Personal Investments • The Traditional vs. Roth Split Decision: As Insanely Complex as It Seems?

Compare this response...

With your current tax rate of 12% but not being in reach of the saver's credit, the most reasonable guess is to use mostly Roth. In fact, I don't see this decision for you as being complex at all. It seems pretty clear to me. It is unlikely (not impossible) that you will ever be taxed at a lower rate than now. Decide accordingly.

...with this response:

Try filling out a tax return assuming zero W2 income in retirement making reasonable assumptions about size of 401k. You will see the tax code is very favorable to accumulated wealth and it is hard to have a higher tax bracket in retirement than when saving.

From a hedging standpoint, I would rather err on the side of having too much money even if that means higher taxes on the back end versus not having saved enough due to overpaying taxes on the front end.

One says:
"It is unlikely (not impossible) that you will ever be taxed at a lower rate than now."

The other says:
"it is hard to have a higher tax bracket in retirement than when saving."

Do you see what I mean in my post about getting completely opposite advice on this? And both make plenty of sense in their way.

I'm just trying to establish that the reason for this opposite advice is not because one is right and one is wrong but because nobody really has a clue and everyone is basically making massive guesses on this - massive in a way not true in most other financial decisions. In other words, that this decision is special in its unsolvability.

They're not opposite at all. They're just making reasonable assumptions about the ongoing income from work a person is likely to have: they're assuming somebody will be near, or over, the 22% bracket, as most (but not all) BH posters are. If you adopt that vantage point, then somebody who is close to the top of the 12% bracket should be making Roth contributions because 1) their income might easily go past the bracket in the future, and 2) TJCA expiration would mean 12% pops up to 15% and the top of the bracket compresses so they might be a marginal 25% payer soon. On the other hand, if somebody is already in the 22% bracket, then it takes a very odd set of circumstances for them to pay substantially more than 22/25% in retirement given current rates and brackets, whether under TCJA rules or pre-TCJA rules (due to come back from the dead in 2026), since they will presumably need to fill standard deductions, possibly exemptions, and both the 10% and 12/15% brackets before touching the 22/25% brackets. Again, this is not a squirmy subjective issue, it's just that it's quantitative and it's much clearer once you get down to brass tacks of numbers.

Statistics: Posted by petulant — Thu Jan 04, 2024 6:43 pm — Replies 41 — Views 1848

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