The general conventional wisdom is that if you think you’ll be in a higher tax bracket now than at retirement, you should put tax-advantaged retirement (IRA/401(k)/403b/457b etc.) money in traditional retirement savings rather than in Roth savings. That means you don’t pay taxes now, but you pay taxes later. If you think you’ll be in a lower tax bracket at retirement, you should put your retirement money in Roth because you pay the taxes now, but will not have to pay taxes on the earnings later.
I have assumed that while our income will likely be lower in retirement, our tax brackets have a very good chance of being higher because they’ve been at historical lows and because we didn’t fix Social Security and Medicare when we had the chance, most likely we’ll be paying for big chunks of those out of general revenue (indeed, that’s the argument the last trustee of SS [Trump has not appointed any trustees, which is bad] made at a very depressing talk he gave recently). So that would imply that for optimizing our wealth, we should do Roths now and pay the taxes now and live large on tax-free earnings later. Of course, I’m not 100% sure that that’s going to happen or even that the US government will keep its promises about the tax-free status of the Roth vehicle.
So what I’ve been doing, as I tend to do when I have no idea what to do, is I’ve been using a 1/n heuristic. Half my retirement money goes in traditional. Half my retirement money goes in Roth.
If the Republicans pass their tax plan, chances are it will make even more monetary sense for me to put money in Roths– pay those taxes now because there’s no point trying to get my AGI down.
And yet… the Republicans are going to dig a huge hole in the national debt with their “no taxing rich people/no spending on investing in our future/spend a lot on the already rich and powerful” plans. The US government is going to need my money more later when good people are in charge and the Republicans will have to face what they’ve done to the US sooner if they get less tax money now. So I’m feeling like it will be patriotic to squeeze them now and pay more in taxes several decades down the line. Even if that means that we end up with a smaller net worth when we die.
So… even though it’s a bit of paperwork for me… I think I’m going to change over all of my retirement savings to traditional. Because the US government will need that tax money later. I know it’s only a drop in the bucket for the US, especially given that they want to increase the deficit by well over 1.5 trillion this year alone, but I do what I can.
Of course, Republicans could mandate that all preferred retirement savings be in the form of Roth so they get taxed now instead of later. And it sounds pretty likely that they’re going to make it so government employees can’t take advantage of both the 403(b) and the 457, which will cut my optional retirement saving in half. That’s a way to punish high earning government employees (particularly those who don’t get much in the way of direct employer contributions) and a way to get good people to not want to work for the government (so either salaries would have to increase or other benefits would increase). But I suspect these politicians don’t want competent people working as civil servants. And they want to punish state and local employees, because why not.
How do you decide between Traditional and Roth options?