Why traditional IRA better than Roth IRA

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misterno
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Why traditional IRA better than Roth IRA

Post by misterno » Wed Apr 11, 2018 4:21 pm

So I have this discussion with a family member. I was gonna support Roth IRA but it turns out traditional IRA is a way better idea

Here is what he said

Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning. Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year

That way you don't pay tax ever. It turns out IRS does not tax dividends and capital gains up to 72K/year if you have no other income.

Are these all true? Then why is Roth IRA so popular in this forum?

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stemikger
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Re: Why traditional IRA better than Roth IRA

Post by stemikger » Wed Apr 11, 2018 4:23 pm

I'm curious to see the replies. I honestly never heard this, but if this is the case, will this change in the future? I am in a TIRA, so it's good news for me.
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momm77
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Re: Why traditional IRA better than Roth IRA

Post by momm77 » Wed Apr 11, 2018 4:29 pm

IRA distributions are not taxed as dividends or capital gains. They are ordinary income and therefore do not receive the benefit of the lower tax rate on dividends and capital gains.

nolesrule
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Re: Why traditional IRA better than Roth IRA

Post by nolesrule » Wed Apr 11, 2018 4:32 pm

momm77 wrote:
Wed Apr 11, 2018 4:29 pm
IRA distributions are not taxed as dividends or capital gains. They are ordinary income and therefore do not receive the benefit of the lower tax rate on dividends and capital gains.
This.

OP's family member is going to be in for a rude awakening when it comes time to start making TIRA withdrawals and has to pay taxes.

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Pajamas
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Re: Why traditional IRA better than Roth IRA

Post by Pajamas » Wed Apr 11, 2018 4:38 pm

Other factors besides the classification of traditional IRA distributions as regular income:

Many people will have other income.
Many people are not eligible to deduct contributions to a traditional IRA.
Few people know exactly how federal taxes will be levied when they are retired in the future.
You can't contribute to a traditional IRA after 70 1/2.
Roth IRAs do not have required minimum distributions (until inherited).
Roth IRA distributions are usually not taxable.

02nz
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Re: Why traditional IRA better than Roth IRA

Post by 02nz » Wed Apr 11, 2018 5:56 pm

As someone else already pointed your family member is mistaken about capital gains taxes, which do not apply to either traditional or Roth IRAs. The main difference is whether you pay your income taxes now (Roth), or get a deduction now and pay the taxes at time of withdrawal instead. Pick your poison. If your tax rates are higher in retirement than now, that favors Roth; if lower in retirement then traditional is better. If rates are the same then it's a wash. See the wiki https://www.bogleheads.org/wiki/Traditional_versus_Roth.

Your family member isn't entirely wrong though, in that contributing to a Roth is sometimes overrated - converting into a Roth is often better. So, to revise that argument:

Contributing to a traditional IRA or 401k equivalent can be way better than to a Roth, because you get a tax deduction (there are income limits though for the traditional IRA). Then during years of no or low income, e.g. retirement (particularly before beginning to receive Social Security benefits), make withdrawals or Roth conversions at low tax rates (e.g., a married couple filing jointly currently pay no more than 12% marginal tax on their first $101,400 of income, with an average rate of under 9%; if that rate is lower than their marginal tax rate in the year when that income was originally earned, then they are saving - potentially a lot - in income tax.)

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patrick013
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Re: Why traditional IRA better than Roth IRA

Post by patrick013 » Wed Apr 11, 2018 6:44 pm

Invest in tax-deferred if the marginal tax rate in retirement
is expected to be less. That's the problem. Half of the
people don't know what their post-retirement tax rate will
be including pensions, annuities, social security etc..

Otherwise the tax-deferral is nice but if you can afford it the
Roth will be better, individual or 401k-Roth's maxed out.

Ho-hum.
age in bonds, buy-and-hold, 10 year business cycle

livesoft
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Re: Why traditional IRA better than Roth IRA

Post by livesoft » Wed Apr 11, 2018 6:48 pm

Folks, don't forget about the standard deduction which could make quite a lot of the traditional IRA withdrawal tax-free.

So no taxes going in and no taxes coming out.

I haven't run the numbers, but suppose a MFJ family had $72K a year from $30K Social Security checks and $42K from a traditional IRA withdrawal. How much Federal income tax would they pay?
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TravelforFun
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Re: Why traditional IRA better than Roth IRA

Post by TravelforFun » Wed Apr 11, 2018 6:52 pm

Everybody is different but some folks' IRA get so big when RMD hits them that makes them wish they had paid income taxes in their younger days and put that money in a Roth.

TravelforFun

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Re: Why traditional IRA better than Roth IRA

Post by JW-Retired » Wed Apr 11, 2018 7:02 pm

livesoft wrote:
Wed Apr 11, 2018 6:48 pm
Folks, don't forget about the standard deduction which could make quite a lot of the traditional IRA withdrawal tax-free.

So no taxes going in and no taxes coming out.

I haven't run the numbers, but suppose a MFJ family had $72K a year from $30K Social Security checks and $42K from a traditional IRA withdrawal. How much Federal income tax would they pay?
HRB calculator for 65 year old couple: $4430 for 2017 year, $3513 for 2018 year under the tax reform law. OP pays tax ..... any other meaning?
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MathWizard
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Re: Why traditional IRA better than Roth IRA

Post by MathWizard » Wed Apr 11, 2018 7:15 pm

Your family member is wrong.

Tax deferred is typically better because families normally don't move up in tax brackets when they retire.

The general advice is 401k to match, then Roth, then back to 401k
as long as 401k is not full of fees.

This usually means you end up with lots of tax deferred, so having some Roth is helpful when RMDs start to become a high percentage of the tax deffered account, which can push you into a higher bracket.

Roth when you arrive starting out is great because you are in a low bracket, and you can withdraw contributions without penalty, so you use it as a 2nd tier Emergency Fund. You will typically never need this, except maybe in job loss, so you get to put tax exempt retirement money away while in a low bracket.

MathWizard
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Re: Why traditional IRA better than Roth IRA

Post by MathWizard » Wed Apr 11, 2018 7:15 pm

Your family member is wrong.

Tax deferred is typically better because families normally don't move up in tax brackets when they retire.

The general advice is 401k to match, then Roth, then back to 401k
as long as 401k is not full of fees.

This usually means you end up with lots of tax deferred, so having some Roth is helpful when RMDs start to become a high percentage of the tax deffered account, which can push you into a higher bracket.

Roth when you arrive starting out is great because you are in a low bracket, and you can withdraw contributions without penalty, so you use it as a 2nd tier Emergency Fund. You will typically never need this, except maybe in job loss, so you get to put tax exempt retirement money away while in a low bracket.

sc9182
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Re: Why traditional IRA better than Roth IRA

Post by sc9182 » Wed Apr 11, 2018 7:45 pm

For many that experience higher tax bracket at retirement - most of them got: high social security (ie, lots of taxable earnings during long careers - in which case Roth during such years ain't saving much to begin with!), earn large pensions (highly valuable position, or Govt employement)., or some level of stock options and/or deferred comp (now, most often this is due to high paying job; excepting Govt workers), or taxable inheritance (ie rich family/trust doling out large inheritance monies).

If you see any/some of these above applicable to you, consider Roth (after 401k+match).

There are some other odd cases where first 10-20 years of career, you earned pittance, while the remainder of career you made like bandit. Now, if you look back, you should've done Roth instead of non-matched-401k-space during low earning years. But, how would you know/guess this before hand !?

With pensions on their way out, or reduction in such benefits, many among newer work-force may never see/enjoy good-ole pensions.

Roth conversion during low earning years, or mega-backdoor may be better options.

Given this evolving landscape - hard to foresee retirement income (or tax-bracket) to be higher than many earning years.

Do strongly suggest HSA, and also having multiple buckets (401k/403b, IRA, Roth, and taxable-brokerage) - each hold respective importance in retirement.

Thoughts!?
Last edited by sc9182 on Fri May 18, 2018 9:02 am, edited 1 time in total.

retiredjg
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Re: Why traditional IRA better than Roth IRA

Post by retiredjg » Wed Apr 11, 2018 8:17 pm

misterno wrote:
Wed Apr 11, 2018 4:21 pm
Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning.
This is only true for people who make money below certain thresholds. And the threshold is not particularly high.

Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year
I suppose there may be some fact pattern where this is correct, but this is certainly not a "generally true" statement in my opinion.

That way you don't pay tax ever. It turns out IRS does not tax dividends and capital gains up to 72K/year if you have no other income.
IRA withdrawals are ordinary income, not dividends and not capital gains.

Are these all true?
Not even close.

TropikThunder
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Re: Why traditional IRA better than Roth IRA

Post by TropikThunder » Wed Apr 11, 2018 8:26 pm

TravelforFun wrote:
Wed Apr 11, 2018 6:52 pm
Everybody is different but some folks' IRA get so big when RMD hits them that makes them wish they had paid income taxes in their younger days and put that money in a Roth.

TravelforFun
It's not at all that simple. The size of one's portfolio (and subsequent RMD) has nothing to do with whether they were in a higher or lower bracket while working.

Miriam2
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Re: Why traditional IRA better than Roth IRA

Post by Miriam2 » Wed Apr 11, 2018 8:32 pm

sc9182 wrote: Given this evolving landscape - hard to foresee retirement income (or tax-bracket) to be higher than many earning years. . . .
Do strongly suggest HSA, and also having multiple buckets (401k/403b, IRA, Roth, and taxable-brokerage) - each hold respective importance in retirement.
I agree. We are in a higher tax bracket in retirement than we ever were while working. I never thought it possible and never planned for it and also, life plays tricks on our plans. Factor in social security, RMDs, pensions, and still-working-earned-income, and the tax brackets jump up.

ncgenx
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Re: Why traditional IRA better than Roth IRA

Post by ncgenx » Wed Apr 11, 2018 8:54 pm

Another big difference IMO is that Traditional you HAVE to take a certain percentage out every year starting at 70 1/2. It's called the Required minimum distribution. Link to the FAQ here https://www.irs.gov/retirement-plans/re ... tributions. If you do not take it out, they tax you quite a bit for not taking the distribution. It's not required until your age is 70 1/2. Roth does not have this requirement. Based on what the market is doing and if you are still working or not you might not want to pull anything out of the IRA at that time in your life.

Our lifespans have continued to be longer and longer, and I personally think I might live to 90 to 100. *knock on wood* So that's 20-30 years of it being a requirement.

IMO "better" is not an objective term. Like so many things in life this is not one of those that one answer is correct for everyone.

It has been linked above but just in case https://www.bogleheads.org/wiki/Traditional_versus_Roth

I also recommend staying away from arguments when it comes to finances. Most of the people that are going to be the most argumentative know the least but think they know the most.

I have money in both Roth and Traditional so I get the pro's and con's of both.

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Re: Why traditional IRA better than Roth IRA

Post by Darth Xanadu » Wed Apr 11, 2018 10:15 pm

ncgenx wrote:
Wed Apr 11, 2018 8:54 pm

I have money in both Roth and Traditional so I get the pro's and con's of both.
Absolutely. I probably contributed to Roth 401k in some years I shouldn't have (now doing pre-tax) but the fact is having a chunk of retirement assets in Roth can be invaluable down the road to win the tax game, particularly since the rules in 30 years will likely be different.
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22twain
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Re: Why traditional IRA better than Roth IRA

Post by 22twain » Thu Apr 12, 2018 12:28 am

MathWizard wrote:
Wed Apr 11, 2018 7:15 pm
families normally don't move up in tax brackets when they retire.
Except on this forum, of course, with our Prodigious Accumulators of Wealth. :wink:
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TwstdSista
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Re: Why traditional IRA better than Roth IRA

Post by TwstdSista » Thu Apr 12, 2018 3:44 am

We prefer Roth since we *might* move up a tax bracket.

SS payments of approximately $48000 plus me still working part-time for another $50000. Still in the 12-15% tax bracket, but add RMDs of $35000 and we could jump up. It all depends on what tax rates and brackets are in 20-25 years.

(are Medicare premiums deductible? what if I'm self-employed and still working? -- add this to the list of things I need to figure out)

(also, I can't fully retire since I need structure. I'd sit on the couch all day....)

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Tamarind
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Re: Why traditional IRA better than Roth IRA

Post by Tamarind » Thu Apr 12, 2018 5:12 am

It's not always wrong. The thing about capital gains and dividend rates is just irrelevant, but if you didn't save much, your tax rate will probably be lower in retirement, making tIRA the better choice (in retrospect).

However, your relative may be in for a rude awakening if they are expecting to have control of the amount of withdrawals but actually did save a lot. RMDs will eventually force your tax bracket up if you have significant tIRA holdings.

And not to be morbid, but if your relative has a spouse who is likely to outlive them, that spouse will be pushed into a higher bracket for the same level of income afterwards.

aristotelian
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Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Thu Apr 12, 2018 6:22 am

Your family member is correct. The only question is whether you can keep your future taxes that low. You are taking a risk that tax rates might change or your income might be too high. If you work until 70 and get 50k from social security, you may not have enough room in the low tax brackets to withdraw all of your Traditional accounts.

For this reason, a good general approach is 401k as the primary vehicle combined with Roth IRA for diversification.

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Who
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Re: Why traditional IRA better than Roth IRA

Post by Who » Thu Apr 12, 2018 6:35 am

Can't tax brackets change over time?

In 30 or 40 years, at any specific income level (adjusted for inflation), is there any guarantee that the tax rate will be the same as it is now? Is there any guarantee that the tax will even be "close" to what it is now? There is no guarantee that I know of. And I don't know if it is a safe bet that the tax brackets will not change substantially. This is debatable, but I'd think that at some time in the future we'd have to start paying off our national debt. There might be some unfortunate changes to our tax brackets that comes with that.

I'm paying my tax now. I don't care what tax brackets are in the future. I will pay no tax when I take my Roth distributions.

retiredjg
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Re: Why traditional IRA better than Roth IRA

Post by retiredjg » Thu Apr 12, 2018 7:04 am

aristotelian wrote:
Thu Apr 12, 2018 6:22 am
Your family member is correct....For this reason, a good general approach is 401k as the primary vehicle combined with Roth IRA for diversification.
I think you may have missed the word "IRA" in the original post?

aristotelian
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Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Thu Apr 12, 2018 7:16 am

retiredjg wrote:
Thu Apr 12, 2018 7:04 am
aristotelian wrote:
Thu Apr 12, 2018 6:22 am
Your family member is correct....For this reason, a good general approach is 401k as the primary vehicle combined with Roth IRA for diversification.
I think you may have missed the word "IRA" in the original post?
Not sure what you mean. I did not miss anything.

retiredjg
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Re: Why traditional IRA better than Roth IRA

Post by retiredjg » Thu Apr 12, 2018 7:44 am

aristotelian wrote:
Thu Apr 12, 2018 7:16 am
retiredjg wrote:
Thu Apr 12, 2018 7:04 am
aristotelian wrote:
Thu Apr 12, 2018 6:22 am
Your family member is correct....For this reason, a good general approach is 401k as the primary vehicle combined with Roth IRA for diversification.
I think you may have missed the word "IRA" in the original post?
Not sure what you mean. I did not miss anything.
The poster was talking about traditional IRA being better than Roth IRA, not the general question of traditional vs Roth.

Since you seem to like the traditional 401k and Roth IRA combination, it seemed unlikely that you thought traditional IRA is better (especially since many people cannot even deduct it).

Perhaps I misunderstood. :happy

aristotelian
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Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Thu Apr 12, 2018 7:47 am

retiredjg wrote:
Thu Apr 12, 2018 7:44 am
The poster was talking about traditional IRA being better than Roth IRA, not the general question of traditional vs Roth.

Since you seem to like the traditional 401k and Roth IRA combination, it seemed unlikely that you thought traditional IRA is better (especially since many people cannot even deduct it).

Perhaps I misunderstood. :happy
Yes, my assumption is that if he already has 401k as his primary vehicle, diversification would favor Roth for his IRA. I should have been clearer, if he does not have a 401k and this is his only retirement account, then yes, I would generally favor Traditional.

TropikThunder
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Re: Why traditional IRA better than Roth IRA

Post by TropikThunder » Thu Apr 12, 2018 3:06 pm

Who wrote:
Thu Apr 12, 2018 6:35 am
Can't tax brackets change over time?
—————————————————-
I'm paying my tax now. I don't care what tax brackets are in the future. I will pay no tax when I take my Roth distributions.
You acknowledge that tax brackets can change. There’s no guarantee that Roth withdrawal rules won’t change 20-30 years from now too.

FireAway
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Re: Why traditional IRA better than Roth IRA

Post by FireAway » Thu Apr 12, 2018 3:42 pm

Neither one is "better". They are both investment tools that you can use in different ways, for different circumstances, to help minimize taxes. You may as well ask "Which is better, stocks or bonds?".

I contributed heavily to a 401K while my income was high, this acted to defer the high taxes I would have paid at the time. At the same time I was doing backdoor Roth contributions to move some of the money I had already paid taxes on into a Roth, so that my earnings would be tax-free. Now that I am in a lower tax bracket, I am moving some of my tIRA money into Roth, taking advantage of a 0% or 12% tax bracket on those conversions. These are lower tax rates than I was paying in my peak earner years, and lower than I anticipate them being during my RMD phase.

The decision of what to use, and when, depends on your tax bracket, earnings, savings, RMDS etc. now, and in the future. Many other variables come into play as well.

retiredjg
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Re: Why traditional IRA better than Roth IRA

Post by retiredjg » Thu Apr 12, 2018 3:56 pm

Misterno, as you can see, the discussion is not as simple as "which is better?". The presence or absence of a work plan affects this decision. Whether one is in a high or low tax bracket affects this decision. Whether one can deduct the contribution affects the decision. Not mentioned, but whether one can reach the saver's credit on federal taxes affects this decision. And there are probably other issues yet to be mentioned.


What DOES NOT affect this decision is the mistaken impression your family member has about staying under 72k a year. That could apply to long term capital gains or to qualified dividends, but It does not apply to an IRA withdrawal. A good portion of that 72k is going to be taxed. Your family member might appreciate learning this.
Last edited by retiredjg on Fri Apr 13, 2018 6:16 am, edited 1 time in total.

gr7070
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Re: Why traditional IRA better than Roth IRA

Post by gr7070 » Thu Apr 12, 2018 4:15 pm

For the extreme majority of middle class America the tax-deferred account is exceedingly likely to be superior to the Roth account.

The deferred account saves you 25% taxes on every penny. Presumably we will always have a graduated tax. Therefore in the future some of that will be taxed at very low to no rates.

In order for that future aggregate tax rate to exceed 25% (what you're saving today) you'll have to be taxed on a fair amount of money at very high rates. That's just highly unlikely for the vast majority of Americans.

BigJohn
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Re: Why traditional IRA better than Roth IRA

Post by BigJohn » Thu Apr 12, 2018 4:20 pm

One other complication I haven’t seen mentioned. By the time you start RMDs you are also talking SS. At some points along the income curve this can result in quite high incremental taxes. As the RMD adds income which gets taxed, it can pull in up to 85% of your SS into your AGI as well. So for example, it’s possible that a $1000 RMD can increase your taxable income by $1850. See this wiki article for more details
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

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Re: Why traditional IRA better than Roth IRA

Post by bsteiner » Thu Apr 12, 2018 4:34 pm

The Roth contribution or conversion generally makes sense to the extent you can do so at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply to the distributions.

For more on this, see my article in the April 2013 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... r_ATRA.pdf.

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Re: Why traditional IRA better than Roth IRA

Post by JW-Retired » Thu Apr 12, 2018 4:46 pm

misterno wrote:
Wed Apr 11, 2018 4:21 pm
Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning. Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year

That way you don't pay tax ever. It turns out IRS does not tax dividends and capital gains up to 72K/year if you have no other income.

Are these all true?
No, they are flat out wrong. As the first couple of responses in the thread pointed out, IRA withdrawals are taxed the same as ordinary earned income. The $72K/year guy will pay lots of tax.

So why has this thread been going on and on?
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JBTX
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Re: Why traditional IRA better than Roth IRA

Post by JBTX » Thu Apr 12, 2018 4:49 pm

livesoft wrote:
Wed Apr 11, 2018 6:48 pm


I haven't run the numbers, but suppose a MFJ family had $72K a year from $30K Social Security checks and $42K from a traditional IRA withdrawal. How much Federal income tax would they pay?
You might be surprised.

If you assume someone around 54 currently, and assume tax rates revert to 2017 rates and brackets, as per current law, the total amount would be around $5300.

That would actually fall into a 27.75% marginal rate, due to taxability of social security impact.

retiredjg
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Re: Why traditional IRA better than Roth IRA

Post by retiredjg » Thu Apr 12, 2018 5:17 pm

JW-Retired wrote:
Thu Apr 12, 2018 4:46 pm
So why has this thread been going on and on?
Good question. :D

PFInterest
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Re: Why traditional IRA better than Roth IRA

Post by PFInterest » Thu Apr 12, 2018 5:21 pm

misterno wrote:
Wed Apr 11, 2018 4:21 pm
So I have this discussion with a family member. I was gonna support Roth IRA but it turns out traditional IRA is a way better idea

Here is what he said

Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning. Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year

That way you don't pay tax ever. It turns out IRS does not tax dividends and capital gains up to 72K/year if you have no other income.

Are these all true? Then why is Roth IRA so popular in this forum?
lol what......OP come back and update yourself.

misterno
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Re: Why traditional IRA better than Roth IRA

Post by misterno » Thu Apr 12, 2018 7:28 pm

PFInterest wrote:
Thu Apr 12, 2018 5:21 pm
misterno wrote:
Wed Apr 11, 2018 4:21 pm
So I have this discussion with a family member. I was gonna support Roth IRA but it turns out traditional IRA is a way better idea

Here is what he said

Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning. Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year

That way you don't pay tax ever. It turns out IRS does not tax dividends and capital gains up to 72K/year if you have no other income.

Are these all true? Then why is Roth IRA so popular in this forum?
lol what......OP come back and update yourself.
well it is tax season so lot of questions and learning alot

there is no clear cut between traditional vs roth

but I am leaning towards roth because I can take the principal out without penalty and I will be paying less tax overall because when withdrawal time comes total money will be much bigger and with Roth I am not paying any tax whereas with traditional I would be. Another advantage is backdoor but I did not research that yet

aristotelian
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Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Thu Apr 12, 2018 7:41 pm

JBTX wrote:
Thu Apr 12, 2018 4:49 pm
livesoft wrote:
Wed Apr 11, 2018 6:48 pm


I haven't run the numbers, but suppose a MFJ family had $72K a year from $30K Social Security checks and $42K from a traditional IRA withdrawal. How much Federal income tax would they pay?
You might be surprised.

If you assume someone around 54 currently, and assume tax rates revert to 2017 rates and brackets, as per current law, the total amount would be around $5300.

That would actually fall into a 27.75% marginal rate, due to taxability of social security impact.
But that is only a 7% effective rate.

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Re: Why traditional IRA better than Roth IRA

Post by Bfwolf » Thu Apr 12, 2018 7:42 pm

misterno wrote:
Thu Apr 12, 2018 7:28 pm
when withdrawal time comes total money will be much bigger and with Roth I am not paying any tax whereas with traditional I would be.
This is a common fallacy. It doesn't matter that the money will be greater when you take it out. Here's a simple exercise to prove the point.

Let's compare $10,000 and a decision to contribute it to a traditional IRA and pay taxes later vs pay taxes on it now and contribute to a Roth IRA. Let's assume a 20% marginal tax bracket both now and in retirement in 10 years. Let's assume a 6% compound annual growth rate.

Scenario 1, traditional IRA: You put $10,000 in the traditional IRA. In 10 years, it grows to $17,908.48. You withdraw it, and pay 20% in taxes, leaving you with $14,326.78.

Scenario 2, Roth IRA: You pay 20% in taxes up front and so put $8,000 in the Roth IRA. In 10 years, it grows to $14,326.78.

As you can see, you end up with the same amount of money both ways, despite the fact that you paid tax on a much bigger number with the tIRA since taxes were deferred.

The key driver for why you should prefer a tIRA to a Roth IRA is tax bracket....if you will be in a lower tax bracket in retirement, choose traditional. Vice versa, choose Roth.

Being able to withdraw your Roth contribution, which you mentioned, is another Roth benefit.

Edited to change "CAGR" to "compound annual growth rate" to avoid acronymitis

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Who
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Re: Why traditional IRA better than Roth IRA

Post by Who » Fri Apr 13, 2018 1:12 am

TropikThunder wrote:
Thu Apr 12, 2018 3:06 pm
Who wrote:
Thu Apr 12, 2018 6:35 am
Can't tax brackets change over time?
—————————————————-
I'm paying my tax now. I don't care what tax brackets are in the future. I will pay no tax when I take my Roth distributions.
You acknowledge that tax brackets can change. There’s no guarantee that Roth withdrawal rules won’t change 20-30 years from now too.
Yes, Roth withdrawal rules can change 20-30 years from now. That is possible, if too many people discover how good the Roth is, pile in, and Uncle Sam realizes that too many people are shielding their money from him. But I don't care. I will be grandfathered in under the old rules.

Uncle Sam makes no guarantee that tax brackets won't change in the future. But Roth account withdrawal rules are guaranteed -- as guaranteed as they can be. They are guaranteed because they are in written law, in effect today.

TropikThunder
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Re: Why traditional IRA better than Roth IRA

Post by TropikThunder » Fri Apr 13, 2018 1:24 am

Who wrote:
Fri Apr 13, 2018 1:12 am

But Roth account withdrawal rules are guaranteed -- as guaranteed as they can be. They are guaranteed because they are in written law, in effect today.
That’s a tad naive in my opinion. There’s nothing in the law that says Congress can’t change the rules and make Roth withdrawals taxable in the future. Likely? No. Possible? Yes.
Can Congress Renege on the tax-free Roth IRA?
Let’s start with the political reality. First, can Congress do it? I think the answer here is pretty unequivocally: Yes. Congress has it within their rights to change the tax treatment for Roth retirement accounts at some point down the road, draw a line in the sand, and say, “Oh, well, we used to allow qualified withdrawals from Roths to be tax free, but we changed our minds, we’re not going to allow that anymore.” So the question of could it happen? Yes, it’s legitimately possible.
https://www.kitces.com/blog/will-congre ... a-promise/

infotrader
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Re: Why traditional IRA better than Roth IRA

Post by infotrader » Fri Apr 13, 2018 1:26 am

Bfwolf wrote:
Thu Apr 12, 2018 7:42 pm
misterno wrote:
Thu Apr 12, 2018 7:28 pm
when withdrawal time comes total money will be much bigger and with Roth I am not paying any tax whereas with traditional I would be.
This is a common fallacy. It doesn't matter that the money will be greater when you take it out. Here's a simple exercise to prove the point.

Let's compare $10,000 and a decision to contribute it to a traditional IRA and pay taxes later vs pay taxes on it now and contribute to a Roth IRA. Let's assume a 20% marginal tax bracket both now and in retirement in 10 years. Let's assume a 6% compound annual growth rate.

Scenario 1, traditional IRA: You put $10,000 in the traditional IRA. In 10 years, it grows to $17,908.48. You withdraw it, and pay 20% in taxes, leaving you with $14,326.78.

Scenario 2, Roth IRA: You pay 20% in taxes up front and so put $8,000 in the Roth IRA. In 10 years, it grows to $14,326.78.

As you can see, you end up with the same amount of money both ways, despite the fact that you paid tax on a much bigger number with the tIRA since taxes were deferred.

The key driver for why you should prefer a tIRA to a Roth IRA is tax bracket....if you will be in a lower tax bracket in retirement, choose traditional. Vice versa, choose Roth.

Being able to withdraw your Roth contribution, which you mentioned, is another Roth benefit.

Edited to change "CAGR" to "compound annual growth rate" to avoid acronymitis
Best explanation so far.
There is not a question of if roth is good or bad. It is all about whether it is good to your unique tax situation.

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Who
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Re: Why traditional IRA better than Roth IRA

Post by Who » Fri Apr 13, 2018 5:11 am

TropikThunder wrote:
Fri Apr 13, 2018 1:24 am
Who wrote:
Fri Apr 13, 2018 1:12 am

But Roth account withdrawal rules are guaranteed -- as guaranteed as they can be. They are guaranteed because they are in written law, in effect today.
That’s a tad naive in my opinion. There’s nothing in the law that says Congress can’t change the rules and make Roth withdrawals taxable in the future. Likely? No. Possible? Yes.
Can Congress Renege on the tax-free Roth IRA?
Let’s start with the political reality. First, can Congress do it? I think the answer here is pretty unequivocally: Yes. Congress has it within their rights to change the tax treatment for Roth retirement accounts at some point down the road, draw a line in the sand, and say, “Oh, well, we used to allow qualified withdrawals from Roths to be tax free, but we changed our minds, we’re not going to allow that anymore.” So the question of could it happen? Yes, it’s legitimately possible.
https://www.kitces.com/blog/will-congre ... a-promise/
Thanks for your comment and the Kitces link. Googling around the internet, I can see that this is a hot debate topic.

If I was going to quote someone, I'd do Ed Slott. I've found quotes from him that are close to what I said. But let's continue with Kitces. The next thing Kitces says is:
Now, will it happen? As Aaron put it, is it realistically possible that this is going to happen? And really I think the answer is realistically no.
Kitces doesn't think this is as "guaranteed" as I do, but he ends up in the same camp as me. It ain't happening.

As Kitces says, congress could pass another law, and renege on their promise. I agree that is possible. But I don't agree that their law will stand.

We have 3 branches of government, with checks and balances. If congress went rogue and passed this law, I'd expect the judicial branch to quickly kill it. Wouldn't reneging be a clear violation of contract law?

I suppose it all comes down to whether you trust government or not. I'll put my faith in them, but if 2 of the 3 branches go rogue, we've got problems.

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oldcomputerguy
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Re: Why traditional IRA better than Roth IRA

Post by oldcomputerguy » Fri Apr 13, 2018 5:58 am

TropikThunder wrote:
Fri Apr 13, 2018 1:24 am
That’s a tad naive in my opinion. There’s nothing in the law that says Congress can’t change the rules and make Roth withdrawals taxable in the future. Likely? No. Possible? Yes.
Agreed. I think that the recently-passed tax legislation (along with the 2016 closing of the "file-and-suspend" loophole) is ample proof that the playing field can change at any time. There are no guarantees that the situation now will be the situation in ten, twenty, or thirty years.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

BigJohn
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Re: Why traditional IRA better than Roth IRA

Post by BigJohn » Fri Apr 13, 2018 7:02 am

TropikThunder wrote:
Fri Apr 13, 2018 1:24 am
That’s a tad naive in my opinion. There’s nothing in the law that says Congress can’t change the rules and make Roth withdrawals taxable in the future. Likely? No. Possible? Yes.
I agree this is a possibility and would not look to the executive or judiciary to change the course if it happens. While it may not seem “fair”, what law would have been violated by this change?

If you need a historical example, look at taxation of SS. For years the common belief was that it could not and would not be taxed. After all, we pay taxes on the money going in so paying taxes coming out would be “unfair” double taxation. Then Congress passed a law where up to 50% of the benefit could be taxed and now it’s up to 85% of the benefit.

I’m not saying the Roth rules are likely to change with no grandfathering provisions but it’s not beyond the realm of possibility.

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JoMoney
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Re: Why traditional IRA better than Roth IRA

Post by JoMoney » Fri Apr 13, 2018 7:53 am

TravelforFun wrote:
Wed Apr 11, 2018 6:52 pm
Everybody is different but some folks' IRA get so big when RMD hits them that makes them wish they had paid income taxes in their younger days and put that money in a Roth.

TravelforFun
For the sake of argument, I'll point out that seems like a wonderful situation to be in... relative to paying the taxes now, missing out on the deferred growth of that money, and winding up in a lower bracket (not by choice) in my withdrawal years.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Why traditional IRA better than Roth IRA

Post by ruralavalon » Fri Apr 13, 2018 8:48 am

misterno wrote:
Wed Apr 11, 2018 4:21 pm
So I have this discussion with a family member. I was gonna support Roth IRA but it turns out traditional IRA is a way better idea

Here is what he said

Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning. Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year

That way you don't pay tax ever. It turns out IRS does not tax dividends and capital gains up to 72K/year if you have no other income.

Are these all true? Then why is Roth IRA so popular in this forum?
For most people traditional deductible contributions will probably be better. But the explanation is wrong. Retirement usually means that employment income has ended. The income tax code is progressive.

For most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

Ordinarily most people are likely better off making traditional contributions to their work-based plans. A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Who
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Re: Why traditional IRA better than Roth IRA

Post by Who » Fri Apr 13, 2018 9:53 am

BigJohn wrote:
Fri Apr 13, 2018 7:02 am
While it may not seem “fair”, what law would have been violated by this change?
I'm not a lawyer, but as I read it, current law says Roth IRAs will not be retaxed.

https://www.law.cornell.edu/uscode/text/26/408A

"Any qualified distribution from a Roth IRA shall not be includible in gross income."

When two parties enter a legal contract, the contract is binding. After they've both "signed on the bottom line," many years later one party cannot rip up the old contract and rewrite it to the detriment of the other party. That cannot be allowed. If it ever happens, correction should be available through the court system.

I don't understand the example of Social Security taxation. "Common belief" is not law. If it isn't written into law that Social Security will not be taxed, then of course it can (will) be taxed in the future.

I also don't understand the file-and-suspend example. When the law was changed, lucky people at the right age were grandfathered in, and received the benefit. If you were too young, too bad. No promise was made to you: the offer was rescinded before you could get it.

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Re: Why traditional IRA better than Roth IRA

Post by JBTX » Fri Apr 13, 2018 10:14 am

aristotelian wrote:
Thu Apr 12, 2018 7:41 pm
JBTX wrote:
Thu Apr 12, 2018 4:49 pm
livesoft wrote:
Wed Apr 11, 2018 6:48 pm


I haven't run the numbers, but suppose a MFJ family had $72K a year from $30K Social Security checks and $42K from a traditional IRA withdrawal. How much Federal income tax would they pay?
You might be surprised.

If you assume someone around 54 currently, and assume tax rates revert to 2017 rates and brackets, as per current law, the total amount would be around $5300.

That would actually fall into a 27.75% marginal rate, due to taxability of social security impact.
But that is only a 7% effective rate.
Maybe but effective rate is irrelevant.

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