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

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

Fri May 18, 2018 10:12 pm
KlangFool wrote:
Fri May 18, 2018 9:49 pm
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,

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.

39.5% no longer exist in 2018. Let's assume that it is 37%.

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

24K standard deduction. Let's assume 50K Social Security Income

It takes about 100K to reach 22%. Deducting Social Security Income of 50K, you get 25 X 50K = 1.25 million.

It takes about 24K + 165K = 189K to reach 24%. Minus 50K, you get 139K. 25 X 193K ~ 4.825 million

It takes about 24K + 315K = 339K to reach 32%. Minus 50K, you get 289K. 25 X 289 = 7.225 million.

It takes about 24K + 400K = 424K to reach 35%. Minus 50K, you get 374K. 25 X 374K = 9.35 million

KlangFool

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

\$6 - \$13M sounds good - and now I see the calculations too. Whew, thank you so much, thought I was screwing something up. I'll be heading back to the salt mine and keep adding to 401K a bit more.

I'll stop hijacking this thread now.

Thank you.

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

\$13M? That number sounds vaguely familiar! I think there was a poster here who wanted to accumulate \$13M before calling himself FI. I wonder what happened to him?

sc9182
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### Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Banking 100% on high SS and/or Pension at cost of ignoring 401k/ira or Roth or taxable may not be smart. Scenarios where you need lumpsum amounts due to some life events, neither SS nor pensions offer that flexibility. Also, if you are out of loop for extended period of time (incarceration, extended away from US homeland etc), own SS may take a pause; whereas IRA withdrawals doesn't need to pause to continue run your family.

Also, if there are terminal scenarios, requiring expensive care - traditional IRA may render better payout (even after 10% withholding) than Roth., just saying.
Last edited by sc9182 on Sat May 19, 2018 7:52 am, edited 2 times in total.

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

KlangFool wrote:
Fri May 18, 2018 10:28 pm

KlangFool
106k/year annual contribution (53k for you and wife), 7% real returns and you are looking at 21 million after 40 years. Seems pretty doable:) Or if you invest with Dave Ramsey and get 10% real you are looking at 47 million. Definitely should have done the ROTH. And we haven't even talked about your defined benefit plans yet for another 4.5 million or so, 403, and who knows what else:)

n00b590
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### Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

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?
Roth is more likely to be the right choice for the average person who might not invest the tax savings from a traditional IRA contribution.

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

Traditional is better than Roth for nearly everyone.

The only reason people even do Roth is because they're not allowed to do Traditional, due to their higher income. If the limits didn't exist, everyone would do Traditional other than the very bottom earners.

This is especially true for people who plan on retiring early, because they can do a Roth conversion later. Delay your taxes as much as possible, people. Deal with it later.

And I still don't understand how someone can have a higher taxable income in retirement than their working years.

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

JustinR wrote:
Sat May 19, 2018 4:03 am
... I still don't understand how someone can have a higher taxable income in retirement than their working years.
Combination of pensions, social security, real estate income, and interest.
It happens, and I understand the problem, and am sympathetic to complaints about how tax money is used, but am more envious of the "problem" than concerned about making sure that doesn't happen to me... Bring it.
Seriously though, if you can see it coming then using a Roth can be a good tool for handling it, but I just don't believe that's a wide spread issue.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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

wrongfunds wrote:
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.
No one else can change their thinking. I took the one spot.

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

n00b590 wrote:
Sat May 19, 2018 12:28 am
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?
Roth is more likely to be the right choice for the average person who might not invest the tax savings from a traditional IRA contribution.
n00b590,

Why do you say that? In that case, that person chooses to spend more of his money instead of paying more taxes. There is nothing wrong with that. As long as someone earned his/her money, it is up to each one of us to decide how to spend and save our money.

KlangFool

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

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. 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.
KlangFool wrote:
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
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.

peseta, Klang Fool and golfCaddy that's a nice explanation of why traditional contributions likely work out better for most people most of the time, and the exceptions where Roth contributions are likely better for some people.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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

I will receive a "decent" federal pension and it doesn't change the equation on standard advice to save to tax deferred while working and spend from tax deferred when retired and in a lower tax bracket.

Virtually all of our tax-deferred savings went in at 28% (post 2001) or 31% (pre 2001). One year (2018) is going in at 24%.
In 2019 pension income will fill up the 0%, 10% and part of the 12% bracket. tax deferred income will fill up the rest of the 12% bracket and some of the 22% bracket. Under some optimistic scenarios of returns way down the road, some fraction of the tax deferred could be taxed at 24%. Our very non-frugal financial standard of living (discretionary income) will be going up in 2019 versus working on significantly lower gross income due mainly to tax savings and cessation of retirement saving. A few years ago I posted some numbers on my situation and received advice here to do Roth conversions to the top of the 28% bracket. So I'm pretty leary of the "pay more taxes sooner" mantra. Adds a lot of complexity (like source of funds to pay tax and collateral tax issues that entails) and seems to be making an expensive side-bet on a future scenario of higher tax rates on lower incomes.

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

The Roth 401k is the clear winner if you consider the lump sum (not the yearly income) and roll that into a Roth IRA at retirement.

No RMD
Want to pay for a grandkid's college: 0 tax
Want to pay for a house: 0 tax
Need to pay for long term care: 0 tax
Unknown large expense: 0 tax
Die: 0 tax (assuming > 5 years in the Roth IRA)

I'm not an expert on retirement and estate planning though, but I just can't see how it's not the winner assuming you can max out either way. It may cost more upfront, but the flexibility it worth it to me.

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

foo.c wrote:
Sat May 19, 2018 10:15 am
The Roth 401k is the clear winner if you consider the lump sum (not the yearly income) and roll that into a Roth IRA at retirement.

No RMD
Want to pay for a grandkid's college: 0 tax
Want to pay for a house: 0 tax
Need to pay for long term care: 0 tax
Unknown large expense: 0 tax
Die: 0 tax (assuming > 5 years in the Roth IRA)

I'm not an expert on retirement and estate planning though, but I just can't see how it's not the winner assuming you can max out either way. It may cost more upfront, but the flexibility it worth it to me.
foo.c,

<<but the flexibility it worth it to me.>>

What flexibility? Can you get your money back from IRS?

<< I just can't see how it's not the winner assuming you can max out either way. It may cost more upfront,>>

It is a clear loser. I can max it both way. So, why would I want to pay more taxes?

1) Roth 401K -> I pay more taxes now.

2) Trad. 401K -> I pay fewer taxes now and in the retirement.

<<No RMD
Want to pay for a grandkid's college: 0 tax
Want to pay for a house: 0 tax
Need to pay for long term care: 0 tax
Unknown large expense: 0 tax
Die: 0 tax (assuming > 5 years in the Roth IRA)>>

3) You can get all of those things when you do Roth conversion of your Trad. 401K at lower tax rate.

4) You get all those things when you put your tax savings from Trad. 401K into Roth IRAs and the taxable account.

I prefer to keep more of my money in my own pocket as opposed to paying taxes. To each its own.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

KlangFool

P.S.: You are wrong. There is an RMD requirement for Roth 401K.
https://www.investopedia.com/articles/r ... th401k.asp

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

KlangFool wrote:
Sat May 19, 2018 10:27 am
...P.S.: You are wrong. There is an RMD requirement for Roth 401K.
https://www.investopedia.com/articles/r ... th401k.asp
Let's use a more authoritative (and current) source: Roth Comparison Chart | Internal Revenue Service
Distributions must begin no later than age 70½, unless still working and not a 5% owner.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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

Sat May 19, 2018 10:33 am
KlangFool wrote:
Sat May 19, 2018 10:27 am
...P.S.: You are wrong. There is an RMD requirement for Roth 401K.
https://www.investopedia.com/articles/r ... th401k.asp
Let's use a more authoritative (and current) source: Roth Comparison Chart | Internal Revenue Service
Distributions must begin no later than age 70½, unless still working and not a 5% owner.
Thank you for the authoritative source.

KlangFool

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

MnD wrote:
Sat May 19, 2018 9:52 am
IA few years ago I posted some numbers on my situation and received advice here to do Roth conversions to the top of the 28% bracket. So I'm pretty leary of the "pay more taxes sooner" mantra. Adds a lot of complexity (like source of funds to pay tax and collateral tax issues that entails) and seems to be making an expensive side-bet on a future scenario of higher tax rates on lower incomes.
The reason many BH tend to give that advice is because they incorrectly extrapolate their own situation to others. The best example would this very topic!

Personally, I pay taxes when they absolutely need to be paid and from the money that I have made at that time. I do not believe in "pre-paying" taxes anymore ever. I do not want to ever pay taxes on my "expected future gains" with present money. I understand "expected future gains" have uncertainty to it. On the other hand paying tax right now is very certain

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

KlangFool wrote:
Sat May 19, 2018 10:37 am
Sat May 19, 2018 10:33 am
KlangFool wrote:
Sat May 19, 2018 10:27 am
...P.S.: You are wrong. There is an RMD requirement for Roth 401K.
https://www.investopedia.com/articles/r ... th401k.asp
Let's use a more authoritative (and current) source: Roth Comparison Chart | Internal Revenue Service
Distributions must begin no later than age 70½, unless still working and not a 5% owner.
Thank you for the authoritative source.

KlangFool
But I believe Roth 401K can be trivially converted in to Roth IRA (aka similar to Rollover; after separating from the employer)

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

Careful on the terminology. Moving funds without changing the account type is a "rollover". Changing between accounts is a "conversion".

You can rollover from an employer's Roth 401(k) to a personal Roth IRA. If you are still working, this may not be permitted. You need to check your employer's Summary Plan Description.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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

Understood!

This is what I should have said
But I believe Roth 401K can be trivially rolled over in to Roth IRA (aka similar to regular 401K Rollover; after separating from the employer)

Conversion MAY have tax consequences; Rollover USUALLY do not.
Is that correct?

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

JustinR wrote:
Sat May 19, 2018 4:03 am
Traditional is better than Roth for nearly everyone.

The only reason people even do Roth is because they're not allowed to do Traditional, due to their higher income. If the limits didn't exist, everyone would do Traditional other than the very bottom earners.

This is especially true for people who plan on retiring early, because they can do a Roth conversion later. Delay your taxes as much as possible, people. Deal with it later.

And I still don't understand how someone can have a higher taxable income in retirement than their working years.
Here's an example.
Projected SS benefits - \$30k/year
Projected SS taxable benefits - \$25k/year
Projected pension - \$40k/year
Projected AGI - \$65k/year
Less \$12k standard deduction
\$53k/year in taxable income
single, so everything withdrawn from a tax deferred IRA is taxed at a minimum of 22% if tax cuts are made permanent
if the individual tax cuts expire, everything from a traditional IRA gets taxed at least 25%.
Last edited by golfCaddy on Sat May 19, 2018 12:18 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"

wrongfunds wrote:
Sat May 19, 2018 12:02 pm
Understood!

This is what I should have said
But I believe Roth 401K can be trivially rolled over in to Roth IRA (aka similar to regular 401K Rollover; after separating from the employer)

Conversion MAY have tax consequences; Rollover USUALLY do not.
Is that correct?
The details are in: Publication 590-A (2017), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service
Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a "rollover contribution."
There are tax considerations when converting between a traditional IRA and a Roth IRA. Search for "Converting From Any Traditional IRA Into a Roth IRA" and note the last paragraph in the section.
Income. You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you hadn’t converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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

KlangFool wrote:
Sat May 19, 2018 10:27 am
3) You can get all of those things when you do Roth conversion of your Trad. 401K at lower tax rate.
I don't give a flip about the rate. Let's say I have 1.5 million in my R401k and you have 1.5 in your T401k.

It costs me 0 to stuff that into a RIRA, and it costs you something like 500k (I didn't do the work) to convert all at once. I probably only contributed around 500-600k to get my 1.5 million in the first place so there's no way I paid more than you.

sc9182
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### Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

foo.c wrote:
Sat May 19, 2018 12:36 pm
KlangFool wrote:
Sat May 19, 2018 10:27 am
3) You can get all of those things when you do Roth conversion of your Trad. 401K at lower tax rate.
I don't give a flip about the rate. Let's say I have 1.5 million in my R401k and you have 1.5 in your T401k.

It costs me 0 to stuff that into a RIRA, and it costs you something like 500k (I didn't do the work) to convert all at once. I probably only contributed around 500-600k to get my 1.5 million in the first place so there's no way I paid more than you.
This is the case of: Human psychology/peace-of-mind trumps math/financial-sense. So be it, but you do understand that there is most-likely higher "cost" associated with that "All-in the Roth" choice.

Also - rollover from Roth-401K to Roth IRA is not as simple as a turn of a switch, as LadyGeek posted, there are some IRS rules/guidelines to be followed.
Last edited by sc9182 on Sat May 19, 2018 1:00 pm, edited 1 time in total.

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

foo.c wrote:
Sat May 19, 2018 12:36 pm
I don't give a flip about the rate.
In that case, you are missing the point of the whole thread.

sc9182
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### Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Sat May 19, 2018 12:17 pm
JustinR wrote:
Sat May 19, 2018 4:03 am
Traditional is better than Roth for nearly everyone.

The only reason people even do Roth is because they're not allowed to do Traditional, due to their higher income. If the limits didn't exist, everyone would do Traditional other than the very bottom earners.

This is especially true for people who plan on retiring early, because they can do a Roth conversion later. Delay your taxes as much as possible, people. Deal with it later.

And I still don't understand how someone can have a higher taxable income in retirement than their working years.
Here's an example.
Projected SS benefits - \$30k/year
Projected SS taxable benefits - \$25k/year
Projected pension - \$40k/year
Projected AGI - \$65k/year
Less \$12k standard deduction
\$53k/year in taxable income
single, so everything withdrawn from a tax deferred IRA is taxed at a minimum of 22% if tax cuts are made permanent
if the individual tax cuts expire, everything from a traditional IRA gets taxed at least 25%.
You may the scenario for not much of ANY type of additional income is good for your "tax-rate" But life doesn't go based on tax-brackets.

How do you expect to handle a one-time/few-times large expenses ? Does SS and/or Pension help with that scenario ? Wouldn't you better to have some monies in Tax-deferred ?

Heard of delaying SS for higher/better benefit (applicable to some, but not all) ? If you delay SS, you could do withdrawals from Traditional IRA and/or Roth-convert up to your-own-optimal tax bracket maximum.

Roth contribution/conversion may or may not be the optimal choice - depending on your marginal rate at the time of contribution/conversions, and/or 5-year duration (and age)..

sc9182
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### Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

randomguy wrote:
Fri May 18, 2018 11:59 pm
KlangFool wrote:
Fri May 18, 2018 10:28 pm

KlangFool
106k/year annual contribution (53k for you and wife), 7% real returns and you are looking at 21 million after 40 years. Seems pretty doable:) Or if you invest with Dave Ramsey and get 10% real you are looking at 47 million. Definitely should have done the ROTH. And we haven't even talked about your defined benefit plans yet for another 4.5 million or so, 403, and who knows what else:)
Understand, you may be doing a mathematical bantering, but when the reality hits the road., there are under 150,000 401K millionaires in Fidelity study. https://www.cnbc.com/2018/02/07/the-num ... -high.html

I am sure there is a specific case or two who hits the number you posted, and beyond (hello Mitt ) -- but ain't gonna be the norm. Strive for achieving higher numbers, yes., realistically possible - but unlikely. Life meanders multiple ways - sequence of returns, marriage, disability, un-employment or under-employment, divorce, death or worse-yet a lawsuit on an not-fully-protected-by-state IRA

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

sc9182 wrote:
Sat May 19, 2018 1:10 pm
randomguy wrote:
Fri May 18, 2018 11:59 pm
KlangFool wrote:
Fri May 18, 2018 10:28 pm

KlangFool
106k/year annual contribution (53k for you and wife), 7% real returns and you are looking at 21 million after 40 years. Seems pretty doable:) Or if you invest with Dave Ramsey and get 10% real you are looking at 47 million. Definitely should have done the ROTH. And we haven't even talked about your defined benefit plans yet for another 4.5 million or so, 403, and who knows what else:)
Understand, you may be doing a mathematical bantering, but when the reality hits the road., there are under 150,000 401K millionaires in Fidelity study. https://www.cnbc.com/2018/02/07/the-num ... -high.html

I am sure there is a specific case or two who hits the number you posted, and beyond (hello Mitt ) -- but ain't gonna be the norm. Strive for achieving higher numbers, yes., realistically possible - but unlikely. Life meanders multiple ways - sequence of returns, marriage, disability, un-employment or under-employment, divorce, death or worse-yet a lawsuit on an not-fully-protected-by-state IRA
I believe you are in violent agreement with those two posters. I hope you don't think they think differently than you do. They (and me) share your views. BUT SOME BH DON'T.

By the way, of those 150K 40K millionaires, 149999 are some of the vocal members here.

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

sc9182 wrote:
Sat May 19, 2018 12:59 pm
Sat May 19, 2018 12:17 pm
JustinR wrote:
Sat May 19, 2018 4:03 am
Traditional is better than Roth for nearly everyone.

The only reason people even do Roth is because they're not allowed to do Traditional, due to their higher income. If the limits didn't exist, everyone would do Traditional other than the very bottom earners.

This is especially true for people who plan on retiring early, because they can do a Roth conversion later. Delay your taxes as much as possible, people. Deal with it later.

And I still don't understand how someone can have a higher taxable income in retirement than their working years.
Here's an example.
Projected SS benefits - \$30k/year
Projected SS taxable benefits - \$25k/year
Projected pension - \$40k/year
Projected AGI - \$65k/year
Less \$12k standard deduction
\$53k/year in taxable income
single, so everything withdrawn from a tax deferred IRA is taxed at a minimum of 22% if tax cuts are made permanent
if the individual tax cuts expire, everything from a traditional IRA gets taxed at least 25%.
Heard of delaying SS for higher/better benefit (applicable to some, but not all) ? If you delay SS, you could do withdrawals from Traditional IRA and/or Roth-convert up to your-own-optimal tax bracket maximum.

Roth contribution/conversion may or may not be the optimal choice - depending on your marginal rate at the time of contribution/conversions, and/or 5-year duration (and age)..
I don't see delaying SS as making much of difference. Retire at 62 with a \$40k pension and you withdraw up to \$10700/year at the 12% rate. In total, that lets you withdraw up to \$85600 from tax deferred at the 12% rate. So all delaying SS means is contributing to traditional is optimal up to the point you expect to have a \$86k balance by retirement.

sc9182
Posts: 246
Joined: Wed Aug 17, 2016 7:43 pm

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

Sat May 19, 2018 1:53 pm
sc9182 wrote:
Sat May 19, 2018 12:59 pm
..
Heard of delaying SS for higher/better benefit (applicable to some, but not all) ? If you delay SS, you could do withdrawals from Traditional IRA and/or Roth-convert up to your-own-optimal tax bracket maximum.

Roth contribution/conversion may or may not be the optimal choice - depending on your marginal rate at the time of contribution/conversions, and/or 5-year duration (and age)..
I don't see delaying SS as making much of difference. Retire at 62 with a \$40k pension and you withdraw up to \$10700/year at the 12% rate. In total, that lets you withdraw up to \$85600 from tax deferred at the 12% rate. So all delaying SS means is contributing to traditional is optimal up to the point you expect to have a \$86k balance by retirement.
You almost implying if you owe more than 12% - no point in saving for tax-deferred, ensued withdrawals at all. Now - do you see you forever living under 12% bracket, which means - under \$50700 you mentioned ? how you plan 'exactly' that ? Or, that are you implying, paying a higher than "12%" tax during your earning years, thus contributing to Roth would help make your case ?

If someones annual expenses are expected to be 80K/year, how you plan to achieve that with your case of SS and pensions? How you bridge that Gap from \$50K --> \$80K ?

Also: How do you expect to handle a one-time/few-times large expenses ? Does SS and/or Pension help with that scenario ? Wouldn't you better to have some monies in Tax-deferred ?

nolesrule
Posts: 1204
Joined: Thu Feb 26, 2015 10:59 am

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

foo.c wrote:
Sat May 19, 2018 12:36 pm
KlangFool wrote:
Sat May 19, 2018 10:27 am
3) You can get all of those things when you do Roth conversion of your Trad. 401K at lower tax rate.
I don't give a flip about the rate. Let's say I have 1.5 million in my R401k and you have 1.5 in your T401k.

It costs me 0 to stuff that into a RIRA, and it costs you something like 500k (I didn't do the work) to convert all at once. I probably only contributed around 500-600k to get my 1.5 million in the first place so there's no way I paid more than you.
Congratulations on being able to stuff that much into a Roth IRA with such little income that you paid zero in taxes on the money going in. Not many people can manage that.

Posts: 728
Joined: Wed Jan 10, 2018 10:02 pm

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

sc9182 wrote:
Sat May 19, 2018 2:02 pm
You almost implying if you owe more than 12% - no point in saving for tax-deferred, ensued withdrawals at all. Now - do you see you forever living under 12% bracket, which means - under \$50700 you mentioned ? how you plan 'exactly' that ? Or, that are you implying, paying a higher than "12%" tax during your earning years, thus contributing to Roth would help make your case ?

If someones annual expenses are expected to be 80K/year, how you plan to achieve that with your case of SS and pensions? How you bridge that Gap from \$50K --> \$80K ?

Also: How do you expect to handle a one-time/few-times large expenses ? Does SS and/or Pension help with that scenario ? Wouldn't you better to have some monies in Tax-deferred ?
The original topic was about whether a roth IRA could be better than a traditional IRA. I gave an example of how that could be the case if the individual tax cuts are allowed to expire. Delaying SS to 70 changes the calculus only slightly. Whether people need to plan for \$50k or \$80k in expenses is a separate issue and should be its own thread.

JustinR
Posts: 1051
Joined: Tue Apr 27, 2010 11:43 pm

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

foo.c wrote:
Sat May 19, 2018 12:36 pm
KlangFool wrote:
Sat May 19, 2018 10:27 am
3) You can get all of those things when you do Roth conversion of your Trad. 401K at lower tax rate.
I don't give a flip about the rate. Let's say I have 1.5 million in my R401k and you have 1.5 in your T401k.

It costs me 0 to stuff that into a RIRA, and it costs you something like 500k (I didn't do the work) to convert all at once. I probably only contributed around 500-600k to get my 1.5 million in the first place so there's no way I paid more than you.
A) I don't think you understand how Roths work. It didn't cost you \$0. You paid taxes on that money already at your highest tax rate.

B) You don't have to convert your Traditional all at once. By spreading it out for several years, you can pay 0% in taxes or very minimal taxes. Meaning you literally paid \$0 taxes ever on that money. That beats Roth every time.

willthrill81
Posts: 9638
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Location: USA

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

JustinR wrote:
Sat May 19, 2018 3:49 pm
foo.c wrote:
Sat May 19, 2018 12:36 pm
KlangFool wrote:
Sat May 19, 2018 10:27 am
3) You can get all of those things when you do Roth conversion of your Trad. 401K at lower tax rate.
I don't give a flip about the rate. Let's say I have 1.5 million in my R401k and you have 1.5 in your T401k.

It costs me 0 to stuff that into a RIRA, and it costs you something like 500k (I didn't do the work) to convert all at once. I probably only contributed around 500-600k to get my 1.5 million in the first place so there's no way I paid more than you.
A) I don't think you understand how Roths work. It didn't cost you \$0. You paid taxes on that money already at your highest tax rate.

B) You don't have to convert your Traditional all at once. By spreading it out for several years, you can pay 0% in taxes or very minimal taxes. Meaning you literally paid \$0 taxes ever on that money. That beats Roth every time.

We're in the 22% bracket, and I anticipate that under the current system, most of our tax-deferred assets will be taxed at an average of under 10% when we withdraw them. It's a no-brainer for us. The only way I'll contribute to Roth accounts is after all of our tax-deferred space is filled, but that's over \$60k a year.
“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

FiveK
Posts: 6729
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"

JustinR wrote:
Sat May 19, 2018 3:49 pm
...in that example.

There are situations in which Roth is better and situations in which traditional is better.

There are methods of analysis that may incorrectly show Roth is better (the "amount of tax paid" analysis) and methods of analysis that may incorrectly show traditional is better (the "marginal vs. effective" analysis).

And one only knows for sure when viewing through hindsight glasses. But reasonable guesses can be made....

wrongfunds
Posts: 1967
Joined: Tue Dec 21, 2010 3:55 pm

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

Can you give some reasonable example where ROTH wins and does not depend upon very unlikely conditions? Obviously apart from brain-surgeon-in-residence cases? Seriously, I am hard pressed to come up with other scenario. We just had somebody do the calculations to come up with once you go over "\$6M" (or was it \$13M?), then Roth makes sense. If one has lot more money to save than say \$130K of tax advantage space, then certainly go for Roth. Or if somebody who will be getting \$300K in inflation adjusted pension, then Roth is certainty. Is there something else where you would categorically say do Roth instead of traditional? All of the conditions that I can come up where Roth makes sense seems to be pretty unlikely for 90% of the population.

willthrill81
Posts: 9638
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

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

ruralavalon
Posts: 15415
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

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

However there are Required Minimum Distributions for Roth 401ks.

Sat May 19, 2018 10:33 am
KlangFool wrote:
Sat May 19, 2018 10:27 am
...P.S.: You are wrong. There is an RMD requirement for Roth 401K.
https://www.investopedia.com/articles/r ... th401k.asp
Let's use a more authoritative (and current) source: Roth Comparison Chart | Internal Revenue Service
Distributions must begin no later than age 70½, unless still working and not a 5% owner.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Silk McCue
Posts: 2202
Joined: Thu Feb 25, 2016 7:11 pm

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

ruralavalon wrote:
Sat May 19, 2018 8:50 pm
However there are Required Minimum Distributions for Roth 401ks.
Of course no taxes will be due on those RMDs.

Or, it could be rolled into a Roth IRA and no RMDs would be required.

Cheers

JustinR
Posts: 1051
Joined: Tue Apr 27, 2010 11:43 pm

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

So far every hypothetical example of a Roth being better has mentioned pensions.

Do people still have pensions? I feel like this is an increasingly irrelevant thing in today's society that is muddying up discussions.

Posts: 728
Joined: Wed Jan 10, 2018 10:02 pm

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

wrongfunds wrote:
Sat May 19, 2018 8:19 pm
Can you give some reasonable example where ROTH wins and does not depend upon very unlikely conditions? Obviously apart from brain-surgeon-in-residence cases? Seriously, I am hard pressed to come up with other scenario. We just had somebody do the calculations to come up with once you go over "\$6M" (or was it \$13M?), then Roth makes sense. If one has lot more money to save than say \$130K of tax advantage space, then certainly go for Roth. Or if somebody who will be getting \$300K in inflation adjusted pension, then Roth is certainty. Is there something else where you would categorically say do Roth instead of traditional? All of the conditions that I can come up where Roth makes sense seems to be pretty unlikely for 90% of the population.
If you look up above, you'll see I outlined a situation where a Roth makes sense with an anticipated \$40k pension under current tax law. To deal with the nit pick of delaying SS, let's assume there's already enough money in the traditional IRA, such that it's anticipated balance is at least \$86k by the time of retirement. It may not be applicable to 90% of the population, but all anyone should care about is if it applies to their tax situation. I don't get to file my tax return based on some hypothetical average person's income and deductions.

Silk McCue
Posts: 2202
Joined: Thu Feb 25, 2016 7:11 pm

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

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

Do people still have pensions? I feel like this is an increasingly irrelevant thing that is muddying up discussions.
Yes. There are many people that still have pensions but certainly fewer than in the past. Very large tax deferred accounts with RMDs act like pensions in some respects as the income is going to appear that will fill up the standard deduction, the lower brackets and along the way will eventually cause SS to be taxed whether you want to take it or not. Beyond that you may wish to spend at a higher level than SS and RMDs. At some point you would really be happy if you had income that you could access that would not cause another .85c of Social Security to be taxed for every dollar taken. That is called a Roth.

There is no one size fits all answer. There is just beautiful math that will allow you to analyze and make your best decision on how to achieve that. It shouldn’t be feared or mocked as some do. It just is what it is.

Cheers

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Joined: Wed Jan 10, 2018 10:02 pm

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

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

Do people still have pensions? I feel like this is an increasingly irrelevant thing in today's society that is muddying up discussions.
Pensions may be going the way of the dodo in the private sector, but the vast majority of government workers still have a defined benefit pension. Since 17% of US workers work for the government, it's far from irrelevant. Even if new government employees don't get a DB, it will take decades for all the workers grandfathered into the existing systems to retire.

FiveK
Posts: 6729
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"

wrongfunds wrote:
Sat May 19, 2018 8:19 pm
Can you give some reasonable example where ROTH wins and does not depend upon very unlikely conditions?
...
All of the conditions that I can come up where Roth makes sense seems to be pretty unlikely for 90% of the population.
Something applicable to 10% could be reasonable, correct?

Anyway, here's one:
- MFJ w/ no dependents; in the 22% bracket; no pension; no SS.
- Contribute \$37K/yr (\$3083/mo) to 401ks, starting at age 25; 8%/yr return, compounded monthly.
- Retire at age 55

After 9 years, the traditional balance is \$485,408. Left to compound for another 21 years, it becomes \$2.59 million. With a 4% withdrawal ratio (again, no pension and no SS), the couple is back in the 22% bracket.

Thus, for the last 21 years of their working career, due to the math behind Maxing out your retirement accounts, Roth is preferable.

Now, if it were me, I would not count on 8% growth and would instead contribute more to traditional, "just in case...." But you asked for an example.

Add some pension and/or SS and it gets even more reasonable....

KlangFool
Posts: 12495
Joined: Sat Oct 11, 2008 12:35 pm

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

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

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

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

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

KlangFool
Last edited by KlangFool on Sat May 19, 2018 9:25 pm, edited 1 time in total.

wrongfunds
Posts: 1967
Joined: Tue Dec 21, 2010 3:55 pm

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

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

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

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

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

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

Yes, a trick question and yes completely hypothetical and no relation to the reality HOWEVER the fundamental point that identical incoming and outgoing marginal tax rate could still mean one is better than other AND as long US tax system keeps some base income as untaxed, in most of the cases, TIRA makes more sense.

jpsc
Posts: 122
Joined: Sat Feb 10, 2018 11:05 pm

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

randomguy wrote:
Fri May 18, 2018 11:59 pm

106k/year annual contribution (53k for you and wife), 7% real returns and you are looking at 21 million after 40 years. Seems pretty doable:) Or if you invest with Dave Ramsey and get 10% real you are looking at 47 million. Definitely should have done the ROTH. And we haven't even talked about your defined benefit plans yet for another 4.5 million or so, 403, and who knows what else:)
There is no warranty of 7% real return, some year your 401K will return -20% like 2008-2009 - some year your 401K becomes 201K

KlangFool
Posts: 12495
Joined: Sat Oct 11, 2008 12:35 pm

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

wrongfunds wrote:
Sat May 19, 2018 9:24 pm
willthrill81 wrote:
Sat May 19, 2018 8:43 pm
wrongfunds wrote:
Sat May 19, 2018 8:19 pm
Can you give some reasonable example where ROTH wins and does not depend upon very unlikely conditions? Obviously apart from brain-surgeon-in-residence cases? Seriously, I am hard pressed to come up with other scenario. We just had somebody do the calculations to come up with once you go over "\$6M" (or was it \$13M?), then Roth makes sense. If one has lot more money to save than say \$130K of tax advantage space, then certainly go for Roth. Or if somebody who will be getting \$300K in inflation adjusted pension, then Roth is certainty. Is there something else where you would categorically say do Roth instead of traditional? All of the conditions that I can come up where Roth makes sense seems to be pretty unlikely for 90% of the population.
Someone that has enough Social Security and an inflation-adjusted pension, for instance, that will put them back into the same tax bracket as they are now will most likely be better off with the Roth. If the marginal tax rate of contribution is the same as the marginal tax rate of withdrawal, then there is no tax arbitrage opportunity. The reason the Roth would likely be better is the lack of RMDs and the preferential tax treatment for heirs.
Are there professions today where social security + inflation adjusted pension will be in the in the same tax bracket? And is being in the same tax bracket enough or one needs to have the similar income i.e. not just the bracket but the location in that bracket needs to be close enough?

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

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

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

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

Yes, a trick question and yes completely hypothetical and no relation to the reality HOWEVER the fundamental point that identical incoming and outgoing marginal tax rate could still mean one is better than other AND as long US tax system keeps some base income as untaxed, in most of the cases, TIRA makes more sense.
wrongfunds,

<<in most of the cases, TIRA Trad. 401K makes more sense.>>

Please use the proper term. We are discussing Trad. 401K versus Roth 401K here. Not Trad. IRA.

KlangFool

wrongfunds
Posts: 1967
Joined: Tue Dec 21, 2010 3:55 pm

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

sorry;

Hopefully, I have not confused anybody.