Shouldn't everyone do a traditional IRA/401k instead of a Roth?

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JustinR
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Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by JustinR » Fri Jan 13, 2017 11:42 pm

Who would have more income as a retiree than when they're working?

Edit: Totally forgot that the cutoff for traditional IRA is a $72k income. So if you make more than that there's no point in getting a traditional IRA over the Roth.
Last edited by JustinR on Sat Jan 14, 2017 7:44 pm, edited 1 time in total.

jacoavlu
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by jacoavlu » Fri Jan 13, 2017 11:45 pm

some people pay no income tax at all. why would such a person want a tIRA over a Roth?

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by NewtoInvesting403 » Fri Jan 13, 2017 11:46 pm

Someone who's starting at the bottom rung of the totem pole and will have rising earning power as time progresses

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by brad.clarkston » Fri Jan 13, 2017 11:59 pm

When your starting out why would you limit yourself?

When you first get a job a 401k might be all you can reasonably try to max out.
When you've been working for 5 years and have some money saved and make more then you can drop the $5,500 a year extra into a Roth.
When you've been working for 10 years and are making real money then you might have an extra $5,500 more to drop into a Trad. IRA.

You should be maxing a HSA if you can at this point.

At some point you make to much for a Roth so you'll start doing backdoor Roth's, open a taxable account as well.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by BW1985 » Sat Jan 14, 2017 12:20 am

Roth money is helpful when retiring early as a source of tax free money to live on while you convert tax deferred dollars to Roth paying zero or low income taxes.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

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FIREchief
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by FIREchief » Sat Jan 14, 2017 12:27 am

JustinR wrote:Who would have more income as a retiree than when they're working?
a) somebody with a big inheritance
b) somebody who lived way below their means and invested wisely
c) somebody who was very successful in their career and didn't blow all the money
etc.

That said, you make a valid point. Since nobody really knows what their status will be when they reach "retirement age," it is difficult to make a good decision. Maybe best to assume everything will go to s**t and just avoid paying uncle Sam anything more now than necessary. If things wind up better, well then it's all still good. :sharebeer
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by JustinR » Sat Jan 14, 2017 12:28 am

BW1985 wrote:Roth money is helpful when retiring early as a source of tax free money to live on while you convert tax deferred dollars to Roth paying zero or low income taxes.
Can you elaborate on this strategy? (or a link if it's in the wiki or something)

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by JustinR » Sat Jan 14, 2017 12:30 am

FIREchief wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
a) somebody with a big inheritance
b) somebody who lived way below their means and invested wisely
c) somebody who was very successful in their career and didn't blow all the money
etc.
So basically these all boil down to "if you plan to blow lots of money as a retiree, than a roth is right for you"?

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by PaulF » Sat Jan 14, 2017 1:20 am

JustinR wrote: Can you elaborate on this strategy? (or a link if it's in the wiki or something)

These could get you started
https://www.bogleheads.org/wiki/Traditional_versus_Roth
https://thefinancebuff.com/case-against-roth-401k.html
https://www.kitces.com/blog/understandi ... -in-basis/

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by FIREchief » Sat Jan 14, 2017 1:26 am

JustinR wrote:
FIREchief wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
a) somebody with a big inheritance
b) somebody who lived way below their means and invested wisely
c) somebody who was very successful in their career and didn't blow all the money
etc.
So basically these all boil down to "if you plan to blow lots of money as a retiree, than a roth is right for you"?
Not following you on this......

None of my responses to your OP question said anything about spending levels after retirement. :confused
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by *3!4!/5! » Sat Jan 14, 2017 2:02 am

jacoavlu wrote:some people pay no income tax at all. why would such a person want a tIRA over a Roth?
Because they may have a have a high marginal tax rate, which generally favors Traditional over Roth. :oops:

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Phineas J. Whoopee
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by Phineas J. Whoopee » Sat Jan 14, 2017 2:20 am

BW1985 wrote:Roth money is helpful when retiring early as a source of tax free money to live on while you convert tax deferred dollars to Roth paying zero or low income taxes.
Do you mean pull money out of your Roth account to live on so you don't have an income tax burden so you can pull money out of your traditional account on which you do have an income tax burden so you can put it into your Roth account?
PJW

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Phineas J. Whoopee
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by Phineas J. Whoopee » Sat Jan 14, 2017 2:25 am

*3!4!/5! wrote:
jacoavlu wrote:some people pay no income tax at all. why would such a person want a tIRA over a Roth?
Because they may have a have a high marginal tax rate, which generally favors Traditional over Roth. :oops:
Do you mean the people jacoavlu refers to, who pay no income tax at all, may have a high marginal tax rate?
PJW

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by *3!4!/5! » Sat Jan 14, 2017 2:38 am

Phineas J. Whoopee wrote:
*3!4!/5! wrote:
jacoavlu wrote:some people pay no income tax at all. why would such a person want a tIRA over a Roth?
Because they may have a have a high marginal tax rate, which generally favors Traditional over Roth. :oops:
Do you mean the people jacoavlu refers to, who pay no income tax at all, may have a high marginal tax rate?
PJW
Yep.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by niceguy7376 » Sat Jan 14, 2017 2:44 am

brad.clarkston wrote: When you've been working for 5 years and have some money saved and make more then you can drop the $5,500 a year extra into a Roth.
When you've been working for 10 years and are making real money then you might have an extra $5,500 more to drop into a Trad. IRA.
If you are talking about the same person doing a roth ira and then if there is more money then a trad ira, you are wrong. An individual can only do the max contribution of 5.5K across roth ira and deductible trad ira (if they are eligible for both).

As for OP, if you are single and have a 401k at work, you can contribute to deductible trad ira if your modified AGI is less than 62K. If you earn more, you still will be able to contribute to Roth till modified AGI is less than 118K.
Last edited by niceguy7376 on Sat Jan 14, 2017 11:13 am, edited 1 time in total.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by FiveK » Sat Jan 14, 2017 2:48 am

*3!4!/5! wrote:
Phineas J. Whoopee wrote:
*3!4!/5! wrote:
jacoavlu wrote:some people pay no income tax at all. why would such a person want a tIRA over a Roth?
Because they may have a have a high marginal tax rate, which generally favors Traditional over Roth. :oops:
Do you mean the people jacoavlu refers to, who pay no income tax at all, may have a high marginal tax rate?
PJW
Yep.
Perhaps "high marginal tax savings rate" is what is meant. E.g., contributing to a t401k can increase refundable credits.

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FiveK
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by FiveK » Sat Jan 14, 2017 2:51 am

Phineas J. Whoopee wrote:
BW1985 wrote:Roth money is helpful when retiring early as a source of tax free money to live on while you convert tax deferred dollars to Roth paying zero or low income taxes.
Do you mean pull money out of your Roth account to live on so you don't have an income tax burden so you can pull money out of your traditional account on which you do have an income tax burden so you can put it into your Roth account?
PJW
Yes, that works and is sometimes called a "Roth pipeline".

E.g., see How to withdraw funds from your IRA and 401k without penalty before age 59.5.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by Phineas J. Whoopee » Sat Jan 14, 2017 3:02 am

FiveK wrote:
*3!4!/5! wrote:
Phineas J. Whoopee wrote:
*3!4!/5! wrote:
jacoavlu wrote:some people pay no income tax at all. why would such a person want a tIRA over a Roth?
Because they may have a have a high marginal tax rate, which generally favors Traditional over Roth. :oops:
Do you mean the people jacoavlu refers to, who pay no income tax at all, may have a high marginal tax rate?
PJW
Yep.
Perhaps "high marginal tax savings rate" is what is meant. E.g., contributing to a t401k can increase refundable credits.
I don't know what a "high marginal tax savings rate" is, but whatever it means, that isn't what 3!4!/5! wrote.

3!4!/5! are you willing to elaborate?

PJW

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by Phineas J. Whoopee » Sat Jan 14, 2017 3:04 am

FiveK wrote:
Phineas J. Whoopee wrote:
BW1985 wrote:Roth money is helpful when retiring early as a source of tax free money to live on while you convert tax deferred dollars to Roth paying zero or low income taxes.
Do you mean pull money out of your Roth account to live on so you don't have an income tax burden so you can pull money out of your traditional account on which you do have an income tax burden so you can put it into your Roth account?
PJW
Yes, that works and is sometimes called a "Roth pipeline".

E.g., see How to withdraw funds from your IRA and 401k without penalty before age 59.5.
Perhaps that is what BW1985 is referring to.

BW1985, can you confirm that's what you meant?

PJW

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by FiveK » Sat Jan 14, 2017 3:18 am

Phineas J. Whoopee wrote:I don't know what a "high marginal tax savings rate" is, but whatever it means, that isn't what 3!4!/5! wrote.
Can't speak for 3!4!/5!, but a marginal tax savings rate is the reduction in taxes (or the increase in refundable credits) one gets per the amount invested in a traditional (e.g., tIRA, t401k, etc.) account.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by *3!4!/5! » Sat Jan 14, 2017 3:40 am

Consider the graph of function y=f(x).
It's certainly possible that f(x)<0 and f'(x)>0 for some x, so parts of graph are below x axis and sloping upwards.
And someone can can negative tax and positive marginal tax rate.
For high positive marginal tax rate Trad typically beats Roth.

Also, what FiveK says.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by JustinR » Sat Jan 14, 2017 4:42 am

FIREchief wrote:
JustinR wrote:
FIREchief wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
a) somebody with a big inheritance
b) somebody who lived way below their means and invested wisely
c) somebody who was very successful in their career and didn't blow all the money
etc.
So basically these all boil down to "if you plan to blow lots of money as a retiree, than a roth is right for you"?
Not following you on this......

None of my responses to your OP question said anything about spending levels after retirement. :confused
Ok, I'm not following why any of your examples would favor a Roth over a traditional. Why would any of those imply a higher income during retirement than during working years?

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by IowaFarmBoy » Sat Jan 14, 2017 6:31 am

JustinR wrote:Who would have more income as a retiree than when they're working?
The issue isn't really more income but what tax bracket you are in. Many things influence your tax bracket- income, marital status, number of exemptions, deductions, etc. When you are young your bracket may be lower for reasons like your income may not be so high, you may be using married filing jointly status, you may be claiming children, you may be itemizing due to mortgage and state income tax, etc. In retirement, at some point one of you may be widowed and filing as single, you won't be claiming exemptions for the kids, you may not be itemizing if your mortgage is paid off and you may not be paying state income tax, etc., all leading toward a higher bracket.

I can currently manage our income/deductions to stay right at the top of the 15% bracket. Once I RMDs kick in, I project we are going to be into the 25% bracket and when one of us is gone, the survivor will have significant income in the 25% bracket.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by The Wizard » Sat Jan 14, 2017 7:51 am

JustinR wrote:Who would have more income as a retiree than when they're working?
I do.
I kept my taxable income down in the 25% bracket while working and contributing the max to my tax deferred 403(b).
In retirement, I'm now in the 28% bracket.
This is not a terrible situation but, knowing what I do now, I would have contributed a portion to a Roth 403(b) my last 5+ years of full-time work rather than all to traditional 403(b)...
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by The Wizard » Sat Jan 14, 2017 7:56 am

niceguy7376 wrote:
brad.clarkston wrote: When you've been working for 5 years and have some money saved and make more then you can drop the $5,500 a year extra into a Roth.
When you've been working for 10 years and are making real money then you might have an extra $5,500 more to drop into a Trad. IRA.
If you are talking about the same person doing a roth and then if there is more moey then a trad ira, you are wrong. An individual can only do the max contribution of 5.5K across roth and deductible trad ira (if they are eligible for both).

As for OP, if you are single and have a 401k at work, you can contribute to deductible trad ira if your modified AGI is less than 62K. If you earn more, you still will be able to contribute to Roth till modified AGI is less than 118K.
Not entirely correct.
In addition to Roth IRAs, many employers now offer a Roth 401k or 403b option, to which one can contribute $18,000 or $24,000 per year with no tax deduction...
Last edited by The Wizard on Sat Jan 14, 2017 8:01 am, edited 1 time in total.
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by The Wizard » Sat Jan 14, 2017 8:00 am

Phineas J. Whoopee wrote:
BW1985 wrote:Roth money is helpful when retiring early as a source of tax free money to live on while you convert tax deferred dollars to Roth paying zero or low income taxes.
Do you mean pull money out of your Roth account to live on so you don't have an income tax burden so you can pull money out of your traditional account on which you do have an income tax burden so you can put it into your Roth account?
PJW
While this is possible, the usual recommendation for prodigious savers is to live off funds from your taxable account during early retirement years while converting traditional tax deferred accounts to Roth...
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by The Wizard » Sat Jan 14, 2017 8:20 am

JustinR wrote: Ok, I'm not following why any of your examples would favor a Roth over a traditional. Why would any of those imply a higher income during retirement than during working years?
If you've been maxing out a 401k or 403b with hefty employer match for forty years or more, you can easily accumulate $2 million or more tax deferred from 1977 to 2017, even more in coming years.
Annuitizing a portion of this accumulation for higher retirement income can result in higher taxable income than when working, simple math...
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by corysold » Sat Jan 14, 2017 8:44 am

We are in that situation too. With 6 kids and itemized deductions, our taxable income drops in the 15% bracket. Taking those away in retirement and adding in one pension at 75% of income 20 years in the future and a second potential pension, we should be well into the 25% bracket in retirement, assuming tax rates as they are now.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by jacoavlu » Sat Jan 14, 2017 8:53 am

My 10 year old daughter has a paper route and made $5000
She will file a tax return and her liabliltiy will be $0.
Should she contribute to a tIRA or a Roth IRA?

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by Kosmo » Sat Jan 14, 2017 8:56 am

*3!4!/5! wrote:Consider the graph of function y=f(x).
It's certainly possible that f(x)<0 and f'(x)>0 for some x, so parts of graph are below x axis and sloping upwards.
And someone can can negative tax and positive marginal tax rate.
For high positive marginal tax rate Trad typically beats Roth.

Also, what FiveK says.
While mathematically correct, when f(x) = tax liability, it's more like a piecewise function. In the case where we ignore tax credits that exceed tax liability (which I'd venture to guess is a vast majority of taxpayers) then f(x) >= 0. Below some income threshold the taxes and marginal rate are both 0.

Back to the OP: As others have pointed out, income is not the same as taxable income. You very well could have the same income in retirement, but be in a higher tax bracket due to lack of deductions/exemptions.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by The Wizard » Sat Jan 14, 2017 9:10 am

jacoavlu wrote:My 10 year old daughter has a paper route and made $5000
She will file a tax return and her liabliltiy will be $0.
Should she contribute to a tIRA or a Roth IRA?
Roth, for sure...
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by midareff » Sat Jan 14, 2017 9:13 am

JustinR wrote:Who would have more income as a retiree than when they're working?

Sheepishly raising hand........ but I planned it that way. Lived responsibly, maxed my deferred compensation for 27 years including all the way through three years of double up. maxed Roth and contributed to taxable. Now we travel nicely four to six times a year, 10 to 25 days at a time. Just like Kirk never believed in the no win scenario I never believed in living in retirement on 70 or 80 percent of your prior income.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by David Jay » Sat Jan 14, 2017 11:18 am

Justin:

One of the things that drives high taxable income in retirement is the Required Minimum Distribution (RMD) from tIRA/401K/403B portfolios. The percentage of your portfolio that must be withdrawn each year starts at 3.6% but it increases as your life expectancy falls (the IRS intends to get ALL their share - it is a tax deferred account). By your late 80s it approaches 10%.

10% of 2 or 3 million is serious scratch.
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by SpringMan » Sat Jan 14, 2017 11:27 am

For someone that will have more income when retired than before, a Roth makes more sense to me. There are no required minimum distributions at age 70.5 drawing on your Roth. If you have more income already than when working, you don't want the RMDs. Many states tax tIRAs too.
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by The Wizard » Sat Jan 14, 2017 11:31 am

David Jay wrote:Justin:

One of the things that drives high taxable income in retirement is the Required Minimum Distribution (RMD) from tIRA/401K/403B portfolios. The percentage of your portfolio that must be withdrawn starts at 3.6% but it increases as your life expectancy falls (the IRS intends to get ALL their share - it is a tax deferred account). By your late 80s it approaches 10%.

10% of 2 or 3 million is serious scratch.
Right.
But it's possible to plan ahead prior to RMDs to keep your taxable income, including Roth conversions, on a level to gradually increasing amount. This is why I'm doing modest Roth conversions at the 28% marginal federal rate.
Otherwise, you may have even more significant jump in "unneeded" taxable income in your seventies...
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by avalpert » Sat Jan 14, 2017 11:34 am

FIREchief wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
a) somebody with a big inheritance
b) somebody who lived way below their means and invested wisely
c) somebody who was very successful in their career and didn't blow all the money
etc.
Why should any of that lead to having more income in retirement? More assets sure, but if managed right it shouldn't lead to more income.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by JeepDaze » Sat Jan 14, 2017 11:36 am

What about someone whose income is too high to benefit from a tIRA tax deduction?
JustinR wrote:Who would have more income as a retiree than when they're working?

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by stlrick » Sat Jan 14, 2017 11:38 am

JustinR wrote:Who would have more income as a retiree than when they're working?
Let's reverse the question. Who would have less income as a retiree than when they're working? If this year while working I am living on X dollars, why would I want to live on 80% of X next year, when I have retired? If I have planned well, which is what this forum is all about, my income will not go down just because I have retired.

At certain times in life, expenses are difficult to control - when you are raising children and then later on, when health care can dominate. But for the last fifteen years before retirement and the first fifteen years after retirement, consumption smoothing is the model that I am aiming for.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by lsp12 » Sat Jan 14, 2017 11:39 am

There are a few reasons to do a Roth.

First, the choice of traditional vs. Roth is in part a bet on the comparison of current vs. future tax rates -- which is a function both of income level and tax rate structure. When I converted to a Roth, I was of the belief that future income tax rates would be higher, due to the gov't deficit as well as which political party was going to be making tax decisions. Second, of course, states taxes vary. So, if one is going to move from a non-income state to an income tax state, that might motivate the decision to do a Roth conversion before moving. Likewise, a view as to future changes in state income tax deductibility -- e.g. there is pressure to eliminate the deductions from future income tax calculations.

The other factor is that a Roth is a great way to pass on tax-free inheritance to kids. If you are fortunate enough to believe you won't ever need your Roth money, there is no RMD while you live. So, the entire amount continues to compound, tax free. When you die, it gets passed to your heirs. They have RMD's, but if the heirs are young the majority of the money will continue to compound tax free, and withdrawals/distributions continue to be tax free. So, from an estate planning perspective, the Roth is a very compelling proposition.

The inheritance angle is a big one -- imagine you are 50, and have $500k in Roth that you don't think you will ever use; it's invested in equities. You have 2 kids, 4 and 2 y.o. If you live til you're 90, at 7.5% compounded, your $500k becomes $8mm! (doubling every 10 years for 40 years). You die, your kids, now 42 and 44 get your Roth. The RMD rate is based on the life expectancy table; as long as the RMD rate is less than the 7.5% R.o.R. of the equities, they will be taking RMD's less than the increase in value for another say 30 years. Given the possibility of increased life expectancy and thus lower RMD rates, they may have as much as 35 or even 40 years, after your death, of growth in the Roth value. After that, the RMD will start to exceed the gain in equity value of the Roth, so the corpus will start to decline, but if the Roth is earning 7.5% the decrease will be pretty slow. So, there is likely to be money left in the account even when they die, and it can be passed on to their heirs! (Though I think the heirs probably will have to close out the Roth within 5 years?)

Imagine if, instead of your kids, you leave the Roth to grandkids, who are say 5 when you die. Then, in addition to your 40 years of tax free compounding, the grandkids will continue to see the Roth grow, even after annual RMD's, for another 70 or 75 years! (All of this assumes they can resist the temptation to take out more than the RMD each year.)

So, they get a nice tax-free annual payout and the value of the Roth continues to grow! Thus, you're looking at perhaps as much as 115 years of tax free compounding.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by Tal- » Sat Jan 14, 2017 11:40 am

It can also be about more than taxes. We use a Roth over a traditional account for two main reasons:

1 - We can save more in a Roth than in a traditional account (a dollar of post tax is worth more than a dollar of pre tax).

2 - We want the flexibility of early withdrawals or avoiding RMDs.

In doing this, we may lose a few % in taxes, but these benefits are worth it for us.
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by The Wizard » Sat Jan 14, 2017 11:48 am

avalpert wrote:
FIREchief wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
a) somebody with a big inheritance
b) somebody who lived way below their means and invested wisely
c) somebody who was very successful in their career and didn't blow all the money
etc.
Why should any of that lead to having more income in retirement? More assets sure, but if managed right it shouldn't lead to more income.
The answer for cases b) and c) is for people who put ~$50,000 per year per person into tax deferred accounts over several decades.
That money has to be taken out as normal taxable income one way or another...
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by KlangFool » Sat Jan 14, 2017 11:48 am

stlrick wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
Let's reverse the question. Who would have less income as a retiree than when they're working? If this year while working I am living on X dollars, why would I want to live on 80% of X next year, when I have retired? If I have planned well, which is what this forum is all about, my income will not go down just because I have retired.

At certain times in life, expenses are difficult to control - when you are raising children and then later on, when health care can dominate. But for the last fifteen years before retirement and the first fifteen years after retirement, consumption smoothing is the model that I am aiming for.
stlrick,

To be precise, X is your annual expense. It is not your income.

While you work, you need to have an income of (X + T) in order to spend X. T is your tax while working. When you retire, you need to have an income of ( X + t) in order to spend. t is your tax while retired. For most people, T >> t aka T is much bigger than t. Hence, they are not the same.

You do not need the same level of income between working and retired in order to spend the same amount of money.

In my case, my portfolio is 45/45/10 (401K / Taxable / Roth). I could spend from my Roth and Taxable account while doing Roth conversion for many years. Most of my expenditure at retirement will be spent without any taxable income.

If you live on 60K of annual expense and you spend from the taxable account and Roth contribution, you could essentially do it with close to ZERO income for many years.

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Last edited by KlangFool on Sat Jan 14, 2017 11:57 am, edited 1 time in total.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by triceratop » Sat Jan 14, 2017 11:55 am

stlrick wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
Let's reverse the question. Who would have less income as a retiree than when they're working? If this year while working I am living on X dollars, why would I want to live on 80% of X next year, when I have retired? If I have planned well, which is what this forum is all about, my income will not go down just because I have retired.

At certain times in life, expenses are difficult to control - when you are raising children and then later on, when health care can dominate. But for the last fifteen years before retirement and the first fifteen years after retirement, consumption smoothing is the model that I am aiming for.

But "X" Isn't your income, it is your expenses. No one is claiming your expenses should go down necessarily, but the income very well may. For one thing, you will no longer be saving for retirement while in retirement. And your taxes should correspondingly be lower.
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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by danaht » Sat Jan 14, 2017 11:56 am

Here is an example of one situation where investing in a Roth is the clear choice. An individual who makes $108,000 a year would be eligible to invest in both - but could only invest "after tax" dollars in the Traditional IRA. In this case, the Roth is the clear winner - both contributions will have the same effect on the current year's taxes, but all future Roth earnings will be tax free. There are many other situations where the Roth is ideal.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by KlangFool » Sat Jan 14, 2017 12:00 pm

danaht wrote:Here is an example of one situation where investing in a Roth is the clear choice. An individual who makes $108,000 a year would be eligible to invest in both - but could only invest "after tax" dollars in the Traditional IRA. In this case, the Roth is the clear winner - both contributions will have the same effect on the current year's taxes, but all future Roth earnings will be tax free. There are many other situations where the Roth is ideal.
danaht,

OP had confused the terminology between 401K and IRA. If my understanding of your post is correct, you are advocating contributing to Trad. 401K and Roth IRA.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by avalpert » Sat Jan 14, 2017 12:04 pm

stlrick wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
Let's reverse the question. Who would have less income as a retiree than when they're working? If this year while working I am living on X dollars, why would I want to live on 80% of X next year, when I have retired? If I have planned well, which is what this forum is all about, my income will not go down just because I have retired.
If I planned well, my spending won't go down - my income definitely will since I know longer need enough income to cover both my spending and my saving...

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by avalpert » Sat Jan 14, 2017 12:07 pm

The Wizard wrote:
avalpert wrote:
FIREchief wrote:
JustinR wrote:Who would have more income as a retiree than when they're working?
a) somebody with a big inheritance
b) somebody who lived way below their means and invested wisely
c) somebody who was very successful in their career and didn't blow all the money
etc.
Why should any of that lead to having more income in retirement? More assets sure, but if managed right it shouldn't lead to more income.
The answer for cases b) and c) is for people who put ~$50,000 per year per person into tax deferred accounts over several decades.
That money has to be taken out as normal taxable income one way or another...
But someone who put it into tax deferred accounts on top of the income they used to cover their spending will not be taking it out on top of that income - so their income should still be lower to capture the same amount of spend.

Now I get that at some point RMDs become the issue, but someone who did b/c also likely had years to do Roth conversions between the time they retired and the time they start SS/RMDs.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by danaht » Sat Jan 14, 2017 12:08 pm

KlangFool wrote:
danaht wrote:Here is an example of one situation where investing in a Roth is the clear choice. An individual who makes $108,000 a year would be eligible to invest in both - but could only invest "after tax" dollars in the Traditional IRA. In this case, the Roth is the clear winner - both contributions will have the same effect on the current year's taxes, but all future Roth earnings will be tax free. There are many other situations where the Roth is ideal.
danaht,

OP had confused the terminology between 401K and IRA. If my understanding of your post is correct, you are advocating contributing to Trad. 401K and Roth IRA.

KlangFool
Opps, I thought the OP was comparing a contribution to a traditional IRA to a Roth IRA.
Yes, for the most part, I believe that everyone should try to defer as much as possible in a traditional 401k - (especially if they are in the 25% (or higher) tax bracket) - and make the Roth IRA contribution too.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by Silence Dogood » Sat Jan 14, 2017 12:12 pm

I think something like 45% of American households have no federal income tax obligation. A Roth makes sense for a lot of people.

It has certainly made sense for me over the past few years - considering that I've been in a low tax bracket and eligible for the American Opportunity Tax Credit.

One thing to keep in mind is that Massachusetts does not allow taxpayers to deduct Traditional IRA contributions (for state income tax purposes) so a Traditional IRA is less advantageous here than it may be elsewhere.

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Re: Shouldn't everyone do a traditional IRA/401k instead of a Roth?

Post by grabiner » Sat Jan 14, 2017 12:23 pm

JustinR wrote:Who would have more income as a retiree than when they're working?
What matters isn't your income, but your marginal tax rate. The Roth is better if your marginal tax rate will be higher in retirement than it is now. If you retire and are in the upper part of the phase-in of Social Security taxation, your marginal tax rate will be 27.75%, and thus contributing to a Roth IRA at a 15% marginal tax rate, possibly even 25%, is a better deal.
Silence Dogood wrote:One thing to keep in mind is that Massachusetts does not allow taxpayers to deduct Traditional IRA contributions (for state income tax purposes) so a Traditional IRA is less advantageous here than it may be elsewhere.
Likewise in NJ. In both states, gains on the Traditional IRA are taxed upon withdrawal. And if your state doesn't allow a deduction (possibly because it doesn't have an income tax) and you retire in a state which has an income tax, you pay state tax twice on the same money.

There is a longer discussion on the wiki: Traditional versus Roth
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