Are Roth Accounts Overrated?

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CoastLawyer2030
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Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

There is a general consensus on the forums that you should take advantage of any and all tax advantaged space that you can. This means contributing to pre-tax accounts (401k, 403b, 457, etc.) and also Roth IRAs. This follows conventional personal finance thinking, but I think I am starting to lean against contributing to Roth IRAs.

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates

Alternatively, even if you earn ordinary income, if you take your deductions elsewhere (by contributing to pre-tax accounts), and you can still pull quite a bit of gains from a brokerage if you can keep your total AGI (gains included) under $80,000.

Basically, there are zero strings attached with a brokerage. You can get the money you want penalty-free, whenever you want, and you just have to move around some numbers to make sure your AGI falls where you want it to fall. Odds are that your effective tax on any withdrawal is extremely minimal.

Meanwhile, Roth IRAs promise tax free growth that is accessible once you are 59.5, but there are strings attached. You can only pull your contributions penalty free. Meanwhile, any gains you pull are taxed at your regular income tax rate PLUS a ten percent penalty.

I live in a LCOL area, so this is certainly location specific. I can live extremely well with an AGI of $80,000, and I get that can't be said for everywhere in the country.

But in sum, my working theory is that the tax benefits of Roths are limited when you consider (a) the strings attached to pulling from a Roth, and (b) how favorably capital gains are taxed.

Editing to Add: I am posting this in the context of my own personal situation. I live in a very LCOL area and can live very comfortably on an AGI of $80,000. Moreover, I intend to retire well before 59.5.
Last edited by CoastLawyer2030 on Wed Apr 21, 2021 5:18 pm, edited 1 time in total.
leftcoaster
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Re: Are Roth Accounts Overrated?

Post by leftcoaster »

Well, Roth conversions enable one to draw down deferred accounts at low taxation levels early in retirement, decreasing the balance subject to RMDs. This can impact eligibility for ACA subsidies beneficially in some cases.

Second, BH is largely a buy and hold philosophy, so access to funds is less important.

Third, a Roth is a good place to place assets with high growth potential.

Fourth , the amounts going into a Roth are not huge at 5-7k. For long term investors with sizable investable income there’s no reason not to. Even more so with the mega back door.

Others may suggest more points. Those are the ones that come to mind.
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LilyFleur
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Re: Are Roth Accounts Overrated?

Post by LilyFleur »

Tax law can be changed. Plenty of Bogleheads were upset when the stretch IRA went away in the most recent tax law. Some of us live in states that tax capital gains at regular income tax rates.

I think the best advice I got when considering a Roth conversion was this (from this forum): a diversity of types of accounts is a good idea.

Most folks will end up single at some point in their lives, and the single tax bracket is difficult. A Roth enables a divorce survivor or a widower to have a tax-free income stream as a retiree.

I have converted a small percentage of my portfolio to a Roth. I will probably do another conversion this year. If I need to lower my tax bill sometime in the future, withdrawing from the Roth will be an option. It's a good legacy vehicle as well which will not drive up my children's tax bill. I actually have more of my portfolio in a brokerage account, and a large portion in a 401k. Many of us have experienced huge growth in our 401ks which will affect our tax bills as retirees.

My son, who just started his first job two years ago, is contributing to a Roth while his income is lower (at the beginning of his career), on the advice of my Schwab advisor.
Slacker
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Re: Are Roth Accounts Overrated?

Post by Slacker »

We pay taxes on the dividends every year in the taxable account during the accumulation phase. Our income puts QDI above the 0% tax rate.

So, if all of our roth contributions went into taxable, that is a minor tax drag over the years. We can max 401k, Roth, HSA, and still have a little leftover that goes into taxable. Since we'll have funds in taxable anyway, it looks beneficial for our situation to include maxing Roth.

Our state taxes all LTCG and QDI at 5% in addition to any potential federal taxes.
crake
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Re: Are Roth Accounts Overrated?

Post by crake »

I agree, given current tax law if you AGI keeps you in the 12% tax bracket there does not seem to be much advantage to investing in a Roth.

Not everyone can control their AGI to keep it at that level. For people who do pay taxes on dividends and capital gains taxes I've made a crude attempt at quantifying the value of a Roth in todays dollars.

Assumptions:
-7% total return
-1.29% dividend rate
-15% tax rate on dividends
-35 years investing
-6000 per year invested
-15% capital gains rate

Given the above assumptions after 35 years one would have ~848k in a Roth account or ~740k in taxable. I assumed a total return of 6.8% in the taxable account due to paying taxes on the dividends and 7% in the Roth account since it is tax free. The cost basis in the taxable account would be higher than 6000*35 due to reinvested dividends. Please forgive my napkin math but my estimate is around 120k of dividends would have been paid making the final cost basis 330000. You would then owe 15% taxes on the remaining 410k or about 62k.

This means that for someone with an AGI above the 12% tax bracket they would have:

-848k Roth
-678k Taxable
-for a final difference of 170k.

This number could certainly shift drastically based on changes in the above assumptions but I think it is useful estimate for the order of magnitude of the benefit a Roth account would provide over a taxable one. I also made the assumption that all the money is withdrawn immediately at retirement. This is obviously a silly assumption but the benefit of the Roth will actually continue to increase over the taxable account the longer the money is held.
HootingSloth
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Re: Are Roth Accounts Overrated?

Post by HootingSloth »

This post seems to be of a piece with your post on intentionally paying the 10% withdrawal penalty.

Tax optimization is not a first order concern, and it is not a second order concern. For people who want to spend the time to do it, it is more or less "free money." But it is not a large amount of free money, and it is not certain for a number of reasons, including uncertainty about changes in future tax laws and uncertainty about investment returns.

It is perfectly OK if you do not want to worry about tax optimization and just do what you want with your money. Many of the rest of us will keep contributing to Roth IRAs. For many, the downsides of making a Roth IRA contribution are pretty close to non-existent. You yourself have noted that eating the 10% penalty is not that bad. And it only applies to the returns, not the original contributions. And, as you are aware, a 72t plan can avoid even the penalty, with some added complexity of course. And we are only talking about a portion of savings, which for many Bogleheads is a very small portion indeed. On the other hand, the potential monetary benefits are not too shabby for 20 minutes of work a year.
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FiveK
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Re: Are Roth Accounts Overrated?

Post by FiveK »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am Roth IRAs promise tax free growth until you are 59.5
Even after age 59.5. :)

Also, qualified Roth withdrawals do not count toward the taxability of SS benefits, but capital gains and qualified dividends do.
redmaw
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Re: Are Roth Accounts Overrated?

Post by redmaw »

As with all things, it depends. I think a diversity of income sources in retirement is key, I want some traditional funds or other income source to take full advantage of the standard deductions, I want some taxable to be available before 60 (and make a conversion ladder feasible), and I want Roth to be able to cover any surges in spending without triggering more taxes. I think each account type has its place, and for me there is a big range of values on each account where the basic function is covered and over that amount location of funds doesn't make much difference. To me once it doesn't make much difference Roth gets priority, because it closes the book on taxes in my mind.

Advantages to the roth account over a taxable account even with 0% cap gains:
The ability to freely change investments in a roth account without tax implications is nice
The amount you withdraw does not effect other taxation decisions
Less vulnerable to tax law changes
non-qualified dividends in a taxable account are taxed as ordinary income, which could become substantial
Umm I think there is something about the FAFSA , but I'm not there yet

So while I tend to agree that for many in the lower income brackets, roth versus taxable is pretty similar, I think once you have "enough" taxable savings the rest is better off in roth. Since roth contributions are limited, and taxable aren't it gets priority for me (once you are on track to get to enough in taxable that is).
mikejuss
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Re: Are Roth Accounts Overrated?

Post by mikejuss »

That's a kooky theory, sir. Thanks for sharing it.
ThankYouJack
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Re: Are Roth Accounts Overrated?

Post by ThankYouJack »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates
Are you forgetting state taxes?
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
Basically, there are zero strings attached with a brokerage. You can get the money you want penalty-free, whenever you want, and you just have to move around some numbers to make sure your AGI falls where you want it to fall. Odds are that your effective tax on any withdrawal is extremely minimal.
I would run some numbers and factor in tax drag from dividends and state taxes. The taxes probably won't be minimal over a long investing period
Admiral
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Re: Are Roth Accounts Overrated?

Post by Admiral »

I guess I don't see any "strings" attached to Roth, or at least not the ones you purport to see.

1) Roth money grows tax free forever, not simply to age 59.5. The same is not true of a taxable account.
2) A Roth is a designated retirement account. You should plan to NOT take your earnings out early. But even if things don't go as planned, your contributions are there for the taking. If you feel you will need access to funds before the requisite holding period is reached, well... that's what a taxable account is for.

I happen to use both Roth and taxable. Taxable is for large things that I know I will be paying for in the near future: college, vacations, home reno, perhaps mortgage payoff.

Roth is for retirement and (likely) a tax free estate. I see no need to pay taxes on money I won't need for 20+ years, or possibly ever.
sailaway
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Re: Are Roth Accounts Overrated?

Post by sailaway »

Your math seems focused on what you can live off of, rather than actual numbers throughout life phases. While our spending is considerably less than $80k, during the accumulation phase, our AGI is rather more than that. If you consider that our Roth accounts are slightly more than our taxable accounts and similarly invested, having them saves us over $1k in fed + state taxes a year, based on last year's dividends and distributions in the taxable accounts. In the case of 2020, that would have been enough to knock us out of safe harbor, so it also saved us any penalties.

I also don't mind my gains being "tied up" for a more traditional retirement age, as I am going to need something to live off of in retirement, anyway, might as well be Roth gains. I would chose to pay income taxes and penalty on deferred monies, rather than Roth earnings. That is, if, heaven forbid, I need to draw on those funds, I would take out my Roth contributions and eligible conversions first, then turn to deferred.

For inheritance purposes, Roth currently means a step up in basis that can be stretched over several years. Even if it is my husband who inherits my Roth, that will help him through the single tax rates until he can replace me.
Triple digit golfer
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Re: Are Roth Accounts Overrated?

Post by Triple digit golfer »

I try not to think too much about the future.

My order of priority is the following, which simply allows us to pay the least amount of tax in present time and save more money. I'll worry about the taxes of the future when I get there.

Tax-deferred
Tax-free
Taxable

If we have so much money in tax-deferred accounts that we are in a high income tax bracket when we withdrawal, I don't think I'll mind too much.

If we are to a point where we have so much in tax-deferred accounts and want to retire, but can't access those accounts, we'll figure something out.

These are problems that most people would love to have.
cshell2
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Re: Are Roth Accounts Overrated?

Post by cshell2 »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am Meanwhile, Roth IRAs promise tax free growth until you are 59.5, but there are strings attached. You can only pull your contributions penalty free. Meanwhile, any gains you pull are taxed at your regular income tax rate PLUS a ten percent penalty.
Take it from a 52 year old. 59.5 comes awful fast. :? Besides, ROTH money is the money I'd want to sit the longest due to not being subject to RMDs. Once I do hit 59.5 I will still leave the ROTH alone and draw from the tax-deferred, converting some as I go.
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LilyFleur
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Re: Are Roth Accounts Overrated?

Post by LilyFleur »

Triple digit golfer wrote: Wed Apr 21, 2021 2:41 pm I try not to think too much about the future.

My order of priority is the following, which simply allows us to pay the least amount of tax in present time and save more money. I'll worry about the taxes of the future when I get there.

Tax-deferred
Tax-free
Taxable

If we have so much money in tax-deferred accounts that we are in a high income tax bracket when we withdrawal, I don't think I'll mind too much.

If we are to a point where we have so much in tax-deferred accounts and want to retire, but can't access those accounts, we'll figure something out.

These are problems that most people would love to have.
A lot of Boglehead retirees do have this problem. It is less of a problem if you have enough cash in taxable to pay the taxes on Roth conversions during the years before you begin to draw Social Security and before you cause your IRMAA to increase. (For many of us, that means we have until age 63 to complete our Roth conversions so our IRMAA isn't increasing. Some of us have enough savings to somewhat disregard IRMAA, but lots of folks here balk at paying anything above the minimum. YMMV, and it sounds like your horizon is pretty far off.)

Bottom line: if you are saving aggressively, you'll be in better shape for retirement. I do think having diversity in types of retirement accounts puts you ahead of the game. I received that advice on this forum a few years back, and it has helped inform some of my investment decisions as there are so many other unknowns for those of us trying to plan for the future (future tax rates, inflation, laws regarding investments, laws that effect heirs, etc.)
Lee_WSP
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

If your question is whether tax advantaged Roth accounts are overrated vs taxable accounts, unless you're asking whether people promote them too much, the answer is a resounding no. Unless you're going to need the cap gains before retirement age, taxable has no advantage over Roth cetaris parabis, and I can't come up with a single scenario where given the no cost option why you would ever opt to let a Roth contribution lapse.

But, perhaps I don't understand the question.

Edit: Put another way, with a cap of $6,500 per year, this is not a very high priority concern. If you qualify just dump it in because there's very little to zero possible cost involved vs taxable.
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CoastLawyer2030
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

First, I’ve added an edit to my original post. I’m well aware Roths continue to grow tax free after 59.5; they just become accessible tax-free at that age.

Second, I added more about my own personal situation, which largely involves downshifting in my mid/late thirties and probably early retiring in my 40s. Thus, access to my investments is a higher priority for me than for others.
ThankYouJack wrote: Wed Apr 21, 2021 2:02 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates
Are you forgetting state taxes?
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
Basically, there are zero strings attached with a brokerage. You can get the money you want penalty-free, whenever you want, and you just have to move around some numbers to make sure your AGI falls where you want it to fall. Odds are that your effective tax on any withdrawal is extremely minimal.
I would run some numbers and factor in tax drag from dividends and state taxes. The taxes probably won't be minimal over a long investing period
I have to be honest and admit that I was unaware that even reinvested dividends were taxed in a brokerage account. Thanks for bringing this to my attention. That makes me want to rant about taxes until I pass out blue in the face, but that’s a lecture for another day.

In any event, are you aware of any online calculators that can estimate dividends and their applicable taxes? Seems to me like the dividends on index funds are extremely small (maybe $1,000/year for every $100,000 invested)? I can’t really tell in my Personal Capital account. One of our 401k’s has about $75,000 in it and the only dividend so far this year is $263.

If that is the case perhaps the tax drag you speak of is very minor? Again, appreciate you bringing this to my attention.
Lee_WSP
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm
In any event, are you aware of any online calculators that can estimate dividends and their applicable taxes? Seems to me like the dividends on index funds are extremely small (maybe $1,000/year for every $100,000 invested)? I can’t really tell in my Personal Capital account. One of our 401k’s has about $75,000 in it and the only dividend so far this year is $263.
Have you looked at these two?

https://www.physicianonfire.com/calculators/taxdrag/

https://www.physicianonfire.com/calculators/taxdrag/




That said, it should be fairly simple to calculate. It's very similar to a mutual fund fee drag. See this calculator: https://www.buyupside.com/calculators/feesdec07.htm

Or just subtract the fee from the CAGR at investing.gov

It's about a 1.5% or 2% dividend yield for VTI. Other people have already done the math

viewtopic.php?t=297964#:~:text=the%20wh ... ax%20rates.
If that is the case perhaps the tax drag you speak of is very minor? Again, appreciate you bringing this to my attention.
Even a drag of 0.1% is significant in an account over seven figures.

Also, I'm pretty sure this very topic has been discussed already. I'll see if I can find the thread. IIRC, it was regarding FIRE & Roth.

edit:
Sure has.
viewtopic.php?t=316928

2nd edit:
Have you heard of the Roth FIRE ladder?
viewtopic.php?t=294836
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FIREchief
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Re: Are Roth Accounts Overrated?

Post by FIREchief »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am Alternatively, even if you earn ordinary income, if you take your deductions elsewhere (by contributing to pre-tax accounts), and you can still pull quite a bit of gains from a brokerage if you can keep your total AGI (gains included) under $80,000.
This is not correct. Since you are using $80K, we'll assume that you are MFJ. In that case, your AGI can be $105.9k and your long term capital gains will be taxed at 0%. It will be even higher if you are making deductible contributions to a tIRA or HSA. See my signature.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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beernutz
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Re: Are Roth Accounts Overrated?

Post by beernutz »

CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm First, I’ve added an edit to my original post. I’m well aware Roths continue to grow tax free after 59.5; they just become accessible tax-free at that age.

Second, I added more about my own personal situation, which largely involves downshifting in my mid/late thirties and probably early retiring in my 40s. Thus, access to my investments is a higher priority for me than for others.
ThankYouJack wrote: Wed Apr 21, 2021 2:02 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates
Are you forgetting state taxes?
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
Basically, there are zero strings attached with a brokerage. You can get the money you want penalty-free, whenever you want, and you just have to move around some numbers to make sure your AGI falls where you want it to fall. Odds are that your effective tax on any withdrawal is extremely minimal.
I would run some numbers and factor in tax drag from dividends and state taxes. The taxes probably won't be minimal over a long investing period
I have to be honest and admit that I was unaware that even reinvested dividends were taxed in a brokerage account. Thanks for bringing this to my attention. That makes me want to rant about taxes until I pass out blue in the face, but that’s a lecture for another day.

In any event, are you aware of any online calculators that can estimate dividends and their applicable taxes? Seems to me like the dividends on index funds are extremely small (maybe $1,000/year for every $100,000 invested)? I can’t really tell in my Personal Capital account. One of our 401k’s has about $75,000 in it and the only dividend so far this year is $263.

If that is the case perhaps the tax drag you speak of is very minor? Again, appreciate you bringing this to my attention.
Roth 401ks and 403bs can become accessible tax-free and without penalty at age 55 in some circumstances. Look up the IRS Rule of 55.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
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FiveK
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Re: Are Roth Accounts Overrated?

Post by FiveK »

CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm ...my own personal situation, which largely involves downshifting in my mid/late thirties and probably early retiring in my 40s. Thus, access to my investments is a higher priority for me than for others.
If you would need to access your Roth gains before age 59.5 (presumably because all other fund sources have been depleted), that would not bode well for the following 30 years or so.
One of our 401k’s has about $75,000 in it and the only dividend so far this year is $263.
December is when at least many, and often most, fund distributions occur. You could check your 2020 results.
Lee_WSP
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

Alright, I was curious, so I did the math.

Looks like the qualified dividend tax rate is the same as the LTCG and approximately the same brackets. So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.225%

Fairly significant.
Last edited by Lee_WSP on Wed Apr 21, 2021 6:41 pm, edited 1 time in total.
sailaway
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Re: Are Roth Accounts Overrated?

Post by sailaway »

CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm First, I’ve added an edit to my original post. I’m well aware Roths continue to grow tax free after 59.5; they just become accessible tax-free at that age.

Second, I added more about my own personal situation, which largely involves downshifting in my mid/late thirties and probably early retiring in my 40s. Thus, access to my investments is a higher priority for me than for others.
We plan to "retire" next year, before my husband turns 40. We still feel that Roth accounts are saving us enough now that we use the mega backdoor Roth. I honestly don't understand why you are so concerned about part of your account being restricted for a decade or two, as you will still need to pay bills after you turn 59.5, anyway.

You can also use Roth conversions to access your tax deferred accounts earlier, with less hassle than 72t. (Or, as someone mentioned, go back to work at 55 somewhere that offers immediate access to a 401k that accepts incoming rollovers and permits partial distributions at 55, then quit as soon as you have everything set up.)

We were well on our way to FI before we ever found bolgeheads or heard of FIRE. However, a fuller understanding of Roth and Roth conversions has boosted our accounts, as well as boosted our confidence in how we will manage funds over the long haul. You may have a specific situation that changes the math, but so far you haven't mentioned anything that does so.
tj
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Re: Are Roth Accounts Overrated?

Post by tj »

beernutz wrote: Wed Apr 21, 2021 5:43 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm First, I’ve added an edit to my original post. I’m well aware Roths continue to grow tax free after 59.5; they just become accessible tax-free at that age.

Second, I added more about my own personal situation, which largely involves downshifting in my mid/late thirties and probably early retiring in my 40s. Thus, access to my investments is a higher priority for me than for others.
ThankYouJack wrote: Wed Apr 21, 2021 2:02 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates
Are you forgetting state taxes?
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
Basically, there are zero strings attached with a brokerage. You can get the money you want penalty-free, whenever you want, and you just have to move around some numbers to make sure your AGI falls where you want it to fall. Odds are that your effective tax on any withdrawal is extremely minimal.
I would run some numbers and factor in tax drag from dividends and state taxes. The taxes probably won't be minimal over a long investing period
I have to be honest and admit that I was unaware that even reinvested dividends were taxed in a brokerage account. Thanks for bringing this to my attention. That makes me want to rant about taxes until I pass out blue in the face, but that’s a lecture for another day.

In any event, are you aware of any online calculators that can estimate dividends and their applicable taxes? Seems to me like the dividends on index funds are extremely small (maybe $1,000/year for every $100,000 invested)? I can’t really tell in my Personal Capital account. One of our 401k’s has about $75,000 in it and the only dividend so far this year is $263.

If that is the case perhaps the tax drag you speak of is very minor? Again, appreciate you bringing this to my attention.
Roth 401ks and 403bs can become accessible tax-free and without penalty at age 55 in some circumstances. Look up the IRS Rule of 55.
You can't rollover a Roth IRA in to a Roth 410k, so that's not super helpful unless you happened to be contributing to a Roth 401k all along.
tj
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Re: Are Roth Accounts Overrated?

Post by tj »

I don't think so. As long as you have five years of expense in Roth contribution and Taxable account, you'll be fine.

Now if Congress decides to Tax Roth IRA's, they become super overrated.
ThankYouJack
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Re: Are Roth Accounts Overrated?

Post by ThankYouJack »

CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm
Second, I added more about my own personal situation, which largely involves downshifting in my mid/late thirties and probably early retiring in my 40s. Thus, access to my investments is a higher priority for me than for others.
I don't think your situation is that unique, especially on here. There are Roth conversions, 72t, 457 (if you have one). Plenty of ways to get money early from a tax-advantage account penalty free.
ThankYouJack wrote: Wed Apr 21, 2021 2:02 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates
Are you forgetting state taxes?
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
In any event, are you aware of any online calculators that can estimate dividends and their applicable taxes? Seems to me like the dividends on index funds are extremely small (maybe $1,000/year for every $100,000 invested)? I can’t really tell in my Personal Capital account. One of our 401k’s has about $75,000 in it and the only dividend so far this year is $263.

If that is the case perhaps the tax drag you speak of is very minor? Again, appreciate you bringing this to my attention.
I estimate my personal tax drag to be around 0.4%. Say I need $1M in a taxable account to retire early. That would be an extra $4k a year in taxes which is pretty significant especially over the long haul and my annual expenses are only ~$80k. Instead I'd rather keep that money in tax advantage accounts and deal with some minor strings.
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Re: Are Roth Accounts Overrated?

Post by ThankYouJack »

Lee_WSP wrote: Wed Apr 21, 2021 5:57 pm Alright, I was curious, so I did the math.

Looks like the qualified dividend tax rate is the same as the LTCG and approximately the same brackets. So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds. You'll get a different result if you choose a different ETF with a different qualified dividend yield.

The actual tax drag is going to be slightly greater as VTI does spit out a small percentage of non qualified dividends though. So, I think you need to add 3% * tax bracket * 1.5% to the drag. At 24%, you're looking at another 0.000108% drag.
I think your math is off by a couple decimal places as the tax is on the dividend, not the dividend yield.

Say you have $1,000 in taxable with a 2% dividend - closer to historical average and easier math ;). The dividend would be $20. 15% tax on that would be $3 or 0.3%.

And that's not factoring in state taxes which are often forgotten or not calculated for some reason.
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

ThankYouJack wrote: Wed Apr 21, 2021 6:36 pm
Lee_WSP wrote: Wed Apr 21, 2021 5:57 pm Alright, I was curious, so I did the math.

Looks like the qualified dividend tax rate is the same as the LTCG and approximately the same brackets. So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds. You'll get a different result if you choose a different ETF with a different qualified dividend yield.

The actual tax drag is going to be slightly greater as VTI does spit out a small percentage of non qualified dividends though. So, I think you need to add 3% * tax bracket * 1.5% to the drag. At 24%, you're looking at another 0.000108% drag.
I think your math is off by a couple decimal places as the tax is on the dividend, not the dividend yield.

Say you have $1,000 in taxable with a 2% dividend - closer to historical average and easier math ;). The dividend would be $20. 15% tax on that would be $3 or 0.3%.

And that's not factoring in state taxes which are often forgotten or not calculated for some reason.
:oops:

The overall math is correct. I just forgot to reconvert from decimals to percentages.
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Re: Are Roth Accounts Overrated?

Post by bsteiner »

No. While each case is different, the Roth is underrated. I think there are many more cases where people should have done them but didn't than there are cases where people did them but shouldn't have.
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Re: Are Roth Accounts Overrated?

Post by anon_investor »

ThankYouJack wrote: Wed Apr 21, 2021 6:36 pm
Lee_WSP wrote: Wed Apr 21, 2021 5:57 pm Alright, I was curious, so I did the math.

Looks like the qualified dividend tax rate is the same as the LTCG and approximately the same brackets. So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds. You'll get a different result if you choose a different ETF with a different qualified dividend yield.

The actual tax drag is going to be slightly greater as VTI does spit out a small percentage of non qualified dividends though. So, I think you need to add 3% * tax bracket * 1.5% to the drag. At 24%, you're looking at another 0.000108% drag.
I think your math is off by a couple decimal places as the tax is on the dividend, not the dividend yield.

Say you have $1,000 in taxable with a 2% dividend - closer to historical average and easier math ;). The dividend would be $20. 15% tax on that would be $3 or 0.3%.

And that's not factoring in state taxes which are often forgotten or not calculated for some reason.
Don't forget NII tax for some folks, an extra 3.8%.
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beernutz
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Re: Are Roth Accounts Overrated?

Post by beernutz »

tj wrote: Wed Apr 21, 2021 6:01 pm
beernutz wrote: Wed Apr 21, 2021 5:43 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm First, I’ve added an edit to my original post. I’m well aware Roths continue to grow tax free after 59.5; they just become accessible tax-free at that age.

Second, I added more about my own personal situation, which largely involves downshifting in my mid/late thirties and probably early retiring in my 40s. Thus, access to my investments is a higher priority for me than for others.
ThankYouJack wrote: Wed Apr 21, 2021 2:02 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates
Are you forgetting state taxes?
CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
Basically, there are zero strings attached with a brokerage. You can get the money you want penalty-free, whenever you want, and you just have to move around some numbers to make sure your AGI falls where you want it to fall. Odds are that your effective tax on any withdrawal is extremely minimal.
I would run some numbers and factor in tax drag from dividends and state taxes. The taxes probably won't be minimal over a long investing period
I have to be honest and admit that I was unaware that even reinvested dividends were taxed in a brokerage account. Thanks for bringing this to my attention. That makes me want to rant about taxes until I pass out blue in the face, but that’s a lecture for another day.

In any event, are you aware of any online calculators that can estimate dividends and their applicable taxes? Seems to me like the dividends on index funds are extremely small (maybe $1,000/year for every $100,000 invested)? I can’t really tell in my Personal Capital account. One of our 401k’s has about $75,000 in it and the only dividend so far this year is $263.

If that is the case perhaps the tax drag you speak of is very minor? Again, appreciate you bringing this to my attention.
Roth 401ks and 403bs can become accessible tax-free and without penalty at age 55 in some circumstances. Look up the IRS Rule of 55.
You can't rollover a Roth IRA in to a Roth 410k, so that's not super helpful unless you happened to be contributing to a Roth 401k all along.
OP apparently doesn't have Roth IRAs yet so it may be super helpful for him to know that the other Roth accounts are accessible with this rule.
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sc9182
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Re: Are Roth Accounts Overrated?

Post by sc9182 »

Besides the discussion about marginal tax rates today Vs. withdrawal-time ..

Unless you have double pensions, double max SS, rental/business income, inheritance, insurance payout, among other things (or all of the above - along with RMDs); if you have (or possibly could have with near-guaranteed certainty) anything less than $1.5 million to 2 millions in IRA/401k isn’t going to move the needle much on Traditional Vs. Roth.

Yes - diversification is very important— but trying to goose ROTH prior to Traditional pre-tax IRA — for many people — is going on be sub-optimal. Traditional IRA establishes a floor/baseline for some ones retirement. If one is going to turn very-lucky in life (amazing later career, ample inheritance, life insurance beneficiary, double delayed/increased max-SS, double inflation-protected and guranteed pensions, significant business income etc.) trad IRA may prove to be a tax nuisance (potentially higher tax nuisance if most of the above conditions materialize).

If you are one of the clairvoyant who can see future 20-30-40 years from now clearly — heard someone’s IRA turned 100+ million!! May be you can go invest your Roth monies in there — making it a multi million tax-free account !!

Then again — if you are so clear about all future events (health, disability, divorces, market-returns, death) — why haven’t one invested in DogeCoin 6 months ago (with Roth no less — can you ??) !!
Last edited by sc9182 on Thu Apr 22, 2021 12:05 pm, edited 2 times in total.
Slacker
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Re: Are Roth Accounts Overrated?

Post by Slacker »

Just wanted to revisit this for one more advantage of Roth over taxable alone:

You are more likely (depending on state) to have Roth assets protected from some types of lawsuits. I am unaware of protections for your taxable account from lawsuits aside from umbrella insurance which may still leave some of your taxable assets exposed if the lawsuit against you awards the plaintiff more than your umbrella coverage.
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Re: Are Roth Accounts Overrated?

Post by Northern Flicker »

The taxable account offers more tax advantage on withdrawals before you are 59.5. The Roth account offers more tax advantage on withdrawals after you are 59.5. The Roth account has less tax drag on dividends.

Most retirement savings is targeted for withdrawals after you are 59.5.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Are Roth Accounts Overrated?

Post by marcopolo »

Lee_WSP wrote: Wed Apr 21, 2021 6:40 pm
ThankYouJack wrote: Wed Apr 21, 2021 6:36 pm
Lee_WSP wrote: Wed Apr 21, 2021 5:57 pm Alright, I was curious, so I did the math.

Looks like the qualified dividend tax rate is the same as the LTCG and approximately the same brackets. So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds. You'll get a different result if you choose a different ETF with a different qualified dividend yield.

The actual tax drag is going to be slightly greater as VTI does spit out a small percentage of non qualified dividends though. So, I think you need to add 3% * tax bracket * 1.5% to the drag. At 24%, you're looking at another 0.000108% drag.
I think your math is off by a couple decimal places as the tax is on the dividend, not the dividend yield.

Say you have $1,000 in taxable with a 2% dividend - closer to historical average and easier math ;). The dividend would be $20. 15% tax on that would be $3 or 0.3%.

And that's not factoring in state taxes which are often forgotten or not calculated for some reason.
:oops:

The overall math is correct. I just forgot to reconvert from decimals to percentages.
I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

marcopolo wrote: Wed Apr 21, 2021 8:00 pm
Lee_WSP wrote: Wed Apr 21, 2021 6:40 pm
ThankYouJack wrote: Wed Apr 21, 2021 6:36 pm
Lee_WSP wrote: Wed Apr 21, 2021 5:57 pm Alright, I was curious, so I did the math.

Looks like the qualified dividend tax rate is the same as the LTCG and approximately the same brackets. So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds. You'll get a different result if you choose a different ETF with a different qualified dividend yield.

The actual tax drag is going to be slightly greater as VTI does spit out a small percentage of non qualified dividends though. So, I think you need to add 3% * tax bracket * 1.5% to the drag. At 24%, you're looking at another 0.000108% drag.
I think your math is off by a couple decimal places as the tax is on the dividend, not the dividend yield.

Say you have $1,000 in taxable with a 2% dividend - closer to historical average and easier math ;). The dividend would be $20. 15% tax on that would be $3 or 0.3%.

And that's not factoring in state taxes which are often forgotten or not calculated for some reason.
:oops:

The overall math is correct. I just forgot to reconvert from decimals to percentages.
I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
While I do not like quoting nerdwallet and investopedia, the IRS does not disagree. OP is currently making more than 80k MFJ; OP is contemplating <80k in early retirement.

https://www.nerdwallet.com/blog/taxes/d ... tax%20rate

https://www.investopedia.com/terms/q/qu ... vidend.asp
AnEngineer
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Re: Are Roth Accounts Overrated?

Post by AnEngineer »

Lee_WSP wrote: Wed Apr 21, 2021 4:00 pm If your question is whether tax advantaged Roth accounts are overrated vs taxable accounts, unless you're asking whether people promote them too much, the answer is a resounding no. Unless you're going to need the cap gains before retirement age, taxable has no advantage over Roth cetaris parabis, and I can't come up with a single scenario where given the no cost option why you would ever opt to let a Roth contribution lapse.

But, perhaps I don't understand the question.

Edit: Put another way, with a cap of $6,500 per year, this is not a very high priority concern. If you qualify just dump it in because there's very little to zero possible cost involved vs taxable.
Also, if you expect to need to withdraw significantly before retirement age (e.g. early retirement), you should probably be looking at trad. IRA and Roth conversions.
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Re: Are Roth Accounts Overrated?

Post by calwatch »

I think that going SOLELY with Roth is probably a bad idea. Prior to the availability of the Roth 401k/403b/457 that was not possible and most people started out with traditional. Many people to this day don't have access to Roth 401k's or the equivalent. While you can technically defer more with a Roth than a traditional if you max out, due to the difference between pre-tax and after-tax income, for high income people the traditional 401k is usually better. But as a high(er) income person myself, I will still drop the maximum in Roth every year to give flexibility, and strategically convert traditional 457 to Roth prior to IRMAA kicking in.
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Re: Are Roth Accounts Overrated?

Post by marcopolo »

Lee_WSP wrote: Wed Apr 21, 2021 8:05 pm
marcopolo wrote: Wed Apr 21, 2021 8:00 pm
Lee_WSP wrote: Wed Apr 21, 2021 6:40 pm
ThankYouJack wrote: Wed Apr 21, 2021 6:36 pm
Lee_WSP wrote: Wed Apr 21, 2021 5:57 pm Alright, I was curious, so I did the math.

Looks like the qualified dividend tax rate is the same as the LTCG and approximately the same brackets. So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds. You'll get a different result if you choose a different ETF with a different qualified dividend yield.

The actual tax drag is going to be slightly greater as VTI does spit out a small percentage of non qualified dividends though. So, I think you need to add 3% * tax bracket * 1.5% to the drag. At 24%, you're looking at another 0.000108% drag.
I think your math is off by a couple decimal places as the tax is on the dividend, not the dividend yield.

Say you have $1,000 in taxable with a 2% dividend - closer to historical average and easier math ;). The dividend would be $20. 15% tax on that would be $3 or 0.3%.

And that's not factoring in state taxes which are often forgotten or not calculated for some reason.
:oops:

The overall math is correct. I just forgot to reconvert from decimals to percentages.
I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
While I do not like quoting nerdwallet and investopedia, the IRS does not disagree. OP is currently making more than 80k MFJ; OP is contemplating <80k in early retirement.

https://www.nerdwallet.com/blog/taxes/d ... tax%20rate

https://www.investopedia.com/terms/q/qu ... vidend.asp

Your own post stipulates AGI<$80k. I was referring to the bolded part of your comment above.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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calmaniac
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Re: Are Roth Accounts Overrated?

Post by calmaniac »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates
To my knowledge the above is not correct. The capital gains tax rate is 0% for a couple earning <$80k/year, but is taxed at the 15% rate when income + cap gains >80k/year. Example, if a couple makes $70k/year, they get $10k in tax-free capital gains and anything above that is taxed at 15% (or more at higher incomes).

You mention your AGI is $80k, so I'm not clear how to expect to avoid paying capital gains taxes. Maybe if your AGI drops to $40k in retirement?

Original post quote above edited for brevity
63 yo,1y til go part-time. AA 70/30: 30% S&P, 16% value, 14% intl, 10% EM, 30% short/int govt bonds. My mil pension + DW's now ≈60% of expenses. Taking SS @age 70--> pension+SS ≈100% of expenses.
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

marcopolo wrote: Wed Apr 21, 2021 8:22 pm
Lee_WSP wrote: Wed Apr 21, 2021 8:05 pm
marcopolo wrote: Wed Apr 21, 2021 8:00 pm
Lee_WSP wrote: Wed Apr 21, 2021 6:40 pm
ThankYouJack wrote: Wed Apr 21, 2021 6:36 pm

I think your math is off by a couple decimal places as the tax is on the dividend, not the dividend yield.

Say you have $1,000 in taxable with a 2% dividend - closer to historical average and easier math ;). The dividend would be $20. 15% tax on that would be $3 or 0.3%.

And that's not factoring in state taxes which are often forgotten or not calculated for some reason.
:oops:

The overall math is correct. I just forgot to reconvert from decimals to percentages.
I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
While I do not like quoting nerdwallet and investopedia, the IRS does not disagree. OP is currently making more than 80k MFJ; OP is contemplating <80k in early retirement.

https://www.nerdwallet.com/blog/taxes/d ... tax%20rate

https://www.investopedia.com/terms/q/qu ... vidend.asp

Your own post stipulates AGI<$80k. I was referring to the bolded part of your comment above.
I don't understand your confusion. If the MFJ AGI is under 80k, then there is almost no drag. What's the confusion?
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm If that is the case perhaps the tax drag you speak of is very minor?
The tax drag on stock index funds can be quite low. You can observe this for Vanguard's funds by clicking on the 'performance' tab when observing a given fund on their website. For VTI, their TSM ETF, the tax drag at the highest tax rates over the last 10 years would have reduced returns from 13.79% annualized to 13.30%. A large number of funds still have expense ratios larger than that.
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Re: Are Roth Accounts Overrated?

Post by MarkNYC »

Lee_WSP wrote: Wed Apr 21, 2021 8:48 pm
marcopolo wrote: Wed Apr 21, 2021 8:22 pm
Lee_WSP wrote: Wed Apr 21, 2021 8:05 pm
marcopolo wrote: Wed Apr 21, 2021 8:00 pm
Lee_WSP wrote: Wed Apr 21, 2021 6:40 pm
The overall math is correct. I just forgot to reconvert from decimals to percentages.
I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
While I do not like quoting nerdwallet and investopedia, the IRS does not disagree. OP is currently making more than 80k MFJ; OP is contemplating <80k in early retirement.

https://www.nerdwallet.com/blog/taxes/d ... tax%20rate

https://www.investopedia.com/terms/q/qu ... vidend.asp
Your own post stipulates AGI<$80k. I was referring to the bolded part of your comment above.
I don't understand your confusion. If the MFJ AGI is under 80k, then there is almost no drag. What's the confusion?
The preferential tax rate on capital gains and qualified dividends is not based on AGI, it is based on taxable income. Taxable income can be significantly less than AGI.
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

Deleted
Last edited by Lee_WSP on Wed Apr 21, 2021 9:48 pm, edited 1 time in total.
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celia
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Re: Are Roth Accounts Overrated?

Post by celia »

bsteiner wrote: Wed Apr 21, 2021 7:00 pm No. While each case is different, the Roth is underrated. I think there are many more cases where people should have done them but didn't than there are cases where people did them but shouldn't have.
+100

If people took appropriate advantage of Roths, we wouldn’t have to keep calling attention to them.

Tax law (and tax brackets) change about every 10 years. It is best to pay the taxes in the years when your tax bracket is lower, either due to tax law and/or your own circumstances. (Note that we are currently in historically low tax brackets.)


Roth accounts can help us in just about every stage of life:

When you are starting your first job, you probably aren’t thinking about retirement, but that is the perfect time to contribute to Roth, because you tend to be in a low tax bracket and have lots of time for the account to compound. As your work experience increases, you usually get raises and eventually get pushed into higher tax brackets. Along the way, you probably signed up for an employer-sponsored retirement plan since the employer encourages it by also contributing along with you (Free money!!!). The employer plans (401K, 457, SEP IRA) are usually tax-deferred (taxes will be due when you withdraw or convert to Roth).

As you go along and have reduced income for a year or two (laid off, illness, family leave, etc), you could use those low-income years to do Roth conversions. When you can, you go back to work and save enough until you can afford to retire.

One day you are ready to retire. If you retired early all your expenses need to be paid from your savings and you will have to fund more years than someone who retired in their 60s. Say you’re only 50. Then you can start a Roth conversion ladder by converting a year’s living expenses into a Roth where it can grow for 5 years before you can withdraw it. You keep doing this for several years, knowing you can always withdraw the contributions at any time and you can withdraw the Roth conversions after 5 years. However, the growth will be taxed, unless the Roth was opened 5 years previously and you are over 59.5. So you wait until you are over 59.5 to withdraw the earlier growth. (You need to keep a chart of how much was contributed, converted, and withdrawn each year from the Roth so you can show the IRS, if audited.)

While in early retirement or regular retirement (in your 60s), you should be looking at all your income steams (SS, pensions, annuities, dividends, RMDs) that will become available and their start years. I’ve found that those who are Single with $500K in tax-deferred or married with $1 million in tax-deferred, are at about the point when future RMDs will start to impact their future tax brackets. Those in stronger financial positions often decide it is to their advantage to do large Roth conversions to keep their future tax brackets from jumping up too much. When they project the value of their tax-deferred accounts to age 72 (when RMDs start) and apply a withdrawal rate that starts at about 4%, they often see that their tax bracket at age 72 is higher than when working and higher than their early retirement tax bracket. For these people, it is better to ‘level out’ their Taxable Income (and thus their tax brackets) from then through the rest of their life, rather than have a few years of low Taxable income (and taxes) followed by the their remaining years (72 and older) having high Taxable income (and tax brackets). So, to ‘level out’ their Taxable Income, they start doing Roth conversions and pay the taxes on each dollar converted, where it can then continue growing tax-free. So the Roths are then seen as tax-planning tools.

For a married couple, they should be aware that after one of them dies, the survivor will then have to file as Single but still need to remove about the same RMD as when married (assuming they are close in age). But the space in the tax brackets for Singles is half as much as for MFJ. This can easily cause the survivor to be pushed into a higher tax bracket. But if they already paid the Roth conversion taxes when they were married, that Roth money won’t be subject to the higher taxes.

Putting money in Roths is also good for your heirs. If you die in your 70s or 80s, your kids will likely still be working and in their high-income years. As they withdraw from your remaining tax-deferred accounts, the money will be added to their own Taxable incomes which could push them into higher tax brackets. But withdrawing from your Roth accounts won’t do that.

If you have an unusual financial year in retirement one year and want to ‘control’ what tax bracket you are in, you can always withdraw Roth money and spend it on the extra expense without it increasing your tax bracket (say, for a new car or roof).


And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

A dollar in Roth is worth more than a dollar in a taxable account, A dollar in taxable is worth more than a dollar in a tax-deferred account.
Last edited by celia on Wed Apr 21, 2021 11:08 pm, edited 1 time in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Are Roth Accounts Overrated?

Post by marcopolo »

Lee_WSP wrote: Wed Apr 21, 2021 8:48 pm
marcopolo wrote: Wed Apr 21, 2021 8:22 pm
Lee_WSP wrote: Wed Apr 21, 2021 8:05 pm
marcopolo wrote: Wed Apr 21, 2021 8:00 pm
Lee_WSP wrote: Wed Apr 21, 2021 6:40 pm

:oops:

The overall math is correct. I just forgot to reconvert from decimals to percentages.
I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
While I do not like quoting nerdwallet and investopedia, the IRS does not disagree. OP is currently making more than 80k MFJ; OP is contemplating <80k in early retirement.

https://www.nerdwallet.com/blog/taxes/d ... tax%20rate

https://www.investopedia.com/terms/q/qu ... vidend.asp

Your own post stipulates AGI<$80k. I was referring to the bolded part of your comment above.
I don't understand your confusion. If the MFJ AGI is under 80k, then there is almost no drag. What's the confusion?

You said:

So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds.

I am confused about where you are getting the 15% for AGI<$80k.

Perhaps you meant to say "Otherwise, it is..." rather than "However, it is..." ?

Maybe, we are saying the same thing, but the wording was confusing.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Lee_WSP
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

marcopolo wrote: Wed Apr 21, 2021 9:44 pm
Lee_WSP wrote: Wed Apr 21, 2021 8:48 pm
marcopolo wrote: Wed Apr 21, 2021 8:22 pm
Lee_WSP wrote: Wed Apr 21, 2021 8:05 pm
marcopolo wrote: Wed Apr 21, 2021 8:00 pm

I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
While I do not like quoting nerdwallet and investopedia, the IRS does not disagree. OP is currently making more than 80k MFJ; OP is contemplating <80k in early retirement.

https://www.nerdwallet.com/blog/taxes/d ... tax%20rate

https://www.investopedia.com/terms/q/qu ... vidend.asp

Your own post stipulates AGI<$80k. I was referring to the bolded part of your comment above.
I don't understand your confusion. If the MFJ AGI is under 80k, then there is almost no drag. What's the confusion?

You said:

So, if your AGI if married filing jointly is below 80k, then the drag is non existent. However, it is 15% of ~1.5% or 0.00225% or less than the expense ratio of all but zero cost funds.

I am confused about where you are getting the 15% for AGI<$80k.

Perhaps you meant to say "Otherwise, it is..." rather than "However, it is..." ?

Maybe, we are saying the same thing, but the wording was confusing.
Alright, the AGI reference was in error. It’s taxable income.

However, that doesn’t really change the math.

The sentence was of income is below, then negligible impact. The next sentence implies the otherwise statement otherwise it makes no sense. How else would you get to the fifteen percent bracket?
ThankYouJack
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Re: Are Roth Accounts Overrated?

Post by ThankYouJack »

willthrill81 wrote: Wed Apr 21, 2021 8:58 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm If that is the case perhaps the tax drag you speak of is very minor?
The tax drag on stock index funds can be quite low. You can observe this for Vanguard's funds by clicking on the 'performance' tab when observing a given fund on their website. For VTI, their TSM ETF, the tax drag at the highest tax rates over the last 10 years would have reduced returns from 13.79% annualized to 13.30%. A large number of funds still have expense ratios larger than that.
That seems significant to me, especially if it's over a long period of time. Also Vanguard doesn't factor in state and local taxes.
corp_sharecropper
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Re: Are Roth Accounts Overrated?

Post by corp_sharecropper »

Does anyone discount their traditional 401k/IRA balance by their current or expected future tax liability? I do, when I'm trying to project the future. Sure makes the Roth money look nice when I do.
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TexasPE
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Re: Are Roth Accounts Overrated?

Post by TexasPE »

LilyFleur wrote: Wed Apr 21, 2021 12:08 pm

Most folks will end up single at some point in their lives, and the single tax bracket is difficult. A Roth enables a divorce survivor or a widower to have a tax-free income stream as a retiree.
This is why I am converting up to the 24% bracket every year - my wife is several years younger and would face a larger tax rate on RMDs should I die before her.
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