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

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

Post by letsgobobby » Thu May 17, 2018 1:31 pm

WanderingDoc wrote:
Thu May 17, 2018 12:53 pm
The Wizard wrote:
Thu May 17, 2018 5:51 am
I put money into my tax deferred 403(b) account for 40 years with a hefty "match". I maxed my contributions to this account in my latter working years, thus keeping me in the 25% marginal bracket.

Then in retirement, I annuitized a portion of that income to get higher lifetime income than a simple SWR would permit, thus giving me a higher AGI in retirement than when working and bumping me into the 28% bracket, now the new 24% bracket.
It's worked out well so far...
I noticed that the general consensus is people are desperately trying to be in a lower tax bracket at retirement. They then brag about it on forums and to their friends. No!!! You should always strive to be in a HIGHER tax bracket. That means you are wealthier. You have more money to enjoy or give every year. No idea when striving for medocrity became "hip". :oops:
If I make ten million dollars this year I may never have to work again, and will be in a lower tax bracket indefinitely. By your definition I am mediocre. By my definition I have reached my goal of becoming financially independent.

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

Post by TravelforFun » Thu May 17, 2018 1:32 pm

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

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

Do not confuse wealth with high income. A person can be very wealthy and have a low income (and a low tax bracket).
This is true that they will potentially have a low income up until 70.5 but the government will not allow wealthy to continue withdrawing a low income. I started running some numbers on my wife and my rmd's if we worked until full retirement and we wait untill 70 to withdraw social security. The RMD'S + social security would be an obscene amount that I doubt we could spend. (we are planning for a much earlier exit)
4 years from RMD and I wish I had piled up more money in taxable than maxing out 401K when I was in my 30s and 40s. Big miscalculation!

TravelforFun

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

Post by The Wizard » Thu May 17, 2018 1:36 pm

WanderingDoc wrote:
Thu May 17, 2018 12:53 pm
The Wizard wrote:
Thu May 17, 2018 5:51 am
I put money into my tax deferred 403(b) account for 40 years with a hefty "match". I maxed my contributions to this account in my latter working years, thus keeping me in the 25% marginal bracket.

Then in retirement, I annuitized a portion of that income to get higher lifetime income than a simple SWR would permit, thus giving me a higher AGI in retirement than when working and bumping me into the 28% bracket, now the new 24% bracket.
It's worked out well so far...
I noticed that the general consensus is people are desperately trying to be in a lower tax bracket at retirement. They then brag about it on forums and to their friends. No!!! You should always strive to be in a HIGHER tax bracket. That means you are wealthier. You have more money to enjoy or give every year. No idea when striving for medocrity became "hip". :oops:
I obviously agree.
A main goal should be to have realtively steady retirement income increasing a few percent per year maybe. Best to avoid large fluctuations in AGI due to our progressive income tax system.

Now in theory, one could save money during working years only in Roth and taxable accounts, no tax deferred 401(k) accounts.
You would then pay higher taxes during working years and quite low taxes in retirement for similar spending levels.
But most of us agree that approach is sub optimal...
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wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Thu May 17, 2018 1:37 pm

4 years from RMD and I wish I had piled up more money in taxable than maxing out 401K when I was in my 30s and 40s. Big miscalculation!
I am not buying it. Please run the appropriate calculations to see if you will come to this conclusion after doing the actual numerical analysis. Remember you are assuming you would have given up the tax deferred space. So you need to retroactively compute the cost of doing that.

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

Post by The Wizard » Thu May 17, 2018 1:40 pm

wrongfunds wrote:
Thu May 17, 2018 1:22 pm
So why do people keep on bringing the so called elephant in the room aka social security taxes whenever we are discussing retirement? After working for 40+ years, you have pretty much accepted the fact that you make money, you pay taxes. The discussion always seems to imply that gummit takes 85% of your hard earned social security away from you...
You probably know that's a wildly incorrect statement, right?
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wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Thu May 17, 2018 1:40 pm

If I make ten million dollars this year I may never have to work again, and will be in a lower tax bracket indefinitely.
Not true; If I make ten million dollars this year, and I will be making fifteen million dollars next year, and twenty year after next etc why I would I stop working?

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

Post by wrongfunds » Thu May 17, 2018 1:43 pm

The Wizard wrote:
Thu May 17, 2018 1:40 pm
wrongfunds wrote:
Thu May 17, 2018 1:22 pm
So why do people keep on bringing the so called elephant in the room aka social security taxes whenever we are discussing retirement? After working for 40+ years, you have pretty much accepted the fact that you make money, you pay taxes. The discussion always seems to imply that gummit takes 85% of your hard earned social security away from you...
You probably know that's a wildly incorrect statement, right?
What is the "wildly incorrect statement" here? Don't people always talk about social security being taxed 85% and that is something extremely evil being done by the government? I mean for a typical BH, this should be pretty much an irrelevant factor but it comes up here too often and so does the high marginal rate associated with it.
Last edited by wrongfunds on Thu May 17, 2018 1:45 pm, edited 1 time in total.

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

Post by The Wizard » Thu May 17, 2018 1:44 pm

midareff wrote:
Thu May 17, 2018 1:30 pm
I think most of that has to do with the inability to retire at a higher income than when they were working. Personally, I targeted 140% of my pre-retirement income as my retired income as I knew I wanted to travel.
Right.
This is why I generally recommend that folks consider their (reasonably considered) Desired Income in retirement rather than simply their expenses...
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by bloom2708 » Thu May 17, 2018 1:46 pm

The Wizard wrote:
Thu May 17, 2018 1:44 pm
midareff wrote:
Thu May 17, 2018 1:30 pm
I think most of that has to do with the inability to retire at a higher income than when they were working. Personally, I targeted 140% of my pre-retirement income as my retired income as I knew I wanted to travel.
Right.
This is why I generally recommend that folks consider their (reasonably considered) Desired Income in retirement rather than simply their expenses...
The other risk is working to long with this strategy. Hard to spend when dead. :wink:
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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

Post by wrongfunds » Thu May 17, 2018 1:48 pm

The Wizard wrote:
Thu May 17, 2018 1:44 pm
midareff wrote:
Thu May 17, 2018 1:30 pm
I think most of that has to do with the inability to retire at a higher income than when they were working. Personally, I targeted 140% of my pre-retirement income as my retired income as I knew I wanted to travel.
Right.
This is why I generally recommend that folks consider their (reasonably considered) Desired Income in retirement rather than simply their expenses...
I suspect your definition of "income" is not the same for those two periods. If it is, I would love to know what percentage of income needs to be saved so that one could have 140% income in retirement and what rate of return is being assumed or achieved to reach that.

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

Post by FiveK » Thu May 17, 2018 1:50 pm

wrongfunds wrote:
Thu May 17, 2018 1:07 pm
FiveK wrote:
Thu May 17, 2018 12:52 pm
It's marginal vs. marginal. Effective is irrelevant. See Marginal Vs Effective Tax Rates And When To Use Each, Marginal tax rate - Bogleheads, etc.
It makes sens to compare marginal vs marginal when effective rate is same. Otherwise, it is pointless and in some cases misleading.

e.g.
Situation A Total Income $100K Total taxes $10K Effective Rate 10% Marginal Rate 20%
Situation B Total Income $100K Total taxes $5K Effective Rate 5% Marginal Rate 33%

B is paying higher marginal rate but is certainly better off than A. You have to look at the rate and the total rather than getting fixated on single number.

The so called social security income hump would be a good example :-)
I'm assuming we're sticking with the general theme of this thread, which is the comparison of tax rates for the purpose of choosing between traditional and Roth contributions - agreed?

For this year, a person could contribute to traditional, or Roth, or do nothing. Let's take "do nothing" as the base case: some amount of tax will be paid this year, and in retirement some tax, based on whatever is done in all other years, will also be paid.

A traditional contribution would save at whatever marginal rate applies this year. If one chooses to contribute an amount that spans a bracket boundary, the marginal rate is the weighted average of the various rates applicable to each dollar.

That same traditional contribution when withdrawn (e.g., using 4%/yr of whatever future balance) would be taxed at whatever marginal rate applies that year. If the withdrawal amount spans a bracket boundary (or rate change, such as the SS hump), the marginal rate is the weighted average of the various rates applicable to each dollar.

Looking at those two marginal rates, one could choose traditional if the future rate will be lower than this year's rate, and otherwise choose Roth, for this year's contribution.

The effective rate plays no part in that comparison - agreed?

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

Post by The Wizard » Thu May 17, 2018 1:50 pm

letsgobobby wrote:
Thu May 17, 2018 1:31 pm
...If I make ten million dollars this year I may never have to work again, and will be in a lower tax bracket indefinitely. By your definition I am mediocre. By my definition I have reached my goal of becoming financially independent.
Not really.
Goal is/should be to have more safely spendable money in retirement than working.
For some of us, that means higher AGI.
But folks with 7-figure incomes will have a lot in taxable accounts, where withdrawals are taxed way less...
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by The Wizard » Thu May 17, 2018 1:53 pm

wrongfunds wrote:
Thu May 17, 2018 1:40 pm
If I make ten million dollars this year I may never have to work again, and will be in a lower tax bracket indefinitely.
Not true; If I make ten million dollars this year, and I will be making fifteen million dollars next year, and twenty year after next etc why I would I stop working?
Perhaps your major league baseball team drops you due to declining performance?
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by randomguy » Thu May 17, 2018 1:53 pm

TravelforFun wrote:
Thu May 17, 2018 1:32 pm
CnC wrote:
Wed May 16, 2018 7:10 pm
retiredjg wrote:
Wed May 16, 2018 6:40 pm

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

Do not confuse wealth with high income. A person can be very wealthy and have a low income (and a low tax bracket).
This is true that they will potentially have a low income up until 70.5 but the government will not allow wealthy to continue withdrawing a low income. I started running some numbers on my wife and my rmd's if we worked until full retirement and we wait untill 70 to withdraw social security. The RMD'S + social security would be an obscene amount that I doubt we could spend. (we are planning for a much earlier exit)
4 years from RMD and I wish I had piled up more money in taxable than maxing out 401K when I was in my 30s and 40s. Big miscalculation!

TravelforFun
I hear that a lot but is it true? Would you really be happier with having a taxable account with say 50-66%(initial taxation and tax drag along the way) of your tax deferred account? Obviously going over the past 40 years of tax law changes makes this tough to get an exact number on.

To some extent this mainly affects people right on the edges. That married couple making around 100k is right on the edge of the new 12/22% brackets and when they are retired (say 40k ss, 40k RMDs) are right in the middle of the SS taxation humps. It makes for a lot of interesting guesses. If your up in the 32%+ brackets it is hard to get the 4 million plus in tax deferred and all your SS will be taxed anyway.

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

Post by randomguy » Thu May 17, 2018 1:59 pm

The Wizard wrote:
Thu May 17, 2018 1:50 pm
letsgobobby wrote:
Thu May 17, 2018 1:31 pm
...If I make ten million dollars this year I may never have to work again, and will be in a lower tax bracket indefinitely. By your definition I am mediocre. By my definition I have reached my goal of becoming financially independent.
Not really.
Goal is/should be to have more safely spendable money in retirement than working.
For some of us, that means higher AGI.
But folks with 7-figure incomes will have a lot in taxable accounts, where withdrawals are taxed way less...
Nah that means you didn't spend enough when working (or worked too long).:) When you retire you no longer are saving 15-30% of your income, notpaying pay roll taxes, have more LTGC/SS (in general that is more tax advantaged than OI) and so on. With 60-70% of the AGI, you will have the same or more spending. Now if that results in you being in a lower bracket depends where you are starting.

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

Post by FiveK » Thu May 17, 2018 2:01 pm

wrongfunds wrote:
Thu May 17, 2018 1:22 pm
So why do people keep on bringing the so called elephant in the room aka social security taxes whenever we are discussing retirement?
Perhaps because it's an "interesting" mathematical situation, and could be a real consideration for some people. For other people (both those who won't reach the "hump" and those who will be well past it), it is irrelevant.
By the way the three examples I listed earlier came from one of the highly respected blogger Michael Kitces. If somebody of his caliber...gets the term AGI wrong and says to add taxable SSI to AGI....
You are correct: he is somewhat loose in the usage of "AGI" in that article.

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

Post by midareff » Thu May 17, 2018 2:03 pm

bloom2708 wrote:
Thu May 17, 2018 1:46 pm
The Wizard wrote:
Thu May 17, 2018 1:44 pm
midareff wrote:
Thu May 17, 2018 1:30 pm
I think most of that has to do with the inability to retire at a higher income than when they were working. Personally, I targeted 140% of my pre-retirement income as my retired income as I knew I wanted to travel.
Right.
This is why I generally recommend that folks consider their (reasonably considered) Desired Income in retirement rather than simply their expenses...
The other risk is working to long with this strategy. Hard to spend when dead. :wink:
You are absolutely right bloom. For me personally, I went into a D.R.O.P. program at 62, which was in 2010, and stayed 29 months of 60 months of eligibility. My portfolio was not sufficiently recovered to exit then and start SS at that point to help preserve taxable account balances. ... while I was still building IRA accounts. I retired at age 64, 2 years and a couple months later. Hindsight being as accurate as it is; I coulda, woulda, maybe, .. a year earlier but my wife was still in the fiance visa process so that would not have accomplished anything in my case. At the moment I/we are starting year 6 retired and we (mostly I) am at 42 countries (outside USA) and 42 states. Ukraine River Cruise next month so it's a few weeks from 43.

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

Post by wrongfunds » Thu May 17, 2018 2:05 pm

The effective rate plays no part in that comparison - agreed?
I don't agree. You can compare marginal when the other rate and the amounts are similar. Otherwise you are comparing apples to oranges.

For example if your annual income today is 100K and your tax deferred account will be $2M and withdrawing 3%, (and ignoring everything else) will you be comparing marginal rates or effective rates?

What if the tax deferred account becomes $20M? I can certainly see why it would have been great idea to have the $20M in Roth account but what are the sequence of events which can possibly lead to the $20M kitty?

So you have to come up with examples which are probable and realistic rather than just theoretical and with no practical chance of happening.

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

Post by vtMaps » Thu May 17, 2018 2:05 pm

randomguy wrote:
Thu May 17, 2018 1:53 pm
TravelforFun wrote:
Thu May 17, 2018 1:32 pm
4 years from RMD and I wish I had piled up more money in taxable than maxing out 401K when I was in my 30s and 40s. Big miscalculation!
I hear that a lot but is it true?
It's certainly true if you retire early and buy health insurance on the exchange. If I had had more in taxable, it would have been easier to keep my income lower in the years before medicare.

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

Post by bradpevans » Thu May 17, 2018 2:20 pm

wrongfunds wrote:
Thu May 17, 2018 1:43 pm
The Wizard wrote:
Thu May 17, 2018 1:40 pm
wrongfunds wrote:
Thu May 17, 2018 1:22 pm
So why do people keep on bringing the so called elephant in the room aka social security taxes whenever we are discussing retirement? After working for 40+ years, you have pretty much accepted the fact that you make money, you pay taxes. The discussion always seems to imply that gummit takes 85% of your hard earned social security away from you...
You probably know that's a wildly incorrect statement, right?
What is the "wildly incorrect statement" here? Don't people always talk about social security being taxed 85% and that is something extremely evil being done by the government? I mean for a typical BH, this should be pretty much an irrelevant factor but it comes up here too often and so does the high marginal rate associated with it.
my guess is they are referring to:
85% OF your SS may be taxed;
this is not the same as your SS taxed at 85%

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

Post by The Wizard » Thu May 17, 2018 2:26 pm

FiveK wrote:
Thu May 17, 2018 2:01 pm
By the way the three examples I listed earlier came from one of the highly respected blogger Michael Kitces. If somebody of his caliber...gets the term AGI wrong and says to add taxable SSI to AGI....
You are correct: he is somewhat loose in the usage of "AGI" in that article.
SSI is Supplemental Security Income (welfare), not Social Security.
I'm not sure how SSI impacts your income taxes; I don't expect to find out personally either...
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by The Wizard » Thu May 17, 2018 2:30 pm

bradpevans wrote:
Thu May 17, 2018 2:20 pm
wrongfunds wrote:
Thu May 17, 2018 1:43 pm
The Wizard wrote:
Thu May 17, 2018 1:40 pm
wrongfunds wrote:
Thu May 17, 2018 1:22 pm
So why do people keep on bringing the so called elephant in the room aka social security taxes whenever we are discussing retirement? After working for 40+ years, you have pretty much accepted the fact that you make money, you pay taxes. The discussion always seems to imply that gummit takes 85% of your hard earned social security away from you...
You probably know that's a wildly incorrect statement, right?
What is the "wildly incorrect statement" here? Don't people always talk about social security being taxed 85% and that is something extremely evil being done by the government? I mean for a typical BH, this should be pretty much an irrelevant factor but it comes up here too often and so does the high marginal rate associated with it.
my guess is they are referring to:
85% OF your SS may be taxed;
this is not the same as your SS taxed at 85%
Correctamundo...
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MathWizard
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MathWizard » Thu May 17, 2018 2:35 pm

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

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

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

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

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

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

Any thoughts?
I usually see the statement as "you will likely be the same or lower tax bracket in retirement".
If you pay the same rate later, it is a wash, so you are only "wrong" if the rate is higher in retirement.

Our retirement funds put us in the 94th percentile in household wealth, and income puts me slightly in
the 22% marginal rate. We are still nowhere close to having enough to generate $189K which would bump
us into the 24% bracket (then it is merely a 2% extra tax on the marginal income so it is not a big mistake).

One issue that gets overlooked is when one spouse dies, taxes are now for a single person. This
is especially important in later years when RMDs produce a very high percentage withdrawal.

It is easy to say that any general comment can be wrong in some edge case, but I think that it is
incumbent on you to provide the counter-example, along with some probability of that happening.
I suspect that cases of "marginal rate is higher in retirement" would apply to very few people.

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

Post by marcopolo » Thu May 17, 2018 2:36 pm

CnC wrote:
Thu May 17, 2018 11:13 am

You can't on one hand say you need more than 25x expenses. That you need 30-40x expenses for an early retirement and then act like my accounts are gonna be too big and "overflowing"

125k - 170k a year after inflation and potential healthcare costs 30x expenses at 175k a year for an early retirement is +5mil and that doesn't include taxes.

So I certainly don't see how my forcasts are outlandish, they are right inline with what boggleheads suggests.

This is very confusing! :annoyed
Did you forget about your pensions and social security?
Lets take the higher end of your spending level of $175k. Out of that, $125K comes from pensions, plus you have social security.
You mentioned that might create a floor of $260k. On top of that you will have $4M in tax-deferred, which at a 3% withdrawal rate would yield another $120k. So, we are up to $390k now, for a $175k budget. Might you also have some after-tax savings? Surely you can see where someone might get the idea that you will be "overflowing". Absolutely nothing wrong with that. But, recognizing it might lead to making different decisions regarding things like when to retire, etc.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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

Post by FiveK » Thu May 17, 2018 2:43 pm

wrongfunds wrote:
Thu May 17, 2018 2:05 pm
The effective rate plays no part in that comparison - agreed?
I don't agree. You can compare marginal when the other rate and the amounts are similar. Otherwise you are comparing apples to oranges.
Are you sure about that? Let's use your examples below.
For example if your annual income today is 100K and your tax deferred account will be $2M and withdrawing 3%, (and ignoring everything else) will you be comparing marginal rates or effective rates?
To ensure we are on the same page, is the following correct?
- annual income today is 100K (yes, this part is obvious, sorry to belabor)
- tax deferred account will be $2M [regardless of what contribution is made this year]
Given that, any traditional contribution will save taxes by decreasing income from $100K, and pay taxes by increasing the $2M from which 3% will be withdrawn. E.g., an $18,500 contribution earning 5% for 10 years would increase the $2M by $30K and the withdrawal by $900, from $60K to $60.9K.
What if the tax deferred account becomes $20M?
Then, following the example above, the withdrawal income would change from $600K to $600.9K.

One would then calculate the marginal rates:
- (change in this year's tax between $100K and $81.5K) / $18.5K contribution
- (change in tax between $60K and $60.9K income) / $900
- (change in tax between $600K and $600.9K income) / $900
and take appropriate action. No effective rate needed or useful - agreed? If you disagree, please show where the effective rate plays a part.
I can certainly see why it would have been great idea to have the $20M in Roth account but what are the sequence of events which can possibly lead to the $20M kitty? So you have to come up with examples which are probable and realistic rather than just theoretical and with no practical chance of happening.
Agreed. And use the marginal rates applicable to those examples.

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

Post by wrongfunds » Thu May 17, 2018 2:45 pm

The Wizard wrote:
Thu May 17, 2018 2:30 pm
bradpevans wrote:
Thu May 17, 2018 2:20 pm
wrongfunds wrote:
Thu May 17, 2018 1:43 pm
The Wizard wrote:
Thu May 17, 2018 1:40 pm
wrongfunds wrote:
Thu May 17, 2018 1:22 pm
So why do people keep on bringing the so called elephant in the room aka social security taxes whenever we are discussing retirement? After working for 40+ years, you have pretty much accepted the fact that you make money, you pay taxes. The discussion always seems to imply that gummit takes 85% of your hard earned social security away from you...
You probably know that's a wildly incorrect statement, right?
What is the "wildly incorrect statement" here? Don't people always talk about social security being taxed 85% and that is something extremely evil being done by the government? I mean for a typical BH, this should be pretty much an irrelevant factor but it comes up here too often and so does the high marginal rate associated with it.
my guess is they are referring to:
85% OF your SS may be taxed;
this is not the same as your SS taxed at 85%
Correctamundo...
Well; that was *the* point; they squeal as if SS is taxed at 85% :-)

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

Post by wrongfunds » Thu May 17, 2018 2:46 pm

The Wizard wrote:
Thu May 17, 2018 2:26 pm
FiveK wrote:
Thu May 17, 2018 2:01 pm
By the way the three examples I listed earlier came from one of the highly respected blogger Michael Kitces. If somebody of his caliber...gets the term AGI wrong and says to add taxable SSI to AGI....
You are correct: he is somewhat loose in the usage of "AGI" in that article.
SSI is Supplemental Security Income (welfare), not Social Security.
I'm not sure how SSI impacts your income taxes; I don't expect to find out personally either...
Touche!! I was the one who used SSI to denote Social Security Income; my bad :oops:

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

Post by FiveK » Thu May 17, 2018 2:51 pm

The Wizard wrote:
Thu May 17, 2018 2:26 pm
FiveK wrote:
Thu May 17, 2018 2:01 pm
By the way the three examples I listed earlier came from one of the highly respected blogger Michael Kitces. If somebody of his caliber...gets the term AGI wrong and says to add taxable SSI to AGI....
You are correct: he is somewhat loose in the usage of "AGI" in that article.
SSI is Supplemental Security Income (welfare), not Social Security.
I'm not sure how SSI impacts your income taxes; I don't expect to find out personally either...
Yes, SSI was a typo here, but Kitces' usage of AGI in his article was still inapt.

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

Post by WhiteMaxima » Thu May 17, 2018 2:56 pm

To many Americans with less savings for retirement, their projected retirement tax bracket will be lower. To a lot of BH, due to their sizable savings, their future tax bracket could be higher with addition SS income and less deduction (dependent, mortgage interest. ect).

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

Post by The Wizard » Thu May 17, 2018 3:07 pm

WhiteMaxima wrote:
Thu May 17, 2018 2:56 pm
To many Americans with less savings for retirement, their projected retirement tax bracket will be lower. To a lot of BH, due to their sizable savings, their future tax bracket could be higher with addition SS income and less deduction (dependent, mortgage interest. ect).
I think we focus too much on tax "brackets".
It's more accurate to say that some high accumulators will have higher AGI, higher taxable income, and higher Federal income tax liability in retirement than when working.
They may or may not get a bit into the next higher tax bracket...
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Thu May 17, 2018 3:08 pm

To ensure we are on the same page, is the following correct?
- annual income today is 100K (yes, this part is obvious, sorry to belabor)
- tax deferred account will be $2M [regardless of what contribution is made this year]
Given that, any traditional contribution will save taxes by decreasing income from $100K, and pay taxes by increasing the $2M from which 3% will be withdrawn. E.g., an $18,500 contribution earning 5% for 10 years would increase the $2M by $30K and the withdrawal by $900, from $60K to $60.9K.

What if the tax deferred account becomes $20M?

Then, following the example above, the withdrawal income would change from $600K to $600.9K.
Forget about increasing $2M by $30K as that number was "assumed" to be $2M sometime in future. It makes no sense to increase it because of the contribution today. I mean it is like estimating something to be exactly 50.3456 but give or take +/- 25 :-) Essentially the future earnings has been already baked in to the final assumption. You could say that $2M assumption is not right. It should be lot less or lot more and provide the reasoning for that argument. Otherwise, we assume it is 2M when the times comes to take the distribution.

You are getting $60K out of it in the future and will be paying the taxes on that $60K in future *BUT* today you have saved the taxes on $100K. I had to pay exact same taxes in future, I am better off deferring it because the time value of the money.

Can we then agree that it makes sense to put it in the tax deferred account?

We can change the assumption about withdrawal percent and/or the value of the tax deferred account and can come up with alternate answer but I believe those assumption would be less probable and less likely than the assumptions made in the numbers I have given.

Do you agree with that?

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

Post by wrongfunds » Thu May 17, 2018 3:09 pm

It's more accurate to say that some high accumulators will have higher AGI, higher taxable income, and higher Federal income tax liability in retirement than when working.
I hope nobody is claiming that something is wrong with that!

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

Post by KlangFool » Thu May 17, 2018 3:10 pm

WhiteMaxima wrote:
Thu May 17, 2018 2:56 pm
To many Americans with less savings for retirement, their projected retirement tax bracket will be lower. To a lot of BH, due to their sizable savings, their future tax bracket could be higher with addition SS income and less deduction (dependent, mortgage interest. ect).
WhiteMaxima,

I disagreed with that statement.

<<To a lot of BH, Only a small number of BH, due to their sizable savings, their future tax bracket could be higher with addition SS income and less deduction (dependent, mortgage interest. ect).>>

1) You need a sizable pension. SS income is capped at a maximum value.

2) Tax-deferred space is limited to most of us. With 2 X Trad. 401K and after 50, the maximum is 49K.

3) So, for folks with very high income and large savings, most of their savings are in the taxable and Roth (IRAs, backdoor Roth, Megabackdoor Roth). They are not in the tax-deferred accounts.

Let's just take the income of 100K as the benchmark. Assuming SS income of 50K, you need another 50K of taxable income. It means that you need 25 X 50K = 1.25 million worth of tax-deferred account money. For most people, that meant they have at least another 1.25 million in the taxable/Roth space.

There are some BH at 2.5 million and above. But, it is not a lot of BH.

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

Post by The Wizard » Thu May 17, 2018 3:13 pm

wrongfunds wrote:
Thu May 17, 2018 3:09 pm
It's more accurate to say that some high accumulators will have higher AGI, higher taxable income, and higher Federal income tax liability in retirement than when working.
I hope nobody is claiming that something is wrong with that!
Nothing wrong with it and in some cases the situation can easily change with a prolonged stock market crash...
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Thu May 17, 2018 3:21 pm

FiveK,

I see where you are going with your example and now I understand it.

But as it turns out, if you ignore the unusual humps or valleys in our tax code, given the progressive nature of the general tax code, marginal vs effective analysis gives the same final answer. It is also extremely difficult or pretty much impossible to know in advance about the humps or valleys and even more difficult to actually plan to avoid or to take advantage of them. I mean why do you believe that the hump for the social security income tax would be there say 20 year down the road and that it would be at the exact same spot as it exists today?

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

Post by HomerJ » Thu May 17, 2018 3:40 pm

WhiteMaxima wrote:
Thu May 17, 2018 2:56 pm
To many Americans with less savings for retirement, their projected retirement tax bracket will be lower. To a lot of BH, due to their sizable savings, their future tax bracket could be higher with addition SS income and less deduction (dependent, mortgage interest. ect).
Maybe when RMDs start at 70.

But I doubt a LOT of BHs spend significantly more in retirement than when working.

In retirement, most of us no longer have a mortgage, we aren't paying payroll taxes, and we certainly aren't saving for retirement anymore.

I would assume pretty much ALL Bogleheads live below their means during their working years. That means they spend less than they earn. That's how one is able to save and become a BH.

Which means to maintain the same lifestyle in retirement you need to pull less than you were making during your working years.

Ergo, less income, less taxes.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Thu May 17, 2018 3:49 pm

wrongfunds wrote:
Thu May 17, 2018 3:21 pm
FiveK,

I see where you are going with your example and now I understand it.

But as it turns out, if you ignore the unusual humps or valleys in our tax code, given the progressive nature of the general tax code, marginal vs effective analysis gives the same final answer. It is also extremely difficult or pretty much impossible to know in advance about the humps or valleys and even more difficult to actually plan to avoid or to take advantage of them. I mean why do you believe that the hump for the social security income tax would be there say 20 year down the road and that it would be at the exact same spot as it exists today?
Agreed that It’s Difficult to Make Predictions, Especially About the Future.

Thus if one, for example, wanted to do 50% traditional and 50% Roth in order to be "no more than 50% wrong" that is defensible. ;)

But if you want to attempt an educated guess, marginal vs. marginal is the correct way because marginal vs. effective gives an incorrect advantage to traditional. E.g., take the case of saving 12% marginal now, vs. paying 22% marginal and 10% effective later.

Should one contribute to traditional because 12% > 10%, or Roth because 12% < 22%?

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

Post by ruralavalon » Thu May 17, 2018 3:54 pm

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

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

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

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

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

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

Any thoughts?
I don't believe any advice on the traditional vs Roth issue should be called a "rule". The answer to the traditional vs Roth question is very individual and fact-sensitive.

I agree that the financial characteristics of "typical people" on this forum are probably different than "most people" in the general population. But I don't believe that most people, or even a large minority, of people on this site are making maximum contributions to their 401ks, IRAs, HSAs and 529s.

I think that the general statement that "most people will likely be in a lower tax bracket in retirement" is an accurate statement.

This discussion got me thinking about the financial characteristics of "most people" as they relate to the traditional vs Roth issue. Of course "most people" is a slippery concept, this all varies with age, income, location, and other demographics. In the general U.S. population (as opposed to the Boglehead population) --

Income & tax bracket
1) the median household income in the U.S. is about $59k annually, U.S. Census, "Income and Poverty in the United States: 2016";
2) The median individual income in the U.S. is about $31k annually, St. Louis Federal Reserve (2015), "Real Median Personal Income in the United States";
3) The most common tax bracket has been 15%, the second most common tax bracket has been 10%, Tax Foundation (2015),
"How Many Taxpayers Fall Into Each Income Tax Bracket?";

Availability of 401k.
4) " 74 percent of employers offer a 401(k) or similar plan to their employees", TransAmerica (2016) "The Current State of 401(k)s: The Employer’s Perspective", p. 23.
5) "Federal data indicates that about 42 million people work for employers with fewer than 100 employees, according to the U.S. Government Accountability Office. Unfortunately, only about 14% of small businesses sponsor some type of retirement plan for their employees, Human interest (2014) "Why Small Business Owners Don't Offer a 401k . . ." ;
6) only 15% of companies with 10-100 employees offer a 401k, for employers with 5-10 employees its 10%, for employers with 1-4 employees its 5%, Human interest (2014) "Why Small Business Owners Don't Offer a 401k . . ." ;
7) "Over 50% of the working population (120 million individuals) works in a small business' defined as 500 employees or less. Forbes (2014), "16 Surprising Statistics About Small Businesses";

Participation in 401ks if available.
8) about 80% of eligible employees participate with elective contributions, Vanguard, "How America Saves 2017", Fig. 21, p.29;
9) only about 10% of participants contributed the maximum $18k annually, Vanguard, "How America Saves 2017", Fig.36, p.37;
10) the average participant elective deferral to the 401k or 403b is about 6% of income, median about 5% of income, Vanguard, "How America Saves 2017" Fig 1, p. 7, and Fig. 29, p.32;
11) The average 401k balance is about $96k, the median is about $25k. Vanguard, "How America Saves 2017", p.4, and Fig. 43, p.42;
(I think there is a Fidelity report or survey with similar numbers, but couldn't find it.)


Availability of DB pension and pension income
12) About 28% of civilian employees (includes workers in private industry and state and local government) have access to a defined benefit pension, https://www.bls.gov/ncs/ebs/benefits/20 ... ble02a.pdf . Only about 13% of private sector employees have a defined benefit (DB) pension plan, Employee Benefit Research Institute (EBRI) (2014), "What are the trends in U.S. retirement plans?"". Fewer than one in five (16 percent) employers offers a company-funded defined benefit plan", TransAmerica (2016) The Current State of 401(k)s: The Employer’s Perspective, p. 23.
13) there is a huge difference between public and private employment, about 22% of private sector participants report their primary plan is a DB plan vs 80% for government employees, EBRI (2003), FAQ; and
14) only about 32-33% of persons age 65-70 receive pension income, EBRI (2006), FAQ, and FAQ.

So "most people" have annual household income around $59k or individual income around $31k, are in the 15% or 10% tax bracket, work for a small employer, are not offered a 401k at work, do participate if it is offered, but do not max the 401k, do not have a defined benefit pension offered at work, and will not receive any pension income.
Last edited by ruralavalon on Sun May 20, 2018 11:22 am, edited 4 times in total.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by letsgobobby » Thu May 17, 2018 4:02 pm

wrongfunds wrote:
Thu May 17, 2018 1:40 pm
If I make ten million dollars this year I may never have to work again, and will be in a lower tax bracket indefinitely.
Not true; If I make ten million dollars this year, and I will be making fifteen million dollars next year, and twenty year after next etc why I would I stop working?
You can do what you want.

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

Post by CnC » Thu May 17, 2018 4:09 pm

marcopolo wrote:
Thu May 17, 2018 2:36 pm
CnC wrote:
Thu May 17, 2018 11:13 am

You can't on one hand say you need more than 25x expenses. That you need 30-40x expenses for an early retirement and then act like my accounts are gonna be too big and "overflowing"

125k - 170k a year after inflation and potential healthcare costs 30x expenses at 175k a year for an early retirement is +5mil and that doesn't include taxes.

So I certainly don't see how my forcasts are outlandish, they are right inline with what boggleheads suggests.

This is very confusing! :annoyed
Did you forget about your pensions and social security?
Lets take the higher end of your spending level of $175k. Out of that, $125K comes from pensions, plus you have social security.
You mentioned that might create a floor of $260k. On top of that you will have $4M in tax-deferred, which at a 3% withdrawal rate would yield another $120k. So, we are up to $390k now, for a $175k budget. Might you also have some after-tax savings? Surely you can see where someone might get the idea that you will be "overflowing". Absolutely nothing wrong with that. But, recognizing it might lead to making different decisions regarding things like when to retire, etc.
I suppose, but as I said before this is if everything stays average.

I'm assuming a historical average market.
No cut in social security.
My pension doesn't go broke.

Granted at 98% funding public opinion about social security and market averages all of that is likely to stay true over the next 20 years. But not planning my future on hopes just seems prudent.

For those of us with a pension, sometimes just a few years will wildly swing the balance. For example if DW and I retire at 55 we will have combined 126k pension at 55.
But, if we leave at 50 we will have combined 85k pension at 55. Social security just compounds the issue also. So while I see your point, I don't view it as overflowing, just safe considering just ±7 years less and I may not have enough to retire.



I just wanted to chime in again thanks for lots of the info provided, it does help me understand some parts I was missing.
Last edited by CnC on Thu May 17, 2018 4:15 pm, edited 1 time in total.

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

Post by wrongfunds » Thu May 17, 2018 4:13 pm

But if you want to attempt an educated guess, marginal vs. marginal is the correct way because marginal vs. effective gives an incorrect advantage to traditional. E.g., take the case of saving 12% marginal now, vs. paying 22% marginal and 10% effective later.

Should one contribute to traditional because 12% > 10%, or Roth because 12% < 22%?
I can answer that question when you tell me current effective rate and both the actual amounts, otherwise the answer would not make sense.

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

Post by wrongfunds » Thu May 17, 2018 4:21 pm

just ±7 years less
I am sorry but that is a HUGE number of years when considering early retirement! Your perspective seems to be tad different than say average!!

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

Post by FiveK » Thu May 17, 2018 5:04 pm

wrongfunds wrote:
Thu May 17, 2018 4:13 pm
But if you want to attempt an educated guess, marginal vs. marginal is the correct way because marginal vs. effective gives an incorrect advantage to traditional. E.g., take the case of saving 12% marginal now, vs. paying 22% marginal and 10% effective later.

Should one contribute to traditional because 12% > 10%, or Roth because 12% < 22%?
I can answer that question when you tell me current effective rate and both the actual amounts, otherwise the answer would not make sense.
You have all the information needed. See Traditional versus Roth - Bogleheads.

How would you use any other information, beyond what has already been given? Alternatively, why would the answer calculated using the given rates not make sense?

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

Post by FiveK » Thu May 17, 2018 5:10 pm

ruralavalon wrote:
Thu May 17, 2018 3:54 pm
This discussion got me thinking about the financial characteristics of "most people" as they relate to the traditional vs Roth issue. Of course "most people" is a slippery concept, this all varies with age, income, location, and other demographics. In the general U.S. population (as opposed to the Boglehead population) --...
Thank you for the work compiling all this.

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

Post by wrongfunds » Thu May 17, 2018 5:18 pm

Given that if the numbers are identical, I would rather pay later than now and given that if the later numbers are huge compared to the current, I would consider myself to be very fortunate and if the later numbers are lower than current, I will be kicking myself silly; I just don't see this as a dilemma. For me the answer is "obvious" regardless of what hypothetical scenario that can be dreamed about. Especially, after evaluating likelihood and the material impact on my financial well-being of each such scenario.

I suppose you would call it that I am punting :-)

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

Post by Yuba » Thu May 17, 2018 5:36 pm

KlangFool wrote:
Wed May 16, 2018 8:31 pm

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

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

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

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

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

KlangFool
KF,
Did you reach your 45/45/10 ratio organically (by maxing tax-deferred, then Roth, then had about the same amount in taxable) or was it done intentionally by not filling up all your tax-deferred space in any given year to reach the same amount to invest in taxable?

Thanks,
Rick dba Yuba

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

Post by sc9182 » Thu May 17, 2018 5:43 pm

wrongfunds wrote:
Thu May 17, 2018 5:18 pm
Given that if the numbers are identical, I would rather pay later than now and given that if the later numbers are huge compared to the current, I would consider myself to be very fortunate and if the later numbers are lower than current, I will be kicking myself silly; I just don't see this as a dilemma. For me the answer is "obvious" regardless of what hypothetical scenario that can be dreamed about. Especially, after evaluating likelihood and the material impact on my financial well-being of each such scenario.

I suppose you would call it that I am punting :-)
Concur - and during some years - if that "super sized" tax-deferred Kitty goes way down 50%+ to say $1 Million or below, you could contemplate "Roth" conversions based on possibly lower tax-brackets. Better than handing out tax dough all upfront.

Sequence of Returns and life-events matter too., a LOT!

Yes do support tax diversification theme - but not at the cost of 'losing' tax-deferred buckets, nor at the cost of 401k matching-contributions, nor interested to lose "protection bestowed upon" 401Ks/Rollover-IRAs by ERISA protection; Also, ability to withdraw penalty-free at age 55 - helping towards early retirement - if desired.

Anybody who expect to roll in dough in retirement, need to consider "asset protection" aspect as well - where in traditional IRA or Roth IRAs necessarily may not fully protect $1M+ in assets - depends on States, or some scenarios.

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

Post by KlangFool » Thu May 17, 2018 6:39 pm

Yuba wrote:
Thu May 17, 2018 5:36 pm
KlangFool wrote:
Wed May 16, 2018 8:31 pm

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

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

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

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

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

KlangFool
KF,
Did you reach your 45/45/10 ratio organically (by maxing tax-deferred, then Roth, then had about the same amount in taxable) or was it done intentionally by not filling up all your tax-deferred space in any given year to reach the same amount to invest in taxable?

Thanks,
Rick dba Yuba
Yuba,

Single income household with only one Trad. 401K account to max up. After Trad. 401K and 2 X Roth IRAs, I ran out of rooms and need to fill my taxable account. Plus, I was stupid and I did not know about Roth IRAs until the last 10 years.

KlangFool

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

Post by LadyGeek » Thu May 17, 2018 6:56 pm

This thread is now in the Investing - Theory, News & General forum (general question).
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by yeahman » Thu May 17, 2018 6:59 pm

Even Roths are subject to tax change risk. It isn't far-fetched to think they could be double taxed in the future. In fact, I rate it as more likely than a rise in the lower marginal income tax rates. The most politically popular tax increases are probably caps and double taxation.

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