Are Roth IRAs “Pay taxes once and never again” really best?”

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BogleBuddy12
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Are Roth IRAs “Pay taxes once and never again” really best?”

Post by BogleBuddy12 »

I have long been a fan of Roth IRAs. I read a book called “The Roth Revolution: Pay Taxes Once and Never Again“ by James Lange and it contends that for most people in most scenarios, a Roth is the better choice.

My wife and I recently became relatively high earners (self-employed.) We no longer qualified for Roth IRAs. So we opened Roth Individual 401(k) accounts at Vanguard and that has been our new vehicle of choice.

Our accountant disagrees with our decision to continue investing in a Roth. He feels we should take the deductions now, and then consider conversions later. This is where I get lost. Can someone explain the pros/cons to this approach? And how do the conversions work?

In the end, we are striving for simplicity.

Thank you.
spectec
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by spectec »

Without knowing more about your financial circumstances, I disagree with your accountant based on simple long-term investing principles. Most accountants I know are very focused on the immediate effect of any tax-related move. They like to see the easy-to-calculate, tangible savings of a current tax deduction, but waive off on the more difficult long-term effects. It is a bit of a guessing game, but if you pass up Roth deductions now in the expectation that you can do considerable conversions later, you are assuming that your income at some point will fall below the threshholds that make conversion practical. From my limited observations, people who are focused & deliberate long-term investors often never find themselves in a position to be able to do significant Roth conversions profitably, even in retirement.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Jack FFR1846 »

I'm going to make up numbers to show your accountant's point.

Say you're a very high earner, paying 35% federal tax now. For a Roth, you'll pay 35% before the money hits your account.

Your accountant says to instead do 401k traditional because you save that 35% in taxes now.

Ok, so later, when you pull the money out in retirement, say your federal tax rate is 10%. With the Roth you pay nothing when pulling out the money. With the traditional 401k, you pay only 10%.
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KlangFool
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by KlangFool »

BogleBuddy12 wrote: Sat Jul 11, 2020 7:19 am I have long been a fan of Roth IRAs. I read a book called “The Roth Revolution: Pay Taxes Once and Never Again“ by James Lange and it contends that for most people in most scenarios, a Roth is the better choice.

My wife and I recently became relatively high earners (self-employed.) We no longer qualified for Roth IRAs. So we opened Roth Individual 401(k) accounts at Vanguard and that has been our new vehicle of choice.

Our accountant disagrees with our decision to continue investing in a Roth. He feels we should take the deductions now, and then consider conversions later. This is where I get lost. Can someone explain the pros/cons to this approach? And how do the conversions work?

In the end, we are striving for simplicity.

Thank you.
BogleBuddy12,

<<I have long been a fan of Roth IRAs. I read a book called “The Roth Revolution: Pay Taxes Once and Never Again“ by James Lange and it contends that for most people in most scenarios, a Roth is the better choice. >>

This is half wrong in the first place. For most people, Trad. 401K with Roth IRA is the best combination.

<<My wife and I recently became relatively high earners (self-employed.) We no longer qualified for Roth IRAs. So we opened Roth Individual 401(k) accounts at Vanguard and that has been our new vehicle of choice. >>

You are wrong!

A) Trad. 401K is a better option for you.

B) Even if you are not qualified for direct Roth IRA, there is an option for Backdoor Roth IRA.

The details matter. As self-employed, you may be able to contribute enough to both Employer and Employee portion of solo 401K for direct Roth IRA contribution.

<<This is where I get lost. Can someone explain the pros/cons to this approach? And how do the conversions work? >>

A) It is very simple to know this if you do your own taxes. What is your current marginal tax rate?

B) You are paying a lot more taxes than necessary by contributing to Trad. 401K.

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frugalecon
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by frugalecon »

There was a recent, very lengthy thread talking about relative merits of Roth and Traditional. You may wish to take a look at it: viewtopic.php?t=318512
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by abuss368 »

BogleBuddy12 wrote: Sat Jul 11, 2020 7:19 am I have long been a fan of Roth IRAs. I read a book called “The Roth Revolution: Pay Taxes Once and Never Again“ by James Lange and it contends that for most people in most scenarios, a Roth is the better choice.

My wife and I recently became relatively high earners (self-employed.) We no longer qualified for Roth IRAs. So we opened Roth Individual 401(k) accounts at Vanguard and that has been our new vehicle of choice.

Our accountant disagrees with our decision to continue investing in a Roth. He feels we should take the deductions now, and then consider conversions later. This is where I get lost. Can someone explain the pros/cons to this approach? And how do the conversions work?

In the end, we are striving for simplicity.

Thank you.
I am a CPA and will be the first to say many CPAs look at things through one tunnel - taxes. While important it is not the only thing.

There are so many advantages and flexibility with Roth’s. I believe it is also not counted against Medicare premiums for income purposes. A little known fact.
John C. Bogle: “Simplicity is the master key to financial success."
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Watty
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Watty »

There is a wiki on this if you have not seen it.

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

Everyone's situation is different but for us once we retired our expenses were a lot lower because we no longer had expenses like;

1) No mortgage payment because the house is paid off
2) Kid is grown up so no more child raising or college costs.
3) No more FICA taxes
4) No more commuting or work expenses like clothing or lunches
5) Cars last a lot longer.
6) No more retirement savings.
7) At most 85% of your Social Security will be taxable and many states do not tax Social Security.

There will be some new expenses in retirement but so far at least for us they are a lot smaller than those.

An over 65 couple can have over $100K in taxable income and still be in the federal 12% tax bracket. Without those expenses, and especially with a paid off house, that is an ample retirement budget for most people.

One other reason that is deductible retirement account may turn out to be best if things do not work out exactly like you are hoping. Especially when I was going through my 50s I saw more people than I would have expected run into setbacks with careers, layoffs, health, the death of a spouse, divorces, etc that caused their retirement plans to be derailed.

You may also get to be in your 50s and see that you can retire years early in the 12% federal tax bracket and many people will decide to do that.

Roths are still a great choice after you have maxed out your deductible retirement accounts but to me once you get above the 12% federal tax bracket it gets a lot harder to justify making Roth contributions when you could make a deductible contribution instead.
MrJedi
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by MrJedi »

The biggest impact is marginal tax rate today vs marginal tax rate at withdrawal. There's not a lot of detail in your post, but since you say high earners, I will guess that traditional is better for you. A more thorough answer can be given with more thorough information. I would say in general there's a very strong case for Roth for most people up to the top of the 12% federal tax bracket. Beyond that is going to heavily depend on each individual's situation.
HomeStretch
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by HomeStretch »

You haven’t provided a complete picture of your financial situation so it’s impossible to give specific feedback for your situation.

But, your 2020 portfolio contributions don’t have to be all Traditional or all Roth. They can be a mix of Traditional, Roth and, if your income /savings rate are high enough, Taxable contributions. A mix can be advantageous at retirement.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by nisiprius »

As someone who has both Roth IRAs and traditional IRAs, some from 401(k) rollovers and others just because, let me say that you should not underweight the complexity of dealing with a TIRA when the time comes to take distributions.

Since a TIRA and a Roth are different, everyone wants to know what's best. The demand has created a supply of calculators, books, and professional advice. The reality is that the complicated calculations require, as inputs, too many things that are unpredictable, starting with what the tax code will be decades into the future, and a few other details like the return of the stock market, etc.

But the difference in complexity is predictable. You may say "well, the rules for Roth IRA withdrawals could change, too," and they could. But the point is that under current rules, it is easy. You wait until you're 59-1/2 and then you just take the money out whenever you like. Under current rules, if you have a TIRA or a 401(k), you'd better buy a book about it. (I'd recommend one, but the one I bought in 2013 is out of date, and there isn't a revised version! But the title itself is revealing: "IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out." IRAs and 401(k)s are the ones you need the book for).

Humiliating story and people are going to say "eh, it's not that complicated, you just need to be a bit organized." I am still waiting on my tax refund even though I filed on 3/13/2020. Because early in January 2019 the bank sent me a reminder that sometime in 2019 I needed to take a $600 RMD from a old IRA bank account. And since there was a year to deal with it, I set it aside. And when they sent me the reminder for 2020 I realized that I'd never gotten around to doing it! $300 penalty for me! So then I got the bright idea, "the rules don't say anything about a waiver for stupidity, but, hey, for $300 I should take a shot at it." And my tax software says "fine, but if you check the box saying you are requesting a waiver, you must file on paper." So I did, paper for state and federal. Got my state refund three weeks later; federal tax return hasn't even begun processing.

And if there's any possibility that someone might inherit a TIRA, that's complicated, too. Maybe it's not all that complicated but, again, the penalty for a screwup is serious. Inheriting a TIRA is a "good problem to have," but it's a problem nevertheless, and it hits at a time when you don't need more problems.

Given a free choice, I would want to be very certain about the dollar size of the TIRA advantage and how sensitive that calculation was to uncertain predictions about the future.
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Harry Livermore
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Harry Livermore »

I think Klang Fool touches upon a good concept.
We have had all kinds of accounts over the years: a SEP-IRA when I was a sole proprietor, traditional IRAs both deductible and non-deductible (in years when we made over the income limits), Roths, and Roth conversions in a "down" year for me, income-wise, and now a small company plan with a traditional 401(k) and profit-sharing component.
I think having some tax diversification will be useful in the future, but who knows. And we are not supposed to speculate on future tax policies on this board. But I think everyone knows that there is uncertainty there, and you might plan based on a law now that changes when you're 61 years old.
If you are having trouble deciding, why not continue to mix it up? You can have the Roth 401(k) in the business, and also contribute to the traditional IRA in your personal, whether or not it's deductible.
Did you say whether you are sole-prop or a corp? That may make a difference, and steer your choice to a sensible approach. I'm not an accountant.
I think also, you can have both a traditional 401(k) and Roth-401(k) at the same time, and split your contributions up to the limit. Maybe others here can comment on the wisdom of that...
Cheers
little_star
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by little_star »

Personally, I am in favor of Roth IRAs at all income levels, but there are many very good reasons to choose a tax-deferred (traditional) version of a 401k.

Roth IRAs:
  • For the young and/or low income: you are likely at the lowest tax rate of your career, so paying the taxes now for a long time-horizon growth is mathematically correct. The fact that you can withdraw your contributions (which you should not do!) makes the Roth a preferred vehicle for beginning investors who do not have a significant financial cushion.
  • For the middle-income: once you cross through the income limits for tax-deferred IRAs, a Roth IRA is a logical choice since you are already paying taxes on that money in any event. If you anticipate crossing through the Roth income limits, it makes sense to choose Roth even when eligible for a tax-deferred IRA so as to leave the way clear for a backdoor Roth. If you wait to clear the tax-deferred IRAs until you are no longer Roth eligible, you will, by definition, be paying higher tax rates on those tIRA conversions than you would have had you contributed directly to a Roth.
  • For the high-income: again, you are already paying taxes on those funds, so why not do a backdoor Roth?
However, it is also very important to have some tax-deferred funds. That is where the 401k, 403b, 457b accounts are important.
  • As many have discussed on these boards, you want to be able to fill the low tax brackets when you retire using tax-deferred funds. You also want to be able to take tax deductions for medical expenses. As there are no income limitations regarding eligibility for these accounts, and they do not impact the prospect of a backdoor Roth, the first choice should be for tax-deferred versions of 401k, 403b, and 457b, at least until you have a healthy balance in these accounts.
  • However, once you have a solid core of tax-deferred funds, it may be appropriate to think about Roth versions of these accounts, particularly if you are likely to reach a high tax-bracket during the RMD phase. Since the Roth/traditional debate circles around the comparison of current to future tax-brackets, it makes most sense to use a Roth version of these accounts if you expect your RMDs to be substantially higher than your current income. The other reason to use a Roth version is that, if you are maxing out the contribution limits, it allows you to invest more money in tax-advantaged accounts, since you are putting in post-tax dollars, which are worth more than pre-tax dollars.
In my own case, I just recently changed to contribute to a Roth 403b account, but that is because I project that my traditional 403b account will be in excess of $2m when I retire and my RMDs will be significantly higher than my current salary. I am also maxing out my contributions, so I appreciate the opportunity to put more into a tax-advantaged account, rather than investing further into my taxable. That said, I do think that the default choice should be for a traditional version of 401k, 403b, and 457b accounts.
Last edited by little_star on Sat Jul 11, 2020 8:40 am, edited 1 time in total.
MathIsMyWayr
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by MathIsMyWayr »

It is mostly about tax. Let's consider the amount $x to invest in pre-tax or Roth depending on which tax rate is lower:
1) invest in pre-tax and TAX on out (withdrawal or Roth conversion)
2) TAX on Roth invest and no tax on out
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teen persuasion
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by teen persuasion »

Harry Livermore wrote: Sat Jul 11, 2020 8:09 am I think Klang Fool touches upon a good concept.
We have had all kinds of accounts over the years: a SEP-IRA when I was a sole proprietor, traditional IRAs both deductible and non-deductible (in years when we made over the income limits), Roths, and Roth conversions in a "down" year for me, income-wise, and now a small company plan with a traditional 401(k) and profit-sharing component.
I think having some tax diversification will be useful in the future, but who knows. And we are not supposed to speculate on future tax policies on this board. But I think everyone knows that there is uncertainty there, and you might plan based on a law now that changes when you're 61 years old.
If you are having trouble deciding, why not continue to mix it up? You can have the Roth 401(k) in the business, and also contribute to the traditional IRA in your personal, whether or not it's deductible.
Did you say whether you are sole-prop or a corp? That may make a difference, and steer your choice to a sensible approach. I'm not an accountant.
I think also, you can have both a traditional 401(k) and Roth-401(k) at the same time, and split your contributions up to the limit. Maybe others here can comment on the wisdom of that...
Cheers
If you want some of each type, and are not eligible for a tIRA deduction, it makes more sense to go traditional 401k and Roth IRA, rather than the reverse.

A non deductible tIRA is the worst of both worlds - no upfront tax deferral (which you'd get with trad 401k contributions) and no tax free withdrawal of growth (which you'd get with Roth contributions).

The best use for a non deductible tIRA contribution is as a start for a backdoor Roth IRA. In which case it's not a "traditional" at all, just an intermediary step in a Roth IRA contribution.

If you wanted some traditional portion, you still don't have it, using IRAs. You need to use a 401k.
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BogleBuddy12
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by BogleBuddy12 »

nisiprius wrote: Sat Jul 11, 2020 8:02 am As someone who has both Roth IRAs and traditional IRAs, some from 401(k) rollovers and others just because, let me say that you should not underweight the complexity of dealing with a TIRA when the time comes to take distributions.

Since a TIRA and a Roth are different, everyone wants to know what's best. The demand has created a supply of calculators, books, and professional advice. The reality is that the complicated calculations require, as inputs, too many things that are unpredictable, starting with what the tax code will be decades into the future, and a few other details like the return of the stock market, etc.

But the difference in complexity is predictable. You may say "well, the rules for Roth IRA withdrawals could change, too," and they could. But the point is that under current rules, it is easy. You wait until you're 59-1/2 and then you just take the money out whenever you like. Under current rules, if you have a TIRA or a 401(k), you'd better buy a book about it. (I'd recommend one, but the one I bought in 2013 is out of date, and there isn't a revised version! But the title itself is revealing: "IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out." IRAs and 401(k)s are the ones you need the book for).

Humiliating story and people are going to say "eh, it's not that complicated, you just need to be a bit organized." I am still waiting on my tax refund even though I filed on 3/13/2020. Because early in January 2019 the bank sent me a reminder that sometime in 2019 I needed to take a $600 RMD from a old IRA bank account. And since there was a year to deal with it, I set it aside. And when they sent me the reminder for 2020 I realized that I'd never gotten around to doing it! $300 penalty for me! So then I got the bright idea, "the rules don't say anything about a waiver for stupidity, but, hey, for $300 I should take a shot at it." And my tax software says "fine, but if you check the box saying you are requesting a waiver, you must file on paper." So I did, paper for state and federal. Got my state refund three weeks later; federal tax return hasn't even begun processing.

And if there's any possibility that someone might inherit a TIRA, that's complicated, too. Maybe it's not all that complicated but, again, the penalty for a screwup is serious. Inheriting a TIRA is a "good problem to have," but it's a problem nevertheless, and it hits at a time when you don't need more problems.

Given a free choice, I would want to be very certain about the dollar size of the TIRA advantage and how sensitive that calculation was to uncertain predictions about the future.
Thank you Nisiprius. This post spoke to me. As I said in the original post, I am striving for simplicity.
kaneohe
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by kaneohe »

The conventional thinking is that the decision is basically a comparison of tax rates now and when you withdraw the money (sounds easier than it is since some prediction is required........but you can modify that prediction each yr along they way). I found a numerical example useful......you can modify to fit your own situation.

Assume you are in 22% marginal tax bracket. Assume you invest 10K in TIRA or 7.8K in Roth . The difference is that the 10K in income is taxed at 22% making only 7.8K available for the Roth. (the numbers are picked for simplicity since the actual contribution limits are different. Also you could make the contributions the same and then account for the difference in a taxable account in addition to the TIRA which adds to the complexity but doesn't change the end result much).

EX 1: contribution tax rate 22%/withdraw tax rate 12%
1A)TIRA starts at 10K. In N yrs it doubles to 20K. You withdraw all at marginal tax rate of 12% (lower than the initial 22%). Tax is 2.4K. You end up with 17.6K.
1B) Roth starts at 7.8K. In N yrs it doubles to 15.6K. You withdraw and pay no taxes but you end up w/ less than the TIRA because the withdraw tax rate of 12% was less than the contribution rate of 22%.

EX2:contribution tax rate 22%/withdraw tax rate 32%
1A)TIRA starts at 10K.In N yrs it doubles to 20K. You withdraw all at marginal tax rate of 32%(higher than the
initial 22%). Tax is 6.4K. You end up at 13.6K.
2)Roth starts at 7.8K. In N yrs it doubles to 15.6K. You with and pay no taxes and you end up w/ more than the
TIRA because the withdraw tax rate of 32% was more than the contribution rate of 22%.

Exercise: what happens if contribution rate and withdraw at both 22%?

So "all" you have to do is predict the final tax rate. Also be aware that if you are successful higher income and tax rates later may be accompanied by even higher rates (NIIT) and other non-tax payments (Medicare IRMAA increased premiums). The basic idea is simple. The reality is a" little" more complex.

Also keep in mind that if you retire early, you may have a time period where you can withdraw from TIRA and make conversions at a lower rate than you would pay than if you waited until SS and RMDs came along and increased your rates. Nobody said it was easy.
Last edited by kaneohe on Sat Jul 11, 2020 9:23 am, edited 1 time in total.
Katietsu
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Katietsu »

I have heard Jim Lange speak in person as well as read many of his blog type posts and listened to hours of his radio show. Ironically, I have not read his book. He upsides a catchy title for his book but I do not belief he is of the opinion that Roth is better than traditional for everyone at all times.

I do not recall him recommending a Roth 401k for someone in your situation unless you have extenuating circumstances, eg expecting a very large pension. You probably would benefit by a traditional 401k plus a backdoor Roth. Edit: I just went to listen to a more recent podcast with an emphasis on Roth. He does seem to be more strongly leaning towards Roth for high income accumulators than I recall from his earlier discussions. Maybe it is because more people have a Roth version in their workplace retirement account now vs even just a few years ago.
Last edited by Katietsu on Sat Jul 11, 2020 10:48 am, edited 1 time in total.
yog
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by yog »

Investors understand the allocation of capital. They understand that time worked provides utility in the present. They understand how TVM, NPV, & taxes affects net worth over time. They maxing all pre-tax & traditional avenues first and add to this with after-tax Roth & taxable investments. They understand they can deploy tax deduction leverage now, enhancing their present utility of working capital in both dollars as well as time worked, and that they will pay the same, less, or possibly even no taxes later. They preserve the option of maximum possible return, and allocate their capital wisely. They use this free leverage to pay down current debt, expand their business, invest in marketable skills, or invest even more for maximum return. This choice is a risk free risk-on strategy. Their Net Worth progression is time optimized.

Savers fear taxes, so they lock in the highest marginal tax rate on their time worked now to avoid tax complexities later. They give up the option of maximum return in exchange for certainty of the future. This is not a good investment, they don't understand this guarantees that they will work longer, or they don't care. This choice is a risky risk-off strategy. Their Net Worth progression is now time constrained.

The debate shouldn't be about which is easier or worth more in retirement, a Roth dollar or traditional dollar. The debate should be, which is a better investment while working, and how long do I have to work to get to my goal? Savers essentially commit to working longer since they give up the free leverage. Investors use this leverage for a greater accumulation of traditional and taxable dollars sooner, preserving the option to stop working sooner, increase their lifetime investments, or to help family and charities sooner. Investors have gained time & net worth dollars, and they will buy their Roth in retirement at a cheaper future cost, and leave excess untaxed traditional dollars to others in a tax optimized fashion.

Ultimately, it is a personal choice, but please understand the tradeoffs - it can be much more significant than it seems in both dollars and time, and your accountant sounds wise in this case.


What wise men suppose is worth more than the certainties of fools. ~ Arabian Proverb
Source: https://proverbicals.com/certainty
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Clever_Username
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Clever_Username »

It depends on a lot of factors. My marginal rates are 24% federal and 9.x% state. If I had to produce just enough income to cover expenses, I'd be in the 12% federal (and I don't plan to retire in this state, so something lower for state; it would be 4-6% if I stayed here). Pre-tax contributions are my preference when possible, and I plan to fund my pre-tax to the max for years to come ($39,000+ in 2020). But when I run out of that space, I do go to Roth, because the tax-free growth is still better than taxable issues.

For people who earn less than I do and spend more than I do, the Roth space is probably superior. For people who earn more than I do but spend a lot too, that might be the case also.
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02nz
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

nisiprius wrote: Sat Jul 11, 2020 8:02 am As someone who has both Roth IRAs and traditional IRAs, some from 401(k) rollovers and others just because, let me say that you should not underweight the complexity of dealing with a TIRA when the time comes to take distributions.

Since a TIRA and a Roth are different, everyone wants to know what's best. The demand has created a supply of calculators, books, and professional advice. The reality is that the complicated calculations require, as inputs, too many things that are unpredictable, starting with what the tax code will be decades into the future, and a few other details like the return of the stock market, etc.

But the difference in complexity is predictable. You may say "well, the rules for Roth IRA withdrawals could change, too," and they could. But the point is that under current rules, it is easy. You wait until you're 59-1/2 and then you just take the money out whenever you like. Under current rules, if you have a TIRA or a 401(k), you'd better buy a book about it. (I'd recommend one, but the one I bought in 2013 is out of date, and there isn't a revised version! But the title itself is revealing: "IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out." IRAs and 401(k)s are the ones you need the book for).

Humiliating story and people are going to say "eh, it's not that complicated, you just need to be a bit organized." I am still waiting on my tax refund even though I filed on 3/13/2020. Because early in January 2019 the bank sent me a reminder that sometime in 2019 I needed to take a $600 RMD from a old IRA bank account. And since there was a year to deal with it, I set it aside. And when they sent me the reminder for 2020 I realized that I'd never gotten around to doing it! $300 penalty for me! So then I got the bright idea, "the rules don't say anything about a waiver for stupidity, but, hey, for $300 I should take a shot at it." And my tax software says "fine, but if you check the box saying you are requesting a waiver, you must file on paper." So I did, paper for state and federal. Got my state refund three weeks later; federal tax return hasn't even begun processing.

And if there's any possibility that someone might inherit a TIRA, that's complicated, too. Maybe it's not all that complicated but, again, the penalty for a screwup is serious. Inheriting a TIRA is a "good problem to have," but it's a problem nevertheless, and it hits at a time when you don't need more problems.

Given a free choice, I would want to be very certain about the dollar size of the TIRA advantage and how sensitive that calculation was to uncertain predictions about the future.
I disagree with this take. Would it be easier to just go all Roth during working years? Yes, but at a pretty high cost, just like it would be easier to turn over all investments to Edward Jones so you don't have to think about it, but again at a pretty high cost.

Simplicity is great ... up to a point. With index funds, simplicity actually (generally) leads to lower costs. Great. But taxes are a whole different story. The tax code has so many different pieces, which interact in ways that are not at all intuitive because it's such a patchwork. But there lies the opportunity: those who are willing to invest a bit of time can save huge amounts - in many cases easily six figures. And no, you don't have to buy a book to optimize withdrawals of traditional IRAs. I've learned a lot right here. It starts with understanding the progressive nature of the income tax code. I think by far my biggest gain from learning on this forum has actually been on the tax, rather than investing, side.

To your story of forgotten RMDs, I'm going to say "eh, it's not that complicated, you just need to be a bit organized." :happy Your $600 RMD suggests this account has not much more than about $10K. You should have rolled it into your "main" IRA for ease of record-keeping and managing RMDs. And likely part of the problem was keeping it at a bank - brokerages are generally better than banks at handling investments and things like RMDs, because that's what they do all day long. I think if you hold an IRA with Vanguard, Fidelity, Schwab, or the like, they make it very difficult to "forget" about RMDs.
02nz
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Jack FFR1846 wrote: Sat Jul 11, 2020 7:33 am I'm going to make up numbers to show your accountant's point.

Say you're a very high earner, paying 35% federal tax now. For a Roth, you'll pay 35% before the money hits your account.

Your accountant says to instead do 401k traditional because you save that 35% in taxes now.

Ok, so later, when you pull the money out in retirement, say your federal tax rate is 10%. With the Roth you pay nothing when pulling out the money. With the traditional 401k, you pay only 10%.
To draw this example out: assume you can make $20K in tax-deferred contributions in one year, real return rate of 4%, 20 years until retirement. That money will grow to about $43.8K in today's dollars, and if taxed at 10% in retirement, then you have $39.4K net.

If you'd paid the tax up front with Roth, the same $20K would only be good for $13K (= $20K * 0.65) in Roth contributions, but never taxed again. With same assumptions as above, you end up with a net of $28.5K in retirement, a difference of over $10K.

Of course, the more you already have in tax-deferred balances, the more your zero- and low-tax space in retirement is in a sense already filled up, and with larger balances your rates in retirement would be higher. So it matters a lot whether you already have $100K in traditional balances or $1M, and also whether you plan to retire early or early-ish. But, assuming no other income, it takes a tax-deferred balance of over $10M (in today's dollars - tax brackets are indexed for inflation) to push a MFJ couple withdrawing 4% a year into the 35% bracket. So OP should think very carefully before going with Roth 401k.

(Yes, I know, my example doesn't account for IRMAA, income tax on SS benefits, or likelihood that surviving spouse faces higher tax rates as a single filer. All of which are good arguments for drawing down tax-deferred balances in early retirement, or in the years between retiring and starting SS/RMDs.)
L82GAME
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by L82GAME »

In echoing fragments of others' comments above:
  • Generally speaking, without your specific info. (see bullet immediately above) the question of Roth vs. a Trad-permutation is dependent on current and future tax rates, which is an exercise in speculation. Speculating is a fool's errand. If you are high-income earners, a bird in the hand is better than two in the bush, and therefore a prudent approach is to diversify savings vehicles to hedge against future policy changes in the tax code relative to your future income (both are currently unknown variables). However, are you, relative to your state and federal marginal income tax brackets and filing status, high income earners (see first bullet above)?
  • Don't mistake "simplicity" for not doing the necessary heavy lifting to educate yourself and practice due diligence
  • Corollary to bullet immediately above; don't seek confirmation of your biases
[Second bullet subsequently edited for clarity.]
Last edited by L82GAME on Sat Jul 11, 2020 11:39 am, edited 2 times in total.
“Simplicity is the ultimate sophistication.” - Lao Tzu
Lee_WSP
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

I'm going to summarize the case for or against choosing a Roth 401k in one sentence. Because you should obviously fund the Roth IRA, that's a no brainer.

If you are in the top two marginal tax brackets, you have nothing or very little to gain and possibly a lot to lose by "locking in" the high marginal rate you have now.

If you're in the middle brackets, it's a fifty fifty shot, but you have more to lose than to gain, so the expected value comes out in favor of taking the deduction today.

Caveat
But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement.
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Harry Livermore
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Harry Livermore »

teen persuasion wrote: Sat Jul 11, 2020 8:43 am
Harry Livermore wrote: Sat Jul 11, 2020 8:09 am I think Klang Fool touches upon a good concept.
We have had all kinds of accounts over the years: a SEP-IRA when I was a sole proprietor, traditional IRAs both deductible and non-deductible (in years when we made over the income limits), Roths, and Roth conversions in a "down" year for me, income-wise, and now a small company plan with a traditional 401(k) and profit-sharing component.
I think having some tax diversification will be useful in the future, but who knows. And we are not supposed to speculate on future tax policies on this board. But I think everyone knows that there is uncertainty there, and you might plan based on a law now that changes when you're 61 years old.
If you are having trouble deciding, why not continue to mix it up? You can have the Roth 401(k) in the business, and also contribute to the traditional IRA in your personal, whether or not it's deductible.
Did you say whether you are sole-prop or a corp? That may make a difference, and steer your choice to a sensible approach. I'm not an accountant.
I think also, you can have both a traditional 401(k) and Roth-401(k) at the same time, and split your contributions up to the limit. Maybe others here can comment on the wisdom of that...
Cheers
If you want some of each type, and are not eligible for a tIRA deduction, it makes more sense to go traditional 401k and Roth IRA, rather than the reverse.

A non deductible tIRA is the worst of both worlds - no upfront tax deferral (which you'd get with trad 401k contributions) and no tax free withdrawal of growth (which you'd get with Roth contributions).

The best use for a non deductible tIRA contribution is as a start for a backdoor Roth IRA. In which case it's not a "traditional" at all, just an intermediary step in a Roth IRA contribution.

If you wanted some traditional portion, you still don't have it, using IRAs. You need to use a 401k.
Good observations. I actually made many nondeductible contributions to an IRA in my younger days. At that point in the history of tax rules, we made too much to be eligible for a Roth, too much to convert, and too much to deduct IRA contributions. I figured tax-deferred growth was preferable to more money in taxable. Eventually, when the rules changed (2010?) those accounts got converted to Roths. There were certainly gains that were taxed, but a good portion of the conversion was not taxed since it was ND contributions.
My off-the-cuff suggestion was made thinking that since they are in a high bracket, and the contribution limits are higher, Roth 401(k) might be more valuable tax wise later, and leftover money to allocate to retirement funds is better tax-deferred growth, and they might be over the limit to deduct contributions... in which case they are also over the limit for a Roth contribution? But I suppose not a back door...
Anyway, thanks for pointing that out. Lots of moving parts.
OP, I'll say it again: having some diversification in tax obligations may be valuable...
Cheers
Lee_WSP
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

The only reason you can't do a backdoor is because you have other IRA accounts. But you can still contribute to the IRA, roll over the tax deducted IRA's into a 401k, and then convert the next tax year once all the tax advantaged dollars have been removed. You'd only pay taxes on the gains.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by dodecahedron »

nisiprius wrote: Sat Jul 11, 2020 8:02 am But the title itself is revealing: "IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out." IRAs and 401(k)s are the ones you need the book for).
And 401(a)s and 403(b)s and 457 plans, TSP, ...

A whole alphanumeric soup of plans with slight different versions of gotcha rules you need to watch out for.

Some of which may have special rules (as in RMD age for distributions based on 403b contribs and earnings credited to a 403(b) prior to 1987 is grandfathered at 75.)

And you can aggregate *some* accounts of a particular type, e.g., 403(b), for the purposes of computing and distributing your RMD. So, for example, if you have a 403(b) with an RMD of $7K at Boston University and a 403(b) with an RMD of $2K at SUNY, you just can satisfy your RMD with a single $9K distribution from either one or any combination of those two 403(b) plans. And similarly if you have IRAs at multiple custodians. But you cannot mix and match across plan types. And some types of accounts (e.g., 401k, 457) can not be aggregated at all. Edited to correct error in previous version of this post. Thanks to user You know what I mean for pointing it out.

One thing you *can* do to simplify your life is to consolidate all your various types of tax deferred retirement funds in a single *type* of account, or even better into a single account with a single custodian. But you may have reasons for wanting to maintain multiple types of plans (e.g., TIAA Trad held in a 403b, G Fund held in TSP, an IRA to use for QCDs, etc.)

It is crazy that there are so many different types of rules for fundamentally similar types of tax-deferred DC retirement plans.

I have already done a lot of consolidation but hope to do even more to simplify finances for my heirs and/or POA. (Hoping I have time, wit, and notice to do so before I pass into the mystery at some unknown point in the future.)
Last edited by dodecahedron on Sun Jul 12, 2020 10:39 am, edited 1 time in total.
02nz
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 11:34 am Caveat
But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement.
It's not necessarily the case that maxing out a Roth 401k is better than maxing a traditional 401k and putting the tax savings into taxable. This can shift the calculus a bit toward Roth, but it doesn't automatically overcome everything else. Particularly if OP has little or nothing in tax-deferred now, then the huge savings from deferring taxes to retirement easily overcomes the tax drag of investing a small amount in taxable. "A tax-advantaged dollar is always better for retirement" is true in isolation / if everything else is equal, but everything else rarely is equal.

To give good advice we really need to know how much OP has in tax-deferred accounts.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

BogleBuddy12 wrote: Sat Jul 11, 2020 8:49 am Thank you Nisiprius. This post spoke to me. As I said in the original post, I am striving for simplicity.
As another poster said: don't seek confirmation of your biases. With some numbers we can give actual advice that may put a price tag on that "simplicity."
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

02nz wrote: Sat Jul 11, 2020 12:34 pm
Lee_WSP wrote: Sat Jul 11, 2020 11:34 am Caveat
But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement.
It's not necessarily the case that maxing out a Roth 401k is better than maxing a traditional 401k and putting the tax savings into taxable. This can shift the calculus a bit toward Roth, but it doesn't automatically overcome everything else. Particularly if OP has little or nothing in tax-deferred now, then the huge savings from deferring taxes to retirement easily overcomes the tax drag of investing a small amount in taxable. "A tax-advantaged dollar is always better for retirement" is true in isolation / if everything else is equal, but everything else rarely is equal.

To give good advice we really need to know how much OP has in tax-deferred accounts.
You clearly did not read my post. You missed two very important requirements. 1) that the tax savings was going into taxable brokerage accounts, and 2) it's for retirement.

If the tax "savings" are going into taxable, you're still investing after tax money but then you'll owe capital gains on the earnings.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 12:43 pm
02nz wrote: Sat Jul 11, 2020 12:34 pm
Lee_WSP wrote: Sat Jul 11, 2020 11:34 am Caveat
But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement.
It's not necessarily the case that maxing out a Roth 401k is better than maxing a traditional 401k and putting the tax savings into taxable. This can shift the calculus a bit toward Roth, but it doesn't automatically overcome everything else. Particularly if OP has little or nothing in tax-deferred now, then the huge savings from deferring taxes to retirement easily overcomes the tax drag of investing a small amount in taxable. "A tax-advantaged dollar is always better for retirement" is true in isolation / if everything else is equal, but everything else rarely is equal.

To give good advice we really need to know how much OP has in tax-deferred accounts.
You clearly did not read my post. You missed two very important requirements. 1) that the tax savings was going into taxable brokerage accounts, and 2) it's for retirement.

If the tax "savings" are going into taxable, you're still investing after tax money but then you'll owe capital gains on the earnings.
Yes I understood that perfectly and stand by my critique of it. My post specifically addresses taxable and tax drag.

Let's look at two options, maxing Roth 401k or maxing traditional 401k and investing savings into taxable. Assuem (as in the earlier examples in this thread, 35% federal tax now or 10% in retirement).

A. Max Roth 401k at $19,500. Assume 4% real growth per year. 20 years to retirement. Contributions grows to $42,727.

B. Max trad'l 401k at $19,500. Same assumptions as in A, contributions grow to same $42,727 in tax-deferred, less 10% income tax = $38,454. But you also saved 35% income tax up front, so that was $6,825 invested into taxable. Assume annual return of 3.5% (vs. 4% in tax-advantaged, due to tax drag), 20 years, so you get $13,480. Subtract 15% tax on LTCG, and the net amount in taxable is $12,482. Add in the net $38,454 from tax-deferred and you have a total of $50,936 after tax, more than if you'd maxed the Roth 401k.
Last edited by 02nz on Sat Jul 11, 2020 12:54 pm, edited 2 times in total.
MrJedi
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by MrJedi »

I think there is a lot of confusion on the topic because of the Backdoor Roth IRA "loophole". Somebody hears about it from a friend or reads a blog post about how great it is, which it is, but they don't understand the logic on how it gets to that position of being a great thing to use.

For most high earners, traditional works out better than Roth, defer high income tax now for lower taxes later.

I think the confusion stems from the availability of the backdoor Roth IRA without an income limit, whereas a deductible IRA has a relatively low income limit. Since there is no income limit for backdoor Roth, the Roth gets a lot of very high praise since if you compared the alternative, investing in a taxable account, Roth is the very clear winner. The question in this situation is Roth vs taxable, not Roth vs Traditional.

So there is this perception that Roth is some magical thing and that this same concept extends to Roth 401k, which isn't true at all. Since there is not an income limit to the traditional 401k, Roth vs Traditional is now a valid question that needs further analysis to decide, not a no brainer decision like the Roth IRA vs taxable above.

For most high earners, the logical order of operations would be:
1. Defer taxes as much as possible, I.e. Traditional 401k, HSA, etc. Note that traditional IRA is not an option since as a high earner, you cannot deduct/defer the IRA.
2. Backdoor Roth (and megabackdoor Roth). This is the next step, since the alternative after this is taxable, and backdoor Roth is the clear winner over that. Note that you can't do a normal Roth 401k since you've maxed out the 401k space with traditional. This is the step I think some people mistakenly believe their Roth 401k is better than Traditional 401k since backdoor Roth IRA is the no brainer here. Really the 401k is already maxed out from step 1 and Roth 401k is not an option.
3. Taxable account (or maybe 529)

For OP, a lot more details are needed to truly assess your situation, but I think most high earners would logically flow down in this manner.
Last edited by MrJedi on Sat Jul 11, 2020 2:06 pm, edited 1 time in total.
Lee_WSP
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

02nz wrote: Sat Jul 11, 2020 12:44 pm
Lee_WSP wrote: Sat Jul 11, 2020 12:43 pm
02nz wrote: Sat Jul 11, 2020 12:34 pm
Lee_WSP wrote: Sat Jul 11, 2020 11:34 am Caveat
But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement.
It's not necessarily the case that maxing out a Roth 401k is better than maxing a traditional 401k and putting the tax savings into taxable. This can shift the calculus a bit toward Roth, but it doesn't automatically overcome everything else. Particularly if OP has little or nothing in tax-deferred now, then the huge savings from deferring taxes to retirement easily overcomes the tax drag of investing a small amount in taxable. "A tax-advantaged dollar is always better for retirement" is true in isolation / if everything else is equal, but everything else rarely is equal.

To give good advice we really need to know how much OP has in tax-deferred accounts.
You clearly did not read my post. You missed two very important requirements. 1) that the tax savings was going into taxable brokerage accounts, and 2) it's for retirement.

If the tax "savings" are going into taxable, you're still investing after tax money but then you'll owe capital gains on the earnings.
Yes I understood that perfectly and stand by my critique of it. My post specifically addresses taxable and tax drag.

Let's look at two options, maxing Roth 401k or maxing traditional 401k and investing savings into taxable. Assuem (as in the earlier examples in this thread, 35% federal tax now or 10% in retirement).

A. Max Roth 401k at $19,500. Assume 4% real growth per year. 20 years to retirement. Contributions grows to $42,727.

B. Max trad'l 401k at $19,500. Same assumptions as in A, contributions grow to same $42,727 in tax-deferred, less 10% income tax = $38,454. But you also saved 35% income tax up front, so that was $6,825 invested into taxable. Assume annual return of 3.5% (vs. 4% in tax-advantaged, due to tax drag), 20 years, so you get $13,480. Subtract 15% tax on LTCG, and the net amount in taxable is $12,482. Add in the net $38,454 from tax-deferred and you have a total of $50,936 after tax, more than if you'd maxed the Roth 401k.
Which turns into 38,711 after you pay 24% taxes on it. Only way you come out ahead is if you're able to convert it in the lowest tax bracket, maybe the second lowest.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 1:00 pm
02nz wrote: Sat Jul 11, 2020 12:44 pm
Lee_WSP wrote: Sat Jul 11, 2020 12:43 pm
02nz wrote: Sat Jul 11, 2020 12:34 pm
Lee_WSP wrote: Sat Jul 11, 2020 11:34 am Caveat
But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement.
It's not necessarily the case that maxing out a Roth 401k is better than maxing a traditional 401k and putting the tax savings into taxable. This can shift the calculus a bit toward Roth, but it doesn't automatically overcome everything else. Particularly if OP has little or nothing in tax-deferred now, then the huge savings from deferring taxes to retirement easily overcomes the tax drag of investing a small amount in taxable. "A tax-advantaged dollar is always better for retirement" is true in isolation / if everything else is equal, but everything else rarely is equal.

To give good advice we really need to know how much OP has in tax-deferred accounts.
You clearly did not read my post. You missed two very important requirements. 1) that the tax savings was going into taxable brokerage accounts, and 2) it's for retirement.

If the tax "savings" are going into taxable, you're still investing after tax money but then you'll owe capital gains on the earnings.
Yes I understood that perfectly and stand by my critique of it. My post specifically addresses taxable and tax drag.

Let's look at two options, maxing Roth 401k or maxing traditional 401k and investing savings into taxable. Assuem (as in the earlier examples in this thread, 35% federal tax now or 10% in retirement).

A. Max Roth 401k at $19,500. Assume 4% real growth per year. 20 years to retirement. Contributions grows to $42,727.

B. Max trad'l 401k at $19,500. Same assumptions as in A, contributions grow to same $42,727 in tax-deferred, less 10% income tax = $38,454. But you also saved 35% income tax up front, so that was $6,825 invested into taxable. Assume annual return of 3.5% (vs. 4% in tax-advantaged, due to tax drag), 20 years, so you get $13,480. Subtract 15% tax on LTCG, and the net amount in taxable is $12,482. Add in the net $38,454 from tax-deferred and you have a total of $50,936 after tax, more than if you'd maxed the Roth 401k.
Which turns into 38,711 after you pay 24% taxes on it. Only way you come out ahead is if you're able to convert it in the lowest tax bracket, maybe the second lowest.
You clearly did not read my post. :happy The $50,936 is AFTER 10% income tax on the traditional 401k (contribution plus growth) and 15% LTCG tax on the gains invested into taxable, and I assumed a lower return for taxable due to tax drag. You're incorrect to take another 24% off.

OK, let's assume 24% income tax on withdrawal for traditional 401k (and 15% LTCG in taxable). The 401k is then worth a net of $32,473 after 24% income tax. Add in the taxable of $12,482 (again, that's after 15% LTCG tax) and you have a total of $44,955. The Roth 401k still loses.

So as I pointed out already, it matters a lot how much tax-deferred OP already has. If it's very little, then the tax rate on the next $19.5K or whatever of traditional contributions will probably be even less than 10%. If it's already in the 7 digits, different story.

I actually agree with the other parts of your earlier post (general as it is), but the caveat, as stated, is clearly wrong. Investing a dollar into Roth is always better than investing a dollar into taxable, absolutely. But that doesn't mean investing the max into Roth is always better than investing the max into traditional and tax savings into taxable. If the tax rates on the front and back ends are fairly close, maxing Roth can be better. But if the tax rate is significantly lower in retirement/upon withdrawal than in working years, then maxing Roth loses.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by whodidntante »

While some measure of tax treatment diversification will be useful for a lot of us, there is not an answer that is always correct.

Try running a few simulations with different assumptions you want to make. Remember to also invest the current year tax savings for pre-tax contributions in the most tax-efficient space remaining. Doing that, I had to make some really dark assumptions about the future to find that pre-tax contributions were worse for me. And I'm going to do a backdoor Roth, and a mega backdoor Roth, max an HSA, and invest in taxable accounts and in my house which could grow tax-free, so tax treatment diversification happens anyway.

If your assumptions are wrong then your projections will be wrong, and your assumptions will almost certainly be wrong, so the goal is to make a good decision in the face of uncertainty. Make sure you're getting the basics right (i.e. savings rate and investment) before you dive into concerns about taxation in retirement.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by FiveK »

When Maxing out your retirement accounts (such that tax savings are invested in taxable accounts), see the discussion at that link. As usual, "it depends...."
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FiveK
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by FiveK »

BogleBuddy12 wrote: Sat Jul 11, 2020 7:19 amOur accountant disagrees with our decision to continue investing in a Roth. He feels we should take the deductions now, and then consider conversions later. This is where I get lost. Can someone explain the pros/cons to this approach? And how do the conversions work?
Any blanket advice to "contribute to Roth" or "contribute to traditional" now, even if qualified by your present tax bracket, is making an assumption about the marginal tax rate you'll pay when withdrawing.

Until you have some idea what that will be for you, there is no good answer to your thread topic question. Fortunately it doesn't take much to make a defensible estimate of your situation - see that link for one way. When you have done that you'll be in a much better position to discuss with your accountant.
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teen persuasion
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by teen persuasion »

MrJedi wrote: Sat Jul 11, 2020 12:46 pm I think there is a lot of confusion on the topic because of the Backdoor IRA "loophole". Somebody hears about it from a friend or reads a blog post about how great it is, which it is, but they don't understand the logic on how it gets to that position of being a great thing to use.

For most high earners, traditional works out better than Roth, defer high income tax now for lower taxes later.

I think the confusion stems from the availability of the backdoor Roth IRA without an income limit, whereas a deductible IRA has a relatively low income limit. Since there is no income limit for backdoor Roth, the Roth gets a lot of very high praise since if you compared the alternative, investing in a taxable account, Roth is the very clear winner. The question in this situation is Roth vs taxable, not Roth vs Traditional.

So there is this perception that Roth is some magical thing and that this same concept extends to Roth 401k, which isn't true at all. Since there is not an income limit to the traditional 401k, Roth vs Traditional is now a valid question that needs further analysis to decide, not a no brainer decision like the Roth IRA vs taxable above.

For most high earners, the logical order of operations would be:
1. Defer taxes as much as possible, I.e. Traditional 401k, HSA, etc. Note that traditional IRA is not an option since as a high earner, you cannot deduct/defer the IRA.
2. Backdoor Roth (and megabackdoor Roth). This is the next step, since the alternative after this is taxable, and backdoor Roth is the clear winner over that. Note that you can't do a normal Roth 401k since you've maxed out the 401k space with traditional. This is the step I think some people mistakenly believe their Roth 401k is better than Traditional 401k since backdoor Roth IRA is the no brainer here. Really the 401k is already maxed out from step 1 and Roth 401k is not an option.
3. Taxable account (or maybe 529)

For OP, a lot more details are needed to truly assess your situation, but I think most high earners would logically flow down in this manner.
I really like this post.

"Roth" is properly an adjective, not a noun; it describes a class/type of a variety of different retirement accounts, it is not one single unique type of retirement account. Details matter; we should not be sloppy using "Roth" as shorthand for Roth IRA, when it could also mean Roth 401k.

So a Roth IRA
is different from a backdoor Roth IRA
is different from a Roth 401k
is different from a mega backdoor Roth (which could be either IRA or 401k).

The traditional vs Roth decision should be looked at for each version (as available to you). Obviously, both backdoor versions have no traditional counterparts. If you are income ineligible (high earner) for Roth IRA contributions, you are also ineligible for the deduction for traditional contributions. Which leaves traditional 401k contributions as the only place to reap the tax deferral.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

02nz wrote: Sat Jul 11, 2020 1:02 pm
Lee_WSP wrote: Sat Jul 11, 2020 1:00 pm
02nz wrote: Sat Jul 11, 2020 12:44 pm
Lee_WSP wrote: Sat Jul 11, 2020 12:43 pm
02nz wrote: Sat Jul 11, 2020 12:34 pm

It's not necessarily the case that maxing out a Roth 401k is better than maxing a traditional 401k and putting the tax savings into taxable. This can shift the calculus a bit toward Roth, but it doesn't automatically overcome everything else. Particularly if OP has little or nothing in tax-deferred now, then the huge savings from deferring taxes to retirement easily overcomes the tax drag of investing a small amount in taxable. "A tax-advantaged dollar is always better for retirement" is true in isolation / if everything else is equal, but everything else rarely is equal.

To give good advice we really need to know how much OP has in tax-deferred accounts.
You clearly did not read my post. You missed two very important requirements. 1) that the tax savings was going into taxable brokerage accounts, and 2) it's for retirement.

If the tax "savings" are going into taxable, you're still investing after tax money but then you'll owe capital gains on the earnings.
Yes I understood that perfectly and stand by my critique of it. My post specifically addresses taxable and tax drag.

Let's look at two options, maxing Roth 401k or maxing traditional 401k and investing savings into taxable. Assuem (as in the earlier examples in this thread, 35% federal tax now or 10% in retirement).

A. Max Roth 401k at $19,500. Assume 4% real growth per year. 20 years to retirement. Contributions grows to $42,727.

B. Max trad'l 401k at $19,500. Same assumptions as in A, contributions grow to same $42,727 in tax-deferred, less 10% income tax = $38,454. But you also saved 35% income tax up front, so that was $6,825 invested into taxable. Assume annual return of 3.5% (vs. 4% in tax-advantaged, due to tax drag), 20 years, so you get $13,480. Subtract 15% tax on LTCG, and the net amount in taxable is $12,482. Add in the net $38,454 from tax-deferred and you have a total of $50,936 after tax, more than if you'd maxed the Roth 401k.
Which turns into 38,711 after you pay 24% taxes on it. Only way you come out ahead is if you're able to convert it in the lowest tax bracket, maybe the second lowest.
You clearly did not read my post. :happy The $50,936 is AFTER 10% income tax on the traditional 401k (contribution plus growth) and 15% LTCG tax on the gains invested into taxable, and I assumed a lower return for taxable due to tax drag. You're incorrect to take another 24% off.

OK, let's assume 24% income tax on withdrawal for traditional 401k (and 15% LTCG in taxable). The 401k is then worth a net of $32,473 after 24% income tax. Add in the taxable of $12,482 (again, that's after 15% LTCG tax) and you have a total of $44,955. The Roth 401k still loses.

So as I pointed out already, it matters a lot how much tax-deferred OP already has. If it's very little, then the tax rate on the next $19.5K or whatever of traditional contributions will probably be even less than 10%. If it's already in the 7 digits, different story.

I actually agree with the other parts of your earlier post (general as it is), but the caveat, as stated, is clearly wrong. Investing a dollar into Roth is always better than investing a dollar into taxable, absolutely. But that doesn't mean investing the max into Roth is always better than investing the max into traditional and tax savings into taxable. If the tax rates on the front and back ends are fairly close, maxing Roth can be better. But if the tax rate is significantly lower in retirement/upon withdrawal than in working years, then maxing Roth loses.
Only a FIRE adherent is planning to go from the highest tax bracket to the lowest.

The tax drag you propose is probably far too low. And the ability to change AA and rebalance with impunity outweighs any small tax savings.

Remember, this hypothetical person is a super saver trying to eek out every last penny of tax advantaged space.

You're also not counting the tax savings on other income by not having the bucket fill up quality by drawing down trad. You can escape all sorts of retirement tax cliffs.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 2:09 pm
02nz wrote: Sat Jul 11, 2020 1:02 pm
Lee_WSP wrote: Sat Jul 11, 2020 1:00 pm
02nz wrote: Sat Jul 11, 2020 12:44 pm
Lee_WSP wrote: Sat Jul 11, 2020 12:43 pm

You clearly did not read my post. You missed two very important requirements. 1) that the tax savings was going into taxable brokerage accounts, and 2) it's for retirement.

If the tax "savings" are going into taxable, you're still investing after tax money but then you'll owe capital gains on the earnings.
Yes I understood that perfectly and stand by my critique of it. My post specifically addresses taxable and tax drag.

Let's look at two options, maxing Roth 401k or maxing traditional 401k and investing savings into taxable. Assuem (as in the earlier examples in this thread, 35% federal tax now or 10% in retirement).

A. Max Roth 401k at $19,500. Assume 4% real growth per year. 20 years to retirement. Contributions grows to $42,727.

B. Max trad'l 401k at $19,500. Same assumptions as in A, contributions grow to same $42,727 in tax-deferred, less 10% income tax = $38,454. But you also saved 35% income tax up front, so that was $6,825 invested into taxable. Assume annual return of 3.5% (vs. 4% in tax-advantaged, due to tax drag), 20 years, so you get $13,480. Subtract 15% tax on LTCG, and the net amount in taxable is $12,482. Add in the net $38,454 from tax-deferred and you have a total of $50,936 after tax, more than if you'd maxed the Roth 401k.
Which turns into 38,711 after you pay 24% taxes on it. Only way you come out ahead is if you're able to convert it in the lowest tax bracket, maybe the second lowest.
You clearly did not read my post. :happy The $50,936 is AFTER 10% income tax on the traditional 401k (contribution plus growth) and 15% LTCG tax on the gains invested into taxable, and I assumed a lower return for taxable due to tax drag. You're incorrect to take another 24% off.

OK, let's assume 24% income tax on withdrawal for traditional 401k (and 15% LTCG in taxable). The 401k is then worth a net of $32,473 after 24% income tax. Add in the taxable of $12,482 (again, that's after 15% LTCG tax) and you have a total of $44,955. The Roth 401k still loses.

So as I pointed out already, it matters a lot how much tax-deferred OP already has. If it's very little, then the tax rate on the next $19.5K or whatever of traditional contributions will probably be even less than 10%. If it's already in the 7 digits, different story.

I actually agree with the other parts of your earlier post (general as it is), but the caveat, as stated, is clearly wrong. Investing a dollar into Roth is always better than investing a dollar into taxable, absolutely. But that doesn't mean investing the max into Roth is always better than investing the max into traditional and tax savings into taxable. If the tax rates on the front and back ends are fairly close, maxing Roth can be better. But if the tax rate is significantly lower in retirement/upon withdrawal than in working years, then maxing Roth loses.
Only a FIRE adherent is planning to go from the highest tax bracket to the lowest.

The tax drag you propose is probably far too low. And the ability to change AA and rebalance with impunity outweighs any small tax savings.

Remember, this hypothetical person is a super saver trying to eek out every last penny of tax advantaged space.
I showed clearly that even going from 35% now to 24% in retirement, maxing traditional 401k and investing the difference in in taxable gives you more than maxing Roth.

Before-tax return of VTI over the past 10 years is 13.74% annualized. After-tax performance (per Vanguard - this is assuming highest federal income tax bracket) is 13.25%, a tax drag of slightly less than the 0.5% I assumed.
Last edited by 02nz on Sat Jul 11, 2020 2:17 pm, edited 1 time in total.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by FiveK »

Lee_WSP wrote: Sat Jul 11, 2020 2:09 pm The tax drag you propose is probably far too low.
One could use either of the two spreadsheets mentioned in More complicated situations to estimate this.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

02nz wrote: Sat Jul 11, 2020 2:16 pm
You can't know what tax bracket you're going to be in retirement. While it's probably a good bet you'll drop down a bracket or two, you still won't know. The only way we have control over that is by controlling our spending in retirement which is a whole different topic and quite clearly much more important than whether you choose to do Roth or trad.

My point still stands that if you're some super saver who wants to eek out every ounce of tax deferred space available, after hitting the trad limit, starting to convert that to Roth makes sense.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm You can't know what tax bracket you're going to be in retirement. While it's probably a good bet you'll drop down a bracket or two, you still won't know. The only way we have control over that is by controlling our spending in retirement which is a whole different topic and quite clearly much more important than whether you choose to do Roth or trad.
Obviously you can't know, you can only make estimates and hedge for uncertainty. For those far from retirement and who don't already have a significant tax-deferred balance, maxing a traditional 401k and a Roth IRA (backdoor if necessary) is a good way to go. As retirement approaches and uncertainty decreases, re-evaluate, ideally every year.
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm My point still stands that if you're some super saver who wants to eek out every ounce of tax deferred space available, after hitting the trad limit, starting to convert that to Roth makes sense.
The point isn't necessarily to maximize every dollar of tax-advantaged space but maximize after-tax dollars upon withdrawal, as I showed in the examples above. It's unclear what you mean by "after hitting the trad limit, starting to convert that to Roth." Does that mean shifting toward Roth contributions, or are you talking about Roth conversions? Whatever you meant, it's not what you actually said before. Here's the statement I took issue with: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." I've shown above that in many cases it's simply not true.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by RocketShipTech »

spectec wrote: Sat Jul 11, 2020 7:25 am From my limited observations, people who are focused & deliberate long-term investors often never find themselves in a position to be able to do significant Roth conversions profitably, even in retirement.
This is a clear sign that you have worked too long and should retire yesterday.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

02nz wrote: Sat Jul 11, 2020 2:54 pm
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm You can't know what tax bracket you're going to be in retirement. While it's probably a good bet you'll drop down a bracket or two, you still won't know. The only way we have control over that is by controlling our spending in retirement which is a whole different topic and quite clearly much more important than whether you choose to do Roth or trad.
Obviously you can't know, you can only make estimates and hedge for uncertainty. For those far from retirement and who don't already have a significant tax-deferred balance, maxing a traditional 401k and a Roth IRA (backdoor if necessary) is a good way to go. As retirement approaches and uncertainty decreases, re-evaluate, ideally every year.
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm My point still stands that if you're some super saver who wants to eek out every ounce of tax deferred space available, after hitting the trad limit, starting to convert that to Roth makes sense.
The point isn't necessarily to maximize every dollar of tax-advantaged space but maximize after-tax dollars upon withdrawal, as I showed in the examples above. It's unclear what you mean by "after hitting the trad limit, starting to convert that to Roth." Does that mean shifting toward Roth contributions, or are you talking about Roth conversions? Whatever you meant, it's not what you actually said before. Here's the statement I took issue with: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." I've shown above that in many cases it's simply not true.
No you haven't. You've only shown it to be disadvantaged under a certain set of conditions. And not enough to definitively say you should not do it.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 3:12 pm
02nz wrote: Sat Jul 11, 2020 2:54 pm
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm You can't know what tax bracket you're going to be in retirement. While it's probably a good bet you'll drop down a bracket or two, you still won't know. The only way we have control over that is by controlling our spending in retirement which is a whole different topic and quite clearly much more important than whether you choose to do Roth or trad.
Obviously you can't know, you can only make estimates and hedge for uncertainty. For those far from retirement and who don't already have a significant tax-deferred balance, maxing a traditional 401k and a Roth IRA (backdoor if necessary) is a good way to go. As retirement approaches and uncertainty decreases, re-evaluate, ideally every year.
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm My point still stands that if you're some super saver who wants to eek out every ounce of tax deferred space available, after hitting the trad limit, starting to convert that to Roth makes sense.
The point isn't necessarily to maximize every dollar of tax-advantaged space but maximize after-tax dollars upon withdrawal, as I showed in the examples above. It's unclear what you mean by "after hitting the trad limit, starting to convert that to Roth." Does that mean shifting toward Roth contributions, or are you talking about Roth conversions? Whatever you meant, it's not what you actually said before. Here's the statement I took issue with: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." I've shown above that in many cases it's simply not true.
No you haven't. You've only shown it to be disadvantaged under a certain set of conditions. And not enough to definitively say you should not do it.
That was my whole point, it depends on the circumstances. Your statement was unqualified: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." It is incorrect as written. In some cases maxing Roth 401k beats maxing traditional 401k and investing the tax savings in taxable, in some cases the latter is better. Like everything else about Roth vs traditional (or rather, the Roth/traditional mix), it depends, and blanket statements are always wrong. :happy
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by willthrill81 »

BogleBuddy12 wrote: Sat Jul 11, 2020 8:49 am
nisiprius wrote: Sat Jul 11, 2020 8:02 am As someone who has both Roth IRAs and traditional IRAs, some from 401(k) rollovers and others just because, let me say that you should not underweight the complexity of dealing with a TIRA when the time comes to take distributions.

Since a TIRA and a Roth are different, everyone wants to know what's best. The demand has created a supply of calculators, books, and professional advice. The reality is that the complicated calculations require, as inputs, too many things that are unpredictable, starting with what the tax code will be decades into the future, and a few other details like the return of the stock market, etc.

But the difference in complexity is predictable. You may say "well, the rules for Roth IRA withdrawals could change, too," and they could. But the point is that under current rules, it is easy. You wait until you're 59-1/2 and then you just take the money out whenever you like. Under current rules, if you have a TIRA or a 401(k), you'd better buy a book about it. (I'd recommend one, but the one I bought in 2013 is out of date, and there isn't a revised version! But the title itself is revealing: "IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out." IRAs and 401(k)s are the ones you need the book for).

Humiliating story and people are going to say "eh, it's not that complicated, you just need to be a bit organized." I am still waiting on my tax refund even though I filed on 3/13/2020. Because early in January 2019 the bank sent me a reminder that sometime in 2019 I needed to take a $600 RMD from a old IRA bank account. And since there was a year to deal with it, I set it aside. And when they sent me the reminder for 2020 I realized that I'd never gotten around to doing it! $300 penalty for me! So then I got the bright idea, "the rules don't say anything about a waiver for stupidity, but, hey, for $300 I should take a shot at it." And my tax software says "fine, but if you check the box saying you are requesting a waiver, you must file on paper." So I did, paper for state and federal. Got my state refund three weeks later; federal tax return hasn't even begun processing.

And if there's any possibility that someone might inherit a TIRA, that's complicated, too. Maybe it's not all that complicated but, again, the penalty for a screwup is serious. Inheriting a TIRA is a "good problem to have," but it's a problem nevertheless, and it hits at a time when you don't need more problems.

Given a free choice, I would want to be very certain about the dollar size of the TIRA advantage and how sensitive that calculation was to uncertain predictions about the future.
Thank you Nisiprius. This post spoke to me. As I said in the original post, I am striving for simplicity.
Simplicity is great, but don't pay a small fortune to achieve it. You could easily be better off hiring a CPA to help you manage the process. And since you already have a CPA working for you who appears to know what s/he is talking about, you're already a good ways there.

If someone expects to be in a lower total (i.e. Federal and state) tax bracket when they withdraw the funds than they are now, which is true for most people, then tax-deferred accounts like traditional IRAs and 401(k)s will nearly always result in greater after-tax wealth.

Yes, it's true that individual circumstances and one's assumptions of the future are important. But for most people, most of the time, tax-deferred contributions are likely to result in greater after-tax wealth.
“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: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

02nz wrote: Sat Jul 11, 2020 3:24 pm
Lee_WSP wrote: Sat Jul 11, 2020 3:12 pm
02nz wrote: Sat Jul 11, 2020 2:54 pm
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm You can't know what tax bracket you're going to be in retirement. While it's probably a good bet you'll drop down a bracket or two, you still won't know. The only way we have control over that is by controlling our spending in retirement which is a whole different topic and quite clearly much more important than whether you choose to do Roth or trad.
Obviously you can't know, you can only make estimates and hedge for uncertainty. For those far from retirement and who don't already have a significant tax-deferred balance, maxing a traditional 401k and a Roth IRA (backdoor if necessary) is a good way to go. As retirement approaches and uncertainty decreases, re-evaluate, ideally every year.
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm My point still stands that if you're some super saver who wants to eek out every ounce of tax deferred space available, after hitting the trad limit, starting to convert that to Roth makes sense.
The point isn't necessarily to maximize every dollar of tax-advantaged space but maximize after-tax dollars upon withdrawal, as I showed in the examples above. It's unclear what you mean by "after hitting the trad limit, starting to convert that to Roth." Does that mean shifting toward Roth contributions, or are you talking about Roth conversions? Whatever you meant, it's not what you actually said before. Here's the statement I took issue with: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." I've shown above that in many cases it's simply not true.
No you haven't. You've only shown it to be disadvantaged under a certain set of conditions. And not enough to definitively say you should not do it.
That was my whole point, it depends on the circumstances. Your statement was unqualified: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." It is incorrect as written. In some cases maxing Roth 401k beats maxing traditional 401k and investing the tax savings in taxable, in some cases the latter is better. Like everything else about Roth vs traditional (or rather, the Roth/traditional mix), it depends, and blanket statements are always wrong. :happy
The statement is still true. The tax advantaged dollar is still better. But it may cost more.

My second statement is likewise still true; it requires two parts 1) a super saver; and 2) they want to maximize every last drop of tax advantaged space.

The attack on the statement is not against what I said, but against the individual who wants to "maximize every last drop of tax advantaged space" because as you've pointed out, it may not be in their best interest.
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 3:38 pm
02nz wrote: Sat Jul 11, 2020 3:24 pm
Lee_WSP wrote: Sat Jul 11, 2020 3:12 pm
02nz wrote: Sat Jul 11, 2020 2:54 pm
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm You can't know what tax bracket you're going to be in retirement. While it's probably a good bet you'll drop down a bracket or two, you still won't know. The only way we have control over that is by controlling our spending in retirement which is a whole different topic and quite clearly much more important than whether you choose to do Roth or trad.
Obviously you can't know, you can only make estimates and hedge for uncertainty. For those far from retirement and who don't already have a significant tax-deferred balance, maxing a traditional 401k and a Roth IRA (backdoor if necessary) is a good way to go. As retirement approaches and uncertainty decreases, re-evaluate, ideally every year.
Lee_WSP wrote: Sat Jul 11, 2020 2:36 pm My point still stands that if you're some super saver who wants to eek out every ounce of tax deferred space available, after hitting the trad limit, starting to convert that to Roth makes sense.
The point isn't necessarily to maximize every dollar of tax-advantaged space but maximize after-tax dollars upon withdrawal, as I showed in the examples above. It's unclear what you mean by "after hitting the trad limit, starting to convert that to Roth." Does that mean shifting toward Roth contributions, or are you talking about Roth conversions? Whatever you meant, it's not what you actually said before. Here's the statement I took issue with: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." I've shown above that in many cases it's simply not true.
No you haven't. You've only shown it to be disadvantaged under a certain set of conditions. And not enough to definitively say you should not do it.
That was my whole point, it depends on the circumstances. Your statement was unqualified: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." It is incorrect as written. In some cases maxing Roth 401k beats maxing traditional 401k and investing the tax savings in taxable, in some cases the latter is better. Like everything else about Roth vs traditional (or rather, the Roth/traditional mix), it depends, and blanket statements are always wrong. :happy
The statement is still true. The tax advantaged dollar is still better. But it may cost more.

My second statement is likewise still true; it requires two parts 1) a super saver; and 2) they want to maximize every last drop of tax advantaged space.

The attack on the statement is not against what I said, but against the individual who wants to "maximize every last drop of tax advantaged space" because as you've pointed out, it may not be in their best interest.
You continue to conflate two things. I don't know if you just can't see it or refuse to see it.

A dollar invested into Roth is absolutely better than a dollar invested into taxable. Therefore, it follows that $19,500 invested into Roth is better than $19,500 invested into taxable.

What does NOT follow is that $19,500 invested into Roth is better than $19,500 invested into traditional and tax savings invested into taxable. It can be better, or it can be worse. It depends. That's all I'm saying.

Your original statement remains incorrect: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement."
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by Lee_WSP »

02nz wrote: Sat Jul 11, 2020 3:55 pm
Lee_WSP wrote: Sat Jul 11, 2020 3:38 pm
02nz wrote: Sat Jul 11, 2020 3:24 pm
Lee_WSP wrote: Sat Jul 11, 2020 3:12 pm
02nz wrote: Sat Jul 11, 2020 2:54 pm

Obviously you can't know, you can only make estimates and hedge for uncertainty. For those far from retirement and who don't already have a significant tax-deferred balance, maxing a traditional 401k and a Roth IRA (backdoor if necessary) is a good way to go. As retirement approaches and uncertainty decreases, re-evaluate, ideally every year.



The point isn't necessarily to maximize every dollar of tax-advantaged space but maximize after-tax dollars upon withdrawal, as I showed in the examples above. It's unclear what you mean by "after hitting the trad limit, starting to convert that to Roth." Does that mean shifting toward Roth contributions, or are you talking about Roth conversions? Whatever you meant, it's not what you actually said before. Here's the statement I took issue with: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." I've shown above that in many cases it's simply not true.
No you haven't. You've only shown it to be disadvantaged under a certain set of conditions. And not enough to definitively say you should not do it.
That was my whole point, it depends on the circumstances. Your statement was unqualified: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." It is incorrect as written. In some cases maxing Roth 401k beats maxing traditional 401k and investing the tax savings in taxable, in some cases the latter is better. Like everything else about Roth vs traditional (or rather, the Roth/traditional mix), it depends, and blanket statements are always wrong. :happy
The statement is still true. The tax advantaged dollar is still better. But it may cost more.

My second statement is likewise still true; it requires two parts 1) a super saver; and 2) they want to maximize every last drop of tax advantaged space.

The attack on the statement is not against what I said, but against the individual who wants to "maximize every last drop of tax advantaged space" because as you've pointed out, it may not be in their best interest.
You continue to conflate two things. I don't know if you just can't see it or refuse to see it.

A dollar invested into Roth is absolutely better than a dollar invested into taxable. Therefore, it follows that $19,500 invested into Roth is better than $19,500 invested into taxable.

What does NOT follow is that $19,500 invested into Roth is better than $19,500 invested into traditional and tax savings invested into taxable. It can be better, or it can be worse. It depends. That's all I'm saying.

Your original statement remains incorrect: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement."
You are just trying to cut down the statement by nitpicking at a couple of very narrow scenarios. This is the theory section, this is not about any one specific set of circumstances.

But fine, if you want me to change it so that it's absolutely 100% stand ups to all criticism, here:

If you want to maximize your tax advantaged dollars, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement
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Re: Are Roth IRAs “Pay taxes once and never again” really best?”

Post by 02nz »

Lee_WSP wrote: Sat Jul 11, 2020 4:07 pm
02nz wrote: Sat Jul 11, 2020 3:55 pm
Lee_WSP wrote: Sat Jul 11, 2020 3:38 pm
02nz wrote: Sat Jul 11, 2020 3:24 pm
Lee_WSP wrote: Sat Jul 11, 2020 3:12 pm

No you haven't. You've only shown it to be disadvantaged under a certain set of conditions. And not enough to definitively say you should not do it.
That was my whole point, it depends on the circumstances. Your statement was unqualified: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement." It is incorrect as written. In some cases maxing Roth 401k beats maxing traditional 401k and investing the tax savings in taxable, in some cases the latter is better. Like everything else about Roth vs traditional (or rather, the Roth/traditional mix), it depends, and blanket statements are always wrong. :happy
The statement is still true. The tax advantaged dollar is still better. But it may cost more.

My second statement is likewise still true; it requires two parts 1) a super saver; and 2) they want to maximize every last drop of tax advantaged space.

The attack on the statement is not against what I said, but against the individual who wants to "maximize every last drop of tax advantaged space" because as you've pointed out, it may not be in their best interest.
You continue to conflate two things. I don't know if you just can't see it or refuse to see it.

A dollar invested into Roth is absolutely better than a dollar invested into taxable. Therefore, it follows that $19,500 invested into Roth is better than $19,500 invested into taxable.

What does NOT follow is that $19,500 invested into Roth is better than $19,500 invested into traditional and tax savings invested into taxable. It can be better, or it can be worse. It depends. That's all I'm saying.

Your original statement remains incorrect: "But if you're going to be putting the tax savings into taxable since you're maximizing the 401k, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement."
You are just trying to cut down the statement by nitpicking at a couple of very narrow scenarios. This is the theory section, this is not about any one specific set of circumstances.

But fine, if you want me to change it so that it's absolutely 100% stand ups to all criticism, here:

If you want to maximize your tax advantaged dollars, then yes, Roth is the way to go because a tax advantaged dollar is always better for retirement
What does that even mean? "Tax-advantaged dollars" don't exist in some vacuum.
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