Help me decide Roth 401K vs Trad'l 401K - $1.6M

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privateID
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Help me decide Roth 401K vs Trad'l 401K - $1.6M

Post by privateID »

I see so many of these threads and I have gone back and forth a few times. Here are my numbers:

1) Age: 56
2) Current TDA balance = $1.6M
3) Retirement age: 60
4) Current marginal tax rate: 22% (fed) + 7+% (NYS) = 29+%
5) Plan to withdraw or convert from 60 to 70 to top of the 12% bracket.
6) My estimate: $1.5M in TDA at age 72 when RMDs begin (the balance will have grown above $2M, but the conversions knock it down to this).
7) My estimate: I will never be in the 22% (future 25%) tax bracket once I retire.
8) My estimate: The full 85% of SS will never be taxed.
9) My estimate: Single survivor case: will be in the 22% (then 25%) tax bracket, but will still be under IRMAA limit.
10) Future marginal tax rate (assuming rates revert back): MFJ: 15% (Fed) + approx 5% (state) = 20%; Single: 25% + approx 5% state = 30%
11) I imagine beneficiaries will be in at least the 25% tax bracket
12) Current and future AA: 50% stock/50% bonds.

Given I'm in a lower tax bracket in retirement, it would seem TDA is the way to go for my last few years. However, it does cause more SS to be taxed. The single survivor case probably slightly favors Roth. So, I guess I'm weighing lower tax bracket vs extra SS tax+single survivor case+beneficiary's tax bracket. It seems to me TDA is still the way to go, but would love to hear from someone who thinks otherwise.
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arcticpineapplecorp.
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Re: Help me decide Roth 401K vs Trad'l 401K - $1.6M

Post by arcticpineapplecorp. »

privateID wrote: Tue Dec 06, 2022 3:15 pm 5) Plan to withdraw or convert from 60 to 70 to top of the 12% bracket.
if you're not going to convert for 4 more years, the 12% bracket will sunset in 2025 so you'll be converting to the top of the 15%, not 12%. Not a reason to change your plan, but I just want you to realize you'll pay 3% more tax than you stated above.

otherwise, makes sense. Also, just because you're TDAing for the next 4 years (and then converting for 10 years) doesn't mean you also can't also contribute to Roth IRA for the next 4 years (even if income level prevents it you can do Backdoor Roth) to get some more money in Roth after maxing TDA in 401k the next 4 years.
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deikel
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Re: Help me decide Roth 401K vs Trad'l 401K - $1.6M

Post by deikel »

I have done this math a couple of years ago and although it is NOT just simple math, there was a range around 1.3 million in tax deferred where it clearly started to be better to fund Roth accounts rather than traditional

The good news is that there will be a range where it will simply turn out to be a wash or close to it, before it will eventually become a mistake and cost you money.....but that range is quite large and at that point in teh savings you have a nice problem to have.

Most people never make it to that problem in the first place

I think you went over already, so Roth seems the way to go for you
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privateID
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Re: Help me decide Roth 401K vs Trad'l 401K - $1.6M

Post by privateID »

arcticpineapplecorp. wrote: Tue Dec 06, 2022 3:21 pm
privateID wrote: Tue Dec 06, 2022 3:15 pm 5) Plan to withdraw or convert from 60 to 70 to top of the 12% bracket.
if you're not going to convert for 4 more years, the 12% bracket will sunset in 2025 so you'll be converting to the top of the 15%, not 12%. Not a reason to change your plan, but I just want you to realize you'll pay 3% more tax than you stated above.

otherwise, makes sense. Also, just because you're TDAing for the next 4 years (and then converting for 10 years) doesn't mean you also can't also contribute to Roth IRA for the next 4 years (even if income level prevents it you can do Backdoor Roth) to get some more money in Roth after maxing TDA in 401k the next 4 years.
Right - 15%. Hard to be consistent talking about this with the changing rates.

I do contribute to a Roth IRA for myself. My wife does a trad'l IRA because of NYS tax benefits (the first $20K of retirement income per person is NYS tax free and she doesn't have much TDA). I also contribute about $15K in an after-tax mega back door 401K that gets converted to Roth immediately. And I also max out my HSA which is like a Roth. So about 35% will be going into Roth or Roth-like accounts if I max out my trad'l 401K.

So, I do have some Roth money going in regardless.
I think you went over already, so Roth seems the way to go for you
Ok. But I think the range is determined by one's individual tax situation. For me in NY State, SS and some retirement income has no state tax. On the Federal tax side, RMD+SS+very small pension puts me in a lower tax bracket than today. Of course, there's always the possibility my math in my spreadsheet is wrong or I made a poor assumption somewhere.
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arcticpineapplecorp.
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Re: Help me decide Roth 401K vs Trad'l 401K - $1.6M

Post by arcticpineapplecorp. »

privateID wrote: Tue Dec 06, 2022 3:57 pm Ok. But I think the range is determined by one's individual tax situation. For me in NY State, SS and some retirement income has no state tax. On the Federal tax side, RMD+SS+very small pension puts me in a lower tax bracket than today. Of course, there's always the possibility my math in my spreadsheet is wrong or I made a poor assumption somewhere.
if the tax you pay on withdrawals will be less than the tax you save on contributions that favors pretax contributions.
If the tax you pay on withdrawals wuold be more than the tax you save on contributions that favors Roth contributions.

if you ran the numbers then the only thing you can't account for is changes to tax rates that can't be anticipated now anyway, so you're doing the best you can and prepared for different scenarios (what you'd pay if you didn't convert, what you'd pay if you do convert over 10 years before RMDs, MFJ vs widowed and so on). That's all you can do. If rates change, you couldn't have known that now.

There are other strategies too. You could make charitable donations via QCD after age 70 1/2. That can satisfy the RMDs but also if you don't need the money and are trying to limit higher fututre RMDs, that would lower them by donating certain larger amounts of your tax deferred assets.

Also you could donate assets in 401k to donor advised fund (and depending upon the amount could result in a tax deduction if you itemize).

You might draw down assets quickly for skilled care (these extraordinary medical expenses would lower income because of itemizing, which would lower tax paid on tax deferred withdrawals).

you could leave tax deferred assets after death to charities and leave Roth to kids (if you have any or were planning on leaving them assets), especially depending upon what their tax rate might be upon receipt.

just some other thoughts.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Topic Author
privateID
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Joined: Sat Oct 18, 2014 4:59 pm

Re: Help me decide Roth 401K vs Trad'l 401K - $1.6M

Post by privateID »

arcticpineapplecorp. wrote: Tue Dec 06, 2022 4:11 pm
privateID wrote: Tue Dec 06, 2022 3:57 pm Ok. But I think the range is determined by one's individual tax situation. For me in NY State, SS and some retirement income has no state tax. On the Federal tax side, RMD+SS+very small pension puts me in a lower tax bracket than today. Of course, there's always the possibility my math in my spreadsheet is wrong or I made a poor assumption somewhere.
if the tax you pay on withdrawals will be less than the tax you save on contributions that favors pretax contributions.
If the tax you pay on withdrawals wuold be more than the tax you save on contributions that favors Roth contributions.

if you ran the numbers then the only thing you can't account for is changes to tax rates that can't be anticipated now anyway, so you're doing the best you can and prepared for different scenarios (what you'd pay if you didn't convert, what you'd pay if you do convert over 10 years before RMDs, MFJ vs widowed and so on). That's all you can do. If rates change, you couldn't have known that now.

There are other strategies too. You could make charitable donations via QCD after age 70 1/2. That can satisfy the RMDs but also if you don't need the money and are trying to limit higher fututre RMDs, that would lower them by donating certain larger amounts of your tax deferred assets.

Also you could donate assets in 401k to donor advised fund (and depending upon the amount could result in a tax deduction if you itemize).

You might draw down assets quickly for skilled care (these extraordinary medical expenses would lower income because of itemizing, which would lower tax paid on tax deferred withdrawals).

you could leave tax deferred assets after death to charities and leave Roth to kids (if you have any or were planning on leaving them assets), especially depending upon what their tax rate might be upon receipt.

just some other thoughts.
All good reasons to go trad'l. I'm definitely leaning toward switching back (I had done Roth 401K the past couple of years). Thanks for that input.
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