Reply
 
Thread Tools Display Modes
  #1  
Old 12-27-2019, 10:11 AM
Nars Glinley is offline
Guest
 
Join Date: May 2002
Location: Sweeping down the plain.
Posts: 5,877

The Trump tax cuts and Roth investment tools.


The Tax Cuts and Jobs Act of 2017, also known as the Trump tax cuts, lowered tax brackets and raised the standard deduction. They are set to revert to previous rates in 2025. There's no way of knowing if they actually will but for the purposes of this thread, let's assume that they will. Coincidentally, 2025 is the year that I am scheduled to retire.

With these new lower "temporary" rates, are Roth investment tools, where contributions are made with after-tax dollars a better choice than pre-tax IRA or 401K investments? What factors should be used in making the decision how to allocate between pre and post tax contributions?

Please note that this is not a thread about the wisdom of the tax cuts themselves. I'd really like this to remain GQ and not get moved to GD.
__________________
I've decided to spend more time criticizing things I don't understand. - Dogbert
  #2  
Old 12-27-2019, 10:26 AM
Great Antibob is offline
Guest
 
Join Date: Feb 2003
Posts: 5,473
Quote:
Originally Posted by Nars Glinley View Post
What factors should be used in making the decision how to allocate between pre and post tax contributions?
This is a big YMMV.

Your expected income after retirement, which presumably won't be zero, is going to matter a lot. Your income bracket now vs after retirement is of course a critical consideration. The mix of income sources as well - how much you get taxed on social security benefits vs interest on bank accounts vs investment income vs income from say rent collected on a 2nd house you let.

Might be a good idea to talk to a professional, if you expect these kinds of considerations to get even moderately complicated.
  #3  
Old 12-27-2019, 10:33 AM
Nars Glinley is offline
Guest
 
Join Date: May 2002
Location: Sweeping down the plain.
Posts: 5,877
Quote:
Originally Posted by Great Antibob View Post
Might be a good idea to talk to a professional, if you expect these kinds of considerations to get even moderately complicated.
I've thought about it but what's holding me back is that any investments that I make will be done through a 401K so I'm not sure how much a professional will be interested in talking to me. I base that on my assumption that most of them work on commission and not on an hourly basis.
__________________
I've decided to spend more time criticizing things I don't understand. - Dogbert
  #4  
Old 12-27-2019, 11:15 AM
Dag Otto is online now
Guest
 
Join Date: Sep 2003
Location: Las Cruces
Posts: 5,565
You can find advisors that work on an hourly basis. I know of two in my area that charge $125-$165 per hour. There are also online calculators you can use. I tried using one this week, and what I learned is that there are a lot of moving parts to this. I general (and I may be wrong, so take this with a huge grain of salt) I think that the longer you can have the money in the Roth, and the more aggressive your investment strategy, the better it will be to convert. And speaking of time-frames, note the 5 year rule on conversions. If you absolutely need to tap these funds in 2025, you are cutting it close. Also note that the link there goes to a six year old article so it may be well out of date, but it highlights some of the reasons an advisor may be a good idea especially if you have a significant amount of funds here.
  #5  
Old 12-27-2019, 11:33 AM
Dag Otto is online now
Guest
 
Join Date: Sep 2003
Location: Las Cruces
Posts: 5,565
I apologise, I didn't read the OP carefully. There wasn't a question about conversions. Sorry.
  #6  
Old 12-27-2019, 11:35 AM
Nars Glinley is offline
Guest
 
Join Date: May 2002
Location: Sweeping down the plain.
Posts: 5,877
Quote:
Originally Posted by Dag Otto View Post
You can find advisors that work on an hourly basis. I know of two in my area that charge $125-$165 per hour. There are also online calculators you can use. I tried using one this week, and what I learned is that there are a lot of moving parts to this. I general (and I may be wrong, so take this with a huge grain of salt) I think that the longer you can have the money in the Roth, and the more aggressive your investment strategy, the better it will be to convert. And speaking of time-frames, note the 5 year rule on conversions. If you absolutely need to tap these funds in 2025, you are cutting it close. Also note that the link there goes to a six year old article so it may be well out of date, but it highlights some of the reasons an advisor may be a good idea especially if you have a significant amount of funds here.
Fortunately, I started my 401K Roth several years ago so the 5 year rule won't apply to me. Also, since in my case I'm only talking about 401K dollars, there's no conversion to consider (I don't think). For other people, those would definitely be things to consider.

Ninja'd, but no worries.
__________________
I've decided to spend more time criticizing things I don't understand. - Dogbert

Last edited by Nars Glinley; 12-27-2019 at 11:36 AM.
  #7  
Old 12-27-2019, 11:36 AM
Bill Door is online now
Charter Member
 
Join Date: Nov 2003
Posts: 5,140
You also need to consider the SECURE Act that takes effect in 2020. That has several changes that may affect you.

One big change is that IRA required minimum deductions (RMDs) will start at 72 years instead of 70.5. Another change is that inherited IRAs will not be able to be drawn down over the life of the heir, but have to be drawn down over a 10 year maximum.

A third change is that IRA contributions will be able to be made at any age as long as you have earned income. You should look at the provisions as you make your decisions.

I generally feel like the benefits of the Roth are better realized if you have more than 10 years to go before you start to take distributions, but your own financial picture will make this vary a lot. The Roth accounts can be left to heirs without them having to make RMDs. That may change your strategy a lot, I know it has altered mine.
  #8  
Old 12-27-2019, 04:56 PM
iamthewalrus(:3= is offline
Guest
 
Join Date: Jul 2000
Location: Santa Barbara, CA
Posts: 12,236
When I think about whether to do Roth or regular 401k contributions, there are two things that I think are of primary importance.

1. My best guess of my tax rate now vs tax rate when I retire.
2. Roth lets you effectively put more money in the 401k since the limits are the same.

For me, I expect that my tax rate will be lower when I retire (I make a relatively high income now), so I take the tax break now and don't use the Roth.
  #9  
Old 12-27-2019, 05:24 PM
ftg's Avatar
ftg is online now
Member
 
Join Date: Feb 2001
Location: Not the PNW :-(
Posts: 21,123
Thanks for the info Bill Door. I didn't know about some of those changes.
  #10  
Old 12-27-2019, 05:30 PM
ftg's Avatar
ftg is online now
Member
 
Join Date: Feb 2001
Location: Not the PNW :-(
Posts: 21,123
Server error in my favor, collect duplicate post.

Last edited by ftg; 12-27-2019 at 05:31 PM.
Reply

Bookmarks

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is Off
HTML code is Off

Forum Jump


All times are GMT -5. The time now is 04:53 PM.

Powered by vBulletin® Version 3.8.7
Copyright ©2000 - 2020, vBulletin Solutions, Inc.

Send questions for Cecil Adams to: cecil@straightdope.com

Send comments about this website to: webmaster@straightdope.com

Terms of Use / Privacy Policy

Advertise on the Straight Dope!
(Your direct line to thousands of the smartest, hippest people on the planet, plus a few total dipsticks.)

Copyright 2019 STM Reader, LLC.

 
Copyright © 2017