15% Marginal Tax Roth vs Traditional?

[JDARNELL]

Quick question.

I am helping a couple with a financial roadmap and am working on options for them to increase their 401Ks. Employer matching is already met. Emergency funds is squared away. Their income puts them square in the 15% marginal bracket and I don't see that changing going forward. They also max out a HSA both good health and active lifestyle. Ages are late 40s no kids or heirs. I suspect they will work. til 63-65 range. They do have a state income tax. Their monthly nut is 40% of net income.

Any opinions on which way to recommend Roth 401K vs Traditional 401K?

 

[RunningBum]

I'm trying to figure out how someone can be in the 15% marginal bracket for regular income since that bracket doesn't exist, and the only way you can be in 15% marginal is if you are talking about extra QDivs or LTCGs. Anyway...

Unless they have an idea of moving to a lower/no-tax state in retirement, I'd do the Roth now. For one thing, the 12% bracket is scheduled to become 15% unless Congress takes action. (So my first remark isn't just being pedantic.) I also prefer taking the bird in hand of relatively low tax rates now vs an uncertain future. And have you figured out whether distributions from the trad 401K will push more SS into being taxed? The marginal rate could be a lot higher if you consider all factors. Could it push more QDivs into being taxed? Does it do that today? Their probably 12% marginal rate may actually be 27% if they have QDivs in taxable and not all are being taxed. The start of this 12+15% rate is where I stop Roth conversions.

 

[JDARNELL]

I'm trying to figure out how someone can be in the 15% marginal bracket for regular income since that bracket doesn't exist, and the only way you can be in 15% marginal is if you are talking about extra QDivs or LTCGs. Anyway...

Unless they have an idea of moving to a lower/no-tax state in retirement, I'd do the Roth now. For one thing, the 12% bracket is scheduled to become 15% unless Congress takes action. (So my first remark isn't just being pedantic.) I also prefer taking the bird in hand of relatively low tax rates now vs an uncertain future. And have you figured out whether distributions from the trad 401K will push more SS into being taxed? The marginal rate could be a lot higher if you consider all factors. Could it push more QDivs into being taxed? Does it do that today? Their probably 12% marginal rate may actually be 27% if they have QDivs in taxable and not all are being taxed. The start of this 12+15% rate is where I stop Roth conversions.

Good catch as I just looked at the marginal rate projections over the future years. Yes 12% bracket now and I am running the analysis with the conversion back to 15% in the pralana software. IMO I think the Roth is the way to go and I am sure when I run the different scenarios its gonna show that also. Just trying to find a way to frame the case when we discuss.

For us we didn't have access to Roth 401Ks when we were coming up while we maxed out traditional. So we are facing the RMD timebomb and trying to optimize that. Our kids are doing Roths as mid 20 earners working on maxing out. Seems pretty cut and dry in their case for now. Maybe it's the 15-20 yr timeframe for this couple that is making me waiver?

 

[Out of Steam]

I'm trying to figure out how someone can be in the 15% marginal bracket for regular income since that bracket doesn't exist, and the only way you can be in 15% marginal is if you are talking about extra QDivs or LTCGs. Anyway...

Likely 12% Federal, 3% state.

When my daughter was in a similar position, I advised her towards a Roth IRA. Her then-employer either didn't do a 401(k) match, or it required remaining with them longer than she expected to. Now at 22% Federal, ~8% state, she is using a standard IRA after getting her 401(k) match.

 

[SevenUp]

Yes 12% bracket now and I am running the analysis with the conversion back to 15%....

No need for any software if those are the assumptions that will be used. The Traditional versus Roth result is based on marginal tax rates, and with those rates using Roth now wins.

 

[RunningBum]

Likely 12% Federal, 3% state.

Ah yeah, that could be a way for it to be. You'll have to excuse me, I just ran a marathon today and it was 80 degrees at the finish. May not be thinking totally clearly. But now that I've downed a Victory Golden Monkey 19.2 oz skull buster with 9.5 ABV I'm sure all is well. Rest assured I am not leaving the hotel after finishing that!

 

[ERD50]

Having some money in Roth can be a good thing if you have a large expense in one year. If you pulled that from trad IRA, you could be pushed into a higher bracket.

 

[SJhawkins]

Tax diversity, if Roth was a thing when we started investing that's the route we would have taken in the lower brackets.

A couple looking to retire early in mid to late 50s, 1/3 in each rIRA, tIRA and brokerage with 2 or 3 million seems like a sane place to be!

 

[pb4uski]

Quick question.

I am helping a couple with a financial roadmap and am working on options for them to increase their 401Ks. Employer matching is already met. Emergency funds is squared away. Their income puts them square in the 15% marginal bracket and I don't see that changing going forward. They also max out a HSA both good health and active lifestyle. Ages are late 40s no kids or heirs. I suspect they will work. til 63-65 range. They do have a state income tax. Their monthly nut is 40% of net income.

Any opinions on which way to recommend Roth 401K vs Traditional 401K?

The key question is what their tax rate will be in retirement. If they do tax deferred savings now they will save 12% plus whatever state is.

Is it likely that they will move to a lower or no tax state in retirement? If so, that would be a feather in favor of tax-deferred savings unless they expect their federal tax in retirement to be nil... sounds impossible but a friend of mine whose retirement income is SS and a rental is 0% and can do tax-deferred account withdrawals each year at 0% tax, so even though he was of a modest income and in a low tax bracket while working tax-deferred savings has saved him some in taxes.

 

[pjigar]

If current and future marginal tax rate is same then contribute to Roth. Better to be safe than sorry.

 

[TheWizard]

If current and future marginal tax rate is same then contribute to Roth. Better to be safe than sorry.

That sounds reasonable but not all retirement income is taxed at your marginal rate.
My marginal rate is 24% but it takes a decent amount of income to fill lower brackets before I get to 24%.

Situations vary...

 

[JDARNELL]

Thx for all the comments. I ended up using the Roth instead of the traditional as with the analysis tool it was able to project the tax implications on SS and traditional.