With a new standard deduction of $24,000, how does that change my strategy for whether to put my $18,000 of 401(k) money in a Roth vs. a traditional account? What new strategies (particularly with tax-advantaged savings plans) should we consider with this change?
Changes in graduated income tax rates don't necessarily drive how you should allocate money to a Traditional vs Roth account (true for both IRA or 401k). What does drive this decision is what your income tax rate is now compared to what you believe your rate will be when you retire. So, if you expect the tax rate change to still be in effect when you retire, it doesn't matter if the change is a tax increase or decrease; your previous allocation could likely remain the same.
This means that if Congress passed the change effective immediately, it would be too late for you to make a meaningful adjustment. But if Congress passes the change effective next year, then most likely your tax rate will decrease for next year, meaning you are probably better off switching all Roth allocations to Traditional, and then switching them back to whatever allocations you have now for next year. The reverse would be true if you knew about an upcoming tax increase (in which case you would load up Roth this year and then switch back to whatever you had for next year).
That being said, regarding after the fact reallocation considerations, I suppose it would be fair to say that if the country is accustomed to a higher tax rate, and then rates are dropped, if spending is not cut to make up for it, then rates would likely have to go up again in the future to make up the difference. If you believe that will happen then Roths would become a little more attractive since rates would be lower than what you expect them to be when you retire.
As a side note, if you ever had reason to believe that Congress was going to move away from the "graduated income tax" structure, all bets are off. For example if the income tax was replaced with a tax on spending such as the FairTax, then in the interim period Roths would become worthless and you'd want to switch to Traditionals until the change went into effect. (And then once in effect both Roths and Traditionals would be pointless.)
There are some that are already under similar restrictions. Highly comp-ed employees can only put a small portion of the traditional limit in their qualified plans. Some may have very high incomes, that if limited to 18K, would be saving inadequately. Others may have high incomes and not have a 401K. What do they do?
I see only two options:
- Backdoor ROTH if one does not qualify for a regular ROTH
- Non-qualified investing. This can be done inside the market, or with alternative investments.
The reduction in the contribution limit would certainly improve the attractiveness of real estate as an investment.