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?
Grumpy Rumblings (of the formerly untenured) 
November 20, 2017 at 4:05 am
I used to do Both Roth and 401K but I no longer qualify due to wage limits. Earning limits are lower for people who have company sponsored retirement plans.
My biggest current retirement decision is staying at a company under newer ownership that is no longer run well because I was grandfathered into a really great pension plan. At this point (>20 years service) for every year I work I get an extra $2k/year payout once I retire or 5 more years is about $1000/mo more come retirement. It is getting harder and harder to enjoy my job because of bad Managment decisions, so at times I wonder if I am making the right choice there. Right now I still have a good boss and a somewhat flexible schedule so I am hanging in there.
November 20, 2017 at 5:48 am
Do you mean IRA? Or are you hitting the 53k total limits?
My 401k itself has both traditional and Roth options. I don’t qualify for a Roth IRA because of income limits.
November 23, 2017 at 4:28 am
I don’t have an employer Roth 401K option at either of my employers, which is a bummer because I am losing the match on my part time gig. (It’s too complicated to try to calculate and be in compliance for such a small sum). I think there may be a way to do it on one if I max out the pretax contributions first but I need to start diverting funds to college savings at this point so it doesn’t make sense to do post tax and max the tax deferred savings. It’s one of my only tax havens so I still do maximaize my pretax savings. I do expect to be in a lower tax bracket come retirement.
November 20, 2017 at 4:52 am
How can this even be remotely justified as good policy? Or do they truly know it’s not good policy and don’t care?
November 20, 2017 at 5:49 am
They’re being pretty upfront that they only care about their big donors.
November 20, 2017 at 11:37 am
government of the corporations, by the corporations, for the corporations. :/
November 20, 2017 at 11:44 am
Not all corporations though, just a subset. So much corruption
November 20, 2017 at 6:52 am
This is a tough one for me. I am just focusing on doing tax deferred in my workplace stuff and then whatever else I have left I put in a Roth IRA. However, but I wouldn’t mind focusing on just Roth if the Republicans have their way with taxes.
November 20, 2017 at 7:07 am
Today is a great day to call about the Tax Scam and about the federal government trying to destroy the ACA. (Several scripts here: https://5calls.org/ )
But it’s also a good day to call about Net Neutrality: https://5calls.org/issue/defend-fcc-net-neutrality
So far I’ve been able to get through to one of my senators and also the FCC office’s voicemail. I’m going to keep trying! Update: got everyone for Net Neutrality call. Got one senator’s voicemail re: tax scam.
November 20, 2017 at 9:23 am
Thanks, I called about net neutrality, the budget, and some acts in the House, one that violates and one that supports the Fourth Amendment on searches and seizures.
The person answering Cruz’s phone said he does have a statement about net neutrality (I already knew he loves this budget), which I could find on his page. (Did she not even know? Or did she not want to deal with telling me after mentioned the mafia-like powers dropping Title II would give to companies?)
I looked on his site and found a bunch of links to newspaper articles quoting a Facebook entry of his saying, “The biggest regulatory threat to the Internet is net neutrality. In short, net neutrality is Obamacare for the Internet. It puts the government in charge of determining Internet pricing, terms of service, and what types of products and services can be delivered, leading to fewer choices, fewer opportunities, and higher prices for consumers. The Internet should not operate at the speed of government.” Um, what?
The whole reason I support net neutrality is the same reason he claims to oppose it: I don’t want all the decisions made centrally, in my case by an oligopoly of internet providers and in his case by “the government.” It gets me so, so angry that so many of these people can just say whatever they want with either no basis or very little basis in reality.
Well, they had to add my opinions to their tally sheet anyway. So there.
November 20, 2017 at 9:43 am
Thanks for calling!!
I also hate the way my senators just blatantly lie about things.
November 20, 2017 at 7:51 am
Wow, your post makes an interesting point. I admire it.
I currently can’t contribute because one may only use earned income to contribute (or your spouse’s) and I’m not working or married. (My pension doesn’t count because the money from that comes from contributions of money I earned in previous years.)
If I were contributing, though, I’m afraid I’d keeping going with the self-centered, self-defensive Roth. I’ve always thought my taxes were going nowhere but up (and so far I’ve always been wrong, ha ha!).
November 20, 2017 at 9:24 am
We don’t have Roth options within our employer accounts, so no decision to make there.
If I had a choice, I’m with you on this (although I also am somewhat of the mindset of “take the tax break today”). A couple more things to consider: Donor advised fund (if you expect to lose ability to itemize in the future). Your recent post on bunching property taxes should be evaluated against the AMT, but seems wise to take that deduction this year (especially if you’re lowering your taxable income next year anyway). We’re also cleaning up our old rollover IRAs (rolling them into work plans, which have good investment options) so we can take advantage of a backdoor Roth without having to pay extra taxes. This is due to the likely combination of limits for 403b/457b, but something that probably should have been done anyway. It doesn’t keep taxes from this government though…
That’s all I can come up with. There is a small part of me that wants to stop earning enough income to have to pay any taxes at all and move somewhere super cheap – but unrealistic.
November 20, 2017 at 9:52 am
We have to see what’s going to happen with taxes next year before making a final decision on the property tax bunching. Taking it this year doesn’t change this year’s taxes much (unless we do a donor advised fund this year, which I’m not really ready to do yet, but maybe should figure out and pull the trigger for anyway… I have a long to-do list right now).
I wonder if my uni would let us start doing mega backdoor Roths if the 403/457 limits are combined…
November 20, 2017 at 10:46 am
Anyone can do a “regular” backdoor Roth for $5,500 per person (or whatever it is exactly). You only need workplace cooperation for the mega-backdoor option. (We don’t have that option either.)
Frustrating that this stuff is so last minute – it takes at least 2 months for changes to the 457 to go through, so we are already slated to contribute in January…
November 20, 2017 at 10:52 am
Yeah, I think we posted about doing that for DH this year the other week (the 5.5K trad IRA is still sitting in Vanguard’s money market account and has earned 15 cents of interest because we haven’t gotten around to converting it). But there’s a big difference between 5.5K and 53K (or rather, 53K-18.5K). Especially since 11K<18.5K.
November 20, 2017 at 11:01 am
Yeah, definitely a big difference!
November 20, 2017 at 11:07 am
We may have to resign ourselves to either spending a lot of money on stuff or paying full freight for college.
November 20, 2017 at 9:57 am
I’ve always gone for taking the tax break now. In the 33% tax bracket, I’d rather not pay the taxes now. Who knows how this strategy will work out in the long run, but my husband and I have both stuck with it. At my last employer, I also did a Mega Backdoor Roth IRA, so I was actually getting about 50/50 Roth contributions in the end. With that, my Roth IRA is actually almost as big as my 401(k)!
November 20, 2017 at 10:18 am
I’ve done a bit of each, because they have such different rules it seems wise to diversify income options in the future. A healthy pool of both gives you much more control over the taxes you pay in any given year in retirement. Of course, a taxable account with both gains and losses also allows more control, but my brain finds that type of complexity too much to think about right now.
Lurking around Bogleheads, somebody linked this post on some of the more esoteric ways of looking at Traditional vs. Roth: http://thegroundedengineer.com/rule-72t-substantially-equal-periodic-payments/. It made me feel better about choosing tIRA this year (though my main driver was simply to get to Admiral funds in that account).
November 20, 2017 at 10:29 am
Diversification has been our thought previously too. We’re at a point in terms of our finances that we can be a bit more risky now.
I hope we never have to worry about withdrawing retirement money before 59.5! But the world is a scary place right now and who knows what is going to happen.
November 20, 2017 at 1:07 pm
I suspect I’ve got more years before 59.5 than you, but in any event my income seems to be radically less stable. Darn biomedical PhD glut. (Also darn my lack of being really really really ridiculously clever).
Re: “the world is a scary place right now ”
Roo: “Mom, can I see your passport?”
Me: “Sure just be careful with it”
Roo: “I have a passport too!”
Me: “You have a pretend passport from school. This is a real one. We’ll get you a real one, in case we have to flee the evil president Trump. Wait, nevermind. Pretend I just said ‘So we can go on a lovely holiday to Canada!'”.
November 20, 2017 at 3:01 pm
There’s a lot to be said for having an econ PhD, regardless of how ridiculous one’s cleverness is.
We definitely renewed my kids’ passports in the past year.
November 20, 2017 at 11:35 am
I’m not able to put enough away to do more than one plan, so I just do 401(k) through my employer. My old 401(k) has been rolled over into a non-Roth IRA and I don’t want to re-characterize it. I just tweak the classifications from time to time (moved a large chunk into “capital preservation” after the election last year. Ironically, the rest has done very well this year, but I still feel better having $$ shielded from market volatility because it is all too clear that stock-market returns do not have very much to do with the real economy).
November 20, 2017 at 4:39 pm
I’m shifting from Roth to Trad next year since, once we get married, our post-Trad-401k income will be low enough to actually do Roth IRA contributions.
November 21, 2017 at 8:24 pm
I haven’t thought this through nearly as carefully as you have, but have stuck with making the maximum Roth contribution, plus, recently, just enough of a contribution to a traditional 403b to get my employer’s match (fortunately, my employer also makes a fairly generous contribution to a TIAA plan even without the match — one of the benefits, along with good health insurance, that has made it not completely self-destructive to stick with my full-time but contingent job). My reasoning, such as it is, is twofold: (1) contributing after-tax money in exchange for tax-free growth strikes me as a form of deferred gratification (and, as a very late boomer, I wouldn’t be at all surprised if taxes are higher by the time I get to retirement age, whatever that turns out to be), and (2) the ability to take out Roth contributions (but not, of course, proceeds) with no penalty if I really need to allows me to stretch to make the full contribution, knowing it’s a reversible decision if it has to be (so far, it hasn’t been). The flexibility provided by reason #2 strikes me as a pretty powerful argument in favor of the Roth for those of us in the middle of the income spectrum (and, at least theoretically, the lower end, but I live in an area where most people at the lower end are spending all they earn on present necessities).
April 30, 2018 at 1:43 am
[…] I said, on top of that, I switched all our Roth 401K/457 stuff to traditional (even though I know that’s not the optimal money thing to do, it’s part of my #resisting), so we should be paying lower taxes on top of the fact that […]