Cut Roth 403b to increase total traditional+aftertax?

[Chin]

I was on pace to exceed the $26000 max with my Roth 403b contributions for the year (I am at catch-up age, I have not put anything into traditional 403b option). I reduced my Roth percentage to not go over the yearly limit and initiated a contribution percentage into the after-tax option. This is the first time I have ever contributed to the after-tax. An idea came to me. Since I can have as much as $63500 in a 403b (catch up contribution, and I know this includes employer match also), should I consider changing my Roth 403b contributions to traditional 403b contributions , freeing up more money from my paychecks as that is tax deferred, and put that extra money into the after-tax portion? This would increase the amount of money that I could put in the 403b significantly. The drawback of course would be paying taxes when the traditional portion is taken out, and on the earnings of the after-tax (but at least I could roll the after-tax into a Roth later, but I would still have to pay taxes on the earnings). I currently max out the Roth IRA. The goal is hopefully 6.5 years away from retirement. I’m in the 24% tax bracket. Overall, my total money is roughly in 50% tax deferred, 50% Roth/taxable account.

I realize that the benefit to putting money into traditional now as opposed to a Roth might benefit me as I might be in a lower tax bracket when I would take it out when I retire, however I also believe tax rates may be higher in the future, particularly since current tax breaks are set to expire at the end of 2025 (unless renewed). I had a brief discussion with my accountant regarding this and her view is that taxes will be higher in the future and I should continue putting as much money as I can in the Roth. Any thoughts?

 

[Gumby]

You may want to read this thread about the problems inherent in having too much of your money in tax deferred accounts. https://www.early-retirement.org/forums/f28/age-65-3-3m-ira-deflate-it-before-rmds-110487-3.html

 

[pb4uski]

Typically, you will be in a very low tax bracket between when you ER and when any pensions or SS start, and that is an ideal time to do low tax cost Roth conversions... I do them annually and pay about 9% of the amount converted in federal income tax.

So unless your tax-deferred is already over $1m, I would take a hard look at tax-deferred contributions to save 24% now and perhaps pay a lot less between ER and 72 when RMDs begin.

 

[Chin]

Pb4uski, thanks. But what about the possibility that taxes may be higher in the future? The current tax breaks are set to expire in 2025, and taxes may be higher in the future for other reasons (i.e. funding increasing U.S. budget deficits). I might be in a lower tax bracket relative to other tax brackets when I retire, but if taxes increase taxes in that lower bracket could still be higher than what my current tax bracket is. Should the possibility that taxes will be higher in the future weigh into the decision, or are future taxes an unknown, so it should not be considered? Thanks.

 

[pb4uski]

I think it likely that tax brackets will sunset as scheduled, but I'm skeptical that they will increase from there, especially for incomes under $250k. Take you best guess and take you take your chances.

 

[mrfeh]

if taxes increase taxes in that lower bracket could still be higher than what my current tax bracket is.

I think this is highly unlikely.

But, of course, nobody knows.

 

[Chin]

Thank you for all of your replies. You are persuading me that it may be a good idea to increase my traditional tax deferred contribution and decrease my Roth contribution. With doing that, I will also increase my after tax contribution. Thanks again.