If you are in the 24% bracket, you net $76 of your $100.
So now your $76 grows over time without paying tax in the future vs. $100 in your pre tax which is still growing today and doesn’t require paying tax until you pull it out.
That presumes you pay the tax from the IRA and not savings. If you pay from savings and roll it all over, then obviously you’ve got $100 in the Roth - but you did still pay today $24. And paying $24 today is potentially worth more than them paying $37 tomorrow due to inflation. $37 in 20 years might by less than $24 is today, in other words.
I think that would be the - is it better or not - people need to look at.
You no longer have $100 (in theory) when you pull it out of the IRA today. And you are spending money today worth more than the equivalent or maybe higher amount tomorrow.
Correct, however the other component you need to add to that analysis is the growth on the money that is used to pay the tax on the Roth conversion. So assume you take money out of your taxable account to pay the 24% taxes today. That money would have continued to grow in your taxable brokerage account–granted, subject to your ordinary income taxes, but assume a tax-efficient allocation.
Understand that I am not arguing against Roth conversion, because I used your tax rate and your children’s tax rate in one of my posts yesterday or the day before.
Then there’s also the discussion of asset allocation within the IRA versus the Roth. Your own fixed Income allocation should be in your IRA and your equity/growth should be in your Roth. Running the analysis for all this is way beyond my limited abilities!
I don’t know if you were suggesting to roll an old employer 401(k) into an IRA at Fidelity, but the reason one would not want to do that is if the person will earn over the Roth IRA contribution limit (I think it’s $150K, give or take), and wishes to continue contributing to a Roth IRA account.
That can be accomplished by doing a back door Roth, but you can’t have any money in an IRA in order to do that, so assuming the new employer allows rolling the old 401(k) plan into the new employer 401(k) plan, that is the way to go.
There are a lot of variables. Asset allocation is outside of my conversion consideration. Both of my FA and myself agreed that I am not going to be heavily in fixed income as I age, as long as I have enough cash equivalent for 6-12 months of living expenses.
Definitely. Unfortunately, I didn’t have the option to roll over into my 401k when I was required by a former employer to roll out of their plan. If it’s an option, it’s smart to roll into the new 401k plan.
Sometimes employers will allow you to roll the money back in from your own IRA to the new employer 401(k) plan. I’m guessing that is not an issue at the ages of most of the people on this board, but a consideration for our children.
For my daughter, the money was all already at Fidelity (her current employee plans and her old employee plans), so the rollover made sense and was very easy. Her current employee is a non-profit so no 401(k) plan for this company, instead a 403(b) plan (both a Roth and a non-Roth option) and a 401(a) plan.
My point was just to remind people to look at their account from an old employee to make sure that they are not being charged unnecessarily, the solution might be different based upon your new employee, age, etc.
I don’t know if this varies by employers–probably–but Secure Act 2.0 now allows the employer match to be contributed to a Roth 401(k). Prior to 2023, employees could contribute to the Roth 401(k) and still receive the employer match, but the employer match had to be contributed to a traditional 401(k). As of the start of 2023, the employee can now contribute to the Roth 401(k) and the employer match will also be contributed to the Roth 401(k).
When you say she has a regular Roth I think you mean she has a Roth IRA, and that she does not have access to a Roth 401(k)?
All of these decisions depend on so many variables, but if you have a young person who is a high learner and has a lot of excess cash flow, then contributing fully to the Roth 401(k) in the early earning years (lower tax years) may make more sense than contributing to the 401(k), as long as the employer will match contributions to the Roth 401(k).
If the employer does not match contributions to the Roth 401(k), then it would be crazy to forego the match and not contribute to the traditional 401(k).
doesn’t matter. If the tax rate is the same, the after-tax total is the same. In other words, the math is the same if you take out 24% today and let it grow tax free beyond that, or let it grow tax-deferred now and take out the 24% at at end. (Associative or distributive property, I always messed them up)
If you take out $24 today, even if you roll the $100 over, you had to pay - so in essence you have netted $76. Now, I assume you have to roll over the $100.
But $24 today might be worth more than $60 tomorrow - we don’t know inflation and what that amount will be worth in 2026 dollars when you take it out - or am I missing something?
you would apply the growth and inflation factors equally, so you end up in the same (math) place xx years hence. (assuming the exact same marginal tax bracket before and after)
The usual recommendation with Roth converstion is to pay the taxes from outside funds
But to do that, you need to have those outside funds available… not always easy in the early retirement years. (Example, you may need to reserve savings/investments to tide you over to deferred SS)
yes, that is the preferred method to pay the taxes, IFF you have the extra cash available. And that is bcos the net effect is moving some of your taxable dollars (for example, from your regular checking account) into the non-taxable Roth to grow tax free.
The “cash available” factor (and tax analysis) limited our Roth rollover amounts… which we spread over a few years. In our situation, FA didn’t see much advantage to doing more rollover if we had to withhold taxes.
MA taxes estates above $2 million. They changed the law in late '23 I think retroactive to the start of '23 from something that was much more onerous. Prior to '23, the law had been that as soon as your estate value exceeded $1 million, you were taxed back to dollar one except for a $40,000 carve out. The current law does not tax the first $2 million of an estate, but does tax above that amount. The attached article has a chart showing the graduated estate tax rates in Massachusetts.
PA does not have an estate tax, but does have an inheritance tax, so the estate does not pay the tax, but the people inheriting the money do. No tax when a spouse inheritance, but children and family members do pay inheritance tax.
I am not a lawyer, accountant, or financial planner so I should probably stop posting on this thread!
@CT1417 good point on estate taxes vs inheritance taxes. It’s best to check the laws in your state as they vary. My state has an estate tax (over $3 million) but no state inheritance tax.
Snow will fall in the Sahara Desert sooner than the government will simplify anything! Our tax code is a prime example of the phenomenon called “enshittification.”
You can look at your years prior to RMDs and just cash out some money and invest it yourself (and pay the taxes then - if those are low tax years) - so that you can ‘level out’ some on the RMD required ‘cashing out’. A ‘no income tax state’ won’t spare you from the federal tax burden you will have if you have a high amount on RMDs.
Snow will fall in the Sahara Desert sooner than the government will simplify anything!