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by FinancialDave
Mon Jan 08, 2024 12:44 pm
Forum: Investing - Theory, News & General
Topic: 2024 Hedge Fund contest
Replies: 156
Views: 26700

Re: 2024 Hedge Fund contest

Name: The Draft Needs Coin

Long
DKNG
COIN
by FinancialDave
Sun Dec 24, 2023 1:13 pm
Forum: Investing - Theory, News & General
Topic: Why Roth conversions always pay off—if you can hold on long enough
Replies: 413
Views: 69112

Re: Why Roth conversions always pay off—if you can hold on long enough

Roth conversion is a gamble with the following factors - future tax rate - lifespan - heirs You can simulate endless numbers of scenarios that would support both "to convert" or "not to convert" choices. Ultimately, it comes down to your bet/projection/consideration of the above factors and whether or not you care about that. The benefit of lowering your future tax liability is only meaningful if 1) you live long enough to actually receive the benefit 2) you want to lower your heirs tax burden when you die There are those who expect a low life expectancy and/or want to spend most if not all of their money before they die, Roth conversion becomes less relevant and/or important. Why is Roth conversion a gamble with future...
by FinancialDave
Sun Dec 24, 2023 11:48 am
Forum: Investing - Theory, News & General
Topic: Why Roth conversions always pay off—if you can hold on long enough
Replies: 413
Views: 69112

Re: Why Roth conversions always pay off—if you can hold on long enough

Roth conversion is a gamble with the following factors - future tax rate - lifespan - heirs You can simulate endless numbers of scenarios that would support both "to convert" or "not to convert" choices. Ultimately, it comes down to your bet/projection/consideration of the above factors and whether or not you care about that. The benefit of lowering your future tax liability is only meaningful if 1) you live long enough to actually receive the benefit 2) you want to lower your heirs tax burden when you die There are those who expect a low life expectancy and/or want to spend most if not all of their money before they die, Roth conversion becomes less relevant and/or important. Why is Roth conversion a gamble with future...
by FinancialDave
Sat Dec 23, 2023 1:42 pm
Forum: Investing - Theory, News & General
Topic: Why Roth conversions always pay off—if you can hold on long enough
Replies: 413
Views: 69112

Re: Why Roth conversions always pay off—if you can hold on long enough

ThankYouJack wrote: Sat Dec 23, 2023 10:00 am Is there a TLDR summary or consensus to this thread?

If I do Roth conversions this year my marginal tax rate could be ~70%. I might drawdown my TDA at a 15% rate. How would the Roth conversion pay off if held long enough?
How long you hold the Roth has very little to do with whether it will "pay off" - it is all about the tax differentials. In other words if you have to pay 70% tax on the conversion, there is little chance in my mind that you could ever spend that Roth money to avoid that kind of tax in the future - making it "pay off."
by FinancialDave
Fri Aug 11, 2023 12:38 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I freely admit to having to make up the term "average effective tax rate" to describe the fact that the math you presented simply averages two different effective rates. In reality it's just the effective tax rate on the whole income as opposed to the effective rate on each stream. And I agree that LTCG would yield a completely different heat map, but that isn't the point here. The issue is that you are reaching entirely the wrong conclusion about the marginal rate on your Trad withdrawal by sequestering effective tax rates into separate buckets by income stream. On something we agree, because the definition of effective tax rate is "The effective tax rate is the average tax rate paid by a person or corporation." So wha...
by FinancialDave
Fri Aug 11, 2023 11:01 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

From your link to the wiki: marginal rate is often described as the tax rate on the "next dollar" or "last dollar" of income. You are confusing often with "always." Read the rest of the wiki, and show me a financial definition of average effective rate. When your SS is $96k your best bet is to calculate the marginal rate on the whole SS - as it is affected by other types of income, because you have no chance to really change the size of your SS. The "next dollar" part of marginal tax rate calculations is best used on income that can be changed -- like what happens when I add $10,000 of dividend income to my SS as opposed to adding $10,000 of ordinary income to my SS. Feel free to do those calculation...
by FinancialDave
Fri Aug 11, 2023 10:45 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

Now, the substance. You are calculating an overall/average/effective tax rate, not a marginal tax rate. Absent context, marginal rate means the tax rate on a small amount of extra income, large enough to smooth out rounding or quantization in the tax rate tables, but not so large to span brackets. A marginal rate can also be calculated over a larger interval if one is considering a specific action (eg. converting $900k to Roth). Your calculation is over the entire span of income, including Social Security, so is useless for making this comparison. The correct calculation for converting $900k to Roth is: (change in tax) / (change in income) = (total tax without conversion - total tax with conversion) / (pre-tax withdrawals without conversio...
by FinancialDave
Fri Aug 11, 2023 9:28 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

Filling up the tax brackets with marginal tax: SS: $96k*.85= $81,600-30,700=$50,900-22,000 [10% = $2200 tax] +28,900 [12% tax =$3468 tax]. Total tax due to SS=$5,668 and 5668/96000 = 5.9% marginal tax rate. TIRA: $91,241-$38,550 [12% tax = $4626] +$52,691 [22% tax = $11,592 tax]. Total tax due to TIRA = $16,218 and 16218/91241 =17.8% marginal tax rate. So you want to spend 24 % of your client’s pretax earnings on tax when they can spend it as is at a marginal rate of 17.8%. You are calculating effective rate, not marginal. And then you are comparing it to the 24% marginal rate. Apples and oranges. Every source of income you have has a "marginal" tax rate associated with it -- size of that income does not matter. See my post just ...
by FinancialDave
Fri Aug 11, 2023 9:25 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

Filling up the tax brackets with marginal tax: SS: $96k*.85= $81,600-30,700=$50,900-22,000 [10% = $2200 tax] +28,900 [12% tax =$3468 tax]. Total tax due to SS=$5,668 and 5668/96000 = 5.9% marginal tax rate. TIRA: $91,241-$38,550 [12% tax = $4626] +$52,691 [22% tax = $11,592 tax]. Total tax due to TIRA = $16,218 and 16218/91241 =17.8% marginal tax rate. So you want to spend 24% of your client’s pretax earnings on tax when they can spend it as is at a marginal rate of 17.8%. Taking total tax due divided by total income gives effective tax rates, not marginal. You are wrong. You can calculate the marginal tax on any amount of money. The effective tax rate for the two incomes is (5668+16218)/187,241=11.7% That's just the average effective rate...
by FinancialDave
Thu Aug 10, 2023 8:07 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

Walkure wrote: Wed Aug 09, 2023 10:17 pm
FinancialDave wrote: Wed Aug 09, 2023 4:41 pm Filling up the tax brackets with marginal tax:

SS: $96k*.85= $81,600-30,700=$50,900-22,000 [10% = $2200 tax] +28,900 [12% tax =$3468 tax]. Total tax due to SS=$5,668 and 5668/96000 = 5.9% marginal tax rate.

TIRA: $91,241-$38,550 [12% tax = $4626] +$52,691 [22% tax = $11,592 tax]. Total tax due to TIRA = $16,218 and 16218/91241 =17.8% marginal tax rate.

So you want to spend 24% of your client’s pretax earnings on tax when they can spend it as is at a marginal rate of 17.8%.
Taking total tax due divided by total income gives effective tax rates, not marginal.
You are wrong. You can calculate the marginal tax on any amount of money. The effective tax rate for the two incomes is (5668+16218)/187,241=11.7%
by FinancialDave
Thu Aug 10, 2023 7:59 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

... I showed that taxpayers who are slightly above the 40.7% bump are better off Roth-converting to come in underneath it instead of staying above, to the tune of about $4,000/year in extra spendable retirement income. You agree with all my numbers, so my example met your standard of showing a benefit from tax-planning around the SS taxation bump. Maybe you missed it, but in the second case with Roth conversions, all 85% of SS is not taxed, only around 60% is. That's where the tax savings comes from. ... I agree with fyre4ce in the specific case where: 1. Taxpayer, not too many years out, call it late 60s, reasonably projects that at age 73, Social Security plus RMDs will put them at, just above, or somewhat below the exit from the social ...
by FinancialDave
Wed Aug 09, 2023 4:41 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

“I showed that taxpayers who are slightly above the 40.7% bump are better off Roth-converting to come in underneath it instead of staying above.. “more SS income will always be better, regardless of taxes..” “? I showed that taxpayers who are slightly above the 40.7% bump are better off Roth-converting to come in underneath it instead of staying above, to the tune of about $4,000/year in extra spendable retirement income. You agree with all my numbers….” “It blows my mind….” “I don't understand the remark ….. ‘ There still seems to be a lot that you don’t understand. Let me give you the back of the napkin view of this problem that anyone can do. Maybe it will help, but if it doesn’t that’s fine too. Filling up the tax brackets with margina...
by FinancialDave
Tue Aug 08, 2023 11:43 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

snip There is something that just doesn't make sense about this strategy you suggest: The correct strategy is to either (1) go far above the bump, so a large range of 22/24% marginal rates dilutes down the 40.7% bump, or (2) go just underneath the bump. For MFJ Why would I worry about the "bump" as you call it at all. All that is happening are two income streams, SS and ordinary income are coming together, one is being taxed at its normal ordinary income of 22% and the other is being taxed at 85% of its normal rate (.22x.85=.187). Maybe you should think more about the Standard Deduction that is tax-free and the 15% of SS that is also tax-free. In truth for just over $185k of income ($85k ordinary & $100k SS) I think your marg...
by FinancialDave
Sat Aug 05, 2023 12:15 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

The general rule would be you don't get an outsized pension without earning an outsized living which for a current retiree like me is not the picture you paint. This is a good point. Especially earlier in one's career (when the time benefit of Roth is the largest), the future is uncertain, and I think of Roth as the more "aggressive" tax play - not in the sense of bending tax rules, but in that you're making a bet on having financial success later in life. There is definitely some uncertainty with starting a job while young with a nice pension plan, and wondering whether you'll be able to work enough years to qualify, won't switch to another job, the pension plan won't be frozen, etc. This uncertainty applies to a lot of "hi...
by FinancialDave
Fri Aug 04, 2023 8:13 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

[snip] PS. SS tax bump has no bearing on anyone whose SS has reached 85% limit of taxation. The affect of SS is just SS*.85 :sharebeer You're mostly right, but I have two quibbles with this statement. First, it's not enough to be just slightly above the 40.7% SS tax bump (ie. when 85% of SS income is taxed). Investors here will still swallow the entire bump every year and it won't be much different from being at the very top of the bump, the worst place to be. The correct strategy is to either (1) go far above the bump, so a large range of 22/24% marginal rates dilutes down the 40.7% bump, or (2) go just underneath the bump. For those near retirement who are in the undesirable place near the top of the bump, the right strategy is usually t...
by FinancialDave
Wed Aug 02, 2023 1:21 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

It took me awhile because I tossed most of my tax training documents in a recent move, but a little online search turned up what we use to use: https://cotaxaide.org/tools/Annuity%20Calculator.html I'm not sure it's necessary to go to the time it will take to figure out how to use it but I see a link to a video tour which should help. In the end I think the answer to how much of the pension is tax-free for 25 years is something close to (your total contributions $) / 25 (yr.). That tool implements the Simplified Method for pension taxability. As described in Publication 575 (2022), Pension and Annuity Income , "Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number o...
by FinancialDave
Wed Aug 02, 2023 12:53 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

A pension can also be thought of as a traditional account, in combination with a Roth, with a mandatory RMD from both at a fixed amount, unless the payout is inflation adjusted which some are (mine is not). The point is a lot of people have pensions with some of their own contributions, in which case the withdrawals, of their money, are tax-free, thus leading to another "tax-free" space, sort of like the 15% SS. The difference is this tax-free space only lasts for about 25 years which is the formula that the employer uses to calculate your tax-free payout based on contributions. There are online calculators we use to use when the taxpayer did not know the tax free portion of their payout, using 1099 data for "employee contri...
by FinancialDave
Wed Aug 02, 2023 10:49 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

I'm pretty sure the vast majority of pensions are funded with pre tax contributions, so I'm lost at this 25 years of tax free discussion. While it can be, mine is not and it is simple corporate pension from a pretty big company. My experience from doing taxes for 7 years, mostly for seniors with pensions or SS or both is that a great number of them contributed after tax dollars to them and they had a 25 year exclusion. Another lessor pile was from the spouse who inherited the pension, and the exclusion had been used up, or the original owner had used up the exclusion. Mine will be used up in another 14 years (wow!) It comes from anyone who adds voluntary after-tax money to their pension, which typically is reported in a separate box, as vo...
by FinancialDave
Wed Aug 02, 2023 8:43 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

Military pensioners can receive two pensions very easily. So can a lot of fire and police which only require twenty years of service in some departments. I'm sure there are other high risk, low vested pension jobs as well. A pension can also be thought of as a traditional account, in combination with a Roth, with a mandatory RMD from both at a fixed amount, unless the payout is inflation adjusted which some are (mine is not). The point is a lot of people have pensions with some of their own contributions, in which case the withdrawals, of their money, are tax-free, thus leading to another "tax-free" space, sort of like the 15% SS. The difference is this tax-free space only lasts for about 25 years which is the formula that the em...
by FinancialDave
Wed Aug 02, 2023 8:14 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

[snip] PS. SS tax bump has no bearing on anyone whose SS has reached 85% limit of taxation. The affect of SS is just SS*.85 :sharebeer You're mostly right, but I have two quibbles with this statement. First, it's not enough to be just slightly above the 40.7% SS tax bump (ie. when 85% of SS income is taxed). Investors here will still swallow the entire bump every year and it won't be much different from being at the very top of the bump, the worst place to be. The correct strategy is to either (1) go far above the bump, so a large range of 22/24% marginal rates dilutes down the 40.7% bump, or (2) go just underneath the bump. For those near retirement who are in the undesirable place near the top of the bump, the right strategy is usually t...
by FinancialDave
Tue Aug 01, 2023 7:38 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

Military pensioners can receive two pensions very easily. So can a lot of fire and police which only require twenty years of service in some departments. I'm sure there are other high risk, low vested pension jobs as well. A pension can also be thought of as a traditional account, in combination with a Roth, both with no growth with a mandatory RMD from both at a fixed amount, unless the payout is inflation adjusted which some are (mine is not). The point is a lot of people have pensions with some of their own contributions, in which case the withdrawals, of their money, are tax-free, thus leading to another "tax-free" space, sort of like the 15% SS. The difference is this tax-free space only lasts for about 25 years which is the...
by FinancialDave
Tue Aug 01, 2023 7:37 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

Military pensioners can receive two pensions very easily. So can a lot of fire and police which only require twenty years of service in some departments. I'm sure there are other high risk, low vested pension jobs as well. A pension can also be thought of as a traditional account, in combination with a Roth, with a mandatory RMD from both at a fixed amount, unless the payout is inflation adjusted which some are (mine is not). The point is a lot of people have pensions with some of their own contributions, in which case the withdrawals, of their money, are tax-free, thus leading to another "tax-free" space, sort of like the 15% SS. The difference is this tax-free space only lasts for about 25 years which is the formula that the em...
by FinancialDave
Tue Aug 01, 2023 11:19 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I am surprised You have had no clients where 401K's did not make sense? Prof. McQ himself is doing Roth conversions - his other posts notwithstanding. ?? Do you mean investors where pretax 401k's don't make sense and thus they go 100% Roth 401k? In my case I would never advise anyone to go 100% Roth , though I know a number of people that do and sleep very well. The ones I know of are usually at least well off enough to not need to worry about some overpayment of taxes. I did taxes for 7 years and saw mostly lower to mid income stories, many with no savings at all other than SS. No 100% Roths that I know of in that group. A number in 0% tax bracket that could have used a TDA to fill up the Standard Deduction. All kinds of stories out there...
by FinancialDave
Tue Aug 01, 2023 10:34 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I am surprised You have had no clients where 401K's did not make sense? Prof. McQ himself is doing Roth conversions - his other posts notwithstanding. ?? Do you mean investors where pretax 401k's don't make sense and thus they go 100% Roth 401k? In my case I would never advise anyone to go 100% Roth, though I know a number of people that do and sleep very well. The ones I know of are usually at least well off enough to not need to worry about some overpayment of taxes. I did taxes for 7 years and saw mostly lower to mid income stories, many with no savings at all other than SS. No 100% Roths that I know of in that group. A number in 0% tax bracket that could have used a TDA to fill up the Standard Deduction. All kinds of stories out there ...
by FinancialDave
Tue Aug 01, 2023 7:23 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I am surprised You have had no clients where 401K's did not make sense? Prof. McQ himself is doing Roth conversions - his other posts notwithstanding. ?? Do you mean investors where pretax 401k's don't make sense and thus they go 100% Roth 401k? In my case I would never advise anyone to go 100% Roth, though I know a number of people that do and sleep very well. The ones I know of are usually at least well off enough to not need to worry about some overpayment of taxes. I did taxes for 7 years and saw mostly lower to mid income stories, many with no savings at all other than SS. No 100% Roths that I know of in that group. A number in 0% tax bracket that could have used a TDA to fill up the Standard Deduction. All kinds of stories out there ...
by FinancialDave
Mon Jul 31, 2023 3:49 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I am surprised You have had no clients where 401K's did not make sense? Prof. McQ himself is doing Roth conversions - his other posts notwithstanding. ?? Do you mean investors where pretax 401k's don't make sense and thus they go 100% Roth 401k? In my case I would never advise anyone to go 100% Roth, though I know a number of people that do and sleep very well. The ones I know of are usually at least well off enough to not need to worry about some overpayment of taxes. I did taxes for 7 years and saw mostly lower to mid income stories, many with no savings at all other than SS. No 100% Roths that I know of in that group. A number in 0% tax bracket that could have used a TDA to fill up the Standard Deduction. All kinds of stories out there ...
by FinancialDave
Mon Jul 31, 2023 3:26 pm
Forum: Investing - Theory, News & General
Topic: Modified RMD retirement withdrawal using a multiplier on the RMD
Replies: 109
Views: 11661

Re: Modified RMD retirement withdrawal using a multiplier on the RMD

May I ask what is the problem that is trying to be solved here with these methodologies? The 1/N approach (where N is years until death based on some probability not to exceed for an individual or couple) is very simple to use in old age or for a non-financial person but it tends to be back-loaded. For instance, at age 63 someone might start retirement spending 1/37th of their portfolio which is 2.7 percent withdrawal rate in year one. It sounds like the referenced modifications bump that up using a multiplication factor. To me that is a methodology, what problem would someone implementing that methodology be trying to solve? The problem to be solved is how to sustainably spend down assets as efficiently as possible in retirement in the fa...
by FinancialDave
Mon Jul 31, 2023 3:15 pm
Forum: Investing - Theory, News & General
Topic: Modified RMD retirement withdrawal using a multiplier on the RMD
Replies: 109
Views: 11661

Re: Modified RMD retirement withdrawal using a multiplier on the RMD

…,, The problem with using the RMD alone is that it tends to be "backloaded", that is, there is more money to spend whe… Did not read article but your statement is wrong. An RMD is strictly to satisfy IRS requirements NOT a withdrawal strategy. Edit: read article now. [Disrepectful comment removed by Moderator Misenplace] [Disagree with] dr wade. Yes, the RMD is an IRS requirement for minimum withdrawal. Using some multiple of the RMD as a withdrawal amount is a retirement withdrawal strategy. And it is the case that this method has a lot in common with the Boglehead's own Variable Withdrawal Percentage method. https://www.bogleheads.org/wiki/Variable_percentage_withdrawal Wade, I have been doing something similar, only moving th...
by FinancialDave
Mon Jul 31, 2023 1:47 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

That would be pretty much how it works for "most" investors that can do it at all because of how 401k deductions are taken, but this person usually gets a bonus near the end of the year which goes directly into what is called post-tax savings, which can then be directly converted to 401k Roth with very little earnings, which I assumed are zero. Thanks. We are familiar with MBR and backdoor Roth, and the normal applications of those. Moving post-tax savings to tax-exempt is one of the well known potential benefits of Roth, but the tax math is different than the Simple marginal rate comparison. The benefit falls into Complex scenarios. My question is even more complex than what is typically covered, and it may or may not apply to y...
by FinancialDave
Mon Jul 31, 2023 11:14 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

That would be pretty much how it works for "most" investors that can do it at all because of how 401k deductions are taken, but this person usually gets a bonus near the end of the year which goes directly into what is called post-tax savings, which can then be directly converted to 401k Roth with very little earnings, which I assumed are zero. Thanks. We are familiar with MBR and backdoor Roth, and the normal applications of those. Moving post-tax savings to tax-exempt is one of the well known potential benefits of Roth, but the tax math is different than the Simple marginal rate comparison. The benefit falls into Complex scenarios. My question is even more complex than what is typically covered, and it may or may not apply to y...
by FinancialDave
Mon Jul 31, 2023 10:01 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I will state up front that the point of this thread is to show that the same amount of pre-tax earnings is required to do a Roth conversion with the taxes paid from inside the TDA account or with taxes paid from outside the account (personal savings). Interesting concept but it doesn't hold in general. Consider people with no "compensation" and thus ineligible to make any IRA/401k/etc. contributions. Outside of making Roth conversions, they have no way to put money into either traditional or Roth accounts, so any income in excess of expenses would be invested in a taxable account. Paying the conversion tax from taxable funds allows them to move money from a taxable account to a Roth account. This is covered in "Traditional p...
by FinancialDave
Mon Jul 31, 2023 7:19 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I will state up front that the point of this thread is to show that the same amount of pre-tax earnings is required to do a Roth conversion with the taxes paid from inside the TDA account or with taxes paid from outside the account (personal savings). Interesting concept but it doesn't hold in general. Consider people with no "compensation" and thus ineligible to make any IRA/401k/etc. contributions. Outside of making Roth conversions, they have no way to put money into either traditional or Roth accounts, so any income in excess of expenses would be invested in a taxable account. Paying the conversion tax from taxable funds allows them to move money from a taxable account to a Roth account. This is covered in "Traditional p...
by FinancialDave
Sun Jul 30, 2023 7:48 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

As one final note there was some confusion about a comment I made concerning taxable acccounts and tax-advantaged limits. I realize TDA and Roth contribution limits alter "your spreadsheet" however they don't alter my thinking for the investor: When you run into those limits you have a couple of logical choices. 1. Have more fun -- spend the excess. In which case the limits don't apply to the math. 2. Put the excess in some other less efficient space such as taxable, ibonds, etc. :moneybag Once again, this is wrong. I've lost count of the times in the thread that you have hand-waved away the contribution limits issue that many have tried to help you understand the importance of, most recently: 2) I'm convinced you are not complet...
by FinancialDave
Sun Jul 30, 2023 11:02 am
Forum: Investing - Theory, News & General
Topic: The I Bond Manifesto
Replies: 425
Views: 74958

Re: The I Bond Manifesto

... it is not about what happens in the 5 years in the middle as both accounts [i.e., both I Bonds] get the same rates[;] it[']s what is happening on the front end and the back end when the bonds have different rates ... Correct. To help see, consider the follow case comparing the ending values, after the same number of six-month periods, of an I Bond purchased in November to one purchased in October. [1] Let "a" be the initial composite rate (e.g., 3.54%) for the October purchase and "b" be the second (e.g., 7.12%). Let "n" be the last rate for the November purchase. Let "c" to "m" be the rates in between "b" and "n". Oct purch: 10000 * (1+a/2) * (1+b/2) * (1+c/2) * (1+...
by FinancialDave
Sat Jul 29, 2023 1:48 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

As one final note there was some confusion about a comment I made concerning taxable acccounts and tax-advantaged limits. I realize TDA and Roth contribution limits alter "your spreadsheet" however they don't alter my thinking for the investor: When you run into those limits you have a couple of logical choices. 1. Have more fun -- spend the excess. In which case the limits don't apply to the math. 2. Put the excess in some other less efficient space such as taxable, ibonds, etc. :moneybag Once again, this is wrong. I've lost count of the times in the thread that you have hand-waved away the contribution limits issue that many have tried to help you understand the importance of, most recently: 2) I'm convinced you are not complet...
by FinancialDave
Sat Jul 29, 2023 11:41 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

... However, if you read all the posts, you will understand my point when I say even BH readers don't get the simple version. ... (Snipet is mine.) Are you sure that most bogleheads don't understand the simple concept of A * B = B * A which is basically what you presented? I think most bogleheads understand the above math very well but realize that there is much more to the Roth vs Tradtional question than that simple math problem. In 2021 they allowed a thread called: Why Roth Conversions always pay off if you hold on long enough. https://www.bogleheads.org/forum/viewtopic.php?t=358688 To go on for 8 pages. If you read the 8 pages you will find the suggestion that the simple concept in the 2 period case (you present above) somehow when RM...
by FinancialDave
Sat Jul 29, 2023 8:32 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

<snipped because you didn't quote anything from the original first post which answers all the questions to its purpose> I read through this entire discussion and also exchanged some PM's with FinancialDave. Here's a summary of my opinions on this thread: 1) Your analysis is mathematically correct, but it is for a severely limited/simplified case that will not apply to most investors. Your case is unrealistic in the following ways: Assumes equal tax rates at contribution and withdrawal. This is rarely the case, and even when it is, the decisions today get based on predicted future marginal tax rates, not actual future marginal rates which cannot be known with certainty in advance. The rubber meets the road in T vs. R analysis where you are ...
by FinancialDave
Fri Jul 28, 2023 3:44 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to create a Bounded Problem For this thread

We have $100k in a TDA account and $30k in savings account and all money was earned at a 30% tax rate. What taxes were paid in years past is irrelevant. Sunk cost fallacy, etc. The money is where it is, regardless of whether it was originally taxed at 10%, 30%, 59.95%, or whatever. The pertinent question is "what to do with it now ?" And that takes us back to bsteiner's example. Wow, that's some real smoke and mirrors. Putting a name on something doesn't make it apply to this problem. For those that don't know what sunk cost fallacy is here is the definition: The Sunk Cost Fallacy describes our tendency to follow through on an endeavor if we have already invested time, effort, or money into it, whether or not the current costs ou...
by FinancialDave
Fri Jul 28, 2023 11:04 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to create a Bounded Problem For this thread

...create a bounded problem that could be useful for a financial planner that really answers the question - Does paying tax for a conversion from outside the TDA get me more spendable income? Perhaps the situation (excerpt below) in bsteiner's post will suffice? Assume a constant 30% Federal and state tax bracket. You have a $100,000 traditional IRA and $30,000 cash. You convert and use your cash to pay the tax on the conversion. You then have a $100,000 Roth IRA. Over some period of time, it grows to $200,000, all of which is yours. If you don't convert, your $100,000 traditional IRA will grow to $200,000. You or your beneficiaries will withdraw the $200,000, pay $60,000 tax, and have $140,000 left. You'll also have your $30,000 cash. Ove...
by FinancialDave
Thu Jul 27, 2023 5:07 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to create a Bounded Problem For this thread

...create a bounded problem that could be useful for a financial planner that really answers the question - Does paying tax for a conversion from outside the TDA get me more spendable income? Perhaps the situation (excerpt below) in bsteiner's post will suffice? Assume a constant 30% Federal and state tax bracket. You have a $100,000 traditional IRA and $30,000 cash. You convert and use your cash to pay the tax on the conversion. You then have a $100,000 Roth IRA. Over some period of time, it grows to $200,000, all of which is yours. If you don't convert, your $100,000 traditional IRA will grow to $200,000. You or your beneficiaries will withdraw the $200,000, pay $60,000 tax, and have $140,000 left. You'll also have your $30,000 cash. Ove...
by FinancialDave
Thu Jul 27, 2023 4:52 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

If I look back at my earnings record five decades ago, and were a Roth option available then, I find it hard to fathom that maxing out in a Roth with low or no tax dollars wouldn’t have been more to my advantage. Those early dollars compounding in an index at 10 percent annually would be nothing to sneeze at fifty years later. If you understand the simple math, you realize compounding doesn't matter because it is assumed the same on both sides and I know for a fact my moderate income generated a marginal tax rate of 33% in some years. I believe the higher rates were at or near 50%. Today, I am spending my much larger TDA account at 12% and below. That is a huge win on money that was never taxed vs money taxed at 25-33% in the 1980s. In 197...
by FinancialDave
Thu Jul 27, 2023 4:36 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

...Bottom line was for the moderate household with either $1m TDA or $!m*(1-tax rate) Roth and a few ratios in between, the tax bracket that is most normally breakeven for the Roth / TDA decision was 15%. I used to see that number in the BH wiki, which I'm sure was out of use of personal calculator but I can't seem to find it now. Anyway, two completely independent studies, same result - you are most likely wasting your money if you are converting it above 15%. However, many people argue that essentially there are other reasons to have more Roth and they may be correct. I would think that the tax bracket(s) where it's most likely for Roth conversion to pay off would somewhat depend on the structure of the brackets. For example converting a...
by FinancialDave
Thu Jul 27, 2023 4:26 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

^ Another factor that may lead some to suggest more aggressive Roth conversions would be return assumptions. Some will assume relatively high returns and then use that to justify suggesting that one convert into high tax brackets. I only use current balances, so effectively that is assuming 0% real returns. I would rather be "wrong" due to high returns than be "wrong" due to low returns. In the first case, I would pay more taxes due to not having converted more when I could have done so in lower tax brackets, but I have more money than I had expected. In the second case, I would have both paid more taxes than necessary and have less money than I had expected. Yup. Overly optimistic growth assumptions and an unfounded fe...
by FinancialDave
Thu Jul 27, 2023 7:24 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

How to create a Bounded Problem For this thread

I will state up front that the point of this thread is to show that the same amount of pre-tax earnings is required to do a Roth conversion with the taxes paid from inside the TDA account or with taxes paid from outside the account (personal savings). Interesting concept but it doesn't hold in general. Consider people with no "compensation" and thus ineligible to make any IRA/401k/etc. contributions. Outside of making Roth conversions, they have no way to put money into either traditional or Roth accounts, so any income in excess of expenses would be invested in a taxable account. Paying the conversion tax from taxable funds allows them to move money from a taxable account to a Roth account. This is covered in "Traditional p...
by FinancialDave
Wed Jul 26, 2023 4:53 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

I will state up front that the point of this thread is to show that the same amount of pre-tax earnings is required to do a Roth conversion with the taxes paid from inside the TDA account or with taxes paid from outside the account (personal savings). Interesting concept but it doesn't hold in general. Consider people with no "compensation" and thus ineligible to make any IRA/401k/etc. contributions. Outside of making Roth conversions, they have no way to put money into either traditional or Roth accounts, so any income in excess of expenses would be invested in a taxable account. Paying the conversion tax from taxable funds allows them to move money from a taxable account to a Roth account. This is covered in "Traditional p...
by FinancialDave
Wed Jul 26, 2023 10:53 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

I haven't read all of the comments, but thank you for the analysis. I would love to see a comparison to investments in a taxable account, with typical dividend payouts, and the 15% capital gains tax. I have been wondering whether I should now skip the tax-advantaged accounts and invest more in taxable. If you can do the math here then it is a fairly easy leap to know the taxable account does not win vs the Roth account, so if you don't have a reason to use it you are money ahead (in the form of after-tax spendable income) over putting that money in your tax-advantaged accounts. It is however a form of tax diversification to both the TDA and Roth, it is just less tax efficient, and I have seen it play havoc in retirement by creating unneces...
by FinancialDave
Wed Jul 26, 2023 10:18 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: How to do Roth Conversion Math without comparing apples and oranges

Certainly, a very extensive reference on all other aspects of Roth conversions is the Boglehead Wiki:

https://www.bogleheads.org/wiki/Roth_conversion
by FinancialDave
Wed Jul 26, 2023 9:52 am
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

How to do Roth Conversion Math without comparing apples and oranges

[Thread merged into here --admin LadyGeek] I hope those that didn’t like my previous thread title (Roth never wins given equal tax treatment) https://www.bogleheads.org/forum/viewtopic.php?t=409269 , will like this one better. I will state up front that the point of this thread is to show that the same amount of pre-tax earnings is required to do a Roth conversion with the taxes paid from inside the TDA account or with taxes paid from outside the account (personal savings). The result of this is that no “complex” math is required to keep track of taxable accounts which are outside the problem of studying the tax-advantaged space. First, I will explain why someone would need to pay the taxes from outside the Tax Deferred account. The reason...
by FinancialDave
Tue Jul 25, 2023 11:13 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

... We all get it that if marginal tax rates throughout our lives were flat, Roth Conversions would make no sense. But for many of us, they would be anything but flat, so we try to even them out with Roth Conversions. That's not correct. At a constant tax rate, the Roth wins handily. Assume a constant 30% Federal and state tax bracket. You have a $100,000 traditional IRA and $30,000 cash. You convert and use your cash to pay the tax on the conversion. <snip> That's delving into "Traditional plus taxable" vs. Roth , and of course correct for that situation. The OP is talking only about the Simplest situation , where the commutative property of multiplication reigns. I think I will need to start a new thread on this because I don't...
by FinancialDave
Tue Jul 25, 2023 10:54 pm
Forum: Investing - Theory, News & General
Topic: Why Roth never Wins when given equal tax treatment with Traditional IRA
Replies: 434
Views: 41145

Re: Why Roth never Wins when given equal tax treatment with Traditional IRA

Shih Tsu man wrote: Tue Jul 25, 2023 10:00 pm
Exchme wrote: Tue Jul 25, 2023 9:58 pm We all get it that if marginal tax rates throughout our lives were flat, Roth Conversions would make no sense. But for many of us, they would be anything but flat, so we try to even them out with Roth Conversions.
Even if marginal tax rates were flat, the Roth has a longer time period allowed for compounding (life plus 10 years)
Sorry, when you run out of TDA due to RMDs and you have to spend Roth you lost the game because now you are spending money that cost you 25% tax to make and spending it in a zero tax bracket -- you won't live to Life plus 10! You will run out of money first.

:sharebeer