pay taxes now or defer

americangal330 · ‎December 30, 2019

I am retiring in April 2020. I am single, I will be 63 years old. I work for a county hospital.

I will be getting a retirement bonus of $30,000 and in addition $35,000 paid out in sick/vacation time.

My estimated income for next year (2020) will be $78,000 plus the $65K = $143,000.

I do not need this money any time soon. Per my plan administrator, I can put $26,000 in BOTH a 403B and a 457. I can select either a traditional or a ROTH for each of these. Most people getting these payouts are tax deferring but, because of my situation, I tend to want to put all of it (total of $52,000) in ROTHs, take the tax hit now and let it grow tax free, hopefully for 20-30 years 😁 and leave it for my heirs.

Based on my retirement income ($47,000 annually) and social security when I draw it ($26,000), I will be in the 22-24% tax bracket (I dip into the 24% bracket now). I don't see the benefit of deferring it and then converting to ROTH's at a future date because I remain in the same bracket. And... of course the taxes are more likely to increase than decrease in the future so another reason I want to pay the piper now..... What do you suggest?

dmertz · ‎December 30, 2019

Rather than do all one or the other, it would probably make sense to split the contributions between traditional and Roth and gradually convert the traditional portion to Roth over the next few years, allowing you to do so at a lower average marginal tax rate.

Generally, if your marginal tax rate when you need to withdraw money from the traditional accounts to cover living expenses is going to be no lower than you would pay now it makes little sense to put the money into the traditional retirement accounts now unless you plan to convert the money to Roth. Without eventually getting the money into a Roth account you would do better just investing in capital investments outside of the traditional accounts so that you can take advantage of long-term capital gains tax rates instead of ordinary-income tax rates that you would pay on the distributions from the traditional accounts.

And don't forget, for tax years after 2025 the current tax rates are scheduled to revert back to what they were before the TCJA of 2017 lowered them to their present levels, so you might end up back in the 25% tax bracket in 2026.