## T- IRA vs Roth IRA in late 60's - which one? T IRA, right?

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Topic Author
phxjcc
Posts: 687
Joined: Thu Aug 23, 2018 3:47 pm

### T- IRA vs Roth IRA in late 60's - which one? T IRA, right?

24% Marginal Tax Rate
> \$14,000 Earned income
MFJ
68/67 Y.O.
AGI below phase out level for IRA's.
According to Turbo Tax, I can save \$3360 by Max'ing out the T IRA contribution; \$7.000 each for \$14,000 total.

So, why would I do a Roth in this case?

I know about RMD's on a T IRA.
But the future tax on the RMD will likely never be greater than the tax savings NOW on the contribution.
Math is shown below.

You guys are smarter that I am on Roth vs TIRA.

Math: to determine break even for Roth vs. T IRA, assuming RMD T IRA withdrawals get taxed and Roth IRA withdrawals do not.
Assumptions
Constant dollars - it is only 4 years.
RMD @ 4% (to make math easy)
Future Tax at 25% (to make math easy)
Portfolio Value = X

Therefore: \$3360 = 0.04 * 0.25 * X
Solve for X:

x = \$3360/0.01
x = \$336,000 (*Future portfolio value for break even)

CAGR required (per year) in 4 years for \$3360 to become \$336,000 : 216%
David Jay
Posts: 10018
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

### Re: T- IRA vs Roth IRA in late 60's - which one? T IRA, right?

One factor you did not include and one you included incorrectly:

1. The two of you will not always be MFJ

2. RMD percentage goes up every year. And the percentage increase accelerates with age. Over 8% at age 90, over 11% at 95.

Put those two together. Surviving spouse is filing single (higher tax bracket) and RMD is 8 - 9 - 10%. All of a sudden filling your 24% tax bracket in the early years starts to look pretty attractive. Not to mention that the 24% tax bracket is scheduled to go back to 28% in 2026.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
David Jay
Posts: 10018
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

### Re: T- IRA vs Roth IRA in late 60's - which one? T IRA, right?

The other significant number is the combined size of all of your tax-deferred accounts (as that drives absolute RMD amount). If you have, say, 1.5 million or more then the surviving spouse could easily end up in the 30-something percent tax bracket.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Watty
Posts: 21398
Joined: Wed Oct 10, 2007 3:55 pm

### Re: T- IRA vs Roth IRA in late 60's - which one? T IRA, right?

phxjcc wrote: Tue Jan 12, 2021 3:11 pm 24% Marginal Tax Rate
Be sure to double check that since the way Social Security is taxed is screwey and you can end up in a higher than expected tax bracket.

It was not clear if that includes any state income taxes or not but if that is your federal tax bracket it would take somewhere around \$350K in taxable income for a couple to exceed the 24% federal tax bracket.

If you will have more income than that you should likely have professional estate planning because if your money is invested for several decades you could be looking a big estate tax bill someday. The exemption limits for estate taxes have gone up and down a number of times so that could also be much lower when you die.

As someone mentioned when one of you dies the survivor could end up in a higher tax bracket then but realistically what you do with this \$14K will likely make a trivial difference then and whoever eventually inherits it will likely be in a lower tax bracket.

I would just use the traditional in that tax bracket.
Lee_WSP
Posts: 3797
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

### Re: T- IRA vs Roth IRA in late 60's - which one? T IRA, right?

If you'll have excess space under the 24% bracket when you begin conversions or at the end of RMDs, then yes, take the deduction, but my inkling is that Roth will be as good or better given expected sunset of tax rates and escalating RMDs
Topic Author
phxjcc
Posts: 687
Joined: Thu Aug 23, 2018 3:47 pm

### Re: T- IRA vs Roth IRA in late 60's - which one? T IRA, right?

Thanks for the help!