## Roth > Taxable > tIRA

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Roth > Taxable > tIRA

If you had \$1, would you rather have it in a taxable account, a traditional IRA or a Roth IRA?

Clearly, the first choice would be the Roth IRA, because you will never have to pay taxes.

The last choice would be the traditional IRA because any money that comes out is taxed as ordinary income. Plus, you are forced to withdraw money and pay taxes at some point according to a schedule called Dreaded Required Minimum Distribution D-RMD.

But how much more is a dollar in taxable or Roth worth than in the tIRA? Let's find out.

I used i-ORP Extended to figure it out. i-ORP uses Linear Programming to find the solution which maximizes Disposable Income, after taxes.

I first entered 2000 in Tax-deferred Account field. Everything else was left blank, so it would use all the default values. The solution is \$82,000
Then I entered 1710 in After-Tax Account field. Again, everything else was blank. The solution is the same \$82,000
Then I entered 1565 in Roth Account field, everything else was blank. The solution is the same \$82,000

So according to i-ORP, for its default set of inputs, \$2,000,000 in tIRA = \$1,710,000 in Taxable = \$1,565,000 in Roth.

In percentages, you only need 85.5% as much in a taxable account to have the same disposable income as the tIRA.
And you only need 78.25% as much in the Roth. So if you could convert to a Roth and pay 21.75% in taxes, you would have the same disposable income.

Plus with the Roth, you would not have any of the uncertainty of the tIRA and no D-RMD's. That alone is worth a lot.
Last edited by grayfox on Tue Jul 23, 2019 5:28 pm, edited 3 times in total.

bloom2708
Posts: 6556
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

### Re: Roth > Taxable > tIRA

If you pay the exact same tax rate on every dollar, it is built to come out very similar.

The hope/goal is to pay less tax on some of the dollars. Some dollars are never spent. Passed on to heirs. Stepped up basis. Move to a no tax state. Much lower marginal (top) tax bracket.

Also, having 30 or 40 years of growth can assist.

I would rather have \$1 in pre-tax and 25 cents in Roth grow for 30, 40 years. Defer the tax, save the tax savings in Roth. Now you saved more.

Saving more early (combo of pre-tax and Roth) and then managing your tax (Roth Conversions), lower marginal tax brackets, progressive tax brackets is the best strategy for most. Those with large pensions that kick in when done working (before SS) probably have to consider more Roth.
Last edited by bloom2708 on Tue Jul 23, 2019 11:33 am, edited 1 time in total.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

jdilla1107
Posts: 702
Joined: Sun Jun 24, 2012 8:31 pm

### Re: Roth > Taxable > tIRA

They key with a TIRA is to engage is tax arbitrage. So, you need to consider using a TIRA to defer paying taxes at a marginal rate of say 37% and then withdrawing money at say 5%.

It really depends on to what extent you can engineer your retirement income. Some people will have no room to maneuver (eg: large pension and late retirement). Some will have a lot. (eg: early retiree)

It also depends on how much you already have in each account. Someone with 100% of their money in ROTH has likely left money on the table. What will they fill their low income brackets with in retirement?

You need to consider the total savings/growth across a lifetime.

Quirkz
Posts: 172
Joined: Mon Jan 14, 2019 5:32 pm

### Re: Roth > Taxable > tIRA

grayfox wrote:
Tue Jul 23, 2019 11:17 am
If you had \$1, would you rather have it in a taxable account, a traditional IRA or a Roth IRA?

Clearly, the first choice would be the Roth IRA, because you will never have to pay taxes.

The last choice would be the traditional IRA because any money that comes out is taxed as ordinary income. Plus, you are forced to withdraw money and pay taxes at some point according to a schedule called Dreaded Required Minimum Distribution D-RMD.

But how much more is a dollar in taxable or Roth worth than in the tIRA? Let's find out.
This is hand-waving over a lot.

For the Roth and taxable, you're ignoring the fact that to put a dollar in, you've already paid taxes. So it either cost you, say, \$1.25 to get that dollar in there, or you earned a dollar and the Roth only has \$0.75 compared to the TIRA. Taxable has the same issue.

In short, if you ignore one kind of expense and focus on another kind of expense, you're going to get really skewed results.

teen persuasion
Posts: 863
Joined: Sun Oct 25, 2015 1:43 pm

### Re: Roth > Taxable > tIRA

This really depends on all sorts of details.

I'd rather PUT \$1 in a 401k (which eventually becomes a tIRA), because that decreases our AGI by \$1. That in turn increases our EITC (a refundable credit) by \$.21. That in turn increases our state EITC by \$.063. It also reduces our federal tax by \$.10, which is no longer paid by CTC (another refundable credit), so it is refunded to us. Similarly, our state tax is reduced by \$.04, which is no longer paid by the state CTC, so it is refunded to us.

Then I can put those refunded credits of \$.413 in a rIRA.

All balances in taxable could decrease any college financial aid, so \$1 in taxable could cost us an additional \$.056 in lost aid, each year, for each child. Four years * 5 children * \$.056 = \$1.12
Last edited by teen persuasion on Tue Jul 23, 2019 1:45 pm, edited 1 time in total.

aristotelian
Posts: 5929
Joined: Wed Jan 11, 2017 8:05 pm

### Re: Roth > Taxable > tIRA

I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
Exactly. my question was "have" not "put".

rkhusky
Posts: 6889
Joined: Thu Aug 18, 2011 8:09 pm

### Re: Roth > Taxable > tIRA

grayfox wrote:
Tue Jul 23, 2019 5:23 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
Exactly. my question was "have" not "put".
So, you want dollars in your Roth to grow the most, taxable next, and tax-deferred least.

02nz
Posts: 2125
Joined: Wed Feb 21, 2018 3:17 pm

### Re: Roth > Taxable > tIRA

If \$1.565 in Roth = \$2 in trad'l, that implies one should pay no more than 21.75% tax (state and federal combined) to get Roth. So at 22% and above federal income tax, one should prefer traditional, based on this math.

That's not far from my own thinking (Roth at 12% and below, traditional at 22% and above), but as usual it also depends on a whole host of other factors.

TropikThunder
Posts: 1616
Joined: Sun Apr 03, 2016 5:41 pm

### Re: Roth > Taxable > tIRA

grayfox wrote:
Tue Jul 23, 2019 5:23 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
Exactly. my question was "have" not "put".
You can’t ignore the fact that it cost you different amounts to get that \$1 into the various accounts. Sure, you’d rather have a dollar in Roth or taxable vs traditional, but you needed to earn more than a dollar to do that. It’s not an accurate assessment to look at the end value when you didn’t start at the same beginning value so I don’t understand what your point is.

JustinR
Posts: 1095
Joined: Tue Apr 27, 2010 11:43 pm

### Re: Roth > Taxable > tIRA

aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
This, except have in Roth -> traditional -> taxable.

Taxable should be last because, well, stuff is taxed.

aristotelian
Posts: 5929
Joined: Wed Jan 11, 2017 8:05 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Tue Jul 23, 2019 6:49 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
This, except have in Roth -> traditional -> taxable.

Taxable should be last because, well, stuff is taxed.

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

I encourage Bogleheads with a large tIRA to run those cases in i-ORP and examine the results. Look at the taxes the 2000 tIRA has to pay. (This table is Nominal Withdrawal Report, i.e. cashflow. All numbers are in \$1,000s)

Code: Select all

``````Age         RMD    TaxDef  AfterTax  RothIRA AftxTrns   Yield    Taxes     DI
065             0      104        0        0        0        0       18       86
066             0      108        0        0        0        0       19       89
067             0      113        0        0        0        0       20       93
068             0      117        0        0        0        0       21       96
069             0      122        0        0        0        0       22      100
070            80      132        0        0        0        0       27      104
071            83      137        0        0        0        0       29      108
072            86      143        0        0        0        0       30      113
073            89      149        0        0        0        0       32      117
074            93      156        0        0        0        0       34      122
075            96      162        0        0        0        0       35      127
076            99      169        0        0        0        0       37      132
077           102      176        0        0        0        0       39      137
078           105      184        0        0        0        0       41      143
079           107      192        0        0        0        0       43      148
080           109      200        0        0        0        0       46      154
081           110      208        0        0        0        0       48      161
082           110      217        0        0        0        0       50      167
083           110      227        0        0        0        0       53      174
084           109      236        0        0        0        0       56      181
085           105      246        0        0        0        0       58      188
086           100      257        0        0        0        0       61      195
087            92      268        0        0        0        0       65      203
088            82      279        0        0        0        0       68      211
089            69      291        0        0        0        0       71      220
090            51      303        0        0        0        0       75      229
091            29      316        0        0        0        0       78      238
LastYear        0      329        0        0        0        0       82      247``````
You start off paying \$18,000 per year in Federal Income Taxes and it rises at the end to \$82,000 per year in FIT. That puts you in the 28% tax bracket, if you earn a dollar as a Walmart Greeter, it's taxed at 28%, your Social Security is taxed, you have to pay big Medicare premiums, and anything else that is means tested based on income.

Compare this to 1565 Roth

Code: Select all

``````Age       RothIRA AftxTrns   Yield    Taxes     DI
065            86        0        0        0       86
066            89        0        0        0       89
067            92        0        0        0       92
068            96        0        0        0       96
069           100        0        0        0      100
070           104        0        0        0      104
071           108        0        0        0      108
072           113        0        0        0      113
073           117        0        0        0      117
074           122        0        0        0      122
075           127        0        0        0      127
076           132        0        0        0      132
077           137        0        0        0      137
078           142        0        0        0      142
079           148        0        0        0      148
080           154        0        0        0      154
081           160        0        0        0      160
082           167        0        0        0      167
083           173        0        0        0      173
084           180        0        0        0      180
085           187        0        0        0      187
086           195        0        0        0      195
087           203        0        0        0      203
088           211        0        0        0      211
089           219        0        0        0      219
090           228        0        0        0      228
091           237        0        0        0      237
LastYear      247        0        0        0      24``````
Same Disposable Income, but taxes are \$0 per year. That's right, zero FIT. You are in the 0 tax bracket. Social Security is not taxed, no higher Medicare premiums, etc. You are below the Federal Poverty Line. As far as the government is concerned, you are poor. Even though the disposable income is the same in both cases. I wonder if you can apply for free government cheese?

Clearly it is better to have \$1,565,000 in a Roth than \$2,000,000 in tIRA

Hector
Posts: 996
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Contact:

### Re: Roth > Taxable > tIRA

Does this calculator factor in inflation over the years?
For example standard deduction for a couple filing jointly was 24,000 last year. It is 24,400 this year.

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

Hector wrote:
Wed Jul 24, 2019 8:38 am
Does this calculator factor in inflation over the years?
For example standard deduction for a couple filing jointly was 24,000 last year. It is 24,400 this year.
Here is what the instructions have to say:
A 2017 Senior Citizens League report revealed that inflation adjusted Social Security benefits grow at a slower rate (2.3%) than the actual retirement cost of living (4.0%). Because of this dichotomy ORP provides two inflation rates:

1. Income inflation is your estimate of the rate of increase in income that is adjusted for the term of retirement. This adjustment applies to Social Security benefits, pension, Cost of Living Adjustments (COLA), and state and Federal tax brackets. This is your estimate of the Consumer Price Index. The 2.0% default is the Federal Reserve's target inflation rate. (If you can't trust your central bank who can you trust?)

2.Spending inflation anticipates the rate of increase for day to day spending during retirement quite apart from the measurements of the government apparatchiks. ORP's 4% default is derived from the Senior Citizens League reports.

Estimate the average inflation rates that you anticipate for the term of your plan. Enter the amount as a percentage. Inflation rates have a significant impact on planned withdrawal levels as measured in today's dollars. Recently inflation has been low at 1%. Over the past 30 years the average has been 5.4%. The world's central banks are attempting to hold inflation in the 2 to 3% range.

bloom2708
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Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

### Re: Roth > Taxable > tIRA

grayfox wrote:
Wed Jul 24, 2019 6:53 am
Clearly it is better to have \$1,565,000 in a Roth than \$2,000,000 in tIRA
Even if you paid 37% tax on every one of the \$1,565,000 dollars while working?

28% doesn't look so bad compared to 37%.

No single example stands up because you can't know the future tax rates or how you will withdraw. You can only know what you pay today getting the \$1 Roth dollar.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

firebirdparts
Posts: 118
Joined: Thu Jun 13, 2019 4:21 pm

### Re: Roth > Taxable > tIRA

I don't think it's so clear that you want to pay taxes now vs. later. That's very much an individual thing. Personally, I am doing everything Roth including my 401k, but that's me.

firebirdparts
Posts: 118
Joined: Thu Jun 13, 2019 4:21 pm

### Re: Roth > Taxable > tIRA

grayfox wrote:
Wed Jul 24, 2019 6:53 am
Clearly it is better to have \$1,565,000 in a Roth than \$2,000,000 in tIRA
You keep using that word, clearly.

Clearly, you're not good at math.

PluckyDucky
Posts: 134
Joined: Tue Jan 15, 2019 8:29 pm

### Re: Roth > Taxable > tIRA

bloom2708 wrote:
Wed Jul 24, 2019 9:15 am
grayfox wrote:
Wed Jul 24, 2019 6:53 am
Clearly it is better to have \$1,565,000 in a Roth than \$2,000,000 in tIRA
Even if you paid 37% tax on every one of the \$1,565,000 dollars while working?

28% doesn't look so bad compared to 37%.

No single example stands up because you can't know the future tax rates or how you will withdraw. You can only know what you pay today getting the \$1 Roth dollar.
How can that even happen? The 37% tax bracket is >\$500k (\$600k for married), but the Roth IRA phase out is \$135k (\$199k married). The tIRA phase out is similar. Numbers change every year but, the difference is clear.

Basically, there are only a small portion of people that aren't phased out of IRAs where the taxes might make sense for a tIRA instead of Roth.

https://www.bankrate.com/finance/taxes/ ... ckets.aspx

FiveK
Posts: 7244
Joined: Sun Mar 16, 2014 2:43 pm

### Re: Roth > Taxable > tIRA

grayfox wrote:
Tue Jul 23, 2019 11:17 am
So according to i-ORP, for its default set of inputs, \$2,000,000 in tIRA = \$1,710,000 in Taxable = \$1,565,000 in Roth.
In addition to the "have in" vs. "contribute to" distinction already covered (reminiscent of 'Bell the cat' - the meaning and origin of this phrase), note that I-ORP's default tax calculations (e.g., "The Cost Basis default is the After-tax Account initial balance" and "ORP does not model the connection between your capital gains tax rate and your...income...to compute your capital gains tax rate" may not represent one's actual situation.

JustinR
Posts: 1095
Joined: Tue Apr 27, 2010 11:43 pm

### Re: Roth > Taxable > tIRA

aristotelian wrote:
Wed Jul 24, 2019 6:29 am
JustinR wrote:
Tue Jul 23, 2019 6:49 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
This, except have in Roth -> traditional -> taxable.

Taxable should be last because, well, stuff is taxed.
Which can be 0%.

Which taxable can be too, except that traditional grows tax free as well. Meaning traditional is better in almost every way than taxable.

FiveK
Posts: 7244
Joined: Sun Mar 16, 2014 2:43 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Wed Jul 24, 2019 12:28 pm
Which taxable can be too, except that traditional grows tax free as well. Meaning traditional is better in almost every way than taxable.
Person A has \$100K in traditional pre-tax.
Person B has \$100K in taxable.
Both want to withdraw the whole amount in one year, paying tax on that as the only income.

Person B will have the higher spendable after tax amount, regardless of the taxable cost basis.

aristotelian
Posts: 5929
Joined: Wed Jan 11, 2017 8:05 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Wed Jul 24, 2019 12:28 pm
Which can be 0%.

Which taxable can be too, except that traditional grows tax free as well. Meaning traditional is better in almost every way than taxable.
If your marginal rate is 0%, then your capital gains/qualified dividend rate is 0%. In almost every instance, regardless of tax bracket, capital gains and qualified dividends are taxed less than marginal income. 0% marginal is the only instance where they are equal.

PluckyDucky
Posts: 134
Joined: Tue Jan 15, 2019 8:29 pm

### Re: Roth > Taxable > tIRA

teen persuasion wrote:
Tue Jul 23, 2019 1:42 pm
This really depends on all sorts of details.

I'd rather PUT \$1 in a 401k (which eventually becomes a tIRA), because that decreases our AGI by \$1. That in turn increases our EITC (a refundable credit) by \$.21. That in turn increases our state EITC by \$.063. It also reduces our federal tax by \$.10, which is no longer paid by CTC (another refundable credit), so it is refunded to us. Similarly, our state tax is reduced by \$.04, which is no longer paid by the state CTC, so it is refunded to us.

Then I can put those refunded credits of \$.413 in a rIRA.

All balances in taxable could decrease any college financial aid, so \$1 in taxable could cost us an additional \$.056 in lost aid, each year, for each child. Four years * 5 children * \$.056 = \$1.12
You have less than 52k income? Isn't that the cap for EITC?

FiveK
Posts: 7244
Joined: Sun Mar 16, 2014 2:43 pm

### Re: Roth > Taxable > tIRA

PluckyDucky wrote:
Wed Jul 24, 2019 2:31 pm
You have less than 52k income? Isn't that the cap for EITC?
With 4 children, the max for EITC is \$55,952. But if 401k's and HSAs are used, gross wages could be \$19K+\$7K (or \$38K, etc.) higher.

By the comment "...reduces our federal tax by \$.10", taxable income is less than \$19,400 so AGI may be <\$43,800, well within the EITC range.

Another good example of why marginal tax rate (in this case, 41%, not counting college aid effects), not federal tax bracket (10%), should inform one's traditional vs. Roth choice.

JustinR
Posts: 1095
Joined: Tue Apr 27, 2010 11:43 pm

### Re: Roth > Taxable > tIRA

aristotelian wrote:
Wed Jul 24, 2019 12:35 pm
JustinR wrote:
Wed Jul 24, 2019 12:28 pm
Which can be 0%.

Which taxable can be too, except that traditional grows tax free as well. Meaning traditional is better in almost every way than taxable.
If your marginal rate is 0%, then your capital gains/qualified dividend rate is 0%. In almost every instance, regardless of tax bracket, capital gains and qualified dividends are taxed less than marginal income. 0% marginal is the only instance where they are equal.
For traditional, your marginal tax rate only has to be 0% when you withdraw. During growth, it's not taxed at all.

Taxable is taxed during both growth and withdrawal. So your tax rate has to be 0% all the time.

Posts: 257
Joined: Tue Feb 28, 2017 2:39 pm

### Re: Roth > Taxable > tIRA

If you overly strategize it, it can be even more complicated:
For 401k, if you are in 24% tax bracket, if you PUT \$19,000 tax deferred, you will actually have \$14,440 upon withdrawal if the tax rate remains the same.
However, if you PUT \$19,000 roth, you will have the same amount, but actually, the impact to your portfolio is greater: you actually need to have \$23,560 to get that number.

danaht
Posts: 596
Joined: Sun Oct 18, 2015 11:28 am

### Re: Roth > Taxable > tIRA

For me : Roth IRA > tIRA > or = to taxable.

Situation: I am in the 24% tax bracket and continuing to partially convert my tIRA to Roth every year. I can't contribute to a Roth directly or do the backdoor Roth because of the before tax money in my tIRA accounts. However, I am focusing on partially converting my tIRA accounts to Roth accounts because of the new lower tax brackets. For me, adding (after tax) money to a tIRA is just as good as adding money to a taxable account. The after tax tIRA contributions will slightly help the taxes of the Roth conversions.

teen persuasion
Posts: 863
Joined: Sun Oct 25, 2015 1:43 pm

### Re: Roth > Taxable > tIRA

PluckyDucky wrote:
Wed Jul 24, 2019 2:31 pm
teen persuasion wrote:
Tue Jul 23, 2019 1:42 pm
This really depends on all sorts of details.

I'd rather PUT \$1 in a 401k (which eventually becomes a tIRA), because that decreases our AGI by \$1. That in turn increases our EITC (a refundable credit) by \$.21. That in turn increases our state EITC by \$.063. It also reduces our federal tax by \$.10, which is no longer paid by CTC (another refundable credit), so it is refunded to us. Similarly, our state tax is reduced by \$.04, which is no longer paid by the state CTC, so it is refunded to us.

Then I can put those refunded credits of \$.413 in a rIRA.

All balances in taxable could decrease any college financial aid, so \$1 in taxable could cost us an additional \$.056 in lost aid, each year, for each child. Four years * 5 children * \$.056 = \$1.12
You have less than 52k income? Isn't that the cap for EITC?
Yes, after deductions for health insurance, HSA, 401k + catchup (over 50).

JustinR
Posts: 1095
Joined: Tue Apr 27, 2010 11:43 pm

### Re: Roth > Taxable > tIRA

FiveK wrote:
Wed Jul 24, 2019 12:33 pm
JustinR wrote:
Wed Jul 24, 2019 12:28 pm
Which taxable can be too, except that traditional grows tax free as well. Meaning traditional is better in almost every way than taxable.
Person A has \$100K in traditional pre-tax.
Person B has \$100K in taxable.
Both want to withdraw the whole amount in one year, paying tax on that as the only income.

Person B will have the higher spendable after tax amount, regardless of the taxable cost basis.
I mean, that's a pretty specific example. Yea, if you want to withdraw \$1m at once then taxable is better.

FiveK
Posts: 7244
Joined: Sun Mar 16, 2014 2:43 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Wed Jul 24, 2019 9:19 pm
FiveK wrote:
Wed Jul 24, 2019 12:33 pm
JustinR wrote:
Wed Jul 24, 2019 12:28 pm
Which taxable can be too, except that traditional grows tax free as well. Meaning traditional is better in almost every way than taxable.
Person A has \$100K in traditional pre-tax.
Person B has \$100K in taxable.
Both want to withdraw the whole amount in one year, paying tax on that as the only income.

Person B will have the higher spendable after tax amount, regardless of the taxable cost basis.
I mean, that's a pretty specific example. Yea, if you want to withdraw \$1m at once then taxable is better.
Why \$1 million?

\$50K works just as well: you pay less tax on a \$50K withdrawal from taxable than from traditional - and that's even with a \$0 cost basis for taxable.

Actually, except for possible EITC ramifications, withdrawal of any amount incurs less tax (or, if \$0, possibly equal) when coming from long term taxable holdings than from traditional.

aristotelian
Posts: 5929
Joined: Wed Jan 11, 2017 8:05 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Wed Jul 24, 2019 5:02 pm
aristotelian wrote:
Wed Jul 24, 2019 12:35 pm
If your marginal rate is 0%, then your capital gains/qualified dividend rate is 0%. In almost every instance, regardless of tax bracket, capital gains and qualified dividends are taxed less than marginal income. 0% marginal is the only instance where they are equal.
For traditional, your marginal tax rate only has to be 0% when you withdraw. During growth, it's not taxed at all.

Taxable is taxed during both growth and withdrawal. So your tax rate has to be 0% all the time.

Yes, there is some dividend drag in taxable, but once you retire you may be in the 0% bracket for qualified dividends. Still, I'd rather pay 15% on 2% dividends during accumulation than 12% or 22% on all gains, dividend and growth, compounded over time in retirement. Plus no RMD's to worry about, and basis steps up when you die.

If you offered me \$1 in taxable or \$1 in my 401k, I would take the \$1 in taxable. Traditional become superior only when you factor the tax deduction.

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

i-ORP is very easy to use. The cases I ran in i-ORP Extended can be easily re-created. You only have to put numbers in two fields. Enter Current Age a the top, which I made 64, and enter an amount into one of the Retirement Accounts. Then make sure all other entry fields are blank, so that it uses the defaults. Also make sure under Retirement Plans, that Retirement Plan Spending = Constant Spending and IRA to Roth IRA Conversion = No Conversions.

I used the defaults so that I would not bias the outcome, either consciously or unconsciously. I believe it's very common for people to choose inputs that make the results come out the way they want. You will do this even if you don't think you are doing it.

I kept the cases very simple with only one account having any funds, and no other income or assets, so that the effect of location is isolated.

Put the amounts in one of these fields under Retirement Accounts:
For Mr. tIRA, Tax-deferred Account Initial Balance
For Mr. Roth, Roth IRA Initial Balance
For Mr. Taxable, After-TAx Account Initial Balance

Amounts are entered in 1,000s, e.g. \$1,000,000 is entered as 1000.

Then just click the Run ORP button at the the bottom.

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

Since it is so easy to run, I decided to run a few more cases to see the effect of portfolio size. I did the same procedure, starting with various amounts in the tIRA. The cases were 100, 500, 1000, 2000, 3000, 5000 in the tIRA. Then I adjusted the amount in the other accounts by trial and error to get the same Disposable Income.

In dollars:

Code: Select all

``````Disposable    Mr.       Mr.      Mr.
Income     tIRA    Taxable     Roth
\$5,000      100       100       100       very small tIRA
\$24,000      500       475       450       average size tIRA for non-BHs?
\$45,000     1000       925       850
\$81,000     2000      1710      1565       typical BH tIRA?
\$119,000     3000      2525      2265
\$235,000     5000      3975      3535       huge tIRA``````
In percentages:

Code: Select all

``````Disposable    Mr.       Mr.      Mr.
Income     tIRA    Taxable     Roth
\$5,000     100%     100%      100%
\$24,000     100%      95.0%     90.0%
\$45,000     100%      92.5%     85.0%
\$81,000     100%      85.5%     78.25%
\$119,000     100%      84.17%    75.5%
\$235,000     100%      79.50%    70.7%``````
Update: Added cases for \$100K and \$5M tIRA.
Last edited by grayfox on Fri Jul 26, 2019 6:07 am, edited 3 times in total.

marcopolo
Posts: 2167
Joined: Sat Dec 03, 2016 10:22 am

### Re: Roth > Taxable > tIRA

You seem to be going through a lot of trouble to show that paying no taxes (Roth) is better than paying taxes on some (Taxable) which is better than paying taxes on all of it (tIRA). While this is correct, it is completely meaningless unless you also factor in how the money got in there in the first place. Each of those account types have a different cost of entry. So, you are looking at ending value without considering the cost. What purpose does that serve? A meaningful analysis is much more complicated than this.
grayfox wrote:
Thu Jul 25, 2019 5:11 am
Since it is so easy to run, I decided to run a few more cases to see the effect of portfolio size. I did the same procedure, starting with various amounts in the tIRA. The cases were 500, 1000, 2000, 3000 in the tIRA. Then I adjusted the amount in the other accounts by trial and error to get the same Disposable Income.

In dollars:

Code: Select all

``````Disposable    Mr.       Mr.      Mr.
Income     tIRA    Taxable     Roth
\$24,000      500       475       450
\$45,000     1000       925       850
\$81,000     2000      1710      1565
\$119,000     3000      2525      2265``````
In percentages:

Code: Select all

``````Disposable    Mr.       Mr.      Mr.
Income     tIRA    Taxable     Roth
\$24,000     100%      95.0%     90.0%
\$45,000     100%      92.5%     85.0%
\$81,000     100%      85.5%     78.25%
\$119,000     100%      84.17%    75.5%``````
Once in a while you get shown the light, in the strangest of places if you look at it right.

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

marcopolo wrote:
Thu Jul 25, 2019 8:34 am
You seem to be going through a lot of trouble to show that paying no taxes (Roth) is better than paying taxes on some (Taxable) which is better than paying taxes on all of it (tIRA). While this is correct, it is completely meaningless unless you also factor in how the money got in there in the first place. Each of those account types have a different cost of entry. So, you are looking at ending value without considering the cost. What purpose does that serve? A meaningful analysis is much more complicated than this.
Paying no taxes on Roth is better than paying taxes on tIRA. Obviously. But how much better?
Apparently you are not interested in a quantitative answer. Fine. Next!

Now for those who are interested on how much better. Most people have more than more than one kind of account. They might have a tIRA and a Taxable, or Roth and Taxable, or all three.
But what is the total value of their retirement accounts? Just add them up? Nope. That would be adding apples and oranges because \$1 tIRA < \$1 Taxable < \$1 Roth.

Again, how much less is \$1 tIRA compared to, say, \$1 in the Roth. I've have not seen anyone make any quantitative statement and show how they determined it.

bloom2708
Posts: 6556
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

### Re: Roth > Taxable > tIRA

You can't figure it out because you can't know the future. Tax rates, withdrawal type and start dates, retirement date, inheritance, future tax rates, future RMD rules, future taxation rules. All unknowable. Any analysis is guessing.

Use Pre-tax and HSA and Roth and taxable and high interest savings/money market. Stuff away. See what happens.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

bloom2708 wrote:
Thu Jul 25, 2019 1:10 pm
You can't figure it out because you can't know the future. Tax rates, withdrawal type and start dates, retirement date, inheritance, future tax rates, future RMD rules, future taxation rules. All unknowable. Any analysis is guessing.

Use Pre-tax and HSA and Roth and taxable and high interest savings/money market. Stuff away. See what happens.
True. i-ORP and all the withdrawal simulators can only let you make some assumptions and play "What If?" They can not tell you "What is?" or "What will be?"

Just the same way a spreadsheet can't tell you what the balance in your account will be in 20 years, unless you own a 20-year Treasury.

Yet you still have to make decisions, like, should I do a Roth Conversion this year, and if so, how much?

marcopolo
Posts: 2167
Joined: Sat Dec 03, 2016 10:22 am

### Re: Roth > Taxable > tIRA

grayfox wrote:
Thu Jul 25, 2019 1:12 pm
bloom2708 wrote:
Thu Jul 25, 2019 1:10 pm
You can't figure it out because you can't know the future. Tax rates, withdrawal type and start dates, retirement date, inheritance, future tax rates, future RMD rules, future taxation rules. All unknowable. Any analysis is guessing.

Use Pre-tax and HSA and Roth and taxable and high interest savings/money market. Stuff away. See what happens.
True. i-ORP and all the withdrawal simulators can only let you make some assumptions and play "What If?" They can not tell you "What is?" or "What will be?"

Just the same way a spreadsheet can't tell you what the balance in your account will be in 20 years, unless you own a 20-year Treasury.

Yet you still have to make decisions, like, should I do a Roth Conversion this year, and if so, how much?
Ok. Now we are getting somewhere. You want to use this analysis to make some decisions. Like whether and how much to Roth convert, That is great. But, again as people keep pointing out, to do that analysis, you have to consider both the cost of doing the conversion now, and how much a dollar in each will yield. You keep ignoring the the first part of that. Which makes the analysis pretty useless for making the decision you say you are interested in making.
Once in a while you get shown the light, in the strangest of places if you look at it right.

JustinR
Posts: 1095
Joined: Tue Apr 27, 2010 11:43 pm

### Re: Roth > Taxable > tIRA

aristotelian wrote:
Wed Jul 24, 2019 11:00 pm
JustinR wrote:
Wed Jul 24, 2019 5:02 pm
aristotelian wrote:
Wed Jul 24, 2019 12:35 pm
If your marginal rate is 0%, then your capital gains/qualified dividend rate is 0%. In almost every instance, regardless of tax bracket, capital gains and qualified dividends are taxed less than marginal income. 0% marginal is the only instance where they are equal.
For traditional, your marginal tax rate only has to be 0% when you withdraw. During growth, it's not taxed at all.

Taxable is taxed during both growth and withdrawal. So your tax rate has to be 0% all the time.

Yes, there is some dividend drag in taxable, but once you retire you may be in the 0% bracket for qualified dividends. Still, I'd rather pay 15% on 2% dividends during accumulation than 12% or 22% on all gains, dividend and growth, compounded over time in retirement. Plus no RMD's to worry about, and basis steps up when you die.

If you offered me \$1 in taxable or \$1 in my 401k, I would take the \$1 in taxable. Traditional become superior only when you factor the tax deduction.
So if you could move all your 401k funds into your taxable account right now, tax free, you would?

I can't relate to that at all.

FiveK
Posts: 7244
Joined: Sun Mar 16, 2014 2:43 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Thu Jul 25, 2019 10:59 pm
So if you could move all your 401k funds into your taxable account right now, tax free, you would?
Yes!
I can't relate to that at all.
Understandable if your marginal rate on ordinary income is 0%. Otherwise, it takes many years avoiding 15% tax on annual stock yield to overcome the higher tax rate on ordinary income. E.g,. see viewtopic.php?p=4660585#p4660585.

JustinR
Posts: 1095
Joined: Tue Apr 27, 2010 11:43 pm

### Re: Roth > Taxable > tIRA

FiveK wrote:
Thu Jul 25, 2019 11:26 pm
JustinR wrote:
Thu Jul 25, 2019 10:59 pm
So if you could move all your 401k funds into your taxable account right now, tax free, you would?
Yes!
I can't relate to that at all.
Understandable if your marginal rate on ordinary income is 0%. Otherwise, it takes many years avoiding 15% tax on annual stock yield to overcome the higher tax rate on ordinary income. E.g,. see viewtopic.php?p=4660585#p4660585.
It's easy to have 0% rate though. Especially if you're retired.

As far as I know, I've never heard of anyone doing a Taxable Conversion Ladder.

Topic Author
grayfox
Posts: 5167
Joined: Sat Sep 15, 2007 4:30 am

### Re: Roth > Taxable > tIRA

marcopolo wrote:
Thu Jul 25, 2019 10:36 pm

Ok. Now we are getting somewhere. You want to use this analysis to make some decisions. Like whether and how much to Roth convert, That is great. But, again as people keep pointing out, to do that analysis, you have to consider both the cost of doing the conversion now, and how much a dollar in each will yield. You keep ignoring the the first part of that. Which makes the analysis pretty useless for making the decision you say you are interested in making.
True. The question I am asking is only one part of the decision. Rome wasn't built in a day.

What promoted me to start this thread was another Roth optimization thread where the subject came up. The author wrote that they de-rate the tIRA by 10% before adding to Roth to calculate total balance. I thought, "That does not sound right, that it is 10% across the board." It seemed to me that it must depend on many factors, one big factor being the size of the tIRA because of progressive tax rates.

So I came up with the idea of running i-ORP to see how much to de-rate a tIRA to get the same disposable income as Roth. And I think it shows that it does, in fact, depend on the amount of money you have in the tIRA. With a small \$100K tIRA, you don't have to de-rate at all. Maybe de-rate about 10% at 500K tIRA. But larger tIRAs, \$2M-\$3M, more like 20-25%. And a huge \$5M tIRA, de-rate by 30%.

A lot of people say they are reluctant to do big Roth conversions because they think they are losing tons of money doing the conversion. But if a \$2M tIRA is really only equivalent to a \$1.5M Roth, they are not really losing \$500K. The \$2M tIRA was never really \$2M in the first place.

A bird in the hand is worth two in the bush.

aristotelian
Posts: 5929
Joined: Wed Jan 11, 2017 8:05 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Thu Jul 25, 2019 10:59 pm
aristotelian wrote:
Wed Jul 24, 2019 11:00 pm
JustinR wrote:
Wed Jul 24, 2019 5:02 pm
aristotelian wrote:
Wed Jul 24, 2019 12:35 pm
If your marginal rate is 0%, then your capital gains/qualified dividend rate is 0%. In almost every instance, regardless of tax bracket, capital gains and qualified dividends are taxed less than marginal income. 0% marginal is the only instance where they are equal.
For traditional, your marginal tax rate only has to be 0% when you withdraw. During growth, it's not taxed at all.

Taxable is taxed during both growth and withdrawal. So your tax rate has to be 0% all the time.

Yes, there is some dividend drag in taxable, but once you retire you may be in the 0% bracket for qualified dividends. Still, I'd rather pay 15% on 2% dividends during accumulation than 12% or 22% on all gains, dividend and growth, compounded over time in retirement. Plus no RMD's to worry about, and basis steps up when you die.

If you offered me \$1 in taxable or \$1 in my 401k, I would take the \$1 in taxable. Traditional become superior only when you factor the tax deduction.
So if you could move all your 401k funds into your taxable account right now, tax free, you would?

I can't relate to that at all.
That is not what I said. You are not even reading my posts.

FiveK
Posts: 7244
Joined: Sun Mar 16, 2014 2:43 pm

### Re: Roth > Taxable > tIRA

JustinR wrote:
Fri Jul 26, 2019 12:57 am
It's easy to have 0% rate though. Especially if you're retired.
Sure, those eligible for pensions just tell Uncle Sam or Megacorp "you keep it."
As far as I know, I've never heard of anyone doing a Taxable Conversion Ladder.
Why would one do that, when converting to Roth is better than converting to taxable?

trueblueky
Posts: 1537
Joined: Tue May 27, 2014 3:50 pm

### Re: Roth > Taxable > tIRA

rkhusky wrote:
Tue Jul 23, 2019 5:38 pm
grayfox wrote:
Tue Jul 23, 2019 5:23 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
Exactly. my question was "have" not "put".
So, you want dollars in your Roth to grow the most, taxable next, and tax-deferred least.
For someone who is retired, this is valuable. It means highest growth assets in Roth, lowest in traditional.

MotoTrojan
Posts: 5507
Joined: Wed Feb 01, 2017 8:39 pm

### Re: Roth > Taxable > tIRA

rkhusky wrote:
Tue Jul 23, 2019 5:38 pm
grayfox wrote:
Tue Jul 23, 2019 5:23 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
Exactly. my question was "have" not "put".
So, you want dollars in your Roth to grow the most, taxable next, and tax-deferred least.
I want them all to grow equally.

If your marginal tax-rate now is the same in retirement then a pre-tax \$1 into tax-deferred will be the same value in retirement as if you had put it in your Roth once both are withdrawn.

aristotelian
Posts: 5929
Joined: Wed Jan 11, 2017 8:05 pm

### Re: Roth > Taxable > tIRA

MotoTrojan wrote:
Fri Jul 26, 2019 7:22 pm
rkhusky wrote:
Tue Jul 23, 2019 5:38 pm
grayfox wrote:
Tue Jul 23, 2019 5:23 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
Exactly. my question was "have" not "put".
So, you want dollars in your Roth to grow the most, taxable next, and tax-deferred least.
I want them all to grow equally.

If your marginal tax-rate now is the same in retirement then a pre-tax \$1 into tax-deferred will be the same value in retirement as if you had put it in your Roth once both are withdrawn.
Most people are not in the same tax bracket in retirement.

abuss368
Posts: 14457
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

### Re: Roth > Taxable > tIRA

A taxable account provides a lot of flexibility and may allow for early or a more secure retirement. There is not enough space in the other tax deferred accounts.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

MotoTrojan
Posts: 5507
Joined: Wed Feb 01, 2017 8:39 pm

### Re: Roth > Taxable > tIRA

aristotelian wrote:
Fri Jul 26, 2019 7:28 pm
MotoTrojan wrote:
Fri Jul 26, 2019 7:22 pm
rkhusky wrote:
Tue Jul 23, 2019 5:38 pm
grayfox wrote:
Tue Jul 23, 2019 5:23 pm
aristotelian wrote:
Tue Jul 23, 2019 1:43 pm
I would rather *have* \$1 in Roth, then taxable, then Traditional.

I would rather *put* \$1 in Traditional, then Roth, then taxable. This is because \$1 in Traditional gives me an additional deduction of about \$.28.
Exactly. my question was "have" not "put".
So, you want dollars in your Roth to grow the most, taxable next, and tax-deferred least.
I want them all to grow equally.

If your marginal tax-rate now is the same in retirement then a pre-tax \$1 into tax-deferred will be the same value in retirement as if you had put it in your Roth once both are withdrawn.
Most people are not in the same tax bracket in retirement.
Perhaps not the same as the year before retirement, but an early accumulator likely is (or perhaps is even in a lower bracket).