Tax Law Sunset 2025 - Roth vs Traditional

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JBTX
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Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Fri Dec 29, 2017 10:29 pm

As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.

tibbitts
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by tibbitts » Fri Dec 29, 2017 10:34 pm

JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
You would think so, but I haven't gotten much traction trying to convince people to evaluate the take-or-delay social security decision based on current law and its resulting reduction in benefits.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Fri Dec 29, 2017 10:36 pm

tibbitts wrote:
Fri Dec 29, 2017 10:34 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
You would think so, but I haven't gotten much traction trying to convince people to evaluate the take-or-delay social security decision based on current law and its resulting reduction in benefits.
Not following, please explain!

Edit: Are you saying if you turned 62 before 2025, let's say 2021, then you would draw social security several years at lower income tax rates and less tax on social security, vs higher taxable amounts if you delay to after 2025?

KlangFool
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Fri Dec 29, 2017 10:41 pm

JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
JBTX,

(A) Why do you assume the law will expire and not extended.

But, the following could happen too.

B) The law will be replaced by another law that lower the rate further.

C) The law is extended

(A), (B), and (C) are equally likely. My bet is on (B) and (C).

KlangFool
Last edited by KlangFool on Fri Dec 29, 2017 10:44 pm, edited 1 time in total.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Fri Dec 29, 2017 10:42 pm

KlangFool wrote:
Fri Dec 29, 2017 10:41 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
JBTX,

Why do you assume

A) The law will expire and not extended.

B) Or, the law will be replaced by another law that lower the rate further.

(A) and (B) are equally likely to the possibility of the law expire and the income rate went up.

KlangFool
Because the policy of the forum is all decisions should be made according to current tax law.

KlangFool
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Fri Dec 29, 2017 10:47 pm

JBTX wrote:
Fri Dec 29, 2017 10:42 pm
KlangFool wrote:
Fri Dec 29, 2017 10:41 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
JBTX,

Why do you assume

A) The law will expire and not extended.

B) Or, the law will be replaced by another law that lower the rate further.

(A) and (B) are equally likely to the possibility of the law expire and the income rate went up.

KlangFool
Because the policy of the forum is all decisions should be made according to current tax law.
Okay. You could go ahead bet on this. I will bet on the other side.

KlangFool

Nate79
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Nate79 » Fri Dec 29, 2017 11:08 pm

Forum policy is to not discuss future legislation. But that doesn't mean we are forced to believe it nor think about what may actually happen and are not forced to discuss a topic that we may think is highly unlikely.

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by tibbitts » Fri Dec 29, 2017 11:43 pm

Nate79 wrote:
Fri Dec 29, 2017 11:08 pm
Forum policy is to not discuss future legislation. But that doesn't mean we are forced to believe it nor think about what may actually happen and are not forced to discuss a topic that we may think is highly unlikely.
And the point is? I assume you are agreeing that discussions should be based on the current law. I don't understand the point about being forced to participate - that is never the case, we are only forced to avoid basing discussions on possible future changes.

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Nate79 » Sat Dec 30, 2017 12:02 am

tibbitts wrote:
Fri Dec 29, 2017 11:43 pm
Nate79 wrote:
Fri Dec 29, 2017 11:08 pm
Forum policy is to not discuss future legislation. But that doesn't mean we are forced to believe it nor think about what may actually happen and are not forced to discuss a topic that we may think is highly unlikely.
And the point is? I assume you are agreeing that discussions should be based on the current law. I don't understand the point about being forced to participate - that is never the case, we are only forced to avoid basing discussions on possible future changes.
:oops:

My point is that discussing under terms that I think is highly unlikely is stupid and thus when making recommendations I will assume that the law will NOT change. There is no rule that recommendations must assume tax law will not change. We just can not discuss pending or future legislation.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 12:27 am

Nate79 wrote:
Sat Dec 30, 2017 12:02 am
tibbitts wrote:
Fri Dec 29, 2017 11:43 pm
Nate79 wrote:
Fri Dec 29, 2017 11:08 pm
Forum policy is to not discuss future legislation. But that doesn't mean we are forced to believe it nor think about what may actually happen and are not forced to discuss a topic that we may think is highly unlikely.
And the point is? I assume you are agreeing that discussions should be based on the current law. I don't understand the point about being forced to participate - that is never the case, we are only forced to avoid basing discussions on possible future changes.
:oops:

My point is that discussing under terms that I think is highly unlikely is stupid and thus when making recommendations I will assume that the law will NOT change. There is no rule that recommendations must assume tax law will not change. We just can not discuss pending or future legislation.
If the law doesn't change, the rates increase in 2025. The only way they don't increase is future legislation.

I think the current law, and its sunset provisions, just puts more strain on the assumption that all decisions should be made based upon current tax law - which is the default forum recommendation.

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corn18
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by corn18 » Sat Dec 30, 2017 12:34 am

Since I am in the 39.6% tax bracket in 2017 and will be in the 35% tax bracket until I retire (planned for 2022), I would like to talk about things like Roths, SS and withdrawal strategy when 2025 rolls around and the law puts me back into the old tax brackets. I enjoy this forum because smart people discuss things like this that are relevant to me. So can we discuss it?

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FiveK
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Sat Dec 30, 2017 12:42 am

Nate79 wrote:
Sat Dec 30, 2017 12:02 am
My point is that discussing under terms that I think is highly unlikely is stupid and thus when making recommendations I will assume that the law will NOT change.
As long as assumptions are stated (as you are doing here), one may decide the reasonableness of those assumptions and thus the likelihood that conclusions derived from them are applicable.

There are multiple assumptions one must make for the R vs. t analysis. If this forum can help people analyze the consequences of a given set of reasonable assumptions, that's a good thing.

Assuming either
- current tax rates and brackets (in real terms) stay constant, or
- current tax law will not change, thus tax rates and brackets will change in 2026
is not unreasonable.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 1:10 am

FiveK wrote:
Sat Dec 30, 2017 12:42 am
Nate79 wrote:
Sat Dec 30, 2017 12:02 am
My point is that discussing under terms that I think is highly unlikely is stupid and thus when making recommendations I will assume that the law will NOT change.
As long as assumptions are stated (as you are doing here), one may decide the reasonableness of those assumptions and thus the likelihood that conclusions derived from them are applicable.

There are multiple assumptions one must make for the R vs. t analysis. If this forum can help people analyze the consequences of a given set of reasonable assumptions, that's a good thing.

Assuming either
- current tax rates and brackets (in real terms) stay constant, or
- current tax law will not change, thus tax rates and brackets will change in 2026
is not unreasonable.
So how will you look at it?

One is almost forced to have a speculative opinion on way or other. I agree assuming the tax law will not change and the rates increase in 2026 is not necessarily "stupid", especially when you look at the long term fiscal picture, and the overall demographics of the country and the resulting impacts.

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iceport
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by iceport » Sat Dec 30, 2017 1:26 am

JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
I agree. Relative to the prior tax law, a Roth contribution under the new tax law is more attractive. (Similarly, as a recent retiree, a Roth conversion prior to 2026 just became more attractive.)

However, there is a larger lesson here: At the time of each contribution to a tax advantaged account, it can never be known for certain how much of a tax break will ultimately be achieved, nor is it known for certain — barring extreme cases — whether a Roth or traditional tax advantaged account will save more in taxes.

This is true because the analysis requires a knowledge of both current and future tax rates, and only one of the two is known. Future tax rates may vary due to personal circumstances including unforeseen hardships, income changes and/or spending spikes in retirement.

More pertinent to your question, if nothing else the recent tax law changes should drive home the point that tax laws are always subject to change.

So another way of looking at the new tax law is that it made the job of choosing a Roth or traditional tax advantaged account that much more difficult, as the uncertainty inherent in future tax laws has been made practically explicit. I suppose in some ways this is a good thing. I've often thought there was a bit too much recency bias at work in making assumptions about future tax rates. In reality, they are quite variable over a lifetime.

A couple of points to keep in mind are that 1) tax diversification is a reasonable approach to addressing tax uncertainties, and 2) either tax advantaged option (Roth or traditional) is likely to be far superior to a taxable account alternative, so the consequences of a mistake are not typically severe.
"Discipline matters more than allocation.” ─William Bernstein

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 1:32 am

iceport wrote:
Sat Dec 30, 2017 1:26 am
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
I agree. Relative to the prior tax law, a Roth contribution under the new tax law is more attractive. (Similarly, as a recent retiree, a Roth conversion prior to 2026 just became more attractive.)

However, there is a larger lesson here: At the time of each contribution to a tax advantaged account, it can never be known for certain how much of a tax break will ultimately be achieved, nor is it known for certain — barring extreme cases — whether a Roth or traditional tax advantaged account will save more in taxes.

This is true because the analysis requires a knowledge of both current and future tax rates, and only one of the two is known. Future tax rates may vary due to personal circumstances including unforeseen hardships, income changes and/or spending spikes in retirement.

More pertinent to your question, if nothing else the recent tax law changes should drive home the point that tax laws are always subject to change.

So another way of looking at the new tax law is that it made the job of choosing a Roth or traditional tax advantaged account that much more difficult, as the uncertainty inherent in future tax laws has been made practically explicit. I suppose in some ways this is a good thing. I've often thought there was a bit too much recency bias at work in making assumptions about future tax rates. In reality, they are quite variable over a lifetime.
Great post. I agree with 100% of what you've said above.

Prior to this new tax law, it was pretty standard in here to assume nothing would really change. Now either the law will have to change, or the rates will change. Something will change. Which gets me back to my favored approach, having a diversified approach of having both.

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FiveK
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Sat Dec 30, 2017 1:36 am

JBTX wrote:
Sat Dec 30, 2017 1:10 am
FiveK wrote:
Sat Dec 30, 2017 12:42 am
Assuming either
- current tax rates and brackets (in real terms) stay constant, or
- current tax law will not change, thus tax rates and brackets will change in 2026
is not unreasonable.
So how will you look at it?
Probably assuming current tax rates and brackets (in real terms) stay constant, because
1) it's easier, and
2) the largest gap in bracket rates, 10%, is the same whether one compares 12% vs. 22% or 15% vs. 25%. Differences of 3% or so are probably within the noise level of likely income and tax law variation.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 1:45 am

FiveK wrote:
Sat Dec 30, 2017 1:36 am
JBTX wrote:
Sat Dec 30, 2017 1:10 am
FiveK wrote:
Sat Dec 30, 2017 12:42 am
Assuming either
- current tax rates and brackets (in real terms) stay constant, or
- current tax law will not change, thus tax rates and brackets will change in 2026
is not unreasonable.
So how will you look at it?
Probably assuming current tax rates and brackets (in real terms) stay constant, because
1) it's easier, and
2) the largest gap in bracket rates, 10%, is the same whether one compares 12% vs. 22% or 15% vs. 25%. Differences of 3% or so are probably within the noise level of likely income and tax law variation.
Would you agree that a difference in 10% could materially change the decision for many? While 3% isn't a lot, considering many people here max 401k contributions, and would have to invest their traditional tax savings in a taxable account, that is also another 3-4%, and you could be looking at a 6-7% spread, and all of that assumes social security taxes will not materially impact your decision.

That seems like a lot of assumptions.

MindBogler
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by MindBogler » Sat Dec 30, 2017 1:56 am

JBTX wrote:
Fri Dec 29, 2017 11:25 pm
And that was before the tax cuts, which might increase debt $1.5 trillion over 10 years.
You forgot an important qualifier so I added it for you.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 2:03 am

MindBogler wrote:
Sat Dec 30, 2017 1:56 am
JBTX wrote:
Fri Dec 29, 2017 11:25 pm
And that was before the tax cuts, which might increase debt $1.5 trillion over 10 years.
You forgot an important qualifier so I added it for you.
You can debate the number, but is pretty much a given it will increase the debt by a non trivial sum.

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FiveK
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by FiveK » Sat Dec 30, 2017 5:30 am

JBTX wrote:
Sat Dec 30, 2017 1:45 am
FiveK wrote:
Sat Dec 30, 2017 1:36 am
JBTX wrote:
Sat Dec 30, 2017 1:10 am
FiveK wrote:
Sat Dec 30, 2017 12:42 am
As long as assumptions are stated (as you are doing here), one may decide the reasonableness of those assumptions and thus the likelihood that conclusions derived from them are applicable.

There are multiple assumptions one must make for the R vs. t analysis. If this forum can help people analyze the consequences of a given set of reasonable assumptions, that's a good thing.

Assuming either
- current tax rates and brackets (in real terms) stay constant, or
- current tax law will not change, thus tax rates and brackets will change in 2026
is not unreasonable.
So how will you look at it?
Probably assuming current tax rates and brackets (in real terms) stay constant, because
1) it's easier, and
2) the largest gap in bracket rates, 10%, is the same whether one compares 12% vs. 22% or 15% vs. 25%. Differences of 3% or so are probably within the noise level of likely income and tax law variation.
Would you agree that a difference in 10% could materially change the decision for many? While 3% isn't a lot, considering many people here max 401k contributions, and would have to invest their traditional tax savings in a taxable account, that is also another 3-4%, and you could be looking at a 6-7% spread, and all of that assumes social security taxes will not materially impact your decision.

That seems like a lot of assumptions.
Yes, there are multiple assumptions one must make for the R vs. t analysis.

If one assumes a withdrawal marginal rate of X, changing that assumption to X plus 10% or X minus 10% could change the conclusion.

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Mike Scott » Sat Dec 30, 2017 5:51 am

Going back to the OP point about Roth's seeming to become more valuable for some, I agree. Given major sources of income now (W2s), current and anticipated tax brackets, anticipated future sources of income (pension/SS) and the probability of a single survivor in the couple in future scenarios... We are shifting even more emphasis to Roth and tax efficient brokerage investments, The recent tax law changes and potential sunset of them do reinforce these shifts but we were already moving in that direction.

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by AlmstRtrd » Sat Dec 30, 2017 7:53 am

JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
2018 will likely be my last year of contributing to a Roth account but the conversions at 12% certainly are a lot more attractive that they were at 15%.

KlangFool
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 8:49 am

OP,

In my case, nothing changes. I will max Trad. 401K, Trad. 457, and max Roth IRAs. The kids will be in the college 2/3 years. Over that time, I will spend all my annual savings and move money from my taxable account to the tax-advantaged accounts. After that, I will contribute my annual savings to Trad. 401K, Trad. 457, Roth IRAs, and the taxable account.

I will FI/retire before 2025. My portfolio will be ranging from 45/45/10 (Tax-deferred/taxable/Roth) to 60/30/10 (Tax-deferred/taxable/Roth). In any case, I will retire before I withdraw my social security and I can spend my Roth contribution and taxable account for many years while doing Roth conversion.

KlangFool

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iceport
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by iceport » Sat Dec 30, 2017 9:40 am

JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
Actually, there's more to think about than the tax hikes due to take effect in 2026. Due to the change in inflation adjustments for the tax bracket cut-offs and standard deductions from the standard CPI to the "chained" CPI version, there is a longer term "real" tax hike built into the new tax bill.

While the effects will be negligible over the short term, they will become significant over the long term — which is typically what we are considering with the Roth vs. traditional contribution decision. (If there was ever a group of people that understands the effects of compounding small costs over the long term, it is the Bogleheads!)
"Discipline matters more than allocation.” ─William Bernstein

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 9:50 am

OP,

Sometime between now and 2025, there will be one or more stock market crashes. Then, I could tax loss harvest and generate a fair amount of capital losses. I could deduct my future income from that.

My strategy is to defer the maximum amount of taxes by contributing to the max into Trad. 401K/457/403B. Then, put the tax savings into Roth IRAs and the taxable account. With substantial money in all 3 pools, I have tax diversification. I could generate any amount of taxable income for maximum tax efficiency.

In general, many folks that could contribute a large amount to Trad. 401K have an income large enough that they could not deduct their contribution to Trad.IRA. Hence, Roth IRA is the only choice. The choice for them is between

A) Trad. 401K and Roth IRAs

B) Trad. 401K, Roth 401K, and Roth IRAs

I believe (A) is more tax diversified than (B).

KlangFool

tibbitts
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by tibbitts » Sat Dec 30, 2017 9:52 am

JBTX wrote:
Fri Dec 29, 2017 10:36 pm
tibbitts wrote:
Fri Dec 29, 2017 10:34 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
You would think so, but I haven't gotten much traction trying to convince people to evaluate the take-or-delay social security decision based on current law and its resulting reduction in benefits.
Not following, please explain!

Edit: Are you saying if you turned 62 before 2025, let's say 2021, then you would draw social security several years at lower income tax rates and less tax on social security, vs higher taxable amounts if you delay to after 2025?
When you receive your estimate from ssa.gov, it will tell you that barring changes in the law, the amount you receive will decrease and not remain at the rates shown in their projections. Exactly when this will happen and how much your benefit will decrease varies, but sometime in the 2030s (not far away) the benefit is likely to drop by about 25%, barring future legislation. Yet this is not reflected in any of the available calculators that I'm aware of, and I don't believe most of our discussions here are using these current projections and current law when they recommend when to take social security. The fact is that more early years of taking benefits at 100% of a reduced base can partly or fully offset the advantage of delaying.

I see this as entirely the same issue - people assuming that legislation will come along to rescue current provisions. I don't believe the 25%-ish cut will occur according to current law, but I believe something detrimental to some or all Bogleheads will happen - and if I had to guess it would be the result of legislation signed one day before the necessary reduction would take place.

But the tax law I see as far more likely to change in completely unpredictable ways numerous times before the sunset provision takes effect, so I think it's just more productive to use the current law in planning, not speculating on future changes.

And I think that approach meets the spirit and the law of forum guidelines. Remember, even in the days when these recent tax law changes seemed to be a done deal (although some of us still had our doubts!), discussions here were still being banned until they were (almost, with a one-thread exception maybe) law.

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by tibbitts » Sat Dec 30, 2017 9:58 am

JBTX wrote:
Sat Dec 30, 2017 1:32 am
iceport wrote:
Sat Dec 30, 2017 1:26 am
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
I agree. Relative to the prior tax law, a Roth contribution under the new tax law is more attractive. (Similarly, as a recent retiree, a Roth conversion prior to 2026 just became more attractive.)

However, there is a larger lesson here: At the time of each contribution to a tax advantaged account, it can never be known for certain how much of a tax break will ultimately be achieved, nor is it known for certain — barring extreme cases — whether a Roth or traditional tax advantaged account will save more in taxes.

This is true because the analysis requires a knowledge of both current and future tax rates, and only one of the two is known. Future tax rates may vary due to personal circumstances including unforeseen hardships, income changes and/or spending spikes in retirement.

More pertinent to your question, if nothing else the recent tax law changes should drive home the point that tax laws are always subject to change.

So another way of looking at the new tax law is that it made the job of choosing a Roth or traditional tax advantaged account that much more difficult, as the uncertainty inherent in future tax laws has been made practically explicit. I suppose in some ways this is a good thing. I've often thought there was a bit too much recency bias at work in making assumptions about future tax rates. In reality, they are quite variable over a lifetime.
Great post. I agree with 100% of what you've said above.

Prior to this new tax law, it was pretty standard in here to assume nothing would really change. Now either the law will have to change, or the rates will change. Something will change. Which gets me back to my favored approach, having a diversified approach of having both.
I have always felt that except for obvious situations (like a 0% marginal bracket, for example), a diversified approach to the type of IRA is valuable, but I don't think most discussions on the forum have taken that approach.

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by LadyGeek » Sat Dec 30, 2017 10:09 am

I removed an off-topic post and reply which were starting to derail the thread.

The reason why discussions of proposed legislation are not permitted in this forum are here: Political comments and proposed tax plan remain off-topic

LadyGeek wrote:
Sun Nov 20, 2016 12:01 pm
...Speculation about future legislation is prohibited by forum policy, see Unacceptable Topics:
Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
This forum is focused on investing that is directly actionable to personal investors. We don't hold debates on conjecture.

The whole point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed regulations change many times between the time they're introduced and signed into law.

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JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 1:03 pm

tibbitts wrote:
Sat Dec 30, 2017 9:52 am
JBTX wrote:
Fri Dec 29, 2017 10:36 pm
tibbitts wrote:
Fri Dec 29, 2017 10:34 pm
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
You would think so, but I haven't gotten much traction trying to convince people to evaluate the take-or-delay social security decision based on current law and its resulting reduction in benefits.
Not following, please explain!

Edit: Are you saying if you turned 62 before 2025, let's say 2021, then you would draw social security several years at lower income tax rates and less tax on social security, vs higher taxable amounts if you delay to after 2025?
When you receive your estimate from ssa.gov, it will tell you that barring changes in the law, the amount you receive will decrease and not remain at the rates shown in their projections. Exactly when this will happen and how much your benefit will decrease varies, but sometime in the 2030s (not far away) the benefit is likely to drop by about 25%, barring future legislation. Yet this is not reflected in any of the available calculators that I'm aware of, and I don't believe most of our discussions here are using these current projections and current law when they recommend when to take social security. The fact is that more early years of taking benefits at 100% of a reduced base can partly or fully offset the advantage of delaying.

I see this as entirely the same issue - people assuming that legislation will come along to rescue current provisions. I don't believe the 25%-ish cut will occur according to current law, but I believe something detrimental to some or all Bogleheads will happen - and if I had to guess it would be the result of legislation signed one day before the necessary reduction would take place.

But the tax law I see as far more likely to change in completely unpredictable ways numerous times before the sunset provision takes effect, so I think it's just more productive to use the current law in planning, not speculating on future changes.

And I think that approach meets the spirit and the law of forum guidelines. Remember, even in the days when these recent tax law changes seemed to be a done deal (although some of us still had our doubts!), discussions here were still being banned until they were (almost, with a one-thread exception maybe) law.
Ok got it. I think IORP actually does have a parameter that allows you to assume a 25ish percent reduction in 2034ish when the trust fund is scheduled to run out of money. I think that actually used to be the default assumption. I ran the numbers in the summer and was surprised it gave me higher values to retire At 62 vs 67 or 70 which was counter to everything I’ve heard and even counter to the IORP guidance that deferring to 70 was the optimal strategy. Of course maybe I’m the exception or it was just user error.

I agree it likely won’t happen exactly that way, but my assumption has been that what we will take out will be materially less than current law, and both DW and I should be near or at SS max payout. When I’m 62 right around 2025 I will have some interesting decisions to make. My wife is 5 years younger so will have more time to sort it out.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 1:09 pm

iceport wrote:
Sat Dec 30, 2017 9:40 am
JBTX wrote:
Fri Dec 29, 2017 10:29 pm
As the policy of the forum is to only evaluate financial decisions based upon actual current tax law, I would assume this would mean when evaluating Roth vs Traditional, for those retiring beyond 2025 the applicable comparison will be today's lower rates vs higher income tax rates in retirement?

Given that, seems Roth's have become comparatively more attractive than before.
Actually, there's more to think about than the tax hikes due to take effect in 2026. Due to the change in inflation adjustments for the tax bracket cut-offs and standard deductions from the standard CPI to the "chained" CPI version, there is a longer term "real" tax hike built into the new tax bill.

While the effects will be negligible over the short term, they will become significant over the long term — which is typically what we are considering with the Roth vs. traditional contribution decision. (If there was ever a group of people that understands the effects of compounding small costs over the long term, it is the Bogleheads!)
Interesting point that I hadn’t thought of. The new legislation will actually lead to a tax increase for personal taxpayers for this reason, if rates are actually allowed to sunset. The corporate rate cuts are permanent I think.

KlangFool
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 1:13 pm

tibbitts wrote:
Sat Dec 30, 2017 9:58 am

I have always felt that except for obvious situations (like a 0% marginal bracket, for example), a diversified approach to the type of IRA is valuable, but I don't think most discussions on the forum have taken that approach.
tibbitts,

I am not sure what do you mean by that.

A) My standard advice is to max out the Trad. 401K and put the tax savings into Roth IRA. I believe that is more tax diversified approach than Roth 401K only or Roth 401K + Roth IRA.

B) There is plenty of confusion in this kind of discussion when folks do not differentiate between IRA and 401K.

KlangFool

DrGoogle2017
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by DrGoogle2017 » Sat Dec 30, 2017 1:18 pm

I’m converting more to Roth. More than the 12% tax bracket. I’m converting up till the tax amount of 2017 for the 15% tax bracket. I know the marginal tax rate will be 25%,ie for every $5000 more in conversion, I pay roughly $1000 more in tax, but I need to smooth out my tax bill from now until I’m 70.
Last edited by DrGoogle2017 on Sat Dec 30, 2017 1:42 pm, edited 1 time in total.

JBTX
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 1:40 pm

KlangFool wrote:
Sat Dec 30, 2017 8:49 am
OP,

In my case, nothing changes. I will max Trad. 401K, Trad. 457, and max Roth IRAs. The kids will be in the college 2/3 years. Over that time, I will spend all my annual savings and move money from my taxable account to the tax-advantaged accounts. After that, I will contribute my annual savings to Trad. 401K, Trad. 457, Roth IRAs, and the taxable account.

I will FI/retire before 2025. My portfolio will be ranging from 45/45/10 (Tax-deferred/taxable/Roth) to 60/30/10 (Tax-deferred/taxable/Roth). In any case, I will retire before I withdraw my social security and I can spend my Roth contribution and taxable account for many years while doing Roth conversion.

KlangFool
I’m not going to argue with your numbers. It is very plausible that if you tightly manage it and do tax loss harvesting and things play out like you say and you diligently reinvest traditional tax savings into taxable accounts and don’t touch them you come out with a marginally better output.

In my case I’m about 45% Roth and Roth 401k, 50% traditional and 5% taxable. 20 years ago,
And again around 15 years ago I did some Roth conversions when the markets were at relative low points. My tax rate was probably in the 25-30% range which is higher than some recommend but by doing the conversions in my mind I actually increased my retirement savings by converting from traditional to Roth. Of course alternatively I could have set the tax I paid aside in a taxable account and taken losses in 2008 and harvested those going forward and perhaps end up with a marginally higher result. But I have to say it is sure nice not having to worry about capital gains and specific identification (which I never actually did anyway, I used weighted average) and tax loss harvesting.

The only downside I see is we’ve limited our liquidity a bit with most everything in retirement accounts, but still have over six figures in emergency funds and ibonds so barring a catastrophe we should be fine. An expensive house remodel at the same time as 6 months of unemployment has eaten into that liquidity.

KlangFool
Posts: 9469
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 3:21 pm

JBTX wrote:
Sat Dec 30, 2017 1:40 pm
KlangFool wrote:
Sat Dec 30, 2017 8:49 am
OP,

In my case, nothing changes. I will max Trad. 401K, Trad. 457, and max Roth IRAs. The kids will be in the college 2/3 years. Over that time, I will spend all my annual savings and move money from my taxable account to the tax-advantaged accounts. After that, I will contribute my annual savings to Trad. 401K, Trad. 457, Roth IRAs, and the taxable account.

I will FI/retire before 2025. My portfolio will be ranging from 45/45/10 (Tax-deferred/taxable/Roth) to 60/30/10 (Tax-deferred/taxable/Roth). In any case, I will retire before I withdraw my social security and I can spend my Roth contribution and taxable account for many years while doing Roth conversion.

KlangFool
I’m not going to argue with your numbers. It is very plausible that if you tightly manage it and do tax loss harvesting and things play out like you say and you diligently reinvest traditional tax savings into taxable accounts and don’t touch them you come out with a marginally better output.
JBTX,

<<don’t touch them you come out with a marginally better output. >>

I have unstable employment situation. So, I need a system that maximizes my net worth as soon as possible. The output may be marginally better but in my case, it may mean whether I reach my number before I am permanently unemployed or under-employed.

In summary, in my system, I tax-deferred the maximum amount of my income through Trad. 401K/457/403B. I put my tax savings into Roth IRAs and the taxable account. I invest tax-efficiently in my taxable account. Upon retirement/FI, I utilized all 3 pools of money to reduce my taxes.

As far as I can tell, with my allocation and tax diversification, I can generate any amount of taxable income as necessary for minimal tax payment under any tax rate environment.

KlangFool

JBTX
Posts: 3579
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 4:02 pm

KlangFool wrote:
Sat Dec 30, 2017 3:21 pm
JBTX wrote:
Sat Dec 30, 2017 1:40 pm
KlangFool wrote:
Sat Dec 30, 2017 8:49 am
OP,

In my case, nothing changes. I will max Trad. 401K, Trad. 457, and max Roth IRAs. The kids will be in the college 2/3 years. Over that time, I will spend all my annual savings and move money from my taxable account to the tax-advantaged accounts. After that, I will contribute my annual savings to Trad. 401K, Trad. 457, Roth IRAs, and the taxable account.

I will FI/retire before 2025. My portfolio will be ranging from 45/45/10 (Tax-deferred/taxable/Roth) to 60/30/10 (Tax-deferred/taxable/Roth). In any case, I will retire before I withdraw my social security and I can spend my Roth contribution and taxable account for many years while doing Roth conversion.

KlangFool
I’m not going to argue with your numbers. It is very plausible that if you tightly manage it and do tax loss harvesting and things play out like you say and you diligently reinvest traditional tax savings into taxable accounts and don’t touch them you come out with a marginally better output.
JBTX,

<<don’t touch them you come out with a marginally better output. >>

I have unstable employment situation. So, I need a system that maximizes my net worth as soon as possible. The output may be marginally better but in my case, it may mean whether I reach my number before I am permanently unemployed or under-employed.

In summary, in my system, I tax-deferred the maximum amount of my income through Trad. 401K/457/403B. I put my tax savings into Roth IRAs and the taxable account. I invest tax-efficiently in my taxable account. Upon retirement/FI, I utilized all 3 pools of money to reduce my taxes.

As far as I can tell, with my allocation and tax diversification, I can generate any amount of taxable income as necessary for minimal tax payment under any tax rate environment.

KlangFool
You seem to be very quantitatively oriented so I am quite sure you are making the best of your situation and optimizing your results. I can relate to the unstable employment, I have been working contract, and haven't worked for 6 months, but will start a new gig next week that looks to be only temporary. In my case luckily the DW has steady paying job so that is very helpful.

I don't argue with the numbers in the comparisons that I see. I am sure in many cases, perhaps most, traditional makes more sense, but only if you follow all of these assumptions

1. Assume that you will reinvest tax savings of traditional back into traditional, or if maxing out 401k reinvest tax savings in taxable account and tax loss harvest over many years
2. Your marginal rate will either be steady or go down
3. Social security taxability of retirement earnings will either not be a factor or can be worked around via early retirement
4. Current tax law will change to accommodate lower future rates vs sunset

That's a lot of assumptions. Such assumptions are fine for experienced bogleheads, but I don't think they are a given for people less experienced in the area. I think the biggest assumption is #1 - because I'm not sure most will automatically plow upfront traditional tax savings back into some sort of long term savings vehicle until retirement. They tend to look at it as where should I put my $10,000 of retirement savings, not should I invest in $8000 or Roth or $10,000 of traditional.

Having said all that, you and others have forced me to rethink my bias towards Roth.

Angelus359
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by Angelus359 » Sat Dec 30, 2017 5:25 pm

KlangFool wrote:
Sat Dec 30, 2017 1:13 pm
tibbitts wrote:
Sat Dec 30, 2017 9:58 am

I have always felt that except for obvious situations (like a 0% marginal bracket, for example), a diversified approach to the type of IRA is valuable, but I don't think most discussions on the forum have taken that approach.
tibbitts,

I am not sure what do you mean by that.

A) My standard advice is to max out the Trad. 401K and put the tax savings into Roth IRA. I believe that is more tax diversified approach than Roth 401K only or Roth 401K + Roth IRA.

B) There is plenty of confusion in this kind of discussion when folks do not differentiate between IRA and 401K.

KlangFool
I actually have the option in my 401k to put any arbitrary amount in a roth 401k or traditional 401k

I could do 50/50

50/50 roth and traditional 401k, and 50/50 roth/traditional ira would actually be more diversified
IT-DevOps System Administrator

KlangFool
Posts: 9469
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 5:32 pm

JBTX wrote:
Sat Dec 30, 2017 4:02 pm
KlangFool wrote:
Sat Dec 30, 2017 3:21 pm
JBTX wrote:
Sat Dec 30, 2017 1:40 pm
KlangFool wrote:
Sat Dec 30, 2017 8:49 am
OP,

In my case, nothing changes. I will max Trad. 401K, Trad. 457, and max Roth IRAs. The kids will be in the college 2/3 years. Over that time, I will spend all my annual savings and move money from my taxable account to the tax-advantaged accounts. After that, I will contribute my annual savings to Trad. 401K, Trad. 457, Roth IRAs, and the taxable account.

I will FI/retire before 2025. My portfolio will be ranging from 45/45/10 (Tax-deferred/taxable/Roth) to 60/30/10 (Tax-deferred/taxable/Roth). In any case, I will retire before I withdraw my social security and I can spend my Roth contribution and taxable account for many years while doing Roth conversion.

KlangFool
I’m not going to argue with your numbers. It is very plausible that if you tightly manage it and do tax loss harvesting and things play out like you say and you diligently reinvest traditional tax savings into taxable accounts and don’t touch them you come out with a marginally better output.
JBTX,

<<don’t touch them you come out with a marginally better output. >>

I have unstable employment situation. So, I need a system that maximizes my net worth as soon as possible. The output may be marginally better but in my case, it may mean whether I reach my number before I am permanently unemployed or under-employed.

In summary, in my system, I tax-deferred the maximum amount of my income through Trad. 401K/457/403B. I put my tax savings into Roth IRAs and the taxable account. I invest tax-efficiently in my taxable account. Upon retirement/FI, I utilized all 3 pools of money to reduce my taxes.

As far as I can tell, with my allocation and tax diversification, I can generate any amount of taxable income as necessary for minimal tax payment under any tax rate environment.

KlangFool
You seem to be very quantitatively oriented so I am quite sure you are making the best of your situation and optimizing your results. I can relate to the unstable employment, I have been working contract, and haven't worked for 6 months, but will start a new gig next week that looks to be only temporary. In my case luckily the DW has steady paying job so that is very helpful.

I don't argue with the numbers in the comparisons that I see. I am sure in many cases, perhaps most, traditional makes more sense, but only if you follow all of these assumptions

1. Assume that you will reinvest tax savings of traditional back into traditional, or if maxing out 401k reinvest tax savings in taxable account and tax loss harvest over many years
2. Your marginal rate will either be steady or go down
3. Social security taxability of retirement earnings will either not be a factor or can be worked around via early retirement
4. Current tax law will change to accommodate lower future rates vs sunset

That's a lot of assumptions. Such assumptions are fine for experienced bogleheads, but I don't think they are a given for people less experienced in the area. I think the biggest assumption is #1 - because I'm not sure most will automatically plow upfront traditional tax savings back into some sort of long term savings vehicle until retirement. They tend to look at it as where should I put my $10,000 of retirement savings, not should I invest in $8000 or Roth or $10,000 of traditional.

Having said all that, you and others have forced me to rethink my bias towards Roth.
JBTX,

<<You seem to be very quantitatively oriented so I am quite sure you are making the best of your situation and optimizing your results. I can relate to the unstable employment, I have been working contract, and haven't worked for 6 months, but will start a new gig next week that looks to be only temporary. In my case luckily the DW has steady paying job so that is very helpful.>>

My whole household is dependent on my single unstable income/employment.

<< I think the biggest assumption is #1 - because I'm not sure most will automatically plow upfront traditional tax savings back into some sort of long term savings vehicle until retirement. >>

I am not sure what do you mean by that? For a "Pay Yourself First" saver, I auto-deduct my paycheck to my 401K, Vanguard mutual funds, and my checking account. I only spend on my checking account. So, why would this be hard?

<<1. Assume that you will reinvest tax savings of traditional back into traditional, or if maxing out 401k reinvest tax savings in taxable account and tax loss harvest over many years
2. Your marginal rate will either be steady or go down
3. Social security taxability of retirement earnings will either not be a factor or can be worked around via early retirement
4. Current tax law will change to accommodate lower future rates vs sunset>>

My current annual expense is 60K per year. When I retire/FI, I will pay off my mortgage and my annual expense will go down to 45K per year. I only need to cover 45K worth of expense every year. In the worst case, I only need to generate 45K worth of income. Why would I pay more tax than my current 6 figures annual income? If the tax system chooses to tax somebody with 45K of income with a lot of taxes, most American would not survive. The median household income is 60K or less.

Furthermore, with 10% (2 to 3 years of expense) in my Roth IRAs, I can spend that money and generate zero income.

If a person's annual expense is low enough (60K or less), there is a fair amount of flexibility in generating less taxable income at retirement.

KlangFool

KlangFool
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 5:40 pm

Angelus359 wrote:
Sat Dec 30, 2017 5:25 pm
KlangFool wrote:
Sat Dec 30, 2017 1:13 pm
tibbitts wrote:
Sat Dec 30, 2017 9:58 am

I have always felt that except for obvious situations (like a 0% marginal bracket, for example), a diversified approach to the type of IRA is valuable, but I don't think most discussions on the forum have taken that approach.
tibbitts,

I am not sure what do you mean by that.

A) My standard advice is to max out the Trad. 401K and put the tax savings into Roth IRA. I believe that is more tax diversified approach than Roth 401K only or Roth 401K + Roth IRA.

B) There is plenty of confusion in this kind of discussion when folks do not differentiate between IRA and 401K.

KlangFool
I actually have the option in my 401k to put any arbitrary amount in a roth 401k or traditional 401k

I could do 50/50

50/50 roth and traditional 401k, and 50/50 roth/traditional ira would actually be more diversified
Angelus359,

What is your gross income? If you give us the number, we could calculate and tell you why that is the wrong decision.

A) If your income is high, your contribution to Trad. IRA is not tax-deductible. Hence, you should contribute to Roth IRA. So, if you go 50/50 on the 401K side, you have too much Roth 401K/Roth IRA. And, you will pay more taxes.

B) If your income is low, you may contribute 100% to Trad. 401K and Trad. IRA in order to qualify for tax credits. In those cases, your tax will be zero or negative.

In summary, 100% to Trad. 401K and 100% to Roth IRA works for almost all income levels.

KlangFool

JBTX
Posts: 3579
Joined: Wed Jul 26, 2017 12:46 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by JBTX » Sat Dec 30, 2017 5:49 pm

KlangFool wrote:
Sat Dec 30, 2017 5:40 pm
If you give us the number, we could calculate and tell you why that is the wrong decision.

I guess this is what I find frustrating and what some of us are referring to. The assumption is Traditional is ALWAYS better than Roth.

drk
Posts: 678
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Location: Seattle

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by drk » Sat Dec 30, 2017 5:53 pm

JBTX wrote:
Sat Dec 30, 2017 5:49 pm
KlangFool wrote:
Sat Dec 30, 2017 5:40 pm
If you give us the number, we could calculate and tell you why whether that is the wrong right decision.

I guess this is what I find frustrating and what some of us are referring to. The assumption is Traditional is ALWAYS better than Roth.
There, I fixed it. Traditional typically is better than Roth with the right organization, hence the bias.

KlangFool
Posts: 9469
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 6:16 pm

JBTX wrote:
Sat Dec 30, 2017 5:49 pm
KlangFool wrote:
Sat Dec 30, 2017 5:40 pm
If you give us the number, we could calculate and tell you why that is the wrong decision.

I guess this is what I find frustrating and what some of us are referring to. The assumption is Traditional is ALWAYS better than Roth.
JBTX,

Why? It is the right answer. The result of the decision is asymmetric.

A) If you defer too much in your tax-deferred account, in the worst case, you have too much money at retirement and you pay more taxes. The result of the bad decision is not too bad.

B) If you put too much money into Roth 401K/IRA, you pay too much tax. In the worst case, you do not have enough money to feed your family. You cannot get the money back from IRS. The result of the bad decision is disastrous.

(B) is especially important for the younger folks with a lot less financial resources. They may not survive if they face a recession and unemployed for more than 1 year. Trad. 401K let them build up a buffer quickly.

KlangFool

KlangFool
Posts: 9469
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 6:23 pm

OP,

I am a lucky/unlucky person.

I am an unlucky person because I never faced a long stretch of prosperity and stable employment. And, we are not talking about minor events.

Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Boom/Bust, 2007/2009 great recession.

I had seen many of peers do not survive.

I am a lucky person because I survived and thrived in spite of all those challenges.

So, when I plan for my financial future, I look at both sides. I do not assume everything will go well. I make sure that even if things go badly, my family can survive.

KlangFool

User avatar
saltycaper
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Location: The Tower

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by saltycaper » Sat Dec 30, 2017 6:28 pm

KlangFool wrote:
Sat Dec 30, 2017 5:40 pm

B) If your income is low, you may contribute 100% to Trad. 401K and Trad. IRA in order to qualify for tax credits. In those cases, your tax will be zero or negative.

In summary, 100% to Trad. 401K and 100% to Roth IRA works for almost all income levels.
If you can go to zero but can't go negative, then you should do what you must to get to zero, and then you should put the rest in Roth.
Quod vitae sectabor iter?

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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by bsteiner » Sat Dec 30, 2017 6:28 pm

The major changes are the widening of the 24% bracket for joint returns to $315,000, twice the width of the single bracket, and the changes to the AMT whereby very few taxpayers will be subject to the AMT. As a result, many more IRA owners will be able to convert at 24% or less.

While that may not be attractive to taxpayers who will be in the 12% bracket in retirement, it will be attractive to many taxpayers who will be in the 22% or higher bracket even in retirement.

smitcat
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by smitcat » Sat Dec 30, 2017 6:38 pm

JBTX wrote:
Sat Dec 30, 2017 4:02 pm
KlangFool wrote:
Sat Dec 30, 2017 3:21 pm
JBTX wrote:
Sat Dec 30, 2017 1:40 pm
KlangFool wrote:
Sat Dec 30, 2017 8:49 am
OP,

In my case, nothing changes. I will max Trad. 401K, Trad. 457, and max Roth IRAs. The kids will be in the college 2/3 years. Over that time, I will spend all my annual savings and move money from my taxable account to the tax-advantaged accounts. After that, I will contribute my annual savings to Trad. 401K, Trad. 457, Roth IRAs, and the taxable account.

I will FI/retire before 2025. My portfolio will be ranging from 45/45/10 (Tax-deferred/taxable/Roth) to 60/30/10 (Tax-deferred/taxable/Roth). In any case, I will retire before I withdraw my social security and I can spend my Roth contribution and taxable account for many years while doing Roth conversion.

KlangFool
I’m not going to argue with your numbers. It is very plausible that if you tightly manage it and do tax loss harvesting and things play out like you say and you diligently reinvest traditional tax savings into taxable accounts and don’t touch them you come out with a marginally better output.
JBTX,

<<don’t touch them you come out with a marginally better output. >>

I have unstable employment situation. So, I need a system that maximizes my net worth as soon as possible. The output may be marginally better but in my case, it may mean whether I reach my number before I am permanently unemployed or under-employed.

In summary, in my system, I tax-deferred the maximum amount of my income through Trad. 401K/457/403B. I put my tax savings into Roth IRAs and the taxable account. I invest tax-efficiently in my taxable account. Upon retirement/FI, I utilized all 3 pools of money to reduce my taxes.

As far as I can tell, with my allocation and tax diversification, I can generate any amount of taxable income as necessary for minimal tax payment under any tax rate environment.

KlangFool
You seem to be very quantitatively oriented so I am quite sure you are making the best of your situation and optimizing your results. I can relate to the unstable employment, I have been working contract, and haven't worked for 6 months, but will start a new gig next week that looks to be only temporary. In my case luckily the DW has steady paying job so that is very helpful.

I don't argue with the numbers in the comparisons that I see. I am sure in many cases, perhaps most, traditional makes more sense, but only if you follow all of these assumptions

1. Assume that you will reinvest tax savings of traditional back into traditional, or if maxing out 401k reinvest tax savings in taxable account and tax loss harvest over many years
2. Your marginal rate will either be steady or go down
3. Social security taxability of retirement earnings will either not be a factor or can be worked around via early retirement
4. Current tax law will change to accommodate lower future rates vs sunset

That's a lot of assumptions. Such assumptions are fine for experienced bogleheads, but I don't think they are a given for people less experienced in the area. I think the biggest assumption is #1 - because I'm not sure most will automatically plow upfront traditional tax savings back into some sort of long term savings vehicle until retirement. They tend to look at it as where should I put my $10,000 of retirement savings, not should I invest in $8000 or Roth or $10,000 of traditional.

Having said all that, you and others have forced me to rethink my bias towards Roth.
We follow along with Klang Fools methods for the most part but each person must carefully assess their own situation. Valuable tools like IORP and the RPM models allow for you to 'tune' your approach and compare a base situation with other possibilities. You can then 'see' that there is much more than a 'small' advantage to getting this right from an overall portfolio but more importantly from a 'spendable' limit.

Your assumptions with our view -

1. Assume that you will reinvest tax savings of traditional back into traditional, or if maxing out 401k reinvest tax savings in taxable account and tax loss harvest over many years
Of course we do.
2. Your marginal rate will either be steady or go down
It will go down due to overall income, the state we retire to and when one spouse is left for sure
3. Social security taxability of retirement earnings will either not be a factor or can be worked around via early retirement
Planned for as in the above calculators
4. Current tax law will change to accommodate lower future rates vs sunset
We always plan for future inflated funds to be taxed 'higher'. IF we are wrong here (doubful) the results will mean that we have suffcient funds left.

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iceport
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by iceport » Sat Dec 30, 2017 6:51 pm

drk wrote:
Sat Dec 30, 2017 5:53 pm
JBTX wrote:
Sat Dec 30, 2017 5:49 pm
KlangFool wrote:
Sat Dec 30, 2017 5:40 pm
If you give us the number, we could calculate and tell you why whether that is likely to be the wrong right decision.

I guess this is what I find frustrating and what some of us are referring to. The assumption is Traditional is ALWAYS better than Roth.
There, I fixed it. Traditional typically is better than Roth with the right organization, hence the bias.
Your "fix" still ignores the inherent uncertainties in the analysis. The unfortunate truth is that for many (most?) investors, they simply won't know in advance whether they've made the optimum choice.
"Discipline matters more than allocation.” ─William Bernstein

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CAsage
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by CAsage » Sat Dec 30, 2017 6:52 pm

bsteiner wrote:
Sat Dec 30, 2017 6:28 pm
The major changes are the widening of the 24% bracket for joint returns to $315,000, twice the width of the single bracket, and the changes to the AMT whereby very few taxpayers will be subject to the AMT. As a result, many more IRA owners will be able to convert at 24% or less.

While that may not be attractive to taxpayers who will be in the 12% bracket in retirement, it will be attractive to many taxpayers who will be in the 22% or higher bracket even in retirement.
Amen. The single 22% tax bracket starts at 38,700. Social Security and RMD can pass that pretty easily - even married couples, one of you will be filing single some day! I can convert more from 2018-2025 without the AMT than I could in 2017 (high property and SALT limited income well below the top of the 25% bracket due to AMT), and it's cheaper 1~3% cheaper.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

drk
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Location: Seattle

Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by drk » Sat Dec 30, 2017 7:01 pm

iceport wrote:
Sat Dec 30, 2017 6:51 pm
Your "fix" still ignores the inherent uncertainties in the analysis. The unfortunate truth is that for many (most?) investors, they simply won't know in advance whether they've made the optimum choice.
Personally, I take it as an axiom that none of us have perfect knowledge of the future. In light of that fact, the "right organization" will limit one-way doors in order to protect flexibility. Contributing to a Roth 401k when one has to pay income taxes always limits flexibility.

That being said, I'll accept your addition to the statement. :sharebeer

KlangFool
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by KlangFool » Sat Dec 30, 2017 7:11 pm

CAsage wrote:
Sat Dec 30, 2017 6:52 pm
bsteiner wrote:
Sat Dec 30, 2017 6:28 pm
The major changes are the widening of the 24% bracket for joint returns to $315,000, twice the width of the single bracket, and the changes to the AMT whereby very few taxpayers will be subject to the AMT. As a result, many more IRA owners will be able to convert at 24% or less.

While that may not be attractive to taxpayers who will be in the 12% bracket in retirement, it will be attractive to many taxpayers who will be in the 22% or higher bracket even in retirement.
Amen. The single 22% tax bracket starts at 38,700. Social Security and RMD can pass that pretty easily - even married couples, one of you will be filing single some day! I can convert more from 2018-2025 without the AMT than I could in 2017 (high property and SALT limited income well below the top of the 25% bracket due to AMT), and it's cheaper 1~3% cheaper.
CAsage,

<<The single 22% tax bracket starts at 38,700. Social Security and RMD can pass that pretty easily ->>

For a single person.

1) The person has to financially survive and fully-employed until 62 years old before social security kicked in.

2) The person has to survive until 70 1/2 years old before RMD is an issue.

3)To reach 38,700 taxable income, the person needs to have about 50K of gross income.

A) Before 62 years old, that person needs to have 50K X 25 = 1.25 million. Less than 10% of the American household has the net worth exceeding 1 million.

B) Assuming 24K of annual social security income, that person needs 26K X 25 = 650K. But, the person needs to survive until 62 years old first.

I do not think any of those are easy for normal people.

KlangFool

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iceport
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Re: Tax Law Sunset 2025 - Roth vs Traditional

Post by iceport » Sat Dec 30, 2017 7:15 pm

drk wrote:
Sat Dec 30, 2017 7:01 pm
iceport wrote:
Sat Dec 30, 2017 6:51 pm
Your "fix" still ignores the inherent uncertainties in the analysis. The unfortunate truth is that for many (most?) investors, they simply won't know in advance whether they've made the optimum choice.
Personally, I take it as an axiom that none of us have perfect knowledge of the future. In light of that fact, the "right organization" will limit one-way doors in order to protect flexibility. Contributing to a Roth 401k when one has to pay income taxes always limits flexibility.

That being said, I'll accept your addition to the statement. :sharebeer
I'm also fond of preserving flexibility. However, the option for Roth conversions after the fact is not perfect flexibility. I also appreciate the spending flexibility that tax diversification affords, though it also comes with a cost.
"Discipline matters more than allocation.” ─William Bernstein

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