Roth, Traditional, and the 15% Tax Bracket

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Fri Feb 26, 2016 2:43 pm

rkhusky wrote:
FiveK wrote: In the first years of contributing, m.v.m. advocates see "if I make no traditional contributions, my marginal withdrawal rate will be 0% - therefore I will make traditional contributions."
The problem with this is that for some (many?) people, it would be better to contribute to Roth in the beginning because they expect their tax rates to increase over their working lifetime. That is why you need to make some projections of future income and tax brackets (not that you are forecasting the government changing tax brackets, but that your income will cause your tax rate to increase in the future).
Yes, absolutely agree. I was trying to keep it simple, but yes to what you are saying here. Usual examples are future doctors now in residency, new college grads starting a full time job halfway through the year, etc.

If you expect later contributions will fill your traditional retirement account to the point that the withdrawal marginal rate will be higher than your current contribution rate, doing Roth now is correct.

User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Fri Feb 26, 2016 3:13 pm

Dutch wrote:What I'm saying is much simpler than that. The traditional vs. roth decision comes down to: possible tax savings at contribution vs. taxes due at withdrawal. I think we all agree on that. If you expect possible tax savings at contribution > taxes due at withdrawal (over your lifetime), then you should go with a Traditional IRA/401(k). If you expect the opposite then you should choose the Roth. No controversy there.

If you believe that marginal tax rate at contribution vs marginal tax rate at withdrawal is the determining factor, then you must also believe that Roth and Traditional are equivalent when marginal tax rate at contribution equals marginal tax rate at withdrawal.

But in my example (which I think is a fair example to examine the tax consequences in isolation, keeping all other factors the same for Trad and Roth) the Traditional option clearly has the advantage. The simple fact that a 0% tax bracket exists, makes this so.
Perhaps the difference is in comparing "over your lifetime" vs. "looking at contributions one year at a time"?

E.g., let's say I'll give you $21 today if you give me $21 tomorrow. Ignoring the time value of money, that would be an equal trade, correct?

Instead, let's say that for one week I'll give you $1 one day if you give me $0.50 the next day, for the second week I'll give you $1 one day if you give me $1 the next day, and for the third week I'll give you $1 one day if you give me $1.50 the next day,- but you may stop the game any day you wish.

Over the maximum lifetime of that game, I would give you $21 and you would give me $21 - even trade. But if you are as smart as I think, you'll stop playing sometime in the second week and walk away $3.50 ahead.

By analogy, the first few years contributing to a traditional account you come out ahead due to filling those lower brackets for retirement. Then you have years in which things are equal. Eventually, however, you can start losing ground due to paying a higher marginal rate in retirement.
Board member TheFinanceBuff makes a similar point: The case against Roth 401(k) http://thefinancebuff.com/case-against-roth-401k.html
Yes, and board member grabiner wrote the portion of the wiki article describing why marginal vs. marginal is correct, so perhaps the score is tied 1-1? :)

Actually, in that article tfb says
Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth.
If you have a defined benefit pension plan and/or you expect to have a large balance in Traditional 401(k)/IRA, large enough to fill the lower brackets every year, then contributing to Roth makes some sense.
In other words, look at your situation anew each year. If, and only if, your expected marginal rate equals or exceeds your contributions rate, switch to Roth.

User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Fri Feb 26, 2016 3:32 pm

FiveK wrote:
rkhusky wrote:Although, they could have up to about 60% in Roth and still be okay.
As we seem to be converging on agreement, I'd like to agree here also but simply don't understand to what whole the 60% refers.
rkhusky wrote:For the above example, If 0% - 60% of the $95K withdrawal is Roth, then one is still being optimal. If one's account ratio, for this example, is also in this range, then one should have no trouble making correct withdrawals.
Ok, got it: if ~$95K gross puts one at the top of the 15% bracket, ~40% of $95K puts one at the bottom of that bracket, so anywhere between those extremes is metaphorically the same as the second week of the $1/day game between Dutch and me described in the previous post. Agreed.

rkhusky
Posts: 8792
Joined: Thu Aug 18, 2011 8:09 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by rkhusky » Fri Feb 26, 2016 4:02 pm

FiveK wrote:
FiveK wrote:
rkhusky wrote:Although, they could have up to about 60% in Roth and still be okay.
As we seem to be converging on agreement, I'd like to agree here also but simply don't understand to what whole the 60% refers.
rkhusky wrote:For the above example, If 0% - 60% of the $95K withdrawal is Roth, then one is still being optimal. If one's account ratio, for this example, is also in this range, then one should have no trouble making correct withdrawals.
Ok, got it: if ~$95K gross puts one at the top of the 15% bracket, ~40% of $95K puts one at the bottom of that bracket, so anywhere between those extremes is metaphorically the same as the second week of the $1/day game between Dutch and me described in the previous post. Agreed.
I think its important to know when one can contribute to Roth without ill effect and when one should contribute to Roth to minimize taxes. For the above example, perhaps one wants 20-30% in Roth, coincidentally near the ratio of (Roth IRA)/(Traditional 401K + Roth IRA) when maxing both.

User avatar
Dutch
Posts: 1277
Joined: Thu Jun 27, 2013 2:12 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by Dutch » Fri Feb 26, 2016 4:39 pm

FiveK wrote:
Dutch wrote:What I'm saying is much simpler than that. The traditional vs. roth decision comes down to: possible tax savings at contribution vs. taxes due at withdrawal. I think we all agree on that. If you expect possible tax savings at contribution > taxes due at withdrawal (over your lifetime), then you should go with a Traditional IRA/401(k). If you expect the opposite then you should choose the Roth. No controversy there.

If you believe that marginal tax rate at contribution vs marginal tax rate at withdrawal is the determining factor, then you must also believe that Roth and Traditional are equivalent when marginal tax rate at contribution equals marginal tax rate at withdrawal.

But in my example (which I think is a fair example to examine the tax consequences in isolation, keeping all other factors the same for Trad and Roth) the Traditional option clearly has the advantage. The simple fact that a 0% tax bracket exists, makes this so.
Perhaps the difference is in comparing "over your lifetime" vs. "looking at contributions one year at a time"?

E.g., let's say I'll give you $21 today if you give me $21 tomorrow. Ignoring the time value of money, that would be an equal trade, correct?

Instead, let's say that for one week I'll give you $1 one day if you give me $0.50 the next day, for the second week I'll give you $1 one day if you give me $1 the next day, and for the third week I'll give you $1 one day if you give me $1.50 the next day,- but you may stop the game any day you wish.

Over the maximum lifetime of that game, I would give you $21 and you would give me $21 - even trade. But if you are as smart as I think, you'll stop playing sometime in the second week and walk away $3.50 ahead.

By analogy, the first few years contributing to a traditional account you come out ahead due to filling those lower brackets for retirement. Then you have years in which things are equal. Eventually, however, you can start losing ground due to paying a higher marginal rate in retirement.
Board member TheFinanceBuff makes a similar point: The case against Roth 401(k) http://thefinancebuff.com/case-against-roth-401k.html
Yes, and board member grabiner wrote the portion of the wiki article describing why marginal vs. marginal is correct, so perhaps the score is tied 1-1? :)

Actually, in that article tfb says
Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth.
If you have a defined benefit pension plan and/or you expect to have a large balance in Traditional 401(k)/IRA, large enough to fill the lower brackets every year, then contributing to Roth makes some sense.
In other words, look at your situation anew each year. If, and only if, your expected marginal rate equals or exceeds your contributions rate, switch to Roth.
I'm not really sure why you're diverting the discussion to different unrelated topics, like the time value of money. I don't think it applies here, but if it did it would favor Traditional since it deferres the tax burden to the future. Also, I think it's clear what point tfb is making in his article, and it does not support your position.

We'll have to agree to disagree. I'm not invested in winning you over. I'm glad to have this issue clearer in my mind, and I thank you and jalbert for getting me there. If anybody is pondering the Roth vs. Traditional choice, I would advise them to run some (simple) modeling in a spreadsheet, and see what it looks like for your specific situation. Don't rely on a rule of thumb.

User avatar
midareff
Posts: 6615
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Roth, Traditional, and the 15% Tax Bracket

Post by midareff » Fri Feb 26, 2016 4:52 pm

More than 30 years ago I started with my employer's 457 plan. There was no match, just the tax relief. All raises, promotions and cost of living adjustments were split, probably 65% or so for the 457 and the balance for me until I hit max. It was tight but I persevered even after a divorce at max, and my income finally made things easier. Then I started contributing to a Roth in addition to max 457. When I got to max 457 and max Roth I put the rest in taxable.

Last year, this year and next I will use the remainder of my 15% tax space after SS and pension and dividends from taxable to convert to my Roth from my IRA (rolled from 457). I wish I had started earlier ... I missed 2013 and 2014 conversions, although in the teeth of the bull I'm not sure the math is as compelling as it is in a market neutral environment.

If you have 15% space to convert a tIRA to a Roth, and those are monies that would be taxed at 25% or greater on or after 70.5, I think the case is compelling.

User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Fri Feb 26, 2016 5:55 pm

Dutch wrote:
FiveK wrote:E.g., let's say I'll give you $21 today if you give me $21 tomorrow. Ignoring the time value of money, t[T]hat would be an equal trade, correct?
I'm not really sure why you're diverting the discussion to different unrelated topics, like the time value of money.
Not trying to divert anything - does the quote read better to you without the struck-through portion? Given that, do you see how the three weeks correspond to three phases of retirement account contributions?
Also, I think it's clear what point tfb is making in his article, and it does not support your position.
Actually it does - perhaps you misunderstand my position? From the tfb article:
...if the marginal tax rate at retirement is the same as it is now, the Traditional and Roth 401(k)’s are equivalent. If the marginal tax rate is higher now than in retirement, one is better off contributing to a Traditional 401k. If the current marginal tax rate is lower, one is better off contributing to a Roth 401k.

But that applies only to the marginal dollar, which is the last dollar you can shift between Traditional and Roth 401(k). It is not necessarily the case for the entire contribution or the average dollar.

The tax system in the United States is progressive and it will probably stay that way. That means that income is taxed at increasing rates as it goes higher. Even if you think the marginal tax rate in the future will be higher, there will still be lower brackets and these lower brackets should be filled with money from a Traditional 401(k).
Neither I nor tfb is advocating all Roth or all traditional. We are both saying to use traditional until "lower brackets" are filled, then switch to Roth if the marginal tax rate is lower now than expected in retirement.
We'll have to agree to disagree. I'm not invested in winning you over. I'm glad to have this issue clearer in my mind, and I thank you and jalbert for getting me there. If anybody is pondering the Roth vs. Traditional choice, I would advise them to run some (simple) modeling in a spreadsheet, and see what it looks like for your specific situation. Don't rely on a rule of thumb.
That seems reasonable, especially if people look at contributions on a year-by-year basis instead of one lump sum (i.e., the difference between $1/day and $21 lump sum in the theoretical game above).

User avatar
Dutch
Posts: 1277
Joined: Thu Jun 27, 2013 2:12 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by Dutch » Fri Feb 26, 2016 7:25 pm

FiveK wrote:
Dutch wrote:Also, I think it's clear what point tfb is making in his article, and it does not support your position.
Actually it does - perhaps you misunderstand my position?


Perhaps I do misunderstand your position. I thought this was your position
FiveK wrote: The "marginal vs. average" approach can seem reasonable at first glance. The first time I heard it, it sounded perfectly legitimate. Unfortunately, the actual math doesn't support it, and "marginal vs. marginal" is in fact correct.
I'm glad to see you moved on from your original position

User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Fri Feb 26, 2016 8:04 pm

Dutch wrote:
FiveK wrote:
Dutch wrote:Also, I think it's clear what point tfb is making in his article, and it does not support your position.
Actually it does - perhaps you misunderstand my position?

Perhaps I do misunderstand your position. I thought this was your position
FiveK wrote: The "marginal vs. average" approach can seem reasonable at first glance. The first time I heard it, it sounded perfectly legitimate. Unfortunately, the actual math doesn't support it, and "marginal vs. marginal" is in fact correct.
I'm glad to see you moved on from your original position
Not sure of your point. The original dalliance with marginal vs. average was prior to commenting on such in this board. Marginal vs. marginal is the correct analysis, and that is also (based on their articles) the position of grabiner, tfb, gocurrycracker, etc.

Whether that leads one to traditional or Roth is a different question entirely.

User avatar
SeeMoe
Posts: 1069
Joined: Sat Jul 18, 2015 11:30 am
Location: Near Philly..

Re: Roth, Traditional, and the 15% Tax Bracket

Post by SeeMoe » Fri Feb 26, 2016 9:54 pm

mhc wrote:What do you think your tax bracket will be in retirement? How far away from retirement are you?

The trade off is pay taxes now or later. I'm guessing you are trying to optimize the total tax picture and not just the taxes right now.
I'd rather pay taxes later. During our working years we maxed out our 457's and TRADITIONAL IRA's. Rolled the 457b's into the IRA accounts when we retired , and did not take RMD's until 70 1/2.
SeeMoe.. :mrgreen:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

cherijoh
Posts: 6406
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Roth, Traditional, and the 15% Tax Bracket

Post by cherijoh » Fri Feb 26, 2016 9:59 pm

jimb_fromATL wrote:Another reason in favor of the Roth IRAs is that there is no RMD requirement for them. There is an RMD requirement for the Roth 401(k).
Yeah, but if you roll it over in to Roth IRA, I believe the RMD requirement disappears. So it is a pretty wimpy disadvantage IMO. :happy

Note: If you have had a Roth IRA for at least 5 years and you rollover your Roth 401k, you do not need to start the 5 year clock over again.

bdpb
Posts: 1572
Joined: Wed Jun 06, 2007 3:14 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by bdpb » Sat Feb 27, 2016 1:09 am

Thanks to FiveK for your persistence.

Unfortunately, there seems to be a blind spot on this topic for many Bogleheads. Every so often we have a never ending thread on this topic and there is usually one or two persons supporting your position. Eventually, those folks supporting your position get burned out and the thread comes to an end. Good luck.

User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Sat Feb 27, 2016 2:51 am

bdpb wrote:Thanks to FiveK for your persistence.
Unfortunately, there seems to be a blind spot on this topic for many Bogleheads. Every so often we have a never ending thread on this topic and there is usually one or two persons supporting your position. Eventually, those folks supporting your position get burned out and the thread comes to an end. Good luck.
Thanks, I see you were a spectator for an early (the first?) such discussion: viewtopic.php?f=10&t=14166 (in which folks such as redbeard, Greenberry, and AzRunner had particularly good points describing why marginal vs. marginal is correct).

For those who prefer pictures, the chart below may be useful. Assumptions:
- 25 years of $15K pre-tax contributions for a couple subject to 15% marginal tax on any Roth contributions. Growth is 7%.
- Constant withdrawals over 10 years, drawing proportionately from traditional and Roth, and taking the balances to $0 at the end.
- Taxable income $20,600 less than the traditional withdrawal amount. 2015 tax brackets. No credits, phaseouts, etc.

Three results are plotted:
- Blue is the annual total of Roth plus after-tax traditional withdrawals. I.e., the spendable amount. Values are on the center y-axis.
- Pink is the marginal withdrawal tax rate paid on traditional withdrawals.
- Green is average withdrawal tax rate paid on traditional withdrawals. Values for both tax rates are on the right y-axis.

The absolute value of the x-axis is the number of years the contributions go to a traditional account. Negative x-axis values mean contributions start with Roth and change to traditional, while the positive x-axis has traditional contributions first and Roth last.

Summary:
- The maximum spendable amount occurs when the marginal withdrawal rate equals the marginal contribution rate
- If the withdrawal marginal rate stays below the contribution rate, more contributions should have gone into traditional
- If the withdrawal marginal rate goes above the contribution rate, more contributions should have gone into Roth
- The average withdrawal tax rate provides no useful information beyond what the marginal withdrawal rate provides

Image
Last edited by FiveK on Sun May 20, 2018 1:15 pm, edited 1 time in total.

ParkersPaPa
Posts: 101
Joined: Sun Jun 14, 2015 9:16 am

Re: Roth, Traditional, and the 15% Tax Bracket

Post by ParkersPaPa » Sat Feb 27, 2016 7:34 pm

rkhusky wrote:Traditional 401k and Roth IRA will provide sufficient tax diversification.
...
I believed that for years until I learned my mega-corp's mega-bank 401k provider resolutely refuses to allow segregated withdrawal. If your 401k is 75% traditional and 25% Roth, that is the mix that is going to come out in any distribution etc. :annoyed

rkhusky
Posts: 8792
Joined: Thu Aug 18, 2011 8:09 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by rkhusky » Sat Feb 27, 2016 8:35 pm

ParkersPaPa wrote:
rkhusky wrote:Traditional 401k and Roth IRA will provide sufficient tax diversification.
...
I believed that for years until I learned my mega-corp's mega-bank 401k provider resolutely refuses to allow segregated withdrawal. If your 401k is 75% traditional and 25% Roth, that is the mix that is going to come out in any distribution etc. :annoyed
Yes, some plans are like that. And, unlike Roth IRA's, Roth 401K's have RMD's. If you can roll traditional IRA's back into your 401K, you could roll over 99% (or whatever it takes to leave the minimum in the plan) of your 401K to Traditional and Roth IRA's. Then roll the Traditional IRA back into the 401K. I would only do this if the 401K is better than any IRA (e.g. the federal government's ultra low cost TSP with its G Fund might fit that bill).

Northern Flicker
Posts: 5406
Joined: Fri Apr 10, 2015 12:29 am

Re: Roth, Traditional, and the 15% Tax Bracket

Post by Northern Flicker » Mon Feb 29, 2016 11:28 pm

Back to the couple in the 15% contribution bracket who have invested enough in previous years to withdraw $95.5K/yr (or whatever we assume for the top of the 15% bracket).

Consequently, any traditional contribution in this year would put them into the 25% withdrawal bracket, while their withdrawal average would still be ~11%. Because this year's traditional contributions would save 15% now but pay 25% later, the contributions should instead go to Roth.
Suppose, after making the contribution, the couple ceases making retirement contributions. Then I agree with the logic. But if the couple continues making contributions, perhaps you can convince yourself that it is not the marginal rate in retirement that matters for comparison to the currrent year marginal rate, but what the marginal rate in retirement would have been if contributions are terminated after the present contribution being evaluated.

Thus, it is only the final accumulation year's contributions that should be compared to the marginal rate in retirement. Previous years contributions should be compared to what the marginal rate in retirement would be if contributions were terminated in that year. I'll call this the hypothetical terminal rate for the present year's contribution. Note that this rule also allows for the lower brackets to be filled with traditional withdrawals as is desirable.

I also believe that aggregate tax rate in retirement may be a good estimate for the average of the hypothetical terminal rates over all year's contributions.

User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Tue Mar 01, 2016 12:11 am

jalbert wrote:
Back to the couple in the 15% contribution bracket who have invested enough in previous years to withdraw $95.5K/yr (or whatever we assume for the top of the 15% bracket).
Consequently, any traditional contribution in this year would put them into the 25% withdrawal bracket, while their withdrawal average would still be ~11%. Because this year's traditional contributions would save 15% now but pay 25% later, the contributions should instead go to Roth.
Suppose, after making the contribution, the couple ceases making retirement contributions. Then I agree with the logic. But if the couple continues making contributions, perhaps you can convince yourself that it is not the marginal rate in retirement that matters for comparison to the currrent year marginal rate, but what the marginal rate in retirement would have been if contributions are terminated after the present contribution being evaluated.
Yes, that is one defensible approach. Perhaps call it the "in case I lose my job and can't find another" approach. It's a perfectly reasonable conservative assumption, even if proven incorrect when employment continues.
Thus, it is only the final accumulation year's contributions that should be compared to the marginal rate in retirement. Previous years contributions should be compared to what the marginal rate in retirement would be if contributions were terminated in that year.
Not following here. Yes, in the actual final accumulation year the assumption above does come true.
But there are other defensible assumptions. E.g., the "I'm going to earn much more in later years" assumption. Under that assumption, if one estimates that future years' contributions will provide a marginal withdrawal rate higher than the current year's contribution, the current year contribution should be Roth. It's a perfectly reasonable aggressive assumption, even if proven incorrect when the higher future earnings don't materialize.

The relative upside vs. downside of the above two assumptions has been well discussed, and tends to favor the former unless one is "really sure" about those future earnings.
I'll call this the hypothetical terminal rate for the present year's contribution. Note that this rule also allows for the lower brackets to be filled with traditional withdrawals as is desirable.
You want to estimate the marginal withdrawal rate under any of the assumptions you choose, correct?
I also believe that aggregate tax rate in retirement may be a good estimate for the average of the hypothetical terminal rates over all year's contributions.
Might be. I'm willing to be persuaded. The estimated marginal withdrawal rate provides an unambiguous answer. As with most estimates, whether it is a good answer depends on whether the estimate is correct. It's not clear how one would use the average withdrawal tax rate. E.g., see the chart posted in viewtopic.php?f=1&t=185255&p=2819261#p2815980, in which the average withdrawal rate stays below the contribution rate for all combinations of traditional and Roth, but "some Roth" is the correct strategy.

Northern Flicker
Posts: 5406
Joined: Fri Apr 10, 2015 12:29 am

Re: Roth, Traditional, and the 15% Tax Bracket

Post by Northern Flicker » Tue Mar 01, 2016 3:16 am

Yes, that is one defensible approach. Perhaps call it the "in case I lose my job and can't find another" approach. It's a perfectly reasonable conservative assumption, even if proven incorrect when employment continues.
I'm not proposing it as a conservative approach, but as an analytic device for determining which vehicle will result in the lowest tax for a given contribution (whether one keeps contributing or not). It clarifies why using the marginal rate in retirement is not correct, except for one's final contribution.

KlangFool
Posts: 15583
Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by KlangFool » Tue Mar 01, 2016 9:27 am

ParkersPaPa wrote:
rkhusky wrote:Traditional 401k and Roth IRA will provide sufficient tax diversification.
...
I believed that for years until I learned my mega-corp's mega-bank 401k provider resolutely refuses to allow segregated withdrawal. If your 401k is 75% traditional and 25% Roth, that is the mix that is going to come out in any distribution etc. :annoyed
ParkersPaPa,

I think you are talking about 2 different things:

A) Trad. 401K and Roth IRA.

Versus

B) Trad. 401K and Roth 401K.

In the case of Roth IRAs, your employer has no control of what you can or cannot do. (A) provide sufficient tax diversification. The goal is to put money into Trad. 401K and earn some tax savings. Then, put the tax savings into Roth IRA account.

KlangFool

User avatar
FiveK
Posts: 8418
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth, Traditional, and the 15% Tax Bracket

Post by FiveK » Tue Mar 01, 2016 2:04 pm

jalbert wrote:
Yes, that is one defensible approach. Perhaps call it the "in case I lose my job and can't find another" approach. It's a perfectly reasonable conservative assumption, even if proven incorrect when employment continues.
I'm not proposing it as a conservative approach, but as an analytic device for determining which vehicle will result in the lowest tax for a given contribution (whether one keeps contributing or not). It clarifies why using the marginal rate in retirement is not correct, except for one's final contribution.
To what analytic device do you refer? A worked example, including numbers, would be useful.
jalbert wrote:
Back to the couple in the 15% contribution bracket who have invested enough in previous years to withdraw $95.5K/yr (or whatever we assume for the top of the 15% bracket).
Consequently, any traditional contribution in this year would put them into the 25% withdrawal bracket, while their withdrawal average would still be ~11%. Because this year's traditional contributions would save 15% now but pay 25% later, the contributions should instead go to Roth.
Suppose, after making the contribution, the couple ceases making retirement contributions. Then I agree with the logic.
Which contribution - traditional or Roth? Why do you then require cessation of contributions in order to agree?
But if the couple continues making contributions, perhaps you can convince yourself that it is not the marginal rate in retirement that matters for comparison to the currrent year marginal rate,
Until a valid counterexample including numbers is presented, the marginal rate remains the only retirement rate that matters under the scenario we have been discussing. See viewtopic.php?f=1&t=185255&p=2824221#p2815980.
but what the marginal rate in retirement would have been if contributions are terminated after the present contribution being evaluated.
What is the difference between the two bolded quotes (one here and the other a couple paragraphs above) that lead you to different conclusions?
Last edited by FiveK on Fri Apr 22, 2016 3:05 pm, edited 1 time in total.

ParkersPaPa
Posts: 101
Joined: Sun Jun 14, 2015 9:16 am

Re: Roth, Traditional, and the 15% Tax Bracket

Post by ParkersPaPa » Sat Mar 05, 2016 9:55 am

KlangFool wrote:
ParkersPaPa wrote:
rkhusky wrote:Traditional 401k and Roth IRA will provide sufficient tax diversification.
...
I believed that for years until I learned my mega-corp's mega-bank 401k provider resolutely refuses to allow segregated withdrawal. If your 401k is 75% traditional and 25% Roth, that is the mix that is going to come out in any distribution etc. :annoyed
ParkersPaPa,

I think you are talking about 2 different things:

A) Trad. 401K and Roth IRA.

Versus

B) Trad. 401K and Roth 401K.

In the case of Roth IRAs, your employer has no control of what you can or cannot do. (A) provide sufficient tax diversification. The goal is to put money into Trad. 401K and earn some tax savings. Then, put the tax savings into Roth IRA account.

KlangFool
You're correct. I was thinking of 401k's.

Post Reply