard.Doc
    replied
    Originally posted by Brains428 View Post
    As it stands today, I think it's best to do traditional contributions. IF Biden wins and IF Biden gets his proposed changes to 401k plans, I'd consider changing contributions to Roth.
    Snopes.com reported that the claim that Biden would tax 401k plans was fake news, made up by someone trying to get more people to vote for one of his opponents.

    The proposed Biden/Harris plan would replace individual retirement account deductions with a flat deduction available to everybody.

    Leave a comment:


  • triad
    replied
    Originally posted by jacoavlu View Post

    that's a dumb way to look at it. By that logic everyone should choose Roth over pretax always
    only if you want more tax protected space should you go roth. most people don't really care about that which is why traditional makes sense for most people

    Leave a comment:


  • Brains428
    replied
    As it stands today, I think it's best to do traditional contributions. IF Biden wins and IF Biden gets his proposed changes to 401k plans, I'd consider changing contributions to Roth.

    Leave a comment:


  • Jack_Sparrow
    replied
    Originally posted by xraygoggles View Post
    I really don't know about retirement RMD and my tax situation at that time, since it's so far away. There's no way to even guess.

    I just wanted to know if anyone was hedging against future tax hikes, which seem more likely than not. Sounds like most are not, but I may still consider it, at least for a portion of my retirement savings.
    I would not put into Roth 401k. I see your argument on hedging future tax hikes over 30 years, however I think even with higher marginal tax rates there is still other factors that will drive your decision.

    1) Stock market growth - will your Roth continue growing at 7-8% or over next 30 years, or 7-8 over next 15 and then 3-5% after that? (IE will your capital gains from traditional 401k drastically outpace your increase in marginal tax rate). (I personally think so just based on my 30 year outlook).
    2) Id almost always would rather have more money and have to pay taxes then have less money and pay less taxes. I feel like I have more control over my taxes(spending) then over my ability to make more money. (in retirement you can move to lower tax states)
    3) Think short term - If in 5 years you walk away from medicine, or disability, decrease standard of living etc. which decision would have been better? (id say traditional).
    4) No guarantee the Roth will remain tax free for the deca-millionaire in 30 years.

    Personally if your 70+ years old and worrying about the 1% marginal tax rate, you've got it made.





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  • G
    replied
    Originally posted by xraygoggles View Post

    Are you sure it's inaccurate? See chart below, taken from Tax Policy Center, a non-partisan think tank from DC. Today is the lower end of marginal rates, historically speaking. Given that, it's more likely that it will increase from here, rather than decrease. That was my thinking.

    (Of course if you include the period before there was any federal income tax, that's not really a fair comparison, since that's never going to happen again.)
    I don't have a reference on-hand, but that chart only gives part of the picture--it is more important to determine what people actually paid than a chart of the top brackets.

    I anticipate a RMD problem, so if 1) I take no action and 2) brackets stay the same, I will likely end up in a higher bracket at retirement than I am not at part-time. but those are two significant issues, one of which I have direct control for a decade or two before my first RMD.

    for sure, plenty of folks are doing Roth as a hedge.

    if there is a blue wave next week (month?), I will probably throw the dice and put in employee contribution as Roth in 2021.

    Leave a comment:


  • CordMcNally
    replied
    Originally posted by xraygoggles View Post

    Are you sure it's inaccurate? See chart below, taken from Tax Policy Center, a non-partisan think tank from DC. Today is the lower end of marginal rates, historically speaking. Given that, it's more likely that it will increase from here, rather than decrease. That was my thinking.

    (Of course if you include the period before there was any federal income tax, that's not really a fair comparison, since that's never going to happen again.)
    There just isn't going to be an appetite for having ridiculous marginal tax brackets for the income that most physicians make in the future. You may start finding some support at the 7 figure mark and increasing support into the 8 and 9 figure income amounts but not where most physicians are at now. I love to think that I'll come up with some ridiculously smart business idea and spend my days Scrooge McDuckin' but I'm not betting my money on that. I'm taking the smart bet now. If I end up being wrong on that bet then that means I'll be in an even *better* financial position than I was predicting, which is already pretty rosy.

    Leave a comment:

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