kaneohe wrote:I suppose it depends on what you are assuming for retirement. Some folks may have a retirement income consisting of a significant base of pension, social security, and perhaps investment distributions. If this base is large enough, retirement fund withdrawals may be a small fraction of the total and marginal tax rate seems applicable. If the retirement fund withdrawal is overwhelmingly dominant, then perhaps effective or average rate might apply. In reality, it might be something in between.
It is possible if the retirement funds are large enough that RMDs would increase the tax rates as high or higher in retirement than while working.
kaneohe wrote:[url]Not sure where your effective rates are coming from........to me it looks like for single, 36K or so is the top of the 15% bracket .
If you had SS of 24K and 15K of investment income and 20K of 401K distributions , seems like you'd fill the lower brackets w/ this base and have an effective tax rate for further income, e.g. TIRA distributions of 25% or so.
monocle wrote:Investment period 20 years
With 12% return
kaneohe wrote:well, you must be on the West coast or maybe HI so you're going to have the last say for tonite anyway.......
you might want to use a tax calculator to do the calculations esp. w/ SS since it's a bit tricky if you haven't done it before
(I'm thinking you're a young whippersnapper ). I used this one http://www.hrblock.com/free-tax-tips-calculators/tax-calculator-home.html
I probably used a different assumption than you on the age (I assumed 65) so probably used a higher std deduction than you
but anyway w/ that I think I found that the taxes were 1568 for Roth vs 11181 for TIRA and with those numbers got
net after tax 65463 for Roth and 63055 for TIRA. Too late to guarantee anything but I'll let you play w/ the tax calculator
and see what you get.
frugaltype wrote:monocle wrote:Investment period 20 years
With 12% return
??
sperry8 wrote:This is very interesting. I've always heard Roth is the no brainer too - but never converted. I am single and in the 28% tax bracket. I just couldn't swallow paying all those taxes now. Even though you show that a single guy (who remains so) in the 28% bracket wins - you're making me think there are enough unknowns that switching would be silly (which I didn't plan anyway).
Can't wait til all the smartest bogleheads in the room wake up and can comment.
btw, welcome to the forum!
SGM wrote:I don't know where effective tax rates come into the calculation. If you are looking at the last dollars invested or taken out, don't you need to look at your marginal rate. Well that is what I do. Assuming you have no control over your other income then use the marginal rate for each dollar that you either put into or take out of the IRAs.
Whoa, whoa, whoa there. WHAT "tax savings?" Traditional IRAs haven't been deductible for a very long time, unless you meet a whole bunch of rather stringent criteria that I've never been able to meet.monocle wrote:Situation 1:
If person A contributes the maximum to the Roth, then person B contributes maximum to the Traditional and then invests the tax savings.
(e.g. current 25% marginal tax bracket: A contributes 5500 to Roth, B contributes 5500 to Traditional and 1,375 to brokerage account)
nisiprius wrote:Whoa, whoa, whoa there. WHAT "tax savings?" Traditional IRAs haven't been deductible for a very long time, unless you meet a whole bunch of rather stringent criteria that I've never been able to meet.monocle wrote:Situation 1:
If person A contributes the maximum to the Roth, then person B contributes maximum to the Traditional and then invests the tax savings.
(e.g. current 25% marginal tax bracket: A contributes 5500 to Roth, B contributes 5500 to Traditional and 1,375 to brokerage account)
Admittedly I haven't looked at this recently--has there been some recent change? Did they bring back the deductible IRA? I'd have thought there would be screaming headlines...
When the IRA first came out contributions WERE deductible, and I contributed for several years. Then they eliminated the deductibility. From 1990 through retirement, there was exactly ONE year, ONE when I thought I was eligible because I was at a cheapskate employer with no retirement plan at all. So I contributed. When I got my W2, to my horror, the "retirement plan" box was checked. It turned out they had some strange kind of marginal thing they called a "profit sharing plan," and they had shared $27.18 in profits with me that year, thereby counting as deferred compensation and disqualifying me from a deductible IRA.
Why do you think you are eligible to deduct your contributions, and have you double-checked that?
cflannagan wrote:From IRS.gov:
For 2013 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work are as follows:
For single filers: $59,000 to $69,000
For head of household filers: $59,000 to $69,000
For married couples filing jointly: $95,000 to $115,000
For married couples filing separately: $0 to $10,000
monocle wrote:
Forgot to mention I was basing all this on Married Filing Jointly at retirement.
.
SeattleCPA wrote:BTW, if you do your math right and the marginal rate both during your working years and during your retirement years is identical, you have a "six of one half a dozen of the other" situation.
[...]
When Roths first appeared, most financial advisors, accountants, mutual fund companies didn't seem to understand the math.
nisiprius wrote:In point of fact we have always blown through the tax savings from the 401(k).
Not a recommendation, absolutely a "don't do as I do." Not a statement that stronger-minded people might not do better, more like a confession. Actually it's sort of hard to figure out what we DID do. We tended to adjust our W4 exemptions count and our estimated tax payments to roughly equal our tax obligation, but with a preference for getting a refund rather than making a payment. The refund, of course, always went straight into the checking account and got treated as a windfall, although it tended to get spent on thing we thought we "needed"--new lawnmower, not vacation. Meanwhile, on the other side, the Roths tended to get funded through an independent seat-of-the-pants decision.
SeattleCPA wrote:I
The upshot? Using a Roth should mostly be a bet that your marginal rate will rise during retirement.
P.S. When Roths first appeared, most financial advisors, accountants, mutual fund companies didn't seem to understand the math. But to their credit Vanguard very early on was pointing out this weirdness in their literature,
monocle wrote:Here is an example of one my calculations...
Person in the current 25% tax bracket is putting into:
ROTH: 10,000
or putting into
TRADITIONAL: 12,500 (investing the tax savings)
SeattleCPA wrote:The upshot? Using a Roth should mostly be a bet that your marginal rate will rise during retirement.
bertilak wrote:SeattleCPA wrote:The upshot? Using a Roth should mostly be a bet that your marginal rate will rise during retirement.
What about the following consideration:
If one is already retired and gets most of one's income from SS and a DB pension, I think it is safe to assume the tax rate will not go down and those future RMDs will soon push one into a higher bracket. Converting to ROTH will reduce the RMDs.
grabiner wrote:bertilak wrote:SeattleCPA wrote:The upshot? Using a Roth should mostly be a bet that your marginal rate will rise during retirement.
What about the following consideration:
If one is already retired and gets most of one's income from SS and a DB pension, I think it is safe to assume the tax rate will not go down and those future RMDs will soon push one into a higher bracket. Converting to ROTH will reduce the RMDs.
And even without the DB pension, the effect of the phase-in of Social Security taxation puts many retirees in a 15% tax bracket but with a 27.75% marginal tax rate. Therefore, it is useful to have some traditional funds (to be withdrawn at 15% before you take SS, or converted to Roths if you don't need the money) and some Roths (to be withdrawn when traditional withdrawals are taxed at 27.75%, and made when the traditional contributions were deductible at only 15% or 25%)
bertilak wrote:SeattleCPA wrote:The upshot? Using a Roth should mostly be a bet that your marginal rate will rise during retirement.
What about the following consideration:
- If one is already retired and gets most of one's income from SS and a DB pension, I think it is safe to assume the tax rate will not go down and those future RMDs will soon push one into a higher bracket. Converting to ROTH will reduce the RMDs.
- I will only convert what I can without going into a higher bracket.
- I don't need all (or even much) of the RMDs to meet expenses. I am creating the tax liability only because it is required.
- The RMD proceeds will be reinvested in a taxable account where only dividends will be taxable, not whatever I withdraw. I will likely never withdraw any cap gains because any money I need will come directly from the RMDs that I already paid tax on.
bertilak wrote:Can you elaborate on the underlined part? I thought "bracket" meant "marginal."
P.S. I am already at 15% even w/o the RMDs.
monocle wrote:I've been trying to see the point of a Roth recently and did a bunch of calculations based on contributions and distributions and everything I'm calculating comes up with the Roth as a loser.
Person A. Roth account investor.
Person B. Traditional account investor.
Assumptions:
Same growth rate on accounts.
Situation 1:
If person A contributes the maximum to the Roth, then person B contributes maximum to the Traditional and then invests the tax savings.
(e.g. current 25% marginal tax bracket: A contributes 5500 to Roth, B contributes 5500 to Traditional and 1,375 to brokerage account)
Situation 1 conclusion: A has less in accounts than B when withdrawals begin.
Situation 2:
If person A contributes under the maximum to the Roth, then person B contributes the same+tax savings into the Traditional.
(e.g. current 25% marginal tax bracket: A contributes 3000 to Roth, B contributes 3000+750).
Situation 2 conclusion: A has less in accounts than B when withdrawals begin.
Contributions are made from the top of the marginal tax rate.
Person A is eating a 25% tax now.
Person B is saving a 25% tax now.
Distributions are based on the retirement effective rate not marginal rate.
Based on 2010 tax rates: (slightly higher now)
Effective tax rates are as follows:
Income Effective Tax Rate
1-15,000 -14%
15,000-30,000 -5%
30,000-50,000 3%
50,000-100,000 8%
100,000-250,000 13%
250,000-1Mill 22%
1Mill or more 23%
Average senior income in the US in 2010: 35,000 dollars meaning an effective rate of 3%.
Mean current income in the US is about 50,000 making for a marginal tax rate of 15%.
15% - 3% = 12% = Traditional Wins
A person making 100,000 per year today and pulling 100,000 per year in retirement:
Contributions taxed at 25%, Distributions taxed at 13%
25% - 13% = 12% Traditional Wins
A person making 40,000 per year now and pulling 100,000 in retirement.
15% on contributions, 13% on distributions.
15%-13% = 2% Traditional Wins
I can understand doing a backdoor Roth if you have already met your contribution limits for the traditional space as the costs are the same, but under no other circumstance can I see the point of contributing to a Roth first. Maybe for inheritance tax avoidance?
It seems that most of the Traditional vs Roth arguments I see online are based on marginal tax rates for contributions and distributions. The flaw there being that the distributions should be treated at the effective tax rate not the marginal.
Is my thinking above flawed in some major way that I am not seeing?
I've got three years left to contribute 17,500 to a Roth TSP space before I retire... after which I cannot because of income limits for the regular Roth IRA. Really want to know if I should take advantage of it while I can or continue with my regular TSP.
The Wizard wrote:bertilak wrote:Can you elaborate on the underlined part? I thought "bracket" meant "marginal."
P.S. I am already at 15% even w/o the RMDs.
It has to do with the phase-in of SS taxation by the IRS, as a function of other income from various sources.
Low income folks have zero percent of their SS taxed.
Middling income folks have up to 50% of their SS taxed.
Higher income folks have up to 85% of their SS taxed.
So when you're in those ramp zones, another $10 of pension income also pushes a portion of SS income into a higher tax zone...
nisiprius wrote:Mr. Senile here: as the days of the Required Minimum Distribution start to loom, I have to say that the simplicity of the Roth--just withdraw the money and spend it--looks better and better all the time. Nothing to do, nothing to think about, nothing to set aside for taxes, no worries about how taxable withdrawals from the IRA affect the taxability of Social Security...
...hmmmm, has anyone taken that into account in the discussion yet? I bet the online calculators don't. It's this innocent-looking form that has about nine different inequalities in it; if adjusted deductible is greater than table B if married filing jointly, then subtract net benefits from gross taxable after exemptions and enter the result on line 5 and hunt the treble, but not greater than the minimum of 15% of the combined ages of Mary and Ann when Mary was twice as old as Ann will be when the dominical letter falls after C, except in the words science, fancies, and glacier....
It is actually quite easy to fill out the form. What's really difficult is to figure out the moving parts and make a little chart of the relationship between pre-tax income and after-tax income.
The Wizard wrote:bertilak wrote:SeattleCPA wrote:The upshot? Using a Roth should mostly be a bet that your marginal rate will rise during retirement.
What about the following consideration:
- If one is already retired and gets most of one's income from SS and a DB pension, I think it is safe to assume the tax rate will not go down and those future RMDs will soon push one into a higher bracket. Converting to ROTH will reduce the RMDs.
- I will only convert what I can without going into a higher bracket.
- I don't need all (or even much) of the RMDs to meet expenses. I am creating the tax liability only because it is required.
- The RMD proceeds will be reinvested in a taxable account where only dividends will be taxable, not whatever I withdraw. I will likely never withdraw any cap gains because any money I need will come directly from the RMDs that I already paid tax on.
This is almost exactly my case as well.
Once retired, the further you get into your 60's, the clearer the writing on the wall becomes...
ObliviousInvestor wrote:SeattleCPA wrote:BTW, if you do your math right and the marginal rate both during your working years and during your retirement years is identical, you have a "six of one half a dozen of the other" situation.
[...]
When Roths first appeared, most financial advisors, accountants, mutual fund companies didn't seem to understand the math.
That darned commutative property of multiplication. It gets people every time.
monocle wrote:Based on the commutative property of multiplication...
Roth: 1000 contribution = 1000 distribution - the 250 contribution tax = 750
Traditional: 1000 contribution = 1000 distribution - 250 distribution tax = 750
However... it doesn't work out like that.The contribution tax is in fact 25%, however the distribution in the 25% tax bracket doesn't exist. The distribution is based on all sources of income and should be calculated at the effective tax rate, not the marginal bracket.
Roth: 1000 contribution = 1000 distribution - the 250 contribution tax = 750
Traditional 1000 contribution = 1000 distribution - 150 distribution tax (15% effective rate, even though we are in the 25% tax bracket) = 850
monocle wrote:ObliviousInvestor wrote:SeattleCPA wrote:BTW, if you do your math right and the marginal rate both during your working years and during your retirement years is identical, you have a "six of one half a dozen of the other" situation.
[...]
When Roths first appeared, most financial advisors, accountants, mutual fund companies didn't seem to understand the math.
That darned commutative property of multiplication. It gets people every time.
I think this is where the flawed logic is from.
It doesn't work out this way. Lets assume a 25% marginal at both the contribution and the distribution phase and a 0% rate of return on the investment and just a one time 1000 dollar contribution.
Based on the commutative property of multiplication...
Roth: 1000 contribution = 1000 distribution - the 250 contribution tax = 750
Traditional: 1000 contribution = 1000 distribution - 250 distribution tax = 750
However... it doesn't work out like that.
The contribution tax is in fact 25%, however the distribution in the 25% tax bracket doesn't exist. The distribution is based on all sources of income and should be calculated at the effective tax rate, not the marginal bracket.
Roth: 1000 contribution = 1000 distribution - the 250 contribution tax = 750
Traditional 1000 contribution = 1000 distribution - 150 distribution tax (15% effective rate, even though we are in the 25% tax bracket) = 850
kaneohe wrote:monocle wrote:Here is an example of one my calculations...
Person in the current 25% tax bracket is putting into:
ROTH: 10,000
or putting into
TRADITIONAL: 12,500 (investing the tax savings)
I believe bsteiner pointed out in another thread that this probably should be:
Roth: 10,000
TIRA: 13,333 (roth is 75% of TIRA, not 80%, which actually helps your case)
tetractys wrote:The number one advantage of contributing to a Roth for me is that the tax free withdrawals are multi-generational. With the traditional that's not the case, and inheritor's end up stuck paying the benefactor's income tax. -- Tet
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