USA Standard 401k vs Roth 401k if I have state income taxes now, but won't in retirement...

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Hi everyone,

I am a UPS driver about 6 years from retirement and have a question for you that I haven't been able to figure out on my own or through Googling endlessly.
I live in Oregon, which has about a 9% state income tax.
When I retire, I will be retiring in either Florida or Mexico and in either case, there will be no state income tax.
So, if I just keep contributing to my standard 401k, it lowers my STATE taxable income now, which I will never have to pay later.
If I do a roth 401k, I won't have to pay any taxes later, but Oregon will get it's full chunk from me now.
So, can anyone tell me which option puts more money in my pocket in the end?
Basically, I don't know if reducing my current Oregon tax liability now with a standard 401k will save me more or less than with a Roth 401k if I retire somewhere that doesn't have a state income tax at all.
If it matters with the math at all, my gross income is about $90k/year
Thank you in advance for any advice.

Steve
 

bklynboy

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You have to consider federal taxes as well here. For example (using rough numbers) if you make a 100K a year and 15K is put in a 401K - your taxable income is reduced to 85K (not considering other adjustments). Assuming you are in a 25% federal bracket, you save about 5K in taxes (federal at 25% and state at 9%) immediately. When you retire, if you plan on withdrawing much less to live on (say 50K) this will put you in a lower tax bracket for federal taxes. Now you moving to a no tax state will save you those taxes for sure, but you still pay federal (lets say tax rate is now 15% so you pay 7500 on 50K).

In a Roth, you pay the 5K in more taxes now (taxed on full 100K) and when you withdraw in retirement you pay no tax. In this simple example

You really need to do the math here and see what would work based on your current tax situation and what you plan to live on in retirement. I will say that Roth is usually better when current income is low since you are giving up a large federal deduction if its not.
 
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Thanks for the feedback. My retirement income will definitely be less-like about $60k.
I could be wrong, but I highly doubt that income taxes will be lower in the future so I'm inclined to lean towards a roth. At least I'd know that no matter what the tax rate is then, it wouldn't affect my income. With all the baby boomers retiring and heavily stressing medicare and SS, I'm guesstimating that income taxes will be higher and not lower when I retirement, but that's just a guess.
 
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Roth is a better option if you think your income in the future will be less than what it is currently. It is a good way to go around the tax charged at the time of withdrawal. Also, i would echo my fellow member's line "to consider your federal taxes as well" as it plays a huge role in deciding how much you will be adding to your account.
 

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