Can one have too much Roth?

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Miriam2
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Can one have too much Roth?

Post by Miriam2 » Wed Nov 27, 2019 10:08 pm

Can one have too much Roth?

For young investors, such as my kids, they're able to contribute directly to a Roth every year, and even when they earn too much to directly contribute to the Roth, they can simply contribute to a tIRA, then convert it to a Roth every year. My son changed jobs and rolled over his old pre-tax 401k to a Rollover IRA and is now converting that to his Roth. Also, many young people use Roth 401k's and other Roth retirement plans. Many young investors will be in a low tax bracket for years, so now would seem to be a good time to pack the Roth full, viewing the taxes paid as being well-worth the investment.

In other words, unlike me (an older investor :wink: ), young people today have many opportunities to build a very sizable already-taxed Roth.

What is the downside or real negative to ending up with a Real Big Roth?

What would be too much Roth?

123
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Re: Can one have too much Roth?

Post by 123 » Wed Nov 27, 2019 10:29 pm

The downside of having too much Roth is that you may have paid too much in tax to get it. However all things being equal it is likely better to have funds in a Roth account versus having them in a taxable account.
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Re: Can one have too much Roth?

Post by MNGopher » Wed Nov 27, 2019 10:37 pm

You can have too much in a Roth if you paid more taxes to put it in there than you would have had in a traditional account. Once it's there though, just leave it alone. Who knows, if future tax rates go way up, it may turn out great.

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Re: Can one have too much Roth?

Post by willthrill81 » Wed Nov 27, 2019 11:08 pm

123 wrote:
Wed Nov 27, 2019 10:29 pm
The downside of having too much Roth is that you may have paid too much in tax to get it.
That's the issue. Too much Roth means that you paid $2 today to save $1 in taxes in the future, for instance.
123 wrote:
Wed Nov 27, 2019 10:29 pm
However all things being equal it is likely better to have funds in a Roth account versus having them in a taxable account.
How could a taxable account ever beat a Roth?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Miriam2
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Re: Can one have too much Roth?

Post by Miriam2 » Wed Nov 27, 2019 11:18 pm

willthrill81 wrote:
123 wrote:
Wed Nov 27, 2019 10:29 pm
The downside of having too much Roth is that you may have paid too much in tax to get it.
That's the issue. Too much Roth means that you paid $2 today to save $1 in taxes in the future, for instance.
I'm particularly interested in millennials - younger investors - who today are still in relatively low tax brackets. They would be paying the taxes to get into Roths now at a lower rate than they will likely be in 10 or 20 years from now. For millennials, they may have 30 years of investing before they retire. Packing their Roths now, and perhaps then continuing to convert tIRAs to Roths over the years - and they will end up with a giant Roth.

Any downside? Any downside to having a giant Roth and a smaller pre-tax account heading into retirement down the road?

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Re: Can one have too much Roth?

Post by Eagle33 » Wed Nov 27, 2019 11:25 pm

willthrill81 wrote:
Wed Nov 27, 2019 11:08 pm
123 wrote:
Wed Nov 27, 2019 10:29 pm
However all things being equal it is likely better to have funds in a Roth account versus having them in a taxable account.
How could a taxable account ever beat a Roth?
When one needs Roth earnings before 59.5 y.o. No TLH with a Roth.

Though I am a big proponent of Roths.
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Re: Can one have too much Roth?

Post by willthrill81 » Wed Nov 27, 2019 11:31 pm

Eagle33 wrote:
Wed Nov 27, 2019 11:25 pm
willthrill81 wrote:
Wed Nov 27, 2019 11:08 pm
123 wrote:
Wed Nov 27, 2019 10:29 pm
However all things being equal it is likely better to have funds in a Roth account versus having them in a taxable account.
How could a taxable account ever beat a Roth?
When one needs Roth earnings before 59.5 y.o. No TLH with a Roth.

Though I am a big proponent of Roths.
Needing the funds before 59.5 makes sense. TLHing merely defers taxes that the Roth avoids entirely.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Can one have too much Roth?

Post by willthrill81 » Wed Nov 27, 2019 11:38 pm

Miriam2 wrote:
Wed Nov 27, 2019 11:18 pm
willthrill81 wrote:
123 wrote:
Wed Nov 27, 2019 10:29 pm
The downside of having too much Roth is that you may have paid too much in tax to get it.
That's the issue. Too much Roth means that you paid $2 today to save $1 in taxes in the future, for instance.
I'm particularly interested in millennials - younger investors - who today are still in relatively low tax brackets. They would be paying the taxes to get into Roths now at a lower rate than they will likely be in 10 or 20 years from now. For millennials, they may have 30 years of investing before they retire. Packing their Roths now, and perhaps then continuing to convert tIRAs to Roths over the years - and they will end up with a giant Roth.

Any downside? Any downside to having a giant Roth and a smaller pre-tax account heading into retirement down the road?
The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so. I certainly did. Tax-deferred contributions are generally preferred if one's income does not grow significantly over the course of one's career. Remember that, assuming 4% withdrawals, it takes over $600k to 'fill up' the standard deduction for a MFJ couple and almost another $500k to fill up the 10% bracket. Granted, SS benefits will reduce those thresholds by some amount, but the point remains that Roth contributions can easily be inferior.

But you're correct that for those with a good chance of seeing significant income growth, Roth contributions when they are young and in a low tax bracket can make a lot of sense and even more so if they live in a low tax or no tax state at the time.

And we're basically planning on what you recommend, doing Roth contributions to the top of our current bracket, effectively trading tax-deferred space for Roth space, and after my planned retirement, we'll keep doing Roth contributions to the top of our current bracket until we begin SS benefits at age 70. By that time, I hope that about 40% of our portfolio will be in Roth IRAs.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Can one have too much Roth?

Post by anon_investor » Wed Nov 27, 2019 11:42 pm

I love roth! But it's all about tax brackets. Roth today is especially good for people who will be in high tax brackets in retirement even in pre-social security years, which would preclude a roth conversion strategy due to high taxable income (e.g. pension, rental income, investment income, trust fund payments, etc.).

But roth is not great for someone who is in a high tax bracket today and will be in a much lower tax bracket in retirement...

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Re: Can one have too much Roth?

Post by abuss368 » Wed Nov 27, 2019 11:46 pm

In my opinion a Roth account is an excellent investment vehicle.
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Re: Can one have too much Roth?

Post by abuss368 » Wed Nov 27, 2019 11:47 pm

We converted a lot of the traditional IRAs years ago and are still contributing and also converting.
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Re: Can one have too much Roth?

Post by bhsince87 » Wed Nov 27, 2019 11:48 pm

willthrill81 wrote:
Wed Nov 27, 2019 11:31 pm
Eagle33 wrote:
Wed Nov 27, 2019 11:25 pm
willthrill81 wrote:
Wed Nov 27, 2019 11:08 pm
123 wrote:
Wed Nov 27, 2019 10:29 pm
However all things being equal it is likely better to have funds in a Roth account versus having them in a taxable account.
How could a taxable account ever beat a Roth?
When one needs Roth earnings before 59.5 y.o. No TLH with a Roth.

Though I am a big proponent of Roths.
Needing the funds before 59.5 makes sense. TLHing merely defers taxes that the Roth avoids entirely.
Taxable can beat Roth for low/mid income people.

Taxable has 100% access anytime for any reason.

And with low enough income there is no tax on cap gains or dividends. Interest is a different matter, but muni bonds can help there.

Tax loss harvesting is a benefit because under current law, it can offset up to $3,000 in other regular income every year, and carried over for years.

That being said, we currently have $2 million+ in taxable, and about $10,000 in Roth.

I'd LOVE to have that reversed!
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Re: Can one have too much Roth?

Post by abuss368 » Wed Nov 27, 2019 11:48 pm

Miriam2 wrote:
Wed Nov 27, 2019 10:08 pm
Can one have too much Roth?

For young investors, such as my kids, they're able to contribute directly to a Roth every year, and even when they earn too much to directly contribute to the Roth, they can simply contribute to a tIRA, then convert it to a Roth every year. My son changed jobs and rolled over his old pre-tax 401k to a Rollover IRA and is now converting that to his Roth. Also, many young people use Roth 401k's and other Roth retirement plans. Many young investors will be in a low tax bracket for years, so now would seem to be a good time to pack the Roth full, viewing the taxes paid as being well-worth the investment.

In other words, unlike me (an older investor :wink: ), young people today have many opportunities to build a very sizable already-taxed Roth.

What is the downside or real negative to ending up with a Real Big Roth?

What would be too much Roth?
I would open a Roth for the kids and simply add total stock fund. They will be very happy in the years ahead.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Can one have too much Roth?

Post by abuss368 » Wed Nov 27, 2019 11:49 pm

bhsince87 wrote:
Wed Nov 27, 2019 11:48 pm
willthrill81 wrote:
Wed Nov 27, 2019 11:31 pm
Eagle33 wrote:
Wed Nov 27, 2019 11:25 pm
willthrill81 wrote:
Wed Nov 27, 2019 11:08 pm
123 wrote:
Wed Nov 27, 2019 10:29 pm
However all things being equal it is likely better to have funds in a Roth account versus having them in a taxable account.
How could a taxable account ever beat a Roth?
When one needs Roth earnings before 59.5 y.o. No TLH with a Roth.

Though I am a big proponent of Roths.
Needing the funds before 59.5 makes sense. TLHing merely defers taxes that the Roth avoids entirely.
Taxable can beat Roth for low/mid income people.

Taxable has 100% access anytime for any reason.

And with low enough income there is no tax on cap gains or dividends. Interest is a different matter, but muni bonds can help there.

Tax loss harvesting is a benefit because under current law, it can offset up to $3,000 in other regular income every year, and carried over for years.

That being said, we currently have $2 million+ in taxable, and about $10,000 in Roth.

I'd LOVE to have that reversed!
:sharebeer
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Miriam2
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Re: Can one have too much Roth?

Post by Miriam2 » Thu Nov 28, 2019 12:08 am

willthrill81 wrote: The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so. I certainly did. Tax-deferred contributions are generally preferred if one's income does not grow significantly over the course of one's career. Remember that, assuming 4% withdrawals, it takes over $600k to 'fill up' the standard deduction for a MFJ couple and almost another $500k to fill up the 10% bracket. Granted, SS benefits will reduce those thresholds by some amount, but the point remains that Roth contributions can easily be inferior.

But you're correct that for those with a good chance of seeing significant income growth, Roth contributions when they are young and in a low tax bracket can make a lot of sense and even more so if they live in a low tax or no tax state at the time.

And we're basically planning on what you recommend, doing Roth contributions to the top of our current bracket, effectively trading tax-deferred space for Roth space, and after my planned retirement, we'll keep doing Roth contributions to the top of our current bracket until we begin SS benefits at age 70. By that time, I hope that about 40% of our portfolio will be in Roth IRAs.
And if you are near retirement and you have approximately 70-90% of your retirement money in a Roth and only 10-30% in a pre-tax account (put aside taxable for this Q) - how would you feel investment-wise? Any downside at that time to having such a large % Roth?

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Re: Can one have too much Roth?

Post by willthrill81 » Thu Nov 28, 2019 12:18 am

bhsince87 wrote:
Wed Nov 27, 2019 11:48 pm
willthrill81 wrote:
Wed Nov 27, 2019 11:31 pm
Needing the funds before 59.5 makes sense. TLHing merely defers taxes that the Roth avoids entirely.
Taxable can beat Roth for low/mid income people.
Please provide an example. Since Roth and taxable contributions are both made after-tax, I fail to see how tax-free can lose to a taxable account, especially with ongoing tax drag.
Last edited by willthrill81 on Thu Nov 28, 2019 12:22 am, edited 1 time in total.
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Re: Can one have too much Roth?

Post by willthrill81 » Thu Nov 28, 2019 12:21 am

Miriam2 wrote:
Thu Nov 28, 2019 12:08 am
willthrill81 wrote: The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so. I certainly did. Tax-deferred contributions are generally preferred if one's income does not grow significantly over the course of one's career. Remember that, assuming 4% withdrawals, it takes over $600k to 'fill up' the standard deduction for a MFJ couple and almost another $500k to fill up the 10% bracket. Granted, SS benefits will reduce those thresholds by some amount, but the point remains that Roth contributions can easily be inferior.

But you're correct that for those with a good chance of seeing significant income growth, Roth contributions when they are young and in a low tax bracket can make a lot of sense and even more so if they live in a low tax or no tax state at the time.

And we're basically planning on what you recommend, doing Roth contributions to the top of our current bracket, effectively trading tax-deferred space for Roth space, and after my planned retirement, we'll keep doing Roth contributions to the top of our current bracket until we begin SS benefits at age 70. By that time, I hope that about 40% of our portfolio will be in Roth IRAs.
And if you are near retirement and you have approximately 70-90% of your retirement money in a Roth and only 10-30% in a pre-tax account (put aside taxable for this Q) - how would you feel investment-wise? Any downside at that time to having such a large % Roth?
Yes, there could be for the reason already stated: you might have paid $2 in taxes on Roth contributions in order to save $1 in taxes on tax-deferred withdrawals.

Even once we begin SS benefits at age 70 and if benefits aren't reduced between now and then, we'll still need well over $1 million in tax-deferred just to bring us up to the top of our current 12% bracket (which we're only in now due to tax-deferred contributions). Making Roth contributions in the 22% bracket only to withdraw them when we would be in the 12% bracket is a losing proposition.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Can one have too much Roth?

Post by Miriam2 » Thu Nov 28, 2019 12:41 am

willthrill81 wrote:
Thu Nov 28, 2019 12:21 am
Miriam2 wrote:
Thu Nov 28, 2019 12:08 am
willthrill81 wrote: The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so. I certainly did. Tax-deferred contributions are generally preferred if one's income does not grow significantly over the course of one's career. Remember that, assuming 4% withdrawals, it takes over $600k to 'fill up' the standard deduction for a MFJ couple and almost another $500k to fill up the 10% bracket. Granted, SS benefits will reduce those thresholds by some amount, but the point remains that Roth contributions can easily be inferior.

But you're correct that for those with a good chance of seeing significant income growth, Roth contributions when they are young and in a low tax bracket can make a lot of sense and even more so if they live in a low tax or no tax state at the time.

And we're basically planning on what you recommend, doing Roth contributions to the top of our current bracket, effectively trading tax-deferred space for Roth space, and after my planned retirement, we'll keep doing Roth contributions to the top of our current bracket until we begin SS benefits at age 70. By that time, I hope that about 40% of our portfolio will be in Roth IRAs.
And if you are near retirement and you have approximately 70-90% of your retirement money in a Roth and only 10-30% in a pre-tax account (put aside taxable for this Q) - how would you feel investment-wise? Any downside at that time to having such a large % Roth?
Yes, there could be for the reason already stated: you might have paid $2 in taxes on Roth contributions in order to save $1 in taxes on tax-deferred withdrawals.

Even once we begin SS benefits at age 70 and if benefits aren't reduced between now and then, we'll still need well over $1 million in tax-deferred just to bring us up to the top of our current 12% bracket (which we're only in now due to tax-deferred contributions). Making Roth contributions in the 22% bracket only to withdraw them when we would be in the 12% bracket is a losing proposition.
I understand - you're talking about taxes and the Roth road to retirement.

But when you are there - put aside the tax road there - when you are at the door to retirement or in retirement, does having a super large Roth compared to a pre-tax account, 70-90% Roth and 10-30% pre-tax, have disadvantages or problems?

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Re: Can one have too much Roth?

Post by willthrill81 » Thu Nov 28, 2019 12:50 am

Miriam2 wrote:
Thu Nov 28, 2019 12:41 am
willthrill81 wrote:
Thu Nov 28, 2019 12:21 am
Miriam2 wrote:
Thu Nov 28, 2019 12:08 am
willthrill81 wrote: The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so. I certainly did. Tax-deferred contributions are generally preferred if one's income does not grow significantly over the course of one's career. Remember that, assuming 4% withdrawals, it takes over $600k to 'fill up' the standard deduction for a MFJ couple and almost another $500k to fill up the 10% bracket. Granted, SS benefits will reduce those thresholds by some amount, but the point remains that Roth contributions can easily be inferior.

But you're correct that for those with a good chance of seeing significant income growth, Roth contributions when they are young and in a low tax bracket can make a lot of sense and even more so if they live in a low tax or no tax state at the time.

And we're basically planning on what you recommend, doing Roth contributions to the top of our current bracket, effectively trading tax-deferred space for Roth space, and after my planned retirement, we'll keep doing Roth contributions to the top of our current bracket until we begin SS benefits at age 70. By that time, I hope that about 40% of our portfolio will be in Roth IRAs.
And if you are near retirement and you have approximately 70-90% of your retirement money in a Roth and only 10-30% in a pre-tax account (put aside taxable for this Q) - how would you feel investment-wise? Any downside at that time to having such a large % Roth?
Yes, there could be for the reason already stated: you might have paid $2 in taxes on Roth contributions in order to save $1 in taxes on tax-deferred withdrawals.

Even once we begin SS benefits at age 70 and if benefits aren't reduced between now and then, we'll still need well over $1 million in tax-deferred just to bring us up to the top of our current 12% bracket (which we're only in now due to tax-deferred contributions). Making Roth contributions in the 22% bracket only to withdraw them when we would be in the 12% bracket is a losing proposition.
I understand - you're talking about taxes and the Roth road to retirement.

But when you are there - put aside the tax road there - when you are at the door to retirement or in retirement, does having a super large Roth compared to a pre-tax account, 70-90% Roth and 10-30% pre-tax, have disadvantages or problems?
Once you're already there, no, I can't think of any drawbacks or problems.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Can one have too much Roth?

Post by Watty » Thu Nov 28, 2019 1:03 am

Miriam2 wrote:
Wed Nov 27, 2019 10:08 pm
Many young investors will be in a low tax bracket for years, so now would seem to be a good time to pack the Roth full, viewing the taxes paid as being well-worth the investment.
One thing to consider is that many young people are still single and single people get into the higher tax brackets real quick.

A single person will get into the 22% federal tax bracket once with around $60K in taxable income and I would not really consider that low. Many people in reasonably well paying fields will be earning that right out of college.

Unless your are in some real high income career, like a doctor, it would take a very compelling case to choose a Roth over a deductible IRA in the 22% or above federal tax bracket.

There is also a problem with the "risk vs reward" balance in the 22% federal tax bracket. The problem is the next higher federal tax bracket is only 2% higher at 24%. Taxes might be higher in the future but paying your taxes decades early just to possibly save 2% is taking a lot of risk for not much reward.

If they are married when they are retired then an over 65 couple that is filing a joint return can have over $100K in taxable income and still be in the 12% federal tax bracket.

It is a lot easier to justify choosing a Roth when they are in the 12% or lower federal tax brackets but if someone is still in that low of a tax bracket when they in their late 20s then they may not be on track to be in a high retirement tax bracket.
Miriam2 wrote:
Wed Nov 27, 2019 10:08 pm
What would be too much Roth?
With the current tax laws for most people it would make sense to have around $50K($100K for a couple) in taxable income in retirement to take advantage of the standard deduction and lower tax brackets.

The way that Social Security is taxed complicates that but even with that taken into account it makes sense to have a good amount of taxable income in retirement.

You might also end up with having too much in Roth accounts if your life and career do not go according to plan. When I was going through my 50's I saw more people than I would have expected run into things like health problems, the death of a spouse, career setbacks, layoffs, burnout, divorces, etc that caused their financial plans to not turn out as well as they had hoped.

When you get into your your 50s many people who are doing well and on track to retire in a high tax bracket will decide that they have "enough" and will retire early in a lower tax bracket. With a paid off house and all the kids out on their own a couple can have an nice well above average lifestyle with $100K in most parts of the country and still be in the 12% federal tax bracket.
Last edited by Watty on Thu Nov 28, 2019 1:10 am, edited 2 times in total.

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Re: Can one have too much Roth?

Post by Watty » Thu Nov 28, 2019 1:07 am

willthrill81 wrote:
Thu Nov 28, 2019 12:50 am

.......

Once you're already there, no, I can't think of any drawbacks or problems.
One drawback is that the Roth would may not best for the people that will inherit the money some day if it is a charity or someone in a lower tax bracket.

If you have to spend considerable time in a nursing home you may also have years when your medical expenses would result in large itemized deductions so you would not have been maying much taxes with your funds in a traditional IRA.

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Re: Can one have too much Roth?

Post by willthrill81 » Thu Nov 28, 2019 1:12 am

Watty wrote:
Thu Nov 28, 2019 1:07 am
willthrill81 wrote:
Thu Nov 28, 2019 12:50 am

.......

Once you're already there, no, I can't think of any drawbacks or problems.
One drawback is that the Roth would may not best for the people that will inherit the money some day if it is a charity or someone in a lower tax bracket.

If you have to spend considerable time in a nursing home you may also have years when your medical expenses would result in large itemized deductions so you would not have been maying much taxes with your funds in a traditional IRA.
That sort of thing was my initial issue as well, but the question was whether there were any drawbacks if you already had the Roth accounts.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Can one have too much Roth?

Post by Miriam2 » Thu Nov 28, 2019 1:38 am

Willthrill and Watty - I appreciate your thoughts and input :happy

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Re: Can one have too much Roth?

Post by fujiters » Thu Nov 28, 2019 2:11 am

willthrill81 wrote:
Thu Nov 28, 2019 12:18 am
bhsince87 wrote:
Wed Nov 27, 2019 11:48 pm
willthrill81 wrote:
Wed Nov 27, 2019 11:31 pm
Needing the funds before 59.5 makes sense. TLHing merely defers taxes that the Roth avoids entirely.
Taxable can beat Roth for low/mid income people.
Please provide an example. Since Roth and taxable contributions are both made after-tax, I fail to see how tax-free can lose to a taxable account, especially with ongoing tax drag.
I could see it for someone in an income tax free state that is in the 0% range for qualified dividends and capital gains (so up to $77.2k MFJ). Same amount after tax going into the account. No tax drag because such a person pays 0% on qualified dividends. Bonus of being able to tax loss harvest and withdraw earnings before 59.5. In this case, the TLH might reduce income tax at 12% rate, and the gains aren't expected to be taxed at all, so it's not merely deferring taxes, but is tax arbitrage.
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Re: Can one have too much Roth?

Post by celia » Thu Nov 28, 2019 3:22 am

Miriam2 wrote:
Wed Nov 27, 2019 10:08 pm
What is the downside or real negative to ending up with a Real Big Roth?
None!
There, I said it, when no-one else before me would. We had another thread recently where people shared their
taxable: tax-deferred: Roth portfolio ratio,
and I was the one who had the highest percentage in Roth, at over 50%. (Our percentage would have been higher had we not inherited large taxable assets.)

All our kids have been maxing out their Roths ever since their first full-time job. So your kids and mine will be ahead of their peers in the Roth savings arena.
What would be too much Roth?
If your Roth balance was more than the exemption for taxable estates, some of it would be taxed again after you die. But I'm not worrying about that since we have a long way to go before either of us are worth $11.4M or more. :D

Eagle33 wrote:
Wed Nov 27, 2019 11:25 pm
When one needs Roth earnings before 59.5 y.o. No TLH with a Roth.
You won’t be pulling out Roth earnings until you pulled out the value of your Roth conversions, which are tax-free withdrawals before 59.5. And if you do pull out the value of the conversions, your future earnings will be a lot smaller than if you hadn’t withdrawn.

Who cares about Tax Loss Harvesting if you don’t have much in taxable?

willthrill81 wrote:
Wed Nov 27, 2019 11:38 pm
The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so.
If you are earning the same amount at age 30 and age 60, you are not even keeping up with inflation, so that is unlikely. I assume you are getting a COLA increase each year while the tax brackets are adjusted similarly. And if you knew ahead of time that would happen, taxable would be preferred to tax-deferred, since all the growth in the tax-deferred will be taxed as regular income when it is withdrawn. But, in that case, putting money in Roth would be even better since you would pay the same tax whether it went to taxable or Roth. In Roth, you will not have to pay taxes on Capital Gains or taxes on every dollar withdrawn.
Tax-deferred contributions are generally preferred if one's income does not grow significantly over the course of one's career. Remember that, assuming 4% withdrawals, it takes over $600k to 'fill up' the standard deduction for a MFJ couple and almost another $500k to fill up the 10% bracket. Granted, SS benefits will reduce those thresholds by some amount, but the point remains that Roth contributions can easily be inferior.
I suspect that a married couple with $600K + $500K of any kind of account had to have more income than what fills the 10% bracket when working. Think about it. Those in the highest tax bracket while working are also paying the max in SS "contributions" while working and may even have a pension. Their IRAs (and 401Ks) will likely be larger too. Those in the lowest tax brackets probably can't afford to save very much if they have living expenses.

bhsince87 wrote:
Wed Nov 27, 2019 11:48 pm
Taxable can beat Roth for low/mid income people.
How so? You pay the same income taxes whether you contribute to Roth or put that money in taxable. But in taxable you may have tax drag each year.
Taxable has 100% access anytime for any reason.
Roth can also be withdrawn, but there may be penalties if under 59.5, a Roth hasn't been open 5 years, or you don't meet any of the exceptions (first-time home buyer, medical expenses, etc). For someone who needs to withdraw early and pay the penalty, they may have been cutting their finances too close and not have an Emergency Fund. They may have bigger issues than withdrawing from the Roth.
And with low enough income there is no tax on cap gains or dividends. Interest is a different matter, but muni bonds can help there.
And with low enough Taxable Income, the Roth contributions wouldn't be taxed.
Tax loss harvesting is a benefit because under current law, it can offset up to $3,000 in other regular income every year, and carried over for years.
You call it a "benefit" when you lose money??? :D :D :D
That being said, we currently have $2 million+ in taxable, and about $10,000 in Roth.

I'd LOVE to have that reversed!
I'd love for you to have it too!

willthrill81 wrote:
Thu Nov 28, 2019 12:21 am
Even once we begin SS benefits at age 70 and if benefits aren't reduced between now and then, we'll still need well over $1 million in tax-deferred just to bring us up to the top of our current 12% bracket (which we're only in now due to tax-deferred contributions). Making Roth contributions in the 22% bracket only to withdraw them when we would be in the 12% bracket is a losing proposition.
You are thinking short term--only considering beginning RMDs. The percentage to be withdrawn grows each year. The account value will also grow each year as long as the per cent to withdraw is less than the percentage of growth. Put those two factors together and your RMDs will grow until you reach the point where your tax-deferred account value starts shrinking. Eventually those RMDs can push you into the next tax bracket.

Added to that, if you are married, is that when you or your spouse dies, the survivor will then have to start filing taxes as single. The space in each tax bracket for Singles is half of what it is for Marrieds. So the same "family income" for Singles will be taxed more. We are also at historically low tax brackets which will revert to 2017 levels in 2026 unless Congress makes the current tax code permanent.

But the best thing about RMDs is that you made it to age 70.5! :D :D :D Not everyone is so lucky.

Watty wrote:
Thu Nov 28, 2019 1:07 am
One drawback is that the Roth would may not best for the people that will inherit the money some day if it is a charity or someone in a lower tax bracket.
If the Roth is given to charity, the original contribution could have been given to charity instead to avoid the "problem" of too much in a Roth. But that contribution amount would have had to have been taxed anyway in the year it was earned.
If you have to spend considerable time in a nursing home you may also have years when your medical expenses would result in large itemized deductions so you would not have been maying much taxes with your funds in a traditional IRA.
You can have a large Roth and still use taxable or tax-deferred to pay for the care.
Last edited by celia on Thu Nov 28, 2019 3:51 am, edited 1 time in total.
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Re: Can one have too much Roth?

Post by RAchip » Thu Nov 28, 2019 3:44 am

To me, one big advantage of a roth is that you know what you have. Everything in there is 100% yours. With a tIRA you dont know what the tax rates will be decades from now and you cant be sure what your situation will be decades from now. I like the certainty aspect.

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Re: Can one have too much Roth?

Post by MathWizard » Thu Nov 28, 2019 3:49 am

Miriam2 wrote:
Wed Nov 27, 2019 10:08 pm
Can one have too much Roth?

For young investors, such as my kids, they're able to contribute directly to a Roth every year, and even when they earn too much to directly contribute to the Roth, they can simply contribute to a tIRA, then convert it to a Roth every year. My son changed jobs and rolled over his old pre-tax 401k to a Rollover IRA and is now converting that to his Roth. Also, many young people use Roth 401k's and other Roth retirement plans. Many young investors will be in a low tax bracket for years, so now would seem to be a good time to pack the Roth full, viewing the taxes paid as being well-worth the investment.

In other words, unlike me (an older investor :wink: ), young people today have many opportunities to build a very sizable already-taxed Roth.

What is the downside or real negative to ending up with a Real Big Roth?

What would be too much Roth?
100% in Roth would be too much definitely.

If your kids are converting to a Roth and stay within the 12% tax bracket, I would say that the size of the Roth is not a problem.

Converting in a higher bracket is likely a bet on future brackets, unless they are already guaranteed to be above the 12% bracket.

I have not converted a non-IRA to a Roth, and never used a Roth401k/403b, but still have about 25% in Roth.

Post-retirement you may want to convert to fill up the 12% bracket at least until you take SS. That can lessen the amount of SS benefits subject to tax, and reduce RMDs which can push you into a higher tax bracket. The effect of RMDs is more pronounced for a widowed person, who then has much lower brackets due to being single.

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Re: Can one have too much Roth?

Post by celia » Thu Nov 28, 2019 4:01 am

MathWizard wrote:
Thu Nov 28, 2019 3:49 am
The effect of RMDs is more pronounced for a widowed person, who then has much lower brackets due to being single.
I'm pretty sure you meant to say that a widowed person has less space in each tax bracket compared to when married.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Can one have too much Roth?

Post by JustinR » Thu Nov 28, 2019 4:16 am

If your kids plan on FIRE (early retirement), having as large of a Roth as possible is ideal. It can fund their first years of the Roth Conversion Ladder and they can have total control of their income in the following years.

Either way, Roth contribution limits are so relatively small that I fail to see how this would be a concern at all...

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Re: Can one have too much Roth?

Post by MotoTrojan » Thu Nov 28, 2019 7:51 am

Miriam2 wrote:
Wed Nov 27, 2019 11:18 pm
willthrill81 wrote:
123 wrote:
Wed Nov 27, 2019 10:29 pm
The downside of having too much Roth is that you may have paid too much in tax to get it.
That's the issue. Too much Roth means that you paid $2 today to save $1 in taxes in the future, for instance.
I'm particularly interested in millennials - younger investors - who today are still in relatively low tax brackets. They would be paying the taxes to get into Roths now at a lower rate than they will likely be in 10 or 20 years from now. For millennials, they may have 30 years of investing before they retire. Packing their Roths now, and perhaps then continuing to convert tIRAs to Roths over the years - and they will end up with a giant Roth.

Any downside? Any downside to having a giant Roth and a smaller pre-tax account heading into retirement down the road?
It’s already been answered; yes, its very likely that they would pay less tax just withdrawing the pre-tax, especially if they are already ineligible for direct Roth contributions today.

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Re: Can one have too much Roth?

Post by MotoTrojan » Thu Nov 28, 2019 7:52 am

JustinR wrote:
Thu Nov 28, 2019 4:16 am
If your kids plan on FIRE (early retirement), having as large of a Roth as possible is ideal. It can fund their first years of the Roth Conversion Ladder and they can have total control of their income in the following years.

Either way, Roth contribution limits are so relatively small that I fail to see how this would be a concern at all...
OP mentioned rolling 401k into IRA and converting to Roth anytime a job change occurs. That’s a lot of contributions.

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Re: Can one have too much Roth?

Post by fennewaldaj » Thu Nov 28, 2019 7:58 am

RAchip wrote:
Thu Nov 28, 2019 3:44 am
To me, one big advantage of a roth is that you know what you have. Everything in there is 100% yours. With a tIRA you dont know what the tax rates will be decades from now and you cant be sure what your situation will be decades from now. I like the certainty aspect.
I did an analysis to figure out how much taxes would have to go up for Roth to be better (assuming current bracket structure) . For me it was about 7%. That was a low enough number to prompt me to do about 33% Roth (vs ~16% if I only did Roth IRAs).

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Re: Can one have too much Roth?

Post by 3funder » Thu Nov 28, 2019 8:13 am

abuss368 wrote:
Wed Nov 27, 2019 11:46 pm
In my opinion a Roth account is an excellent investment vehicle.
+1

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Re: Can one have too much Roth?

Post by livesoft » Thu Nov 28, 2019 8:15 am

willthrill81 wrote:
Wed Nov 27, 2019 11:08 pm
How could a taxable account ever beat a Roth?
Over 40% of US families do not pay federal income tax. Thus they don't pay taxes on a taxable account. You might say, "Oh, that makes them the same!" But wait! There is no penalty from withdrawing gains from a taxable account before age 59 1/2. There is a penalty for withdrawing gains from a Roth IRA before age 59 1/2. That's how a taxable account could beat a Roth.
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Re: Can one have too much Roth?

Post by SGM » Thu Nov 28, 2019 8:52 am

We converted all tax deferred accounts to Roth accounts after retirement and prior to taking SS at 70. I won't calculate how much this will currently save us in taxes by having no RMDs until I do my 2019 taxes. However, I estimate that we would move into the next highest tax rate if we had to take an RMD. I would prefer to have 80% in Roth accounts, but that was impossible given the rules in place while we wBorking. We were never eligible for Roth investments or conversions until the law changed in 2010. By paying taxes for conversions out of a taxable account I was exchanging future taxable dividends and capital gains for Roth accounts that would never be taxed. There was no loss in buying power on the day of the conversion. Now when no RMDs are required I am reaping the major benefits of conversion.

My children have had Roth IRAs since they first started working. They have limited 401k options where they work. So their taxable accounts are larger than their Roth accounts.

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Re: Can one have too much Roth?

Post by JustinR » Thu Nov 28, 2019 9:56 am

MotoTrojan wrote:
Thu Nov 28, 2019 7:52 am
JustinR wrote:
Thu Nov 28, 2019 4:16 am
If your kids plan on FIRE (early retirement), having as large of a Roth as possible is ideal. It can fund their first years of the Roth Conversion Ladder and they can have total control of their income in the following years.

Either way, Roth contribution limits are so relatively small that I fail to see how this would be a concern at all...
OP mentioned rolling 401k into IRA and converting to Roth anytime a job change occurs. That’s a lot of contributions.
Wait, isn't that even better?

Those rollover contributions can be withdrawn tax free after 5 years. So OP will literally pay 0% tax on all of that money. There's absolutely no con to having a huge Roth full of rolled over funds.

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Re: Can one have too much Roth?

Post by yohac » Thu Nov 28, 2019 10:06 am

Watty wrote:
Thu Nov 28, 2019 1:07 am
If you have to spend considerable time in a nursing home you may also have years when your medical expenses would result in large itemized deductions so you would not have been paying much taxes with your funds in a traditional IRA.
This is pretty much our thought process. No kids, so we don't much care about inheritance taxes. Except for RMDs, we won't need to touch our traditional IRAs until a nursing home comes into play.

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Re: Can one have too much Roth?

Post by David Jay » Thu Nov 28, 2019 10:10 am

My plan is to have nothing but one big Roth by age 85. Spouse can inherit. Kids inherit from her.

Not much downside...

Link to my post on Roth Conversions after start of SS: viewtopic.php?f=10&t=237277
Last edited by David Jay on Thu Nov 28, 2019 10:21 am, edited 1 time in total.
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Re: Can one have too much Roth?

Post by stan1 » Thu Nov 28, 2019 10:12 am

Note: Topic was young investors, not current retirees.

There is such a thing as too much Traditional IRA/401K once you turn 70.5 and it can come from an inherited account as well as your own accounts. If you are likely to inherit a $1M Traditional IRA (2019 dollars) it will throw off all your planning about future lower income tax rates. But if that age is 40 years away I would assume many things will be different. Assuming nothing changes is not reasonable, so hedge your bets. Do not assume you will be living in the same state. Do not assume your taxes will go up or down. Do not assume you will be alive. You don't know, hedge your bets through diversification.

I think its reasonable even for a high income earner in 30s to put money into Roth 401Ks if they can cash flow the higher taxes that will be owed right now. If the choice being made is taxable income going into an investing account or Roth 401K reasonable to do some of both. The potential to have decades of tax free dividend and capital gains appreciation is tempting.

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Re: Can one have too much Roth?

Post by EddyB » Thu Nov 28, 2019 10:16 am

Miriam2 wrote:
Thu Nov 28, 2019 12:41 am
willthrill81 wrote:
Thu Nov 28, 2019 12:21 am
Miriam2 wrote:
Thu Nov 28, 2019 12:08 am
willthrill81 wrote: The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so. I certainly did. Tax-deferred contributions are generally preferred if one's income does not grow significantly over the course of one's career. Remember that, assuming 4% withdrawals, it takes over $600k to 'fill up' the standard deduction for a MFJ couple and almost another $500k to fill up the 10% bracket. Granted, SS benefits will reduce those thresholds by some amount, but the point remains that Roth contributions can easily be inferior.

But you're correct that for those with a good chance of seeing significant income growth, Roth contributions when they are young and in a low tax bracket can make a lot of sense and even more so if they live in a low tax or no tax state at the time.

And we're basically planning on what you recommend, doing Roth contributions to the top of our current bracket, effectively trading tax-deferred space for Roth space, and after my planned retirement, we'll keep doing Roth contributions to the top of our current bracket until we begin SS benefits at age 70. By that time, I hope that about 40% of our portfolio will be in Roth IRAs.
And if you are near retirement and you have approximately 70-90% of your retirement money in a Roth and only 10-30% in a pre-tax account (put aside taxable for this Q) - how would you feel investment-wise? Any downside at that time to having such a large % Roth?
Yes, there could be for the reason already stated: you might have paid $2 in taxes on Roth contributions in order to save $1 in taxes on tax-deferred withdrawals.

Even once we begin SS benefits at age 70 and if benefits aren't reduced between now and then, we'll still need well over $1 million in tax-deferred just to bring us up to the top of our current 12% bracket (which we're only in now due to tax-deferred contributions). Making Roth contributions in the 22% bracket only to withdraw them when we would be in the 12% bracket is a losing proposition.
I understand - you're talking about taxes and the Roth road to retirement.

But when you are there - put aside the tax road there - when you are at the door to retirement or in retirement, does having a super large Roth compared to a pre-tax account, 70-90% Roth and 10-30% pre-tax, have disadvantages or problems?
ACA subsidies? If the retirement begins before Medicare eligibility, and one uses an ACA plan, Roth withdrawals won’t count as MAGI to qualify for a subsidy. Having some traditional IRA to withdraw might be better then?

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Re: Can one have too much Roth?

Post by EddyB » Thu Nov 28, 2019 10:23 am

JustinR wrote:
Thu Nov 28, 2019 4:16 am
If your kids plan on FIRE (early retirement), having as large of a Roth as possible is ideal. It can fund their first years of the Roth Conversion Ladder and they can have total control of their income in the following years.

Either way, Roth contribution limits are so relatively small that I fail to see how this would be a concern at all...
I’m sure there are many on this site who are putting far more than the “contribution limit” into a Roth IRA every year by rolling after-tax contributions out of a 401(k).

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Re: Can one have too much Roth?

Post by David Jay » Thu Nov 28, 2019 10:26 am

EddyB wrote:
Thu Nov 28, 2019 10:16 am
ACA subsidies? If the retirement begins before Medicare eligibility, and one uses an ACA plan, Roth withdrawals won’t count as MAGI to qualify for a subsidy. Having some traditional IRA to withdraw might be better then?
I am there for 2020 and 2021, limiting my tIRA withdrawals to enhance my ACA subsidy.

My “bronze” policy will cost me $18 a month in 2020, with a nice HSA balance to cover the deductible if needed.
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Re: Can one have too much Roth?

Post by danaht » Thu Nov 28, 2019 10:30 am

Also, If you live in an income tax free state now and plan to retire in a high income tax state - it may make sense to do Roth conversions now. For instance - I live in TX now - but may retire in CA. That is one reason why I am trying to grow my Roth IRA, and HSA accounts as much as possible right now. The latest tax cuts are making Roth IRA conversions a little less expensive for most people to do.

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Re: Can one have too much Roth?

Post by MotoTrojan » Thu Nov 28, 2019 10:33 am

JustinR wrote:
Thu Nov 28, 2019 9:56 am
MotoTrojan wrote:
Thu Nov 28, 2019 7:52 am
JustinR wrote:
Thu Nov 28, 2019 4:16 am
If your kids plan on FIRE (early retirement), having as large of a Roth as possible is ideal. It can fund their first years of the Roth Conversion Ladder and they can have total control of their income in the following years.

Either way, Roth contribution limits are so relatively small that I fail to see how this would be a concern at all...
OP mentioned rolling 401k into IRA and converting to Roth anytime a job change occurs. That’s a lot of contributions.
Wait, isn't that even better?

Those rollover contributions can be withdrawn tax free after 5 years. So OP will literally pay 0% tax on all of that money. There's absolutely no con to having a huge Roth full of rolled over funds.
Of course the OP paid tax, a Roth conversion is a taxable event.

If you pay marginal tax on all of those Roth contributions/conversions and then retire with only Roth, it’s a huge con... many of those dollars spent in retirement wouldn’t have been withdrawn from pre-tax at the marginal rate, as you have to fill up the earlier brackets.

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Re: Can one have too much Roth?

Post by MotoTrojan » Thu Nov 28, 2019 10:35 am

EddyB wrote:
Thu Nov 28, 2019 10:23 am
JustinR wrote:
Thu Nov 28, 2019 4:16 am
If your kids plan on FIRE (early retirement), having as large of a Roth as possible is ideal. It can fund their first years of the Roth Conversion Ladder and they can have total control of their income in the following years.

Either way, Roth contribution limits are so relatively small that I fail to see how this would be a concern at all...
I’m sure there are many on this site who are putting far more than the “contribution limit” into a Roth IRA every year by rolling after-tax contributions out of a 401(k).
But that is the only option for excess tax-advantaged savings and of course Roth beats taxable. Question is whether one should pass on pre-tax space and make that Roth. Many of the people you are describing leave their core $19K annual limit in pre-tax

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Re: Can one have too much Roth?

Post by willthrill81 » Thu Nov 28, 2019 10:47 am

celia wrote:
Thu Nov 28, 2019 3:22 am
willthrill81 wrote:
Wed Nov 27, 2019 11:38 pm
The downside is that the anticipated higher earnings may never come. Some people more or less top out in their income earning by age 30 or so.
If you are earning the same amount at age 30 and age 60, you are not even keeping up with inflation, so that is unlikely. I assume you are getting a COLA increase each year while the tax brackets are adjusted similarly.
I believe that you're overlooking that the tax brackets are adjusted each year for inflation. When I was referring to someone earning the same amount over an extended period of time, I was referring to inflation-adjusted (i.e. real) dollars.
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Re: Can one have too much Roth?

Post by abuss368 » Thu Nov 28, 2019 10:48 am

I believe the Roth feature was added to the Federal TSP plan years ago.
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Re: Can one have too much Roth?

Post by willthrill81 » Thu Nov 28, 2019 11:13 am

livesoft wrote:
Thu Nov 28, 2019 8:15 am
willthrill81 wrote:
Wed Nov 27, 2019 11:08 pm
How could a taxable account ever beat a Roth?
Over 40% of US families do not pay federal income tax. Thus they don't pay taxes on a taxable account. You might say, "Oh, that makes them the same!" But wait! There is no penalty from withdrawing gains from a taxable account before age 59 1/2. There is a penalty for withdrawing gains from a Roth IRA before age 59 1/2. That's how a taxable account could beat a Roth.
It's not 'beating' the Roth with regard to after-tax balances, but yes, being able to withdraw before 59.5 is an advantage.
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Re: Can one have too much Roth?

Post by abuss368 » Thu Nov 28, 2019 11:19 am

I am curious had the roth been available a long time ago if more baby boomers would have selected it over a traditional ira.
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Re: Can one have too much Roth?

Post by willthrill81 » Thu Nov 28, 2019 11:25 am

abuss368 wrote:
Thu Nov 28, 2019 11:19 am
I am curious had the roth been available a long time ago if more baby boomers would have selected it over a traditional ira.
I'm sure that they would have. The ability to do Roth conversions will be very beneficial to us. We will start next year converting a rollover 401k (now traditional IRA) to a Roth IRA to the top of the 12% bracket, and once I retire, we'll continue doing Roth conversions of my current 401k. Our plan is to continue doing so for about 30 years so that by the time we begin SS benefits at 70, around 40% of our investments will be in Roth IRAs.
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