re: Expiration of “Trump” tax cuts

Sorry…to be clear I was talking about a company sponsored tax deferred 401k vs a company sponsored after tax Roth 401k.

Are you saying the tax deferred is better?

I was under the assumption that the Roth was the way to go….so much so that people are actively converting traditional IRAs to Roths.

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was under the assumption that the Roth was the way to go….so much so that people are actively converting traditional IRAs to Roths.

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I would imagine most people are converting Roths as a bridge from early retirement to 59.5. Or they are in a super low tax bracket. Or they fricked up and listened to Dave Ramsey who for some reason encourages everyone to do a back door Roth no matter what be their financial situation is.

It doesn't make a lot of sense (to me) to fund a Roth in your prime earning years when you're in a high bracket. Roths generally make the most sense when you're in a low tax bracket (i.e. early in your career).

Example: married filing joint, $150k taxable income now, $150k annual retirement. Assumptions: no other retirement income, using 2024 brackets without inflation adjustment for simplicity sake (fair because not adjusting withdrawal amount for inflation either).

Tax bracket today: 22% thus each extra dollar you choose to pay tax on and contribute to Roth is taxed at 22% (thus only contributing .78¢) or you defer tax of 22% and contribute that full dollar to traditional.

At retirement the Roth balance will be 22% smaller than equivalent traditional contribution (unless you max annual contributions in which case to compare apples/apples you would invest the excess traditional tax savings either in a Roth IRA, taxable brokerage, etc)

Retirement Withdrawals from traditional are taxed at a lower EFFECTIVE RATE. First, $29k is tax free due to standard deduction. Next $23k taxed at 10% then additional up to $94k taxed at 12%. At that point you have ~$122k of withdrawals that have been taxed at rates from 0-12% (instead of 22% when you earned them) Only at that point does the last $18k get taxed in the 22% bracket.
Even if brackets are raised it isnt likely your bottom brackets will exceed the top rate you pay today (unles low income in which case Roth is easy choice.)
The math can still work in favor of traditional if you have other income in retirement but its a little more nuanced. You can have quite a bit of income before withdrawals are fully taxed in same bracket or higher than during contribution years. Of course there are other considerations such as triggering tax on SS benefits, ACA subsidy income limits, IRMAA, RMDs on traditional but not Roth etc. Thus, it is a good idea to have $ in multiple tax buckets so you can optimize where you pull from in retirement year to year based on needs and situation.

That’s definitely something to ponder.

Most material I’ve seen pushes 100% Roth due to the assumption that taxes will be much higher in the future. Especially in 10 years (my window) when SS and Medicare will be at th breaking point. Even though the plan is to have everything paid off so I expect expenses to be much lower at retirement.

That said, the majority of my retirement savings is still in traditional from my younger years when a Roth wasn’t an option but if these rates change I may consider switching over to get out of the higher bracket for that full contribution amount.

Thanks!

ETA..also, we’ve had a pretty low effective tax rate for years with two kids and a rental. But the rental is almost fully depreciated and with these changes if they happen that could make sense.

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SALT cap would be removed

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This is why Democrats would probably not support it. SALT deductions are big in high tax states, so for their voter interests it's their calculation that letting taxes go up by letting those sunset, BUT also getting the SALT back is a net win for them.

Biden’s press secretary said they’re going to magically only sunset for people making over 400k.

“But the law doesn’t work that way. It’s going to sunset for everybody not just those making over 400k…”

“The President has made it very clear he’s not going to raise taxes on anybody making over 400k”

Thanks so much for the clarity…

Multiple bucket is great but most people learn about it later in life when traditional 401k probably makes the most sense at their marginal income rates.

In your 20s and maybe even your 30s you should be making Roth IRAs and putting anywhere from the company match % to the annual maximums in Roth 401ks if available. Provides alot of flexibility early and typically at lower marginal rates. Traditional 401k from the 22% bracket onward and/or later in life.

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they love raising taxes.

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Someone has to pay for all the illegals do do pants is letting in the country



most with nothing

Don't forget: the Obamacare Cliff also returns at the same time....

For a lot of people, that will be bigger than the sunset of the Trump Tax Cuts, though I think your $200K family example may not get burned, a 150 K family who needs Obamacare may feel a big bite.

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This is why Democrats would probably not support it. SALT deductions are big in high tax states, so for their voter interests it's their calculation that letting taxes go up by letting those sunset, BUT also getting the SALT back is a net win for them.

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Republicans should be pushing for SALT to be 100% non deductible and call the deduction what it is, a massive tax break for the 1%.