Roth or Trad. IRA more for AGI purposes than federal income tax?

[Djeayzonne]

I have been messing around with the excel file available from excel1040.com.

I am self-employed, and after adding in my expenses into schedule C and all other information, I am confused on what I should do with my IRAs
because either way federal income tax is kind of a moot point.

Here are some of the numbers:

So, after all expenses including an employer profit sharing contribution to the solo 401k of 16,000 and above-the-line deductions, the AGI is 42,500
Then, with my itemized deductions (gotta love Texas property taxes) and exemptions, my taxable income would be 12,000.
This would be taxed at 10%, so 1,200.
I would still get a Savers Credit of 400, so total federal income tax is 800.
At this AGI, the premium tax credit would be around 2800.

Now, if I decide to go to traditional IRA for the rest of my contributions this year (I already contributed 360 to each of our Roths):
AGI drops to 32,400, which gets me around 4400 for the premium tax credit.
This would also allow me to get the full 2,000 Savers Credit, but with a taxable income of only 1,800 and 180 in federal income taxes, it is a complete waste.

So, at this point, since we are talking about very little taxable income either way, and thus the 10% bracket,
is there much point in going traditional just to lower AGI and get more premium tax credit?

I guess if put the remaining 10,280 in traditional, it would save me 800 in federal tax plus about 1600 in premium tax credit.

It seems like the advantage of Roth would be much more valuable than saving 2400 now,
but I really have no frame of reference for what my income and tax situation will be when I retire yet as I am just getting started after having discovered this site and lifestyle a few months ago.

So, I would like to get feedback from people who have been doing this much longer and have more experience.

*Note: Obviously, neither situation has any bearing on my self-employment tax, which is why I didn't include any data on that.

[MDM]

It seems like the advantage of Roth would be much more valuable than saving 2400 now,
but I really have no frame of reference for what my income and tax situation will be when I retire yet as I am just getting started after having discovered this site and lifestyle a few months ago.

If you have everything in Roth accounts, your withdrawal tax rate will be 0% and you will regret not saving some tax by using traditional accounts.

If your retirement income come solely from traditional withdrawals, you use the 4% withdrawal rate guideline, filing MFJ with no dependents and prior to age 65, your traditional balance needs to be
$517,500 to go from a marginal withdrawal tax rate of 0% to 10%
$981,250 to go from a marginal withdrawal tax rate of 10% to 15%
$2,400,000 to go from a marginal withdrawal tax rate of 15% to 25%
etc.

Have you calculated your marginal savings rate for different 401k and/or tIRA contribution amounts?

ETA: Typos

[Djeayzonne]

MDM,

Well, the solo 401K is traditional, and the employee+profit sharing contributions will be degrees of magnitude higher than the IRAs after a few years.
Did you specifically mean just regarding IRAs?  Why would I regret not having in traditional assuming you meant not to include the 401K?

I didn't quite understand your last question.
I guess the 401K contributions are 25% marginal tax bracket, and I already said that the IRAs are 10%. Did you mean something else?

However, just based on what you said, I get the feeling maybe I should go ahead and at least put enough in traditional to completely get rid of federal?
Well, at least that is the situation this year. I could make less (possible) or more (not likely) next and subsequent years.

Side note: I also bring this up because I am planning for next year too regarding choosing an HDHP/HSA combo.
The monthly premiums on the HDHP are twice that of the silver plan I currently have now.
So, the extra monthly premium plus the HSA contributions would have a fairly significant impact to monthly cash flow, so I have been wrestling with this the last few days.

Anyway, thanks for responding.

[MDM]

Well, the solo 401K is traditional, and the employee+profit sharing contributions will be degrees of magnitude higher than the IRAs after a few years.
Did you specifically mean just regarding IRAs?  Why would I regret not having in traditional assuming you meant not to include the 401K?

Ok, missed the part about the t401k.

I didn't quite understand your last question.
I guess the 401K contributions are 25% marginal tax bracket, and I already said that the IRAs are 10%. Did you mean something else?

Marginal rates are not always the same as tax brackets.  When the saver's (or any other) credit is in play, marginal rates are definitely not the same as tax brackets.  If you are at least somewhat familiar with Excel data tables you can use the case study spreadsheet to graph your marginal savings rates over a range of 401k/IRA contributions.

However, just based on what you said, I get the feeling maybe I should go ahead and at least put enough in traditional to completely get rid of federal?
Well, at least that is the situation this year. I could make less (possible) or more (not likely) next and subsequent years.

Not necessarily get rid of federal (but maybe).  Let's say you expect to pay a 15% marginal rate in retirement.  If the 401k saves at a 25% rate but the IRA would only be 10% (not saying it is, just "what if?") then going traditional for the 401k but Roth for the IRA would be reasonable.

The monthly premiums on the HDHP are twice that of the silver plan I currently have now.

Ouch.  Used to be that HDHP premiums were the low ones....