With lower tax rates and higher future budget deficits, are people switching to Roth 401k contributions next year?
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My husband makes Roth 401K contributions because my projections show that we’ll be in a higher tax bracket when we have to start taking RMDs. A Roth 401K rollover to a Roth IRA will not be subject to RMDs, so that will be helpful in keeping some investment income off the 1040 in our retirement years. Of course, pretax balances, (company match and pretax contributions he made in the past), will be rolled over to an IRA and will be subject to RMDs. By far, pretax balance is the largest portion, but any little bit that can escape RMDs is helpful.
I’ve always split my contributions between the two. Don’t really see anything in the tax plan that would get me to change that at the moment. I’ve always liked the idea of having different pools of money to draw from in retirement.
Yes I see your reasoning. With low tax rates in 2018, pay the taxes and put in the Roth rather than putting the funds into a IRA to avoid taxes today and pay the higher tax rate when the Democrats raise taxes again. Probably very prophetic.
The current individual tax cut expires in 10 years, so no one will have to raise taxes for that to happen.
Yeah deep question here. Will future Congress be able un-ring the bell of lowered individual taxes? Will they do it enough that putting money into a Roth in 2018 is a good idea until they need to change it back?
The individual tax cuts expire after 2025 (not quite 10 years); the corporate tax cuts are permanent. This was a legislative accounting strategy used so that the Senate could pass tax reform via reconciliation, needing only 51 votes and avoiding the filibuster and other dilatory tactics. Reconciliation is only allowed to increase the deficit up to certain limits because of the Byrd rule.
The Byrd rule for reconciliation requires that over a 10-year horizon reconciliation must only be projected to affect the deficit by a certain amount. Some interesting diagrams at https://www.washingtonpost.com/graphics/2017/business/tax-bill-overview/ .
Kind of odd that the individual cuts sunset while the corporate cuts are permanent – some more individual taxpayer-friendly legislation might have done things the other way around, surely.
Probably a gamble that even a future democrat controlled congress would pause before allowing taxes to rise for individuals. Especially painful since the brackets would be indexed to C-CPI (brackets, exemptions, maybe the 2017 standard deductible would rise less than CPI till 2015 and) in perpetuity.
I could easily see a future Congress letting the top marginal rate return to where it was while keeping some of the broader individual cuts in place.