Do Roth accounts always lose?

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Re: Do Roth accounts always lose?

Postby SeattleCPA » Sun Sep 01, 2013 8:44 pm

SC Hoosier wrote:I realize that I am a outlier in this forum, but for my situation the tIRA cannot possibly win. My wife and I both work and have a household income of 34,000. We pay NO federal income taxes because we have 3 kids. I probably will work part time in retirement just to feel useful. So, if we make approximately $20,000 per year with some social security income, I'll be really glad that I chose a roth. I wouldn't get any tax reduction for contributing to a tIRA anyway. Later in life, with a higher income and no kids at home, it would be a good idea for me to start contributing to a tIRA so that I can reduce my current tax burden and have some different withdrawal options in retirement.

Thoughts?


So you are another example of this rule that I've given, that JW has given, that JamesSFO has given, that Mike Piper has given... heck that Vanguard gives.

This is all about the marginal rate. Right now for you, because of the factors you mention, your marginal rate is zero. You're saying (probably correctly) that your rate won't be any lower during retirement and will probably be higher. So "give up" the tax benefit now... and "take" the tax benefit later on.

You're doing it right. :D
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Re: Do Roth accounts always lose?

Postby Riceman » Sun Sep 01, 2013 9:15 pm

I think my situation makes me the posterboy for Roth contributions.

-15% marginal federal tax rate, with enough room to harvest all my capital gains at a 0% tax rate.
-Currently living in a state with no income tax
-work for the government, so expect pension + social security at retirement
-am capable of maxing all roth contributions, thus benefiting from the additional effective contribution space that roth accounts afford over traditional ones
-my income is high enough that reducing it wouldn't qualify me for any credits

Consequently I'm maxing my own roth ira, my wife's, and maxing the roth tsp, for a total of 28,500 in ROTH accounts each year. When we eventually get pushed into the 25% tax bracket, maybe I'll switch to traditional, but the problem is that my pension will begin at age 50, so there won't be much time for conversions. It'll probably be a 6 of one, half-dozen of the other situation.
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Re: Do Roth accounts always lose?

Postby island » Sun Sep 01, 2013 9:30 pm

willbcocks wrote:I think my situation makes me the posterboy for Roth contributions.

but the problem is that my pension will begin at age 50, so there won't be much time for conversions. It'll probably be a 6 of one, half-dozen of the other situation.


Can't postpone the pension?
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Re: Do Roth accounts always lose?

Postby Riceman » Sun Sep 01, 2013 10:12 pm

You mean a situation where delaying the pension for some years would earn a higher annuity once I start receiving it? As far as I can tell, no, since I would already be eligible for full, not partial retirement.

The most tax-efficient option would be to retire immediately after 20 years of service, at age 47/48, and have two years for any conversions before the pension kicks in. Of course that would mean I'd have a lower high-3 salary and fewer years of service, so the pension itself would be smaller. It's also hard to predict so far in advance how long I'll want to work--maybe I'll have no interest in retiring early.
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Re: Do Roth accounts always lose?

Postby IlliniDave » Mon Sep 02, 2013 7:32 am

I haven't done the math in a while, but for any situation I could foresee for myself based on current tax regulations, funding a 401k(or TIRA)+taxable investment of the avoided taxes versus paying taxes+equal funding of a Roth; the 401k+taxable wins for me, although not by much. However, since the income limit on Roth conversions was removed, I do fund a nondeductible IRA and convert it to a Roth every year. Can't beat that deal with a stick, although the amount of money involved is relatively small due my age when that door opened.
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Re: Do Roth accounts always lose?

Postby Dick D » Mon Sep 02, 2013 8:44 am

With Pension and SS our joint income is 78 k. Deductions get us into the 15 percent bracket. At some point rmd will move us to a higher tax bracket. This is why I have been doing Roth conversions until I turn 70.
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Re: Do Roth accounts always lose?

Postby JamesSFO » Mon Sep 02, 2013 10:18 am

People keep doing the modeling as if the tax code will never change (not inviting discussion of non-existent proposed legislation here, just pointing out that modeling should consider potential changes to the tax code).

What if in 20 years the brackets move up en masse? What if the deductions change? This is true even if you are close to retirement because that will last ~30 years and over that time the brackets may shift. So how does a Roth work out if tax brackets all move up 5 basis points?

Also, as someone pointed out, if you make enough money to fill a traditional 401(K), then you probably cannot do a deductible IRA, so a backdoor Roth is better than taxable investing.
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Re: Do Roth accounts always lose?

Postby BigFoot48 » Mon Sep 02, 2013 10:36 am

nisiprius wrote: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; ....

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.

My model does that, but from your scary description you've got me worried I missed something. Anyway, for those doing conversions, it does all the major tax calculations. Retiree Roth Conversion Decision Model
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Re: Do Roth accounts always lose?

Postby bertilak » Mon Sep 02, 2013 10:48 am

JamesSFO wrote:People keep doing the modeling as if the tax code will never change (not inviting discussion of non-existent proposed legislation here, just pointing out that modeling should consider potential changes to the tax code).

This is the "bird (probably) in hand" theory. I believe that once you have money in a Roth it is highly unlikely the rules will change in a way to make that money taxable or to affect the tax status of other income. That would be (1)retroactive and (2)double jeopardy, both concepts which generally are not practiced.

I don't know how that could be modeled. Perhaps "a bird in the hand is worth two in the bush."
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Re: Do Roth accounts always lose?

Postby bsteiner » Mon Sep 02, 2013 11:30 am

JamesSFO wrote:People keep doing the modeling as if the tax code will never change (not inviting discussion of non-existent proposed legislation here, just pointing out that modeling should consider potential changes to the tax code).

What if in 20 years the brackets move up en masse? What if the deductions change? This is true even if you are close to retirement because that will last ~30 years and over that time the brackets may shift. So how does a Roth work out if tax brackets all move up 5 basis points?...


The Roth conversion works out better than it otherwise would if future tax rates are higher than current tax rates, since the tax rate on the conversion is the rate in effect when you convert.

On the other hand, for the same reason, the Roth conversion works out worse than it otherwise would if future tax rates are lower than current tax rates.

For this reason, several clients who expect to always be in the top bracket converted in 2010, intending to include all of the income from the conversion in 2010. After the 35% top rate was extended for 2011 and 2012, they instead included the income from the conversion one-half in 2011 and one-half in 2012, or in some cases (if the value of the IRA went down in the interim) they recharacterized and converted again in 2011 and/or 2012.

It can be many decades from now until your beneficiaries have to take their last required distribution. There's no way to predict future tax rates over many decades, though it's a safe bet that they'll change many times over the years.

When you do your analysis, you can make whatever assumptions you want as to future tax rates. I generally use the rates as they are presently scheduled to be in effect in future years based on the law as in now exists. However, you're welcome to use different assumptions. My guess is that in most cases the benefit of a Roth conversion during the year(s) when you expect your tax rate to be at a low point is enough so that the analysis won't change if future tax rates turn out to be a few points higher than current tax rates. Of course, if future tax rates are substantially lower than current tax rates, you'd be better off not converting.

You should keep in mind that it's not all or nothing. You can convert some but not all, you can convert over a number of years, and you can convert or begin to convert at a later time.
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Re: Do Roth accounts always lose?

Postby an_asker » Tue Sep 03, 2013 9:13 am

This thread is TLDR! :oops: Quick question - does it refer to Roth IRA vs. Traditional IRA or Roth 401(k) vs. Traditional IRA?

I've always assumed that a Roth IRA is better than a Traditional IRA, so will really need to read this thread if it claims otherwise! :confused
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Re: Do Roth accounts always lose?

Postby The Wizard » Tue Sep 03, 2013 9:22 am

an_asker wrote:This thread is TLDR! :oops: Quick question - does it refer to Roth IRA vs. Traditional IRA or Roth 401(k) vs. Traditional IRA?

I've always assumed that a Roth IRA is better than a Traditional IRA, so will really need to read this thread if it claims otherwise! :confused

Trad IRAs tend to be better for lower income folks who haven't saved a lot.
Roth IRAs tend to be better for higher income folks who have saved a lot and expect to be in same tax bracket when retired.
A notable exception would be for someone following Livesoft's plan of paying zero income taxes in retirement; that person would be better having assets in a trad IRA...
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Re: Do Roth accounts always lose?

Postby an_asker » Tue Sep 03, 2013 9:28 am

The Wizard wrote:
an_asker wrote:This thread is TLDR! :oops: Quick question - does it refer to Roth IRA vs. Traditional IRA or Roth 401(k) vs. Traditional IRA?

I've always assumed that a Roth IRA is better than a Traditional IRA, so will really need to read this thread if it claims otherwise! :confused

Trad IRAs tend to be better for lower income folks who haven't saved a lot.
Roth IRAs tend to be better for higher income folks who have saved a lot and expect to be in same tax bracket when retired.
A notable exception would be for someone following Livesoft's plan of paying zero income taxes in retirement; that person would be better having assets in a trad IRA...

Once again, a disclaimer that I didn't read the entire thread. With that out of the way ...

Don't understand Livesoft's plan. If you are saving in a trad IRA or a Roth IRA, you are paying your taxes up front, are you not? Or is his example for those folks who are able to deduct their savings in a trad IRA? If so, that makes sense.
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Re: Do Roth accounts always lose?

Postby cflannagan » Tue Sep 03, 2013 9:29 am

bertilak wrote:
JamesSFO wrote:People keep doing the modeling as if the tax code will never change (not inviting discussion of non-existent proposed legislation here, just pointing out that modeling should consider potential changes to the tax code).

This is the "bird (probably) in hand" theory. I believe that once you have money in a Roth it is highly unlikely the rules will change in a way to make that money taxable or to affect the tax status of other income. That would be (1)retroactive and (2)double jeopardy, both concepts which generally are not practiced.

I don't know how that could be modeled. Perhaps "a bird in the hand is worth two in the bush."


Not how I interpreted's JamesSFO's post. He's not talking about tax rules for Roth IRA changing as far as I can tell. He's talking about tax brackets.

And I agree - tax brackets are at historical lows. It's very unlikely my tax bracket is going down (I'm in 15% after deductions, even with some gains/income).

Therefore, it makes total sense for me to max out Roth IRA if I'm in 15%, after putting money into 401k up to the match.

Put money in, at one of lowest tax rates possible, and avoid any potential higher tax rates later on.
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Re: Do Roth accounts always lose?

Postby SGM » Tue Sep 03, 2013 9:47 am

I have been criticized for recommending people read James Lange's book The Roth Revolution. He looks at the Roth from a wide variety of angles. I am not sure why I was criticized, but ask me if I give a damn in Phillie. :D
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Re: Do Roth accounts always lose?

Postby bertilak » Tue Sep 03, 2013 10:29 am

cflannagan wrote:
bertilak wrote:
JamesSFO wrote:People keep doing the modeling as if the tax code will never change (not inviting discussion of non-existent proposed legislation here, just pointing out that modeling should consider potential changes to the tax code).

This is the "bird (probably) in hand" theory. I believe that once you have money in a Roth it is highly unlikely the rules will change in a way to make that money taxable or to affect the tax status of other income. That would be (1)retroactive and (2)double jeopardy, both concepts which generally are not practiced.

I don't know how that could be modeled. Perhaps "a bird in the hand is worth two in the bush."


Not how I interpreted's JamesSFO's post. He's not talking about tax rules for Roth IRA changing as far as I can tell. He's talking about tax brackets.

And I agree - tax brackets are at historical lows. It's very unlikely my tax bracket is going down (I'm in 15% after deductions, even with some gains/income).

Therefore, it makes total sense for me to max out Roth IRA if I'm in 15%, after putting money into 401k up to the match.

Put money in, at one of lowest tax rates possible, and avoid any potential higher tax rates later on.

Well, he did refer to "tax code" (twice) and "legislation." Sounds like (tax) rules to me! I was trying to point out that such rule changes were less likely for an existing Roth than traditional IRA since the taxes were all past history for whatever is already inthe Roth.

But, bottom line, for those already retired it is unlikely they will move to a lower bracket, especially when RMDs kick in. These people have already taken any drop in income they are likely to see -- assuming they are not circling the drain, income-wise.
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Re: Do Roth accounts always lose?

Postby bsteiner » Tue Sep 03, 2013 10:36 am

SGM wrote:I have been criticized for recommending people read James Lange's book The Roth Revolution. He looks at the Roth from a wide variety of angles. I am not sure why I was criticized, but ask me if I give a damn in Phillie.


Jim Lange is well respected, and his books are good.

Full disclosure: I've been a guest on his radio show on two occasions. Here is a link to the audio (nos. 44 and 76): http://www.rothira-advisor.com/radioshow.php.
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Re: Do Roth accounts always lose?

Postby The Wizard » Tue Sep 03, 2013 11:42 am

an_asker wrote:
The Wizard wrote:
an_asker wrote:This thread is TLDR! :oops: Quick question - does it refer to Roth IRA vs. Traditional IRA or Roth 401(k) vs. Traditional IRA?

I've always assumed that a Roth IRA is better than a Traditional IRA, so will really need to read this thread if it claims otherwise! :confused

Trad IRAs tend to be better for lower income folks who haven't saved a lot.
Roth IRAs tend to be better for higher income folks who have saved a lot and expect to be in same tax bracket when retired.
A notable exception would be for someone following Livesoft's plan of paying zero income taxes in retirement; that person would be better having assets in a trad IRA...

Once again, a disclaimer that I didn't read the entire thread. With that out of the way ...

Don't understand Livesoft's plan. If you are saving in a trad IRA or a Roth IRA, you are paying your taxes up front, are you not? Or is his example for those folks who are able to deduct their savings in a trad IRA? If so, that makes sense.

Yes, you have to have the right mix of self employment income and after tax investments (and losses) to make that work and have a deductible tIRA...
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Re: Do Roth accounts always lose?

Postby mptness » Tue Sep 03, 2013 3:13 pm

The Wizard wrote:
an_asker wrote:This thread is TLDR! :oops: Quick question - does it refer to Roth IRA vs. Traditional IRA or Roth 401(k) vs. Traditional IRA?

I've always assumed that a Roth IRA is better than a Traditional IRA, so will really need to read this thread if it claims otherwise! :confused

Trad IRAs tend to be better for lower income folks who haven't saved a lot.
Roth IRAs tend to be better for higher income folks who have saved a lot and expect to be in same tax bracket when retired.
A notable exception would be for someone following Livesoft's plan of paying zero income taxes in retirement; that person would be better having assets in a trad IRA...


I did read the entire thread, and have been confused by some of it. For example the statement that traditional IRAs tend to be better for low income folks who haven't saved a lot seems to go against the general guideline to prefer a Roth in the 15% bracket.


I reread the Wiki on Roth vs. Traditional and found it to be an excellent summary of the subject. Is there anything in this thread that suggests changing that article. I think the answer is that Roth IRAs always lose except when they don't. Generally, it seems that if you are considering the tax rate of the contribution/conversion and that of the withdrawal, and basing your decision on that, then you are doing it right. Don't forget to check your own situation because YMMV.
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Re: Do Roth accounts always lose?

Postby cflannagan » Tue Sep 03, 2013 3:17 pm

mptness wrote:I did read the entire thread, and have been confused by some of it. For example the statement that traditional IRAs tend to be better for low income folks who haven't saved a lot seems to go against the general guideline to prefer a Roth in the 15% bracket.


I reread the Wiki on Roth vs. Traditional and found it to be an excellent summary of the subject. Is there anything in this thread that suggests changing that article. I think the answer is that Roth IRAs always lose except when they don't. Generally, it seems that if you are considering the tax rate of the contribution/conversion and that of the withdrawal, and basing your decision on that, then you are doing it right. Don't forget to check your own situation because YMMV.


I'd love to hear TheWizard explain why Trad IRA is "better for low income folks".

I consider myself low-income (15% bracket), and everything seem to be telling me Roth IRA is the better choice (after 401k up to matching). Because I'm already at one of lowest tax brackets, I'm making a bet that my tax bracket is going to end up either being the same (15%), which in that case I get to keep all the gains in Roth IRA tax-free, or at higher tax bracket (even better).
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