J Collins recommended article: Traditional vs Roth IRA

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simplesauce
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J Collins recommended article: Traditional vs Roth IRA

Post by simplesauce »

Curious on everyone's thoughts on this article shared by J Collins in the Stock Series. Some interesting insights here making a case for both sides:

https://momanddadmoney.com/documents/Tr ... %20IRA.pdf
Last edited by simplesauce on Mon Apr 06, 2020 1:18 pm, edited 1 time in total.
Silk McCue
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Re: New article: Traditional vs Roth IRA

Post by Silk McCue »

The authors appear to be marginally knowledgeable. Not very effective in their analysis and understanding.

This quote sealed the deal for me.
What you need to do instead is compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE.

That's because any contributions to a Traditional IRA save you money at your marginal rate today, but any future withdrawals are taxed at your effective rate.
No they aren’t.

Not that it matters but this “paper” is from 2015.

Cheers
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FiveK
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Re: New article: Traditional vs Roth IRA

Post by FiveK »

simplesauce wrote: Sun Apr 05, 2020 5:45 pm Some interesting insights....
Interesting only to the extent (as Silk M. noted) that it contains the first of the two Common misconceptions described at that link.
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firebirdparts
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Re: New article: Traditional vs Roth IRA

Post by firebirdparts »

Silk McCue wrote: Sun Apr 05, 2020 6:18 pm The authors appear to be marginally knowledgeable. Not very effective in their analysis and understanding.

This quote sealed the deal for me.
What you need to do instead is compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE.

That's because any contributions to a Traditional IRA save you money at your marginal rate today, but any future withdrawals are taxed at your effective rate.
No they aren’t.

Not that it matters but this “paper” is from 2015.

Cheers
Oh, wow. These are dumb people.

I admit, there are angles to it that I hadn't considered, and while I'm not sure I understand all the factors, I do see that you might have an opinion in retirement what the perfect amount of Roth is. The ACA cliff and of course social security taxability are both pretty complex and they'd be hard to predict, along with predicting the cost of your lifestyle, out there 20 years in the future. I don't actually have that complex a model of my retirement, FWIW.

I was just on the phone with Fidelity 5 minutes ago about this very thing. My employer's 401k plan offers "after tax contribution and in-plan Roth conversion" which means that I can put more money in than the employee contribution maximum (yay!) I put in all Roth for a couple of years, because I really don't have significant Roth money. Going forward, I will be maxing before-tax and adding some after-tax-in-plan-conversion on top of that, and that required a phone call. At some point however I need to have a more solid opinion of that target than I do now.

Right now, we are limited to 5% of our salary for after tax, but I'm just happy it's not zero.
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simplesauce
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Re: New article: Traditional vs Roth IRA

Post by simplesauce »

FiveK wrote: Mon Apr 06, 2020 11:45 am
simplesauce wrote: Sun Apr 05, 2020 5:45 pm Some interesting insights....
Interesting only to the extent (as Silk M. noted) that it contains the first of the two Common misconceptions described at that link.
Thank you for sharing.
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FiveK
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by FiveK »

simplesauce wrote: Sun Apr 05, 2020 5:45 pm ...shared by J Collins in the Stock Series.
Missed that part the first time. Sorry to see that - thought better of JL Collins work. Do you have the URL of the page where he shared it?
Silk McCue
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Re: New article: Traditional vs Roth IRA

Post by Silk McCue »

simplesauce wrote: Mon Apr 06, 2020 1:19 pm
FiveK wrote: Mon Apr 06, 2020 11:45 am
simplesauce wrote: Sun Apr 05, 2020 5:45 pm Some interesting insights....
Interesting only to the extent (as Silk M. noted) that it contains the first of the two Common misconceptions described at that link.
Thank you for sharing.
Why did you retitle your article and text to reference J Collins? Should we care that J Collins recommended a seriously flawed analysis?

You would be better served by our Wiki.

https://www.bogleheads.org/wiki/Traditional_versus_Roth

Cheers
Silk McCue
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by Silk McCue »

FiveK wrote: Mon Apr 06, 2020 2:37 pm
simplesauce wrote: Sun Apr 05, 2020 5:45 pm ...shared by J Collins in the Stock Series.
Missed that part the first time. Sorry to see that - thought better of JL Collins work. Do you have the URL of the page where he shared it?
You didn’t miss it. It wasn’t there. The post was edited this afternoon in an attempt to give the referenced piece more credence.

Cheers
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simplesauce
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by simplesauce »

FiveK wrote: Mon Apr 06, 2020 2:37 pm
simplesauce wrote: Sun Apr 05, 2020 5:45 pm ...shared by J Collins in the Stock Series.
Missed that part the first time. Sorry to see that - thought better of JL Collins work. Do you have the URL of the page where he shared it?
You didn’t miss it. I added the J Collins reference this afternoon so it did not appear to be a random article. It is linked in his stock series; here is the chapter: https://jlcollinsnh.com/2015/06/02/stoc ... h-buckets/
Silk McCue
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by Silk McCue »

simplesauce wrote: Mon Apr 06, 2020 3:05 pm
FiveK wrote: Mon Apr 06, 2020 2:37 pm
simplesauce wrote: Sun Apr 05, 2020 5:45 pm ...shared by J Collins in the Stock Series.
Missed that part the first time. Sorry to see that - thought better of JL Collins work. Do you have the URL of the page where he shared it?
You didn’t miss it. I added the J Collins reference this afternoon so it did not appear to be a random article. It is linked in his stock series; here is the chapter: https://jlcollinsnh.com/2015/06/02/stoc ... h-buckets/
I think Collins was throwing his friend a bone. Momanddadmoney refer to him as a friend.

Cheers
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simplesauce
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by simplesauce »

Silk McCue wrote: Mon Apr 06, 2020 3:15 pm
simplesauce wrote: Mon Apr 06, 2020 3:05 pm
FiveK wrote: Mon Apr 06, 2020 2:37 pm
simplesauce wrote: Sun Apr 05, 2020 5:45 pm ...shared by J Collins in the Stock Series.
Missed that part the first time. Sorry to see that - thought better of JL Collins work. Do you have the URL of the page where he shared it?
You didn’t miss it. I added the J Collins reference this afternoon so it did not appear to be a random article. It is linked in his stock series; here is the chapter: https://jlcollinsnh.com/2015/06/02/stoc ... h-buckets/
I think Collins was throwing his friend a bone. Momanddadmoney refer to him as a friend.

Cheers
Ah, very nice detective work! Well in the Stock Series itself, J Collins also thinks the Roth is potentially too good to be true. He takes some issue with it. Meanwhile all of the other books I’ve read love investing Roth. So I have some more learning to do. And I will refer to the Bogleheads Wiki often.
somekevinguy
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Re: New article: Traditional vs Roth IRA

Post by somekevinguy »

Silk McCue wrote: Sun Apr 05, 2020 6:18 pm The authors appear to be marginally knowledgeable. Not very effective in their analysis and understanding.

This quote sealed the deal for me.
What you need to do instead is compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE.

That's because any contributions to a Traditional IRA save you money at your marginal rate today, but any future withdrawals are taxed at your effective rate.
No they aren’t.

Not that it matters but this “paper” is from 2015.

Cheers
Ok-I'll admit I don't quite get it, even after reading the Bogleheads Wiki page. Why are you comparing deferring at your marginal rate and withdrawing at your marginal rate (for all pretax contributions)?

1) You are deferring at your marginal rate

2) You are withdrawing at variable rates. Yes, if you already have a large nest egg in traditional/pretax accounts, such that your withdrawals get to be the same marginal rate as you were contributing, then yes, further contributions are being taxed at the future marginal rate. However, if you are early on in your investing career, and high earning, the contributions you make, assuming fixed tax rates, are not going to be taxed at the same marginal rate but a much lower rate (ignoring pensions, SS for now). ie HHI of 600K, marginal tax rate of 45% being deferred, if I have 200K in my pretax accounts, adding another 19,500 is not being taxed at 45% in the future..

I do see that over time, the contributions to a pretax account are going to get taxed at different rates based on the nest egg you've built up, it still implies that much of those contributions are going to be taxed at a lower rate than your current marginal rate, especially early on in your investing career no?

So while it is a simplification that it is marginal now vs effective later, I'm not sure why the question should instead be marginal now vs. marginal later.

For example, if I have taxable and Roth accounts I can draw from, couldn't I withdraw from a 401K up to whatever tax bracket I wanted, then use the taxable and Roth accounts to fill in the rest of my spending at lower/no tax?

Thanks for helping to clarify my misperception/ignorance.
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FiveK
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Re: New article: Traditional vs Roth IRA

Post by FiveK »

somekevinguy wrote: Mon Apr 06, 2020 3:21 pmYes, if you already have a large nest egg in traditional/pretax accounts, such that your withdrawals get to be the same marginal rate as you were contributing, then yes, further contributions are being taxed at the future marginal rate.
That's the point. :)

Some people may always be subject to a higher marginal rate while working than what they'll pay when withdrawing. Others may develop that "large [enough] nest egg in traditional/pretax accounts" such that RMDs (remember the R means Required) will subject them to a higher marginal rate when withdrawing than they paid while working.

Fortunately, the choice of t vs. R does not need to be the same throughout a working career. So, how does one determine when that expected nest egg will be large enough so Roth contributions now become preferable? By comparing marginal vs. marginal, not marginal vs. effective.

Does that makes sense?
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firebirdparts
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by firebirdparts »

To be fair, when I started working, IRA's were tax deductable for many people. Then 401k's were invented, then Roth IRA's, then IRA's weren't deductable, then (holy cow) they invented Roth 401k. now, today, we have backdoor Roth, mega Roth, Solo 401k, and through my empolyer I even have after-tax 401k with instant Roth conversion. There's no fees on any of it. Life is great.

So today, if you came into the work force today, you could consider having nothing but Roth sheltered savings. You could be looking out there in the future with no tax deferred savings of any kind. To we who lived through it all, this seems ridiculous, but it wasn't an option for us. it's an option for 20-somethings.

That said, when you use the word "debunked", then that sort of presumes that you're not the dumbest person in the room. So I'd be very careful with that word if I was a blogger.
Last edited by firebirdparts on Mon Apr 06, 2020 10:26 pm, edited 1 time in total.
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somekevinguy
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Re: New article: Traditional vs Roth IRA

Post by somekevinguy »

Fortunately, the choice of t vs. R does not need to be the same throughout a working career. So, how does one determine when that expected nest egg will be large enough so Roth contributions now become preferable? By comparing marginal vs. marginal, not marginal vs. effective.

Does that makes sense?
Gotcha- so is it fair to say you're comparing your current marginal rate with a constantly increasing (hopefully) marginal rate in retirement based on your tax-deferred nest-egg? And you should basically continue to do this calculation each working year such that you eventually switch to Roth once your projected marginal rate exceeds your current marginal rate?
Jags4186
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Re: New article: Traditional vs Roth IRA

Post by Jags4186 »

somekevinguy wrote: Mon Apr 06, 2020 3:21 pm
Silk McCue wrote: Sun Apr 05, 2020 6:18 pm The authors appear to be marginally knowledgeable. Not very effective in their analysis and understanding.

This quote sealed the deal for me.
What you need to do instead is compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE.

That's because any contributions to a Traditional IRA save you money at your marginal rate today, but any future withdrawals are taxed at your effective rate.
No they aren’t.

Not that it matters but this “paper” is from 2015.

Cheers
Ok-I'll admit I don't quite get it, even after reading the Bogleheads Wiki page. Why are you comparing deferring at your marginal rate and withdrawing at your marginal rate (for all pretax contributions)?

1) You are deferring at your marginal rate

2) You are withdrawing at variable rates. Yes, if you already have a large nest egg in traditional/pretax accounts, such that your withdrawals get to be the same marginal rate as you were contributing, then yes, further contributions are being taxed at the future marginal rate. However, if you are early on in your investing career, and high earning, the contributions you make, assuming fixed tax rates, are not going to be taxed at the same marginal rate but a much lower rate (ignoring pensions, SS for now). ie HHI of 600K, marginal tax rate of 45% being deferred, if I have 200K in my pretax accounts, adding another 19,500 is not being taxed at 45% in the future..

I do see that over time, the contributions to a pretax account are going to get taxed at different rates based on the nest egg you've built up, it still implies that much of those contributions are going to be taxed at a lower rate than your current marginal rate, especially early on in your investing career no?

So while it is a simplification that it is marginal now vs effective later, I'm not sure why the question should instead be marginal now vs. marginal later.

For example, if I have taxable and Roth accounts I can draw from, couldn't I withdraw from a 401K up to whatever tax bracket I wanted, then use the taxable and Roth accounts to fill in the rest of my spending at lower/no tax?

Thanks for helping to clarify my misperception/ignorance.
If your only income in retirement is your withdrawals from tax deferred accounts then you can use marginal at contribution and effective at withdrawal. Most people are not in that situation. Most people collect social security. Most people are going to have some interest income. Many people will have dividends. Some will have pensions. Maybe you own a rental and have rental income. After all of that, once you start withdrawing from your TIRAs you will be paying at your marginal rate.

Even if you're in a situation where all of your income comes from tax deferred withdrawals, there is a marginal cost for each incremental dollar you withdraw. IF you can withdraw $50k at 12% and then the $50,001st dollar is at 22% then you really need to compare it in lumps, not all averaged out.
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FiveK
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Re: New article: Traditional vs Roth IRA

Post by FiveK »

somekevinguy wrote: Mon Apr 06, 2020 4:10 pm
Fortunately, the choice of t vs. R does not need to be the same throughout a working career. So, how does one determine when that expected nest egg will be large enough so Roth contributions now become preferable? By comparing marginal vs. marginal, not marginal vs. effective.

Does that makes sense?
Gotcha- so is it fair to say you're comparing your current marginal rate with a constantly increasing (hopefully) marginal rate in retirement based on your tax-deferred nest-egg? And you should basically continue to do this calculation each working year such that you eventually switch to Roth once your projected marginal rate exceeds your current marginal rate?
Yes.

Doing it this way provides a hedge against "things didn't work out so well."

Alternatively, in a career such as a medical doctor, one might expect relatively low income early with much above average later, and flip the process: contribute to Roth early, then switch to traditional later.

Any way one looks at it, there is some guesswork involved.
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FiveK
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Re: New article: Traditional vs Roth IRA

Post by FiveK »

Jags4186 wrote: Mon Apr 06, 2020 4:16 pm If your only income in retirement is your withdrawals from tax deferred accounts then you can use marginal at contribution and effective at withdrawal.
Only if you
- are taking a retrospective look at "how did I do on average?" making the t vs. R choice, or
- want to make a single t vs. R choice and hold that for your entire working career.

Otherwise, the withdrawal amounts based on previous years' traditional contributions fill lower brackets just as a pension does and thus current and future traditional contributions will be withdrawn "on top of" (aka, at marginal rates) those "baked in" withdrawal amounts.
averagedude
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by averagedude »

I do agree with the author that this decision can go either way. I do like all of the arguments for choosing Roth. Their are some behavior reasons to choosing a Roth, because some people are only going to invest a certain amount of money and they seem to forget to invest the tax savings of the Traditional. Unless I missed it, one thing the article didn't mention was how social security is taxed. Unless tax law changes, alot of people are going to have 85% of their social security taxed in the future because it was never indexed to inflation. Another thing to consider is what tax rate your heirs will pay due to the SECURE act, which may or may not be important. I have the opinion that if the math is close on this decision, choose the ROTH. I seldom hear of an eighty year old that regrets their decision of choosing a ROTH.
02nz
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Re: J Collins recommended article: Traditional vs Roth IRA

Post by 02nz »

averagedude wrote: Mon Apr 06, 2020 7:32 pm I seldom hear of an eighty year old that regrets their decision of choosing a ROTH.
Maybe because the Roth IRA wasn't even available until that person was almost 60, and Roth 401k's with their higher contribution limits weren't an option until even later? Even if that person was maxing out the Roth IRA every year, it would only make up a small or even tiny part of the portfolio, unless he/she also did a lot of Roth conversions. Most people should have some of both, and it's hard to regret having Roth (not all caps by the way) if it's 5-10% of your portfolio.
nolesrule
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Re: New article: Traditional vs Roth IRA

Post by nolesrule »

somekevinguy wrote: Mon Apr 06, 2020 3:21 pm
Silk McCue wrote: Sun Apr 05, 2020 6:18 pm The authors appear to be marginally knowledgeable. Not very effective in their analysis and understanding.

This quote sealed the deal for me.
What you need to do instead is compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE.

That's because any contributions to a Traditional IRA save you money at your marginal rate today, but any future withdrawals are taxed at your effective rate.
No they aren’t.

Not that it matters but this “paper” is from 2015.

Cheers
Ok-I'll admit I don't quite get it, even after reading the Bogleheads Wiki page. Why are you comparing deferring at your marginal rate and withdrawing at your marginal rate (for all pretax contributions)?

The nuance is that the "now vs. withdrawal" comparison is made in the absence of future contributions. It is this analysis that tells you what the withdrawal tax rate will be on the money you contribute now. Future contributions have no impact on this, because they will always be on top of whatever your previously contributed balance is.
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