Why do so many people quote "You will likely be in a lower tax bracket in retirement"

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CnC
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Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Wed May 16, 2018 6:31 pm

I just saw another comment where someone was touting the benefits of a pretax 401k vs a Roth where they said most people will be in a lower tax bracket in retirement so pretax is better.

While that is a pair of factually correct statements. Most people will be in a lower bracket. And if you are in a lower tax bracket in retirement you will be better off pre tax.

But the people they are talking to on this site are maxing out their 401k's, IRA's and funding 529's, HSA's or taxable accounts.

These are not the "typical people" that will be in a lower tax bracket in retirement. Having 25x annual expenses is considered a risky retirement here.

So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?

Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.

Any thoughts?

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JoMoney
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JoMoney » Wed May 16, 2018 6:38 pm

There are many many people who visit and use this site and are not among the super wealthy image some have created as "typical" Boglehead.
The consequence of having too much taxable money in retirement is having to pay more taxes.
The consequence of paying more in taxes today and a smaller balance in retirement may mean not being able to match expenses.

If I can plan around the taxes optimally, then great.. but there are worse situations then having to pay taxes because you're drawing down RMDs on too big of a retirement account.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by retiredjg » Wed May 16, 2018 6:40 pm

CnC wrote:
Wed May 16, 2018 6:31 pm
But the people they are talking to on this site are maxing out their 401k's, IRA's and funding 529's, HSA's or taxable accounts.

These are not the "typical people" that will be in a lower tax bracket in retirement. Having 25x annual expenses is considered a risky retirement here.
People who are filling all those accounts are actually living on a much lower amount than their income. When the time comes for retirement, unless their expenses go up a lot, they will need/take a much lower income than they had while working. Thus....the lower tax bracket in retirement.

Do not confuse wealth with high income. A person can be very wealthy and have a low income (and a low tax bracket).

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by bmelikia » Wed May 16, 2018 7:01 pm

I'm 33.5 years old - I don't pretend to know what tax bracket I will be in 26 year from now - also, I don't know what tax brackets will be in 26 years - maybe there won't even be "tax brackets" in 26 years. . .

. . .I am confident, however, that "future me" will enjoy not paying any taxes on my Roth IRA and Roth 401k withdrawals - that assumes my health allows me to make it to 59.5+ years old
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by jakehefty17 » Wed May 16, 2018 7:07 pm

CnC wrote:
Wed May 16, 2018 6:31 pm
So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?
When you're retired, your taxable income most certainly should be lower.

There's always exceptions to any rule and the highly successful are more likely to exceed normal limitations. If you're planning on a retirement where you continue to earn taxable income and you expect to make more money than you are now, Roth accounts may be better.

The immediate tax benefits of a traditional 401k are more appealing to most people. Fact is you don't know what your tax bracket will be in the future. Getting the tax break now is tangible and easier then hedging your bet on the unknown future.

I have a traditional 401k and a Roth IRA. Will start a taxable account soon.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by flyingaway » Wed May 16, 2018 7:10 pm

Because otherwise you would have worked too long.

CnC
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Wed May 16, 2018 7:10 pm

retiredjg wrote:
Wed May 16, 2018 6:40 pm

People who are filling all those accounts are actually living on a much lower amount than their income. When the time comes for retirement, unless their expenses go up a lot, they will need/take a much lower income than they had while working. Thus....the lower tax bracket in retirement.

Do not confuse wealth with high income. A person can be very wealthy and have a low income (and a low tax bracket).
This is true that they will potentially have a low income up until 70.5 but the government will not allow wealthy to continue withdrawing a low income. I started running some numbers on my wife and my rmd's if we worked until full retirement and we wait untill 70 to withdraw social security. The RMD'S + social security would be an obscene amount that I doubt we could spend. (we are planning for a much earlier exit)

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JoeRetire » Wed May 16, 2018 7:15 pm

CnC wrote:
Wed May 16, 2018 6:31 pm
So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?
For most people this is not misleading advice.
Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.
The traditional advice is correct for the majority of people here, but is often determined by the age of the individual. Younger folks tend to make less, and are thus already in a low tax bracket, but will earn more and be in higher brackets when they reach their peak earning years.

You should examine your personal situation to determine if you are in the majority or not.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Slacker » Wed May 16, 2018 7:22 pm

Personally, I don't have a problem with putting in 28% [correction] 24% tax bracket money that I will pull out filling up the 10%, 12% and 22% tax brackets.

CnC
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Wed May 16, 2018 7:24 pm

JoeRetire wrote:
Wed May 16, 2018 7:15 pm
CnC wrote:
Wed May 16, 2018 6:31 pm
So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?
For most people this is not misleading advice.
Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.
The traditional advice is correct for the majority of people here, but is often determined by the age of the individual. Younger folks tend to make less, and are thus already in a low tax bracket, but will earn more and be in higher brackets when they reach their peak earning years.

You should examine your personal situation to determine if you are in the majority or not.

We throw around majority, but the majority saves nothing or next to nothing.

Anyone who maxes their 401k is not in the majority. So saying something is true for the majority certainly doesn't meant it's true for the 401k maxer.

I'm interested in knowing if the regular 401ks are best for the majority of 401k and it's maxers. Everything I always read talks to me like making my 401k is impossible.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by marcopolo » Wed May 16, 2018 7:30 pm

CnC wrote:
Wed May 16, 2018 7:10 pm
retiredjg wrote:
Wed May 16, 2018 6:40 pm

People who are filling all those accounts are actually living on a much lower amount than their income. When the time comes for retirement, unless their expenses go up a lot, they will need/take a much lower income than they had while working. Thus....the lower tax bracket in retirement.

Do not confuse wealth with high income. A person can be very wealthy and have a low income (and a low tax bracket).
This is true that they will potentially have a low income up until 70.5 but the government will not allow wealthy to continue withdrawing a low income. I started running some numbers on my wife and my rmd's if we worked until full retirement and we wait untill 70 to withdraw social security. The RMD'S + social security would be an obscene amount that I doubt we could spend. (we are planning for a much earlier exit)
Exactly, you are planning earlier exit, and can do Roth conversions at lower bracket to reduce RMD.

I was in highest or second highest bracket for most of my accumulation years, maxed all tax-advantaged plans, retired early, and plan to be in 12% marginal tax bracket for the foreseeable future, so I fit the profile described by retiredjg above. You likely do as well.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by SpringMan » Wed May 16, 2018 7:30 pm

We were in a lower bracket when we retired but once RMDs kicked in at age 70.5 that was no longer the case. I consider this a good problem to have.
Best Wishes, SpringMan

CnC
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Wed May 16, 2018 7:39 pm

By the way guys relax I'm not out to get anyone and I'm not saying pretax is a scam or anything.

I'm just trying to open up the conversation with scenarios. Personally I will have 15-20 years to convert our 401ks so I think we might come out ahead, but it will be pretty tight.


If I wasn't planning such an early exit pretax contributions would have been a very poor choice.

The very idea that it was never even suggested that I look into a Roth 401k was surprising to me.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by NYC_Guy » Wed May 16, 2018 7:43 pm

My marginal rate, while working, is > 50%. Moving out of NYC and NYS (to my house in Pennsylvania) in retirement will lower my marginal rate by ~13% w/r/t withdrawals from my TIRA and Trad401k. I also expect my Federal rate to be lower. But none of us has a crystal ball. If I was not at the top Federal rate and in a state (and city) with a relatively high top bracket, my calculus would be different. YMMV.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by lostdog » Wed May 16, 2018 7:44 pm

CnC wrote:
Wed May 16, 2018 7:24 pm
JoeRetire wrote:
Wed May 16, 2018 7:15 pm
CnC wrote:
Wed May 16, 2018 6:31 pm
So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?
For most people this is not misleading advice.
Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.
The traditional advice is correct for the majority of people here, but is often determined by the age of the individual. Younger folks tend to make less, and are thus already in a low tax bracket, but will earn more and be in higher brackets when they reach their peak earning years.

You should examine your personal situation to determine if you are in the majority or not.

We throw around majority, but the majority saves nothing or next to nothing.

Anyone who maxes their 401k is not in the majority. So saying something is true for the majority certainly doesn't meant it's true for the 401k maxer.

I'm interested in knowing if the regular 401ks are best for the majority of 401k and it's maxers. Everything I always read talks to me like making my 401k is impossible.
Most don't even save to match.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Sandi_k » Wed May 16, 2018 7:45 pm

It is individually dependent.

- Some make too much to contribute to a Roth, except via the backdoor sidestep.

- Some don't have 401(k) Roths available at all.

- Some of us do have pensions - that may very well, when combined with investment withdrawals, kick us into the same (or higher!) tax bracket.

- However, tax rates/brackets have changed - how was I supposed to plan for that?!

In short, everyone has to do their own due diligence. My spreadsheet clearly coalesces around certain years to do some Roth conversions, especially when looking at IRMAA snapshots. For others, that might not be true at all.

No one cares more about your money and tax payments than you do. :D

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JBTX » Wed May 16, 2018 7:49 pm

CnC wrote:
Wed May 16, 2018 7:24 pm
JoeRetire wrote:
Wed May 16, 2018 7:15 pm
CnC wrote:
Wed May 16, 2018 6:31 pm
So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?
For most people this is not misleading advice.
Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.
The traditional advice is correct for the majority of people here, but is often determined by the age of the individual. Younger folks tend to make less, and are thus already in a low tax bracket, but will earn more and be in higher brackets when they reach their peak earning years.

You should examine your personal situation to determine if you are in the majority or not.

We throw around majority, but the majority saves nothing or next to nothing.

Anyone who maxes their 401k is not in the majority. So saying something is true for the majority certainly doesn't meant it's true for the 401k maxer.

I'm interested in knowing if the regular 401ks are best for the majority of 401k and it's maxers. Everything I always read talks to me like making my 401k is impossible.
It is a much debated subject and it all depends on the underlying assumptions.

I would agree that for most people, the traditional is better, under certain assumptions, because they will likely be at a lower rate in retirment.

The assumptions are:

- taxes don’t materially increase in the future
- if investing in traditional, the upfront tax savings will be reinvested in a taxable or tax deferred account until retirement
- social security impact on retirement impact will not come into play. This is more likely to be true if they retire well before receiving social security and do Roth conversions during that pre social security phase
- there are no other significant sources of retirement income, such as pensions or part time work while receiving social security.

All of those could certainly be true for many Bogleheads. I think they are less likely to be true for rank and file non bogleheads.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MNGopher » Wed May 16, 2018 7:55 pm

CnC wrote:
Wed May 16, 2018 7:10 pm
retiredjg wrote:
Wed May 16, 2018 6:40 pm

People who are filling all those accounts are actually living on a much lower amount than their income. When the time comes for retirement, unless their expenses go up a lot, they will need/take a much lower income than they had while working. Thus....the lower tax bracket in retirement.

Do not confuse wealth with high income. A person can be very wealthy and have a low income (and a low tax bracket).
This is true that they will potentially have a low income up until 70.5 but the government will not allow wealthy to continue withdrawing a low income. I started running some numbers on my wife and my rmd's if we worked until full retirement and we wait untill 70 to withdraw social security. The RMD'S + social security would be an obscene amount that I doubt we could spend. (we are planning for a much earlier exit)
Spend down most of your 401K in your 60's, after you retire but before RMD's or social security. Take out enough that will keep you in a lower tax bracket than your working years when you put it in. This could be subsidized by investments in a taxable account with only long term capital gain tax rates, or cash if you have some saved.

Then when you hit 70.5 live primarily on social security and your Roth, and whatever is left in your 401k won't have very high RMD's because you spent most of it in the last decade.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by livesoft » Wed May 16, 2018 8:03 pm

I say it because it has been true for me and my family. We used to be in the 33% marginal income tax bracket. Nowadays with my spouse still working full-time and a 6-figure Adjusted Gross Income (NOT taxable income!) we would not pay any Federal income taxes if we didn't do those Roth conversions. As it is, we were in the 15% marginal income tax bracket for a few years now and effective tax rate is about 3%.

So ... I am sure glad Roth 401(k) and Roth 403(b) did not exist when we were accumulating. We weren't even eligible for Roth IRAs until recently, so we didn't have to even think about the Roth vs Traditional decision.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MP123 » Wed May 16, 2018 8:05 pm

MNGopher wrote:
Wed May 16, 2018 7:55 pm

Spend down most of your 401K in your 60's, after you retire but before RMD's or social security. Take out enough that will keep you in a lower tax bracket than your working years when you put it in. This could be subsidized by investments in a taxable account with only long term capital gain tax rates, or cash if you have some saved.

Then when you hit 70.5 live primarily on social security and your Roth, and whatever is left in your 401k won't have very high RMD's because you spent most of it in the last decade.
Yes. I think this is the right approach. It also allows you to delay SS until 70 for increased COLAed benefits.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by nbseer » Wed May 16, 2018 8:08 pm

MNgopher sez: "Spend down most of your 401K in your 60's," to lower RMDs. But if you've built up a sizable 401K, the tax bite could be brutal. Better to take SS before age 70 and use it to pay taxes on Roth conversions, while staying in the 15% bracket.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by livesoft » Wed May 16, 2018 8:10 pm

Another thing that people neglect is that standard deduction and tax brackets are indexed to COLA, so when they have portfolios of $10 million, the standard deduction will be $500,000 or so.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by aristotelian » Wed May 16, 2018 8:17 pm

You can have fairly massive wealth and low taxable income in retirement. Here is a good example:
viewtopic.php?t=87471

With tax free Roth and taxable accounts (on which principal has already been taxed), only a small portion of your spending is going to be withdrawing from pre-tax accounts. Even thinking optimistically that you are going to be very wealthy in retirement, you can still pay little tax with a little creativity and planning.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement

Post by Silk McCue » Wed May 16, 2018 8:21 pm

CnC wrote:
Wed May 16, 2018 7:39 pm

I'm just trying to open up the conversation with scenarios. Personally I will have 15-20 years to convert our 401ks so I think we might come out ahead, but it will be pretty tight.
With 15-20 years to convert you may very well benefit by converting heavily one bracket higher early in that process to reduce the future growth of tax deferred and the additional taxes required for conversions on that growth. You would need to do that analysis for your own particular circumstances. As is often stated here, if you are married and one passes early the taxes on the single can be a real hit.

Cheers

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by billy269 » Wed May 16, 2018 8:23 pm

To me it is pretty simple. If in 12% or less bracket, do Roth. If in 22% or higher do traditional. If at 22% with good pension expected, it is debatable.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by bb » Wed May 16, 2018 8:23 pm

Not definitive but I always assumed having to pay too much taxes when retired would be a good problem to have.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MNGopher » Wed May 16, 2018 8:25 pm

nbseer wrote:
Wed May 16, 2018 8:08 pm
MNgopher sez: "Spend down most of your 401K in your 60's," to lower RMDs. But if you've built up a sizable 401K, the tax bite could be brutal. Better to take SS before age 70 and use it to pay taxes on Roth conversions, while staying in the 15% bracket.
Yes, I agree about the Roth conversions if your 401K is sizable. In my case i began maxing my Roth IRA much sooner because of terrible options in my employers tax deferred plan, that were only improved in recent years.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Wed May 16, 2018 8:31 pm

CnC wrote:
Wed May 16, 2018 6:31 pm

But the people they are talking to on this site are maxing out their 401k's, IRA's and funding 529's, HSA's or taxable accounts.
CnC,

My portfolio is 45/45/10 (tax-deferred/Taxable/Roth). So, why won't my tax rate at retirement would not be lowered?

1) I could spend my Roth IRA contribution and HSA tax-free. Aka, 0% taxable income

2) Meanwhile, I could Roth convert my tax-deferred account.

3) And, do tax gain harvesting or tax loss harvesting on my taxable account.

I have maximum flexibility to generate whatever amount of taxable income every year.

KlangFool

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement

Post by CnC » Wed May 16, 2018 8:45 pm

Silk McCue wrote:
Wed May 16, 2018 8:21 pm
CnC wrote:
Wed May 16, 2018 7:39 pm

I'm just trying to open up the conversation with scenarios. Personally I will have 15-20 years to convert our 401ks so I think we might come out ahead, but it will be pretty tight.
With 15-20 years to convert you may very well benefit by converting heavily one bracket higher early in that process to reduce the future growth of tax deferred and the additional taxes required for conversions on that growth. You would need to do that analysis for your own particular circumstances. As is often stated here, if you are married and one passes early the taxes on the single can be a real hit.

Cheers
I actually am planning on that since I will have a sizable pension at 55 I plan to hit the max 24% bracket a few years and then try to live under the capital gains limits for the remainder.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by IowaFarmBoy » Wed May 16, 2018 8:56 pm

If you currently file using married brackets, at some point the survivor of you or your spouse will be filing using single brackets and your rate may be higher.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by White Coat Investor » Wed May 16, 2018 9:00 pm

CnC wrote:
Wed May 16, 2018 6:31 pm
I just saw another comment where someone was touting the benefits of a pretax 401k vs a Roth where they said most people will be in a lower tax bracket in retirement so pretax is better.

While that is a pair of factually correct statements. Most people will be in a lower bracket. And if you are in a lower tax bracket in retirement you will be better off pre tax.

But the people they are talking to on this site are maxing out their 401k's, IRA's and funding 529's, HSA's or taxable accounts.

These are not the "typical people" that will be in a lower tax bracket in retirement. Having 25x annual expenses is considered a risky retirement here.

So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?

Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.

Any thoughts?
Well, it certainly can't be in a higher bracket barring tax law change. That said, yes, supersavers can justify making Roth 401(k) contributions. If you're going to have a $5-10M+ tax-deferred plan, there's a decent chance you should be considering Roth 401(k) contributions.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by ThriftyPhD » Wed May 16, 2018 9:03 pm

For reference, the married filing jointly (MFJ) tax brackets in 2018:

Code: Select all

10%	$0	
12%	$19,050	
22%	$77,400	
24%	$165,000	
32%	$315,000	
35%	$400,000
37%	$600,000
Plus, you have the $24k standard deduction, so the first $24k is tax free.

Now, lets assume at 4% withdrawal rate. This means you can withdraw $24k per year, tax free, and if that's 4% of your portfolio then $24k*25 = $600k. So you need more than $600k in pre tax before it fills your standard deduction. Then, your next $19,050 is taxed at 10%. That's another $476,250 in the portfolio, or $1,076,250, to get to the point where your 4% is filling the 10% bracket. Your next $58,350 is 12% tax. That requires another $1,458,750 in the portfolio, total of $2,535,000, to fill the deduction, 10%, and 12% brackets. Next $87,600 per year, or $2,190,000 portfolio, is taxed at 22%. In total that's $4,725,000 in the portfolio before a 4% withdrawal pushes you past the 22% bracket. Specifically, that's $4.725 million in the pre tax account only. Roth and taxable would be in addition to that.

So, if you're in the 22% bracket while working, you can save close to $5 million in pre tax before it would push you into a higher bracket. Saving $5 million when you earn less than $189k per year is impressive. To do so, you probably saved a sizable chunk of that $189k, which means you don't really need a portfolio 25*$189k to retire. As a commenter above pointed out, "you worked too long".

It would also be a challenge to get that much into pre tax. Assume both spouses put the full $18,500 in each year. This would be $3084 per month, lets round it up to $4000 to account for catchup contributions and matching. It would take over 33 years at 6% REAL interest growth before this contribution rate resulted in a portfolio > $4.725k. Over 40 years if it's 4% real growth.

That said, your specific details matter. Social security will change the numbers, so you would need to estimate when you plan to retire, when you plan to take social security, and modify the above. Also moving from a high tax state to a no tax state would a contributing factor as well. If you have a pension, social security, and work as a contractor where you can put $55k pre tax into a solo 401k, then maybe you can get to the point where you end up in a higher bracket. But again, "you worked too long". And if you retire early and do Roth conversions, or retire from a high tax state to a low tax state, it might still make sense.

So, can you come up with scenarios where Roth is a better option than pre tax? Sure. But I think the advice that most should go pre tax because they will likely retire to a lower tax bracket is a sound assumption.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by rkhusky » Wed May 16, 2018 9:06 pm

I had a 30% marginal rate while working. Using a Traditional 401K allowed me to max Roth IRA and contribute to taxable and 529. I expect to spend the next 15 years doing Roth conversions and tax gain harvesting, such that by 70 I will have very little Traditional left and very little capital gains in taxable, all while in the 12% tax bracket.

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Watty
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Watty » Wed May 16, 2018 9:17 pm

Why do so many people quote "You will likely be in a lower tax bracket in retirement"
One often overlooked factor is that a lot of people will have setbacks and not have things go smoothly until they retire.

When I was going through my 50's I saw a lot more people than I would have expected run into things like layoffs, the death of a spouse, divorce, developing major health problems, job burnout, and lots of other things. If you run into something like that you could not only end up being in a lower retirement tax bracket but you could also run short of money.

I got lucky and did not run into any setbacks like that but for me a couple of big factors are;
1) Getting my house paid off.
2) No more child raising expenses.
3) Once I get on Medicare my healthcare costs will likely go down a lot.
4) I will likely be in an income range where very little if any of my Social Security will be taxed.
5) My state exempts a lot of retirement income from state income taxes.

My rough retirement budget is roughly $35,000 a year in Social Security when I start that and $25,000 in taxable income. According to Taxcaster I will owe less than $700 in federal income taxes and in some years I may be able to manage my income so that I owe no federal income tax. I live in a moderate to low cost of living area so along with a paid off house a couple can live very comfortably on $60,000 including some extras like travel.

There are two other factors that people often don't take into account.

1) For a couple it is very likely that one of them will survive the other and then start filing tax returns in the higher single tax brackets. This could put them in a higher tax bracket. When possible while we are both still alive I will likely be doing Roth conversions up to the top of the 12% federal tax bracket to help mitigate this.

2) I have seen relatives slow down a lot by the time they reached their mid 70's even though they were still in relatively good health. At that point they didn't spend much travel and even going out to diner or shopping was not something they did very much. Their main expenses were just things like property taxes, food, utilities, and a housekeeper. Up until assisted living is needed that can be a lot of years where people don't need a lot of income.
Last edited by Watty on Wed May 16, 2018 9:58 pm, edited 1 time in total.

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randomizer
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by randomizer » Wed May 16, 2018 9:24 pm

bmelikia wrote:
Wed May 16, 2018 7:01 pm
I'm 33.5 years old - I don't pretend to know what tax bracket I will be in 26 year from now - also, I don't know what tax brackets will be in 26 years - maybe there won't even be "tax brackets" in 26 years. . .

. . .I am confident, however, that "future me" will enjoy not paying any taxes on my Roth IRA and Roth 401k withdrawals - that assumes my health allows me to make it to 59.5+ years old
And that laws re: Roth don’t change. Anything is possible on a long enough time scale.
75:25 AA / Expected retirement: 2097

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by trueblueky » Wed May 16, 2018 9:40 pm

IowaFarmBoy wrote:
Wed May 16, 2018 8:56 pm
If you currently file using married brackets, at some point the survivor of you or your spouse will be filing using single brackets and your rate may be higher.
Agree.
Since retiring, we are in our lowest tax bracket ever. We went from 25% federal and 8.8% state to 15% (now 12%) federal and 0% state. We are doing Roth conversions to the top of 12% until RMDs and DW's SS start in a few years. That combination, or one of us passing, will push us permanently into a higher bracket

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by stlutz » Wed May 16, 2018 10:05 pm

Also keep in mind that it's your effective tax rate that matters when you withdraw. When you save it's the marginal rate.

When I contribute to my 401K, it reduces my taxable income--thus I'm taking money "off the top" in terms of income. Whatever bracket I'm in, I'm getting a deduction at my marginal rate.

When I withdraw that money, it's actually taxed at a variety of rates. So even if you were in the same marginal rate as when you are working, the average rate per dollar is still lower.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Wed May 16, 2018 10:35 pm

Some really good replies I am glad that there has been more thought put into it than it first seemed when I originally came here knowing nothing.


Perhaps my situation is a bit more unique with pension taxable pretax Roth and social security all weighing in.
ThriftyPhD wrote:
Wed May 16, 2018 9:03 pm
For reference, the married filing jointly (MFJ) tax brackets in 2018:

Code: Select all

10%	$0	
12%	$19,050	
22%	$77,400	
24%	$165,000	
32%	$315,000	
35%	$400,000
37%	$600,000
Plus, you have the $24k standard deduction, so the first $24k is tax free.

Now, lets assume at 4% withdrawal rate. This means you can withdraw $24k per year, tax free, and if that's 4% of your portfolio then $24k*25 = $600k. So you need more than $600k in pre tax before it fills your standard deduction. Then, your next $19,050 is taxed at 10%. That's another $476,250 in the portfolio, or $1,076,250, to get to the point where your 4% is filling the 10% bracket. Your next $58,350 is 12% tax. That requires another $1,458,750 in the portfolio, total of $2,535,000, to fill the deduction, 10%, and 12% brackets. Next $87,600 per year, or $2,190,000 portfolio, is taxed at 22%. In total that's $4,725,000 in the portfolio before a 4% withdrawal pushes you past the 22% bracket. Specifically, that's $4.725 million in the pre tax account only. Roth and taxable would be in addition to that.

So, if you're in the 22% bracket while working, you can save close to $5 million in pre tax before it would push you into a higher bracket. Saving $5 million when you earn less than $189k per year is impressive. To do so, you probably saved a sizable chunk of that $189k, which means you don't really need a portfolio 25*$189k to retire. As a commenter above pointed out, "you worked too long".

It would also be a challenge to get that much into pre tax. Assume both spouses put the full $18,500 in each year. This would be $3084 per month, lets round it up to $4000 to account for catchup contributions and matching. It would take over 33 years at 6% REAL interest growth before this contribution rate resulted in a portfolio > $4.725k. Over 40 years if it's 4% real growth.

That said, your specific details matter. Social security will change the numbers, so you would need to estimate when you plan to retire, when you plan to take social security, and modify the above. Also moving from a high tax state to a no tax state would a contributing factor as well. If you have a pension, social security, and work as a contractor where you can put $55k pre tax into a solo 401k, then maybe you can get to the point where you end up in a higher bracket. But again, "you worked too long". And if you retire early and do Roth conversions, or retire from a high tax state to a low tax state, it might still make sense.

So, can you come up with scenarios where Roth is a better option than pre tax? Sure. But I think the advice that most should go pre tax because they will likely retire to a lower tax bracket is a sound assumption.

This post has some very good math but if you were to have a pension and a reasonable taxable account those lower brackets would fill up very quickly.

This is what first made me check in on it. The ability to pay tax now and completely bypass capital gains in the future was very appealing.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Sophia1884 » Wed May 16, 2018 10:53 pm

CnC wrote:
Wed May 16, 2018 7:39 pm
I'm just trying to open up the conversation with scenarios. Personally I will have 15-20 years to convert our 401ks so I think we might come out ahead, but it will be pretty tight.
CnC, can you please clarify what you mean by the above? Why are you converting your 401ks? how? to what end? and why will it be "pretty tight"?

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by boglebill2015 » Wed May 16, 2018 10:55 pm

randomizer wrote:
Wed May 16, 2018 9:24 pm
bmelikia wrote:
Wed May 16, 2018 7:01 pm
I'm 33.5 years old - I don't pretend to know what tax bracket I will be in 26 year from now - also, I don't know what tax brackets will be in 26 years - maybe there won't even be "tax brackets" in 26 years. . .

. . .I am confident, however, that "future me" will enjoy not paying any taxes on my Roth IRA and Roth 401k withdrawals - that assumes my health allows me to make it to 59.5+ years old
And that laws re: Roth don’t change. Anything is possible on a long enough time scale.
It makes no sense for me to Roth now, with a current marginal rate on earned income of ~46%. Even if it were sensible from a current taxation rate standpoint, I'd have a nagging fear that large Roths could be subject to tax of some sort in the future. Suppose that marginal rates go up, the argument could be "you got to put that into the Roth at the old tax rate". Or there doesn't even need to be an argument, just "those who are doing well need to pay their 'fair share'"

Roth is just a law, not a constitutional amendment, after all. Stranger things have happened.

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Watty
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Watty » Wed May 16, 2018 10:57 pm

One more thing that I forgot, some people who work in a state with a high state income tax will retire in a state with low or no state income tax.

Another is that many people that are in a high retirement tax brackets will leave large estates to heirs that are in lower tax brackets.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by WanderingDoc » Wed May 16, 2018 11:04 pm

I have also been wondering the same thing as the OP.

Paying more in taxes today (by contributing to Roth) has zero relevance to having a small balance. This doesn't even make sense. Your balance would only be smaller if these 2 things were true:
1) You are investing ever single available cent you have left over after expenses
2) You don't max your 401k every year or most years.

I would argue, you shouldn't be investing every single available cent into your 401k. There are better investment vehicle out there that pay you NOW, not at some deferred point in the future when you may be sick or dead.

Whats nice about Roth is, what your balance is, you KNOW that is what you'll have. If taxes rates are higher when you retire (which is quite likely), you may be stuck paying 40-80% taxes on your balance, who knows. Doesn't seem "safe and secure" to me.

Also, one 25 and 30 year mortgages get payed off by tenants, rental income will instantly triple.

You should always strive to be wealthier, and more successful when you are older, not less! Contribute to a Roth, or else you are conceding that you don't have what it takes to always improve over time.

JoMoney wrote:
Wed May 16, 2018 6:38 pm
There are many many people who visit and use this site and are not among the super wealthy image some have created as "typical" Boglehead.
The consequence of having too much taxable money in retirement is having to pay more taxes.
The consequence of paying more in taxes today and a smaller balance in retirement may mean not being able to match expenses.

If I can plan around the taxes optimally, then great.. but there are worse situations then having to pay taxes because you're drawing down RMDs on too big of a retirement account.
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by inbox788 » Wed May 16, 2018 11:08 pm

Watty wrote:
Wed May 16, 2018 10:57 pm
One more thing that I forgot, some people who work in a state with a high state income tax will retire in a state with low or no state income tax.

Another is that many people that are in a high retirement tax brackets will leave large estates to heirs that are in lower tax brackets.
Or the reverse. About the only counterexample I could come up with is some with modest income and expenses while working but lots of pretax income and capital gains and plans to spend more in retirement. Let’s say 30 years ago a secretary at Amazon put all of his 401k in Amazon stock and it has grown to 8 figures. He makes and spends 100k in Seattle and plans to move to SF in retirement and spend 500k.

Most typical retired folks don’t make this type of drastic increase in expenditure and with constant expenses, you have no need for savings and investments so income replacement isn’t 100%, maybe 80’s. And you have lower tax brackets to fill.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Watty » Wed May 16, 2018 11:20 pm

inbox788 wrote:
Wed May 16, 2018 11:08 pm
Watty wrote:
Wed May 16, 2018 10:57 pm
One more thing that I forgot, some people who work in a state with a high state income tax will retire in a state with low or no state income tax.

Another is that many people that are in a high retirement tax brackets will leave large estates to heirs that are in lower tax brackets.
Or the reverse. About the only counterexample I could come up with is some with modest income and expenses while working but lots of pretax income and capital gains and plans to spend more in retirement. Let’s say 30 years ago a secretary at Amazon put all of his 401k in Amazon stock and it has grown to 8 figures. He makes and spends 100k in Seattle and plans to move to SF in retirement and spend 500k.

Most typical retired folks don’t make this type of drastic increase in expenditure and with constant expenses, you have no need for savings and investments so income replacement isn’t 100%, maybe 80’s. And you have lower tax brackets to fill.
'

I agree that there are lots of different situations. It really does not matter much what happens for most people, just for someone in your situation.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by frugalmama » Wed May 16, 2018 11:51 pm

ThriftyPhD wrote:
Wed May 16, 2018 9:03 pm
For reference, the married filing jointly (MFJ) tax brackets in 2018:

Code: Select all

10%	$0	
12%	$19,050	
22%	$77,400	
24%	$165,000	
32%	$315,000	
35%	$400,000
37%	$600,000
Plus, you have the $24k standard deduction, so the first $24k is tax free.

Now, lets assume at 4% withdrawal rate. This means you can withdraw $24k per year, tax free, and if that's 4% of your portfolio then $24k*25 = $600k. So you need more than $600k in pre tax before it fills your standard deduction. Then, your next $19,050 is taxed at 10%. That's another $476,250 in the portfolio, or $1,076,250, to get to the point where your 4% is filling the 10% bracket. Your next $58,350 is 12% tax. That requires another $1,458,750 in the portfolio, total of $2,535,000, to fill the deduction, 10%, and 12% brackets. Next $87,600 per year, or $2,190,000 portfolio, is taxed at 22%. In total that's $4,725,000 in the portfolio before a 4% withdrawal pushes you past the 22% bracket. Specifically, that's $4.725 million in the pre tax account only. Roth and taxable would be in addition to that.

So, if you're in the 22% bracket while working, you can save close to $5 million in pre tax before it would push you into a higher bracket. Saving $5 million when you earn less than $189k per year is impressive. To do so, you probably saved a sizable chunk of that $189k, which means you don't really need a portfolio 25*$189k to retire. As a commenter above pointed out, "you worked too long".

It would also be a challenge to get that much into pre tax. Assume both spouses put the full $18,500 in each year. This would be $3084 per month, lets round it up to $4000 to account for catchup contributions and matching. It would take over 33 years at 6% REAL interest growth before this contribution rate resulted in a portfolio > $4.725k. Over 40 years if it's 4% real growth.

That said, your specific details matter. Social security will change the numbers, so you would need to estimate when you plan to retire, when you plan to take social security, and modify the above. Also moving from a high tax state to a no tax state would a contributing factor as well. If you have a pension, social security, and work as a contractor where you can put $55k pre tax into a solo 401k, then maybe you can get to the point where you end up in a higher bracket. But again, "you worked too long". And if you retire early and do Roth conversions, or retire from a high tax state to a low tax state, it might still make sense.

So, can you come up with scenarios where Roth is a better option than pre tax? Sure. But I think the advice that most should go pre tax because they will likely retire to a lower tax bracket is a sound assumption.
A pension can really change that up quickly though so it is definitely an individual situation.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JoMoney » Thu May 17, 2018 2:10 am

WanderingDoc wrote:
Wed May 16, 2018 11:04 pm
... Paying more in taxes today (by contributing to Roth) has zero relevance to having a small balance. This doesn't even make sense. ...

Not everyone is able to max out their tax advantaged accounts. Somebody with an average income making a contribution to a pre-tax account vs Roth will by definition be able to contribute more to the pre-tax account. Every dollar they contribute pre-tax comes off the top end of whatever tax bracket they get into, which could easily be 25% Federal + state which might be 9% in a place like California. Saving an extra 34% a year would absolutely build a larger account balance over time.
If the pre-tax retirement account is their main source of taxable income at withdrawal, they'll be able to apply a standard deduction and get their blended tax-rate up to whatever income level they're taking out, which could easily be below whatever there current top end bracket is (and they might move to a state with lower or no income tax)
...You should always strive to be wealthier, and more successful when you are older, not less! Contribute to a Roth, or else you are conceding that you don't have what it takes to always improve over time.

If someone is able to save more, beyond pre-tax accounts, or is reasonably certain they'll have other sources of taxable income filling up the bottom end of their future tax bracket that's great, but may not be a typical situation. Paying the taxes now in a higher bracket is a certainty, whether or not they'll be in an as high bracket at withdrawal is not so certain, but you have the option of deferring until that time to make a decision. One can decide to pay the taxes now and convert the account to Roth at any time (and a more opportunistic time may come along).
"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 do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by vtMaps » Thu May 17, 2018 5:35 am

I haven't seen it mentioned yet, but for many folks the SS tax hump puts them in a higher marginal bracket than when they were working. For example: A MFJ couple with ordinary income of $75k is in the 12% marginal bracket. If that couple retires with the same income, but $40k is SS and $35k is other ordinary income (such as IRA distribution), they will be in the 22.2% marginal bracket.
nbseer wrote:
Wed May 16, 2018 8:08 pm
Better to take SS before age 70 and use it to pay taxes on Roth conversions, while staying in the 15% bracket.
The problem here is that you may be paying taxes on SS. Depending on the amount of your other income, SS can potentially be tax free.

--vtMaps
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by The Wizard » Thu May 17, 2018 5:51 am

I put money into my tax deferred 403(b) account for 40 years with a hefty "match". I maxed my contributions to this account in my latter working years, thus keeping me in the 25% marginal bracket.

Then in retirement, I annuitized a portion of that income to get higher lifetime income than a simple SWR would permit, thus giving me a higher AGI in retirement than when working and bumping me into the 28% bracket, now the new 24% bracket.
It's worked out well so far...
Attempted new signature...

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Grt2bOutdoors » Thu May 17, 2018 6:09 am

livesoft wrote:
Wed May 16, 2018 8:10 pm
Another thing that people neglect is that standard deduction and tax brackets are indexed to COLA, so when they have portfolios of $10 million, the standard deduction will be $500,000 or so.
What?? If someone today had a portfolio of $10 million how do you figure the standard deduction is 5%? Married, no dependents, age 65, property tax of $10k.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JoeRetire » Thu May 17, 2018 6:26 am

CnC wrote:
Wed May 16, 2018 7:24 pm
We throw around majority, but the majority saves nothing or next to nothing.

Anyone who maxes their 401k is not in the majority. So saying something is true for the majority certainly doesn't meant it's true for the 401k maxer.

I'm interested in knowing if the regular 401ks are best for the majority of 401k and it's maxers. Everything I always read talks to me like making my 401k is impossible.
IMHO...
The majority of folks who max out their 401ks are currently enjoying a reasonably high income now, yet living off less.
So the majority of folks who max out their 401ks will likely be in a lower tax bracket in retirement.
Thus they will benefit from a traditional 401k.

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