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

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

Post by dodgersummer » Fri Jun 22, 2018 10:10 pm

JBTX wrote:
Wed May 16, 2018 7:49 pm
CnC wrote:
Wed May 16, 2018 7:24 pm
JoeRetire wrote:
Wed May 16, 2018 7:15 pm
CnC wrote:
Wed May 16, 2018 6:31 pm
So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?
For most people this is not misleading advice.
Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.
The traditional advice is correct for the majority of people here, but is often determined by the age of the individual. Younger folks tend to make less, and are thus already in a low tax bracket, but will earn more and be in higher brackets when they reach their peak earning years.

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

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

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

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

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

The assumptions are:

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

All of those could certainly be true for many Bogleheads. I think they are less likely to be true for rank and file non bogleheads.
If traditional is better then why do bogleheads and FA recommended maxing roth first and then 401k if no company match exists?

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 » Sat Jun 23, 2018 10:10 am

I assume my taxes will be about what I pay now. Maybe briefly less for a few years.
People quote "You will likely be in a lower tax bracket in retirement," because they assume you will have less income in retirement.
I want to have income in retirement about the same as it is now. It depends where your money is sitting. Most of my money is in tax deferred accounts. So will be taxed as ordinary income. So far SS income is only taxed at 85%, so I might pay a little less on tax. If you have already paid taxes on most of your money, then the rate might go down. Inflation and tax rates are "unknown". But at least they are known to be unknown. Much better than unknown unknowns.

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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 Jun 23, 2018 11:09 am

dodgersummer wrote:
Fri Jun 22, 2018 10:10 pm
If traditional is better then why do bogleheads and FA recommended maxing roth first and then 401k if no company match exists?
Where do you see the "Roth first" recommendation in the bogleheads wiki?

E.g., in Prioritizing investments - Bogleheads one finds
"Contribute the maximum to an IRA, traditional or Roth...depending on eligibility and personal circumstances".

Very similar advice, "Max Traditional IRA or Roth...based on income level" can be found in Investment Order.

In other words, "it depends...."

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

Post by JBTX » Sat Jun 23, 2018 11:37 am

dodgersummer wrote:
Fri Jun 22, 2018 10:10 pm
JBTX wrote:
Wed May 16, 2018 7:49 pm
CnC wrote:
Wed May 16, 2018 7:24 pm
JoeRetire wrote:
Wed May 16, 2018 7:15 pm
CnC wrote:
Wed May 16, 2018 6:31 pm
So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?
For most people this is not misleading advice.
Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.
The traditional advice is correct for the majority of people here, but is often determined by the age of the individual. Younger folks tend to make less, and are thus already in a low tax bracket, but will earn more and be in higher brackets when they reach their peak earning years.

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

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

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

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

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

The assumptions are:

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

All of those could certainly be true for many Bogleheads. I think they are less likely to be true for rank and file non bogleheads.
If traditional is better then why do bogleheads and FA recommended maxing roth first and then 401k if no company match exists?
I have not seen such across the board recommendation. Like I said it is really based on your individual assumptions and what is important to you. If you were to do nothing else other than invest a fixed amount in one or the other than most of the time Roth will be the best. If you choose to reinvest the traditional up front tax savings then traditional will often be the best, dependent upon those above assumptions.

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ruralavalon
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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 » Sat Jun 23, 2018 2:16 pm

dodgersummer wrote:
Fri Jun 22, 2018 10:10 pm
If traditional is better then why do bogleheads and FA recommended maxing roth first and then 401k if no company match exists?
That is not the recommendation, to max a Roth IRA as a priority over maxing the employee contribtuion to traditional 401k. The recommended prioity on the Boglehead's wiki is:
. . . . .
4) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances,
5) Contribute the remainder of the maximum employee contribution to the work-based plan,
. . . . .
Please see the wiki article "Prioritizing investments".

The "circumstance" that most often compels use of some type of IRA is a mediocre or poor menu funds offered in too many 401ks. "If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments".

The "eligibility" problem is that there are a higher income limits for contributions to Roth IRAs than for deductible contributions to traditional IRAs. Sometimes a Roth IRA is the only type of IRA which is available, for higher earning investors.

It is not automatically better to use an IRA as a priority ahead of maxing the 401k. If an IRA is used then its not automatically better, or even possible, to use a Roth IRA.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Engineer250
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Engineer250 » Sat Jun 23, 2018 9:06 pm

I agree with everyone who said diversification is best. It's interesting how this gets so heated but the "should I invest in international?" doesn't get nearly as heated. Everyone is okay with everyone making their own choices there, just not on pre-tax versus Roth I guess.

I'm 33, MFJ, 15% bracket last year, 22% bracket this year. My Pre-Tax / Roth / Taxable ratio is about 75% / 25% / 0%. Within a few years I expect to be in the 24% bracket easily. I think peak-career, we will hit the 32% tax bracket.

This is the first year I've been able to max out my 401k (though have been contributing since I was 20 and making a lot less, and the last few years have been close). This year I'm doing 50/50 Pre-Tax/Roth in my 401k, and maxing out both our Roth IRAs. My spouse is going back to work this year and will probably not max out 401k this year, but will max out next year. I have access to a mega backdoor 401k if I stay at my current employer. Plan is to do the amount of pre-tax we need to to stay in the 22% bracket for as long as possible, and the remainder goes to Roth 401k. I'm not sure what I'll do once we get into the 24%, possibly max out pre-tax in the 401k. I think within 5 or so years we will make too much to contribute to Roth IRA without doing the backdoor. Right now, I can't really afford to contribute taxable or backdoor in addition to maxing the 401ks/Roths.

I estimate the amount I have saved in pre-tax today will be worth about $2M with 5% annual returns in 30 years from now. That's not counting future contributions. I never put in a lot, but I started young, and increased contributions during the recession, and have benefited from the bull market. I know everyone will say "well don't count your chickens" but I feel like it's only going to be probably 2 years before I am in 24%, and another few years after that before I'm in 32% for the rest of my career. So it makes sense to me to get money into the Roth now rather than wait until I've hit the 32% and be filling the backdoor roth with money taxed at 32%. I also have a defined-contribution pension in addition to my 401k that will be worth some unknown dollar amount based on how long I work for my employer. Expecting two large SS incomes as well from both of us having long and relatively successful careers.

There's a lot of "what if they change the way Roths are taxed" or "what if they move to a consumption tax" but I don't think that's any more or less likely than tax rates going up (or down). No one knows the future. I like to have my portfolio tax diverse. I mean, they could raise LTCG tax in the next 30 years as well, and a lot of people who intended to use their huge taxable balances to do Roth conversions last minute won't have that option. To me, having 10% of my total portfolio be in Roth, that's not enough diversity. Ideally, I'd like to get my pre-tax/Roth balances closer to 50/50 and suspect I will get there when I can afford to mega backdoor roth in the future.
Where the tides of fortune take us, no man can know.

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ruralavalon
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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 Jun 24, 2018 9:10 am

Engineer250 wrote:
Sat Jun 23, 2018 9:06 pm
I agree with everyone who said diversification is best. It's interesting how this gets so heated but the "should I invest in international?" doesn't get nearly as heated. Everyone is okay with everyone making their own choices there, just not on pre-tax versus Roth I guess.
. . . . .
I agree, it is interesting. I am not very surprised at the differences in viewpoint.

I am 72 years old, married filing jointly, retired 7.5 years, and I started my first real post-college job in 1971.

First, some of the media (e.g. Suze Orman) have touted the Roth IRA as best for everyone, creating a general mistaken impression in the public at large.

Second, older members didn't have much chance to use a Roth. The Roth IRA was invented in 1997, and Roth 401k contributions were not allowed until 2006. Older investors know that traditional contributions worked quite well, but younger investors don't have this background knowledge.

Third, it's human to feel that most other people are probably in a situation similar to oneself. But so much on the Roth versus traditional question depends on personal and financial circumstance, and we have different circumstances.

Median household income in the U.S. is currently around $59k per year, and median individual income in the U.S. is currently around $31k per year. The average household or individual will not be maxing out a 401k, or even maxing any kind of IRA. But many (not all, or even most) on this forum have good fortune and higher income required to begin maxing one or another or both accounts, and to start to create the dilemma of a Roth versus traditional question.

The average household or individual will never, after stopping employment income, have such a large retirement savings in traditional accounts that they could even possibly have a higher marginal tax rate during retirement. Even people with higher than median income need to consider whether their traditional accounts will become so large as to push them into a higher marginal tax rate during retirement, after employment income has ended.

Fourth, predicting the marginal tax rate in retirement is seldom an easy or simple question because that requires predicting future employment income over many years, and also because of the impact of tax credits, deductions, phase ins, phase outs, amount of Social Security to be taxed, whether someone will have pension income, etc.

Fifth, there is always the fact that we don't know what changes in tax law will occur over the decades before someone's retirement. But some of us have opinions about what may change in tax law, and those opinions can be quite divergent.

Sixth there are wide differences of opinion about what changes (if any) will be made by Congress to Social Security law, or the impact of any changes.

It is not surprising to me that we get such different views on the Roth versus traditional question, and that the discussions can sometimes get a little heated.

I guess this is a plea for a little understanding of the impact of different personal and financial circumstances, and of the uncertainties of predictions about future changes in tax law or Social Security.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

randomguy
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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 » Sun Jun 24, 2018 10:20 am

ruralavalon wrote:
Sun Jun 24, 2018 9:10 am
Engineer250 wrote:
Sat Jun 23, 2018 9:06 pm
I agree with everyone who said diversification is best. It's interesting how this gets so heated but the "should I invest in international?" doesn't get nearly as heated. Everyone is okay with everyone making their own choices there, just not on pre-tax versus Roth I guess.
. . . . .
I agree, it is interesting. I am not very surprised at the differences in viewpoint.

International versus domestic only is pretty much a religious arguement where faith plays the major roll. The domesitc only people are placing faith that the US will be at least average and will not have a prolonged divergence. The international people are having faith that the past 10 years of underperformance will mean revert and the diversification benefit at some point will be useful. And international versus US only used to be heated but after several years, I think people have accepted the other side isn't going to change their mind:)

Roth versus traditional is a math problem and based on your assumptions you can get slightly different answers. It is a lot easier to debate that. It also helps that the choice doesn't matter much. There are few cases where you end up with more than 5% differences in spending by making one choice or the other. And when your in the exceptional cases, it tends to be pretty clear (i.e. the 500k working, 150k retired or the 100k working, 200k retired). And like in the pay off the house versus invest, marginal differences mean that there is no clear right path so there will always be a difference of opinion.

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

Post by averagedude » Sun Jun 24, 2018 12:26 pm

There are many reasons why most people pay less taxes in retirement
1. No more fica or medicare taxes.Roughly 7.5 percent of every dollar earned for most people.
2. Savers dont need to withdraw as much, because they arent saving anymore.
3.The federal government can only tax 85% of your social security. Some people the government taxes none of it.
4. Most states dont tax social security, and for most people this makes up an average of 50 percent of a retirees income.
5. A 1300 dollar exemption for being over 65.
6. Retirees with roth iras pay no taxes on this income and can use withdrawal strategies to stay in the lowest two tax brackets.
7.For some, their kids are grown, no more college expenses, and mortgages are paid off, thus requiring less money they need to withdraw.
8. Some downsize and move to lower cost of living areas.
9. This is debatable, but most retirees that are 75 years or older travel less, dont care about home improvement projects, drive less, spend less on entertainment, and overall spend less money. For most, healthcare is there biggest expense.

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

Post by Engineer250 » Sun Jun 24, 2018 2:42 pm

randomguy wrote:
Sun Jun 24, 2018 10:20 am
International versus domestic only is pretty much a religious arguement where faith plays the major roll.
...
Roth versus traditional is a math problem and based on your assumptions you can get slightly different answers.
I disagree. Roth versus traditional is only a math problem if you know the future. Not only what your tax rate will be, but what future tax rates will be. Just because we don't discuss what they might be on this board (so we don't get all political and angry) doesn't mean assuming they stay the same is any different than assuming whatever US vs International stocks did in the last 10 or 20 or 50 years will repeat itself again.

I'm not sure what the psychology behind the vehemence of "thou shalt 401k pre-tax only" is, or why its proponents are so single-minded. There are plenty of other topics people feel they are right about that don't turn into 10+ page threads.
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Engineer250
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Engineer250 » Sun Jun 24, 2018 2:45 pm

ruralavalon wrote:
Sun Jun 24, 2018 9:10 am
Median household income in the U.S. is currently around $59k per year, and median individual income in the U.S. is currently around $31k per year. The average household or individual will not be maxing out a 401k, or even maxing any kind of IRA. But many (not all, or even most) on this forum have good fortune and higher income required to begin maxing one or another or both accounts, and to start to create the dilemma of a Roth versus traditional question.

The average household or individual will never, after stopping employment income, have such a large retirement savings in traditional accounts that they could even possibly have a higher marginal tax rate during retirement. Even people with higher than median income need to consider whether their traditional accounts will become so large as to push them into a higher marginal tax rate during retirement, after employment income has ended.
Although I am a proponent of more Roth than your average BH, I agree with this 100%. I would never tell any of the people in my personal life of more modest incomes to Roth 401k. At the Boglehead level, it is "what do I do with all my savings". At the average level, getting people to save more in any form is probably the biggest hurdle.
Where the tides of fortune take us, no man can know.

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

Post by JoMoney » Sun Jun 24, 2018 2:52 pm

Engineer250 wrote:
Sun Jun 24, 2018 2:42 pm
randomguy wrote:
Sun Jun 24, 2018 10:20 am
International versus domestic only is pretty much a religious arguement where faith plays the major roll.
...
Roth versus traditional is a math problem and based on your assumptions you can get slightly different answers.
I disagree. Roth versus traditional is only a math problem if you know the future. Not only what your tax rate will be, but what future tax rates will be. Just because we don't discuss what they might be on this board (so we don't get all political and angry) doesn't mean assuming they stay the same is any different than assuming whatever US vs International stocks did in the last 10 or 20 or 50 years will repeat itself again.

I'm not sure what the psychology behind the vehemence of "thou shalt 401k pre-tax only" is, or why its proponents are so single-minded. There are plenty of other topics people feel they are right about that don't turn into 10+ page threads.
Taking that approach, I would suggest looking at the consequences.
I'd much rather have to deal with a much larger taxable IRA that has so much money that it puts me in a higher tax bracket then potentially not having enough to get by in a tax-free account.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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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 » Sun Jun 24, 2018 2:53 pm

Engineer250 wrote:
Sun Jun 24, 2018 2:42 pm
There are plenty of other topics people feel they are right about that don't turn into 10+ page threads.
Many of the long traditional vs. Roth threads occur because, even given assumptions about future tax rates, people get the math wrong and just don't see why they are getting it wrong.

But yes, if we include speculation about what future tax rates someone might pay, the answer becomes that much less clear.

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

Post by Jordan4FI » Sun Jun 24, 2018 3:59 pm

We can lock this thread out now....

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

Post by steve roy » Sun Jun 24, 2018 4:24 pm

When I started work as a twenty-something bachelor 52 years ago, the top marginal rate on Federal Income Tax was 70%, which kicked in at $101,200.

Here in 2018, the top marginal rate (single payer) is 37% for income above $500,000.

To attempt to predict income tax rates 10, 30, or 50 years from now is an interesting game, but a fool's errand.

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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 Jun 24, 2018 5:55 pm

steve roy wrote:
Sun Jun 24, 2018 4:24 pm
When I started work as a twenty-something bachelor 52 years ago, the top marginal rate on Federal Income Tax was 70%, which kicked in at $101,200.

Here in 2018, the top marginal rate (single payer) is 37% for income above $500,000.

To attempt to predict income tax rates 10, 30, or 50 years from now is an interesting game, but a fool's errand.
:thumbsup

It was only a short time ago that many of the 'all Roth all the time' folks were claiming that tax rates had nowhere to go but up. And then they went down.

"Predictions are very difficult, especially about the future."
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by international001 » Sun Jun 24, 2018 6:10 pm

I think you also have to consider assymetric risks
If you are at 2018's 24%, it's highly unlikely that your retirment bracket will be much lower
For an individual, if you make up to 157k (upper limit of 24%), what are the chances your income will be lower than 38k (lower limit for 22%)

I plan to go Roth while these Trump extravaganza goes on, then I may be go back to traditional

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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 » Sun Jun 24, 2018 6:15 pm

international001 wrote:
Sun Jun 24, 2018 6:10 pm
For an individual, if you make up to 157k (upper limit of 24%), what are the chances your income will be lower than 38k (lower limit for 22%)
Excellent, if you have no money in traditional 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 willthrill81 » Sun Jun 24, 2018 6:18 pm

international001 wrote:
Sun Jun 24, 2018 6:10 pm
I think you also have to consider assymetric risks
If you are at 2018's 24%, it's highly unlikely that your retirment bracket will be much lower
For an individual, if you make up to 157k (upper limit of 24%), what are the chances your income will be lower than 38k (lower limit for 22%)
The limits you're referring to are for taxable income, not gross income. There are many instances of people in fairly high tax brackets paying zero or very little in Federal income taxes during 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 international001 » Mon Jun 25, 2018 5:37 am

Yes.. I'm just talking about tax bracket (marginal, on your last dollar) for taxable income.

What scenario are you thinking about?

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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 » Mon Jun 25, 2018 8:24 am

international001 wrote:
Mon Jun 25, 2018 5:37 am
Yes.. I'm just talking about tax bracket (marginal, on your last dollar) for taxable income.

What scenario are you thinking about?
What marginal rate would you expect for a retiree with no pension or traditional accounts, but a very large Roth account?

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

Post by trueblueky » Mon Jun 25, 2018 9:02 am

FiveK wrote:
Mon Jun 25, 2018 8:24 am
international001 wrote:
Mon Jun 25, 2018 5:37 am
Yes.. I'm just talking about tax bracket (marginal, on your last dollar) for taxable income.

What scenario are you thinking about?
What marginal rate would you expect for a retiree with no pension or traditional accounts, but a very large Roth account?
Zero federal because even two large SS would not reach the 10% bracket.

However, that person likely paid more tax than needed while working. In many cases, they would have done better to take the tIRA and 401k breaks then.

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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 » Mon Jun 25, 2018 9:37 am

trueblueky wrote:
Mon Jun 25, 2018 9:02 am
FiveK wrote:
Mon Jun 25, 2018 8:24 am
international001 wrote:
Mon Jun 25, 2018 5:37 am
Yes.. I'm just talking about tax bracket (marginal, on your last dollar) for taxable income.

What scenario are you thinking about?
What marginal rate would you expect for a retiree with no pension or traditional accounts, but a very large Roth account?
Zero federal because even two large SS would not reach the 10% bracket.

However, that person likely paid more tax than needed while working. In many cases, they would have done better to take the tIRA and 401k breaks then.
Seems reasonable. Let's see what international001 thinks.

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

Post by RetiredTrvl » Mon Jun 25, 2018 10:09 am

So as someone who retired a couple of years ago, I thought I'd add my personal experience on this.

It wasn't until the mid 1990s that I started earning enough money to put some money in a 401K. At the time I was in the 15% Federal tax bracket.

Around 2000 I stopped contributing to the 401K as I had just enough money to purchase a townhouse and needed all the money I earned to pay the mortgage. I did however open a ROTH and put money in there when I could. By the time I retired, I was in the 25% tax bracket.

Upon retirement, the pension I get kept me in the 25% bracket (now 22%). I am transferring money from my 401K to my ROTH IRA each year for the next 4 years maxing out the 22% tax bracket but I'm paying 7% more in federal tax on that money than I saved when I put the money in the 401K.

By the time I take SS, together with the COLA increases that come with my pension, I will be in the 24% tax bracket (which is why I'm transferring money to the ROTH).

So for those of us fortunate enough to have a pension and certainly in my case, it is not a given that you will be in a lower tax bracket in retirement - it all depends on your personal circumstances.

This phrase is/was thrown around as if it was a given & applies to everyone.

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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 » Mon Jun 25, 2018 10:21 am

RetiredTrvl wrote:
Mon Jun 25, 2018 10:09 am
So as someone who retired a couple of years ago, I thought I'd add my personal experience on this.

It wasn't until the mid 1990s that I started earning enough money to put some money in a 401K. At the time I was in the 15% Federal tax bracket.

Around 2000 I stopped contributing to the 401K as I had just enough money to purchase a townhouse and needed all the money I earned to pay the mortgage. I did however open a ROTH and put money in there when I could. By the time I retired, I was in the 25% tax bracket.

Upon retirement, the pension I get kept me in the 25% bracket (now 22%). I am transferring money from my 401K to my ROTH IRA each year for the next 4 years maxing out the 22% tax bracket but I'm paying 7% more in federal tax on that money than I saved when I put the money in the 401K.

By the time I take SS, together with the COLA increases that come with my pension, I will be in the 24% tax bracket (which is why I'm transferring money to the ROTH).

So for those of us fortunate enough to have a pension and certainly in my case, it is not a given that you will be in a lower tax bracket in retirement - it all depends on your personal circumstances.

This phrase is/was thrown around as if it was a given & applies to everyone.
RetiredTrvl,

Let's discuss your situation for a while.

<<It wasn't until the mid 1990s that I started earning enough money to put some money in a 401K. At the time I was in the 15% Federal tax bracket.

Around 2000 I stopped contributing to the 401K >>

<<but I'm paying 7% more in federal tax on that money>>

Your Trad. 401K contribution was from 1990 to 2000. Aka, 18 to 28 years ago. Assuming inflation rate of 2% to 3% per year, you may not be making a wrong decision.

1) Yes, you are paying 7% more taxes now.

2) But, with 2% to 3% inflation rate, the tax money is only worth 50% of what it was from 1990 to 2000. It is still a net win.

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 FiveK » Mon Jun 25, 2018 10:28 am

KlangFool wrote:
Mon Jun 25, 2018 10:21 am
Your Trad. 401K contribution was from 1990 to 2000. Aka, 18 to 28 years ago. Assuming inflation rate of 2% to 3% per year, you may not be making a wrong decision.

1) Yes, you are paying 7% more taxes now.

2) But, with 2% to 3% inflation rate, the tax money is only worth 50% of what it was from 1990 to 2000. It is still a net win.
Not in this case.

Spendable from Traditional = Contribution * Growth * (1 - tax_rate_now)
Spendable from Roth = Contribution * (1 - tax_rate_then) * Growth

Substitute 22% for tax_rate_now and 15% for tax_rate_then....

This assumes there was a Roth choice available back 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 KlangFool » Mon Jun 25, 2018 10:54 am

FiveK wrote:
Mon Jun 25, 2018 10:28 am
KlangFool wrote:
Mon Jun 25, 2018 10:21 am
Your Trad. 401K contribution was from 1990 to 2000. Aka, 18 to 28 years ago. Assuming inflation rate of 2% to 3% per year, you may not be making a wrong decision.

1) Yes, you are paying 7% more taxes now.

2) But, with 2% to 3% inflation rate, the tax money is only worth 50% of what it was from 1990 to 2000. It is still a net win.
Not in this case.

Spendable from Traditional = Contribution * Growth * (1 - tax_rate_now)
Spendable from Roth = Contribution * (1 - tax_rate_then) * Growth

Substitute 22% for tax_rate_now and 15% for tax_rate_then....

This assumes there was a Roth choice available back then.
https://en.wikipedia.org/wiki/Roth_IRA

Roth IRA started in 1998.

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 smitcat » Mon Jun 25, 2018 11:14 am

The major drivers to this complicated decision are the tax class you are in when making the money as well as what you will be in when retired.
Adding some variables - I always received a match on the 401K - mostly in the area of 5-6%.
All of the 401K funds were contributed while we were in a higher tax state and will be withdrawn when we aqre in a no tax state.

Each year while we were in a high tax situation and considering the 401K strategy we figured that if we were 'crushed' by some unforseen event that greatly affected our imcome and/or wealth we would end up in a very low tax retirement making the choice a good one.
If we were fortuneate enough to not have any diffculties along the way and had to pay a higher tax eventually it would be sustainable.

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

Post by international001 » Mon Jun 25, 2018 11:52 am

FiveK wrote:
Mon Jun 25, 2018 9:37 am
trueblueky wrote:
Mon Jun 25, 2018 9:02 am
FiveK wrote:
Mon Jun 25, 2018 8:24 am
international001 wrote:
Mon Jun 25, 2018 5:37 am
Yes.. I'm just talking about tax bracket (marginal, on your last dollar) for taxable income.

What scenario are you thinking about?
What marginal rate would you expect for a retiree with no pension or traditional accounts, but a very large Roth account?
Zero federal because even two large SS would not reach the 10% bracket.

However, that person likely paid more tax than needed while working. In many cases, they would have done better to take the tIRA and 401k breaks then.
Seems reasonable. Let's see what international001 thinks.
(assume individual, not married)
Let's assume I get the maximum SS, around 30k/year
Let's assume I get distribution from pre-tax 401k 10k/year (in case it was not clear, I plan to invest part on pre-tax)
This is 60k, so I'm already in 22% tax bracket

If I get the rest from Roth I'm good (contributions at marginal 24%). Of course, I would be better off investing in pre-tax (distributions at marginal 22%). But I'm betting that when I retire the tax brackets will be higher by some significant amount. If they are the same or a little bit lower, I don't loose that much.

Do my number 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 trueblueky » Mon Jun 25, 2018 12:47 pm

international001 wrote:
Mon Jun 25, 2018 11:52 am
FiveK wrote:
Mon Jun 25, 2018 9:37 am
trueblueky wrote:
Mon Jun 25, 2018 9:02 am
FiveK wrote:
Mon Jun 25, 2018 8:24 am
international001 wrote:
Mon Jun 25, 2018 5:37 am
Yes.. I'm just talking about tax bracket (marginal, on your last dollar) for taxable income.

What scenario are you thinking about?
What marginal rate would you expect for a retiree with no pension or traditional accounts, but a very large Roth account?
Zero federal because even two large SS would not reach the 10% bracket.

However, that person likely paid more tax than needed while working. In many cases, they would have done better to take the tIRA and 401k breaks then.
Seems reasonable. Let's see what international001 thinks.
(assume individual, not married)
Let's assume I get the maximum SS, around 30k/year
Let's assume I get distribution from pre-tax 401k 10k/year (in case it was not clear, I plan to invest part on pre-tax)
This is 60k, so I'm already in 22% tax bracket

If I get the rest from Roth I'm good (contributions at marginal 24%). Of course, I would be better off investing in pre-tax (distributions at marginal 22%). But I'm betting that when I retire the tax brackets will be higher by some significant amount. If they are the same or a little bit lower, I don't loose that much.

Do my number make sense?
$30k from SS plus $10k from 401k is $40k total.
Is there other income that gets this to sixty?
Half of SS plus the other 10k = 25k, so SS is not taxed. AGI = $10k.
$12k standard deduction (more if 65 or older). No federal tax.

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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 » Mon Jun 25, 2018 12:47 pm

international001 wrote:
Mon Jun 25, 2018 11:52 am
(assume individual, not married)
Let's assume I get the maximum SS, around 30k/year
Let's assume I get distribution from pre-tax 401k 10k/year (in case it was not clear, I plan to invest part on pre-tax)
This is 60k, so I'm already in 22% tax bracket
...
Do my number make sense?
Not exactly. $30K + $10K = $40K, not $60K.

See chart below for the marginal rates applicable to different amounts of pre-tax distributions, assuming a single filer age 65 with $30K SS benefit.

The steps up from a 15% rate start at $18,750. Assuming a 4% WR, that's a pre-tax balance of ~$470K. One can make a reasonable case, among others, for contributing to traditional until the projected balance reaches that amount, and contributing to Roth after 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 SGM » Mon Jun 25, 2018 12:53 pm

Four years retired here: I do know that by not having conversions to make at 70 1/2 I will be in a lower marginal bracket than if I had not converted. I also know that my Roth account and taxable account are much larger than the were during the last year I made Roth conversions. So despite the lower marginal rates with the new tax law I am still pleased I converted.

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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 » Mon Jun 25, 2018 1:25 pm

Going in, our pre-tax contributions saved us 28-31% on every dollar plus some AMT avoidance.
Coming out, it will be taxed at a blend of 12% and 22% under current law.
Our gross income drops dramatically at retirement but expenses (saving, income and payroll taxes, education, mortgage) drop even more, so our overall financial standard of living (discretionary take-home "pay") goes up a nice bit versus working.

Down the road I can conjure up some scenarios where pre-tax account withdrawals will all be taxed at 22% coming out (versus 28-31% going in) and given over-sized returns even some unlikely scenarios where most is 22% and some at 25% which seems like a real first-world problem to have.

100% pre-tax that saved 28-31% on all dollars beats Roth or "Roth diversification" every time. I will not pre-pay taxes now, which is a very real expense based on speculation about future tax rates or over-sized market returns. And I have a pension and other income streams that the Roth crowd seems convinced tilts things towards making after-tax contributions. Seems like they haven't done the math. We have a flat state income tax but a large retirement income exemption, so figuring in state taxes makes pre-tax look even better.

Retirement years can bring with them a lot of very real problems but I'm sure not going to be hand-wringing over the small possibility that I'll have so much income someday that my last retirement income dollars might see a top bracket rate similar to what I saved on every dollar contributing pre-tax. THE HORROR! :mrgreen:

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

Post by international001 » Tue Jun 26, 2018 3:54 am

FiveK wrote:
Mon Jun 25, 2018 12:47 pm
international001 wrote:
Mon Jun 25, 2018 11:52 am
(assume individual, not married)
Let's assume I get the maximum SS, around 30k/year
Let's assume I get distribution from pre-tax 401k 10k/year (in case it was not clear, I plan to invest part on pre-tax)
This is 60k, so I'm already in 22% tax bracket
...
Do my number make sense?
Not exactly. $30K + $10K = $40K, not $60K.

See chart below for the marginal rates applicable to different amounts of pre-tax distributions, assuming a single filer age 65 with $30K SS benefit.

The steps up from a 15% rate start at $18,750. Assuming a 4% WR, that's a pre-tax balance of ~$470K. One can make a reasonable case, among others, for contributing to traditional until the projected balance reaches that amount, and contributing to Roth after that.

Image
My typo.. yes I meant $40k
What I am trying to say is that after $38,700 (tax brackets for 2018), your marginal rate goes to 22%. If plan to reach this marginal rate on retirement via SS and traditional. The rest, I wanted via Roth

I think you are using your examples with married and tax brackets of 2017. I'm using single and 2018. I don't understand your graph (40% around 35k?)

There is lots of uncertainty.. But my point is that I don't expect my tax bracket to ever be lower (much) than 24%. So doing Roth now it's the most safe bet. On top of this, you have to consider that you may retire abroad, in a place with higher 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 Sheepdog » Tue Jun 26, 2018 6:45 am

Should I butt in here with my actual example?
It really is possible to retire with a decent amount of investments (but not over $1mil) and pay little to no income taxes. It takes little planning. In my 19th year in retirement (2017) I paid negligible federal income tax with income from Social Security and investments to support an average annual spending of over $70,000.
Just before retiring in 1998, I was in the 39% tax bracket. I converted some of our traditional IRAs to the new Roth IRAs from 1999 to 2002 equal to 25% of our total savings with the hope of reducing taxes later. I paid the taxes then so that I don't have to now. (The tax from the conversion was not excessive because I did it after retiring and in a lower tax bracket.) In addition, I virtually eliminated our taxable accounts in my first 5 years in retirement. I did that by using those accounts for expenses and to purchase I Bonds equal to about 20% of my total savings. I Bonds added more tax deferment. So our annual income then came from only SS plus those taxable accounts up until 2004 (age 70.5) when I started taking distributions from the traditional IRAs. By then, most of the taxable investments were gone.

My goal was to reduce my federal taxes to near zero. Once the conversion to Roths was complete I did that. My income tax in 1998, my last working year, was $23,858; In my first full retirement year 1999 and the conversion was started it was only $5,301. By 2003 to today my annual tax bill has never been higher than $300, but most years it has been zero. (Last year it was only $164 even with converting $10K more TIRA to Roth.) Today at age 84, 30% of our savings remains in traditional IRAs, 36% in Roth IRAs, 21% in 3.0 to 3.6% (plus inflation) I Bonds, 7% fixed term SPIAs and 6% CDs and money market. Our investment total is 39% higher than when I retired even after taking out an average of 4.56% every year. (I started retirement in 1998 with $682K and it is $950K today.)
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

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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 » Tue Jun 26, 2018 8:45 am

Sheepdog wrote:
Tue Jun 26, 2018 6:45 am

My goal was to reduce my federal taxes to near zero.
See I think that is the wrong goal. It should be to maximize spendable money (or asset value on death). That is not the same as paying 0 dollars in federal tax. I would postulate that paying 0 dollars in federal tax means you have chosen an suboptimal route since that is tax space that could be used to to get money tax free instead of paying taxes early. That being said it is impossible to optimize things that exactly as there are too many unknowns.

What would be fun would be to figure out where you would be if you didn't do the ROTH conversion. Would you have been better taking 15-20k/year out of the IRA tax free (maybe doing ROTHs, maybe selling it) instead of prepaying taxes? I bet you would be with in a few bucks either way depending on exact SS, pensions, and asset location

And it should be pointed out that this is a prime example of being in a lower bracket in retirement. Going from like 300k of income to under 100k results in being in a much lower 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 international001 » Tue Jun 26, 2018 8:54 am

It looks to me that you prefered to pay more taxes before and less during retirment.

To maximize total income, you should plan to fill all your tax brackets during your whole life. And have the lowest marginal tax bracket than you can, of course.

If one year you are at 37% tax bracket and the other at 0%, try to pay less taxes the first (e.g. contribute to pre-tax 401k) and more the second (do a roollover to roth). Just paying low income taxes during retirement is not the best optimization strategy.

Somebody should tell young people to do Roth when they start working and do pre-tax later on (when their income increases), for instance.
Personally, I plan to fill the 24% tax bracket by doing Roth conversions while this low tax income environment lasts.

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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 » Tue Jun 26, 2018 9:02 am

international001 wrote:
Tue Jun 26, 2018 3:54 am
My typo.. yes I meant $40k
What I am trying to say is that after $38,700 (tax brackets for 2018), your marginal rate goes to 22%. If plan to reach this marginal rate on retirement via SS and traditional. The rest, I wanted via Roth
Yes, that makes sense.
I think you are using your examples with married and tax brackets of 2017. I'm using single and 2018. I don't understand your graph (40% around 35k?)
The graph is indeed for 2018 and single. See Taxation of Social Security benefits - Bogleheads, and/or download the personal finance toolbox spreadsheet to verify.
There is lots of uncertainty.. But my point is that I don't expect my tax bracket to ever be lower (much) than 24%. So doing Roth now it's the most safe bet.
If you already have a large enough traditional balance and accumulated SS benefits, and expect to start SS so soon after retirement that there is not enough time to convert much of the traditional balance at lower rates, then your plan looks good.

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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 » Tue Jun 26, 2018 9:03 am

international001 wrote:
Tue Jun 26, 2018 8:54 am
Just paying low income taxes during retirement is not the best optimization strategy.
+1

Spot on.
“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 trueblueky » Tue Jun 26, 2018 1:25 pm

international001 wrote:
Tue Jun 26, 2018 3:54 am
FiveK wrote:
Mon Jun 25, 2018 12:47 pm
international001 wrote:
Mon Jun 25, 2018 11:52 am
(assume individual, not married)
Let's assume I get the maximum SS, around 30k/year
Let's assume I get distribution from pre-tax 401k 10k/year (in case it was not clear, I plan to invest part on pre-tax)
This is 60k, so I'm already in 22% tax bracket
...
Do my number make sense?
Not exactly. $30K + $10K = $40K, not $60K.

See chart below for the marginal rates applicable to different amounts of pre-tax distributions, assuming a single filer age 65 with $30K SS benefit.

The steps up from a 15% rate start at $18,750. Assuming a 4% WR, that's a pre-tax balance of ~$470K. One can make a reasonable case, among others, for contributing to traditional until the projected balance reaches that amount, and contributing to Roth after that.

Image
My typo.. yes I meant $40k
What I am trying to say is that after $38,700 (tax brackets for 2018), your marginal rate goes to 22%. If plan to reach this marginal rate on retirement via SS and traditional. The rest, I wanted via Roth

I think you are using your examples with married and tax brackets of 2017. I'm using single and 2018. I don't understand your graph (40% around 35k?)

There is lots of uncertainty.. But my point is that I don't expect my tax bracket to ever be lower (much) than 24%. So doing Roth now it's the most safe bet. On top of this, you have to consider that you may retire abroad, in a place with higher taxes.
$40,000 of income with $30,000 coming from Social Security does not put a Single in 22% marginal rate.

To figure how much SS is taxed, add half of it to the rest of your income. 10 +30/2 = 25. No SS is taxed. If the amount were over $25,000, then half would be taxed. With even more income, up to 85% would be taxed.

So, the Adjusted Gross Income line at the bottom of that person's 1040 first page is $10,000. On the second page, we subtract $12,000 standard deduction for Single (more if 65+).

Subtract to get Taxable Income. If the result is less than zero, write zero.
Zero it is. No taxable income.

And the tax on that is?
Yep, zero.

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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 » Tue Jun 26, 2018 1:35 pm

trueblueky wrote:
Tue Jun 26, 2018 1:25 pm
$40,000 of income with $30,000 coming from Social Security does not put a Single in 22% marginal rate.
True, but $30K coming from SS plus income from other sources (e.g., tIRA withdrawal) puts the marginal rate on the other income as shown in the chart.

$30K from SS plus $10K from other income does indeed have a 0% marginal 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 Sheepdog » Tue Jun 26, 2018 1:41 pm

randomguy wrote:
Tue Jun 26, 2018 8:45 am
Sheepdog wrote:
Tue Jun 26, 2018 6:45 am

My goal was to reduce my federal taxes to near zero.
See I think that is the wrong goal. It should be to maximize spendable money (or asset value on death). That is not the same as paying 0 dollars in federal tax. I would postulate that paying 0 dollars in federal tax means you have chosen an suboptimal route since that is tax space that could be used to to get money tax free instead of paying taxes early. That being said it is impossible to optimize things that exactly as there are too many unknowns.

What would be fun would be to figure out where you would be if you didn't do the ROTH conversion. Would you have been better taking 15-20k/year out of the IRA tax free (maybe doing ROTHs, maybe selling it) instead of prepaying taxes? I bet you would be with in a few bucks either way depending on exact SS, pensions, and asset location

And it should be pointed out that this is a prime example of being in a lower bracket in retirement. Going from like 300k of income to under 100k results in being in a much lower tax bracket.
So you think my goal was wrong. It was not the wrong goal for me. Your suggestion that it would be fun to figure out where my finances would be if I did not do what I did. It wouldn't be "fun" for me. My plans were my goal, not yours, and It has been successful in all respects. I would never suggest that you follow this. I am happy with my decision after almost 20 years. I imagine what your thoughts would be of my decision to have my stock investment percentage in retirement at only 100 minus my age, but stopped at 23% stock at age 77 (2010). I imagine you would say..."look at the money I lost by such at 23%". Maybe I am a child of the Great Depression and the fears which it brought to my parents. I spent all I wanted to spend, traveled to many countries, I give to charities a lot of money every year, have a great home, am healthy, attend the arts and sporting events and eat in nice restaurants weekly. My simple plans allowed that and still had growth of capital in my lifetime and I will still have money to give away at death (age 100+).
My investing plans has never been to get the most. I don't need the most. I invested, saved, spent to have a good retirement, spend all I want to spend, and never run out. I believed in investing safely only as much as I needed to and to survive happily. Not paying taxes was one way to reach that goal.
(And, I never earned over $100 k in my career.)
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

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

Post by trueblueky » Tue Jun 26, 2018 1:48 pm

FiveK wrote:
Tue Jun 26, 2018 1:35 pm
trueblueky wrote:
Tue Jun 26, 2018 1:25 pm
$40,000 of income with $30,000 coming from Social Security does not put a Single in 22% marginal rate.
True, but $30K coming from SS plus income from other sources (e.g., tIRA withdrawal) puts the marginal rate on the other income as shown in the chart.

$30K from SS plus $10K from other income does indeed have a 0% marginal rate.
I agree with the chart. The first $12,000 of other income is shown at zero tax. I do not agree with statement (not by you) that the taxpayer would be in 22% marginal 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 peseta » Tue Jun 26, 2018 1:56 pm

Not to further extend the life of the thread-that-won't-die, but what is folks' reaction to this recent study out of the University of Arizona? Apologies if this was discussed earlier in the thread, but I did not see it. Larry Swedroe wrote about it here:

http://www.etf.com/sections/index-inves ... nopaging=1

Key point: "Whereas conventional wisdom largely supports choosing between traditional and Roth accounts by comparing current tax rates to expected future tax rates, the hedging benefits of traditional accounts and the usefulness of Roth accounts in managing tax-schedule uncertainty are important considerations in the optimal savings decision." The study concludes that, contrary to conventional advice, the largest economic benefits from Roth investments accrue to high-income investors. Trying to distill it down to this, however, obscures some important nuances to the authors' work, so the study is worth reading in full.

The study goes to the point some have raised about the value of limiting downside future tax risk by adding Roth contributions to the mix, especially today when tax rates have been (temporarily?) reduced and income taxes are, from a historical perspective, perhaps "on sale." I understand the mathematical points many have made on this issue but, I must say, I find it interesting that despite the generally conservative financial approach advocated by many here (e.g., 3% SWR versus 4% SWR), it seems that this aspect of this traditional/Roth issue gets a bit of a short shrift. Locking in tax rates today eliminates uncertainty about future income tax practices. Whether it's a good idea to so lock in (and to what extent) is, of course, a separate issue and depends on individual circumstances.

Link to study: https://static1.squarespace.com/static/ ... cation.pdf

peseta

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

Post by Horsefly » Tue Jun 26, 2018 2:12 pm

peseta wrote:
Tue Jun 26, 2018 1:56 pm
Not to further extend the life of the thread-that-won't-die, but what is folks' reaction to this recent study out of the University of Arizona? Apologies if this was discussed earlier in the thread, but I did not see it. Larry Swedroe wrote about it here:

http://www.etf.com/sections/index-inves ... nopaging=1

Key point: "Whereas conventional wisdom largely supports choosing between traditional and Roth accounts by comparing current tax rates to expected future tax rates, the hedging benefits of traditional accounts and the usefulness of Roth accounts in managing tax-schedule uncertainty are important considerations in the optimal savings decision." The study concludes that, contrary to conventional advice, the largest economic benefits from Roth investments accrue to high-income investors. Trying to distill it down to this, however, obscures some important nuances to the authors' work, so the study is worth reading in full.

The study goes to the point some have raised about the value of limiting downside future tax risk by adding Roth contributions to the mix, especially today when tax rates have been (temporarily?) reduced and income taxes are, from a historical perspective, perhaps "on sale." I understand the mathematical points many have made on this issue but, I must say, I find it interesting that despite the generally conservative financial approach advocated by many here (e.g., 3% SWR versus 4% SWR), it seems that this aspect of this traditional/Roth issue gets a bit of a short shrift. Locking in tax rates today eliminates uncertainty about future income tax practices. Whether it's a good idea to so lock in (and to what extent) is, of course, a separate issue and depends on individual circumstances.

Link to study: https://static1.squarespace.com/static/ ... cation.pdf

peseta
Great point, and it looks like a good article. I've downloaded it and read most of the intro. Like you said, with the current crazy low rates for taxes, it changes the dynamic. Thanks for posting it!

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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 » Tue Jun 26, 2018 3:14 pm

peseta wrote:
Tue Jun 26, 2018 1:56 pm
Whether it's a good idea to so lock in (and to what extent) is, of course, a separate issue and depends on individual circumstances.
Yes indeed! The conclusions one reaches do - or at least should ;) - depend on the assumptions one makes.

The vast majority of the article appears well done. One point, "18We do not anticipate that incorporating a conversion option into our model, along with life-cycle effects and income variability, would substantially alter our main results" seems soft, because
- Those who work longer accumulate higher SS and (perhaps) pension benefits, and have fewer years and income space for conversions at low rates.
- Those who work shorter accumulate lower SS and (perhaps) pension benefits, and have more years and income space for conversions at low rates.

Again, one size doth not fit all. Thanks for posting the link!

randomguy
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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 » Tue Jun 26, 2018 5:28 pm

Sheepdog wrote:
Tue Jun 26, 2018 1:41 pm


So you think my goal was wrong. It was not the wrong goal for me. Your suggestion that it would be fun to figure out where my finances would be if I did not do what I did. It wouldn't be "fun" for me. My plans were my goal, not yours, and It has been successful in all respects. I would never suggest that you follow this. I am happy with my decision after almost 20 years. I imagine what your thoughts would be of my decision to have my stock investment percentage in retirement at only 100 minus my age, but stopped at 23% stock at age 77 (2010). I imagine you would say..."look at the money I lost by such at 23%". Maybe I am a child of the Great Depression and the fears which it brought to my parents. I spent all I wanted to spend, traveled to many countries, I give to charities a lot of money every year, have a great home, am healthy, attend the arts and sporting events and eat in nice restaurants weekly. My simple plans allowed that and still had growth of capital in my lifetime and I will still have money to give away at death (age 100+).
My investing plans has never been to get the most. I don't need the most. I invested, saved, spent to have a good retirement, spend all I want to spend, and never run out. I believed in investing safely only as much as I needed to and to survive happily. Not paying taxes was one way to reach that goal.
(And, I never earned over $100 k in my career.)
Why did you choose to optimize minimizing federal taxes? What happiness did that bring you? Was there is some joy in writing 1 5k check (big pain) instead of 10 500 (little cuts)? For most people, making 25k and paying 3k in federal taxes makes them happier than making 20k and paying 0 dollars in taxes since they have 2k more money. My guess your were in approximately this case (but probably not by that much think 5% more money not 10%). I.E. they maximize the spendable money and not minimize taxes. It is easy to get distracted in investing and end up with goals (lowest possible ER, smallest amount of funds) that might not match your real goal. Obviously you can have some reason why minimizing taxes makes you happier than maximizing spendable money. I just can't imagine what it is.

And the fun would be seeing if the choice you make to prepay taxes paid off or not. As Plato said "An unexamined life is not worth living". :) Granted it wouldn't be fun to learn you made the suboptimal choice (my guess off the limited data presented). But I also suspect it made little to no difference (call it <5%) which could also be reassuring. Or I could be totally wrong and you ended up with another 5% because of your choice and you could then feel good about it.:) And yes that is being totally results oriented:)

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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 » Tue Jun 26, 2018 5:32 pm

randomguy wrote:
Tue Jun 26, 2018 5:28 pm
Was there is some joy in writing 1 5k check (big pain) instead of 10 500 (little cuts)?
Loss aversion theory says that a single loss is preferable to a multiple losses of equivalent value. The reverse is true of gains.
“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

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 » Tue Jun 26, 2018 5:37 pm

randomguy wrote:
Tue Jun 26, 2018 5:28 pm

Why did you choose to optimize minimizing federal taxes? What happiness did that bring you?...
I don't think there's any advantage to be had by dissing Sheepdog.
That being said, I focused more on gross income and net income after taxes in retirement, rather than simply minimizing income taxes.
So, five+ years into retirement, I've been paying more income taxes per year than when working but also have more net income as well...
Attempted new signature...

international001
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by international001 » Tue Jun 26, 2018 5:52 pm

willthrill81 wrote:
Tue Jun 26, 2018 5:32 pm
randomguy wrote:
Tue Jun 26, 2018 5:28 pm
Was there is some joy in writing 1 5k check (big pain) instead of 10 500 (little cuts)?
Loss aversion theory says that a single loss is preferable to a multiple losses of equivalent value. The reverse is true of gains.
Aren;t you supposed to pass a test before joining BH? I thought only homos-economicus were allowed ;-)

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