roth 401k better in 2018 with new tax law?

[billy]

Hi,

My 401k plan allows both pretax and roth (after tax) contributions up tot the 18000 limit.  Will be MFJ in 2018, taxable income should be between 300-360k depending on amount wife works.  Her plan only allows pretax dollars (so she will put 18000 there, lowering our taxable income), mine allows both.  Would it make the most sense for me to use all the 18000 space available to me as a roth 401k due to the new tax brackets? We also backdoor roth each year.  I use an HSA but will be losing it for other reasons in 2018 so wont have access to contributing to it anymore.

 

-billy

[GXA]

Interesting question - The 32% marginal bracket is at an income of $315,000-$400,000.  The 24% rate is $165,000-$315,000.

Although my first inclination was to just invest all of it with pretax dollars using a regular 401k - the 24% rate may be tempting.

Ultimately it is impossible to know which will end up better without know future tax rates and future incomes.  There would be some benefit to diversifying and having some funds in a roth, and some in a regular 401k, or perhaps "a bird in the hand is worth two in the bush" (take the deduction now)...

Sorry for the vague, non-committal response.  

[Lithium]

I won't be doing this.  My marginal bracket currently is 36% federal (28% AMT + 7% AMT exemption phaseout + 1% Pease phaseout), and I'll be going to 35% next year if I'm no longer in AMT land.  Not a meaningful difference.  I know many expect tax brackets to be going up in a substantial way in 8-10 years, but I'm hoping my income will drop dramatically by then if the FIRE plan works out.

[Dr. Mom]

The answer comes down to saving at your marginal rate versus what your effective rate will be at retirement.  My husband and I have been discussing this issue as we were thinking the math for us would favor Roth.  We were wrong.  Our situation is income similar to you, about 350K now. So we put in to regular 401k at 24% to 32% marginal rate.  We are looking at withdrawing at most 150K annually in retirement.  I won't bore you with our assumptions here.  You'll have to make your own for your situation.  Assuming tax rates go back to 2017 levels when we retire (I am not predicting anything here, just going by current law) our effective rate on $150K of income will be 19.3%.  So to me the traditional 401k won over Roth.  We still plan to do backdoor Roths for tax diversification.  Hope my thought process helps.  Happy for anyone to challenge me if you see errors

[billy]

I think if I knew that our income would be 314,999 I would do it for sure.  But the unknown range, Im debating using the traditional to lower our total income, or taking the chance that 24% will be our best rate for awhile (expecting raises that will push us over the 315k range for sure), and i truly expect taxes to go up in the future, more so by the time we retire (Im thinking 20 more years of work).

[billy]

thank you dr mom, if your math is correct thats the type of answer I was looking for

[ENT Doc]

Depends on when you plan to retire too. FIRE favors pre-tax.

[billy]

ENT Doc:

Plan is retire in early 50s- if plan works out: drop to per diem or daytime at 45-50 (will want to maintain health insurance at that point).  Get out at 55 or work two days per week at that point as a total per diem. Definitely out by 60. Currently 38.

[VagabondMD]

Dr. Mom wrote:

The answer comes down to saving at your marginal rate versus what your effective rate will be at retirement.  My husband and I have been discussing this issue as we were thinking the math for us would favor Roth.  We were wrong.  Our situation is income similar to you, about 350K now. So we put in to regular 401k at 24% to 32% marginal rate.  We are looking at withdrawing at most 150K annually in retirement.  I won’t bore you with our assumptions here.  You’ll have to make your own for your situation.  Assuming tax rates go back to 2017 levels when we retire (I am not predicting anything here, just going by current law) our effective rate on $150K of income will be 19.3%.  So to me the traditional 401k won over Roth.  We still plan to do backdoor Roths for tax diversification.  Hope my thought process helps.  Happy for anyone to challenge me if you see errors

Click to expand...

I agree that the math favors the traditional 401k. However, in later years, depending on how much of one's assets are in a pre-tax environment (traditional IRA and 401k, defined benefit, deferred comp, etc.), the amount of RMD withdrawals from one's IRA could reach levels that push one into unanticipated higher tax brackets. As such, we have started to use our Roth space more for 401k contributions, in the 39.6% bracket, and the modestly lower tax rates in 2018 favor doing this a bit more.

Joanna can probably articulate this better, and perhaps my assumptions are wrong, too!

[Dr. Mom]

Vagabond MD wrote:

Dr. Mom wrote:

The answer comes down to saving at your marginal rate versus what your effective rate will be at retirement.  My husband and I have been discussing this issue as we were thinking the math for us would favor Roth.  We were wrong.  Our situation is income similar to you, about 350K now. So we put in to regular 401k at 24% to 32% marginal rate.  We are looking at withdrawing at most 150K annually in retirement.  I won’t bore you with our assumptions here.  You’ll have to make your own for your situation.  Assuming tax rates go back to 2017 levels when we retire (I am not predicting anything here, just going by current law) our effective rate on $150K of income will be 19.3%.  So to me the traditional 401k won over Roth.  We still plan to do backdoor Roths for tax diversification.  Hope my thought process helps.  Happy for anyone to challenge me if you see errors

Click to expand…

I agree that the math favors the traditional 401k. However, in later years, depending on how much of one’s assets are in a pre-tax environment (traditional IRA and 401k, defined benefit, deferred comp, etc.), the amount of RMD withdrawals from one’s IRA could reach levels that push one into unanticipated higher tax brackets. As such, we have started to use our Roth space more for 401k contributions, in the 39.6% bracket, and the modestly lower tax rates in 2018 favor doing this a bit more.

Joanna can probably articulate this better, and perhaps my assumptions are wrong, too!

Click to expand...

Absolutely correct.  Just doesn't apply to us.  We are not the supersaver FIRErs many of the posters here are

[billy]

Im not sure if this makes any difference but currently our retirement savings are around 75% pretax (457, deferred comp/tda with NYC, 401ks- pretax, HSA) , 25% after-tax (individual roth(backdoor) and 401k-roth).  I will be adding a taxable account next year, which will receive the majority of our savings for the year from this point on (although we will max everything else out).  Will still backdoor roth every year we can, and plan on maxing out 401k.  We will lose access to my 401k in 2019 (planning job move next year), but will still have wifes 401k for the foreseeable future. I no longer can contribute to the 457.