I recently calculated how much it would cost us in taxes and opportunity cost if I switch maxing out from traditional 401k to ROTH 401k.
Married filing jointly. We are both 45 years old. Planning to retire at 65. We have more than half a million in trad ira right now. No plans for early retirement. We will be in 24% tax bracket if we dont contribute to traditional 401k. Between me and my wife, we are going to contribute 41,694 to our 401k combined (will put 7306 into trad for getting company match).
@ 24% we will be paying $10,006 in additional yearly federal taxes. So if we calculate the same contribution until retirement that is $200,131 in 20 years. Also $425,617 lost in opportunity cost if we would regularly invest the tax savings in taxable account @ 7% return. All this for ROTH account of $886,702 for the same rate @ 7% for 20 years.
We understand we will avoid the tax torpedo, IRRMA surcharge, risk of widower tax trap, higher ss tax, high RMD. But is it really worth shedding $425,000 in opportunity cost in 20 years? Alternative is to continue with maxing trad and convert from trad to ROTH during the low income years (and low tax bracket) right after retirement. We will have a small pension at 65. We can delay it. But we are not sure if the laws around conversion will change in the future.
What would you do if you were in our situation?
Should you ROTH in 24% tax bracket?
byu/tinkerjreddit inpersonalfinance
Posted by tinkerjreddit
13 Comments
Honestly with that much already in traditional and being in the 24% bracket, I’d probably stick with traditional and do the Roth conversions in early retirement when you’re in the 12% bracket or whatever. That $425k opportunity cost is pretty brutal and you’ve got a 20 year runway to do conversions strategically
Since you plan to work until at least Medicare age, I would assume you would have health insurance through your work until then.
One of the big advantages of Roth is if you plan to retire before Medicare age. It gives you a clear way to manipulate your “income” so you qualify for health subsidies.
Since you don’t need that, I would Stick with traditional. Then revisit the option of conversions in the first couple years of retirement.
“invest the savings in money market @ 7% return”
How are you doing the above?
[deleted]
>What would you do if you were in our situation?
I would have stopped considering Roth a tax bracket earlier. With no plans for early retirement, there’s rarely a reason for a 24%-bracket couple to do Roth unless they’re going to be in the 24% bracket or higher in retirement. You mentioned all great little reasons why taxable income can hurt you in retirement, but some are over-rated (I think, like widow tax increase), easily avoided (tax torpedo), or just something I personally don’t care about (RMD’s – it’s going to less than what I want to withdraw anyway as it’s the same as an amortized based withdraw assuming 0% growth).
And yeah, you can always do Roth conversions during your retirement if you find yourself in a lower-income year.
>will put 7306 into trad for getting company match
What does this mean? Typically the company will match either Traditional or Roth contributions but the match itself will be Traditional
Obligatory: https://www.reddit.com/r/personalfinance/s/79raAobRsr
Why not just switch to backdoor Roth IRA? I have to imagine you’re pretty close to the tIRA deduction income limits anyways?
Edit: nevermind, didn’t see you aren’t retiring early. Wrong sub lol
My wife (64) and I (69) are retired, her very recently. I’m using my funds to supplement our income along with my SS until she claims hers at 67 and will reduce my RMDs to practically nothing by the time I am 73. She has about $675,000 in her retirement account and we are going to use the next 10 years to do conversions to Roth, so her RMDs won’t be in the $40-50,000 range and will be more like $10-12,000. Taking advantage now and will keep us in the 12% tax bracket.
Traditional. You can control the taxes you pay through conversions later.
The traditional answer is to game out your returns, income expectations, retirement age, etc. But I’m in a tax bracket above yours, and I’m putting as much into Roth as I can because, with the state of things (entitlement programs, the national debt, etc ), I fully expect tax rate hikes for much of the rest of my life.
So, run the numbers, but bear in mind that the rates aren’t fixed over time either. That’s one more parameter in your model.
I’m 43 years old and planning to retire at 62. I max the pre-tax 401k limit; they’d be taxed at 24% (+ 5.75% state) if I went Roth instead. That doesn’t make sense for me because I live well below my means. If I were retired now and not saving for retirement and a house, my marginal tax rate would be 12%, with enough room above me to convert $20K from traditional to Roth per year without hitting 22%. Even if I couldn’t convert at 12%, I don’t see myself exceeding 22% marginal tax at any point in retirement, and most of it will taxed in the lower brackets, so I’m sticking with pre-tax.
I do also max my Roth IRA via the backdoor, but I only started the account 3 years ago, so I’m heavily traditional. I want a better balance, but I’m planning to start using mega backdoor Roth in 2027 if not this year, so I’ll use that to build the Roth funds. Right now the extra funds are going to my short-term savings to buy a house, but that fund will be complete by end of year).
My advice would be to diversify your retirement savings vehicles/accounts just like you presumably diversify the asset classes you hold. So, just as you likely hold a mix of stocks, bonds, and cash, hold funds in both Roth and traditional Retirement Accounts. Given you already have reasonable assets in traditional, I would be reluctant to start shoving some into a Roth moving forward.
I’m in a very similar situation like you. Mid 40s, if healthy enough plan to retire at 65+. I have 950k in a 401k. Up until last week, I put 13% pretax, and company puts in 10%
For the past 8 years I’ve been putting money into a Roth ira, and only the past few years been maxing it, and have around 75k in there.
Last week, I changed my contribution to be 10% post tax into Roth 401k. I did some quick math and I’m hoping 13 to 10 is the same amount in my take home pay check. The idea is I have this huge chunk of my retirement in pretax, and my match is going to pretax, so I’ll start hedging my bets and start growing my post tax 401k.
Just hope the tax stuff works itself out at the end.
I believe I’m also 24% bracket. Also, this year I’m starting the backdoor Roth ira process too. So far, I’ve done my first monthly contribution converted. Let’s all hope for the best.