Author Topic: Switch to Trad 401(k) before hitting the 25% tax bracket?  (Read 1763 times)

mrmoneycleanshaven

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Switch to Trad 401(k) before hitting the 25% tax bracket?
« on: February 07, 2015, 02:57:11 PM »
So the single biggest jump in federal tax brackets is from 15% to 25%, giving the middle class quite the shaft. Up until now I have been ROTH-ROTH-ROTH as I only pay federal taxes, and have stayed under $74,900 in taxable income; however, I will soon be cresting that cap and will have a marginal tax rate of 25%, which will be slightly higher than what I estimate I'll have as a marginal tax rate in retirement.

In retirement I plan on getting a pension that puts me in the middle of the 15% bracket, but I'll also be paying state taxes so my effective marginal tax rate will be 24% or so for each dollar I pull from my retirement accounts.

I had honestly thought about never taking anything out of my ROTH's, but seeing how the federal govt is talking about making distributions mandatory on them they've lost some of their appeal.

Granted tax rates can/will go up, but after seeing how they tried to double tax 529's I'm kind of on edge here.

So should I switch to get some tax savings while I can?


themagicman

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Re: Switch to Trad 401(k) before hitting the 25% tax bracket?
« Reply #1 on: February 07, 2015, 04:26:34 PM »
Yes, I think that you should definitely take the savings while you can. I am in the 15% bracket and am 100% traditional. No telling what rates will be in the future or if Roth IRA will be tax free in the future. I think you should take the gift while you can because you might not be able to again.

SaintM

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Re: Switch to Trad 401(k) before hitting the 25% tax bracket?
« Reply #2 on: February 07, 2015, 06:28:36 PM »
The president wasn't prepared for the outcry over 529s, a vehicle that one can park hundreds of thousands of dollars in and grow tax free. After that, there is zero chance that Roths will ever be taxed. They may go away, but they will never be taxed. The smartest thing to do is load up your Roth now and never, ever pay tax on the earnings.

Tax-free is way better than tax deferral.

themagicman

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Re: Switch to Trad 401(k) before hitting the 25% tax bracket?
« Reply #3 on: February 07, 2015, 06:37:58 PM »
After that, there is zero chance that Roths will ever be taxed. They may go away, but they will never be taxed.

There will be a lot of presidents and congresses between now and retirement. No telling what is going to happen in the future.

Tax-free is way better than tax deferral.
No, assuming you keep the same tax rate in retirement, "tax free" will be the same as tax deferred

johnny847

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Re: Switch to Trad 401(k) before hitting the 25% tax bracket?
« Reply #4 on: February 07, 2015, 06:45:25 PM »
After that, there is zero chance that Roths will ever be taxed. They may go away, but they will never be taxed. The smartest thing to do is load up your Roth now and never, ever pay tax on the earnings
Emphasis mine.

I would never make absolute statements about something that involves politics. Especially if we're talking about Roths where to realize the full value of the Roth, you need to actually pull out earnings penalty free, which can only occur when you reach 59.5

With the current political climate, do I agree with your statement for the near future? Yes.
But is it absolutely, 100% certain that this will be true for the rest of our lifetimes? No, it is not.