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

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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 » Fri May 18, 2018 4:18 pm

cusetownusa wrote:
Fri May 18, 2018 2:55 pm
FiveK wrote:
Fri May 18, 2018 2:35 pm
cusetownusa wrote:
Fri May 18, 2018 2:28 pm
I guess I don't understand what you are saying because I don't understand how comparing marginal vs effective is not correct in this situation.

Most of my career I have been contributing into my trad 401k while in a 24% or higher federal tax bracket. If I retired tomorrow and started to withdraw that money to live on I would be paying 0% for the first $24,000, then 12%, then 22%. My effective tax rate would be around 10% give or take. Why wouldn't I compare the 24% to the 10%?
You can do that if you want to evaluate the overall effect of your past choices. But, good or bad, you can't change those.

Going forward, however, you do get to choose. If you don't make another dollar of traditional contributions, by your post you expect to be in the 22% bracket, correct? That means any additional traditional contributions will be withdrawn starting at a 22% rate. In other words, you should compare your marginal tax saving rate now vs. your expected marginal tax rate on withdrawals.

Does that make sense?
I see the point you are making now...I don't have nearly enough in my tax deferred accounts to where any additional contribution will be taxed at a higher marginal tax rate. Most likely I will never get to that point as that means I could have retired much sooner and kept my same standard of living.

Since my current income is way higher than my expenses I will probably always benefit from maxing out my tax deferred space.
Unless you're a 'super saver' or someone like the OP who is lucky enough to have a sizable pension, this is true for most folks.

I find it unfortunate that so many financial pundits say "Roth is always better because you'll never have to pay tax on the gains" when they obviously haven't sat down and done the math. It might shock you to know that many 'financial advisers' don't understand that if the money going into a tax-deferred account would be taxed at the same marginal rate coming out, there's no tax-arbitrage between traditional and Roth account types (i.e. you have the exact same dollars after-tax regardless of which account held the money).
“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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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 » Fri May 18, 2018 4:20 pm

CnC wrote:
Fri May 18, 2018 4:10 pm
I just think once you hit a magic number pretax contributions do not make sense.
Yes! That is something with which all should agree.

Where reasonable people can disagree is the specific value of that magic number, because that depends on assumptions for withdrawal rate, future investment returns, etc.

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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 » Fri May 18, 2018 4:20 pm

FiveK wrote:
Fri May 18, 2018 4:20 pm
CnC wrote:
Fri May 18, 2018 4:10 pm
I just think once you hit a magic number pretax contributions do not make sense.
Yes! That is something with which all should agree.

Where reasonable people can disagree is the specific value of that magic number, because that depends on assumptions for withdrawal rate, future investment returns, etc.
:beer well I'm glad we could agree on something.

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

Post by wrongfunds » Fri May 18, 2018 4:22 pm

It is thus incorrect to assume future traditional contributions can use those lower brackets.
Are you sure you really mean that? I believe the poster was talking about future distributions and might have mistyped it as contributions. Why would anybody be talking about future contributions using lower brackets?

I really don't want to bring up my $2M vs $20M example back again!

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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 » Fri May 18, 2018 4:26 pm

wrongfunds wrote:
Fri May 18, 2018 4:22 pm
It is thus incorrect to assume future traditional contributions can use those lower brackets.
Are you sure you really mean that? I believe the poster was talking about future distributions. Why would anybody be talking about future using lower brackets?
Yes. The implied ending is "...use those lower brackets when withdrawing." In other words, one should not compare today's marginal rate with the future effective rate. If some amount of future contributions could be withdrawn at 0%, etc., tax rates, then effective would be correct. But it doesn't work that way.

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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 » Fri May 18, 2018 4:29 pm

wrongfunds wrote:
Fri May 18, 2018 4:22 pm
It is thus incorrect to assume future traditional contributions can use those lower brackets.
Are you sure you really mean that? I believe the poster was talking about future distributions. Why would anybody be talking about future using lower brackets?
Wrongfunds. I notice that all/most of your quotes of prior posts are missing the author. As I have been reading your posts it is a challenge to find the context of your quote of them without the author. You will notice that with others this information is retained, just as yours is above. It would be very helpful for those reading the posts if you could post so that we can see the original author.

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 KlangFool » Fri May 18, 2018 4:30 pm

peseta wrote:
Fri May 18, 2018 4:07 pm
KlangFool wrote:
Fri May 18, 2018 3:44 pm
I disagreed. If someone can contribute to Roth 401K, that person could contribute to Trad. 401K and put the tax saving into Roth IRAs and the taxable account. A tilt towards Roth 401K is overloading the Roth space.
Again, I don't entirely disagree with your reasoning. But this assumes someone is not a max saver. If he is, there is no investment of the tax savings in Roth and the Roth 401(k) thus permits sheltering of more post-tax money.

I think the amount of savings (e.g., 1M) is less important than the ratio of traditional to Roth. Take a max saver with a 5K employer match. If that person has max-saved for a while in a traditional 401k and a regular/backdoor Roth, he will be investing in approximately a 23.5:5.5 ratio. Even discounting the 23.5k for future taxes, that is not exactly in balance.

Of course, if someone is not a max-saver, your point is very much on-target.

peseta
peseta,

<<I think the amount of savings (e.g., 1M) is less important than the ratio of traditional to Roth. >>

I disagreed. For a married couple, you need at least 1M before you can reach the 22% tax bracket at retirement. For a single person, you need at least 500K.

<<Take a max saver with a 5K employer match. If that person has max-saved for a while in a traditional 401k and a regular/backdoor Roth, he will be investing in approximately a 23.5:5.5 ratio.>>

You have to make a big assumption in order for this ratio to work. You are assuming that this person is continuously fully-employed until retirement age. Not all of us are that lucky.

KlangFool

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

Post by wrongfunds » Fri May 18, 2018 4:34 pm

RE: FiveK

I give up! Sometimes when I read some of your postings, I get the feeling that we are in violent agreement but then you say something else and I get thoroughly confused! I hope you are not playing with me : :D

The wording ""...use those lower brackets when withdrawing." implies that his MARGINAL (there; I finally said it and just for you!) tax rate during withdrawal is lower than his current MARGINAL rate. And if that is the case, traditional tax deferred makes 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 KlangFool » Fri May 18, 2018 4:35 pm

CnC wrote:
Fri May 18, 2018 4:10 pm
KlangFool wrote:
Fri May 18, 2018 3:44 pm
peseta wrote:
Fri May 18, 2018 3:31 pm
KlangFool wrote:
Fri May 18, 2018 2:05 pm
(A) is balanced and diversified across all possible future tax scenarios. (B) only works out in one possible outcome. Do you really want to bet all your retirement outcome on one tax basket?
I don't think we disagree. For me, getting closer to position (A) has meant focusing more on Roth these days, since most of my tax-privileged investment has been pre-tax. I suspect this is true for the vast majority of people, since the Roth 401(k) is so new. Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many.

I must say that the recent tax reform influenced this decision. My marginal rate fell 4%, which matters.

peseta
peseta,

1) If your tax-deferred portfolio is more than 1 million, you might be right. If not, Trad. 401K probably is still the right answer for you.

2) Don't forget about the taxable account too.

<<Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many. >>

I disagreed. If someone can contribute to Roth 401K, that person could contribute to Trad. 401K and put the tax saving into Roth IRAs and the taxable account. A tilt towards Roth 401K is overloading the Roth space.

KlangFool


Klang are you suggesting once you hit 1 million tax deferred you should start seriously considering Roth 401k contributions?

Not nessissarly do them but consider them once you hit the 1 million mark in pretax?
CnC,

Yes, for most people. For someone with a vested pension, the threshold would be lowered. All of us should calculate this number. Until then, max up Trad. 401K and all tax-deferred accounts and put the tax savings into Roth IRAs and the taxable account make the most sense.

KlangFool

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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 » Fri May 18, 2018 4:44 pm

wrongfunds wrote:
Fri May 18, 2018 4:34 pm
RE: FiveK

I give up! Sometimes when I read some of your postings, I get the feeling that we are in violent agreement but then you say something else and I get thoroughly confused! I hope you are not playing with me : :D
Nope, not playing with you. Might very well be in violent agreement! And if we were face to face, that would likely become clear quickly.
The wording ""...use those lower brackets when withdrawing." implies that his MARGINAL (there; I finally said it and just for you!) tax rate during withdrawal is lower than his current MARGINAL rate. And if that is the case, traditional tax deferred makes sense.
Oh dear...remember that the entire quote would contain (emphasis added) "...is thus incorrect to assume future traditional contributions can use those lower brackets when withdrawing."

For whatever reason, the "marginal vs. marginal" vs. "marginal vs. effective" debate has been around ~as long as Roth accounts have been available (see Roth vs Traditional 401K - earliest(?) Bogleheads thread) and continues now, more than 10 years later.... :?

Perhaps reading how another poster worked through this to reach the OMG I get it moment would be helpful?

ETA: Fixed link
Last edited by FiveK on Fri May 18, 2018 9:28 pm, edited 1 time in total.

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

Post by azanon » Fri May 18, 2018 5:57 pm

KlangFool wrote:
Fri May 18, 2018 4:35 pm
CnC wrote:
Fri May 18, 2018 4:10 pm
KlangFool wrote:
Fri May 18, 2018 3:44 pm
peseta wrote:
Fri May 18, 2018 3:31 pm
KlangFool wrote:
Fri May 18, 2018 2:05 pm
(A) is balanced and diversified across all possible future tax scenarios. (B) only works out in one possible outcome. Do you really want to bet all your retirement outcome on one tax basket?
I don't think we disagree. For me, getting closer to position (A) has meant focusing more on Roth these days, since most of my tax-privileged investment has been pre-tax. I suspect this is true for the vast majority of people, since the Roth 401(k) is so new. Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many.

I must say that the recent tax reform influenced this decision. My marginal rate fell 4%, which matters.

peseta
peseta,

1) If your tax-deferred portfolio is more than 1 million, you might be right. If not, Trad. 401K probably is still the right answer for you.

2) Don't forget about the taxable account too.

<<Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many. >>

I disagreed. If someone can contribute to Roth 401K, that person could contribute to Trad. 401K and put the tax saving into Roth IRAs and the taxable account. A tilt towards Roth 401K is overloading the Roth space.

KlangFool


Klang are you suggesting once you hit 1 million tax deferred you should start seriously considering Roth 401k contributions?

Not nessissarly do them but consider them once you hit the 1 million mark in pretax?
CnC,

Yes, for most people. For someone with a vested pension, the threshold would be lowered. All of us should calculate this number. Until then, max up Trad. 401K and all tax-deferred accounts and put the tax savings into Roth IRAs and the taxable account make the most sense.

KlangFool
Is there any particular reason you think the CFA/financial planning community isn't saying this? Most of them (just personal observation) advocate the Roth. Or how about good ole Ed Slott as another example; "go from forever tax to never tax!" I'm pretty sure Tony Robbins in his latest financial book also came out pretty strong for Roth. Is this mostly ignorance, conspiracy, or something else?

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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 » Fri May 18, 2018 6:13 pm

azanon wrote:
Fri May 18, 2018 5:57 pm
Is there any particular reason you think the CFA/financial planning community isn't saying this? Most of them (just personal observation) advocate the Roth. Or how about good ole Ed Slott as another example; "go from forever tax to never tax!" I'm pretty sure Tony Robbins in his latest financial book also came out pretty strong for Roth. Is this mostly ignorance, conspiracy, or something else?
I honestly think that people just haven't run the numbers.
“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 KlangFool » Fri May 18, 2018 6:23 pm

willthrill81 wrote:
Fri May 18, 2018 6:13 pm
azanon wrote:
Fri May 18, 2018 5:57 pm
Is there any particular reason you think the CFA/financial planning community isn't saying this? Most of them (just personal observation) advocate the Roth. Or how about good ole Ed Slott as another example; "go from forever tax to never tax!" I'm pretty sure Tony Robbins in his latest financial book also came out pretty strong for Roth. Is this mostly ignorance, conspiracy, or something else?
I honestly think that people just haven't run the numbers.
+1.

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 willthrill81 » Fri May 18, 2018 6:28 pm

willthrill81 wrote:
Fri May 18, 2018 6:13 pm
azanon wrote:
Fri May 18, 2018 5:57 pm
Is there any particular reason you think the CFA/financial planning community isn't saying this? Most of them (just personal observation) advocate the Roth. Or how about good ole Ed Slott as another example; "go from forever tax to never tax!" I'm pretty sure Tony Robbins in his latest financial book also came out pretty strong for Roth. Is this mostly ignorance, conspiracy, or something else?
I honestly think that people just haven't run the numbers.
I remembered this quote which is germane to the topic as well.

"Never attribute to malice that which is adequately explained by stupidity."
-Hanlon's razor
“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

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 peseta » Fri May 18, 2018 7:47 pm

KlangFool wrote:
Fri May 18, 2018 4:30 pm
I disagreed. For a married couple, you need at least 1M before you can reach the 22% tax bracket at retirement. For a single person, you need at least 500K.
A-ha, sorry for being slow on the uptake, now I get your reasoning. 22% married bracket starts at $77.4k. Add $24k standard deduction and you're at just over $50k $100k. At 3.5% SWR, 1M produces $35k a year taxable, 4% produces $40k. So, part of the math depends on what SWR the person is using, and how much they will be taking as capital gains from taxable (or from an HSA).

However, for the person who is maxing out tax-advantaged but not piling up much taxable on top of that, it seems to me that (especially with two-income earners with decent SS) you'll get up into that 22% bracket with far less than 1M tax-deferred, even at a 3.5% SWR. Or am I missing something?


I'm a federal employee so I will (hopefully) have at least a modest pension, so I think that also reduces that 1M "minimum limit" for me (as you point out). If I retire at my MRA I'll be just about hitting the 22% bracket with my pension alone (assuming things remain the same). The points above about these questions being very situation-specific are really important. (And, of course, who knows what the tax rates will be decades from now.)

The point you made about a VAT is also a good one. When people speculate that "taxes will be higher in the future," even if that turns out to be correct, that doesn't necessarily mean *income* taxes will be higher. There's other ways to skin the fiscal cat . . .

Thanks for the food for thought! I still maintain that the tax cut does, all things being equal, make the Roth 401(k) more attractive than it was last year. How much depends on one's personal situation, and on future events we cannot reasonably predict.

peseta

[EDIT] I'm an idiot and subtracted rather than added the standard deduction. Nonsensical part of post deleted.
Last edited by peseta on Fri May 18, 2018 7:57 pm, edited 1 time in total.

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

Post by KlangFool » Fri May 18, 2018 7:56 pm

peseta wrote:
Fri May 18, 2018 7:47 pm
KlangFool wrote:
Fri May 18, 2018 4:30 pm
I disagreed. For a married couple, you need at least 1M before you can reach the 22% tax bracket at retirement. For a single person, you need at least 500K.
A-ha, sorry for being slow on the uptake, now I get your reasoning. 22% married bracket starts at $77.4k. Subtract $24k standard deduction and you're at just over $50k. At 3.5% SWR, 1M produces $35k a year taxable, 4% produces $40k. So, part of the math depends on what SWR the person is using, and how much they will be taking as capital gains from taxable (or from an HSA).

However, for the person who is maxing out tax-advantaged but not piling up much taxable on top of that, it seems to me that (especially with two-income earners with decent SS) you'll get up into that 22% bracket with far less than 1M tax-deferred, even at a 3.5% SWR. Or am I missing something?
peseta,

1) Only 85% of the social security income is taxable.

https://taxfoundation.org/2018-tax-brackets/

2) The standard deduction is 24K. For a married couple, you need another 77K before you reach 22% tax bracket. So, you need about 100K of income. Let's be generous and assume that the Social Security Income is 50K. You still need another 50K. Assuming 4% SWR, you need 25 X 50K = 1.25 million.

<< now I get your reasoning. 22% married bracket starts at $77.4k. Subtract $24k standard deduction and you're at just over $50k.>>

3) Your calculation is wrong. The gross income is deducted 24K before you get your taxable income. So, you need 100K of gross income in order to reach 22%.

KlangFool
Last edited by KlangFool on Fri May 18, 2018 7:59 pm, edited 1 time in total.

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 peseta » Fri May 18, 2018 7:58 pm

KlangFool wrote:
Fri May 18, 2018 7:56 pm
1) Only 85% of the social security income is taxable.

https://taxfoundation.org/2018-tax-brackets/

2) The standard deduction is 24K. For a married couple, you need another 77K before you reach 22% tax bracket. So, you need about 100K of income. Let's be generous and assume that the Social Security Income is 50K. You still need another 50K. Assuming 4% SWR, you need 25 X 50K = 1.25 million.
Thanks -- I caught my error as you were posting this. Appreciate your thoughts.

peseta
Last edited by peseta on Fri May 18, 2018 8:08 pm, edited 2 times in total.

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 » Fri May 18, 2018 8:03 pm

azanon wrote:
Fri May 18, 2018 9:48 am

This is being made unnecessarily confusing. My household gross income is well under 200K, but I'm able to completely fund a $18,500 Roth 401(k) and 2, $5,500 Roth IRA accounts, despite the taxes my wife and I owe on our income. If one can do that, it is easily a better choice than using traditionals instead, then saving the leftover money (cause you got the tax break) into a taxable account. Hope that clears up what I'm saying.
smile and be 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 KlangFool » Fri May 18, 2018 8:05 pm

peseta wrote:
Fri May 18, 2018 7:58 pm
KlangFool wrote:
Fri May 18, 2018 7:56 pm
1) Only 85% of the social security income is taxable.

https://taxfoundation.org/2018-tax-brackets/

2) The standard deduction is 24K. For a married couple, you need another 77K before you reach 22% tax bracket. So, you need about 100K of income. Let's be generous and assume that the Social Security Income is 50K. You still need another 50K. Assuming 4% SWR, you need 25 X 50K = 1.25 million.
Thanks -- I caught my error as you were posting this. Appreciate your thoughts.

peseta
peseta,

So, you should realize by now. Many folks that recommend Roth 401K as the correct answer for most people are simply wrong. Actually, the reverse is true. Roth 401K is the wrong answer for 90+% of people since only 10% of the US Household has a net worth of 1 million or more. Out of those households, only those with 1 million in the tax-deferred account may use Roth 401K.

There are some exceptions. But, it will be for folks with a very sizable pension.

KlangFool

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 » Fri May 18, 2018 8:13 pm

If your retirement MFJ expense needs are about $100k, assuming your tax bracket is under 15% (401k/ira withdrawals, and/or SS, and side-gig income) , you can possibly do 0% capital gains harvesting from taxable. No need to withdraw 401k monies upfront, can wait/grow till RMDs kick in.

If not much in taxable, you could consider Roth conversions till you fill up to 22% tax bucket.

If you've built up (or converted to) sufficient Roth, you could possibly qualify for ACA subsidies..

Tax diversification is crucial.

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 » Fri May 18, 2018 8:21 pm

It really does not matter. If you are worried about the difference between 10 and 20 percent tax, and can not adapt to that, then you probably need to keep working. Sad but true
Last edited by dknightd on Fri May 18, 2018 8:25 pm, edited 1 time in total.

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 peseta » Fri May 18, 2018 8:21 pm

KlangFool wrote:
Fri May 18, 2018 8:05 pm
So, you should realize by now. Many folks that recommend Roth 401K as the correct answer for most people are simply wrong. Actually, the reverse is true. Roth 401K is the wrong answer for 90+% of people since only 10% of the US Household has a net worth of 1 million or more. Out of those households, only those with 1 million in the tax-deferred account may use Roth 401K.

There are some exceptions. But, it will be for folks with a very sizable pension.

KlangFool
This is making more sense to me, assuming the tax brackets don't change dramatically. Of course, this advice cuts somewhat against the advice some give in this forum of "always max traditional." And I definitely agree with you that financial "gurus" are far too prone to glibly recommend the Roth. I think Ric Edelman's show is a shell of its former self but, to his credit, he has always said the Roth is overblown.

I think the devil's advocate position would be for, say, someone in the current 12% tax bracket: 12% federal tax is *cheap.* Even if there is a chance you would have been better off putting money in tax-deferred, take the bird in the hand now and do Roth. I think Clark Howard has made this risk-based argument before, which is a different point than claiming that the Roth is likely to be mathematically optimal in the future, because who knows.

One last thought -- people with an employer match will still be getting additional money in their traditional 401(k) over the years. For example, I get over $8k in 401(k) match a year. That should also reduce that "1M maximum," no? How much is probably a bit difficult to calculate, of course.

peseta
Last edited by peseta on Fri May 18, 2018 8:24 pm, edited 1 time in total.

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

Post by wrongfunds » Fri May 18, 2018 8:22 pm

But if I keep on working, I will have even bigger RMD.

(Some people say the above!)

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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 » Fri May 18, 2018 8:40 pm

peseta wrote:
Fri May 18, 2018 8:21 pm
KlangFool wrote:
Fri May 18, 2018 8:05 pm
So, you should realize by now. Many folks that recommend Roth 401K as the correct answer for most people are simply wrong. Actually, the reverse is true. Roth 401K is the wrong answer for 90+% of people since only 10% of the US Household has a net worth of 1 million or more. Out of those households, only those with 1 million in the tax-deferred account may use Roth 401K.

There are some exceptions. But, it will be for folks with a very sizable pension.

KlangFool
This is making more sense to me, assuming the tax brackets don't change dramatically. Of course, this advice cuts somewhat against the advice some give in this forum of "always max traditional." And I definitely agree with you that financial "gurus" are far too prone to glibly recommend the Roth. I think Ric Edelman's show is a shell of its former self but, to his credit, he has always said the Roth is overblown.
peseta,

<<this advice cuts somewhat against the advice some give in this forum of "always max traditional." >>

I do not understand why you say that. It is not against the advice of "always max traditional". In fact, I am one of those guys. To be specific, my advice is
Max up your tax-deferred accounts and put the tax savings into Roth IRAs and the taxable account.

Even if someone maxes his/her Trad. 401K, it is hard to reach 1 million. And, in most cases, the person could early retire way before it reaches 1 million. I max my Trad. 401K whenever I am employed. This is a single income household. After 20+ years, my tax-deferred portfolio is only 500K to 600K. My taxable and Roth is another 500K to 600K. My FI number is 1.5 million. My tax-deferred account will never reach 1 million. I will FI before that happened.

<<For example, I get over $8k in 401(k) match a year. That should also reduce that "1M maximum," no? How much is probably a bit difficult to calculate, of course.>>

I do not understand why you say that? Both employer and employee contribution are added together for that 1 million.

KlangFool

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 KlangFool » Fri May 18, 2018 8:47 pm

peseta wrote:
Fri May 18, 2018 8:21 pm

I think the devil's advocate position would be for, say, someone in the current 12% tax bracket: 12% federal tax is *cheap.* Even if there is a chance you would have been better off putting money in tax-deferred, take the bird in the hand now and do Roth.
peseta,

Why someone in the 12% tax bracket chooses to pay 12% tax instead of 0% or getting a tax refund?

At that tax bracket, if someone contributes enough to the Trad. 401K, they could qualify for tax credits such as Saver's Credit or EITC?

https://www.bogleheads.org/wiki/Saver%27s_credit

https://www.irs.gov/credits-deductions/ ... tax-credit

So, it is not necessarily safe to contribute to Roth 401K at 12% or lower tax bracket either.

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

Post by peseta » Fri May 18, 2018 9:02 pm

KlangFool wrote:
Fri May 18, 2018 8:40 pm
I do not understand why you say that. It is not against the advice of "always max traditional". In fact, I am one of those guys. To be specific, my advice is
Max up your tax-deferred accounts and put the tax savings into Roth IRAs and the taxable account.

Even if someone maxes his/her Trad. 401K, it is hard to reach 1 million. And, in most cases, the person could early retire way before it reaches 1 million. I max my Trad. 401K whenever I am employed. This is a single income household. After 20+ years, my tax-deferred portfolio is only 500K to 600K. My taxable and Roth is another 500K to 600K. My FI number is 1.5 million. My tax-deferred account will never reach 1 million. I will FI before that happened.
Well, some do advocate maximizing traditional under any circumstances. You suggest doing so until a limit is reached, which is different. Some folks can sock $55k into a SEP anually (makes me jealous), so they can certainly hit $1M.
KlangFool wrote:
Fri May 18, 2018 8:40 pm
I do not understand why you say that? Both employer and employee contribution are added together for that 1 million.
I was suggesting that it could change one's stopping point. Let's hypothetically say someone hits $1m in traditional 401(k) at age 55, but plans to work 7 more years. From age 55-62, even though that person has switched to Roth 401(k), his employer will still be making matching contributions to the traditional account, totaling $40k (leaving inflation out of it). Thus, he really needs less than $1m in the traditional.

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 wrongfunds » Fri May 18, 2018 9:06 pm

This topic is a great example how people extrapolate their own situation to others without even bothering to understand that others are in different situation. Similar thing is taking place in the other topic which OP is being advised to do Roth conversion even though that is the wrong thing in his case.

This topic has 270 replies but at least one person might have changed their thinking after this long discussion. It should not have to be this difficult.

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 peseta » Fri May 18, 2018 9:06 pm

KlangFool wrote:
Fri May 18, 2018 8:47 pm
Why someone in the 12% tax bracket chooses to pay 12% tax instead of 0% or getting a tax refund?

At that tax bracket, if someone contributes enough to the Trad. 401K, they could qualify for tax credits such as Saver's Credit or EITC?

https://www.bogleheads.org/wiki/Saver%27s_credit

https://www.irs.gov/credits-deductions/ ... tax-credit

So, it is not necessarily safe to contribute to Roth 401K at 12% or lower tax bracket either.
I personally agree. But, that of course assumes that the taxpayer will in fact be in the 0% bracket and those credits will be there down the road at retirement. If the law changes, who knows. Thus, the case could be made that Roth-ifying at low tax brackets minimizes downside risk. This is a better argument than the typical trope that "Roth is always best."

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 golfCaddy » Fri May 18, 2018 9:07 pm

It's a good rule for most people most of the time. It doesn't work as well for people getting a pension, expecting a substantial inheritance, who got a one time windfall, by winning the startup lottery or the actual lottery, super savers who save at least 1x their expenses each year, those with a SAHS who might re-enter the workforce after the kids reach a certain age, or students or residents who expect to see substantial income 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 KlangFool » Fri May 18, 2018 9:10 pm

peseta wrote:
Fri May 18, 2018 9:02 pm
KlangFool wrote:
Fri May 18, 2018 8:40 pm
I do not understand why you say that? Both employer and employee contribution are added together for that 1 million.
I was suggesting that it could change one's stopping point. Let's hypothetically say someone hits $1m in traditional 401(k) at age 55, but plans to work 7 more years. From age 55-62, even though that person has switched to Roth 401(k), his employer will still be making matching contributions to the traditional account, totaling $40k (leaving inflation out of it). Thus, he really needs less than $1m in the traditional.

peseta
peseta,

Come on. So, this person has 1 million in the tax-deferred account and he is worrying that he has an additional ( 40K/25) ~ $1,600 income over the 22% tax bracket? Please note that the actual number is 1.25 million or higher. 1 million is safe enough.

Please note that if this person has 1 million in the tax-deferred account, he/she probably has another 1 million in the Roth and the taxable. There are probably not many folks that choose to work another 7 years if they have 2 million.

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

Post by peterinjapan » Fri May 18, 2018 9:12 pm

Sadly Roth goes away very quickly. I've always earned too much to get a Roth, though I am aggressively doing them for my kids. It's why I always tell young people, whatever you do, learn what this thing is as early as you can.

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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 » Fri May 18, 2018 9:14 pm

peseta wrote:
Fri May 18, 2018 9:06 pm
KlangFool wrote:
Fri May 18, 2018 8:47 pm
Why someone in the 12% tax bracket chooses to pay 12% tax instead of 0% or getting a tax refund?

At that tax bracket, if someone contributes enough to the Trad. 401K, they could qualify for tax credits such as Saver's Credit or EITC?

https://www.bogleheads.org/wiki/Saver%27s_credit

https://www.irs.gov/credits-deductions/ ... tax-credit

So, it is not necessarily safe to contribute to Roth 401K at 12% or lower tax bracket either.
I personally agree. But, that of course assumes that the taxpayer will in fact be in the 0% bracket and those credits will be there down the road at retirement. If the law changes, who knows. Thus, the case could be made that Roth-ifying at low tax brackets minimizes downside risk. This is a better argument than the typical trope that "Roth is always best."

peseta
peseta,

1) I am not talking about retirement aka future here. There are folks at that income/tax bracket level use the Trad. 401K and Trad. IRAs to earn those tax credit now. Why would they want to contribute to the Roth 401k?

In fact, I did that for one year when I was unemployed for part of the year. I received EITC.

2) You need earned income in order to get those tax credits. So, a person cannot be fully-retired and claim those tax credits.

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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 » Fri May 18, 2018 9:17 pm

FiveK wrote:
Fri May 18, 2018 4:44 pm

For whatever reason, the "marginal vs. marginal" vs. "marginal vs. effective" debate has been around ~as long as Roth accounts have been available (see Roth vs Traditional 401K - earliest(?) Bogleheads thread) and continues now, more than 10 years later.... :?

Perhaps reading how another poster worked through this to reach the OMG I get it! moment would be helpful?
I started reading that one. I am really amused by how right livesoft had been and how wrong most others who were predicting tax rates going nowhere but up in 2008.

I am hoping that before we reach 300 replies to the current topic, we will see another "OMG I get it" reply OR may be not :sharebeer

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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 » Fri May 18, 2018 9:22 pm

KlangFool wrote:
Fri May 18, 2018 9:10 pm
peseta,

Come on. So, this person has 1 million in the tax-deferred account and he is worrying that he has an additional ( 40K/25) ~ $1,600 income over the 22% tax bracket? Please note that the actual number is 1.25 million or higher. 1 million is safe enough.

Please note that if this person has 1 million in the tax-deferred account, he/she probably has another 1 million in the Roth and the taxable. There are probably not many folks that choose to work another 7 years if they have 2 million.

KlangFool
You're right that for someone close to retirement (probably most) it's chump change. But folks with substantial balances in traditional without much in Roth or taxable do exist. These tend to be people with decent, steady income who have saved >$10k in a traditional 401(k) for 15 years or more. Someone who started doing that at 25 in 1998 might have $700k or even more in his traditional account in 2018 and might hit that $1m by age 50, all without saving much in taxable or Roth (remember, if one is above the Roth income limits, the backdoor Roth didn't exist until recently). That 50-year-old might easily work another decade or more with employer-provided traditional matching contributions.

In any event, I think you make some very good points, overall.

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 ad2007 » Fri May 18, 2018 9:25 pm

Klangfool, (or anyone else who understands this)

Can you please go over again why it makes sense to direct money into Roth 401K once the tax deferred account reaches $1M? Or some magic number? How do figure that number?

Oh, and I've not gotten to the "OMG, I get it". Actually getting more confused.

Thanks,

ad

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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 » Fri May 18, 2018 9:26 pm

This needs to be repeated. Even after 10 years since mptfan posted this, it is still true (may be except taxes always going up part but nobody could have guessed otherwise at that time)
mptfan wrote:
Wed Mar 05, 2008 11:07 am
For those in their peak earning years, it is usually better to maximize tax deductible plans (401k, 403b, SIMPLE IRA, SEP IRA, deductible traditional IRA) before investing in non-tax deductible plans (Roth IRA) because:

1) You get an immediate tax reduction equal to your marginal tax rate. If you are currently in your peak earning years, you are probably in a high marginal tax bracket, say 25% or higher, and you will save 25% or more of every dollar you invest in a tax deductible plan. Then, when you retire and begin withdrawing that money, you will pay taxes based on your lower AVERAGE tax rate (aka effective tax rate) in retirement, not your marginal tax rate in retirement. Your average tax rate is almost always lower than your marginal tax rate. If you pay state income tax, your savings are even more dramatic. People who suggest that a Roth IRA and a 401k are a wash if you will be in the same tax bracket in retirement simply don't understand this.

2) Your fixed expenses in retirement may be lower than they are now (no mortgage, no tuition bills or other child related expenses, no car payments, no work related expenses). You will also no longer need to save a chunk of your income for retirement. Therefore, when you retire, you will likely be able to maintain the same standard of living on less income, which means you will be in a lower marginal tax bracket in retirement. If you want to live a more extravagant lifestyle and withdraw money into the higher tax brackets, so be it, you will have that choice. To that extent, and to that extent only, the Roth may prove to be a better choice in the future, but that does not prove that a Roth is better choice as the first option for your investment money now.

3) By contributing to tax deferred plans, you can reduce your current adjusted gross income (AGI) below the threshold at which you can fully take advantage of certain tax credits or tax deductions, such as the child tax credit, or the earned income credit, or the student loan interest deduction, or other credits. If you did not fully take advantage of tax deductible investment plans (and instead contribute to a Roth IRA), your AGI would be correspondingly higher, and you would lose some tax credits, or, the amount of certain tax credits would be reduced. By contrast, investing in a Roth does not lower your AGI.

4) While I agree with the consensus that tax rates will likely be higher in the future, I think it's somewhat naive to have faith that congress will never tax Roth withdrawals, no matter how desperate our government may be in the future for tax revenue. There is a lot of tinkering that can be done in the future, such as reducing the eligibility to take tax free withdrawals, limiting the amount of annual tax free withdrawals, etc. It can (and I think it will) happen.

5) You will retain the option of converting some of your tax deductible funds to a Roth IRA at lower marginal tax rates in the future. For example, you may decide to retire before you are eligible for social security benefits, and withdraw taxable savings to pay your expenses until social security begins. By doing this, you will be using "return of capital" which is not taxed as income, and you may find yourself in a very low tax bracket for a period of time, maybe even a zero tax bracket, and you can use up your lower tax brackets during that time period to convert tax deferred IRAs to a Roth IRA and pay tax on that money at your then lower tax rates. By contrast, funds contributed to a Roth IRA can never be converted to a traditional deductible IRA.

6) Almost everyone will die with some money. Some will die with a great deal of money, especially those of us who plan carefully and consider safe withdrawal rates. I have even heard some suggest that they do not plan on touching their principal during retirement, and some have stated that they continue to be net savers even after retirement. Therefore, given the fact that we will likely die with some significant amount of money left over, we will never have to pay taxes on that chunk of money which was tax deferred. Our heirs will have to worry about paying the deferred taxes on that money. So, I much rather save the taxes now, allow my money to grow tax free, and defer a significant chunk of that tax liability beyond my grave to my heirs. I refuse to voluntarily pay more taxes now so that my heirs will enjoy the benefit of paying less taxes when I'm dead.

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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 » Fri May 18, 2018 9:31 pm

wrongfunds wrote:
Fri May 18, 2018 9:17 pm
I am hoping that before we reach 300 replies to the current topic, we will see another "OMG I get it" reply OR may be not :sharebeer
ad2007 wrote:
Fri May 18, 2018 9:25 pm
Oh, and I've not gotten to the "OMG, I get it". Actually getting more confused.
That link somehow came up "undefined". Fixed it in the post, but it's here (OMG I get it) if you don't want to search back.

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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 » Fri May 18, 2018 9:36 pm

ad2007 wrote:
Fri May 18, 2018 9:25 pm
Klangfool, (or anyone else who understands this)

Can you please go over again why it makes sense to direct money into Roth 401K once the tax deferred account reaches $1M? Or some magic number? How do figure that number?

Oh, and I've not gotten to the "OMG, I get it". Actually getting more confused.

Thanks,

ad

There isn't a magical number forever one. What people are saying is that you want to go tradition up til the last marginal tax bracket and then switch to roth.
So if the tax rates are
0%
12%
22%
24%
32%.

If you expect to be in the 22% bracket in retirement, you want enough traditional to fill up the 0 and 12% brackets. If you are in the 32% bracket, you want to be filling up 0,12,22 and 24%. Note filling up to the last bracket is pretty neutral (i.e. you don't gain or lose much) and it is only when you go up another bracket (35%) that you get big differences.

Obviously this is really hard to get exact as you need to make good predications about gains, inflation and future tax changes. For people in the 22% bracket today (77k AGI for married couples), you tend to have about 40k of SS (2 people) and need about 60k of income. 60k of income is around 1-1.2 million dollars (this is based on RMDs not the SWR you pick. You can invest the RMD but you will pay taxes on it now).

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

Post by MossySF » Fri May 18, 2018 9:39 pm

Let's see if we can break this into general population versus Bogleheads:

General population: Odds are they will undersave and hence they need the tax deductions immediately in order to fund their living expenses. They won't be comparing contributing $2000 tradition versus $2500 Roth (including the tax hit). And with their savings rates, odds are they'll be in the near-0% income rate anyways during retirement. Traditional for sure.

High Income Boglehead: They are in the top marginal rate right now. Hence, it's unlikely they'll be in a higher tax bracket. Yeah yeah yeah, future tax law changes, etc -- have you noticed the trend in the USA? Taxes go down, services go down, people complain -- tax rates go down even more to try to jump-start the supply-side economy. I'd put the odds of consumption taxes/service fees going up over income taxes going up.

Regular Boglehead: At these income levels, there are income phase-outs for credits and deductions that make traditional contributions even more important. For example, child tax credits, rental loss deductions, retirement savers credits, earned income credits, etc. An easy example for the average household making 77K -- the retirement savers tax credit threshold is 63K. Put 14K into a traditional 401K and now you're under the limit and can get an additional 1400 tax credit -- that means your marginal rate for your contributions was not 12%/22% but 22%/32%.

Low Income Boglehead: If you already qualify for all credits & deductions without further AGI reductions, Roth contributions for the win!
Last edited by MossySF on Fri May 18, 2018 9:49 pm, edited 3 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 KlangFool » Fri May 18, 2018 9:40 pm

peseta wrote:
Fri May 18, 2018 9:22 pm
KlangFool wrote:
Fri May 18, 2018 9:10 pm
peseta,

Come on. So, this person has 1 million in the tax-deferred account and he is worrying that he has an additional ( 40K/25) ~ $1,600 income over the 22% tax bracket? Please note that the actual number is 1.25 million or higher. 1 million is safe enough.

Please note that if this person has 1 million in the tax-deferred account, he/she probably has another 1 million in the Roth and the taxable. There are probably not many folks that choose to work another 7 years if they have 2 million.

KlangFool
You're right that for someone close to retirement (probably most) it's chump change. But folks with substantial balances in traditional without much in Roth or taxable do exist. These tend to be people with decent, steady income who have saved >$10k in a traditional 401(k) for 15 years or more. Someone who started doing that at 25 in 1998 might have $700k or even more in his traditional account in 2018 and might hit that $1m by age 50, all without saving much in taxable or Roth (remember, if one is above the Roth income limits, the backdoor Roth didn't exist until recently). That 50-year-old might easily work another decade or more with employer-provided traditional matching contributions.

In any event, I think you make some very good points, overall.

peseta
peseta,

<<Someone who started doing that at 25 in 1998 might have $700k or even more in his traditional account in 2018 >>

And, that person would have 1.4 million or more considering all accounts.

<<all without saving much in taxable or Roth>>

Usually, that assumption is wrong.

<<might hit that $1m by age 50, >>

The person could switch to Roth 401K at that time.

<<That 50-year-old might easily work another decade or more with employer-provided traditional matching contributions.>>

Why would that person work another decade? Time is more precious than money at that age.

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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 » Fri May 18, 2018 9:43 pm

wrongfunds wrote:
Fri May 18, 2018 9:26 pm
This needs to be repeated. Even after 10 years since mptfan posted this, it is still true (may be except taxes always going up part but nobody could have guessed otherwise at that time)
<snip>
Unfortunately mptfan got the first point wrong, while Redbeard and Greenberry (see their posts in that thread) were correct. And people continue to be misled today....

Many of mptfan's other points are indeed good.

Of course, as dknightd observed, the difference between a correct and incorrect choice for traditional vs. Roth in most cases won't be huge.

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

Post by golfCaddy » Fri May 18, 2018 9:48 pm

wrongfunds wrote:
Fri May 18, 2018 9:26 pm
This needs to be repeated. Even after 10 years since mptfan posted this, it is still true (may be except taxes always going up part but nobody could have guessed otherwise at that time)
mptfan wrote:
Wed Mar 05, 2008 11:07 am
For those in their peak earning years, it is usually better to maximize tax deductible plans (401k, 403b, SIMPLE IRA, SEP IRA, deductible traditional IRA) before investing in non-tax deductible plans (Roth IRA) because:

1) You get an immediate tax reduction equal to your marginal tax rate. If you are currently in your peak earning years, you are probably in a high marginal tax bracket, say 25% or higher, and you will save 25% or more of every dollar you invest in a tax deductible plan. Then, when you retire and begin withdrawing that money, you will pay taxes based on your lower AVERAGE tax rate (aka effective tax rate) in retirement, not your marginal tax rate in retirement. Your average tax rate is almost always lower than your marginal tax rate. If you pay state income tax, your savings are even more dramatic. People who suggest that a Roth IRA and a 401k are a wash if you will be in the same tax bracket in retirement simply don't understand this.
This is true for most people. However, many people may have enough taxable income from other sources to fill up the 10% and 12% brackets, or tax deferred withdrawals could affect the amount of SS that is taxable. It's not a binary choice either. You don't have to be 100% tax deferred or 100% roth.

2) Your fixed expenses in retirement may be lower than they are now (no mortgage, no tuition bills or other child related expenses, no car payments, no work related expenses). You will also no longer need to save a chunk of your income for retirement. Therefore, when you retire, you will likely be able to maintain the same standard of living on less income, which means you will be in a lower marginal tax bracket in retirement. If you want to live a more extravagant lifestyle and withdraw money into the higher tax brackets, so be it, you will have that choice. To that extent, and to that extent only, the Roth may prove to be a better choice in the future, but that does not prove that a Roth is better choice as the first option for your investment money now.
I don't see the point in saving money unless you plan to spend it eventually.
6) Almost everyone will die with some money. Some will die with a great deal of money, especially those of us who plan carefully and consider safe withdrawal rates. I have even heard some suggest that they do not plan on touching their principal during retirement, and some have stated that they continue to be net savers even after retirement. Therefore, given the fact that we will likely die with some significant amount of money left over, we will never have to pay taxes on that chunk of money which was tax deferred. Our heirs will have to worry about paying the deferred taxes on that money. So, I much rather save the taxes now, allow my money to grow tax free, and defer a significant chunk of that tax liability beyond my grave to my heirs. I refuse to voluntarily pay more taxes now so that my heirs will enjoy the benefit of paying less taxes when I'm dead.
I can understand being extremely frugal throughout life if your goal is to leave a lot to your heirs, but that doesn't seem to be the case here. When you read points 2 and 6 together, there seems to be a richest man in the graveyard mentality.
Last edited by golfCaddy on Fri May 18, 2018 9:52 pm, edited 3 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 KlangFool » Fri May 18, 2018 9:49 pm

ad2007 wrote:
Fri May 18, 2018 9:25 pm
Klangfool, (or anyone else who understands this)

Can you please go over again why it makes sense to direct money into Roth 401K once the tax deferred account reaches $1M? Or some magic number? How do figure that number?

Oh, and I've not gotten to the "OMG, I get it". Actually getting more confused.

Thanks,

ad
ad2007,

It is easier to explain if you state your marginal tax rate and whether you are filing single or married. If you are married, do you have kids?

Then, we can go over your numbers. It is easier for you because you know your own tax situation and how much tax that you pay now.

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 KlangFool » Fri May 18, 2018 9:54 pm

FiveK wrote:
Fri May 18, 2018 9:43 pm
wrongfunds wrote:
Fri May 18, 2018 9:26 pm
This needs to be repeated. Even after 10 years since mptfan posted this, it is still true (may be except taxes always going up part but nobody could have guessed otherwise at that time)
<snip>
Unfortunately mptfan got the first point wrong, while Redbeard and Greenberry (see their posts in that thread) were correct. And people continue to be misled today....

Many of mptfan's other points are indeed good.

Of course, as dknightd observed, the difference between a correct and incorrect choice for traditional vs. Roth in most cases won't be huge.
FiveK,

I disagreed. That statement is only true if the person is continuously fully-employed. Then, he/ she has the luxury of a long career to accumulate the portfolio. For some of us, we have limited career lifespan. The choice for Trad. versus Roth is the difference between we reach our FI number before long-term unemployment or under-employment or not.

The Trad. folks can reach the FI number a few years before the Roth folks. And, that is a world of difference.

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 randomguy » Fri May 18, 2018 9:57 pm

KlangFool wrote:
Fri May 18, 2018 8:05 pm
peseta wrote:
Fri May 18, 2018 7:58 pm
KlangFool wrote:
Fri May 18, 2018 7:56 pm
1) Only 85% of the social security income is taxable.

https://taxfoundation.org/2018-tax-brackets/

2) The standard deduction is 24K. For a married couple, you need another 77K before you reach 22% tax bracket. So, you need about 100K of income. Let's be generous and assume that the Social Security Income is 50K. You still need another 50K. Assuming 4% SWR, you need 25 X 50K = 1.25 million.
Thanks -- I caught my error as you were posting this. Appreciate your thoughts.

peseta
peseta,

So, you should realize by now. Many folks that recommend Roth 401K as the correct answer for most people are simply wrong. Actually, the reverse is true. Roth 401K is the wrong answer for 90+% of people since only 10% of the US Household has a net worth of 1 million or more. Out of those households, only those with 1 million in the tax-deferred account may use Roth 401K.

There are some exceptions. But, it will be for folks with a very sizable pension.

KlangFool
You are wrong and here is why. Most people don't understand math.:) You tell them to save 10k/year and they are saving 10k/year no matter what. Having them do it in a ROTH is a way to trick them into saving 22% more. Yes in theory they might end up with another 10-15% by using a tIRA but they will not do that. They will spend the money. Think of it as something like Dave Ramsey's snowball for paying off debt. It is totally stupid mathematically. But a lot of people say it helped them pay off their debt. Both of those statements can be true.

I would actually love to see someone run a cradle to grave simplified example to see what the difference between the two approaches. Doing something like 100k salary, saving 15k/year from 25-65, 40k/year SS starting at 65 and say 7% nominal return and 3% inflation, My guess is that we are going to be talking about less than 10% differences between the 2 (or 3 if you want to go tax deferred and then roth) approaches. For this "typical" type couple much of the gains from the lower tax brackets is counteracted by SS taxation (somewhere like a 5%-10% tax). You need special situations (a lot more spending in retirement than when working or a lot lower rates from say a move from CA to FL) to get big difference

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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 » Fri May 18, 2018 9:59 pm

KlangFool wrote:
Fri May 18, 2018 9:54 pm
FiveK wrote:
Fri May 18, 2018 9:43 pm
...in most cases....
For some of us....
Agreed.

randomguy
Posts: 6010
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Fri May 18, 2018 10:06 pm

KlangFool wrote:
Fri May 18, 2018 9:40 pm

<<That 50-year-old might easily work another decade or more with employer-provided traditional matching contributions.>>

Why would that person work another decade? Time is more precious than money at that age.

KlangFool
Why would someone stop working just because they have a bunch of money?:) Some people only work for money. Others find that being productive brings a ton of satisfaction. Take a guy like MMM. He now has plenty of money to retire. He keeps on working because he finds it satisfying. Think about how many people work for free. Or if you want the absurd examples, why does Mark Zuckerberg, Lebron James, Mick Jagger, and so on keep showing up for work despite having enough money for a dozen lifetimes. Heck a lot of people who I think have boring careers (say janitor) still take a ton of pride in their work and derive meaning from it. For them the 1000+ hours/year you don't spent working is plenty.

ad2007
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by ad2007 » Fri May 18, 2018 10:12 pm

KlangFool wrote:
Fri May 18, 2018 9:49 pm
ad2007 wrote:
Fri May 18, 2018 9:25 pm
Klangfool, (or anyone else who understands this)

Can you please go over again why it makes sense to direct money into Roth 401K once the tax deferred account reaches $1M? Or some magic number? How do figure that number?

Oh, and I've not gotten to the "OMG, I get it". Actually getting more confused.

Thanks,

ad
ad2007,

It is easier to explain if you state your marginal tax rate and whether you are filing single or married. If you are married, do you have kids?

Then, we can go over your numbers. It is easier for you because you know your own tax situation and how much tax that you pay now.

KlangFool
OK...I'll play.

Married filling jointly, 2 kids, no state, fed: 39.5%, effective 30%

Combined 401K over $1M (hence my interest in that magic number), Roth $400K, no pension.

So... is there a number at which it I should switch from 401K to Roth? My plan was to keep going and during retirement, try to do Roth conversion.

randomguy
Posts: 6010
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Fri May 18, 2018 10:25 pm

ad2007 wrote:
Fri May 18, 2018 10:12 pm
KlangFool wrote:
Fri May 18, 2018 9:49 pm
ad2007 wrote:
Fri May 18, 2018 9:25 pm
Klangfool, (or anyone else who understands this)

Can you please go over again why it makes sense to direct money into Roth 401K once the tax deferred account reaches $1M? Or some magic number? How do figure that number?

Oh, and I've not gotten to the "OMG, I get it". Actually getting more confused.

Thanks,

ad
ad2007,

It is easier to explain if you state your marginal tax rate and whether you are filing single or married. If you are married, do you have kids?

Then, we can go over your numbers. It is easier for you because you know your own tax situation and how much tax that you pay now.

KlangFool
OK...I'll play.

Married filling jointly, 2 kids, no state, fed: 39.5%, effective 30%

Combined 401K over $1M (hence my interest in that magic number), Roth $400K, no pension.

So... is there a number at which it I should switch from 401K to Roth? My plan was to keep going and during retirement, try to do Roth conversion.
35% bracket ends at 600k. Assume 5% RMDs (start lower, climb higher) and we get 600k/.05= 12 million dollars. Now that is with todays rates. Maybe you think the 32% bracket will go up to 40% in the future. Then fill up to say the 24% bracket (315k= 6.3 million) would be a win.

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FiveK
Posts: 5146
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK » Fri May 18, 2018 10:25 pm

ad2007 wrote:
Fri May 18, 2018 10:12 pm
Married filling jointly, 2 kids, no state, fed: 39.5%, effective 30%

Combined 401K over $1M (hence my interest in that magic number), Roth $400K, no pension.

So... is there a number at which it I should switch from 401K to Roth? My plan was to keep going and during retirement, try to do Roth conversion.
For you, using the 37% federal bracket as a target:
($624K minus expected income from everything other than traditional withdrawals) / (planned withdrawal ratio).

E.g., for $100K/yr from pension, SS, etc., and a 4% withdrawal ratio:
($624K - $100K) / 0.04 = $13,100,000.

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