Hello, I wanted to get everyone’s professional opinion. This board has been very informative and helpful over the years.
I currently contribute to my 401k (mostly Roth 401k), but I don’t max it out. My wife and I also max out our Roth IRAs. This past year we are nearing the phase out maximum where we can no longer contribute to the Roth IRA. This makes we wonder about a couple of questions …
1.) Should I max out my roth 401k (30.5 since I’m 50+) and stop contributing to my roth IRA? If so, I will contribute about the same total amount (401k + IRAs) as I did in 2023. This would remove the problem of not being able to contribute to our roth IRAs.
2.) Is there any drawback to ONLY contributing to my employer sponsored 401k? I have 90% of my nest egg with Vanguard (where we contribute to our Roth IRAs).
3.) Should I contribute 100% in the roth 401k or should I do a combination of traditional 401k and roth 401k? We have approximately 55% roth and 45% traditional in “all” of our retirement assets.
4.) This ties in with question 3. How much taxes will I generate in retirement? Will I pay more taxes while employed, or when I am retired? What goes into the tax calculation (in retirement)? Once I answer this question, I will know how to answer question #3 above (roth 401k vs traditional 401k).
Thanks in advance for the feedback,
Nearing Retirement (but still have another 10-15 years)
If you have money in pre-tax 401ks, does that offset the contribution limits? Or are you sufficiently above the IRA limits?
If you make nondeductible IRA contributions, how much is already in a Traditional IRA? If so, can you transfer that directly over into the Traditional 401k?
Can you convert your nondeductible contributions to a Roth IRA tax-free or do you have existing earnings or pretax IRA contributions that would create a partially taxable event?
Do you want taxable money that has more flexibility or are you wanting to have tax deferred or tax free instruments only but that have restrictions
You probably want to meet with an accountant to double check your options and situation
Lastly, do you want to potentially do a QLAC? I don’t think annuities are paying that much now.
If you could answer your question 4), you would be the King of Earth! The tax rates are going back to the old rates (indexed by inflation) on 12/31/2025, and NO ONE knows how that will work out.
But since you’re asking the question, it appears that you haven’t run a retirement simulator which will give you scenarios of your retirement cash flows (if you had, you would not be asking the question). So consider that your #1 gap to fill. If you need suggestions on what planning tool to use, please ask.
Once you have cash flow scenarios, you have a “retirement salary” estimate out to the rest of your life. So then, if we had tax rates, you could figure out your taxes.
For more fun, Google on “Medicare IRMAA”. You might not know what that is. It’s a surcharge or extra income tax levied by Medicare if your Modified AGI goes up above certain levels, I don’t know exactly the levels now, but I think it’s about $190,000 for a couple, and $85,000 per a single person. worse, it’s a cliff, so if you go $1 over… you get the entire penalty. And there are several cliffs you can fall off of, and each one is higher and breaks more bones.
I also personally believe that we are paying the lowest tax rates of our lives, so I’m pre-paying them as much as possible by doing the Roth 401(k) and selective Roth conversions, being careful to stay below the lowest MAGI cliff. The National Debt is so bad they’re going to HAVE to raise taxes in the future. It’s not going to be a matter the country has any choice in. We’ve lowered taxes to the basement already. No place to go but up.
There is never an absolute “should”, there’s only what numerical effect will your choices have on your tax liability and IRMAA exposure, and do you want those exposures? As stated above, you need a retirement income plan to be able to judge that. You have assets, obviously, but you don’t have all of the information assembled to make a choice, and random strangers on the Internet will only confound you.
I don’t want to share too much about me, but my retirement plan tells me throughout all of my years of retirement what the ranges of my taxable income could be - and it’s a huge range for any given year of course as you get further into the future, because stock market returns vary hugely - but I have some sense of what’s possible. So I know what I need to do now to avoid tax consequences I don’t like later… because if I get to RMD age and my tax-deferred IRA money crashes on my head like a Boeing Max 9 door plug, it will be years and years maybe decades too late to do anything to fix it… except give away lots of the IRA to charity with QCDs. Google QCD.
There is no problem in only doing the Vanguard 401(k). Who custodies your assets doesn’t matter, as long as they are a quality low-cost provider. But you need to right fund choices for your stage of life. At 50+ you should start having significant amounts of bonds. I would also not give up on International, various research firms like Research Affiliates, Schwab, Vanguard, GMO think International has better prospects over the next decade than US.
Your current marginal tax rate looks to be 24%. As suggested in another post, try to assess what your income will be in retirement. Of course, future marginal tax rates are unknown. Search Oblivious Investor “Contributions: When In Doubt, Go Roth” for a short article that goes over some of the considerations if your marginal tax rate now and in retirement might be the similar.
Another important option is to do conversions from traditional to Roth when your income will decline after retiring and before you start on Social Security and your RMDs.
If you aren’t aware of it already, look up Backdoor Roth IRA. There’s no income limit for conversions to Roth, and so if you don’t already have money in a traditional IRA (or if you can transfer your traditional IRA money into your 401k), you can do a non-deductible traditional IRA contribution followed by a Roth conversion.
I wouldn’t bother with Roth 401k at this point in your career. Unless you’re a super-saver (i.e., maxing your pre-tax retirement accounts for most of your career), you’re unlikely to be a higher average tax bracket than your marginal tax bracket now. What people generally overlook in the calculation is that your tax break now is at your marginal rate, whereas your withdrawals later will be across multiple tax brackets. I haven’t read it, but I’m almost certain that the article “Contributions: When In Doubt, Go Roth” referenced above makes that same logical error.
The IRMAA issue is real, and suggests leaning toward Roth in close cases.
I was considering moving my 403b to Vanguard but they told me I’d have to roll it into an IRA and would lose some protections by doing so, specifically I believe 403’s [and probably 401’s] are exempt from affecting you when you enroll in Medicare. You might check into to this as well.
[quote=“udflyerfan, post:1, topic:4158”] You asked:
4.) This ties in with question 3. How much taxes will I generate in retirement? Will I pay more taxes while employed, or when I am retired? What goes into the tax calculation (in retirement)? Once I answer this question, I will know how to answer question #3 above (roth 401k vs traditional 401k).
[/quote]
Here are two possible scenarios concerning US income tax rates. If (A) happens, then you will pay less taxes in retirement. If (B) happens, you will pay more taxes in retirement.
(A) The US congress is determined to get the country out of debt. They are making a spending budget and sticking to it. The national debt is rapidly being paid off. In a few more years, our country will be debt-free and the government will be able to function on the money collected from income taxes each year. No tax increases will be needed, because our national budget is always balanced each year.
(B) The US congress cannot stick with their budget plans. Spending is out of control. The national budget has not been balanced in years. The national debt has increased so much that no principal debt has been paid off in years. New government bonds go to pay the interest on old government bonds. The only way to get out of this mess is to elect some people that will make a budget and stick with it, when it will probably mean reducing spending and raising taxes for many decades. How likely is that to happen, when for generations the congressional standard operating procedure is to print more money and kick the debt snowball down the road for the next Congress to handle?
Or, Congress and/or states could just figure out how to get their hands on some of the Roth IRA money. It’s extremely unlikely that all Roth withdrawals would ever be taxed outright. But there are lots of other ways to effectively tax them. For example, people with Roth withdrawals could be phased out of other benefits such as Medicare, property tax exemptions seniors may get now, etc. Used to be that Social Security was never taxed. Now up to 85% is. That is equivalent to a tax increase on other income. Congress could pass a law that 100% of Social Security is taxable in you have $X in Roth withdrawals. No, the Roth isn’t taxable, ha ha ha! Of course not!
Even if tax rates go up, most people will still be in the same or a lower tax bracket when they retire, unless they’ve saved a large percentage of their income (e.g., 25% over their entire working years) in pre-tax accounts. Even if you maintain the exact same spending levels in retirement, you need less than when you were working because you don’t pay Social Security taxes or retirement contributions.
Sure, Congress can do all sorts of tax changes. For example, originally, a Roth IRA could be passed on to a beneficiary, and the inheritor did not have to pay taxes on the Roth during their life. Due to tax law changes, now they have only 10 years of tax-free income.
Only the most likely things can be predicted. For all the rest, we will have to adjust on the fly. Increasing taxes are almost certain to happen. All the rest is up for grabs.