Need two numbers:
1) Marginal tax saving rate you would get from a traditional contribution this year.
2) Marginal tax rate expected (a back of the envelope calculation should suffice) for withdrawals based on a traditional contribution this year.
What do you get for those numbers?
I'm not positive how to get these numbers, but I can tell you that I currently fall into the 22% Marginal Tax rate based on my current earnings.
The new tax code has fewer "moving parts" for someone in your current situation, so the federal marginal saving rate is
probably the same as your federal bracket, 22%. If you pay a progressive state income tax, you would add your state bracket to that. If you put your situation into the
case study spreadsheet (CSS) in Excel, you should see the marginal rate on the chart near cell F81. It will be negative because it is a saving rate
Estimating the marginal rate on withdrawals takes a little more work, but not too much and it's probably worthwhile for you to go through the exercise. From the
Investment Order sticky:
Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Include any guaranteed pension amount that you can't defer in return for higher payments when you do start
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so. Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so. Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement
The steps above may look complicated at first, but you don't need great precision. The answer will either be "obvious" or "difficult to choose". If the latter, it likely won't make much difference which you pick anyway.
Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income
Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem.
Thus using traditional is a "safer" choice.
To help with the math, see rows 196-207 on the 'Misc. calcs' tab in the CSS. Then take numbers from that and enter them in the designated cells on the Calculations tab. Change Calculations!G106 to "D31", hit the nearby "Update chart" button, adjust cell P82 as needed to reach the expected traditional withdrawal amount on the x-axis, and read the marginal rate from the chart.
Again, this may be daunting at first glance but if you have even a little Excel familiarity it will be simple in hindsight. :)
Ask questions as needed.
