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

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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 » Sat May 19, 2018 9:49 pm

wrongfunds wrote:
Sat May 19, 2018 9:24 pm
Conceptually, to understand what I am asking, assume single 20% tax bracket after having first 20K exempt from taxes i.e. all income over 20K is taxed at 20%. How would current analysis then change? Everybody would be in the same bracket trivially. I think if you run that mental exercise, it will be clear that one can not make decisions just on the bracket but the actual amounts are needed for that analysis.

Under that conceptual scenario, for non-Roth, the entire tax deferred will always be funded at 20% assuming one has after tax earnings of at least $20K.

Suppose it had grown to $1M. Taking 4% out i.e. $40K out every year during 25 year retirement.

How are the taxes paid on the $1M coming out? Half of the money will NEVER be taxed!

Yes, a trick question and yes completely hypothetical and no relation to the reality HOWEVER the fundamental point that identical incoming and outgoing marginal tax rate could still mean one is better than other AND as long US tax system keeps some base income as untaxed, in most of the cases, TIRA makes more sense.
In that example, traditional makes more sense up to the point at which the traditional balance would be $500K at retirement.

Beyond that, if the pre-tax amount needed to fund a Roth contribution is less than the IRS maximum for a traditional contribution, traditional and Roth are equivalent.

If, however, the pre-tax amount needed to fund a Roth contribution is more than the IRS maximum for a traditional contribution, Roth is better.

See Traditional versus Roth - Bogleheads, in particular the parts about "commutative property of multiplication" and "Maxing out your retirement accounts".

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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 » Sat May 19, 2018 9:56 pm

In that example, traditional makes more sense up to the point at which the traditional balance would be $500K at retirement.

Beyond that, if the pre-tax amount needed to fund a Roth contribution is less than the IRS maximum for a traditional contribution, traditional and Roth are equivalent.

If, however, the pre-tax amount needed to fund a Roth contribution is more than the IRS maximum for a traditional contribution, Roth is better.
Let us assume IRS maximum is $18K. Can you then tell me using the on-going example? I do not understand the last couple of statements.

By the way, in my example, the funding was all on auto and the value of the account was looked at it at the time of the retirement. I am suspecting that you want to switch to Roth somewhere on the way and want to assume some future numbers which obviously we don't have. My $1M was found at the end. Are you insisting that I give you that number before hand? How in the world can I guarantee you that number?

One might think I am nitpicking and only joking but no, I am seriously trying to understand the rationale behind this perpetual discussion about Roth vs Traditional. Does Roth needs the predict the future much more than Traditional needs to predict the future? Because if so, that had never been shown as a factor in any of the discussion that I have seen so far.
Last edited by wrongfunds on Sat May 19, 2018 10:04 pm, edited 1 time in total.

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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 » Sat May 19, 2018 10:03 pm

wrongfunds wrote:
Sat May 19, 2018 9:56 pm
In that example, traditional makes more sense up to the point at which the traditional balance would be $500K at retirement.

Beyond that, if the pre-tax amount needed to fund a Roth contribution is less than the IRS maximum for a traditional contribution, traditional and Roth are equivalent.

If, however, the pre-tax amount needed to fund a Roth contribution is more than the IRS maximum for a traditional contribution, Roth is better.
Let us assume IRS maximum is $18K. Can you then tell me using the on-going example? I do not understand the last couple of statements.
Try either (perhaps both) of the spreadsheets referenced in the wiki under Maxing out your retirement accounts. The "Roth vs. Traditional when contributing the maximum allowed" part of the toolbox spreadsheet starts at row 148 of the 'Misc. calcs' tab.

Post back with inputs given and result calculated - does it make sense after 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 wrongfunds » Sat May 19, 2018 10:08 pm

Your reply came in while I was re-editing mine.
=========================================
By the way, in my example, the funding was all on auto and the value of the account was looked at it at the time of the retirement. I am suspecting that you want to switch to Roth somewhere on the way and want to assume some future numbers which obviously we don't have. My $1M was found at the end. Are you insisting that I give you that number before hand? How in the world can I guarantee you that number?

One might think I am nitpicking and or joking but no, I am seriously trying to understand the rationale behind this perpetual discussion about Roth vs Traditional. Does Roth needs the predict the future much more than Traditional needs to predict the future? Because if so, that had never been shown as a factor in any of the discussion that I have seen so far.

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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 » Sat May 19, 2018 10:10 pm

wrongfunds wrote:
Sat May 19, 2018 9:56 pm
By the way, in my example, the funding was all on auto and the value of the account was looked at it at the time of the retirement. I am suspecting that you want to switch to Roth somewhere on the way and want to assume some future numbers which obviously we don't have. My $1M was found at the end. Are you insisting that I give you that number before hand? How in the world can I guarantee you that number?
There are no guarantees.

The only way we know what was correct at contribution time is after we get to withdrawal time, so yes there is guesswork involved. For the example you gave, if one could guess perfectly the correct thing to do would be to switch from traditional to Roth once one guesses the traditional balance will be $1 million at retirement.

For those with cloudier crystal balls, continuing traditional contributions somewhat beyond that point is reasonable.

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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 » Sat May 19, 2018 10:21 pm

Ah!

I understand that whether Traditional is better or Roth is better is NOT a solvable problem. On the other hand, whether Traditional *was* better or Roth *was* better is solvable with great record keeping and lots of computing power :-)

If you guess wrong on Roth, then you are in worse shape than guessing wrong on Traditional, correct? For example, if I had guessed of having $1M there and started doing Roth but due to market conditions, I end up having $0.5M, I certainly would be in much worse position than NOT doing Roth. The extra taxes that I paid would have been paid prematurely on the future predicted gains which never materialized (is that correct or am I just making that fact up?)

Having to pay real taxes on paper profit which was never realized is very bad to ones emotional health.

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

Post by willthrill81 » Sat May 19, 2018 10:25 pm

KlangFool wrote:
Sat May 19, 2018 9:23 pm
willthrill81 wrote:
Sat May 19, 2018 8:43 pm
wrongfunds wrote:
Sat May 19, 2018 8:19 pm
Can you give some reasonable example where ROTH wins and does not depend upon very unlikely conditions? Obviously apart from brain-surgeon-in-residence cases? :-) Seriously, I am hard pressed to come up with other scenario. We just had somebody do the calculations to come up with once you go over "$6M" (or was it $13M?), then Roth makes sense. If one has lot more money to save than say $130K of tax advantage space, then certainly go for Roth. Or if somebody who will be getting $300K in inflation adjusted pension, then Roth is certainty. Is there something else where you would categorically say do Roth instead of traditional? All of the conditions that I can come up where Roth makes sense seems to be pretty unlikely for 90% of the population.
Someone that has enough Social Security and an inflation-adjusted pension, for instance, that will put them back into the same tax bracket as they are now will most likely be better off with the Roth. If the marginal tax rate of contribution is the same as the marginal tax rate of withdrawal, then there is no tax arbitrage opportunity. The reason the Roth would likely be better is the lack of RMDs and the preferential tax treatment for heirs.
willthrill81,

Even in that case, the person would be paying the same amount of tax with either Trad. or Roth. In that case, if we add in inflation, the Trad. folks still win.

$1,000 now is worth a lot more than $1,000 in the future due to inflation.

In order for Roth to win with inflation, the retirement tax rate has to be a lot higher.

KlangFool
I don't follow your logic here. If the marginal tax rate is the same going in as coming out, the after-tax money will be identical in both instances, regardless of the returns or inflation involved.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by md&pharmacist » Sat May 19, 2018 10:44 pm

Tax brackets can be all over the place in retirement.

I built a $4M office building at age 44. If I sell it in retirement after full tax depreciation and appreciation of the property after 30 years, I may have a tax bill on a $8M sale that year. Same with my large home that I will no longer need.

Many pay off their debts prior to retirement, so they don't have mortgage income deductions on their taxes any more. They are no longer supporting children, so those deductions disappear as well.

If you are well into the maximum tax bracket and want to continue your lifestyle, your hefty 401(k) sales can keep you in the top tax bracket, even if you live on 70% of prior lifestyle.

Most of the time, most people will likely be in a lower bracket. Not all people and not all of the time. Of course, if the government raises taxes, most people can be in a higher tax bracket ultimately. Social security income tax thresholds keep going up so more of your income is being taxed for social security already. Higher gasoline prices mean higher taxes paid there with time. Generally, inflation on almost all products and services purchased mean more paid in sales taxes as well.

Of course those that don't already pay anything in taxes due to low income/poverty cannot pay less in taxes.

Too many variables.

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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 » Sat May 19, 2018 11:38 pm

jpsc wrote:
Sat May 19, 2018 9:31 pm
randomguy wrote:
Fri May 18, 2018 11:59 pm

106k/year annual contribution (53k for you and wife), 7% real returns and you are looking at 21 million after 40 years. Seems pretty doable:) Or if you invest with Dave Ramsey and get 10% real you are looking at 47 million. Definitely should have done the ROTH. And we haven't even talked about your defined benefit plans yet for another 4.5 million or so, 403, and who knows what else:)
There is no warranty of 7% real return, some year your 401K will return -20% like 2008-2009 - some year your 401K becomes 201K :-)
Sure and other years you make 40%. On average, somewhere around 7% is a good guess. For a real world example, the person that started 40 years ago and invested in stocks would have 33 million dollars today.:) So it is easily doable.:)

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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 » Sun May 20, 2018 4:13 am

willthrill81 wrote:
Sat May 19, 2018 10:25 pm
KlangFool wrote:
Sat May 19, 2018 9:23 pm
willthrill81 wrote:
Sat May 19, 2018 8:43 pm
wrongfunds wrote:
Sat May 19, 2018 8:19 pm
Can you give some reasonable example where ROTH wins and does not depend upon very unlikely conditions? Obviously apart from brain-surgeon-in-residence cases? :-) Seriously, I am hard pressed to come up with other scenario. We just had somebody do the calculations to come up with once you go over "$6M" (or was it $13M?), then Roth makes sense. If one has lot more money to save than say $130K of tax advantage space, then certainly go for Roth. Or if somebody who will be getting $300K in inflation adjusted pension, then Roth is certainty. Is there something else where you would categorically say do Roth instead of traditional? All of the conditions that I can come up where Roth makes sense seems to be pretty unlikely for 90% of the population.
Someone that has enough Social Security and an inflation-adjusted pension, for instance, that will put them back into the same tax bracket as they are now will most likely be better off with the Roth. If the marginal tax rate of contribution is the same as the marginal tax rate of withdrawal, then there is no tax arbitrage opportunity. The reason the Roth would likely be better is the lack of RMDs and the preferential tax treatment for heirs.
willthrill81,

Even in that case, the person would be paying the same amount of tax with either Trad. or Roth. In that case, if we add in inflation, the Trad. folks still win.

$1,000 now is worth a lot more than $1,000 in the future due to inflation.

In order for Roth to win with inflation, the retirement tax rate has to be a lot higher.

KlangFool
I don't follow your logic here. If the marginal tax rate is the same going in as coming out, the after-tax money will be identical in both instances, regardless of the returns or inflation involved.
The amount is the same but the real value is different with inflation. $1000 now is worth more than $1000 20 years later.

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 JoeRetire » Sun May 20, 2018 6:35 am

JustinR wrote:
Sat May 19, 2018 8:59 pm
So far every hypothetical example of a Roth being better has mentioned pensions.

Do people still have pensions? I feel like this is an increasingly irrelevant thing in today's society that is muddying up discussions.
I've read that something on the order of 13% of Americans have pensions these days.
I wouldn't call that increasingly irrelevant, although it does make me jealous. :happy

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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 » Sun May 20, 2018 7:06 am

golfCaddy wrote:
Sat May 19, 2018 9:35 pm
wrongfunds wrote:
Sat May 19, 2018 9:24 pm

Are there professions today where social security + inflation adjusted pension will be in the in the same tax bracket?
Yes, there are a lot of government workers where SS + inflation adjusted pension will put them into the same tax bracket.
And some non government workers with large 403(b) or 401(k) accumulations who choose to annuitize a portion of their accumulation can also achieve higher AGI in retirement than when working...
Attempted new signature...

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

Post by DK666 » Sun May 20, 2018 8:35 am

I’ll give an example of why we contribute to a Roth, realizing it’s not applicable to everyone and not guaranteed to be optimal (due to normal risks)

MFJ, early 30s, income after deductions but before 401k firmly in 24% marginal bracket. Expect to work until 59.5 not out of need but desire. Conservative assumptions will leave us in the 24% bracket in retirement.

Why we contribute to ROTH 401k? Half our contributions come from generous company contributions (traditional) and all previous savings were in traditional. We expect our incomes to continue to rise, potentially pushing us to a higher bracket at some point (flipping us back to traditional). With Tax reform we decided to lock-in the 24% rate rather than betting it doesn’t go back to 28/33%. Additionally, the longer we contribute to the Roth 401k the more flexibility we’ll have to front-load our retirement spending when we’re younger.

Nothing too complicated. Diversification, flexibility and locking in today’s tax rate. In the end we might end up paying 22% marginal (25 if it goes back up) most years in retirement, but it will be a consequence of our Roth contributions rather than a miscalculation.

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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 » Sun May 20, 2018 9:46 am

KlangFool wrote:
Sun May 20, 2018 4:13 am
willthrill81 wrote:
Sat May 19, 2018 10:25 pm
KlangFool wrote:
Sat May 19, 2018 9:23 pm
willthrill81 wrote:
Sat May 19, 2018 8:43 pm
wrongfunds wrote:
Sat May 19, 2018 8:19 pm
Can you give some reasonable example where ROTH wins and does not depend upon very unlikely conditions? Obviously apart from brain-surgeon-in-residence cases? :-) Seriously, I am hard pressed to come up with other scenario. We just had somebody do the calculations to come up with once you go over "$6M" (or was it $13M?), then Roth makes sense. If one has lot more money to save than say $130K of tax advantage space, then certainly go for Roth. Or if somebody who will be getting $300K in inflation adjusted pension, then Roth is certainty. Is there something else where you would categorically say do Roth instead of traditional? All of the conditions that I can come up where Roth makes sense seems to be pretty unlikely for 90% of the population.
Someone that has enough Social Security and an inflation-adjusted pension, for instance, that will put them back into the same tax bracket as they are now will most likely be better off with the Roth. If the marginal tax rate of contribution is the same as the marginal tax rate of withdrawal, then there is no tax arbitrage opportunity. The reason the Roth would likely be better is the lack of RMDs and the preferential tax treatment for heirs.
willthrill81,

Even in that case, the person would be paying the same amount of tax with either Trad. or Roth. In that case, if we add in inflation, the Trad. folks still win.

$1,000 now is worth a lot more than $1,000 in the future due to inflation.

In order for Roth to win with inflation, the retirement tax rate has to be a lot higher.

KlangFool
I don't follow your logic here. If the marginal tax rate is the same going in as coming out, the after-tax money will be identical in both instances, regardless of the returns or inflation involved.
The amount is the same but the real value is different with inflation. $1000 now is worth more than $1000 20 years later.

KlangFool
I am wrong. Sorry for the confusion.

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 ruralavalon » Sun May 20, 2018 9:54 am

JustinR wrote:
Sat May 19, 2018 8:59 pm
So far every hypothetical example of a Roth being better has mentioned pensions.

Do people still have pensions? I feel like this is an increasingly irrelevant thing in today's society that is muddying up discussions.
I don't have a pension. Yes, some people do still have pensions. link to prior post.

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.



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

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.
Last edited by ruralavalon on Sun May 20, 2018 11:22 am, edited 3 times in total.
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MnD
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MnD » Sun May 20, 2018 10:20 am

The real number is 28% of civilian workers have access to a DB pension plan.
Interestingly, 42% of "Management, professional, and related" have access to a DB pension, as do 48% of those whose civilian wages fall in the "top 10%" category.
https://www.bls.gov/ncs/ebs/benefits/20 ... ble02a.pdf

The 13% refers to private sector workers. In your first link it was written out 6 times in the text and were the first words of the chart title.
It's so common to see that private sector worker detail excluded when reporting very low pension participation rates - I wonder if its intentional.
ruralavalon wrote:
Sun May 20, 2018 9:54 am
Availability of DB pension and pension income
12) Only about 13% of 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.

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

Post by willthrill81 » Sun May 20, 2018 10:43 am

KlangFool wrote:
Sun May 20, 2018 9:46 am
KlangFool wrote:
Sun May 20, 2018 4:13 am
willthrill81 wrote:
Sat May 19, 2018 10:25 pm
KlangFool wrote:
Sat May 19, 2018 9:23 pm
willthrill81 wrote:
Sat May 19, 2018 8:43 pm


Someone that has enough Social Security and an inflation-adjusted pension, for instance, that will put them back into the same tax bracket as they are now will most likely be better off with the Roth. If the marginal tax rate of contribution is the same as the marginal tax rate of withdrawal, then there is no tax arbitrage opportunity. The reason the Roth would likely be better is the lack of RMDs and the preferential tax treatment for heirs.
willthrill81,

Even in that case, the person would be paying the same amount of tax with either Trad. or Roth. In that case, if we add in inflation, the Trad. folks still win.

$1,000 now is worth a lot more than $1,000 in the future due to inflation.

In order for Roth to win with inflation, the retirement tax rate has to be a lot higher.

KlangFool
I don't follow your logic here. If the marginal tax rate is the same going in as coming out, the after-tax money will be identical in both instances, regardless of the returns or inflation involved.
The amount is the same but the real value is different with inflation. $1000 now is worth more than $1000 20 years later.

KlangFool
I am wrong. Sorry for the confusion.

KlangFool
No problem. :beer
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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 » Sun May 20, 2018 10:52 am

MnD wrote:
Sun May 20, 2018 10:20 am
The real number is 28% of civilian workers have access to a DB pension plan.
Interestingly, 42% of "Management, professional, and related" have access to a DB pension, as do 48% of those whose civilian wages fall in the "top 10%" category.
https://www.bls.gov/ncs/ebs/benefits/20 ... ble02a.pdf

The 13% refers to private sector workers. In your first link it was written out 6 times in the text and were the first words of the chart title.
It's so common to see that private sector worker detail excluded when reporting very low pension participation rates - I wonder if its intentional.
ruralavalon wrote:
Sun May 20, 2018 9:54 am
Availability of DB pension and pension income
12) Only about 13% of 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.
Thanks, I have amended my posts.

What is the document that table 2 which you linked comes from?

The idea in my prior post was only to try to state the financial characteristics of "most people" as they relate to the traditional vs Roth decision. Most people will not have a DB Pension, so the conclusion is still the same.

Or to answer JustinR's question, yes some people do still have pensions, so that answer is still the same as well.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Culbretd » Sun May 20, 2018 7:03 pm

@KlangFool

I’m gonna throw a monkey wrech in this agruement and hopefully @Klang can answer it. Reading this thread has got me thinking about my situation. I work for a private company who offers a generous pension plan with COLA and my wife works for the state so she will have a small pension plan. I currently max out my Roth 401 and she contributes to her Roth 457. Prior to a couple of years ago we went tax deferred so we have money in pretax too. My reasoning was we will both have a pension and if we retire early we want to use the 457 Roth to live off of tax free, plus I figured our pension would fill up any low tax bracket bickers. We both currently max Roth IRA’s too.

What if I were to switch my plan back to Tradition 401k and still max it out and the extra money I receive each week from going pretax I were to put that into my after tax non Roth part of my account. I can roll the after tax non Roth money over as many times as I want to; my plan has no limit so I can in theory do it each paycheck. Roll it over to my Roth IRA thus giving us more money in the Roth IRA which we can access (contribution wise) after 5 years. Would we end up with more money in the long run doing this? I would put it in the after tax non Roth rather than contributing more to my wife’s Roth 457 plan since we may decide to keep working and we won’t have access to the Roth 457 til she retires.

Oh.. and I finally got the light bulb to go off after going back and looking at my check. The % i allocate is being taken off my gross income not my net (take home pay). So contributing $355 each week. So switching to pretax I won’t have to adjust my contribution % at all.

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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 » Sun May 20, 2018 7:09 pm

Culbretd wrote:
Sun May 20, 2018 7:03 pm
What if I were to switch my plan back to Tradition 401k and still max it out and the extra money I receive each week from going pretax I were to put that into my after tax non Roth part of my account.
Whether you should use traditional or Roth for the 401k still depends on the marginal rate at which you would save tax now, vs. the marginal rate at which you expect to pay tax when withdrawing.

Beyond that, the after-tax non-Roth is a great option regardless of what you choose for the first part.

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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 » Mon May 21, 2018 8:59 am

There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.

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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 » Mon May 21, 2018 9:03 am

CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Look up "Roth Conversion Ladder". I think you still come out ahead because if you can afford to retire in early 50s, you were likely in high tax bracket. It is quite likely that conversions after early retirement are at lower rate than your marginal rate pre-retirement.
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 sc9182 » Mon May 21, 2018 9:05 am

CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has. <-- following two of your points ain't so exactly

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Substantially equal periodic payments (SEPP) are one of the exceptions in the United States Internal Revenue Code §72(t)(1) that allows receiving payments without the 10% early distribution penalty from a retirement plan (or deferred annuity) before the usual 59​1⁄2 age (Wikipedia)

The IRS Rule of 55 allows an employee who is laid off, fired, or who quits a job between the ages of 55 and 59 1/2 to pull money out of his 401(k) or 403(b) plan without penalty - Linky https://www.thebalance.com/what-is-the- ... 55-2894280

And like marcopolo indicated - Roth conversions help ..

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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 » Mon May 21, 2018 10:36 am

marcopolo wrote:
Mon May 21, 2018 9:03 am
CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Look up "Roth Conversion Ladder". I think you still come out ahead because if you can afford to retire in early 50s, you were likely in high tax bracket. It is quite likely that conversions after early retirement are at lower rate than your marginal rate pre-retirement.
We are in a medium tax bracket. ±200k for a family of 4 mfj.
I have looked at the conversions granted my math could be off but I don't see how you even put a dent in your traditional 401k via Roth conversions and stay in a lowish tax bracket.

Now this is in future money when I'm going to hopefully retire but I have bumped up the tax brackets accordingly.

Say after typical stock growth me and dw have 4 mil in our combined 401ks tax deferred.

Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.

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

Post by willthrill81 » Mon May 21, 2018 10:45 am

CnC wrote:
Mon May 21, 2018 10:36 am
marcopolo wrote:
Mon May 21, 2018 9:03 am
CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Look up "Roth Conversion Ladder". I think you still come out ahead because if you can afford to retire in early 50s, you were likely in high tax bracket. It is quite likely that conversions after early retirement are at lower rate than your marginal rate pre-retirement.
We are in a medium tax bracket. ±200k for a family of 4 mfj.
I have looked at the conversions granted my math could be off but I don't see how you even put a dent in your traditional 401k via Roth conversions and stay in a lowish tax bracket.

Now this is in future money when I'm going to hopefully retire but I have bumped up the tax brackets accordingly.

Say after typical stock growth me and dw have 4 mil in our combined 401ks tax deferred.

Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.
The Roth conversion ladder often only works well if you have enough assets to cover the five year waiting period between the conversion and the ability to spend that money.

I too am planning on retiring at around that age, and I'm planning on either using the SEPP 72(t) rule and/or making withdrawals from my 457 plan, which has no early withdrawal penalty as long as you've separated from service to the employer.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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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 » Mon May 21, 2018 10:51 am

I am not sure how you can do this calculation without having all the current data and without making reasonable guesses about the future.

Obviously, if you will have income of $300K+ income in retirement as compared to "only" $200K today, then obviously you will NOT be in a lower tax bracket in retirement.

BUT if you retire early (and do not get any more salary) AND need to have the $200K as spending money, you could start depleting and partially converting your un-taxed accounts. You have to run the numbers to see how it works out.

If the analysis says, you have just too much money, we will all sympathize with your plight and wish you best of luck and hope you overcome such a hardship.

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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 » Mon May 21, 2018 11:00 am

willthrill81 wrote:
Mon May 21, 2018 10:45 am
CnC wrote:
Mon May 21, 2018 10:36 am
Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.
The Roth conversion ladder often only works well if you have enough assets to cover the five year waiting period between the conversion and the ability to spend that money.

I too am planning on retiring at around that age, and I'm planning on either using the SEPP 72(t) rule and/or making withdrawals from my 457 plan, which has no early withdrawal penalty as long as you've separated from service to the employer.
SWR says 3.5% - 4% withdrawal rate is good to project instead of 7% ranges. Now 4% of $4MM is $160K -- that should be within ballpark of your current ±200k income (with or without SS) - not much afar. If you do expect life/filing-status changes to single, yes, you would find yourself in higher Tax brackets.

If all you are saving is $18.5K maxing out for 401k and employer match -- its hard to make portfolio to $4MM by 50'ish early retirement age, unless bull-market continues perennially (or you are currently in 20s)!

Are you NOT contributing to Roth, after-tax 401K (in-turn Roth), or Brokerage in-addition to 401K contributions alone ? You may come to realize two things:
A) your retirement withdrawals may not support your lifestyle as these savings may prove insufficient - only about 10-12% of your current income, folks do 20-25%, especially more if early-retirement contemplated
B) if all you have is 401K/IRAs, some of the plans (Roth conversions, 5 years waiting-window for Roth withdrawals, and/or very-early retirement etc) may not pan out -- forget the tax rate/bracket at full-retirement being an issue - you may have less withdrawal/income to meet early-retirement (if planned) expenses as the issue!

As wrongfunds said: if your analysis sticks, you may have just too much money, we will all sympathize with your plight ..

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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 » Mon May 21, 2018 11:12 am

willthrill81 wrote:
Mon May 21, 2018 10:45 am
CnC wrote:
Mon May 21, 2018 10:36 am
marcopolo wrote:
Mon May 21, 2018 9:03 am
CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Look up "Roth Conversion Ladder". I think you still come out ahead because if you can afford to retire in early 50s, you were likely in high tax bracket. It is quite likely that conversions after early retirement are at lower rate than your marginal rate pre-retirement.
We are in a medium tax bracket. ±200k for a family of 4 mfj.
I have looked at the conversions granted my math could be off but I don't see how you even put a dent in your traditional 401k via Roth conversions and stay in a lowish tax bracket.

Now this is in future money when I'm going to hopefully retire but I have bumped up the tax brackets accordingly.

Say after typical stock growth me and dw have 4 mil in our combined 401ks tax deferred.

Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.
The Roth conversion ladder often only works well if you have enough assets to cover the five year waiting period between the conversion and the ability to spend that money.

I too am planning on retiring at around that age, and I'm planning on either using the SEPP 72(t) rule and/or making withdrawals from my 457 plan, which has no early withdrawal penalty as long as you've separated from service to the employer.
I am familiar with the 5 year rule I also will have a 457 plan that I may keep I place although the fees are very high. ±1% on sp500 index.

But, withdrawal from a 457 plan are still taxed as regular income. Thus you still have that part of your tax bracket being filled.

I just do not see how the idea of "just convert all your pretax at a lower rate" is feasible. I mean it seems like your either convert a small percentage at s low tax rate or a large percentage at a average to high rate.

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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 » Mon May 21, 2018 11:17 am

I just do not see how the idea of "just convert all your pretax at a lower rate" is feasible. I mean it seems like your either convert a small percentage at s low tax rate or a large percentage at a average to high rate.
I agree with you. It only works if you don't have boatload of money to begin with.

We are at reply #380. I suspect we need to reach to #700 before we will have a consensus on how to find a solution to such vexing problem.

Let us continue to come up with answers.

Sometimes you might think I am too sarcastic but no, I am far from it. With 3 year difference between mine and SO's age even if I were to retire earlier than her, we still will not have the so called 0 tax years. If the analysis tells me that I will save few percentage points on RMD taxes by doing massive conversion, I am not going to bother at all. I will come back here and complain about RMD and tax bite but I hope you guys remember this conversation and really lay on me then.

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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 » Mon May 21, 2018 11:27 am

sc9182 wrote:
Mon May 21, 2018 11:00 am
willthrill81 wrote:
Mon May 21, 2018 10:45 am
CnC wrote:
Mon May 21, 2018 10:36 am
Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.
The Roth conversion ladder often only works well if you have enough assets to cover the five year waiting period between the conversion and the ability to spend that money.

I too am planning on retiring at around that age, and I'm planning on either using the SEPP 72(t) rule and/or making withdrawals from my 457 plan, which has no early withdrawal penalty as long as you've separated from service to the employer.
SWR says 3.5% - 4% withdrawal rate is good to project instead of 7% ranges. Now 4% of $4MM is $160K -- that should be within ballpark of your current ±200k income (with or without SS) - not much afar. If you do expect life/filing-status changes to single, yes, you would find yourself in higher Tax brackets.

If all you are saving is $18.5K maxing out for 401k and employer match -- its hard to make portfolio to $4MM by 50'ish early retirement age, unless bull-market continues perennially (or you are currently in 20s)!

Are you NOT contributing to Roth, after-tax 401K (in-turn Roth), or Brokerage in-addition to 401K contributions alone ? You may come to realize two things:
A) your retirement withdrawals may not support your lifestyle as these savings may prove insufficient - only about 10-12% of your current income, folks do 20-25%, especially more if early-retirement contemplated
B) if all you have is 401K/IRAs, some of the plans (Roth conversions, 5 years waiting-window for Roth withdrawals, and/or very-early retirement etc) may not pan out -- forget the tax rate/bracket at full-retirement being an issue - you may have less withdrawal/income to meet early-retirement (if planned) expenses as the issue!

As wrongfunds said: if your analysis sticks, you may have just too much money, we will all sympathize with your plight ..

Well if having too much money is the only problem I will have then I suppose I will carry that heavy burden.

But as I said before I am planning for an "early retirement" thus 4% would be non conservative. 2.5-3% including my pension seems like it is right where most boggleheads suggest when retiring at age 50.


"If all you are saving is $18.5K maxing out for 401k and employer match -- its hard to make portfolio to $4MM by 50'ish early retirement age, unless bull-market continues perennially (or you are currently in 20s)!"

It's not that hard, remember 18.5k is just this year it will likely go up $500 every other year and then every year relatively soon because of inflation indexing. It also doesn't include matches which tack several thousand to the amount each year. If markets are typical it will get there, if they return significantly below normal no, I won't be there thus the need for multiple plans.

I wasn't anticipating withdrawl of 7% I was anticipating growth of 7% which is well within historical averages for the stock bond blend we are going to have.

I'm not really sure what else you are saying, we contributing money to everyone tax advantaged option available minus hsa and 529's. We also have a reasonable amount in taxable. I said in my opening post I understand pretax 401ks being good for those who don't save a large percentage of their income. My question was directed at those of us who do.

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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 » Mon May 21, 2018 11:30 am

Hold on a second here; you are 32 years old today. Please stop counting your chickens before they are at least close to hatching! In your case, the mother hen has not even yet layed eggs :-)

I might be taking liberty for speaking for majority here but we all thought you were much closer to your goal. Are you just putting the numbers in the spreadsheet? I think you need to read more of KF's famous postings where he tells about saving every year, year worth of expenses. Once you get on that train, then you start worrying if you will be in too high of tax bracket in retirement.

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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 » Mon May 21, 2018 11:53 am

CnC wrote:
Mon May 21, 2018 11:27 am
..
Well if having too much money is the only problem I will have then I suppose I will carry that heavy burden.

But as I said before I am planning for an "early retirement" thus 4% would be non conservative. 2.5-3% including my pension seems like it is right where most boggleheads suggest when retiring at age 50.


"If all you are saving is $18.5K maxing out for 401k and employer match -- its hard to make portfolio to $4MM by 50'ish early retirement age, unless bull-market continues perennially (or you are currently in 20s)!"

It's not that hard, remember 18.5k is just this year it will likely go up $500 every other year and then every year relatively soon because of inflation indexing. It also doesn't include matches which tack several thousand to the amount each year. If markets are typical it will get there, if they return significantly below normal no, I won't be there thus the need for multiple plans.

I wasn't anticipating withdrawl of 7% I was anticipating growth of 7% which is well within historical averages for the stock bond blend we are going to have.

I'm not really sure what else you are saying, we contributing money to everyone tax advantaged option available minus hsa and 529's. We also have a reasonable amount in taxable. I said in my opening post I understand pretax 401ks being good for those who don't save a large percentage of their income. My question was directed at those of us who do.
If you are contributing or possibly maxing other Tax advantaged vehicles - you be dandy. should your question boil down to:
A) Should I leave some Pre-Tax space alone since my withdrawals from expected Pre-Tax buckets push me over the Tax-bracket edge ?
B) Should I invest in Roth, instead of Traditional/Pre-Tax 401K since my Pre-Tax bucket expected to grow to large chunk? -- Only you would know (and time would tell/confirm) - if that kitty too big, and/or if your current tax bracket too small compared to your /guessed/ retirement bracket .. Also, keep in mind sequence of returns - on the year after you declared retirement 2008 may repeat? I would err on the side of having "more" (Preferably in Tax deferred), than having less kitty; As we approach end-game, there is always more-charity, college for nephews etc, inheritance, and other good causes.

If I were in your shoes - I would do this, that and the other to maximize tax-protected space (tax-deferred more so); Then whatever leftover savings goes to Taxable/brokerage investments. Sorry we ain't got 457 plans ..

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

Post by willthrill81 » Mon May 21, 2018 12:04 pm

If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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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 » Mon May 21, 2018 12:07 pm

willthrill81 wrote:
Mon May 21, 2018 12:04 pm
If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings.
Agree. But right after you retire, a year 2008 type market gyration occurs, due to bad sequence of returns; or worse yet, high inflation, all our projects/models go down the tube. OP may then realize - wish he had more money saved/stashed away .. (ideally in tax-deferred, then comes tax-protected/efficient accounts).

Models may wary from actual results :-)

On the contrary: your account(s) may "perennially" grow and overshoot all thru your retirement (and spouse's too) without any black-swans/sequence-of-returns/low-inflation -- again this is good problem to deal with than one-eyed focus on tax-bracket(s) alone!)
Last edited by sc9182 on Mon May 21, 2018 1:04 pm, edited 2 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 Silk McCue » Mon May 21, 2018 12:15 pm

willthrill81 wrote:
Mon May 21, 2018 12:04 pm
If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings.
This will not hold true if any of your Social Security income gets taxed and you could have avoided that by using Roth dollars rather than tax deferred dollars. Any dollars converted to Roth at 12% MIGHT avoid paying 22.2% on each dollar distributed from tax deferred due to Social Security being taxed.

This must be analyzed on a case by case basis.

Roth conversions will absolutely allow us to pay 12% on conversions rather than paying 22.2% if we used tax deferred. With no planning we would very likely be pushed into 40.7%. Individual analysis is critical to knowing what is best for you.

Cheers

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

Post by willthrill81 » Mon May 21, 2018 12:26 pm

Silk McCue wrote:
Mon May 21, 2018 12:15 pm
willthrill81 wrote:
Mon May 21, 2018 12:04 pm
If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings.
This will not hold true if any of your Social Security income gets taxed and you could have avoided that by using Roth dollars rather than tax deferred dollars. Any dollars converted to Roth at 12% MIGHT avoid paying 22.2% on each dollar distributed from tax deferred due to Social Security being taxed.

This must be analyzed on a case by case basis.

Roth conversions will absolutely allow us to pay 12% on conversions rather than paying 22.2% if we used tax deferred. With no planning we would very likely be pushed into 40.7%. Individual analysis is critical to knowing what is best for you.

Cheers
I don't see how your example involving SS changes what I said.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by Silk McCue » Mon May 21, 2018 12:49 pm

willthrill81 wrote:
Mon May 21, 2018 12:26 pm
Silk McCue wrote:
Mon May 21, 2018 12:15 pm
willthrill81 wrote:
Mon May 21, 2018 12:04 pm
If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings.
This will not hold true if any of your Social Security income gets taxed and you could have avoided that by using Roth dollars rather than tax deferred dollars. Any dollars converted to Roth at 12% MIGHT avoid paying 22.2% on each dollar distributed from tax deferred due to Social Security being taxed.

This must be analyzed on a case by case basis.

Roth conversions will absolutely allow us to pay 12% on conversions rather than paying 22.2% if we used tax deferred. With no planning we would very likely be pushed into 40.7%. Individual analysis is critical to knowing what is best for you.

Cheers
I don't see how your example involving SS changes what I said.
You stated "If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings." I provided a concrete example where doing so would and the example will be applicable to a decent percentage of retirees. What is not understood? I also made it clear that this must be done on a case by case basis. I couldn't have provided a more balanced point so that others beside you and me could recognize a scenario where tax savings would be likely or might be achieved.

I am definitely not trying to argue with you.

Cheers

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

Post by The Wizard » Mon May 21, 2018 1:07 pm

[*] a
willthrill81 wrote:
Mon May 21, 2018 12:04 pm
If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings.
The savings may not be huge but they come from levelling your income, before and after age 70.5, along with possibly NOT being in an even higher Medicare IRMAA tier after that age...
Last edited by The Wizard on Mon May 21, 2018 1:26 pm, edited 1 time in total.
Attempted new signature...

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

Post by sc9182 » Mon May 21, 2018 1:12 pm

Silk McCue wrote:
Mon May 21, 2018 12:49 pm
willthrill81 wrote:
Mon May 21, 2018 12:26 pm
Silk McCue wrote:
Mon May 21, 2018 12:15 pm
willthrill81 wrote:
Mon May 21, 2018 12:04 pm
If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings.
This will not hold true if any of your Social Security income gets taxed and you could have avoided that by using Roth dollars rather than tax deferred dollars. Any dollars converted to Roth at 12% MIGHT avoid paying 22.2% on each dollar distributed from tax deferred due to Social Security being taxed.

This must be analyzed on a case by case basis.

Roth conversions will absolutely allow us to pay 12% on conversions rather than paying 22.2% if we used tax deferred. With no planning we would very likely be pushed into 40.7%. Individual analysis is critical to knowing what is best for you.

Cheers
I don't see how your example involving SS changes what I said.
You stated "If you'll be in the same tax bracket during retirement as when you were working, Roth conversions are unlikely to result in tax savings." I provided a concrete example where doing so would and the example will be applicable to a decent percentage of retirees. What is not understood? I also made it clear that this must be done on a case by case basis. I couldn't have provided a more balanced point so that others beside you and me could recognize a scenario where tax savings would be likely or might be achieved.

I am definitely not trying to argue with you.

Cheers
I see both of you guys mostly on same page - Silk, your points are well made and apply for average/above average earners and savers.

Main difference being: OP expecting his withdrawals to cross (or his expenses demand that) well beyond 12% brackets, and 85% SS taxation points during early or full retirement - so 12% bracket may be moot point for OP's projected case - as it appears - with or without SS ..

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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 » Mon May 21, 2018 1:17 pm

By the way anyone know what the magic number that pretax 401ks stop making sense?

That would be really helpful. :wink:

@sc9182
Right now we are in the 24% bracket and anticipate being there for the vast majority of our earning lives. It's possible based on promotions we may hit 32% in our final working years.


I can't foresee ever going below the 24% bracket in retirement unless it's by lowing our income via taxable and Roth withdrawals.

It is likely that brackets up until 22% will be filled via pension taxable dividends and possibly other random income streams from 55 to end of life. Once we hit social security it is likely that we will fill up the majority of the 22% bracket also.

So we will be close to maxing out 22% before any rmd's.


All this is assuming no catastrophic loss or major tax change of course. Planning for the worst means having too much money won't be a problem and best left for another thread.

The Wizard
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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 » Mon May 21, 2018 1:30 pm

CnC wrote:
Mon May 21, 2018 1:17 pm
By the way anyone know what the magic number that pretax 401ks stop making sense?

That would be really helpful. :wink:
There is no magic number.
It depends on your individual situation, including your AGI during your latter working years.
If that AGI was $70k, the answer would be different than for an AGI of $140k...
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marcopolo
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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 » Mon May 21, 2018 2:23 pm

CnC wrote:
Mon May 21, 2018 10:36 am
marcopolo wrote:
Mon May 21, 2018 9:03 am
CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Look up "Roth Conversion Ladder". I think you still come out ahead because if you can afford to retire in early 50s, you were likely in high tax bracket. It is quite likely that conversions after early retirement are at lower rate than your marginal rate pre-retirement.
We are in a medium tax bracket. ±200k for a family of 4 mfj.
I have looked at the conversions granted my math could be off but I don't see how you even put a dent in your traditional 401k via Roth conversions and stay in a lowish tax bracket.

Now this is in future money when I'm going to hopefully retire but I have bumped up the tax brackets accordingly.

Say after typical stock growth me and dw have 4 mil in our combined 401ks tax deferred.

Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.

As others have said, you have too much money! :sharebeer


I am also not sure about the 7% growth rate. My numbers are not as high as yours, but i am at that stage of life right now. Retired early at age 51.

Here are a few observations:

1) I really only had about 18 years during the accumulation phase, so a little more limited in pre-tax savings and growth.
But, if you are planning early retirement, your situation might be similar.

2) We were a single earner household, so only one 401k to dump money into

3) Much of my 401k has already been moved to Roth IRA via Mega Backdoor transfers.

4) My 401k is almost exclusively bonds, I keep my equities in my after-tax and Roth accounts for better tax efficiency
This limits the growth of my 401k, way below your assumed 7% rate

5) My 401k is only about 30% of our overall portfolio, 20% in Roth IRA, 50% in after tax

6) I will have 18 years to do Roth conversions, I also do not need to empty it, just reduce it enough to get RMD to a reasonable level

I plan to convert enough each year to the lower of ACA cliff and 12% bracket. Once on medicare, or earlier if ACA subsidy rules change, I will top out the 12% bracket. The money went in at 30+% savings over the years, so i think i will come out ahead.
Once in a while you get shown the light, in the strangest of places if you look at it right.

sc9182
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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 » Mon May 21, 2018 2:39 pm

CnC wrote:
Mon May 21, 2018 1:17 pm
By the way anyone know what the magic number that pretax 401ks stop making sense?

That would be really helpful. :wink:

@sc9182
Right now we are in the 24% bracket and anticipate being there for the vast majority of our earning lives. It's possible based on promotions we may hit 32% in our final working years.

I can't foresee ever going below the 24% bracket in retirement unless it's by lowing our income via taxable and Roth withdrawals.

It is likely that brackets up until 22% will be filled via pension taxable dividends and possibly other random income streams from 55 to end of life. Once we hit social security it is likely that we will fill up the majority of the 22% bracket also.
So we will be close to maxing out 22% before any rmd's.

All this is assuming no catastrophic loss or major tax change of course. Planning for the worst means having too much money won't be a problem and best left for another thread.
Does 401k/IRA Principal need to be preserved, or expecting to leave zero/near-zero ? projected expenses/growth ? Inflation growth estimate ? life expectancy of self, and spouse, length of retirement ? HCOL/LCOL, projected state taxes, VAT taxes in retirement ? Leaving anything for inheritance, and legacy ?

Guess too many variables. Like they say in Fractal theory - a small change in initial estimate could lead to drastic change in final outcome. Long away from retirement, and/or long-time in retirement definitely leaves some (in-fact many) uncertainties.

Sound like you may never need any withdrawals 401K/IRA savings (to support your retirement needs/lifestyle): based on your expected SS, pension taxable dividends and possibly other random income streams.

Is the question now: If I don't need the income from a 401K/IRA -- would I still need to contribute to 401K/IRA, instead direct savings to Roth 401k/Roth-IRA accounts, or Taxable/brokerage accounts ?

Definitely do not lose "matching" on 401Ks. Whether you shift to Roth 401K, or Roth-IRA -- I think you can figure that the best !

Don't believe there is such specific magical mystical number for us, even though we attempt to ball park it based on current knowledge/projections.

We will 'feel good' if our 401Ks/investments organic growth as much as our AGI - as/when we approach retirement (long ways away)! Yes, we will still continue to contribute and get the matching for 401K + other retirement/health/Roth/taxable savings as well until we do retire. If we indeed shoot past such mythical magic number (unknowable to us until as we approach the end-date), so be it. We sure could help good causes. Working in-itself or working-hard, consequently saving decently, we never considered those (working, saving, or err on saving more than we project at this point of time) to be problems. Or may be you could decide to contemplate early/really-early retirement if kittys grown large enough - instead of working-and saving more away .. ?

We got long ways to go, kids college a few.years away, paying off low-rate mortgage among other things. If we do/did overflow as-and-when the end-game approaches., yes, we can think of many good causes putting any such excess to good use; and leave some towards inheritance.

"marcopolo" points are also noteworthy and could support towards a good realistic example ..

"Show me the money"
Last edited by sc9182 on Mon May 21, 2018 3:17 pm, edited 1 time in total.

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

Post by CnC » Mon May 21, 2018 3:06 pm

marcopolo wrote:
Mon May 21, 2018 2:23 pm


As others have said, you have too much money! :sharebeer


I am also not sure about the 7% growth rate. My numbers are not as high as yours, but i am at that stage of life right now. Retired early at age 51.

Here are a few observations:

1) I really only had about 18 years during the accumulation phase, so a little more limited in pre-tax savings and growth.
But, if you are planning early retirement, your situation might be similar.

2) We were a single earner household, so only one 401k to dump money into

3) Much of my 401k has already been moved to Roth IRA via Mega Backdoor transfers.

4) My 401k is almost exclusively bonds, I keep my equities in my after-tax and Roth accounts for better tax efficiency
This limits the growth of my 401k, way below your assumed 7% rate

5) My 401k is only about 30% of our overall portfolio, 20% in Roth IRA, 50% in after tax

6) I will have 18 years to do Roth conversions, I also do not need to empty it, just reduce it enough to get RMD to a reasonable level

I plan to convert enough each year to the lower of ACA cliff and 12% bracket. Once on medicare, or earlier if ACA subsidy rules change, I will top out the 12% bracket. The money went in at 30+% savings over the years, so i think i will come out ahead.
That's an interesting idea, holding all our bonds in our 401ks to limit growth there and increase growth in Roth. It certainly sounds like you will come out ahead. I wonder how you will get your bracket so low, but if you can more power to you.

I'm still not understanding the "too much money" thing. We are going to have a margin of safety but that's with typical returns my goal is to be able to retire even with a sup optimal market. That's everyone's goal right? I mean my 4 million planned may end up at 2 million if we have a skunk market over the next few decades.

So to me that falls into the "just the right amount of money" tick box. Or is it a false positive where the suggestion is always means as a goal to aspire to rather than one to reach?



Regardless of what the true answer is, we will likely do all 5 saving methods simply incase one of them break due to law changes we will have the remaining ones to support us.

marcopolo
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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 » Mon May 21, 2018 3:20 pm

CnC wrote:
Mon May 21, 2018 3:06 pm
I wonder how you will get your bracket so low, but if you can more power to you.

I'm still not understanding the "too much money" thing.
I was actually just joking about the "too much money" part. You are projecting a number years into the future, so i don't think it is unreasonable.

We will stay in a low bracket by pulling most of our spending needs from our taxable accounts, and the dividends/Capital Gains they throw off.
We invest in very tax efficient ETFs in our taxable account, so the yearly Dividends is about $40k. On average, our taxable investments have about 40% unrealized gains in them. So, with $24K standard deduction, we could pull about $195k/year for living expenses and still stay in the 12% tax bracket. We don't plan to spend anywhere near that much, leaving room for some Roth conversions each year.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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

Post by dknightd » Mon May 21, 2018 3:31 pm

You might be in a higher tax bracket, or a lower tax bracket. It is impossible for us to predict.

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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 » Mon May 21, 2018 4:02 pm

dknightd wrote:
Mon May 21, 2018 3:31 pm
You might be in a higher tax bracket, or a lower tax bracket. It is impossible for us to predict.
*Sigh*

What if someone, filing single, has taxable income of $39,000 this year, putting them in the new 22% Federal bracket. That person retires in a year or two and then amazingly has taxable income of $81,000 (or a bit more with inflation) but remains in the same 22% bracket, which spans TI of $38,700 to $82,500.
Is that perfectly acceptable?

Or take person #2 with taxable income during last working year of $82,000 (upper end of 22% bracket).
And then in retirement he has TI of $84,000, putting him in the 24% marginal bracket.
Is that quite the travesty?

So are we really asking and discussing the right relevant questions here?
I don't think so...
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willthrill81
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by willthrill81 » Mon May 21, 2018 4:04 pm

dknightd wrote:
Mon May 21, 2018 3:31 pm
You might be in a higher tax bracket, or a lower tax bracket. It is impossible for us to predict.
We cannot predict it precisely, of course. But we can probably do a lot better than random chance.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by LaurieAnnaT » Mon May 21, 2018 4:16 pm

My husband and I planned on taking social security at 70. We planned on living forever so that we would be paying taxes at married filing jointly rates on our social security and RMDs.

Never, in 100 years, did I think that my big strong husband would die at age 63. So yes, I will most definitely be in a higher tax bracket starting next year. That sucks.

There has to be one of the most common situations in retirement - one spouse dies, leaving the surviving spouse in a single taxpayer 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 Nowizard » Mon May 21, 2018 4:23 pm

We are definitely not among the super wealthy posting here, neither of us ever making more than six figures annually during our working lives. However, we have saved well, invested well and have SS and a small pension (One of us). Most of our assets are in retirement accounts, and we are in a higher tax bracket in retirement than while working, that in spite of making ROTH contributions during the last decade of our working lives.

Tim

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