The tax-now Roth IRA will increase in popularity over the coming years. Let me explain why.
When Congress passed the Tax Cut and Jobs Act (TJCA) of 2017, it inaugurated an eight-year period of the lowest tax rates in American history, which started on January 1, 2018.
However, due to the sunset clause that was built into the legislation, the tax sale ends on December 31, 2025. If Congress does nothing, which they tend to do, taxes will revert to their pre-2018 levels on January 1, 2026. This means anywhere from a 1% to 5% increase in marginal tax rates.
Therefore, the logical solution is to try and convert some of your tax-deferred retirement money in your 401(k)s and traditional IRAs into a tax-now Roth IRA. This way, you can potentially save on taxes if tax rates are higher during your retirement years.
How Much To Contribute To A Roth IRA?
The question is how much of your tax-deferred retirement funds should you move? And at what marginal income tax bracket should you contribute or convert to a Roth IRA to minimize future retirement tax liability?
Here is a chart from 2018 comparing the old marginal tax rates with the new marginal tax rates after TCJA was passed. The chart gives us an idea of what marginal income tax rates could rise to in 2026, if Congress doesn't act.
Quick Thoughts On The Roth IRA
I've been a long-time opponent of the Roth IRA since I haven't been able to contribute to one since I turned 25 in 2002. The arbitrary income limits to be able to contribute shut me out, so I decided to reject the Roth IRA as well.
In addition, doing a Roth IRA conversion wasn't appealing after my income declined by 80% once I left banking in 2012. The last thing I wanted to do was pay more taxes. Instead, I wanted to hold onto as much money as possible to get through an unknown future.
However, now that I'm older with children, I now believe contributing to a Roth IRA is a good way to tax-efficiently diversify your retirement income sources. With the TJCA expiring on December 31, 2025, it's worth focusing on the Roth IRA again.
How Much Tax-Deferred Assets To Shift To Tax-Now By January 1, 2026
To decide on paying taxes up front by contributing or converting assets into a tax-now Roth IRA, we need to make the following assumptions:
- Congress will let tax rates return to previous levels on January 1, 2026
- Tax rates may go even higher than pre-2017 levels due to an even larger budget deficit
- You believe your tax rates in retirement will be higher than your tax rates while working
Here's the thing. For the vast majority of Americans, I do not think their tax rates will be higher in retirement than while working. The majority of Americans are aggressive spenders instead of prodigious capital accumulators. As a result, the urgency of shifting assets from tax-deferred retirement accounts to tax-now accounts is low.
Also, please don't be fooled when financial advisors or books refer to the Roth IRA as a “tax-free” retirement vehicle. How can a Roth IRA be tax-free when you have to pay taxes before contribution? A Roth IRA is a tax-now retirement vehicle.
Yes, once you make your after-tax contributions to a Roth IRA, the growth compounds tax-free, and the withdrawals after five years are tax-free. But there is no free lunch when it comes to the government.
The only way Roth IRA contributions are tax-free is when you earn below the standard deduction limit and contribute. So for those of you who are working students, working part-time, or just starting your careers, opening up a Roth IRA makes a ton of sense.
The Average American Retirement Tax Profile
We know the median retirement balance is around $100,000. We also know the median Social Security payment is around $24,000 a year.
Even if you withdraw $10,000 a year from your median retirement balance a year, your total income would be $34,000 ($24,000 + $10,000). That income falls within the 12% marginal federal income tax rate, which is low. It seems unlikely the 12% tax rate and income threshold of $44,725 for 2023 will go lower.
Therefore, one could argue the average American in the 12% marginal federal income tax bracket should contribute as much as they can afford to a Roth IRA. After all, the next tax bracket jumps by 10% to 22%, the largest tax jump of all the tax brackets.
The Middle Class Is Safe From Paying More
Given we know politicians crave power the most, we also know raising taxes on middle-class Americans will cause politicians to lose power. Hence, there is virtually zero chance politicians will raise taxes on any person or household making less than $100,000.
I doubt politicians will raise taxes on people making under $250,000 either. President Biden has already promised the public he won't raise taxes on Americans making less than $400,000. So a $150,000 income buffer is more than enough to feel protected from future tax hikes.
Of course, nobody knows the future of where tax brackets will go. All we know is the long-term tax bracket trend is down since the 1950s. And once you start giving people what they want, they are loathed to give up what they have.
The Mass Affluent American Tax Profile
Now let's say you have been a regular Financial Samurai reader since 2009. As a result, 33% of you have an above-average income of between $100,000 – $200,000. 18% of you make over $200,000 a year, while 17% of you make between $75,000 – $100,000 a year.
You also have an above-average net worth. 35% of you have a net worth of between $300,000 – $1 million. 25% of you have a net worth over of $1 million.
With such an income and wealth profile, the majority of you will face the 24% and 32% marginal federal income tax rates. For individuals, the income range is $95,376 – $231,250. The income range is $190,751 – $462,500 for those married filing jointly.
For those in the 32% marginal income tax rate or higher, it makes little sense to convert any funds to a tax-now Roth IRA. You will unlikely pay an equal or higher marginal income tax rate in retirement. Here are the 2024 tax rates, which are the same but with higher income thresholds.
32% Marginal Federal Income To Contribute To A Roth IRA
Let's assume you make $182,101, the lowest income threshold that begins to face a 32% marginal federal income tax rate. At a 4% withdrawal rate, you would need $4,552,525 in capital to generate $182,101 in retirement income.
Even if you collect $40,000 in annual Social Security, thereby lowering your income threshold to $142,101, you'd still need $3,552,525 in your retirement accounts to start paying a 32% marginal federal income tax rate in retirement.
Now let's assume you make $231,250, the highest income threshold that pays a 32% marginal federal income tax rate until you face the 35% rate. At a 4% withdrawal rate, you would need $5,781,250 in capital to generate $231,250 in retirement income.
Even if you collect $40,000 in annual Social Security, thereby lowering your income threshold to $191,250, you'd still need $4,781,250 in your retirement accounts to match your working income and pay a 32% marginal federal income tax rate.
Yes, I firmly believe the vast majority of personal finance readers will retire millionaires. But it is unlikely the majority of mass affluent personal finance readers will retire with over $3.55 – $4.8 million in capital plus $40,000 in annual Social Security payments in today's dollars.
Again, it is highly unlikely tax rates are going up for those making less than $250,000 a year. A 32% marginal federal income tax rate is already 10% higher than what the median household income of $75,000 faces.
The 24% Marginal Federal Income Tax Profile Is A Wash
If your income taxes are likely not going up making $250,000, then there's even a greater likelihood your income taxes are not going up if you make less.
Making between $95,736 to $182,100 (24% marginal income tax bracket) as an individual provides for a comfortable middle-class lifestyle, depending on where you live in the country. At this income range, you are a highly coveted group of voters.
$182,100 is also what I consider to be the best income to live the best life and pay the most reasonable amount of taxes.
You won't generate more income in retirement than while working
Here's the thing. If you make $95,736 on average as a worker, it won't be easy to amass $2,393,400 in retirement by 60 at a 4% rate of return to generate $95,736 in retirement income. Remember, the median retirement balance is only around $100,000.
Even with $25,000 a year in Social Security, you'd still need $1,893,400 in retirement to generate $70,736 a year at a 4% rate of return. Doable, for sure. But unlikely for the majority.
Therefore, for most workers in the 24% marginal income tax bracket, the most likely best-case scenario is a PUSH. Meaning you will pay the same tax rate in retirement as you did while working.
What Married Filing Jointly Tax Rackets Could Go To In 2026
Here is the married filing jointly before and after TCJA tax rate in 2018 to give readers an idea of what tax rates could go up to in 2026. A 4% potential tax hike is meaningful.
The Standard Deduction Will Help Push Your Retirement Tax Bracket Lower
Even if you pay off your mortgage and lose all your itemized deductions in retirement, you will still benefit from the standard deduction to reduce your taxable income.
The standard deduction for married couples filing jointly for 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023.
In other words, as an individual, you could actually make a gross income of $58,575 and remain in the 12% marginal tax bracket even though the 22% marginal tax bracket starts at $44,766. $58,575 gross income minus $13,850 standard deduction equals $44,765.
In 20 years, at a 3% annual increase, the single taxpayer standard deduction will rise to $25,000 and the married couples filing jointly standard deduction will rise to $50,000. Based on the latest Social Security cost of living adjustment, I'm confident the standard deduction amount will continue to increase as well.
The 10% And 12% Marginal Federal Income Tax Profile Is Ideal For Roth IRA Contribution
If you ever find yourself in the 10% and 12% marginal federal income tax bracket, then by all means contribute to a Roth IRA or conduct a backdoor Roth IRA conversion.
Let's say you are a young worker paying 10% or 12%. You likely have income upside to pay a higher rate in the future. If you're fortunate enough to pay a 0% marginal federal income tax rate thanks to the standard deduction, shovel as much money as you can into a Roth IRA!
You are contributing tax-free money, enjoying the benefits of tax-free compounding, and will get to withdraw the money tax-free as well. In this case, the Roth IRA truly is tax-free.
If you are an older worker who finds themselves underemployed or out of a job one day, converting some money to a Roth IRA or contributing makes sense.
The optimal time to do a Roth conversion is after you retire, are in a lower tax bracket, but before claiming Social Security benefits.
Losing Income Makes Contributing To A Roth IRA Difficult
In my experience, it's just hard to pay taxes to fund a Roth IRA when you're out of a job or aren't earning as much as you once were.
In 2013, I earned the least amount of money since 2003. My severance check was paid out in 2012 and I no longer had a paycheck. Therefore, I should have converted some of my 401(k) money into a Roth IRA.
Instead, I just rolled it over into a traditional IRA because paying taxes on my retirement savings was last on my list. I was still coming to grips with what I had done – leaving a well-paying job at age 34.
There was also a point in my post-retirement life when I wanted to be a fruit farmer in Oahu. If so, I'd have plenty of years paying a low marginal tax rate to convert some funds into a Roth IRA.
Alas, my income bounced back because my investments rebounded from the global financial crisis. Further, Financial Samurai grew and random opportunities such as startup consulting and writing a book came about.
Higher Taxes Are Not Guaranteed Beyond 2026
I first wrote, Disadvantages Of A Roth IRA in 2012, during the Obama administration. The post engendered a lot of dissension, which I had expected. The majority of commenters said tax rates are only going up.
Then Trump became president and the Tax Cut and Jobs Act was passed in 2018. As a result, tax rates went down. Therefore, anybody who contributed to a Roth IRA or converted funds to a Roth IRA during the Obama administration made a suboptimal financial decision.
Given we now have the lowest tax rates in history and a clear December 31, 2025 expiration date, it is now safer to assume tax rates are going up. It's the same thing as assuming interest rates were likely to go up in 2020 given the 10-year bond yield dropped to 0.56%. At the very least, we didn't buy bonds.
Today, we are happily buying Treasury bonds yielding 5%+ in anticipation for rates to eventually decline. So maybe shifting more assets from tax-deferred to tax-now retirement vehicles is good for retirement income diversification.
Roth IRA distributions do not have any Required Minimum Distributions. The distributions also don’t count toward calculating Social Security tax either.
Count On Politicians To Support The Middle Class
The path of least resistance is to do nothing, which Congress is great at. We also need to raise more revenue to pay for our massive spending since the pandemic began. Therefore, the probability that rates go up beyond 2026 is the highest it's been in a while.
However, I'm also counting on all politicians' desire for power. When you have power, you are loathed to relinquish it.
It's like elite colleges holding onto legacy admissions. Colleges know legacy admissions rigs entrance in favor of the wealthy majority. But elite colleges would rather abandon SAT/ACT requirements in order to have more leeway in determining their incoming classes.
Hence, I assign only a 20% probability that tax rates are going up in 2026 for sub $250,000 income-earners. For those households making over $400,000, perhaps the probability is over 60%.
We could see occasional temporary spikes in tax rates, as we did with inflation in 2022 and 2023. However, over the long run, raising taxes is political suicide.
As always, consult a tax professional before making any moves.
Related post: Use Rule 72(t) To Withdraw Retirement Funds Penalty Free
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Sam, the table comparing tax bracket between 2018 vs 2026 is misleading. Sure we know how the tax rate will change in 2026 (10% to 10%, 12% to 15% 22% to 25%), but the tax bracket will not stay the same. It will definitely go up a lot given the huge inflation since 2018. I will project that the upper limit of 15% for MFJ will be over $100K in stead of $77400 shown in your table. My projection is based on the 2024 figure of $94300 as reference.
Folks have been saying taxes will definitely go up for a while. But the trend over the past 50+ years has been down.
We’ll just have to wait and see. So far, Biden hasn’t been able to implement his new top tax bracket of 39.6%.
Another good reason for withdrawing from traditional IRA’s for a retiree is to keep the tax bracket below the “Rich” level before being pushed into them by RMD’s. Smoothing out the tax burden over a period years could make good sense. ROTH IRA’s have a lot of rules and the rules can change so putting the after tax proceeds into a brokerage and buying dividend paying stocks could a good option. It may not be optimal tax wise but it does provide a high degree of control over one’s wealth and increases passive income.
“ it inaugurated an eight-year period of the lowest tax rates in American history, which started on January 1, 2018.”
I think the period before c. 1916 without any income tax and the period shortly after that disqualifies your statement.
Taxes are so complex. It’s good to point out workarounds like this one.
While the tax rate drops were nice, the elimination of SALT deduction made this tax “break” negative for us. I would much rather get SALT back and have 39.6% as the top rate.
Of course that changes once I don’t get W2 income anymore, which was the plan before 2026. Like I said, complex….
Ah yes, good point and reminder of the SALT deduction limit of $10,000. Forgot about that one due to AMT and paying off one property.
The SALT cap made it a tax increase, not a tax cut. Somehow everyone talks about this legislation like taxes were reduced. I don’t think that is the case for CA, MA, NY and many other states where housing is expensive. Removing the cap would actually be a tax break and lower my taxes by a noticeable amount.
It depends on your deductions and how much you made.
My problem is that RMDs at 75 are going to double and then triple our income and drive us into terrible brackets, regardless of what rates are then.
We will have 12 years of reduced income, after retirement and before age 75 (with higher take home than we have while working). In that time we could backdoor our Roth IRAs, but it’s a limited window and could only move so much each year (maybe a couple hundred k) without jumping into really expensive brackets, regardless, plus, we would have to pay state taxes on anything over 40k per year.
And where to pay the taxes from? Usually you get it from outside the fund but if your goal is to reduce RMDs . . .
Guess I should fiddle with the spreadsheets some more. Would be somewhat easier if we could move to a no income tax state, but the wife won’t have it.
It’s not a bad problem to have, but we sacrificed a fair amount to get here and none of this was given to us, nor did we ever invent the pet rock or anything. I feel no inclination to give our politicians one cent more than I have to.
And of course, those same politicians could very easily decide to make Roth IRAs subject to RMDs, in which case all this part of the planning is for naught.
What about the effect on IRMAA? I’m looking at tax free income sources as a way to stabilize yearly income/taxes so I don’t get surprised by an unplanned increase in Medicare premiums. If I want to take a trip or something one year, that big expense would come from the tax free income source and keep my annual income steady.
Sam,
You mentioned that you have leveraged short term bonds. With the high yields right now, can you post an article of how to do a bond ladder, why it makes sense for some people and how it could outpace the market in this year of uncertainty. Thanks.
Hi Sam, I’m good for now. But check out these two posts:
https://www.financialsamurai.com/treasury-bonds/
https://www.financialsamurai.com/why-you-wont-regret-buying-treasury-bonds/
Gotta kick back and enjoy the nice risk-free returns as the Fed hikes us into another recession.
Oh… and NewRetirement also enables you to toggle on and off the TCJA sunset.
And, the Required Minimum Distributions ages have been updated per the omnibus spending bill. (Beginning on Jan. 1, 2023, the age to start taking RMDs jumps from 72 to 73 and it increases again in 2033 to 75.)
NewRetirement actually offers a variety of Roth tools that may be useful to anyone considering the pros and cons of pre vs post tax savings and conversions.
1) In the NewRetirement Planner you can apply future contributions to Roth in one scenario and to traditional savings in another scenario and do a full scenario comparison to assess future wealth, returns, tax liability and more.
2) Also in the Planner, you can try out any individual Roth conversions in any future year and again, assess the financial ramifications across a variety of plan metrics.
3) The Planner also has a very unique tool, the Roth Conversion Explorer, that is designed to help you identify a multi year conversion strategy to either maximize your estate at longevity, stay within a certain tax bracket, and/or minimize lifetime tax liability (coming soon).
4) Finally, there is a stand alone 2023 Roth Conversion Calculator to help you see all the various tax implications of Roth conversions this year, including IRMAA.
—> Go to NewRetirement to use rich Roth functionality that is part of the comprehensive Planner
–> Find the 2023 calculator here: https://www.newretirement.com/retirement/roth-conversion-calculator/
What would the Long Term Capital Gains Tax Rate by Income Brackets for couples change to if/when TJCA is rolled back?
grib57
The TCJA retained the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. But there is talk about doubling the top LTCG tax rate for top earners.
Nobody knows for sure.
Sam, you raise good points about the difficulties in deciding whether to convert tax-deferred money, but do you see any reason why anyone, no matter how wealthy they are, wouldn’t contribute to a back-door Roth each year via a non-deductible IRA? Sure, it’s only $6500-$7500 per year, but you or your heirs never pay taxes on the earnings.
Please write out an example with numbers and discuss the alternatives of the money with future tax scenarios. It helps in coming up with a solution. Thx
OK, a 25 year old who makes too much to contribute directly to a Roth instead contributes $6500 to a non-deductible IRA and then immediately converts this to a Roth. If she gets a 6% annual return, in 40 years she’ll have just under $70,000. She can withdraw all of this without paying any taxes. Isn’t this a no-brainer?
The back-door Roth IRA contribution is a way to by-pass the income limit of Roth IRA. You will need to diligently keep track of the tax basis and keep all the copies of the Forms 8606. For the back door to work, you need to have an “empty” transitional IRA account to receive the non-deductible IRA contribution every year, then convert it to Roth without any taxes right away as you have full tax basis in the contribution. Then file the Form 8606 along with your Form 1040 to show the tax basis in the contribution.
Google the paper by Dr. Edward F. McQuarrie “When and for Whom are Roth Conversions Most Beneficial? A New Set of Guidelines, Cautions and Caveats”. It gives many scenarios but concludes that Roth IRA conversions only make sense if you are in the very lowest tax brackets, such as 0%, 10% and 12% as Sam mentions in this post. In my opinion it’s worth a read before doing any conversions.
Can you share his different reasonings than mine?
It’s complicated. The inflation reduction act gives exchange subsidies. Great, but this now acts as an additional income tax of 8% for nice incomes, if this applies to you. It also expires in 2026. And Medicare IRMAA is an uneven 5% kicker for high incomes. The taxman always gets his share.
Do you mind writing out an example to help us understand these taxes? I’m not putting things together based on what you’ve said. Thx
Timely post. I just did an early retirement at 54. of our retirement accounts about 80% is in pretax, 20% in Roth. we dropped down significantly to the 12% tax bracket (we were 32, sometimes 35) so Im considering doing some conversions..mainly because I suspect once we get 20 years out that pretax portfolio will probably be double, maybe triple, in size and RMDs will very likely push us up a few brackets.
I need to go do the analysis and was wondering if you or others have tools out there they’ve used to model conversions. I think someone said Prelana Gold is one paid tool, but maybe others.
I’d do it since you’re going from 32% to 12%. At 12%, it’s a no brainer to start converting. Gotta pay the tax man eventually.
Converting before you collect SS makes sense too.
I think NewRetirement has a tool.
Don’t forget the widow penalty. When the husband dies, the tax brackets shift to individual from joint and her tax rates go up, so I think a Roth IRA part for this part of her life could be valuable
“All we know is the long-term tax bracket trend is down since the 1950s.”
There were many more deductions and loopholes back then.
As someone already retired, I’m looking at a 4% increase in my marginal rate after TCJA expires. In addition, since I plan on leaving my heirs my Retirement holdings, it seems like a Roth would be a much better way to do it. Am I missing something? Thanks.
No. If you think your tax rate is going up 4% in 2026 and beyond, then a Roth IRA will reduce your tax liability.
As a federal government employee, I want to thank you for paying taxes up front. The more you pay, the stronger our nation.
Too few people pay taxes or enough taxes. The country is relying on people like you to pay more taxes and pay more taxes now.
Thank you
Another consideration are RMDs from Trad IRA, 401K, etc… People are living longer in retirement and RMDs could boost you into higher tax brackets as well. Add to that collecting SocSec later will also add to annual retirement income. Also, I believe a ROTH IRA can be inherited and withdrawals would be tax free.
True.
The optimal time to do a Roth conversion is after you retire, are in a lower tax bracket, but before claiming Social Security benefits.
Sam –
I’m confused.
My quick Google search shows for MFJ the pre TCJA tax rate of 25% applied to the taxable income range $75,900 – $153,100. But your MFJ table has this range as $77,401 – $156,150. Are you applying an inflationary factor?
We manage our expenses and IRA withdrawals in order to stay within the TCJA 22% taxable income bracket, and would prefer staying within the old 25% tax bracket rather than falling into the old 28% tax bracket.
Please explain slowly using small words. LOL
THANKS!
Sure. The before and after income tax rates charts are from 2018 (see captions). They are there to give readers an idea of what tax rates could move to in 2016. if Congress doesn’t do anything.
If you want the latest MFJ tax brackets for 2023, you can click this post.
Honestly I think the question is more complex than the government tax rate. Take a hypothetical person retiring at age 50. At 51 they can convert traditional to roth at their marginal tax rate. Having enough in tax now can theoretically allow them to structure those withdrawals from 51 to rmds to effectively pay a lower tax rate for that period. So in some ways your strategic plan is the key not what congress does.
That’s true.
The optimal time to do a Roth conversion is after you retire, are in a lower tax bracket, but before claiming Social Security benefits.
So your example highlights a perfect time to convert.
So on point! We are in this exact same position. I retired at 49 (now 52) and have been doing the conversions every year. Did some also last fall when the market was at its lowest—one redeeming feature of retiring in a bear market. Probably will do some conversions again given the current lull in the market.
The thing I find hard is to do a really large sum up to a certain tax bracket. Apart from having taken advantage of healthcare subsidies which would result in a penalty if the income from conversion went too high, it’s just hard psychologically to pay too much taxes upfront even though we can certainly afford to with our savings. Yes, we know if we keep the pre-tax balances as is (7 figures, continuing to grow and compound), we would be in a much higher bracket by the time RMDs come around.
But the fact that the age for RMDs recently got pushed to 75 is making it harder to focus too far out.
Hi Sam,
May I ask ‘if’ and ‘how’ you use Empower?
It feels vulnerable to provide links to accounts.
Thanks much for the post.
GG
I link up all my financial accounts so I have a clear a snapshot of my entire net worth. I also manually add private investment accounts, and other financial accounts as well.
The founders come from a cyber security background. And I have never experienced any type of breach. Everything is traceable if there is one.
I’ve just never felt worried about online financial tools. Everything is digital nowadays, and will be digital forever into the future I think.
I love how I always learn something new on your blog. I wasn’t even aware of the 2026 expiration. It wouldn’t surprise me if tax rates go up. I’ve basically accepted a reality that my taxes will keep increasing until I completely stop having any active income and shift into full retirement and decumulation mode.
Very helpful to read through your explanations and how most people won’t benefit from shifting funds into a tax-now IRA before the policy expiration. Thanks!
Something worth mentioning is that the current standard deduction is also based on the TCJA. So if 2026 brings back exemptions, the standard deduction may significantly fluctuate.
In other words, you think the standard deduction amount will go down? I just don’t think that will happen based on the Social Security cost of living adjustment for this year and inflation, etc.
If the Tax Cuts and Jobs Act expires on Jan 1, 2026, then the standard deduction will be cut roughly in half. The 10K limitation on deducting state and local taxes (property, income, real estate) will go away, making it more likely that you will itemize deductions.
For something else to happen, Congress will need to act.
Hmm, if that happens and is true, then Congress has to act for the sake of the middle class.
Another thing to consider is that many of us booked stock market losses in 2022. A person could sell some of their traditional IRA”s and offset the gains with their 2022 losses and pay no tax on the conversion to a Roth.
Personally, I have a fairly large taxable portfolio so I’m gonna save these losses to offset future gains in my taxable account. If I was close to a traditional retirement I would probably use the losses on a Roth conversion.
Sounds like a good idea. However, if you wait, long enough, your loss is my turn into gains again!
My understanding is that distributions from a traditional IRA are considered ordinary income as opposed to capital gains, and therefore the capital loss offset would be limited to $3,000/yr. This doesn’t negate the strategy but it does limit it.
Sam what are the chances that even if you are invested in Roth assets that the govt will eventually add a wealth tax that gets at our Roth assets even though technically this is not income taxes. So from that standpoint shouldn’t we look to diversify the risk by keeping a split in tax deferred or other tax shielded investments? Thanks
Maybe a 5% chance. A Roth IRA is good for retirement income diversification.
I have always thought that any attempt to get at retirement account funds will target the employer contribution.
The sales pitch to the general public is that everyone should do their “fair share” and the state won’t claw at the funds contributed from an individual’s paycheck. But the part contributed by the company wasn’t really that person’s to begin with, so it’s fair to go after that portion of the account. You didn’t work for it, you were given it, so now we all need to give to the greater good.
Many people who aren’t directly affected by such a move would probably go along with that logic. I’m planning on needing income producing assets in retirement because I expect to not get social security and also lose some of my employer contributions over the next 30+ years.
Interesting to be reminded of those WWII/Korean war year rates. Should it come to blows with China over Taiwan (or even just increased saber rattling), increased military budget will need funding.
One reason I favor a Roth, via back-door non-deductible contributions, is that it would reduce your income that is considered for Medicare premiums in retirement. If you pull from a tax-deferred account, you have to report it which could increase your Medicare premiums.
If you want Medicare, assuming it’s even viable. But yes, ideally all your capital would be in a ROTH IRA. 0% all the way.
Like many articles, discussing replacing current income in retirement rather than expected expenses. Found in retirement, my expenses much lower. Do agree with the need to convert some traditional to Roth over the next 2 years. Personally converting up to the 12% tax bracket.
The expiration in 2026′ is of major concern, considering that federal tax collections as a percent of GDP have only been this high three times in the past. Every time we got this high it began to slow the growth of the golden goose. When they do expire in 2026′ I hope we at least get provided with more deductions/targeted incentives.
It was great to hear Buffet speak out a little bit last week regarding buy backs and tax rates
Vaughn, unsure where your numbers come from regarding tax collections to GDP. Just saw an article that they are at 16.5%, the lowest in the income tax era, much lower than most developed countries.
I am for every individual minimizing tax loss but we have to pay for what we have. Medicare, SS and Defense (with interest coming on) are necessary features of government to stabilize and protect the population. Fine, if you disagree (Medicare expansions, for example) but the country was in a very bad place when these programs came about. So which do we cut and by what % when clearly almost everyone sees a rise in taxes once TCJA ends; the opposite of what you are stating?
I thought it prudent to contribute to all Roth vehicles since as a military family, almost half our income was ten free to begin with. Stuffing that money into Roths means that the money will truly remain tax free.
*tax free