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.
- 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