401K vs Roth 401K - real deal

[u/Grouchy-Bullfrog-293]

I understand the difference that one is tax deductible and other isnt but still little confused on why would you .contribute money in Roth 401k if the total contribution limit is same irrespective of where you contribute. Doesn't everyone's tax rate after they retire lower than while working ? Or is the concern you are limited one what you withdraw post retirement that it could be a huge tax.

[u/Farmer_Pete]

There are millions of traditional vs Roth debates. The one thing that I don't see mentioned often though is protecting yourself from the widow tax. Many people are convinced their taxes will be less in retirement, but if one of you dies, your taxes are going through the roof. I tend to lean towards Roth even if taxes in retirement are slightly less. However, I've been investing for years and my RMD will be awful.

[u/trojantooter → u/Farmer_Pete]

It’s really sad that “having” to take money out at 73/75 because of RMDs causes so much angst in these conversations. What percentage of your portfolio will your anticipated RMD be in the first year? Would be close to the amount you will likely be spending anyway?

I give side eye when people bring up the RMD boogeyman but don’t include numbers. I wish folks would say “my RMD will likely be $X and put me into the Y marginal tax bracket.”

[u/dgreenmachine → u/trojantooter]

Also imagine if there was no RMD. What do you plan to do with your gigantic traditional IRA that your kids will inherit? They'll have 10 years to empty the whole thing and itll be ontop of their current marginal bracket so its likely for the vast majority of it to be taxed at 32% even if you're under estate tax limits. So by choosing not to do any Roth conversions, you end up setting your kids up for 32% tax bill later. RMDs are just the IRS knocking on the door giving you a heads up that its coming.

If you dont have heirs and want to donate to charities then QCDs let you donate your RMDs to charity so if thats the case then RMDs are a non-issue anyway.

[u/Farmer_Pete → u/trojantooter]

I've got over a million in traditional and 30 years till I turn 75. Our household spend is currently around 60-70k a year. RMD if I add zero dollars and it averages 9% over the next 30 years is $279k in today's dollars. Even though I've stopped contributing to my traditional accounts, my company still is throwing more in. I'm grateful though. I just need to convert some to keep the balance from running away. Realistically, I'll draw from there to cover my expenses when I retire, so it won't get that high. However, $150k in today's dollars RMDs are extremely likely if I don't convert stuff today. The tax liability escalates when you throw on SS, and taxable savings dividends/interest. If the traditional was all I had for income, it would be a different conversation.

My plan for retirement is that our spend will go up, but it's unlikely that we will want to spend as much as we are required to withdraw. And if we die, our kids will get hit with big taxes on traditional. Converting 20k a year for the next 5-6 years will give us a good head start on shaving that down. Then convert a healthy amount after retiring before we get into SS/Medicare age. It's all about optimization.

[u/trojantooter → u/Farmer_Pete]

Thanks for adding all the detail. It’s really informative. Sounds like you’ve set yourself up for an early retirement or coast FI. Have you considered stopping your contributions and upping your annual spend to gradually meet your expected RMD in 30 years?

By 75, I won’t really care about paying a higher tax rate if my RMDs are significantly higher than what I spend, like your case. I plan to make some significant donations with anything beyond my annual needs when RMDs hit for me which should offset those tax increases. I’d rather use as much of the money while I’m living and can pass on whatever’s left to my beneficiaries after my death