When I started working at 22 I started off with 15% of salary into traditional tax deferred 401k. I’m now 27 with 88k in my tax deferred account, and am thinking about converting it to a Roth account. I don’t know much, but is this advisable? Is it generally the case that is rather pay taxes now if I think I’ll be making more money later in my career, thus I’ll be taxed at a higher rate than compared to today? And when is the best time to convert? Sooner rather than later? When mrkts are frothy?

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Good idea to have a “3 legged stool” approach to retirement. It’s a bit different these days though. You want pre tax, after tax, brokerage. Pretax, you know the tax rules today. Increase take home cash flow and setup retirement. Bad thing here is may be subject to taking minimal distributions, interfering with your plans if all of your money is here. Never miss the company match. After tax (Roth), flexibility for @tomorrow” given the rules don’t change. Limits today cash flow for prospect of tomorrow. You’re betting taxes are going up. Last 15 years, taxes have gone up and down depending on how you get your money. Also, the rules in 40 years can always change. Think of those who bet on their pensions and they were renegotiated. Those ppl are in a bad spot if that was their primary source of income in retirement. Brokerage, access your money anytime and more flexibility. Least tax efficient, but most flexible. Should be part of your portfolio. If Roth 401k is an option or after tax contributions with in service withdraws you can mega backdoor Roth to blow past the 6k Roth IRA limit you can start doing these for allocating funds. Id recommend putting “new” money into a Roth instrument if you want to, not move your pretax money. Good luck and you’re on a great track!

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I can’t really tell you what’s best because so many pieces of info are missing...but in almost every case I’d say no this is a terrible idea...why? Because it doesn’t matter what happens to the prevailing tax code...it is just what is your marginal rate now on the converted funds and what is the projected marginal rate when you withdraw. Remember that you’ve got probably 54 more tax years ahead of you(you probably won’t be earning an income for close to 30 of them if you retire at a “normal” age...throughout history, there has been a standard deduction of some kind...whether that’s $12k, $24k or some other number who knows...but it’s likely to be some amount that is tax-free each year. For a single person of your age...there is about 54 tax years where you can pull out $50k per year at an effective rate under current law of 8.6% federal(a blend of the “0%/standard deduction, 10%, and 12% brackets)...if you are married...then that’s 5.3% effective. So you really have to be concerned that you are very likely to exceed your current marginal rate when withdrawing from IRA(or converting to Roth later)...also, remember that pre-tax IRA dollars are extremely valuable to keep around(at least some) so that you can make sure your future income is not too low (to take advantage of at least the standard deduction each year for the rest of your life and other tax planning considerations). For example, think about losing your job and not being able to find a new one for a whole tax year...you’d better hope you’ve got some Traditional IRA/401k money to convert to Roth (or withdraw if had to) to create a high enough income to qualify for ACA subsidy or else you are going to be out of a job and an extra $6k or more for health insurance premiums because your income may be too low for ACA and assets too high for Medicaid. Let’s just assume your current income is $50,000 and you are single...you are talking about a $4,314.50 federal tax bill(with just $50k income and nothing else factored in)...adding an $88k Roth conversion would increase your federal tax bill by $19,909.00 to $24,223.50. $19,909 on $88k is 23% effective...to be at risk of paying a higher rate than that you’d have to be sure you are not ever going to have the possibility to earn less than around $100k or you definitely aren’t going to retire early. Think about the lifestyle you want to live in retirement...do you want to spend $100k per year even though you might only spend a fraction of that now? The other thing to consider is an article published in this month’s Investment Advisor magazine...entitled “What Do Retirees Really Pay in Taxes?” It is on page 41 if you care to read it...the authors are researchers at Boston College’s Center for Retirement Research...their analysis was hypothetical and it assumed households would take required minimums from their Traditional IRas/401ks, and would live off the dividends and interest of their financial assets...they calculate the average retiree would pay 5.7% in taxes...retirees in the bottom three quintiles of income would pay 0% to 0.3% in taxes and the top quintile(top 20% of income) would pay 10.5% in taxes...the very top 1% of income earners would pay an average federal tax rate of 20.9%!! So you want to volunteer to pay a higher rate of tax than even what the top 1% of retirees will pay. Interesting...never going to take a year off, switch careers...not to mention that there are plenty of ways to not pay taxes if you are fortunate to be in that 1%...if you have a goal to give to charity when you are that wealthy 1%er, you can do QCDs(qualified charitable distributions)...and pay 0% tax. Again, I don’t know enough to advise...but I would guess the odds of this being a good strategy are 1:1000. But as someone else posted, when you do Roth conversions...it’s ideal to convert when prices are low on securities, all else equal.

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What’s your current salary now?

Best time is when markets are temporarily depressed and when tax rates are low. When the covid-19 meltdown happened (March/April) would have been the best. But anytime is ok. Going forward, Biden’s tax increase shouldn’t affect you (assume your regular salary is under $300k) but might result in a temporary market drop (in the long run, however, taxes are less tied to market returns than you’d think). In the long run, however, our budget is a mess and getting worse. At some point they will have to raise rates on all Americans (looking at plans passed in several GOP-states, it is their desire to shift the tax burden to the poor/middle-income), so a good idea to convert before that happens.

Ok. Thanks for your *opinion* as well. But don’t dismiss my opinion and offer your own like you’re some authority of the future.

Also...kind of theoretical...but if you looked at a year like 2015(ignore the inflated deficit the last four years)...US Federal spending was probably around $3.68 trillion and “In 2015, 141.2 million taxpayers reported earning $10.14 trillion in adjusted gross income and paid $1.45 trillion in individual income taxes.” That’s 14% effective on average before the TCJA lowered individual income rates...so to cover the whole dang budget through just the individual income tax (no corporate taxes, no estate taxes, no possible future national sales tax/VAT, no tariffs or anything else)...you’d only have to increase the effective rate on individual income to 35% or so...and that’s like loony toons, hide in a bunker, the “taxes are going to infinity” kind of assumptions...there is also mounting evidence that lawmakers are less concerned about the deficit...modern monetary theory seems to be influencing tax policy and there is little evidence that we “need to eventually hike taxes”. Bottom line: doing Roth conversions at anything above 12% marginal under current tax law is probably not as safe as it seems to most folks. You’ve also got to make pretty aggressive future investment return assumptions to justify Roth conversions also...and at a US equity CAPE north of 30 and a 10-year UST rate of 0.78%...well all I can say to that is “good luck”!

I’m willing to take the time if it helps someone...no different than you, probably.

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