On the fence about ROTH this year

[MountainTown]

In the past my wife and I have done the following to reduce our approximate $123k gross income down to AGI of about $70k.

TSP traditional, max out 18500
State deferred comp 18500
Traditional IRA his/her, 11000

flex accounts not relevant but including for clarity (2650+2650)
=-=-

The plan is to do the same maxing out of employer accounts this year and up to 19000 each as it is raised. This will qualify us for traditional IRA's again. Our effective tax rate for federal is about 5% by my calculations. It seems pretty small. Are we wasting opportunity by deducting as such again? Should we be putting at least one of the chunks of $6000 in Roth? As an example if we had done all Roth in 2018, we would have paid about $1400 more in federal taxes.

I estimate that in 2019, if I were to separate off a Roth we would pay about $700 more. If we did all Roth I think we would pay $1400 more. I have been hesitant to do so as I would pretty swayed by the madfientist and go curry cracker articles which highly favor traditional tax deduction and later conversions. I may be going back to school soon so I was seeing some opportunities for roth conversions at low tax rates. That being said if we are at a 5% effective rate now maybe it doesn't get much better.
 
Any help is appreciated. Note I didn't include state taxes for simplification reasons but the state runs roughly 60% of what the federal tax is.

Thanks for any help!

[terran]

The only thing that matters in Roth vs traditional is current marginal rate vs expected marginal rate. If the current marginal rate is higher you should contribute to traditional, if it's lower you should contribute to Roth, if it's the same then traditional and Roth are mathematically the same so I would contribute to Roth to reduce uncertainty and increase flexibility.

Remember to count any tax credits contributing changes. You probably make a little too much for the savers tax credit given the retirement accounts you have access to, but the child tax credit might change if you have kids.

Also remember to count state taxes. If you currently live in a state that taxes income and plan to retire to one that doesn't then that would tend to favor traditional, and vice versa for example.

Of course, none of this can be exact since you don't know how laws will change in the future and you don't know what exactly will happen to your stash in the future, but take your best guess and go with that.

[MountainTown]

yea actually this year I think we were just 6k shy of qualifying for the saver's credit. Our income will only go up this year so I don't think we can get down to that number.

I hear that about the expected future rate. I guess I thought there might be some common sense in doing roth no matter what at a certain taxation rate or income rate(due to diminishing returns on tax savings).

[MDM]

...there might be some common sense in doing roth no matter what at a certain taxation rate....

Yes.  At 0% marginal tax saving rate for a traditional contribution, using Roth is a good idea no matter what non-negative future marginal rate one assumes.

Otherwise it's a guessing game.  The lower the current marginal rate, the more likely Roth will be best, and vice versa.

[BeautifulDay]

Wouldn’t social security be another factor to consider? If I understand it correctly, the less taxable income you have in retirement the less taxes you pay on social security.  If income is low enough you don’t get taxed on soc sec.

I have been wanting to put more in Roth because:

• I want to lower those soc sec taxes,
• there is a possibility of higher tax rates in retirement
• the flexibility that Roth provides for withdrawing the principal anytime

[MountainTown]

There is no payroll tax(social security) for either traditional or roth withdrawals.

[MDM]

There is no payroll tax(social security) for either traditional or roth withdrawals.

True, but enough other taxable income can cause taxation of otherwise untaxed social security benefits.

[MDM]

Wouldn’t social security be another factor to consider? If I understand it correctly, the less taxable income you have in retirement the less taxes you pay on social security.  If income is low enough you don’t get taxed on soc sec.

I have been wanting to put more in Roth because:

• I want to lower those soc sec taxes,
• there is a possibility of higher tax rates in retirement
• the flexibility that Roth provides for withdrawing the principal anytime

All good points.  Just note that if you put so much in Roth that your retirement marginal rate is low(er than what you would save now), you may wish you had put more into traditional.

[BeautifulDay]

Here is info on the soc sec taxes https://www.ssa.gov/planners/taxes.html I was referring to.

MDM you are correct about trying to balance the marginal tax rate. I try to hedge my bets by putting some money in Roth and some in traditional accounts.  Most of my money is in traditional.  With the Roth funds I will have options for how I withdraw funds to reduce taxes.

[MDM]

Here is info on the soc sec taxes https://www.ssa.gov/planners/taxes.html I was referring to.

MDM you are correct about trying to balance the marginal tax rate. I try to hedge my bets by putting some money in Roth and some in traditional accounts.  Most of my money is in traditional.  With the Roth funds I will have options for how I withdraw funds to reduce taxes.

Good link.

See also Taxation of Social Security benefits - Bogleheads for pictures.

[Zamboni]

I think of my Roth as tax diversification. My situation is quite a bit different from yours, though. Good job working through your numbers and trajectory!