Roth 401K- Does Switching Make Sense?



rother 401kI got a lot of great comments last week about the impact Trump might have on the real estate market.  It will definitely be interesting to see how that all shapes up.  On a different note, something I’ve been pondering over recently is what I should do about my 401k.  


Currently, I have the ability to contribute to a Roth 401k and Traditional 401k at work.  For the past five years, I have been able to max out my Traditional 401k and then max out my wife’s and my Roth IRAs through brokerage firms like Betterment and Motif Investing.  My initial thought was that I was diversifying my tax risk for the future.


Honestly, if you told me a year ago that Donald Trump would be President and that he would lower tax rates across the board with a Republican Congress, I would have probably laughed.  But based on the chart below, it appears that could be happening.


Single Married Filing Jointly Tax Rate
$0-$37,500 $0 – $75,000 12%
$37,500-$112,500 $75,000-$225,000 25%
over $112,500 over $225,000 33%


A Little Tax History Lesson

roth 401kI decided to do a little bit of research to figure out how tax rates have fluctuated.  To say that they have varied over time is an understatement.  The earliest data that I could find shows that in 1643, tax collectors would go door to door asking people how much income they made.  They would then calculate the tax right there on the spot and would receive payment.  What that tax rate was, nobody knows.  I haven’t been able to figure it out, and I think there is a chance that they didn’t follow a specific rate either.  As I’m sure you can guess, that did not do very well as people sometimes alter the truth when it’s advantageous to them.  So that form of tax collection yielded very little revenue.  


Income Tax During the Civil War

The first income tax law was implemented in 1861 during the Civil War.  Earned income over $600 (present-day $15,478) to $10,000 (present-day $257,968) was taxed at a rate of 3%.  Over $10,000 (present-day $257,968) was taxed at a rate of 5%.  Can you imagine that?  A flat 5% over $10,000– I’d be jumping up for joy if I saw that type of tax rate.


No Need for Taxes

In 1873, the tax actually expired when the need for federal revenues dried up.  Yep, you read that right.  The government decided they didn’t need anymore money.  For some reason, I don’t anticipate witnessing that in my lifetime…


The Wilson-Gorman Tariff

rob 401kA Democratic-led Congress reintroduced the tax when they passed the Wilson-Gorman Tariff, which taxed income of $4,000 (present-day $107,578) at 2%.  That was the first time income taxes were collected during a non-war time.  This bill was passed to deal with the reduced income received from tariff reductions during the Presidency of Grover Cleveland, which interestingly enough, got overruled by the Supreme Court due to some wonky legal jargon around personal property and apportionment around the states.  I’ll spare you the details.  Trust me, it’s boring, but google “Wilson-Gorman Tariff” if you really want to learn more.  


Revenue Act of 1913

The next great event in income tax history occurred in 1913, when the Revenue Act of 1913 was passed.  You can see in the chart below, the massive tax rates that individuals were paying.  I kid, I kid.


Income Tax in 1913 (In Constant 2013 Dollars)



roth 401kCan you imagine paying 1% of your income up to $463,000?  I am salivating at the thought of all the things that I could do with that tax savings.  Not to mention that it would be a no-brainer if a Roth IRA had been implemented to lock in those low rates because 4 short years later (1917), the top bracket went from 7% to 67%.  


Whoever had invested in their Roth IRA at this point was sitting pretty.  I’m just kidding.  I don’t want to confuse you.  The Roth IRA was not implemented until 1998, so it wasn’t actually possible to do this.  I don’t want you calling up your grandparents and asking them why they weren’t using Roth IRAs back in their day.


In 1917, I’m not sure who was making $35,874,063 (present-day $669,213,829), but I have a feeling that they were clearly targeting some of the entrepreneurs who had near monopolies in certain industries.  The next year (1918), that top bracket rose another 10% to 77%.  


The Great Depression

roth 401kOver the years leading up to 1925, tax rates started to decrease such that the top bracket was 25% again.  That remained until the Great Depression (1929) when rates jumped back up to a top bracket rate of 63% and even higher to 79% in 1936.  The rate continued to rise to 81% in 1941 on income over $78,093,197 (present-day $1.2B).  Until 1944, the top tax bracket rate hit 94% on income over $2,609,023 (present-day $35,396,437.15), which was the US top tax rate apex.



The top tax bracket stayed above 90% until 1964, when it fell all the way down to 77%.  It remained at 70% until 1982, when it dropped down to 50%.  I have to admit that I had no idea that when I was born that the top tax bracket rate was 70%.  I can’t imagine a rate that high again, but then again, I had no idea that at one point individuals were paying a top tax bracket rate of 94%.  


Lock In or Take a Chance?

roth 401kI think most of you are probably familiar with the tax rates that have been going back and forth since Reagan’s time through Obama’s presidency.  Each President and Congress differs in determining the proper amount of taxes to maximize the revenue needed to fund the federal government.


I’m sure some of you are glazing over and mad at me for making you read all that tax history.  But my dilemma is, should I lock in the low tax rates that I currently experience, or if I should take a chance that the government might potentially lower tax rates even more in the future?


Quick side note: I’m going to make the assumption that Congress doesn’t change the rules on me and at some point decide that Roth IRAs are illegal and that my tax-free growth all of a sudden becomes taxable income.



roth 401kUnder the Trump tax cuts, my wife and I would have an effective tax rate that would be lower than the 15% tax rate.  My guess is that it will be somewhere in the high single digits.  I’m trying to decide if it makes sense to just pay taxes now and not have to deal with taxes in the future.  I know that I may only have 4-8 years if this works out to really maximize this strategy.


But, for all I know, in the future, Congress could adopt a national consumption tax or figure out ways to eliminate tax in its entirety.  For those reading this early in the morning, that was suppose to elicit a laugh.  I don’t actually believe the latter would happen 🙂


So readers, what do you think?  Are you doing anything to make your portfolio more tax-efficient?  Are you currently maxing out your Roth 401k?  Share your thoughts below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.


  1. Great history lesson! I knew about the 70pct rates, but 94?!?!

    Imho, if you don’t lock in at today’s rates, I wouldn’t wait too much longer. Single digits are pretty low, and again imho, current tax rates are unsustainably low, considering our upward spending trends and our upward spiraling debt.
    I think (I really apologize if I’m wrong on this) it was physician on fire that wrote a great piece titled ‘my dollars are worth more than your dollars’.
    Daniel Palmer recently posted…Beyond Saving for a Rainy DayMy Profile

    • Thanks for stopping by and sharing Daniel!!! I have a feeling after the tax rates shake out that I will be moving my money over to a roth 401k. I’ll have to check out the article on PoF.

  2. I’m going the route of a Roth 401k. If you think about our investing horizon, the question is more about where do you think taxes will be in 10-20 years? People have a ton of debt, medicare and social security are failing, and government spending is not slowing down.

    If I make more than 112k, then I might switch back to the traditional 401k, but for now, I’m going to stick with the Roth. (btw, I contribute 4% to get the company match. I’m going to increase to 10% after my bonus)
    Erik @ The Mastermind Within recently posted…Positive Transformation – Bigger, Faster, Stronger 4My Profile

  3. It will be interesting to see how tax rates change over the next 30-40 years for sure. That really wasn’t that long ago that it was 70%-wow! (trying to make you feel young, lol).
    I think I’m going to stay the course contributing the bulk of our money into a traditional 401(k), but also maxing out a Roth IRA. I’m hoping we’ll have low enough expenses in retirement that we will not pay tax on our 401k distributions (because we’ll have the standard deduction and personal exemptions to wipe out the income) and then be able to draw on our Roth IRA contributions as well to really pay very, very little if any taxes during that time. I can see this plan changing and adapting as the years go by.
    Kathryn recently posted…5 Steps to a DIY Financial PlanMy Profile

    • I love hearing from your perspective Kathryn. Especially since you’re a CPA 🙂

      I have been doing the same of a mix between maxing out my traditional 401k and my Roth IRA.

      But depending on how things shake I may make some alterations.

  4. Gotta love the low tax rates back when the government was so small! I’m curious to see what the final tax rate is under Trump, and whether they make it retroactive to the beginning of 2017. Keep in mind that deductions will likely change, which could take away some of the impact of lower tax rates for certain filers.

    One thing a lot of people don’t consider is your tax rate is likely to be lower in retirement. One reason is you likely won’t have a mortgage and won’t need extra income to push into savings. Therefore, your income and tax rate will be lower. Also consider the source of your income in retirement. If you expect all of your retirement income to come through capital gains and dividends, then you would currently pay 0% up to $75k if married, and just 15% after that.
    Go Finance Yourself! recently posted…Is Your Car Insurance Coverage Good Enough?My Profile

    • Great points Go Finance Yourself!!! My worry is if taxes will rise in the future due to huge liabilities on today’s books. I’m sure if you told me 30 years that tax rates would have been essentially cut if half that I wouldn’t have believed you based on history 🙂

      • Anything is possible. Before the Trump tax cuts that are likely to go in effect this year, I would have said it’s highly unlikely that tax rates rise in the future. It would be political suicide to raise them up much higher than they were. I know tax rates were really high before the Regan tax cuts, but keep in mind the tax code was a lot different. The top marginal tax rate was 70% before Regan, but the effective tax rate was much lower for most due to deductions allowed under the tax code at the time.

        The only concern I have is if they were to get rid of preferential tax treatment for long-term capital gains and dividends. I don’t see that happening, however the dollar limitations for preferential treatment could be brought down as I believe Clinton was proposing to do.
        Go Finance Yourself! recently posted…Is Your Car Insurance Coverage Good Enough?My Profile

        • Thanks for sharing that background Go Finance Yourself!!!

          I need to go back and read what Clinton was proposing as I’m sure that will potentially be some of the working basis for the next election cycle.

    • Great analysis Full Time Finance!!! That what I currently do by maxing out my traditional 401k and Roth IRA. It’ll be very interesting to see what the future holds.

  5. When I had the option of both a traditional & Roth 401k I did a 20% Traditional & 80% Roth mix to help hedge against Roth accounts being taxed.

    One concern of mine is that Roth accounts will be taxed again in the future, especially as the Social Security/Disability Trust Funds are expected to become insolvent in a few years & all the other financial woes.
    Josh @MoneyBuffalo recently posted…How We Saved for an Adult Gap YearMy Profile

    • That too is one of my biggest fears. I really don’t want to get hit with another tax bill if I played by the current rules. Hopefully Congress wouldn’t do that but you never know.

  6. I’m contributing to a traditional 457 plan but also contribute to a Roth IRA so there is tax diversification. As someone with a pension, I sometimes wonder about switching to a Roth 457. The Finance Buff actually wrote a post saying most TSP participants should go with the Roth:
    However, this may not apply for those planning on an early retirement. In that case, it seems like the prevailing thought is to go with traditional and then do the Roth conversion…

  7. Interesting post, Mustard Seed Money! I’m always in for a bit of tax history!

    I’m currently contributing to a Traditional 401(k) and a ROTH IRA, so you could consider me as one of the hybrids. I’m not what the future will hold, but by having both types, hopefully that will diversify myself for the future.

  8. Oh man, I’m also drooling over those tax rates! It’s so funny that the government previously needed so little funds to operate. Sighhhh. I know we need taxes to make our government function, but hey, I’m all about being in a lower tax bracket if possible. But it’s not possible for 2016, since I had an income increase, so that’ll be just peachy.

    As far as 2017, we’re paying off a huge amount of student loan debt. I’d like to pump more funds into IRAs and 401(k)s to decrease our tax liability, but this only makes sense for us to do after we pay off our loans first.
    Mrs. Picky Pincher recently posted…What A Frugal Weekend!My Profile

    • I’m all about the government making the maximum impact with the minimum amount of funds 🙂

      Sounds like you and Mr. Picky Pincher have a solid plan in place and I can’t wait to hear your success as you pay off those student loans!!!

  9. That’s a hard one. We’ve been contributing to our traditional IRAs for a couple years now and I know in the future we’ll be doing the Roth IRA laddering, but it still nags in the back of my mind that maybe we should be doing Roth instead? That darn income tax is always getting in the way of our retirement plans!

    With roth, there’s also the idea that since you already paid the tax on the money, you’re technically contributing more money now compared to a traditional IRA since you’ll have to pay tax on it later. I’ve also seen some good calculations that show them both as equal. At the moment I think we’ll still stick to our laddering option assuming they don’t take it away in the future!
    Mr. Saturday @ Seeking Saturdays recently posted…My Biggest Purchase Fail Ever – A Super BicycleMy Profile

    • I’m glad that you enjoyed the brief tax history lesson. I have to admit I was super excited to read up on it and had to scale back after my wife read the initial draft 🙂 She thought it was too boring.

  10. Shoot – I can’t remember who posted last week about “how much money in your nest egg is really yours (Groovys?)” but it was a huge eye opener for me. I have messed around with my traditional and Roth 401ks going back and forth (and sometimes splitting contributions) over the years. After that post, I realized that a portion of my nest egg (anything in the traditional) isn’t really mine…It’s the governments!! This week I switched my 401k to a Roth and most likely won’t be changing it again. I still have the money in the traditional and may roll it over eventually or wait to use that money last when my income is lower. So many ins and outs!! This is some great info and definitely another great way to look at things. 🙂
    Miss Mazuma recently posted…I’m Officially Famous For Being In DebtMy Profile

    • I read that same article and I have to admit it wasn’t on the forefront of my mind when I was writing this post but I wonder if it got in there subconsciously 🙂

      That was a tremendous article!!!

  11. When it comes to being able to keep more money in my pocket and keeping the taxman out, I am in. If I can …

    – pay less taxes
    – get free money
    – tax shelter my investments
    – get tax deductions with certain actions

    Then I am more than happy to take advantage of those government programs. I know that one day, I’ll have to pay more taxes, but once I have made the money and it’s in my control, I don’t mind paying taxes. My goals are to minimize my taxes now and grow my savings. Once I have the money, I can worry about the tax rates later. I would rather find ways to minimize my taxes when I am retired than to worry about having enough money to last for the rest of my life.
    Leo T. Ly @ isaved5k recently posted…The First Step To Saving A Million DollarsMy Profile

  12. I think if your tax rates are looking like they’ll be in the high single digits, then I would lock that in and go more towards a Roth 401k. You can always hedge a bit and still contribute some toward your Traditional 401k.

    For my wife and I, even with Trump’s proposal, we’re still better of going Traditional 401k at this point. If our household income drops enough, I may divert more towards my Roth 401k option. Thanks for the history lesson!
    SomeRandomGuyOnline recently posted…Little Random Guy’s College Savings PlanMy Profile

    • Thanks for sharing SRGO!!! I’m glad that you enjoyed the history lesson and it was incredibly eye opening for me. I can’t imagine a 1% agreeing to 94% tax rate these days 🙂

    • You are absolutely correct!!! I heard it may get pushed back until the end of the year. So maybe I’ll make some changes in 2018 once I fully know what I’m getting myself into.

  13. I am putting about 75% 25% between traditional and Roth IRAs. I have no idea what taxes will be like in the future, but I don’t more chances of them being higher just because of inflation so we will have to pay more for public services thus higher taxes I’m speculating. Maybe it’s good to pay now and get it over with.
    SMM recently posted…What’s a REITMy Profile

    • I’m waiting to see what the final tax bill is finalized but I definitely think there is a good chance in the future that taxes will rise. How much who knows? But it’d be nice to have a crystal ball 🙂

  14. LOL, all that tax history was making my head spin! You nerd out with tax history like my oldest daughter nerds out with sci-fi stuff. 🙂 Personally, I’d stay with the Roth. If taxes do decrease, you’ll grow even more wealthy, which will mean you’ll want the tax-free choice after retirement, right? 🙂

  15. We will likely continue to just max out our traditional 401k accounts. Honestly I haven’t taken a serious look at the Roth 401k, mostly because our current taxes are so high. I have to imagine our tax rate is going to be significantly lower once we retire.
    Mr. Need2Save recently posted…Filling Your Time In Early RetirementMy Profile

  16. This is a tricky topic that I’ve gone back and forth on over the years. Two years ago I did a majority Roth 401(k). Then my tax preparer said I should contracture to a traditional 401(k) because I was a high income earner and needed all of the write offs I could get.

    Last year, I took my finances seriously and made my own decisions – knocking out $97k in debt and maxing out my traditional 401(k).

    This year, I am doing a slightly blended approach. A majority going into my traditional 401(k) and I am contributing some to my Roth 401(k).

    One question for you: why use Betterment instead of Vanguard or Fidelity? You could save on fees moving to one of those companies!!

    • Thanks for sharing Grounded Engineer!!! Sounds like you had an awesome year if you knocked out 97k in debt and maxing out your 401k. That’s some serious dedication.

      I have had friends tell me that they really enjoy Betterment because they have no interest in investing and having played around with it’s a nice interface.

      I also like Motif Investing for those that like to buy individual stocks and get their hands dirty in the market.

      But like you I am a big fan of Vanguard and Fidelity’s offering for passive index funds.

    • I totally agree with you Andrew!!! Can you imagine if we were back at 3% tax rates. I’d certainly enjoy the tax savings and potentially reach FIRE earlier 🙂

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