I looked at a similar problem with pre-2017 tax rates: Roth 401(k) in a 28% bracket thoughts. BLUF: You are probably better off with the Roth if you are a long way from retirement. While you take a tax loss on the Roth money, you get the benefit of more money growing tax-deferred.
Your choice is essentially between contributing to a traditional 401(k) at 24% now, then converting at 22% after you retire, or contributing to a Roth 401(k) now to effectively get more tax-deferred savings.
It is correct to use 22% for the comparison even though you may have some income taxed at lower rates, because you are making the decision only for this year; you will likely fill up the lower brackets with traditional money in some years in which it is more desirable. For example, even if the tax brackets do not change and you stay in the 24% bracket, your marginal tax rate will eventually become 27.8% because your taxable dividends plus your salary will eventually make you subject to Net Investment Income Tax. (The NIIT threshold is not indexed to inflation.)
One important consideration: are you likely to retire in a lower-tax state? If you are paying 8% state tax now, your marginal tax rate may be 32%, and could go down to 22% in retirement; in that case, the traditional account is clearly better.
Your choice is essentially between contributing to a traditional 401(k) at 24% now, then converting at 22% after you retire, or contributing to a Roth 401(k) now to effectively get more tax-deferred savings.
It is correct to use 22% for the comparison even though you may have some income taxed at lower rates, because you are making the decision only for this year; you will likely fill up the lower brackets with traditional money in some years in which it is more desirable. For example, even if the tax brackets do not change and you stay in the 24% bracket, your marginal tax rate will eventually become 27.8% because your taxable dividends plus your salary will eventually make you subject to Net Investment Income Tax. (The NIIT threshold is not indexed to inflation.)
One important consideration: are you likely to retire in a lower-tax state? If you are paying 8% state tax now, your marginal tax rate may be 32%, and could go down to 22% in retirement; in that case, the traditional account is clearly better.
Statistics: Posted by grabiner — Thu Jun 20, 2024 10:58 pm — Replies 5 — Views 313