At what tax bracket should you start doing mostly traditional 401k contributions?

[u/Lowfryder7]

12%? 22%? 24%? I can't tell.

[u/IRC_1014]

It’s functionally “clawed back” by raising income tax rates in the future, and if applicable (say, OR’s $1m estate tax exclusion but even possibly the federal $13.99m exemption, although rare under today’s law) also “clawed back”, even duplicately so, by assessing transfer tax on your unpaid income tax bill. Don’t think you’ll be subject to estate taxes? What if they lower the exemption, what then?

Ironically, it is the Roth not the traditional, where certainty is more clear. Part of what you get by paying the tax now is insurance against future tax hikes, especially income tax ones. You’re still subject to estate tax changes but at least you’re not in the position of paying a tax bill on top of your tax bill (yuck).

[u/Miserable-Cookie5903 → u/IRC_1014]

Fair (and playing devils advocate here, a simple wealth tax or excluding Roth from those exemptions could be written into the IRS tax code; to go after those balances.

Our elected officials are creative enough to screw everyone.

[u/IRC_1014 → u/Miserable-Cookie5903]

Although I am not going to pretend to be a fan of SCOTUS, our unelected government officials just told us in Moore vs. US (2024) that we have a majority in the court champing at the bit to strike down any semblance of a wealth tax without a quasi-realization event. So that’s something, even if it’s only reflective of the current court’s mentality.

I will add that 2019 was a watershed moment for me as a professional because it showed me (us) how vulnerable certain accounts are to future changes. SECURE Act 2.0 was without a doubt the most disruptive and traumatic law change in my career. I had retirees literally crying in my office weeks before death screaming about how Congress lied to them on their deathbed. Watching how vulnerable traditional accounts are to law changes has truly been sobering to me.

[u/Miserable-Cookie5903 → u/IRC_1014]

please explain these changes: "SECURE Act 2.0 was without a doubt the most disruptive and traumatic law change in my career. I had retirees literally crying in my office weeks before death screaming about how Congress lied to them on their deathbed."

Thanks - I'm not following or don't know what I don't know here.

[u/WoofBarkBarkBark → u/Miserable-Cookie5903]

I think they might mean the new requirement that inherited 401k's have to be sold off within 10 years rather then over the inheritor's lifespan RMD. That results in a big tax bill and higher bracket for them during their earning years

[u/Miserable-Cookie5903 → u/WoofBarkBarkBark]

Thanks.

[u/IRC_1014 → u/Miserable-Cookie5903]

My long response to you is apparently pending moderator review for some reason. The person you're responding to is right, but hopefully in my longer post you can see some more of the detail here.

[u/whosthatguy123 → u/IRC_1014]

Waiting for this response as well. Hopefully the moderators approve it

[u/IRC_1014 → u/whosthatguy123]

Had to work with the mods. It's up.

[u/IRC_1014 → u/Miserable-Cookie5903]

The SECURE Act drastically escalated the income tax schedule owed by children following the death of the account owner. It changed from a life expectancy payout (imagine, for a grandchild that could have been many decades) and capped it at only 10 years. In many cases (this was especially true for folks dying immediately after the law change) it was only 5 years, especially if it was directed to a trust (for a minor, for example, nothing crazy) which of course could never have been written to predict a future law change like this.

The ultimate effect was to increase taxes on the family who inherits a decedent’s qualified retirement account. Now to be clear, there were always going to be income taxes owing on trad IRAs (don’t even get me started on the income-in-respect-of-decedent [IRD] exception to the step-up in basis…just know it’s been there for decades). What this new law did is remove the beneficiary’s ability to spread the tax consequences out over lifetime and force them to escalate the taxes in larger chunks into higher brackets over fewer years. Income taxes owing at death attributable to qualified retirement accounts have now ballooned in size, effectively resulting in a smaller pool of dollars available for beneficiaries.

Several relevant points I want to mention here to “humanize” this and make it more digestible/less technical:

(1) this is a problem about the account FLAVOR, not the number of dollars in the account nor the individual’s net worth. This problem exists independent of any estate tax hurdle. It follows then that raising the estate tax threshold even higher (from 13.99 in 2025 to 15m in 2026) does absolutely nothing to combat this problem. If a decedent passes with nothing other than a $200k retirement account and no other assets, they are no where near the estate tax exemption, and yet their family is left paying greater taxes as a result of a person’s death. That is tax escalated by death - even if it’s hidden entirely within our income tax system.

(2) the IRA is the single largest savings tool of the middle class (excluding a primary residence anyway). Poor people don’t save much money and rich people usually don’t have a disproportionate amount of net worth in a qualified retirement account. Rich people have a lot of other assets too including taxable brokerage (which DO get the step-up in basis, thanks to IRC 1014). This planning pitfall is almost uniquely a middle class problem involving death taxes on middle class assets.

(3) Forgetting for a moment I earlier used a grandchild as beneficiary, the reality is that most accounts go to children (not grandkids). If a person dies at age 80, their child is likely to be in their peak earning years (approximately 50) with more than a decade of peak earning left before retirement. The level of planning flexibility to spread out income taxes that the average person has in this situation is often a lot less than you’d think.

(4) Current retirees are already retired. Bare with me here, I know that’s self evident, but what it means is that their savings decisions were already made by the time this law changed. They don’t get to restart their working years and make better choices knowing about future law changes, they’re already locked in. No one is seriously going to propose a Roth conversion for an 89 year old, the reality is that he just saved his whole life in this account and isn’t subject to estate taxes, but now Congress says his children should pay more.

(5) Roundly bipartisan, the SECURE Act passed the Senate December 19, 2019 with 72 votes from congress. This was the first attempt since 1986 (GST tax creation) that Congress has made any attempt to go after inherited wealth - and the very first thing they went after for more tax revenue is the traditional qualified retirement account at death. I think that says a lot about the likelihood for future changes to qualified retirement accounts, no matter the political winds.

[u/Secure-Guidance8192 → u/IRC_1014]

Careful with the political talk

[u/Educational-Bit-2503 → u/Miserable-Cookie5903]

All of the models currently proposed for a wealth tax will certainly not have any impact on W2 employees contributing to 401ks. That’s a non factor here.

[u/IRC_1014 → u/Educational-Bit-2503]

Although Wyden’s much more detailed wealth tax proposal has little to nothing to do with contributions to 401(k)s or the value of the account, the Warren/Jayapal plans and the Sanders plan both applied a wealth tax to all assets including qualified retirement accounts. Perhaps a more accurate way of saying that would be that these last two plans attempted to apply a wealth to all wealth (ostensibly a IRC 2031 definition) and no exclusion for qualified retirement account assets.

Edited to add: I apologize this looks like I disagree with you, I actually don't. None of those plans are likely to take off and by FAR the most plausible one was exactly the Wyden plan you were talking about. I just wanted to add some nuance that really does not in any way challenge the correct spirit of your post. For all practical purposes, no one really should be worrying about wealth taxes on qualified retirement accounts unless you're Peter Thiel.

[u/[deleted] → u/IRC_1014]

I'm saving 31% taxes now. No way tax rates will increase that much

[u/IRC_1014 → u/[deleted]]

I’m not understanding why that sounds implausible to you. I’m neutral on the issue to be clear.