Roth 401k to "increase limits"

[KungfuRabbit]

I wrote 2 or 3 different versions of this post with details more specific to me and what I'm thinking, but they all got extremely confusing.  This is a POTENTIAL life path for me, and I really want to avoid conversations in this post about the merit of that life path.

The crux of the matter is with our current high incomes and no rush to RE, if we work 10 more years (making us low 40s) we'd have about ~$5,000,000 (assuming 7% market return, assets about $2,000,000 401k, $500,000 ROTH IRA, $2,500,000 not tax advantaged, ignoring HSA - we currently max out all tax advantaged avenues).  If we live by the 4% rule we'd need to blow $200,000 per year to avoid just getting richer or time (our current spending is about $50,000, so I'd need to take up some expensive hobbies...).  For the sake of this post though please don't comment about "retire earlier" or "die rich", this post is assuming full on fancy pants living at its finest.  Even after various deductions and tax avoidance strategies I don't see how to avoid being in the 25% tax bracket.

So if we look at saving right now we make over $250,000 / year gross, but easily get into the 28% tax bracket with standard deductions, so any money we put into a 401k is avoiding paying taxes at a 28% rate.  If we withdraw that money at a 25% rate we are saving 3% in taxes, which is obviously a win - albeit a pretty minor one. 

However there are 2 complications to that which is where my questions lie:
-I personally think taxes will go up, how can't they with our obscene national debt / aging work force / increase in natural disasters due to global warming / rising medical costs OR implementation of universal health care.  What is the value of hedging your bets against taxes getting higher and overall tax diversification?
-The contribution limit is $18,000 in to a traditional 401k, or $18,000 in to a ROTH 401k.  If the traditional 401k is going to be taxed at 25%, that means putting $18,000 into a ROTH 401k has as much value as putting $24,000 into a traditional 401k.  So then the question becomes, what is better - investing $18,000 in a traditional 401k and ~$4,000 ($6,000 minus taxes..) in non tax advantaged brokerage accounts, or paying $6,000 in taxes now and having $18,000 in a ROTH 401k???

Finally, if you think everything I said above is crap and I should go 100% traditional 401k - how big would the 'stache need to be for a ROTH 401k to make sense (I understand ROTH 401k makes the most sense if you are low income now and will be high income later, but that's out of scope for this discussion). 

[MDM]

So if we look at saving right now we make over $250,000 / year gross, but easily get into the 28% tax bracket with standard deductions, so any money we put into a 401k is avoiding paying taxes at a 28% rate.  If we withdraw that money at a 25% rate we are saving 3% in taxes, which is obviously a win - albeit a pretty minor one. 

-The contribution limit is $18,000 in to a traditional 401k, or $18,000 in to a ROTH 401k.  If the traditional 401k is going to be taxed at 25%, that means putting $18,000 into a ROTH 401k has as much value as putting $24,000 into a traditional 401k.  So then the question becomes, what is better - investing $18,000 in a traditional 401k and ~$4,000 ($6,000 minus taxes..) in non tax advantaged brokerage accounts, or paying $6,000 in taxes now and having $18,000 in a ROTH 401k???

See Maxing out your retirement accounts for a discussion of exactly this issue.

...how big would the 'stache need to be for a ROTH 401k to make sense (I understand ROTH 401k makes the most sense if you are low income now and will be high income later, but that's out of scope for this discussion).

At ~$2.4MM, a 4% withdrawal ratio on a traditional balance alone will put you into the 25% bracket, while it takes ~$4.3MM to reach the 28% bracket.  You will have other income (dividends, interest, maybe capital gains from the taxable account) so it will take less in the traditional accounts to reach those brackets.

If it's just the two of you, you are probably correct on the current 28% marginal rate.  If you have a couple of kids (or itemize deductions, etc.) the AMT could hit you for higher marginal rates.

[Laura33]

FWIW, we switched to a Roth 401(k) a couple of years ago for the same reason -- likely the 25% bracket in the future, anticipate taxes going up, etc.  In addition, we have a lot of money in traditional 401(k)s, so getting a chunk in a Roth* seemed like a reasonable hedge against taxes going up significantly in the future.

One thing to keep in mind, though:  not all accounts are created equal in terms of taxable income.  Your 401(k) withdrawals will be taxed as ordinary income, but your post-tax accounts are capital gains and so are (currently) taxed at a lower rate.  Since in your case you have a lot of $$ in taxable accounts, that could change the math.

*I am also doing the backdoor Roth, but DH has six figures in an existing tIRA from a prior 401(k) plan, which we are not rolling over and paying taxes on at our current rates.

[talltexan]

I'm a longtime proponent of the 401K before the Roth: imagine the tax increase you predict comes...and it's a consumption/sales tax. Now your roth money is getting taxed again, but 401K traditional money hasn't been.

Don't think it can happen? Re-read Ted Cruz's campaign platform.