Mirror, mirror on the wall, what’s the future tax rate for them all?
No one quite knows how much their tax rate on retirement assets will be over a possible 30-year retirement. What we do know is the term “tax-free” means 0%. As far as I can tell, you can’t raise that!
With the Tax Cuts and Jobs Act of 2017, most Americans will be paying less tax on their income. With that tax break, you’ll want to consider adding more to your Roth 401(k) or Roth IRA accounts since you’re getting less of a tax break on a traditional 401(k) or IRA. This is critical if you believe tax rates will rise in the future, if you have decades to save, or if you believe your personal tax bracket will be higher in future. Investing in Roth IRAs means that any gains you make on those investments accrue tax-free year after year.
The Roth 401(k) allows up to $18,500 in contributions in 2018 (up to $24,500 if you reach age 50 or older in a given calendar year) with no income limitations. The Roth IRA allows up to $5,500 in contributions (up to $6,500 if you reach age 50 or older in a given calendar year), but comes with income limitations.
You’ll notice I didn’t say put all contributions in Roth accounts, just focus on contributing more than you did in recent memory. Everyone talks about diversifying your assets, but rarely do you hear about diversifying your tax situation in retirement. There’s no rule against splitting your contributions to both types of accounts to build in future flexibility.
I felt it only fair to pay respects to Senator William Roth, Jr. (see this blog’s title) who successfully lobbied to have the Roth IRA added to the Taxpayer Relief Act of 1997. He was instrumental in helping millions of Americans increase their savings at a time when many weren’t saving enough for their futures. His legacy lives on.