[BuyckCabin]

Looking for a sounding board.

I’m 50. planning on retiring at 57.

I’ve been maxing my 401K this year, and whatever the max will be next year, etc. I am debating maxing the Roth 401 instead. But that means I know I’ll pay 22% tax on that money (Federal). I live in FL so no state.

I was planning on converting $100,000 a year after I retire. BUT, I’ll be living in MN. Thus paying 12% federal and 7.85% in MN. Thus paying 19.85% total. At face value, the later looks slightly better. But I get an employer match would nullify the 2027 taxes I pay if I do the ROTH 401. I wonder if doing it 7 years earlier would be beneficial.

The wife will stay working after I retire. So we will have a minimum of 80k taxable income when I’m retired.

[jimhoward]

For most people the Roth is the better way to go. A dirty little secret is that for many people, the tax rate in retirement is, to their surprise, the same or even higher than it was when they were working.....negating the tax advantage of the 401K. The reason for that is income from retirement jobs, social security, and interest and dividends from after tax accounts, and 401K distributions all count.

But in your case, it does not appear to be true. Your tax rate in retirement looks like it will be low. As a result, it probably doesn't matter very much whether you contribute to a Traditional or Roth IRA. Roth is probably still better, but the difference is probably not huge. Of course, you will work out the number better than anyone on this board can.

[ltcdfancher]

Originally Posted by BuyckCabin

Looking for a sounding board.

I’m 50. planning on retiring at 57. Wife and I currently make 200,000+ a year (160,000 a year with no OT).

I’ve been maxing my 401K to the tune of $32,500 this year, and whatever the max will be next year, etc. I am debating maxing the Roth 401 instead. But that means I know I’ll pay 22% tax on that money (Federal). I live in FL so no state.

I was planning on converting $100,000 a year after I retire. BUT, I’ll be living in MN. Thus paying 12% federal and 7.85% in MN. Thus paying 19.85% total. At face value, the later looks slightly better. But I get an employer match of $6000-$6500 which would nullify the 2027 taxes I pay if I do the ROTH 401. I wonder if doing it 7 years earlier would be beneficial.

The wife will stay working after I retire. So we will have a minimum of 80k taxable income when I’m retired.

I’m a bit confused here. Once the author retires in a few years, the wife will continue to work adding $80K to the income side of the ledger. Add in the $100K of a Roth Conversion to the income side pushes this couple deep into the 22% bracket, doesn’t it?
Can this couple live on the single, $80K salary?
If not, then from where will they pull the rest of the money? Will the Rule of 55 apply?
How large is the 401K “elephant”?

I’m no expert, but I do spend time what-iffing various scenarios in my own plan. I’m spending down my tax-deferred assets now in order to deplete them entirely before turning on my SS income stream.

[Altavia]

Adding the need to also look at the IRMA brackets at your future income levels.

A 50/50 split could be a good target to balance.

[BuyckCabin]

Originally Posted by ltcdfancher

Can this couple live on the single, $80K salary?

No offense, but that question constantly confuses and amuses me. For the life of me I cannot fathom needing and spending 7,000/month or more.

We currently live in a new house (4 bed 2 bath) on a "lake" built in 2024 That has a $1500/month mortgage (will be paid off ion 6 years). Two teenagers in the house who eat everything that isn't bolted down. Taxes with bonds and HOA (AKA maintenance fees ) are crazy high here. That whole package (entire house operating cost including groceries and supplies) only costs us 4200/month today and that includes buying meat. I have only hunted and acquired 200# of meat thus far this year.

We have 0.0 interest in travel, or fancy cars, or big houses. I've already traveled the world and shot every critter I wanted. I already own all the boats and ATVs and equipment I'll need except for maybe the 30hp tractor I'll buy.

We are going back to a simple basic satisfying life. No people other than family. No clubs. No night life. Just us and nature and family and good wholesome down to earth living.

[rsmurano]

12% federal tax seems way low for $200k income. Plus, when you do Roth conversions of $100k after you retire plus your wife’s $80k income, you might be in a larger tax bracket.
Also, do both of you max out your 401k/401k Roth accounts while you are working? If not, both of you should!

I never qualified to get into a Roth while we worked, so both my wife and I max’d out our 401k’s plus we put in another 40% of our income into taxable investment accounts. Those 401k deductions saved us big $$$ in taxes while we worked. If I was working today, I would do the same!! The myth of RMDs are a bad thing or it’s going to cost you more in the future in taxes is dead. My wife retired at 53 and me at 61 and we haven’t touched our 401k’s. It’s been recommended from the so called experts to pull from taxable accounts 1st, 401k’s 2nd, and roths 3rd, which I agree, so that’s how we structured our money decades ago.
And yes, we understand that we could be doing $300k or more in RMDs per year, and a few thousand more a year in increased medicare payments. These deductions will be much less than what we make in our 401ks so the portfolio balance will keep growing despite the RMDs

[RoboVil]

Originally Posted by BuyckCabin

Looking for a sounding board.

I’m 50. planning on retiring at 57.

I’ve been maxing my 401K this year, and whatever the max will be next year, etc. I am debating maxing the Roth 401 instead. But that means I know I’ll pay 22% tax on that money (Federal). I live in FL so no state.

I was planning on converting $100,000 a year after I retire. BUT, I’ll be living in MN. Thus paying 12% federal and 7.85% in MN. Thus paying 19.85% total. At face value, the later looks slightly better. But I get an employer match would nullify the 2027 taxes I pay if I do the ROTH 401. I wonder if doing it 7 years earlier would be beneficial.

The wife will stay working after I retire. So we will have a minimum of 80k taxable income when I’m retired.

Likely, the tax rates will increase in the future due to the national debt, but who knows, it has not happened yet. I would invest in the ROTH at that tax bracket.

[Altavia]

The other part that made my brain hurt is the tax deferred money invested in a 401K is growing untill you need it.

At some point, seems growth from the deferred tax money will (should) exceed the tax on a withdrawal.

[CoachKandSportsguy]

so you are confused between a wealth creation strategy and a cost minimization strategy, as well as the difference between spending today and spending for the future. Many people are, and that's normal, because every part of financial sales on all media battle for your today money and for your investment money. . if you watch closely, you see advertisements for immediate cash back (they want your today money) and safety and security for retirement (your investment future money). One wants to save to create wealth and the other wants you to spend money for enjoyment.

401K is savings with tax avoidance today with potential taxes in the future
401R is savings with taxes today and potential no taxes in the future.

The future is ALWAYS UNCERTAIN. . so tax rates in the future will be uncertain for both plans.
The returns on every investment will be uncertain, though there are reasons why people will expect the returns of today to continue forever.
The costs of your lifestyle will change, as the costs in the future change. . currently unknown to you. .
your health lifestyle will change, as your body ages, and slowly breaks down. How many high school and college friends/ acquaintances are now no longer with us? have you been lucky so far or are you average or are your special?

which makes this forecast or prediction of the future impossible to be accurate. .

so, if you are as happy with your current lifestyle and cost, go with the pay the tax today strategy and avoid the tax later strategy, as its pain now for benefit later, which many have a hard time choosing based upon their current day lifestyle

good luck with your planning, but don't expect the last 40 years of declining interest rates and inflation to continue as it physically can't, without going into a depression. .

[Maker]

Listening to people in retirement, and dealing with taxes, RMDs, IRMMA penalties, etc...
I have never heard anyone say they regret having their money in Roth.
I have heard it far too often they regret not funding Roth more, instead of their 401k.

If you backdoor rollover to Roth, remember the principal is available tax free right away. Any gains it makes are taxable unless 5 years passes.
A great strategy if you do rollovers in different years is to have separate accounts per year. Do not co-mingle funds from one year with another year. That can become a tax nightmare.

Also, you should take social security at 62. Even if you don't need it. Put that money into any interest account and let it grow. Yes, it is a lower amount per month than waiting... but...
Now at 67, you can withdraw a tiny amount every month to bump up that smaller SS amount to what it would have been if you had delayed taking SS. The breakeven point is late 80's at 0% interest for the investment. You are always ahead with just a couple percent interest. And if you pass away before breakeven, your family has all that money.

[Paulfa1]

Not enough info to give sound advise. But Maxing out 401k Roth to the extent you do not pass the of the top of the 22% sounds good to me. But depends on the exact situation and your assumptions for the future. The big thing I look at is how much you are paying now vs later. When looking at that remember that after you turn on SS by the time you start paying taxes after your deductions you will probably be paying 18.5% in the 10 % bracket and 22.5 % in the 12% bracket. There may be a slight margin near the top of the 12% bracket where SS will stop being taxed and it will revert back to 12% before moving to the 22% bracket. Mine was a very small margin.
So I deferred SS to 70 to get the IRA down. My break even was 76. And taking SS at 62 was not a good option for me and I believe not for many. SS is the absolute best Annuity out there. I have several friends who took SS at 62, then was talked into an annuity. That does not make sense to me. PS if you only have Roth and SS security there will be no tax on SS. Be sure to add that into your numbers But again there is really not enough info given to make a decision.