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

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

Post by FiveK » Fri May 25, 2018 6:08 pm

marcopolo wrote:
Fri May 25, 2018 5:38 pm
But, the cost i am concerned about is not that associated with the act of entering the conversion amount, but rather the cost of guessing wrong on the assumptions and ending up paying more in taxes now than would be owed if I had converted less. e.g. Soc Sec takes a bigger haircut (means test), tax rates are lowered again, they figure out some way to tax Roth accounts.... Given those risks, is the small gain achieved assuming static conditions worth it? Converting at 12%, I feel pretty confident i will come out ahead even if some of those risks materialize. At 22% or 24%, it seems like the risk/reward is not so simple.
Indeed, It’s Difficult to Make Predictions, Especially About the Future.

Take your best guess and act accordingly this year. Repeat the analysis process and act according to any new information in each subsequent year.

smitcat
Posts: 1764
Joined: Mon Nov 07, 2016 10:51 am

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

Post by smitcat » Fri May 25, 2018 6:37 pm

marcopolo wrote:
Fri May 25, 2018 2:58 pm
smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
OK so I will say that everyone's results will be different dependent upon their inputs. The key is to mostly lower the taxable base before your RMD's kick in and the RPM will show you the base case(no coverts) vs the Roth conversion . By playing around with the amount of Roth conversions you will get to an optimal amount - which we intend to check each year with the latest data on our balances, taxes, etc. With that said I will respond to your questions by looking at our last RPM output...
"Just out of curiosity, how big do you go with your Roth conversions?" - 24%
Total taxes paid in base case = $877,000
Total taxes paid in full case = $392,300
Difference in tax total = $484,700
Difference in account balances ending = $642,300
This run is with both of us living a ripe old age the advantage is steeper when we run this with one spouse passing early.
I don't think you will ever be able to picture this in your mind unless/until you run the RPM - at least we were unable to come close to projecting these outcomes without running them.

marcopolo
Posts: 1045
Joined: Sat Dec 03, 2016 10:22 am

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

Post by marcopolo » Fri May 25, 2018 6:59 pm

smitcat wrote:
Fri May 25, 2018 6:37 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm
smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
OK so I will say that everyone's results will be different dependent upon their inputs. The key is to mostly lower the taxable base before your RMD's kick in and the RPM will show you the base case(no coverts) vs the Roth conversion . By playing around with the amount of Roth conversions you will get to an optimal amount - which we intend to check each year with the latest data on our balances, taxes, etc. With that said I will respond to your questions by looking at our last RPM output...
"Just out of curiosity, how big do you go with your Roth conversions?" - 24%
Total taxes paid in base case = $877,000
Total taxes paid in full case = $392,300
Difference in tax total = $484,700
Difference in account balances ending = $642,300
This run is with both of us living a ripe old age the advantage is steeper when we run this with one spouse passing early.
I don't think you will ever be able to picture this in your mind unless/until you run the RPM - at least we were unable to come close to projecting these outcomes without running them.
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.
Once in a while you get shown the light, in the strangest of places if you look at it right.

trueblueky
Posts: 1330
Joined: Tue May 27, 2014 3:50 pm

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

Post by trueblueky » Fri May 25, 2018 7:25 pm

marcopolo wrote:
Fri May 25, 2018 5:38 pm
FiveK wrote:
Fri May 25, 2018 5:28 pm
marcopolo wrote:
Fri May 25, 2018 5:19 pm
While getting money into a Roth has other advantages as well, if we assume static conditions, paying 22% now to be in similar (22% or 24%) bracket in 18 years does not seem like a big gain.
It's not a big gain, but the cost of typing one number instead of another into web site box for "amount to convert" is also rather low.
Point taken :happy .

But, the cost i am concerned about is not that associated with the act of entering the conversion amount, but rather the cost of guessing wrong on the assumptions and ending up paying more in taxes now than would be owed if I had converted less. e.g. Soc Sec takes a bigger haircut (means test), tax rates are lowered again, they figure out some way to tax Roth accounts.... Given those risks, is the small gain achieved assuming static conditions worth it? Converting at 12%, I feel pretty confident i will come out ahead even if some of those risks materialize. At 22% or 24%, it seems like the risk/reward is not so simple.
I agree. I convert to the top of 12% knowing the world would need to change a lot to keep DW and me out of a higher bracket when any of three events occur:
My RMD
Her Social Security at 70
Either of us pass away forcing the other into filing Single -- this is the one I don't have a date certain

I do not convert into the 22% bracket.

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

Post by randomguy » Fri May 25, 2018 7:29 pm

marcopolo wrote:
Fri May 25, 2018 6:59 pm
smitcat wrote:
Fri May 25, 2018 6:37 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm
smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
OK so I will say that everyone's results will be different dependent upon their inputs. The key is to mostly lower the taxable base before your RMD's kick in and the RPM will show you the base case(no coverts) vs the Roth conversion . By playing around with the amount of Roth conversions you will get to an optimal amount - which we intend to check each year with the latest data on our balances, taxes, etc. With that said I will respond to your questions by looking at our last RPM output...
"Just out of curiosity, how big do you go with your Roth conversions?" - 24%
Total taxes paid in base case = $877,000
Total taxes paid in full case = $392,300
Difference in tax total = $484,700
Difference in account balances ending = $642,300
This run is with both of us living a ripe old age the advantage is steeper when we run this with one spouse passing early.
I don't think you will ever be able to picture this in your mind unless/until you run the RPM - at least we were unable to come close to projecting these outcomes without running them.
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.

As you said the amount paid in taxes isn't a meaningful number. You want to optimized spendable money and end account balances (which need to be adjusted for spendable/donated amount). And of course it is also nice to now the size of portfolio that we are looking at. A 642k difference in a 1 million dollar portfolio is one thing. 642k in a 40 million dollar portfolio on the other hand is pretty much a rounding error.:)

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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 25, 2018 7:32 pm

marcopolo wrote:
Fri May 25, 2018 6:59 pm
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.
"Taxes paid" can be a misleading metric and should probably be ignored. "Spendable amount remaining" is much more useful.

Using "taxes paid" makes a Roth account look better than it deserves. E.g., if one is in the 28% bracket now, will be at 12% in retirement, and gets 4X growth. Starting with the same Pre-Tax Amount (PTA), the spendable amount is
Traditional: PTA * 4 * 0.88 = PTA * 3.52
Roth: PTA * 0.75 * 4 = PTA * 3

But the tax paid is
Traditional: PTA * 4 * 0.12 = PTA * 0.48
Roth: PTA * 0.25

Despite paying more in tax, traditional is preferable to Roth in this situation.

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

Post by marcopolo » Fri May 25, 2018 9:00 pm

FiveK wrote:
Fri May 25, 2018 7:32 pm
marcopolo wrote:
Fri May 25, 2018 6:59 pm
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.
"Taxes paid" can be a misleading metric and should probably be ignored. "Spendable amount remaining" is much more useful.

Using "taxes paid" makes a Roth account look better than it deserves. E.g., if one is in the 28% bracket now, will be at 12% in retirement, and gets 4X growth. Starting with the same Pre-Tax Amount (PTA), the spendable amount is
Traditional: PTA * 4 * 0.88 = PTA * 3.52
Roth: PTA * 0.75 * 4 = PTA * 3

But the tax paid is
Traditional: PTA * 4 * 0.12 = PTA * 0.48
Roth: PTA * 0.25

Despite paying more in tax, traditional is preferable to Roth in this situation.
Perhaps I did not state it very clearly, but that was precisely the point I was trying to make.
Once in a while you get shown the light, in the strangest of places if you look at it right.

smitcat
Posts: 1764
Joined: Mon Nov 07, 2016 10:51 am

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

Post by smitcat » Sat May 26, 2018 5:54 am

marcopolo wrote:
Fri May 25, 2018 6:59 pm
smitcat wrote:
Fri May 25, 2018 6:37 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm
smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
OK so I will say that everyone's results will be different dependent upon their inputs. The key is to mostly lower the taxable base before your RMD's kick in and the RPM will show you the base case(no coverts) vs the Roth conversion . By playing around with the amount of Roth conversions you will get to an optimal amount - which we intend to check each year with the latest data on our balances, taxes, etc. With that said I will respond to your questions by looking at our last RPM output...
"Just out of curiosity, how big do you go with your Roth conversions?" - 24%
Total taxes paid in base case = $877,000
Total taxes paid in full case = $392,300
Difference in tax total = $484,700
Difference in account balances ending = $642,300
This run is with both of us living a ripe old age the advantage is steeper when we run this with one spouse passing early.
I don't think you will ever be able to picture this in your mind unless/until you run the RPM - at least we were unable to come close to projecting these outcomes without running them.
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.
I was hoping to encourage others to run their own numbers rather than have a discussion about all of our variables which go into this - which would take up a few pages anyway and not apply to your situation.
The difference in account balance ending is one of the smaller runs , it goes up appreciably with any one of these changes:
- one spouse passing early
- an 'average' or higher earnings exectation (our are conservative)
- a larger inflation rate (our are average)
- a smaller drawdown (we have a much larger drawdown then we expect to use)
- tax rates remain flat as is in this run
I could have put in the numbers for a run with 7% account earnings, one spouse pass at 80 , drawdown of 50% and inflation at 3% but no-one would believe it.

So the balance at end could be converted to 'spendable' money by making the drawdown higher but in our case it is for heirs. About 10 years back when my father passed he left me a very small 401K inheritance - I must take about $1,000/yr on that in forced RMD's. I have learned that those funds go on 'top' of my existing eaernings and i have noo choice taking them right about when my earnings/taxes are at theor greatest point. Therefor my tax rate on this RMD has been close to 40% between Fed and State taxes.So whether we spend these dollars or leave them our best fit solution resides in running these models and choosing the best outcomes and refining each year.
My message is that the affect os not what you may think and that it IS worth running your own numbers to get your choices.
It will take time to initially set up and understand but it will hlep your view of not only Roth conversions but many other options, variables, and consequeces.

smitcat
Posts: 1764
Joined: Mon Nov 07, 2016 10:51 am

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

Post by smitcat » Sat May 26, 2018 5:58 am

randomguy wrote:
Fri May 25, 2018 7:29 pm
marcopolo wrote:
Fri May 25, 2018 6:59 pm
smitcat wrote:
Fri May 25, 2018 6:37 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm
smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
OK so I will say that everyone's results will be different dependent upon their inputs. The key is to mostly lower the taxable base before your RMD's kick in and the RPM will show you the base case(no coverts) vs the Roth conversion . By playing around with the amount of Roth conversions you will get to an optimal amount - which we intend to check each year with the latest data on our balances, taxes, etc. With that said I will respond to your questions by looking at our last RPM output...
"Just out of curiosity, how big do you go with your Roth conversions?" - 24%
Total taxes paid in base case = $877,000
Total taxes paid in full case = $392,300
Difference in tax total = $484,700
Difference in account balances ending = $642,300
This run is with both of us living a ripe old age the advantage is steeper when we run this with one spouse passing early.
I don't think you will ever be able to picture this in your mind unless/until you run the RPM - at least we were unable to come close to projecting these outcomes without running them.
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.

As you said the amount paid in taxes isn't a meaningful number. You want to optimized spendable money and end account balances (which need to be adjusted for spendable/donated amount). And of course it is also nice to now the size of portfolio that we are looking at. A 642k difference in a 1 million dollar portfolio is one thing. 642k in a 40 million dollar portfolio on the other hand is pretty much a rounding error.:)
I was hoping to get some folks to run their own numbers and not waste time mulling over ours We are no where near 40 million dollars more in the neighborhood of 10X less - but this does not help others run their scenarios as it depends upon many more factors then account balance.

marcopolo
Posts: 1045
Joined: Sat Dec 03, 2016 10:22 am

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

Post by marcopolo » Sat May 26, 2018 7:29 am

smitcat wrote:
Sat May 26, 2018 5:54 am
marcopolo wrote:
Fri May 25, 2018 6:59 pm
smitcat wrote:
Fri May 25, 2018 6:37 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm
smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
OK so I will say that everyone's results will be different dependent upon their inputs. The key is to mostly lower the taxable base before your RMD's kick in and the RPM will show you the base case(no coverts) vs the Roth conversion . By playing around with the amount of Roth conversions you will get to an optimal amount - which we intend to check each year with the latest data on our balances, taxes, etc. With that said I will respond to your questions by looking at our last RPM output...
"Just out of curiosity, how big do you go with your Roth conversions?" - 24%
Total taxes paid in base case = $877,000
Total taxes paid in full case = $392,300
Difference in tax total = $484,700
Difference in account balances ending = $642,300
This run is with both of us living a ripe old age the advantage is steeper when we run this with one spouse passing early.
I don't think you will ever be able to picture this in your mind unless/until you run the RPM - at least we were unable to come close to projecting these outcomes without running them.
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.
I was hoping to encourage others to run their own numbers rather than have a discussion about all of our variables which go into this - which would take up a few pages anyway and not apply to your situation.
The difference in account balance ending is one of the smaller runs , it goes up appreciably with any one of these changes:
- one spouse passing early
- an 'average' or higher earnings exectation (our are conservative)
- a larger inflation rate (our are average)
- a smaller drawdown (we have a much larger drawdown then we expect to use)
- tax rates remain flat as is in this run
I could have put in the numbers for a run with 7% account earnings, one spouse pass at 80 , drawdown of 50% and inflation at 3% but no-one would believe it.

So the balance at end could be converted to 'spendable' money by making the drawdown higher but in our case it is for heirs. About 10 years back when my father passed he left me a very small 401K inheritance - I must take about $1,000/yr on that in forced RMD's. I have learned that those funds go on 'top' of my existing eaernings and i have noo choice taking them right about when my earnings/taxes are at theor greatest point. Therefor my tax rate on this RMD has been close to 40% between Fed and State taxes.So whether we spend these dollars or leave them our best fit solution resides in running these models and choosing the best outcomes and refining each year.
My message is that the affect os not what you may think and that it IS worth running your own numbers to get your choices.
It will take time to initially set up and understand but it will hlep your view of not only Roth conversions but many other options, variables, and consequeces.
Thanks. If nothing else, this conversation has convinced me that i need to spend some additional time understanding the nuances of the RPM spreadsheet.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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

Post by LadyGeek » Sat May 26, 2018 7:53 am

A reminder on the acronyms, as searching this thread for "RPM" didn't hit the right post:
FiveK wrote:
Wed May 23, 2018 2:00 pm
CnC wrote:
Wed May 23, 2018 1:31 pm
OPR or RPM calculators? I am not familiar with them. Please explain.
Optimal Retirement Planner - Extended Parameter Form
and
Retiree Portfolio Model - Bogleheads
Wiki 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.

marcopolo
Posts: 1045
Joined: Sat Dec 03, 2016 10:22 am

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

Post by marcopolo » Sat May 26, 2018 9:43 am

marcopolo wrote:
Sat May 26, 2018 7:29 am
smitcat wrote:
Sat May 26, 2018 5:54 am
marcopolo wrote:
Fri May 25, 2018 6:59 pm
smitcat wrote:
Fri May 25, 2018 6:37 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm


I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
OK so I will say that everyone's results will be different dependent upon their inputs. The key is to mostly lower the taxable base before your RMD's kick in and the RPM will show you the base case(no coverts) vs the Roth conversion . By playing around with the amount of Roth conversions you will get to an optimal amount - which we intend to check each year with the latest data on our balances, taxes, etc. With that said I will respond to your questions by looking at our last RPM output...
"Just out of curiosity, how big do you go with your Roth conversions?" - 24%
Total taxes paid in base case = $877,000
Total taxes paid in full case = $392,300
Difference in tax total = $484,700
Difference in account balances ending = $642,300
This run is with both of us living a ripe old age the advantage is steeper when we run this with one spouse passing early.
I don't think you will ever be able to picture this in your mind unless/until you run the RPM - at least we were unable to come close to projecting these outcomes without running them.
That difference is huge. Is that in nominal dollars, inflation adjusted dollars, or dollars adjusted by the assumed investment growth rate? I think the last one is what you want to be comparing, right?

Paying $100,000 today may be worse than paying $200,000 20 years from now if the $100,000 left to grow would have been $400,000 in 20 years.
I was hoping to encourage others to run their own numbers rather than have a discussion about all of our variables which go into this - which would take up a few pages anyway and not apply to your situation.
The difference in account balance ending is one of the smaller runs , it goes up appreciably with any one of these changes:
- one spouse passing early
- an 'average' or higher earnings exectation (our are conservative)
- a larger inflation rate (our are average)
- a smaller drawdown (we have a much larger drawdown then we expect to use)
- tax rates remain flat as is in this run
I could have put in the numbers for a run with 7% account earnings, one spouse pass at 80 , drawdown of 50% and inflation at 3% but no-one would believe it.

So the balance at end could be converted to 'spendable' money by making the drawdown higher but in our case it is for heirs. About 10 years back when my father passed he left me a very small 401K inheritance - I must take about $1,000/yr on that in forced RMD's. I have learned that those funds go on 'top' of my existing eaernings and i have noo choice taking them right about when my earnings/taxes are at theor greatest point. Therefor my tax rate on this RMD has been close to 40% between Fed and State taxes.So whether we spend these dollars or leave them our best fit solution resides in running these models and choosing the best outcomes and refining each year.
My message is that the affect os not what you may think and that it IS worth running your own numbers to get your choices.
It will take time to initially set up and understand but it will hlep your view of not only Roth conversions but many other options, variables, and consequeces.
Thanks. If nothing else, this conversation has convinced me that i need to spend some additional time understanding the nuances of the RPM spreadsheet.
Just noticed this little tidbit in the "Limitations" section of the RPM spreadsheet:

4. It can not calculate the taxes on withdrawal of funds containing unrealized capital gains in the taxable account. As a result, taxes will be understated on such gains included in the starting taxable account balance or earned over the years.

This seems like a pretty big limitation. I plan to live mostly on withdrawals from taxable accounts (~40% in unrealized gains) for the next ~20 years. It seems the model would ignore the impact of that on any spending, taxes, and benefits of Roth conversions.

Not sure how useful this will be in my situation, Is there a recommended work around for that?
Once in a while you get shown the light, in the strangest of places if you look at it right.

northtexan
Posts: 84
Joined: Mon Jul 11, 2016 8:11 pm

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

Post by northtexan » Sat May 26, 2018 12:18 pm

It all depends on the individual. Personally I am in the lowest tax bracket right now so I have no incentive to load up a 401k or tax deferred account. I have incentive to load up my roth account first and then other accounts. I also like the idea of having all the money that is in the account being tax free once in retirement. No one knows what will happen in 20-40 years, taxes could be lower or higher I would rather know what I have and leave less up to chance.

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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 » Sat May 26, 2018 12:25 pm

northtexan wrote:
Sat May 26, 2018 12:18 pm
It all depends on the individual. Personally I am in the lowest tax bracket right now so I have no incentive to load up a 401k or tax deferred account. I have incentive to load up my roth account first and then other accounts. I also like the idea of having all the money that is in the account being tax free once in retirement. No one knows what will happen in 20-40 years, taxes could be lower or higher I would rather know what I have and leave less up to chance.
If you're in the lowest tax bracket, by contributing to the tax-defered account, you may qualify for the tax credit. In those cases. besides not paying taxes, you get tax credits. Why would you refuse free money?

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 » Sat May 26, 2018 6:58 pm

KlangFool wrote:
Sat May 26, 2018 12:25 pm
If you're in the lowest tax bracket, by contributing to the tax-defered account, you may qualify for the tax credit. In those cases. besides not paying taxes, you get tax credits. Why would you refuse free money?
Definitely worth checking. It is possible that, even with a credit, the marginal tax saving rate will be less than the expected withdrawal rate, so Roth would still be better. It all depends....

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

Post by Briar Rabbit » Sun May 27, 2018 9:47 am

I haven't read the entire thread, but I have always thought I would use roth ira funds to pay off my mortgage or buy a vacation cabin in retirement. Its also my 3rd back up emergency fund source.

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

Post by KlangFool » Sun May 27, 2018 10:01 am

Briar Rabbit wrote:
Sun May 27, 2018 9:47 am
I haven't read the entire thread, but I have always thought I would use roth ira funds to pay off my mortgage or buy a vacation cabin in retirement. Its also my 3rd back up emergency fund source.
Briar Rabbit,

So, that is why the common advice is to:

A) Do not contribute to Roth 401K.

B) Contribute to the Trad. 401k.

C) Put the tax savings into Roth IRAs.

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 Briar Rabbit » Sun May 27, 2018 10:14 am

KlangFool wrote:
Sun May 27, 2018 10:01 am
Briar Rabbit wrote:
Sun May 27, 2018 9:47 am
I haven't read the entire thread, but I have always thought I would use roth ira funds to pay off my mortgage or buy a vacation cabin in retirement. Its also my 3rd back up emergency fund source.
Briar Rabbit,

So, that is why the common advice is to:

A) Do not contribute to Roth 401K.

B) Contribute to the Trad. 401k.

C) Put the tax savings into Roth IRAs.

KlangFool
Klang,

I am a public employee, so i will receive a state pension as well as social security. I also do not have 401K, but 457 which is not matched. I have a sizable amount in the 457, and based on my estimates, the roth ira will never outpace it even with max contributions. With two children, daycare, and mortgage interest deduction I think it makes sense to contribute to roth ira right now. perhaps in 15-20 years I will favor the 457 more.

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

Post by KlangFool » Sun May 27, 2018 10:30 am

Briar Rabbit wrote:
Sun May 27, 2018 10:14 am
KlangFool wrote:
Sun May 27, 2018 10:01 am
Briar Rabbit wrote:
Sun May 27, 2018 9:47 am
I haven't read the entire thread, but I have always thought I would use roth ira funds to pay off my mortgage or buy a vacation cabin in retirement. Its also my 3rd back up emergency fund source.
Briar Rabbit,

So, that is why the common advice is to:

A) Do not contribute to Roth 401K.

B) Contribute to the Trad. 401k.

C) Put the tax savings into Roth IRAs.

KlangFool
Klang,

I am a public employee, so i will receive a state pension as well as social security. I also do not have 401K, but 457 which is not matched. I have a sizable amount in the 457, and based on my estimates, the roth ira will never outpace it even with max contributions. With two children, daycare, and mortgage interest deduction I think it makes sense to contribute to roth ira right now. perhaps in 15-20 years I will favor the 457 more.
Briar Rabbit,

<<I think it makes sense to contribute to roth ira right now.>>

That is not necessarily true. At low tax bracket, if you contribute to the Trad. 457, you may qualify for tax credits like saver's credit or EITC. In those cases, your tax maybe 0% or negative. Aka, you get a tax refund even though you pay no taxes.

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

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 Briar Rabbit » Sun May 27, 2018 10:51 am

KlangFool wrote:
Sun May 27, 2018 10:30 am
Briar Rabbit wrote:
Sun May 27, 2018 10:14 am
KlangFool wrote:
Sun May 27, 2018 10:01 am
Briar Rabbit wrote:
Sun May 27, 2018 9:47 am
I haven't read the entire thread, but I have always thought I would use roth ira funds to pay off my mortgage or buy a vacation cabin in retirement. Its also my 3rd back up emergency fund source.
Briar Rabbit,

So, that is why the common advice is to:

A) Do not contribute to Roth 401K.

B) Contribute to the Trad. 401k.

C) Put the tax savings into Roth IRAs.

KlangFool
Klang,

I am a public employee, so i will receive a state pension as well as social security. I also do not have 401K, but 457 which is not matched. I have a sizable amount in the 457, and based on my estimates, the roth ira will never outpace it even with max contributions. With two children, daycare, and mortgage interest deduction I think it makes sense to contribute to roth ira right now. perhaps in 15-20 years I will favor the 457 more.
Briar Rabbit,

<<I think it makes sense to contribute to roth ira right now.>>

That is not necessarily true. At low tax bracket, if you contribute to the Trad. 457, you may qualify for tax credits like saver's credit or EITC. In those cases, your tax maybe 0% or negative. Aka, you get a tax refund even though you pay no taxes.

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

KlangFool
Klang,

Thanks for the idea (link). We make too much to qualify for the savers tax credit. Even if we could max retirement vehicles (18k 457 and 55k sep ira) we would need the income to pay for our current living expenses.

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

Post by KlangFool » Sun May 27, 2018 11:02 am

Briar Rabbit wrote:
Sun May 27, 2018 10:51 am
KlangFool wrote:
Sun May 27, 2018 10:30 am
Briar Rabbit wrote:
Sun May 27, 2018 10:14 am
KlangFool wrote:
Sun May 27, 2018 10:01 am
Briar Rabbit wrote:
Sun May 27, 2018 9:47 am
I haven't read the entire thread, but I have always thought I would use roth ira funds to pay off my mortgage or buy a vacation cabin in retirement. Its also my 3rd back up emergency fund source.
Briar Rabbit,

So, that is why the common advice is to:

A) Do not contribute to Roth 401K.

B) Contribute to the Trad. 401k.

C) Put the tax savings into Roth IRAs.

KlangFool
Klang,

I am a public employee, so i will receive a state pension as well as social security. I also do not have 401K, but 457 which is not matched. I have a sizable amount in the 457, and based on my estimates, the roth ira will never outpace it even with max contributions. With two children, daycare, and mortgage interest deduction I think it makes sense to contribute to roth ira right now. perhaps in 15-20 years I will favor the 457 more.
Briar Rabbit,

<<I think it makes sense to contribute to roth ira right now.>>

That is not necessarily true. At low tax bracket, if you contribute to the Trad. 457, you may qualify for tax credits like saver's credit or EITC. In those cases, your tax maybe 0% or negative. Aka, you get a tax refund even though you pay no taxes.

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

KlangFool
Klang,

Thanks for the idea (link). We make too much to qualify for the savers tax credit. Even if we could max retirement vehicles (18k 457 and 55k sep ira) we would need the income to pay for our current living expenses.
Briar Rabbit,

<<We make too much to qualify for the savers tax credit.>>

1) Are you sure about that?

2) If you are making too much, then, why would Roth IRA before Trad. 457 make sense for you? The pension would have to be 6 figures before that makes sense. What is your current marginal tax rate?

<<we would need the income to pay for our current living expenses.>>

3) Depending on your marginal tax rate and state income tax rate, contribute more to the Trad. 457 instead of Roth IRA may not change your net take-home pay at all.

4) There is no early withdrawal penalty with the 457. This makes it almost as good as Roth IRA in some cases.

If you are interested, you should start a new topic and let us take a look at that.

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 dknightd » Sun May 27, 2018 3:05 pm

trueblueky wrote:
Fri May 25, 2018 7:25 pm

I agree. I convert to the top of 12%
If I ever get down into the 12% marginal bracket, I would do conversions to fill it up. That might happen when I retire, but it might not. I would actually prefer that it did not ;)

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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 » Sun May 27, 2018 3:25 pm

KlangFool wrote:
Sun May 27, 2018 11:02 am

Briar Rabbit,

<<We make too much to qualify for the savers tax credit.>>

1) Are you sure about that?

2) If you are making too much, then, why would Roth IRA before Trad. 457 make sense for you? The pension would have to be 6 figures before that makes sense. What is your current marginal tax rate?

<<we would need the income to pay for our current living expenses.>>

3) Depending on your marginal tax rate and state income tax rate, contribute more to the Trad. 457 instead of Roth IRA may not change your net take-home pay at all.

4) There is no early withdrawal penalty with the 457. This makes it almost as good as Roth IRA in some cases.

If you are interested, you should start a new topic and let us take a look at that.

KlangFool
A pension doesn't have to be 6 figures, in current dollars, to fill up the two lowest brackets. The 22% bracket starts at $77400 for MFJ. When the individual tax cuts expire, you need $75900, adjusted for inflation, of taxable income to be in the 25% bracket for MFJ. You would add the standard deduction and exemptions to that, but then you have to subtract out the amount of taxable SS.

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

Post by KlangFool » Sun May 27, 2018 3:47 pm

golfCaddy wrote:
Sun May 27, 2018 3:25 pm
KlangFool wrote:
Sun May 27, 2018 11:02 am

Briar Rabbit,

<<We make too much to qualify for the savers tax credit.>>

1) Are you sure about that?

2) If you are making too much, then, why would Roth IRA before Trad. 457 make sense for you? The pension would have to be 6 figures before that makes sense. What is your current marginal tax rate?

<<we would need the income to pay for our current living expenses.>>

3) Depending on your marginal tax rate and state income tax rate, contribute more to the Trad. 457 instead of Roth IRA may not change your net take-home pay at all.

4) There is no early withdrawal penalty with the 457. This makes it almost as good as Roth IRA in some cases.

If you are interested, you should start a new topic and let us take a look at that.

KlangFool
A pension doesn't have to be 6 figures, in current dollars, to fill up the two lowest brackets.
The 22% bracket starts at $77400 for MFJ.
When the individual tax cuts expire, you need $75900, adjusted for inflation, of taxable income to be in the 25% bracket for MFJ. You would add the standard deduction and exemptions to that, but then you have to subtract out the amount of taxable SS.
golfCaddy,

That is after 24K standard deduction. So, to reach 22% tax bracket, you need 100+K of income to reach the 22% bracket.

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 golfCaddy » Sun May 27, 2018 3:52 pm

KlangFool wrote:
Sun May 27, 2018 3:47 pm
golfCaddy wrote:
Sun May 27, 2018 3:25 pm
KlangFool wrote:
Sun May 27, 2018 11:02 am

Briar Rabbit,

<<We make too much to qualify for the savers tax credit.>>

1) Are you sure about that?

2) If you are making too much, then, why would Roth IRA before Trad. 457 make sense for you? The pension would have to be 6 figures before that makes sense. What is your current marginal tax rate?

<<we would need the income to pay for our current living expenses.>>

3) Depending on your marginal tax rate and state income tax rate, contribute more to the Trad. 457 instead of Roth IRA may not change your net take-home pay at all.

4) There is no early withdrawal penalty with the 457. This makes it almost as good as Roth IRA in some cases.

If you are interested, you should start a new topic and let us take a look at that.

KlangFool
A pension doesn't have to be 6 figures, in current dollars, to fill up the two lowest brackets.
The 22% bracket starts at $77400 for MFJ.
When the individual tax cuts expire, you need $75900, adjusted for inflation, of taxable income to be in the 25% bracket for MFJ. You would add the standard deduction and exemptions to that, but then you have to subtract out the amount of taxable SS.
golfCaddy,

That is after 24K standard deduction. So, to reach 22% tax bracket, you need 100+K of income to reach the 22% bracket.

KlangFool
I understand that, but you aren't including SS. If someone has $40k of taxable SS, then they only need a $60k pension to reach $100k total.

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 » Sun May 27, 2018 4:01 pm

golfCaddy wrote:
Sun May 27, 2018 3:52 pm
KlangFool wrote:
Sun May 27, 2018 3:47 pm
golfCaddy wrote:
Sun May 27, 2018 3:25 pm
KlangFool wrote:
Sun May 27, 2018 11:02 am

Briar Rabbit,

<<We make too much to qualify for the savers tax credit.>>

1) Are you sure about that?

2) If you are making too much, then, why would Roth IRA before Trad. 457 make sense for you? The pension would have to be 6 figures before that makes sense. What is your current marginal tax rate?

<<we would need the income to pay for our current living expenses.>>

3) Depending on your marginal tax rate and state income tax rate, contribute more to the Trad. 457 instead of Roth IRA may not change your net take-home pay at all.

4) There is no early withdrawal penalty with the 457. This makes it almost as good as Roth IRA in some cases.

If you are interested, you should start a new topic and let us take a look at that.

KlangFool
A pension doesn't have to be 6 figures, in current dollars, to fill up the two lowest brackets.
The 22% bracket starts at $77400 for MFJ.
When the individual tax cuts expire, you need $75900, adjusted for inflation, of taxable income to be in the 25% bracket for MFJ. You would add the standard deduction and exemptions to that, but then you have to subtract out the amount of taxable SS.
golfCaddy,

That is after 24K standard deduction. So, to reach 22% tax bracket, you need 100+K of income to reach the 22% bracket.

KlangFool
I understand that, but you aren't including SS. If someone has $40k of taxable SS, then they only need a $60k pension to reach $100k total.
golfCaddy,

The number is based on current tax brackets that are adjusted upward annually with the inflation rate. After 10 to 15 years, we are back to 6 figures pension.

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 dknightd » Sun May 27, 2018 4:52 pm

I still do not understand how assuming "You will likely be in a lower tax bracket in retirement" is bad idea. If you end up being wrong, smile and be happy! What am I missing?

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

Post by FiveK » Sun May 27, 2018 4:56 pm

dknightd wrote:
Sun May 27, 2018 4:52 pm
I still do not understand how assuming "You will likely be in a lower tax bracket in retirement" is bad idea. If you end up being wrong, smile and be happy! What am I missing?
Perhaps that some people can reach a point at which it is odds-on that they will not be in a lower tax bracket.

Otherwise, your perspective is reasonable.

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

Post by Culbretd » Sun May 27, 2018 5:11 pm

golfCaddy wrote:
Sun May 27, 2018 3:52 pm
KlangFool wrote:
Sun May 27, 2018 3:47 pm
golfCaddy wrote:
Sun May 27, 2018 3:25 pm
KlangFool wrote:
Sun May 27, 2018 11:02 am

Briar Rabbit,

<<We make too much to qualify for the savers tax credit.>>

1) Are you sure about that?

2) If you are making too much, then, why would Roth IRA before Trad. 457 make sense for you? The pension would have to be 6 figures before that makes sense. What is your current marginal tax rate?

<<we would need the income to pay for our current living expenses.>>

3) Depending on your marginal tax rate and state income tax rate, contribute more to the Trad. 457 instead of Roth IRA may not change your net take-home pay at all.

4) There is no early withdrawal penalty with the 457. This makes it almost as good as Roth IRA in some cases.

If you are interested, you should start a new topic and let us take a look at that.

KlangFool
A pension doesn't have to be 6 figures, in current dollars, to fill up the two lowest brackets.
The 22% bracket starts at $77400 for MFJ.
When the individual tax cuts expire, you need $75900, adjusted for inflation, of taxable income to be in the 25% bracket for MFJ. You would add the standard deduction and exemptions to that, but then you have to subtract out the amount of taxable SS.
golfCaddy,

That is after 24K standard deduction. So, to reach 22% tax bracket, you need 100+K of income to reach the 22% bracket.

KlangFool
I understand that, but you aren't including SS. If someone has $40k of taxable SS, then they only need a $60k pension to reach $100k total.
That is the situation I’m trying to figure out myself. I’ll have a pension of 60k and after my SS and my wifes SS lets say another 35k to 40k then we are on the verge of $100,000. If I have a 2million is tax deferred then I can’t really access it cuz the taxes on it will be cringe worthy. I do 100% Roth but after reading this thread I’m rethinking that and maybe I should go the tax deffered route but I’m having trouble pulling the trigger to get the tax break now.

Let’s say I have $2 million in my tax deffered accounts, when I die and my kids inherit the RMD’s they will be taxed at their highest bracket correct?

I’m mulling over the idea of going 100% tax deffered and taking the extra money each week and putting in my after tax non Roth and simply rolling it over every week to my Roth IRA. My plan allows unlimited rollovers so I could in theory do it every week before gains are made. Maybe that is a better rebalancing act and would increase my Roth accounts too.

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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 » Sun May 27, 2018 5:18 pm

dknightd wrote:
Sun May 27, 2018 4:52 pm
I still do not understand how assuming "You will likely be in a lower tax bracket in retirement" is bad idea. If you end up being wrong, smile and be happy! What am I missing?
That some people are likely to have a combination of taxable investment income, taxable SS, or pension sufficient to fill up the lowest two tax brackets, and under existing law, the individual cuts expire after 2025.

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

Post by FiveK » Sun May 27, 2018 5:21 pm

Culbretd wrote:
Sun May 27, 2018 5:11 pm
I’ll have a pension of 60k and after my SS and my wifes SS lets say another 35k to 40k then we are on the verge of $100,000. If I have a 2million is tax deferred then I can’t really access it cuz the taxes on it will be cringe worthy.
Assuming the $60K and $40K are in today's dollars, then it depends whether one considers 22% "cringe worthy" because that would be the tax rate on ~$100K/yr withdrawal from tax deferred accounts.

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

Post by dknightd » Sun May 27, 2018 6:11 pm

Trying to time taxes is about like trying to time stocks. some will win and others will loose

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

Post by Culbretd » Sun May 27, 2018 6:28 pm

FiveK wrote:
Sun May 27, 2018 5:21 pm
Culbretd wrote:
Sun May 27, 2018 5:11 pm
I’ll have a pension of 60k and after my SS and my wifes SS lets say another 35k to 40k then we are on the verge of $100,000. If I have a 2million is tax deferred then I can’t really access it cuz the taxes on it will be cringe worthy.
Assuming the $60K and $40K are in today's dollars, then it depends whether one considers 22% "cringe worthy" because that would be the tax rate on ~$100K/yr withdrawal from tax deferred accounts.
So I’m understanding correctly. The 100K withdrawal from our portfolio (which is on top of the 100K a year from pension and SS) would be taxed at the 22% tax bracket?

I guess I could stomach that. That is prolly the rate that I’m puttint it in right now.

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

Post by FiveK » Sun May 27, 2018 7:14 pm

Culbretd wrote:
Sun May 27, 2018 6:28 pm
FiveK wrote:
Sun May 27, 2018 5:21 pm
Culbretd wrote:
Sun May 27, 2018 5:11 pm
I’ll have a pension of 60k and after my SS and my wifes SS lets say another 35k to 40k then we are on the verge of $100,000. If I have a 2million is tax deferred then I can’t really access it cuz the taxes on it will be cringe worthy.
Assuming the $60K and $40K are in today's dollars, then it depends whether one considers 22% "cringe worthy" because that would be the tax rate on ~$100K/yr withdrawal from tax deferred accounts.
So I’m understanding correctly. The 100K withdrawal from our portfolio (which is on top of the 100K a year from pension and SS) would be taxed at the 22% tax bracket?

I guess I could stomach that. That is prolly the rate that I’m puttint it in right now.
That's the rate I got, but you should put your numbers into some 2018 tax estimator (or 2017 estimator if you think those rates & brackets are more likely when you are withdrawing) to check. E.g., the "what if?" worksheets of TurboTax, TaxAct, etc., the personal finance toolbox spreadsheet, 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 The Wizard » Sun May 27, 2018 10:41 pm

golfCaddy wrote:
Sun May 27, 2018 5:18 pm
dknightd wrote:
Sun May 27, 2018 4:52 pm
I still do not understand how assuming "You will likely be in a lower tax bracket in retirement" is bad idea. If you end up being wrong, smile and be happy! What am I missing?
That some people are likely to have a combination of taxable investment income, taxable SS, or pension sufficient to fill up the lowest two tax brackets, and under existing law, the individual cuts expire after 2025.
As I said up thread, tax brackets aren't really the thing to worry about.
That quote should have been: "You will likely have lower Adjusted Gross Income in retirement."

Worry about that, since tax brackets fluctuate from time to time...
Attempted new signature...

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

Post by Culbretd » Mon May 28, 2018 4:03 am

The Wizard wrote:
Sun May 27, 2018 10:41 pm
golfCaddy wrote:
Sun May 27, 2018 5:18 pm
dknightd wrote:
Sun May 27, 2018 4:52 pm
I still do not understand how assuming "You will likely be in a lower tax bracket in retirement" is bad idea. If you end up being wrong, smile and be happy! What am I missing?
That some people are likely to have a combination of taxable investment income, taxable SS, or pension sufficient to fill up the lowest two tax brackets, and under existing law, the individual cuts expire after 2025.
As I said up thread, tax brackets aren't really the thing to worry about.
That quote should have been: "You will likely have lower Adjusted Gross Income in retirement."

Worry about that, since tax brackets fluctuate from time to time...

I don’t know if that will be true. No mortgage no savers credit for he kids as they will be gone. You wo’nt have to pay F.I.C.A or Medicare but it seems like most of your icnome will be taxable in retirement. For those of us wanting to leave our money behind to our kids not having it taxed has it advagtages.

Being debt free in retirement will in turn cause you to need less money to live offf of though.

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

Post by The Wizard » Mon May 28, 2018 6:30 am

Culbretd wrote:
Mon May 28, 2018 4:03 am

...I don’t know if that will be true. No mortgage no savers credit for he kids as they will be gone. You wo’nt have to pay F.I.C.A or Medicare but it seems like most of your icnome will be taxable in retirement. For those of us wanting to leave our money behind to our kids not having it taxed has it advagtages.

Being debt free in retirement will in turn cause you to need less money to live offf of though.
Well it's true for me, five years into retirement.
It works like this: you work a few One More Years to pad your portfolio a bit in case we have a 40% stock market decline in the first few years of retirement.
But then the stock market goes UP 40% in those first few years.

And I travel 2x or 3x more in retirement, so my income needs aren't really reduced...

Edit: I lied, of course, since total stock market is up more like 80% over last five years, not 40%. But then, I'm not invested 100% in stocks at my age...
Attempted new signature...

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

Post by trueblueky » Mon May 28, 2018 7:23 am

The Wizard wrote:
Sun May 27, 2018 10:41 pm
golfCaddy wrote:
Sun May 27, 2018 5:18 pm
dknightd wrote:
Sun May 27, 2018 4:52 pm
I still do not understand how assuming "You will likely be in a lower tax bracket in retirement" is bad idea. If you end up being wrong, smile and be happy! What am I missing?
That some people are likely to have a combination of taxable investment income, taxable SS, or pension sufficient to fill up the lowest two tax brackets, and under existing law, the individual cuts expire after 2025.
As I said up thread, tax brackets aren't really the thing to worry about.
That quote should have been: "You will likely have lower Adjusted Gross Income in retirement."

Worry about that, since tax brackets fluctuate from time to time...
You can have the same standard of living in retirement with lower Adjusted Gross Income. The ways are many, and are discussed here often.

One way is to reduce spending without changing standard of living. Some of this is a natural part of the lifecycle:
* Paid-off mortgage.
* Paid-off children through college.
* Relocate to lower cost area.
* No commuting (as if that ever improved your QOL).
* No more FICA, Medicare, professional dues, 401k contributions and other items that reduce net salary. (This one is easiest because it's automatic when you retire.)

Another is to increase use of money that doesn't count toward AGI.
* Spend down taxable account while delaying Social Security. LTCG and dividends are taxed at lower rate, possibly zero. Spending original basis is not taxed.
* Municipal bonds if appropriate.

The goal is quality of life.

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

Post by Culbretd » Mon May 28, 2018 7:31 am

The Wizard wrote:
Mon May 28, 2018 6:30 am
Culbretd wrote:
Mon May 28, 2018 4:03 am

...I don’t know if that will be true. No mortgage no savers credit for he kids as they will be gone. You wo’nt have to pay F.I.C.A or Medicare but it seems like most of your icnome will be taxable in retirement. For those of us wanting to leave our money behind to our kids not having it taxed has it advagtages.

Being debt free in retirement will in turn cause you to need less money to live offf of though.
Well it's true for me, five years into retirement.
It works like this: you work a few One More Years to pad your portfolio a bit in case we have a 40% stock market decline in the first few years of retirement.
But then the stock market goes UP 40% in those first few years.

And I travel 2x or 3x more in retirement, so my income needs aren't really reduced...

Edit: I lied, of course, since total stock market is up more like 80% over last five years, not 40%. But then, I'm not invested 100% in stocks at my age...

Congrats man and safe travels. Are you debt free and no long have a mortgage?

I know everyone’s plan is different so trying to come up with one on your own you realize there is no one size fits all plan. If nothing else I learned from this thread to diversify from retirement contributions. Since I already contribute to Roth IRA I believe I’ll switch my 401k to most tax deffered with maybe 10% staying to Roth. Mine as well take the tax break. I think that should give me plenty of tax free money in retirement to pay for grandkids college and travel without having to worry about conversions. It also leaves me the option of Roth conversions in retirement assuming I retire early (before taking SS) and get to convert at a lower tax bracket.

Odd ball question? Giving the new $24k standard deduction did anyone change their w-4 at work from claiming 0 to claim 1 or higher. I’ve always claimed 0 since I’ve had this job prior to gettting married. With our first kid on the way I wonder if I should change mine but I’m worried I might owe taxes come April.

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

Post by FiveK » Mon May 28, 2018 9:09 am

Culbretd wrote:
Mon May 28, 2018 7:31 am
Odd ball question? Giving the new $24k standard deduction did anyone change their w-4 at work from claiming 0 to claim 1 or higher. I’ve always claimed 0 since I’ve had this job prior to gettting married. With our first kid on the way I wonder if I should change mine but I’m worried I might owe taxes come April.
You could use one of the withholding estimators, such as
the IRS Withholding Calculator or
the personal finance toolbox spreadsheet
to help with this.

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

Post by The Wizard » Mon May 28, 2018 12:01 pm

Culbretd wrote:
Mon May 28, 2018 7:31 am
The Wizard wrote:
Mon May 28, 2018 6:30 am
Culbretd wrote:
Mon May 28, 2018 4:03 am

...I don’t know if that will be true. No mortgage no savers credit for he kids as they will be gone. You wo’nt have to pay F.I.C.A or Medicare but it seems like most of your icnome will be taxable in retirement. For those of us wanting to leave our money behind to our kids not having it taxed has it advagtages.

Being debt free in retirement will in turn cause you to need less money to live offf of though.
Well it's true for me, five years into retirement.
It works like this: you work a few One More Years to pad your portfolio a bit in case we have a 40% stock market decline in the first few years of retirement.
But then the stock market goes UP 40% in those first few years.

And I travel 2x or 3x more in retirement, so my income needs aren't really reduced...

Edit: I lied, of course, since total stock market is up more like 80% over last five years, not 40%. But then, I'm not invested 100% in stocks at my age...

Congrats man and safe travels. Are you debt free and no long have a mortgage?

I know everyone’s plan is different so trying to come up with one on your own you realize there is no one size fits all plan. If nothing else I learned from this thread to diversify from retirement contributions...
I have a small HELOC balance, around $25k now, that I refied my higher interest mortgage into a while back. I could pay it off today but I like my taxable investment account as is, so I'll just continue with regular oversize monthly payments.


I am doing around $25,000 a year I Roth conversions, which adds to my AGI and taxable income, so you're quite right that situations vary...
Attempted new signature...

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

Post by PinotGris » Mon May 28, 2018 7:57 pm

dknightd wrote:
Sun May 27, 2018 4:52 pm
I still do not understand how assuming "You will likely be in a lower tax bracket in retirement" is bad idea. If you end up being wrong, smile and be happy! What am I missing?
If you know your taxes will actually rise upon retirement- mostly because of RMW- you can clean up mistakes in your portfolio such as holding bonds in taxable account, do conversions to Roth while you are still employed.

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

Post by northtexan » Thu Jun 21, 2018 7:43 am

KlangFool wrote:
Sat May 26, 2018 12:25 pm
northtexan wrote:
Sat May 26, 2018 12:18 pm
It all depends on the individual. Personally I am in the lowest tax bracket right now so I have no incentive to load up a 401k or tax deferred account. I have incentive to load up my roth account first and then other accounts. I also like the idea of having all the money that is in the account being tax free once in retirement. No one knows what will happen in 20-40 years, taxes could be lower or higher I would rather know what I have and leave less up to chance.
If you're in the lowest tax bracket, by contributing to the tax-defered account, you may qualify for the tax credit. In those cases. besides not paying taxes, you get tax credits. Why would you refuse free money?

KlangFool

A tax credit won't be more than a few thousand dollars or even the amount that you contribute. If you put the amount you can afford in a 401k into a ROTH both enter tax free but the ROTH will exit tax free also giving you a lot more savings than a tax credit. The tax credit seems to be beneficial for the short term if you need money in the moment. The ROTH is a long term benefit.

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 » Thu Jun 21, 2018 8:02 am

northtexan wrote:
Thu Jun 21, 2018 7:43 am
KlangFool wrote:
Sat May 26, 2018 12:25 pm
northtexan wrote:
Sat May 26, 2018 12:18 pm
It all depends on the individual. Personally I am in the lowest tax bracket right now so I have no incentive to load up a 401k or tax deferred account. I have incentive to load up my roth account first and then other accounts. I also like the idea of having all the money that is in the account being tax free once in retirement. No one knows what will happen in 20-40 years, taxes could be lower or higher I would rather know what I have and leave less up to chance.
If you're in the lowest tax bracket, by contributing to the tax-defered account, you may qualify for the tax credit. In those cases. besides not paying taxes, you get tax credits. Why would you refuse free money?

KlangFool

A tax credit won't be more than a few thousand dollars or even the amount that you contribute. If you put the amount you can afford in a 401k into a ROTH both enter tax free but the ROTH will exit tax free also giving you a lot more savings than a tax credit. The tax credit seems to be beneficial for the short term if you need money in the moment. The ROTH is a long term benefit.
northtexan,

For the person in the low tax bracket, the 401K will exit tax-free too. Hence, Roth IRA will not give the person a lot more savings.

<<A tax credit won't be more than a few thousand dollars >>

A few thousand is a big deal for folks in the low tax bracket.

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 » Thu Jun 21, 2018 11:48 pm

northtexan wrote:
Thu Jun 21, 2018 7:43 am
If you put the amount you can afford in a 401k into a ROTH both enter tax free....
Not sure what is meant by this. Could you provide some example numbers?

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

Post by TwstdSista » Fri Jun 22, 2018 6:58 am

Pages 1-4 were a head-spinner. Around pages 5+6 I started to "get it". Pages 6-10 were interesting and provided a lot more information. But I "get it" now! (I think....)

Much to keep in mind, as we are considering Roth conversions this year.

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

Post by northtexan » Fri Jun 22, 2018 5:06 pm

FiveK wrote:
Thu Jun 21, 2018 11:48 pm
northtexan wrote:
Thu Jun 21, 2018 7:43 am
If you put the amount you can afford in a 401k into a ROTH both enter tax free....
Not sure what is meant by this. Could you provide some example numbers?
Personally I made over 5500 dollars but did not have to pay any taxes due to standard deductions. I was able to put money into a ROTH IRA "tax free" and I will take it out "tax free" I could but the same amount in a 401k but when I withdraw I will be taxed at whatever tax rate I will fall into at that time and I plan on being at a higher tax bracket than I currently am, as many hope to be as well that are in the lower tax brackets. My statement was confusing, sorry about that.
Last edited by northtexan on Fri Jun 22, 2018 5:13 pm, edited 1 time in total.

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

Post by northtexan » Fri Jun 22, 2018 5:12 pm

KlangFool wrote:
Thu Jun 21, 2018 8:02 am
northtexan wrote:
Thu Jun 21, 2018 7:43 am
KlangFool wrote:
Sat May 26, 2018 12:25 pm
northtexan wrote:
Sat May 26, 2018 12:18 pm
It all depends on the individual. Personally I am in the lowest tax bracket right now so I have no incentive to load up a 401k or tax deferred account. I have incentive to load up my roth account first and then other accounts. I also like the idea of having all the money that is in the account being tax free once in retirement. No one knows what will happen in 20-40 years, taxes could be lower or higher I would rather know what I have and leave less up to chance.
If you're in the lowest tax bracket, by contributing to the tax-defered account, you may qualify for the tax credit. In those cases. besides not paying taxes, you get tax credits. Why would you refuse free money?

KlangFool

A tax credit won't be more than a few thousand dollars or even the amount that you contribute. If you put the amount you can afford in a 401k into a ROTH both enter tax free but the ROTH will exit tax free also giving you a lot more savings than a tax credit. The tax credit seems to be beneficial for the short term if you need money in the moment. The ROTH is a long term benefit.
northtexan,

For the person in the low tax bracket, the 401K will exit tax-free too. Hence, Roth IRA will not give the person a lot more savings.

<<A tax credit won't be more than a few thousand dollars >>

A few thousand is a big deal for folks in the low tax bracket.

KlangFool
If you are able to put tax free money into the Roth IRA it will be more beneficial than putting the money into the 401k. Since the money will never be taxed. If the 401k money exits tax free than there is either not a lot of money in the account itself since mandatory distributions are ever increasing. If you get to where we all want to be, one should have over 1-2 million in the 401k account a 4% withdraw will put you into tax bracket that is not low. With inflation the money might be more than 1-2 million and the tax brackets will likely not increase, so many should plan to pay more taxes per purchase power of the money.

A few thousand is a big deal but looking long term taking the few thousand at the moment to fund the 401k you will miss out on the potential of tens of thousand of dollars that are completely tax free. I do understand that many cannot afford to fund retirement accounts without the tax credit, but if you can afford it. My perspective is that the Roth IRA is more beneficial than a 401k for low tax bracket folks.

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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 Jun 22, 2018 5:16 pm

northtexan wrote:
Fri Jun 22, 2018 5:06 pm
Personally I made over 5500 dollars but did not have to pay any taxes due to standard deductions. I was able to put money into a ROTH IRA "tax free" and I will take it out "tax free" I could but the same amount in a 401k but when I withdraw I will be taxed at whatever tax rate I will fall into at that time.
Oh, yes - if one's marginal tax rate now is 0% then a Roth is at least as good as a traditional account, and likely better.

It is possible for one to be in the 0% or 10% bracket and have a much higher marginal tax saving rate due to credits (e.g., earned income) that make traditional a better choice, but if the marginal rate is 0% then Roth is the better bet.

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

Post by WestUniversity » Fri Jun 22, 2018 9:14 pm

As another poster stated don't confuse wealth with income. When I retire my six figure salary will go away, so by virtue of that alone I will be in a lower tax bracket. Most of our assets are in tax deferred accounts...
Last edited by WestUniversity on Sun Jun 24, 2018 12:32 pm, edited 1 time in total.

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