true, but I think some of those are older posters who don’t realize that employers now offer a Roth 401k which receives a full employer match. (At least that is my theory. When our megacorp first started offering 401ks, employees had to withhold into the pre-tax to receive the er match.)
Plus, I think there is some ‘cover the bases’…since the future is unknown, why not put 50% into Roth and 50% into tax-deferred?
But your point, I think, is a good one: not a clear decision fore those 20-somethings making bank, as they are starting in a higher marginal bracket than most of their college peers.
That’s a good idea to post on Bogleheads. Sometimes I’ve gotten useful info there, though sometimes people are very opinionated and not particularly helpful. Like AI, gotta pick and choose what is valid and useful.
That is a common reason for conversion but only a minor consideration for my husband and me (especially me). If the kids’ bonus money comes with some tax liability, so be it. Our decisions are mostly swayed by the impacts to our own portfolio / spending.
To add to Colorado mom’s response, when your heirs inherit your IRA, they must empty the account within ten years of inheriting it. This came about as a result of the Secure Act, or maybe Secure 2.0. Previously, inherited IRA accounts used the uniform lifetime table to calculate the RMD. This allowed for lower distributions than the new ten year requirement. It was then called the Stretch IRA.
If your heirs inherit during their prime earning years, or even their own retirement years, these 1/10 of the account value distributions can bump them into a higher tax bracket as the distribution is taxed as ordinary income.
If you convert the account to Roth, no tax owed by heirs.
I think the young earners in fairly high tax brackets in their 20s will soon be pushed into all traditional 401(k), which is why I don’t have a problem with all Roth 401(k) in the first several years out of college. Stash as much in the Roth 401(k) as you can, with the knowledge that it will be harder to rationalize at the next marginal bracket.
So the estate tax doesn’t save bcuz that money was still given sans tax ? Well they’ll have a bill. As opposed to me having a bill. Will see. I will certainly seek help if some sort.
Since I don’t know what state you live in**, I will ignore state estate taxes here. Assuming the total value of your state is under the federal limit of $15 million a person, there won’t be tax due on the inheritance.
Ordinary income taxes will be charged on IRA distributions, or if you have a taxable account that generates dividends and interest. Assets will enjoy a step up in value, so your heir could liquidate your entire taxable account upon your death, and not pay any income taxes. Alternatively, if your heir held your taxable account and some of it threw off dividends or capital gains, those amounts would be taxed as ordinary income in the year received.
However income tax will be due on each distribution from your IRA, whether the IRA is cashed out upon your death or over the course of 10 years.
** Look into this sooner rather than later if you live in Pennsylvania, or if you live in Massachusetts with an estate worth more than $2 million. I am sure there are other examples but those are the two I know off the top of my head.
My DH and I were having a conversation about when to do more Roth conversions for him (too late for me). In order to keep IRMAA down it won’t be this year or in 2027 (we are deferring my 1st RMD til next January so will get a big tax hit next year) so it looks like it will be 2028. Still going to watch taxable Income brackets.
So you will take your first (this year’s) RMD by April and your second RMD by the end of next year? That will be an unpleasant tax hit next year!
I keep thinking of all the moving pieces this calculation involves. Maybe you can convert some in 2028 since you will only have one RMD hitting your income that year?
Yep! We know. It will be ugly that year. But there are reasons this is the strategy we are taking. We have had some pretty ugly tax hits in previous years too.
My 30 something high earner said her financial planner (who specializes in people in her profession) said to do the 401K amount up to the employer match…so she is. And she also has a regular Roth. Roth IRA was not an option. Her tax bracket will probably go UP so the CFP suggested Roth and pay the taxes now at the lower rate.
Doing your 401K up to the employer match is always the first recommendation of any financial planning article I’ve read. Given most are 33%+ match and usually higher than that, it’s just too way much to leave on the table, even though many 401Ks now charge annual administrative fees so it can be more expensive to have a 401K than similar funds in an IRA. But often, the funds you get in a 401K will have lower annual fees than the similar fund in an IRA to offset the administrative fees ( which are typically small and are only noticeable in very new accounts - i.e. if you pay $50 a year and have $1000 in your 401k, you’ll notice. If you have $50,000, you won’t).
But if you are getting a 25% or 50% or 66% or 75% or 100% match, it would be short sighted to give up that free money, which is why the advice is always to do so to at least the match. Then you just hope you last the 3 or 5 years that most require to vest.
Sometimes that’s the best/only way to handle things. With the short window of the increased SALT limit, I am bunching my property tax payments so that I can claim the itemized deduction every other year. This works because my property tax payments are due July 1 and January 1. I will make three payments in one year, and one the following year, alternating itemization years.
I maybe stating the obvious here…If I were to convert $100 to Roth, over next 20 years I would have $100* (1+.04)^20 in Roth assuming 4% interest, and my pretax IRA would go down as I withdraw from it. So it is a lot more than just leaving $100 tax free to my kids. Both of my kids are already at the highest tax bracket and I don’t see it coming down (it’s not that hard living in NyC).
If I could pay 24% tax when I do the conversion vs them doing it at 37% or maybe higher someday, for me it is better that I do it.
As I mentioned before, it is more than just the $100, it is all the interest/appreciation of 100 would all be tax free, and it’s not the case for pretax IRA.
Young people today switch jobs fairly often. Remind them to move their 401(k) when they leave. My daughter had an 401(k) plan from an old employer, once she left that company they starting tacking on fees. It was better for her to move it to an IRA rollover instead (both were at fidelity).