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My Roth vs traditional decision

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  • Avatar Caligas 
    Participant
    Status: Physician
    Posts: 61
    Joined: 12/19/2017

    In my partnership we have a 401k profit sharing plan. Currently I’m maximizing the Roth portion at $19,000 for 2019, with the remainder of the $56k total contributed pre-tax.

    Currently my federal marginal tax rate is 32%.

    Probably I am paying a higher tax rate on this Roth money now that I would if I deferred until retirement. The main reason to do Roth is to have a tax free bucket to draw off of. But I’m not sure if that makes it worth paying the tax now. I am not particularly concerned about estate planning advantages of the Roth.

    At 42, I have already accumulated over $300k total in Roth accounts, so the “bucket” is in place and will continue to grow. Also, I will continue to do a “backdoor Roth” for myself and my wife as long as that’s possible.

    Thus, my leaning is towards starting to do all $56k in my work 401k as tax deferred.

    Any thoughts?

    #197449 Reply
    Liked by Craigy
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3033
    Joined: 01/08/2016
    Currently my federal marginal tax rate is 32%.

    Click to expand…

    you need 11.1MM in traditional assets to create a RMD that will put you over this limit.

    if that is what you are on pace for or projecting, then you can be 100% Roth now.

    otherwise….no.

    The main reason to do Roth is to have a tax free bucket to draw off of.

    Click to expand…

    that is what backdoor rIRAs are for as well as Roth conversions early in retirement.

     

    #197450 Reply
    Liked by Krentist, ENT Doc
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 61
    Joined: 12/19/2017

    Just to clarify, I am not 100% Roth, just 19k of the 56k total going into the plan.

    #197453 Reply
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 61
    Joined: 12/19/2017

    (Plus the backdoor for me and spouse)

    #197454 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6930
    Joined: 01/09/2016

    You’re doing great with your Roth balance at age 42. I’d move to traditional (tax deductible) for now. However, and this is very important, making tax-deductible contributions now is only a good idea if you have a plan for the taxes you’re saving as a result of your contributions. If the savings are merely being absorbed into spending, you would do better to force yourself to pay taxes now rather than take them out of your budget after retirement. I fear many if not most HIPs do not do this. Calculate the savings and put it into a taxable account.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #197455 Reply
    Liked by DCdoc, Caligas
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 298
    Joined: 06/18/2018

    Your AGI is less than 400k (32% marginal MFJ)?  If I were you, I’d wager my tax rates would be lower in retirement than now, so I’d stop Rothing my 401k.

    You’d be better off with that extra tax $ you’re paying now invested in taxable, which can also be spent tax free (the principal at least, or LTCG and DIV at 0% or 15% depending on your AGI).

    What you’re doing is likely tax inefficient.

    #197458 Reply
    Liked by Caligas
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 61
    Joined: 12/19/2017

    Yes, I save a fairly high percentage of income so the additional income from stopping Roth would be invested in a taxable account.

    Sounds like that’s the way to go.

    Plus can continue the backdoor Roth x 2.

    #197460 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 327
    Joined: 06/14/2016

    It comes down to what you would do with the $7000 tax savings. If you think you would spend, do Roth instead. If you think you would save in a MMF, do Roth instead. If you would invest it as aggressively as 401k, do pretax. There’s a slight liability issue where retirement savings are protected from creditors. $19000 in Roth is my more valuable than $19000 pretax and $7000 in taxable if you are at extremely high risk of med mal and worried judgment could exceed malpractice insurance limits. I think this is near to zero, but non-zero.

    #197619 Reply
    Liked by Craigy
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 1771
    Joined: 09/16/2016

    I don’t think it’s ever a bad idea to put money into a Roth. But either way is a winner.

    Like DCdoc said, $19k in Roth is worth a lot more than $19k in pretax 401k.

    Remember those tax savings are only actual savings if you are actually in a lower bracket in retirement, or your heirs will be in a lower bracket than the bracket at which you paid in.  This is the case for most but not all.  Depending on how long you plan on working, I suspect you will have sizable income-producing assets and large taxable RMDs in retirement.  Most of my high-net-worth clients only see taxes going up in the future.

    Also consider that it’s much nicer to inherit a Roth balance than a regular one.

    LEVEL 1 WCI FORUM MEMBER.

    #197635 Reply
    Liked by q-school
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 338
    Joined: 02/11/2019

    I find it hard to believe that my effective tax rate will be higher then my current marginal rate even if taxes go up.

    “Never let your sense of morals prevent you from doing what is right.”

    #197678 Reply
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2192
    Joined: 05/07/2017

    I find it hard to believe that my effective tax rate will be higher then my current marginal rate even if taxes go up.

    Click to expand…

    Ha!  Depends on how much you save and what tax rates are in the future

    #197686 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 338
    Joined: 02/11/2019

    Actually a lot depends on how much you spend. Right now I am being taxed on what I earn. After I retire even if all my money was pretax I would only be taxed on what I spend. Until RMDs anyways.
    I figure when I start to get close to an RMD issue and if I do not plan to quit working I will change to Roth.

    “Never let your sense of morals prevent you from doing what is right.”

    #197721 Reply

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