When you have a close call for Roth vs Trad’l, thoughts on this approach?

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Topic Author
privateID
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When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

I’m 56 and plan to retire at 60. I understand the advice for Roth vs Trad'l (contributions or conversions) that concludes it's mostly about marginal tax rate today vs marginal tax rate at retirement. Marginal tax rate today is usually easy to compute. Marginal tax-rate in retirement is harder. Here’s my estimate marginal tax rate profile for my future years (MFJ and live in NY).

Today till 60: 22% Fed + 7% state = 29%
61- 70: 25% Fed + 7% state (maybe a bit less) = 32%
71-74: 15% Fed * 1.85 (for SS bump) + 4% state (withdraw/convert to top of 10% tax bracket, so less income here) = 31%
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state (RMDs begin so more income) = 33%

I rounded a few of the numbers, but everything is close. From this I conclude slight edge to doing Roth contributions/conversions today. But there are a lot of factors that can change the future marginal tax rates:

1) NY State taxes - Alot going on here. NY has a progressive tax system (similar to Federal) with NY adjustments. SS is not taxed. The first $20K per individual of retirement income is state tax free. All of these factors make computing NY state taxes complicated (although in this case a ballpark estimate is fine).

2) SS taxation - It has been discussed here how the SS taxation equation is not indexed for inflation. As such, everyone is slowly moving toward 85% of SS being taxed. Will this change? This certainly would greatly affect marginal tax rates going forward for people not at the max 85%. This alone would sway my Roth vs trad'l decision.

3) Withdrawals happen over changing marginal tax rates - People really don't have uniform expenses, the amount needed changes over all these periods. I could have different marginal tax rates in these periods.

4) Heir's tax rate - who knows?

5) Changing tax code - can't predict the future.

In addition to all those complications, I can easily change assumptions about rate of return and inflation that can change my future marginal tax rates.

So which makes sense for me: Trad’l or Roth?

I’m currently still working and have changed my mind multiple times on the contribution decision. I was thinking of taking a middle of the road approach for my last 4 years. My asset allocation is 50% stock and 50% bonds. I try to put more stocks in my Roth accounts. My plan – mirror my AA with with my Roth/trad’l decision. In other words, contribute 50% Roth (all stocks) and 50% in trad’l (all bonds). This way I’m keeping my AA where I want it and I’m keeping my asset placement where I want it. I also may decide to do extra conversions if opportunity knocks or my trad'l balance grows too high.

Thoughts on this approach? Makes sense given that I don’t see a slam dunk decision here.
Last edited by privateID on Fri Jan 13, 2023 6:16 pm, edited 1 time in total.
exodusNH
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by exodusNH »

privateID wrote: Fri Jan 13, 2023 4:26 pm I’m 56 and plan to retire at 60. I understand the advice for Roth vs Trad'l (contributions or conversions) that concludes it's mostly about marginal tax rate today vs marginal tax rate at retirement. Marginal tax rate today is usually easy to compute. Marginal tax-rate in retirement is harder. Here’s my estimate marginal tax rate profile for my future years (MFJ and live in NY).
Roth vs trad may also be due to eligibility. E.g., I have a 401k and cannot deduct IRA contributions. I use backdoor Roth to get around that.

Roth withdrawals don't count against your current year's income. That might be a big benefit to control taxes later.

It's also better for your heirs than a trad account.
KlangFool
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by KlangFool »

privateID wrote: Fri Jan 13, 2023 4:26 pm
61- 70: 25% Fed + 7% state (maybe a bit less) = 32%
privateID,

Please explain how is this possible? Do you have a big pension?

KlangFool
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privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

KlangFool wrote: Fri Jan 13, 2023 4:43 pm
privateID wrote: Fri Jan 13, 2023 4:26 pm
61- 70: 25% Fed + 7% state (maybe a bit less) = 32%
privateID,

Please explain how is this possible? Do you have a big pension?

KlangFool
I do not have a big pension. I did not include all my plans here, just what I thought was relevant. I plan to withdraw/convert to the top of the 15% tax bracket during this time. For me, that's a given. I'm trying to figure out how much more I can get into Roth. In my projections, I would feel more comfortable having some more in Roth.

Roth vs trad may also be due to eligibility. E.g., I have a 401k and cannot deduct IRA contributions. I use backdoor Roth to get around that.
Yes, I do that as well. My 50/50 plan would be across all contributions (401K, mega back door, IRAs, employer contributions).
KlangFool
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by KlangFool »

privateID wrote: Fri Jan 13, 2023 5:08 pm
KlangFool wrote: Fri Jan 13, 2023 4:43 pm
privateID wrote: Fri Jan 13, 2023 4:26 pm
61- 70: 25% Fed + 7% state (maybe a bit less) = 32%
privateID,

Please explain how is this possible? Do you have a big pension?

KlangFool
I do not have a big pension. I did not include all my plans here, just what I thought was relevant. I plan to withdraw/convert to the top of the 15% tax bracket during this time.
privateID,

Then, where does this 25% Fed tax rate comes from?

KlangFool
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privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

KlangFool wrote: Fri Jan 13, 2023 6:04 pm
privateID wrote: Fri Jan 13, 2023 5:08 pm
KlangFool wrote: Fri Jan 13, 2023 4:43 pm
privateID wrote: Fri Jan 13, 2023 4:26 pm
61- 70: 25% Fed + 7% state (maybe a bit less) = 32%
privateID,

Please explain how is this possible? Do you have a big pension?

KlangFool
I do not have a big pension. I did not include all my plans here, just what I thought was relevant. I plan to withdraw/convert to the top of the 15% tax bracket during this time.
privateID,

Then, where does this 25% Fed tax rate comes from?

KlangFool
25% is my marginal tax rate. My next dollar taxed.
Topic Author
privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Given confusion above, I should clarify my marginal future tax-rate figures.

Today till 60: 22% Fed + 7% state = 29% (last dollar at middle of the fed 22% tax bracket)
61- 70: 25% Fed + 7% state (maybe a bit less) = 32% (last dollar at top of the fed 15% tax bracket)
71-74: 15% Fed * 1.85 (for SS bump) + 4% state = 31% (last dollar at top of the fed 10% tax bracket)
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state = 33% (last dollar at middle of the fed 15% tax bracket)
CletusCaddy
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by CletusCaddy »

privateID wrote: Sat Jan 14, 2023 8:27 am Given confusion above, I should clarify my marginal future tax-rate figures.

Today till 60: 22% Fed + 7% state = 29% (last dollar at middle of the fed 22% tax bracket)
61- 70: 25% Fed + 7% state (maybe a bit less) = 32% (last dollar at top of the fed 15% tax bracket)
71-74: 15% Fed * 1.85 (for SS bump) + 4% state = 31% (last dollar at top of the fed 10% tax bracket)
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state = 33% (last dollar at middle of the fed 15% tax bracket)
There is no 25% federal tax bracket. There is 24% and then 32%.

The 24% tax bracket starts at $95k taxable income if you are single. But that’s after a standard deduction of $14k. So $110k of AGI.

Will you really have over $110k of AGI from age 61-70? How much do you intend to withdraw from your accounts every year, and how much of that is taxed at ordinary income rates?
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privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Rates revert back to 15% and 25% from 2026 going forward (unless congress acts to change them).

I am MFJ. Using todays brackets, the top of the 15% tax bracket, with the standard deduction, is between $117K and $120K depending upon if you are 65 years. I plan to withdraw or convert to the top of the future 15% tax bracket.

My point was showing that the difference in my future marginal tax rates and my marginal rate today is very small (although very difficult to actually determine) given my current plan. As such, I thought a middle of the road approach was reasonable for my last 4 years of work. With my AA at 50/50, I thought doing my Roth/trad’l at 50/50 where the Roth would be all stocks and the trad’l would be all bonds seems like a good idea. It's also easy to implement (set the same percentage for both with my company). Nothing crazy here, but I usually don't hear people talk about a middle of the road approach that often. Adding to it, that it helps my asset placement (stocks in Roth), I liked the idea.
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Watty
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Watty »

privateID wrote: Fri Jan 13, 2023 4:26 pm Today till 60: 22% Fed + 7% state = 29%
61- 70: 25% Fed + 7% state (maybe a bit less) = 32%
71-74: 15% Fed * 1.85 (for SS bump) + 4% state (withdraw/convert to top of 10% tax bracket, so less income here) = 31%
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state (RMDs begin so more income) = 33%
One thing you are missing is that at least until you are 60 then you will have a tax saving for any traditional accounts and that money can be invested.

For example if put $10K into a traditional this year then you will have $2,900 in tax savings compared to putting $10K into a Roth. You could put into an index fund in your taxable account that could be left invested for decades and potentially left to your estate at a stepped up cost basis.

I did not follow all your numbers but it looks like if you use a Roth now when you are paying 29% then you might avoid paying taxes when you are 75+ at 33%.

That is only a 4% potential savings which would not be enough savings to me to make paying your taxes decades before you might need to especially when you could have that $2,900(or whatever) invested for decades instead.
Olemiss540
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Olemiss540 »

CletusCaddy wrote: Sat Jan 14, 2023 8:39 am
privateID wrote: Sat Jan 14, 2023 8:27 am Given confusion above, I should clarify my marginal future tax-rate figures.

Today till 60: 22% Fed + 7% state = 29% (last dollar at middle of the fed 22% tax bracket)
61- 70: 25% Fed + 7% state (maybe a bit less) = 32% (last dollar at top of the fed 15% tax bracket)
71-74: 15% Fed * 1.85 (for SS bump) + 4% state = 31% (last dollar at top of the fed 10% tax bracket)
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state = 33% (last dollar at middle of the fed 15% tax bracket)
There is no 25% federal tax bracket. There is 24% and then 32%.

The 24% tax bracket starts at $95k taxable income if you are single. But that’s after a standard deduction of $14k. So $110k of AGI.

Will you really have over $110k of AGI from age 61-70? How much do you intend to withdraw from your accounts every year, and how much of that is taxed at ordinary income rates?
Current tax law eliminates the 22% bracket and replaces it with the 25% in a few years.

OP, with the limited information provided I don't see any benefit to traditional contributions. If it's a coin flip, always go Roth IMO given the flexibility it provides for tax planning and early retirement use. It's different if you are a decade plus from retirement projecting returns but it sounds like your tax bracket estimations are much clearer/closer to reality.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by cowdogman »

Watty wrote: Sat Jan 14, 2023 11:21 am
One thing you are missing is that at least until you are 60 then you will have a tax saving for any traditional accounts and that money can be invested.
But that is offset by the tax payable on the gain in the tIRA.

Consider the following example:

Assume 10% pa return and 25% tax rate on both.

59 YO contributes $7,000 to tIRA and withdraws balance one year later and pays tax.

vs.

59YO who contributes $5,250 ($7,000 x 25% tax rate) to Roth IRA and withdraws balance one year later (no tax).

tIRA: The $7,000 grows to $7,700 and the tax on withdrawal is $1,925, for a net of $5,775.

Roth: The $5,250 grows to $5,775 with no tax on withdrawal.

As long as the returns on the Roth and tIRA are the same and the tax bracket is the same, there is no difference. The only relevant issue when comparing Roth and tIRA is tax bracket now vs tax bracket later.

It took me a while to accept the above argument, thinking it had to be more complicated, but it's not.
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JazzTime
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by JazzTime »

One can easily overthink these things. Keep it simple. No one ever regrets having retirement funds in a Roth. I've never heard anyone say or write: "Gee, I wish I had a big traditional IRA instead of my Roth."

Of course, if one is absolutely sure to be at or near poverty level and have low tax liability during retirement, then go traditional.
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privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Thanks for the responses. It's interesting how some people come to the opposite conclusions with the same input.

Watty says why pay taxes early when there's only a couple percent difference? Go trad'l.

Olemiss540 says if it's a close call, go Roth.

cowdogman correctly asserts the returns are the same all else being equal.

JazzTime says go Roth unless you're sure you will be in a lower bracket.

One other factor I haven't mentioned so far is that I have a kid in college and expect to get the AOTC tax credit. That credit starts to phase out at AGI of 160K. So, another possibility is to contribute/convert up to that point.

I think whatever I do here, it will not move the needle too much. The decision to max out these plans is much more important than Roth vs trad'l if it is indeed close.
rivercrosser
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by rivercrosser »

cowdogman wrote: Sat Jan 14, 2023 1:24 pm
Watty wrote: Sat Jan 14, 2023 11:21 am
One thing you are missing is that at least until you are 60 then you will have a tax saving for any traditional accounts and that money can be invested.
But that is offset by the tax payable on the gain in the tIRA.

Consider the following example:

Assume 10% pa return and 25% tax rate on both.

59 YO contributes $7,000 to tIRA and withdraws balance one year later and pays tax.

vs.

59YO who contributes $5,250 ($7,000 x 25% tax rate) to Roth IRA and withdraws balance one year later (no tax).

tIRA: The $7,000 grows to $7,700 and the tax on withdrawal is $1,925, for a net of $5,775.

Roth: The $5,250 grows to $5,775 with no tax on withdrawal.

As long as the returns on the Roth and tIRA are the same and the tax bracket is the same, there is no difference. The only relevant issue when comparing Roth and tIRA is tax bracket now vs tax bracket later.

It took me a while to accept the above argument, thinking it had to be more complicated, but it's not.

What about if you don't need it and have to start taking RMDs and depending on income more of your SS is taxable.
Navillus1968
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Navillus1968 »

privateID wrote: Fri Jan 13, 2023 6:17 pm
KlangFool wrote: Fri Jan 13, 2023 6:04 pm
privateID wrote: Fri Jan 13, 2023 5:08 pm
KlangFool wrote: Fri Jan 13, 2023 4:43 pm
privateID wrote: Fri Jan 13, 2023 4:26 pm
61- 70: 25% Fed + 7% state (maybe a bit less) = 32%
privateID,

Please explain how is this possible? Do you have a big pension?

KlangFool
I do not have a big pension. I did not include all my plans here, just what I thought was relevant. I plan to withdraw/convert to the top of the 15% tax bracket during this time.
privateID,

Then, where does this 25% Fed tax rate comes from?

KlangFool
25% is my marginal tax rate. My next dollar taxed.
I don't get the math.

You say you're in the 22% Fed bracket / 7% New York bracket today, 29% combined.

In retirement, you intend on withdrawing from TIRA/Trad 401k & Roth converting to the top of (IOW: not going over) the post-TCJA 15% bracket, which should be similar to today's 12% bracket, about $84K taxable income in 2022 (MFJ).
$84k taxable income puts you in the 5.85% NYS bracket (MFJ), round up to 6%. 15% + 6%= 21% combined tax rate, not 32%.

In addition, $20k of your TIRA/401k w/d is deductible, so NYS will tax you on $64k, not $84k, yes? This reduces your actual state tax rate further from a nominal 5.85% to about 4.5%, if my math is right (fair warning- History major, so no guarantees).

If your 19.5%-21% combined tax rate in retirement is going to be at least 8 percentage points lower than today's 29%, doing Roth today seems a bad idea. Just wait & do partial Roth conversions from age 61 to 70 in a much lower bracket.
For now, keep using tax-deferred/deductible 401k & TIRA while working until 60.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Contador314 »

privateID wrote: Fri Jan 13, 2023 4:26 pm
1) NY State taxes - Alot going on here. NY has a progressive tax system (similar to Federal) with NY adjustments. SS is not taxed. The first $20K per individual of retirement income is state tax free. All of these factors make computing NY state taxes complicated (although in this case a ballpark estimate is fine).
Can you contribute to traditional and then convert it to Roth(up to the 20k)? I do this in Illinois. Fed tax is a wash, but you deduct the conversion on your state taxes since it is exempt. If you were to recognize the income in retirement you would already be above the 20k threshold, so more valuable to do it now.
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privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Navillus1968 wrote: Sat Jan 14, 2023 10:47 pm
privateID wrote: Fri Jan 13, 2023 6:17 pm
KlangFool wrote: Fri Jan 13, 2023 6:04 pm
privateID wrote: Fri Jan 13, 2023 5:08 pm
KlangFool wrote: Fri Jan 13, 2023 4:43 pm

privateID,

Please explain how is this possible? Do you have a big pension?

KlangFool
I do not have a big pension. I did not include all my plans here, just what I thought was relevant. I plan to withdraw/convert to the top of the 15% tax bracket during this time.
privateID,

Then, where does this 25% Fed tax rate comes from?

KlangFool
25% is my marginal tax rate. My next dollar taxed.
I don't get the math.

You say you're in the 22% Fed bracket / 7% New York bracket today, 29% combined.

In retirement, you intend on withdrawing from TIRA/Trad 401k & Roth converting to the top of (IOW: not going over) the post-TCJA 15% bracket, which should be similar to today's 12% bracket, about $84K taxable income in 2022 (MFJ).
$84k taxable income puts you in the 5.85% NYS bracket (MFJ), round up to 6%. 15% + 6%= 21% combined tax rate, not 32%.

In addition, $20k of your TIRA/401k w/d is deductible, so NYS will tax you on $64k, not $84k, yes? This reduces your actual state tax rate further from a nominal 5.85% to about 4.5%, if my math is right (fair warning- History major, so no guarantees).

If your 19.5%-21% combined tax rate in retirement is going to be at least 8 percentage points lower than today's 29%, doing Roth today seems a bad idea. Just wait & do partial Roth conversions from age 61 to 70 in a much lower bracket.
For now, keep using tax-deferred/deductible 401k & TIRA while working until 60.
You are correct that may tax rate from 61-70 would be around 21%. And that is because I plan to convert to the top of the 15% bracket. If I want to convert more than that, each additional dollar will be taxed at 25% + 6% (or maybe a little more as I climb into the 25% tax bracket). That's how I get 32%. I currently pay 7% state tax. I was figuring on the same if I convert into the 25% bracket. You are probably right that with the $20K state deduction, my state tax will be less. So, maybe 31% or perhaps 30%. So, assuming I'd prefer to reduce my TDA accounts more than just the amount of converting to the top of the 15% from 61-70, I need to decide whether to contribute/convert more today at 29% or penetrate the 25% tax bracket from 61-70.
Last edited by privateID on Sat Jan 14, 2023 11:18 pm, edited 1 time in total.
Topic Author
privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Contador314 wrote: Sat Jan 14, 2023 10:48 pm
privateID wrote: Fri Jan 13, 2023 4:26 pm
1) NY State taxes - Alot going on here. NY has a progressive tax system (similar to Federal) with NY adjustments. SS is not taxed. The first $20K per individual of retirement income is state tax free. All of these factors make computing NY state taxes complicated (although in this case a ballpark estimate is fine).
Can you contribute to traditional and then convert it to Roth(up to the 20k)? I do this in Illinois. Fed tax is a wash, but you deduct the conversion on your state taxes since it is exempt. If you were to recognize the income in retirement you would already be above the 20k threshold, so more valuable to do it now.
The $20K state tax deduction in NY starts at age 59.5. So, I am not there yet. I plan to retire at age 60. There will be one year there where I can do something like this. These really are separate decisions. I could contribute to a trad'l or Roth. But I then will convert to realize the $20K. Great idea. I believe I had heard something like this before but forgot about it. Appreciate the reminder.
02nz
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by 02nz »

Olemiss540 wrote: Sat Jan 14, 2023 12:09 pm
CletusCaddy wrote: Sat Jan 14, 2023 8:39 am
privateID wrote: Sat Jan 14, 2023 8:27 am Given confusion above, I should clarify my marginal future tax-rate figures.

Today till 60: 22% Fed + 7% state = 29% (last dollar at middle of the fed 22% tax bracket)
61- 70: 25% Fed + 7% state (maybe a bit less) = 32% (last dollar at top of the fed 15% tax bracket)
71-74: 15% Fed * 1.85 (for SS bump) + 4% state = 31% (last dollar at top of the fed 10% tax bracket)
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state = 33% (last dollar at middle of the fed 15% tax bracket)
There is no 25% federal tax bracket. There is 24% and then 32%.

The 24% tax bracket starts at $95k taxable income if you are single. But that’s after a standard deduction of $14k. So $110k of AGI.

Will you really have over $110k of AGI from age 61-70? How much do you intend to withdraw from your accounts every year, and how much of that is taxed at ordinary income rates?
Current tax law eliminates the 22% bracket and replaces it with the 25% in a few years.

OP, with the limited information provided I don't see any benefit to traditional contributions. If it's a coin flip, always go Roth IMO given the flexibility it provides for tax planning and early retirement use. It's different if you are a decade plus from retirement projecting returns but it sounds like your tax bracket estimations are much clearer/closer to reality.
(Bolding mine) I would advise just the opposite - if it's a coin flip, go with tax-deferred given the flexibility it provides for tax planning and early retirement. For early retirement, it's good to have all three types of accounts (taxable, tax-deferred, and Roth) for flexibility, but in general retiring early is a strong argument for having more in tax-deferred accounts.
Olemiss540
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Olemiss540 »

02nz wrote: Sat Jan 14, 2023 11:24 pm
Olemiss540 wrote: Sat Jan 14, 2023 12:09 pm
CletusCaddy wrote: Sat Jan 14, 2023 8:39 am
privateID wrote: Sat Jan 14, 2023 8:27 am Given confusion above, I should clarify my marginal future tax-rate figures.

Today till 60: 22% Fed + 7% state = 29% (last dollar at middle of the fed 22% tax bracket)
61- 70: 25% Fed + 7% state (maybe a bit less) = 32% (last dollar at top of the fed 15% tax bracket)
71-74: 15% Fed * 1.85 (for SS bump) + 4% state = 31% (last dollar at top of the fed 10% tax bracket)
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state = 33% (last dollar at middle of the fed 15% tax bracket)
There is no 25% federal tax bracket. There is 24% and then 32%.

The 24% tax bracket starts at $95k taxable income if you are single. But that’s after a standard deduction of $14k. So $110k of AGI.

Will you really have over $110k of AGI from age 61-70? How much do you intend to withdraw from your accounts every year, and how much of that is taxed at ordinary income rates?
Current tax law eliminates the 22% bracket and replaces it with the 25% in a few years.

OP, with the limited information provided I don't see any benefit to traditional contributions. If it's a coin flip, always go Roth IMO given the flexibility it provides for tax planning and early retirement use. It's different if you are a decade plus from retirement projecting returns but it sounds like your tax bracket estimations are much clearer/closer to reality.
(Bolding mine) I would advise just the opposite - if it's a coin flip, go with tax-deferred given the flexibility it provides for tax planning and early retirement. For early retirement, it's good to have all three types of accounts (taxable, tax-deferred, and Roth) for flexibility, but in general retiring early is a strong argument for having more in tax-deferred accounts.
In what way would you have more flexibility by having a larger un-taxed bucket?

Roth funds are the most valuable funds to own. If marginal tax are equivalent (meaning you already have a large enough bucket of traditional to push the OP into the 22% bracket), then there is no logical reason to continue pre-tax investing with Roth investing options available.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
02nz
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by 02nz »

Olemiss540 wrote: Sun Jan 15, 2023 7:06 am
02nz wrote: Sat Jan 14, 2023 11:24 pm
Olemiss540 wrote: Sat Jan 14, 2023 12:09 pm
CletusCaddy wrote: Sat Jan 14, 2023 8:39 am
privateID wrote: Sat Jan 14, 2023 8:27 am Given confusion above, I should clarify my marginal future tax-rate figures.

Today till 60: 22% Fed + 7% state = 29% (last dollar at middle of the fed 22% tax bracket)
61- 70: 25% Fed + 7% state (maybe a bit less) = 32% (last dollar at top of the fed 15% tax bracket)
71-74: 15% Fed * 1.85 (for SS bump) + 4% state = 31% (last dollar at top of the fed 10% tax bracket)
75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state = 33% (last dollar at middle of the fed 15% tax bracket)
There is no 25% federal tax bracket. There is 24% and then 32%.

The 24% tax bracket starts at $95k taxable income if you are single. But that’s after a standard deduction of $14k. So $110k of AGI.

Will you really have over $110k of AGI from age 61-70? How much do you intend to withdraw from your accounts every year, and how much of that is taxed at ordinary income rates?
Current tax law eliminates the 22% bracket and replaces it with the 25% in a few years.

OP, with the limited information provided I don't see any benefit to traditional contributions. If it's a coin flip, always go Roth IMO given the flexibility it provides for tax planning and early retirement use. It's different if you are a decade plus from retirement projecting returns but it sounds like your tax bracket estimations are much clearer/closer to reality.
(Bolding mine) I would advise just the opposite - if it's a coin flip, go with tax-deferred given the flexibility it provides for tax planning and early retirement. For early retirement, it's good to have all three types of accounts (taxable, tax-deferred, and Roth) for flexibility, but in general retiring early is a strong argument for having more in tax-deferred accounts.
In what way would you have more flexibility by having a larger un-taxed bucket?

Roth funds are the most valuable funds to own. If marginal tax are equivalent (meaning you already have a large enough bucket of traditional to push the OP into the 22% bracket), then there is no logical reason to continue pre-tax investing with Roth investing options available.
Roth dollars are valuable to HAVE, but they're also the costliest to GET. OP stated intent to convert to top of 12%/15% bracket after retiring at 60, but did not state size of tax-deferred portfolio. A married couple w/ no other income can convert over $100K a year and pay an average of about 9% federal income tax. OP has a decade between retirement and start of SS- so well over a $1M of tax-deferred can be converted/withdrawn at favorable tax rates. I would advise going with Roth only if OP has a much larger tax-deferred balance, i.e., $1.5M or more currently. Growth of the tax-deferred balance should also be controlled by placing bonds into tax-deferred accounts and stocks into Roth accounts.
Olemiss540
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Olemiss540 »

02nz wrote: Sun Jan 15, 2023 7:33 am
Olemiss540 wrote: Sun Jan 15, 2023 7:06 am
02nz wrote: Sat Jan 14, 2023 11:24 pm
Olemiss540 wrote: Sat Jan 14, 2023 12:09 pm
CletusCaddy wrote: Sat Jan 14, 2023 8:39 am

There is no 25% federal tax bracket. There is 24% and then 32%.

The 24% tax bracket starts at $95k taxable income if you are single. But that’s after a standard deduction of $14k. So $110k of AGI.

Will you really have over $110k of AGI from age 61-70? How much do you intend to withdraw from your accounts every year, and how much of that is taxed at ordinary income rates?
Current tax law eliminates the 22% bracket and replaces it with the 25% in a few years.

OP, with the limited information provided I don't see any benefit to traditional contributions. If it's a coin flip, always go Roth IMO given the flexibility it provides for tax planning and early retirement use. It's different if you are a decade plus from retirement projecting returns but it sounds like your tax bracket estimations are much clearer/closer to reality.
(Bolding mine) I would advise just the opposite - if it's a coin flip, go with tax-deferred given the flexibility it provides for tax planning and early retirement. For early retirement, it's good to have all three types of accounts (taxable, tax-deferred, and Roth) for flexibility, but in general retiring early is a strong argument for having more in tax-deferred accounts.
In what way would you have more flexibility by having a larger un-taxed bucket?

Roth funds are the most valuable funds to own. If marginal tax are equivalent (meaning you already have a large enough bucket of traditional to push the OP into the 22% bracket), then there is no logical reason to continue pre-tax investing with Roth investing options available.
Roth dollars are valuable to HAVE, but they're also the costliest to GET. OP stated intent to convert to top of 12%/15% bracket after retiring at 60, but did not state size of tax-deferred portfolio. A married couple w/ no other income can convert over $100K a year and pay an average of about 9% federal income tax. OP has a decade between retirement and start of SS- so well over a $1M of tax-deferred can be converted/withdrawn at favorable tax rates. I would advise going with Roth only if OP has a much larger tax-deferred balance, i.e., $1.5M or more currently. Growth of the tax-deferred balance should also be controlled by placing bonds into tax-deferred accounts and stocks into Roth accounts.
Makes sense, the post 70 marginal rate calculation was confusing with regards to the SS "bump" integration. If you look into the SS bump, the actual available 10-15% bracket available for conversions is extremely small and is not indexed for inflation.

You really don't need much in traditional withdrawals (especially with taxable distributions and interest earnings as well) before being in the 22%+ bracket so from my recent experience, planning any conversions post 70/SS is difficult.

When I was reading the OP's marginal rate pre-70, I assumed that was due to high TIRA balance.

It's also confusing that the OP is calculating their future marginal rate as "post Roth conversions to the top of the 15% bracket". I need to reread the OPs posts but feel like investment account balances are required otherwise it seems like a riddle.

I'll bow out of this thread as others seem to better grasp the OPs current situation but stand by the statement that if the tax cost is a coin flip after analysis (meaning the marginal rates are the same pre and post retirement), than Roth contributions are always preferred as the cost is equal but the benefits of the Roth far outweigh the traditional.
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02nz
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by 02nz »

Olemiss540 wrote: Sun Jan 15, 2023 8:09 am
02nz wrote: Sun Jan 15, 2023 7:33 am
Olemiss540 wrote: Sun Jan 15, 2023 7:06 am
02nz wrote: Sat Jan 14, 2023 11:24 pm
Olemiss540 wrote: Sat Jan 14, 2023 12:09 pm

Current tax law eliminates the 22% bracket and replaces it with the 25% in a few years.

OP, with the limited information provided I don't see any benefit to traditional contributions. If it's a coin flip, always go Roth IMO given the flexibility it provides for tax planning and early retirement use. It's different if you are a decade plus from retirement projecting returns but it sounds like your tax bracket estimations are much clearer/closer to reality.
(Bolding mine) I would advise just the opposite - if it's a coin flip, go with tax-deferred given the flexibility it provides for tax planning and early retirement. For early retirement, it's good to have all three types of accounts (taxable, tax-deferred, and Roth) for flexibility, but in general retiring early is a strong argument for having more in tax-deferred accounts.
In what way would you have more flexibility by having a larger un-taxed bucket?

Roth funds are the most valuable funds to own. If marginal tax are equivalent (meaning you already have a large enough bucket of traditional to push the OP into the 22% bracket), then there is no logical reason to continue pre-tax investing with Roth investing options available.
Roth dollars are valuable to HAVE, but they're also the costliest to GET. OP stated intent to convert to top of 12%/15% bracket after retiring at 60, but did not state size of tax-deferred portfolio. A married couple w/ no other income can convert over $100K a year and pay an average of about 9% federal income tax. OP has a decade between retirement and start of SS- so well over a $1M of tax-deferred can be converted/withdrawn at favorable tax rates. I would advise going with Roth only if OP has a much larger tax-deferred balance, i.e., $1.5M or more currently. Growth of the tax-deferred balance should also be controlled by placing bonds into tax-deferred accounts and stocks into Roth accounts.
Makes sense, the post 70 marginal rate calculation was confusing with regards to the SS "bump" integration. If you look into the SS bump, the actual available 10-15% bracket available for conversions is extremely small and is not indexed for inflation.

You really don't need much in traditional withdrawals (especially with taxable distributions and interest earnings as well) before being in the 22%+ bracket so from my recent experience, planning any conversions post 70/SS is difficult.

When I was reading the OP's marginal rate pre-70, I assumed that was due to high TIRA balance.

It's also confusing that the OP is calculating their future marginal rate as "post Roth conversions to the top of the 15% bracket". I need to reread the OPs posts but feel like investment account balances are required otherwise it seems like a riddle.
Yep, knowing the balances would be useful, esp. as OP is quite close to retirement. In general, I agree people should manage their tax-deferred balances with an eye to 1) impact on taxation of SS benefits; 2) RMDs; and 3) likelihood of one spouse pre-deceasing the other, with the survivor having to file as single. The best way to do this, in general, is to use the years between retiring and start of SS to withdraw from (and/or do Roth conversions on) tax-deferred balances.
02nz
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by 02nz »

Olemiss540 wrote: Sun Jan 15, 2023 8:09 am I'll bow out of this thread as others seem to better grasp the OPs current situation but stand by the statement that if the tax cost is a coin flip after analysis (meaning the marginal rates are the same pre and post retirement), than Roth contributions are always preferred as the cost is equal but the benefits of the Roth far outweigh the traditional.
As a general statement, I strongly disagree. If the tax cost is truly the same during working years and withdrawal, then it's a wash. However, there are strong reasons to lean toward traditional when it's a coin flip, such as asymmetric risk, possibility of unexpected low-income years due to unemployment or earlier retirement than planned, possibility of lower than anticipated returns resulting in smaller portfolio at retirement, etc. It does make sense to have some of both, and generally the closer one is to retirement the more certainty (making more sense to lean toward Roth if tax-deferred balances are getting very large).

The flexibility of tax-deferred accounts is often greatly underappreciated even by those on this board. This blog post was very educational for me.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by dknightd »

Step 1. Open both a Roth IRA, and if possible a 401/403 designated Roth account. Do it today, if you have not already done it. Get that 5 year clock started. Once the 5 years is past, and you are 59.5 it becomes tax free.

I'm pretty sure for most people, me included, it does not matter much where the money is. It will all be taxed one day. We know today's rate, but are guessing at future rates.

I'm paying taxes today, at my current rate, to have more money in a Roth account. I convert up to the top of my current tax bracket. I'm trying to even out my taxable income. If one day I need some money I like having it in a Roth account so I can withdraw it without worrying about taxes.

I can not predict future tax rates. But I'm pretty sure one day I'll have a lumpy expense. And that lumpy expense might bump me up a tax bracket. I like the idea of being able to pay that lumpy expense without thinking about tax consequences.

Since we can not predict the future, I like the concept of diversifying our future tax liabilities.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
02nz
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by 02nz »

dknightd wrote: Sun Jan 15, 2023 9:05 am Step 1. Open both a Roth IRA, and if possible a 401/403 designated Roth account. Do it today, if you have not already done it. Get that 5 year clock started. Once the 5 years is past, and you are 59.5 it becomes tax free.

I'm pretty sure for most people, me included, it does not matter much where the money is. It will all be taxed one day. We know today's rate, but are guessing at future rates.

I'm paying taxes today, at my current rate, to have more money in a Roth account. I convert up to the top of my current tax bracket. I'm trying to even out my taxable income. If one day I need some money I like having it in a Roth account so I can withdraw it without worrying about taxes.

I can not predict future tax rates. But I'm pretty sure one day I'll have a lumpy expense. And that lumpy expense might bump me up a tax bracket. I like the idea of being able to pay that lumpy expense without thinking about tax consequences.

Since we can not predict the future, I like the concept of diversifying our future tax liabilities.
Agree re: diversifying, but don't make the mistake of paying too high a tax cost for the comfort of "not having to worry about taxes." For one, one of the main potential lumpy expenses, a large medical bill, is a strong reason to have a large tax-deferred balance, as withdrawals from tax-deferred for this purpose can be largely tax-free, thanks to the medical expenses deduction. More broadly, optimizing taxes is possibly the single biggest thing you can do for your finances, other than earning more, with as much impact as choosing low-cost investments.

Also, I believe that you need to fund, not just open, a Roth IRA, to start the clock.
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privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Olemiss540 wrote: Sun Jan 15, 2023 8:09 am It's also confusing that the OP is calculating their future marginal rate as "post Roth conversions to the top of the 15% bracket". I need to reread the OPs posts but feel like investment account balances are required otherwise it seems like a riddle.
I understand the confusion I caused by using the term "marginal tax-rate" and applying toward my Roth conversions beyond the 15% tax bracket. However, assuming I made the decision to convert to the top of the 15% tax bracket, a decision that I think is a no-brainer, then the next relevant decision is after that point. Ant that is when all my choices seem to be similar.

I project in 4 years I will have $2M in my TDAs. After a decade of withdrawing/converting to the top of the 15% tax bracket, with conservative return estimates, my TDA drops to $1.5M when SS begins. Other than that I have a small pension (about $8K/yr not linked to inflation). All that does keep me in the 15% tax-bracket once RMDs begin.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by dknightd »

I agree, it probably has to be funded. Put $1 in a Roth account today. Or whatever it takes.

I'm a 50/50 person. But my savings are mostly in tax deferred, not Roth. If I can get 25% in Roth accounts I'll be happy. I would probably not do more than 50%
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Navillus1968
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Navillus1968 »

privateID wrote: Sat Jan 14, 2023 11:08 pm
Navillus1968 wrote: Sat Jan 14, 2023 10:47 pm
privateID wrote: Fri Jan 13, 2023 6:17 pm
KlangFool wrote: Fri Jan 13, 2023 6:04 pm
privateID wrote: Fri Jan 13, 2023 5:08 pm

I do not have a big pension. I did not include all my plans here, just what I thought was relevant. I plan to withdraw/convert to the top of the 15% tax bracket during this time.
privateID,

Then, where does this 25% Fed tax rate comes from?

KlangFool
25% is my marginal tax rate. My next dollar taxed.
I don't get the math.

You say you're in the 22% Fed bracket / 7% New York bracket today, 29% combined.

In retirement, you intend on withdrawing from TIRA/Trad 401k & Roth converting to the top of (IOW: not going over) the post-TCJA 15% bracket, which should be similar to today's 12% bracket, about $84K taxable income in 2022 (MFJ).
$84k taxable income puts you in the 5.85% NYS bracket (MFJ), round up to 6%. 15% + 6%= 21% combined tax rate, not 32%.

In addition, $20k of your TIRA/401k w/d is deductible, so NYS will tax you on $64k, not $84k, yes? This reduces your actual state tax rate further from a nominal 5.85% to about 4.5%, if my math is right (fair warning- History major, so no guarantees).

If your 19.5%-21% combined tax rate in retirement is going to be at least 8 percentage points lower than today's 29%, doing Roth today seems a bad idea. Just wait & do partial Roth conversions from age 61 to 70 in a much lower bracket.
For now, keep using tax-deferred/deductible 401k & TIRA while working until 60.
You are correct that may tax rate from 61-70 would be around 21%. And that is because I plan to convert to the top of the 15% bracket. If I want to convert more than that, each additional dollar will be taxed at 25% + 6% (or maybe a little more as I climb into the 25% tax bracket). That's how I get 32%. I currently pay 7% state tax. I was figuring on the same if I convert into the 25% bracket. You are probably right that with the $20K state deduction, my state tax will be less. So, maybe 31% or perhaps 30%. So, assuming I'd prefer to reduce my TDA accounts more than just the amount of converting to the top of the 15% from 61-70, I need to decide whether to contribute/convert more today at 29% or penetrate the 25% tax bracket from 61-70.
OK, got it.
Please correct me if I've misread the ways you are saving, but I think you are doing the following (2022 figures):

Assuming AGI of about $200k & saving 25% of gross income, or $50k/year
Income too high for deductible TIRA, so Roth IRA for you & DW- 2 x $7k= $14k
Trad 401k for you- $20.5k + $6.5 catchup= $27k
Mega Backdoor Roth for you- remaining $9k.

Assuming this is close to reality, you are already contributing substantial funds to Roth each year, while still taking advantage of all available deductible contributions. It's a win-win.

These are placeholder numbers, but you can plug in the correct figures.
Deductiible TIRA contributions are not an option due to 401k & income above $129k, so Roth IRA is much better than non-deductible TIRA.

Mega Backdoor Roth via your 401k is better than saving in taxable, but is it better than deductible trad 401k at a 29% tax rate? I say no.

YMMV, but i would max out the trad 401k to get the 29% deduction & only put any leftover funds into Mega Backdoor Roth. I would also hold off on any Roth conversions until retirement at 60 & a lower tax rate once W-2 income stops. Festina lente, as they say in Rome.

One final thought, if your TIRA is fat with bonds, that will tend to hold back the growth of that account. Unless your current TIRA balance is pushing $2 million, you can likely chip away at it during your 60s with moderate-sized Roth conversions without venturing into the 25% tax bracket.

My favorite lifetime RMD calculator (https://www.schwab.com/ira/ira-calculators/rmd) is undergoing SECURE Act 2.0-related maintenance.
This guy- https://www.mortgagecalculator.org/calc ... bution.php is operational, but NOT updated for SECURE Act 2.0, so it shows RMD at 72, vice 75, but it should give you a ballpark idea of what kind of RMDs to expect.

PS- Not trying to be morbid, but eventually, one of you is likely to be widowed. Filing Single vice MFJ exposes your income to much higher tax rates, the so-called Widow's Tax Trap. If family history &/or current health issues make it more likely that one of you will substantially predecease the other, then more aggressive Roth conversions might be logical.
Note: the 2017 tax brackets that revert in 2026 are more generous to Single filers than the current TCJA figures, so the widow's burden is eased somewhat. Example- the 25% Single bracket top will be ~$101k vs MFJ top of ~$168k, or 60%. TCJA Single brackets are all 50% of MFJ.

Edited to add: I was typing this post when OP posted his 1026 AM comment, so didn't have the benefit of knowing OP's TDA amount!
Last edited by Navillus1968 on Sun Jan 15, 2023 9:52 am, edited 1 time in total.
dknightd
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by dknightd »

privateID wrote: Sun Jan 15, 2023 9:26 am All that does keep me in the 15% tax-bracket once RMDs begin.
Currently 12%, projected to go back to 15%. But who knows.
And RMD might change, again. And taxes on might SS might change.

You will not know what was optimal till it is too late to change. So pick something that seems to work for you
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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privateID
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Navillus1968 wrote: Sun Jan 15, 2023 9:36 am Assuming AGI of about $200k & saving 25% of gross income, or $50k/year
Income too high for deductible TIRA, so Roth IRA for you & DW- 2 x $7k= $14k
Trad 401k for you- $20.5k + $6.5 catchup= $27k
Mega Backdoor Roth for you- remaining $9k.

Assuming this is close to reality, you are already contributing substantial funds to Roth each year, while still taking advantage of all available deductible contributions. It's a win-win.

These are placeholder numbers, but you can plug in the correct figures.
Deductiible TIRA contributions are not an option due to 401k & income above $129k, so Roth IRA is much better than non-deductible TIRA.

Mega Backdoor Roth via your 401k is better than saving in taxable, but is it better than deductible trad 401k at a 29% tax rate? I say no.

YMMV, but i would max out the trad 401k to get the 29% deduction & only put any leftover funds into Mega Backdoor Roth. I would also hold off on any Roth conversions until retirement at 60 & a lower tax rate once W-2 income stops. Festina lente, as they say in Rome.

One final thought, if your TIRA is fat with bonds, that will tend to hold back the growth of that account. Unless your current TIRA balance is pushing $2 million, you can likely chip away at it during your 60s with moderate-sized Roth conversions without venturing into the 25% tax bracket.

My favorite lifetime RMD calculator (https://www.schwab.com/ira/ira-calculators/rmd) is undergoing SECURE Act 2.0-related maintenance.
This guy- https://www.mortgagecalculator.org/calc ... bution.php is operational, but NOT updated for SECURE Act 2.0, so it shows RMD at 72, vice 75, but it should give you a ballpark idea of what kind of RMDs to expect.

PS- Not trying to be morbid, but eventually, one of you is likely to be widowed. Filing Single vice MFJ exposes your income to much higher tax rates, the so-called Widow's Tax Trap. If family history &/or current health issues make it more likely that one of you will substantially predecease the other, then more aggressive Roth conversions might be logical.
Note: the 2017 tax brackets that revert in 2026 are more generous to Single filers than the current TCJA figures, so the widow's burden is eased somewhat. Example- the 25% Single bracket top will be ~$101k vs MFJ top of ~$168k, or 60%. TCJA Single brackets are all 50% of MFJ.
I would say you are relatively close with the numbers. A little high on my AGI. Closer to $150K.

Given that I'm already doing both, you suggest TDA over Roth and wait till 60 with lower tax rate (see my bolding). Sure, it's a lower rate till the top of the 15% tax bracket. And as I mentioned while you were typing, converting to the top of the 15% tax bracket gets me down to $1.5M when RMDs begin. However, I am trying to figure out whether to do more. And in that case, it's not a lower tax-rate after 60 but slightly higher. BTW - I do the Mega back door to the max my company provides (10% of my salary). Also, the single survivor case and tax-rates of heirs are reasons that I think I should do more Roth.
dknightd wrote:Currently 12%, projected to go back to 15%. But who knows.
And RMD might change, again. And taxes on might SS might change.

You will not know what was optimal till it is too late to change. So pick something that seems to work for you
And many other unknowns as well. That's why I started this thread. Given that's I plan to convert to the top of the 15% tax-bracket, should I do more than that assuming any more is relatively equal tax-wise. That is why I thought a 50-50 approach may be an easy and good approach. Although, the idea contributing/converting to $160 AGI (the lower limit to get the max AOTC credit for my daughter in college) is feeling attractive.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by mnnice »

[/quote]

Yep, knowing the balances would be useful, esp. as OP is quite close to retirement. In general, I agree people should manage their tax-deferred balances with an eye to 1) impact on taxation of SS benefits; 2) RMDs; and 3) likelihood of one spouse pre-deceasing the other, with the survivor having to file as single. The best way to do this, in general, is to use the years between retiring and start of SS to withdraw from (and/or do Roth conversions on) tax-deferred balances.
[/quote]

Or at least the relative percentages. What I would do with my biggest piece of the pie was taxable, tax-deferred, or Roth would be different. When people to portfolio reviews here I am often surprised at how two households with the same net worth have very different compositions of these three pies. Sure directional more Roth is better, but at what cost requires some personal prognostication about future income (that is not one size fits all)and also some guessing about the forbidden topic of legislative changes in the tax code.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by cowdogman »

rivercrosser wrote: Sat Jan 14, 2023 10:25 pm
cowdogman wrote: Sat Jan 14, 2023 1:24 pm
Watty wrote: Sat Jan 14, 2023 11:21 am
One thing you are missing is that at least until you are 60 then you will have a tax saving for any traditional accounts and that money can be invested.
But that is offset by the tax payable on the gain in the tIRA.

Consider the following example:

Assume 10% pa return and 25% tax rate on both.

59 YO contributes $7,000 to tIRA and withdraws balance one year later and pays tax.

vs.

59YO who contributes $5,250 ($7,000 x 25% tax rate) to Roth IRA and withdraws balance one year later (no tax).

tIRA: The $7,000 grows to $7,700 and the tax on withdrawal is $1,925, for a net of $5,775.

Roth: The $5,250 grows to $5,775 with no tax on withdrawal.

As long as the returns on the Roth and tIRA are the same and the tax bracket is the same, there is no difference. The only relevant issue when comparing Roth and tIRA is tax bracket now vs tax bracket later.

It took me a while to accept the above argument, thinking it had to be more complicated, but it's not.

What about if you don't need it and have to start taking RMDs and depending on income more of your SS is taxable.
If the returns and the tax rates are the same, it makes no difference. However, SS income goes into determining what your tax rate is.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by cowdogman »

privateID wrote: Sat Jan 14, 2023 4:58 pm Thanks for the responses. It's interesting how some people come to the opposite conclusions with the same input.

Watty says why pay taxes early when there's only a couple percent difference? Go trad'l.

Olemiss540 says if it's a close call, go Roth.

cowdogman correctly asserts the returns are the same all else being equal.

JazzTime says go Roth unless you're sure you will be in a lower bracket.

One other factor I haven't mentioned so far is that I have a kid in college and expect to get the AOTC tax credit. That credit starts to phase out at AGI of 160K. So, another possibility is to contribute/convert up to that point.

I think whatever I do here, it will not move the needle too much. The decision to max out these plans is much more important than Roth vs trad'l if it is indeed close.
All else being equal (or close), it's a judgment call. Some people (me included) are adverse to paying taxes before due and so I err on the side of traditional contributions. Some people don't like uncertainty and want to lock in the tax rate now--and I can appreciate that POV.

If the difference in tax rates is 2-3% there is no wrong answer (IMO).

A couple things to remember:

Your RMDs may not be 100% taxed at your marginal rate. A part of my RMDs are projected to be taxed at 25%, but it's the tip of the iceberg and much will be taxed at 15%.

You will likely have some low-income years before RMDs to do Roth conversions so as to fine tune your RMDs to keep the tip of the Iceberg as small as possible.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Olemiss540 »

02nz wrote: Sun Jan 15, 2023 9:02 am
Olemiss540 wrote: Sun Jan 15, 2023 8:09 am I'll bow out of this thread as others seem to better grasp the OPs current situation but stand by the statement that if the tax cost is a coin flip after analysis (meaning the marginal rates are the same pre and post retirement), than Roth contributions are always preferred as the cost is equal but the benefits of the Roth far outweigh the traditional.
As a general statement, I strongly disagree. If the tax cost is truly the same during working years and withdrawal, then it's a wash. However, there are strong reasons to lean toward traditional when it's a coin flip, such as asymmetric risk, possibility of unexpected low-income years due to unemployment or earlier retirement than planned, possibility of lower than anticipated returns resulting in smaller portfolio at retirement, etc. It does make sense to have some of both, and generally the closer one is to retirement the more certainty (making more sense to lean toward Roth if tax-deferred balances are getting very large).

The flexibility of tax-deferred accounts is often greatly underappreciated even by those on this board. This blog post was very educational for me.
I am not one that underappreciates the flexibility one has with withdrawal rates and the high level of variability in potential returns. The conservative (and smart approach) is to err on the side of more money (trad ira) but the OP's post led me to believe they were close to retirement. I am talking to the OP, not to a 28 year old that has 300k in a Tira and is projecting marginal rates at retirement 40 years from now. Apologies if I missed the OPs age and was speaking out of line but no need to strongly disagree as we generally DO agree based on my previous posts. Sheesh.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Olemiss540 »

OP,

Sorry if I missed it but do you have health insurance planned 4 years from now? That can play a large role with regards to future marginal rates given the need for maintaining subsidies for ACA coverage if applicable.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by 02nz »

Olemiss540 wrote: Sun Jan 15, 2023 2:08 pm
02nz wrote: Sun Jan 15, 2023 9:02 am
Olemiss540 wrote: Sun Jan 15, 2023 8:09 am I'll bow out of this thread as others seem to better grasp the OPs current situation but stand by the statement that if the tax cost is a coin flip after analysis (meaning the marginal rates are the same pre and post retirement), than Roth contributions are always preferred as the cost is equal but the benefits of the Roth far outweigh the traditional.
As a general statement, I strongly disagree. If the tax cost is truly the same during working years and withdrawal, then it's a wash. However, there are strong reasons to lean toward traditional when it's a coin flip, such as asymmetric risk, possibility of unexpected low-income years due to unemployment or earlier retirement than planned, possibility of lower than anticipated returns resulting in smaller portfolio at retirement, etc. It does make sense to have some of both, and generally the closer one is to retirement the more certainty (making more sense to lean toward Roth if tax-deferred balances are getting very large).

The flexibility of tax-deferred accounts is often greatly underappreciated even by those on this board. This blog post was very educational for me.
I am not one that underappreciates the flexibility one has with withdrawal rates and the high level of variability in potential returns. The conservative (and smart approach) is to err on the side of more money (trad ira) but the OP's post led me to believe they were close to retirement. I am talking to the OP, not to a 28 year old that has 300k in a Tira and is projecting marginal rates at retirement 40 years from now. Apologies if I missed the OPs age and was speaking out of line but no need to strongly disagree as we generally DO agree based on my previous posts. Sheesh.
These threads don't exist only for the benefit of the OP. You wrote that "if the tax cost is a coin flip after analysis then Roth contributions are always preferred" (emphasis mine). That statement, without any qualification whatsoever about age, current size of tax-deferred portfolio, or any other relevant factors, and coming right after you "bowed out of the thread," certainly sounded like a general statement you thought held true for all situations, and that's what I take issue with, because it's not good general advice.
Last edited by 02nz on Sun Jan 15, 2023 2:56 pm, edited 2 times in total.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by cowdogman »

Olemiss540 wrote: Sun Jan 15, 2023 2:13 pm OP,

Sorry if I missed it but do you have health insurance planned 4 years from now? That can play a large role with regards to future marginal rates given the need for maintaining subsidies for ACA coverage if applicable.
Good point. For me another large factor is taking advantage (to the extent possible) of the zero cap gains bracket as I get closer to retirement. When we talk about marginal rate it should be the true marginal rate, not the top bracket.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by celia »

Where will you get health insurance from age 60 (retirement) until Medicare starts at 65? If using the ACA, you will want to keep your AGI low during that time, so you probably won’t do Roth conversions then.

If you are married, when one of you dies, the survivor will need to start filing as Single (or HoH?). If the survivor has over half the same income as you jointly have while married, his/her tax bracket will likely increase because the space in each tax bracket for Single is half as much as the space for MFJ.

When the markets are down, that is a good time to convert since you can convert more shares for the same tax when share prices are lower.

These are all good reasons to get a head start on increasing your Roth space NOW. In fact, when you are 70 and ready to collect your maximum SS, where will you wish you had more money (in Roth or tax-deferred)?
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: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by JoeRetire »

privateID wrote: Fri Jan 13, 2023 4:26 pm I rounded a few of the numbers, but everything is close. From this I conclude slight edge to doing Roth contributions/conversions today.

2) SS taxation - It has been discussed here how the SS taxation equation is not indexed for inflation. As such, everyone is slowly moving toward 85% of SS being taxed. Will this change?
Anybody currently predicting a change to social security in this regard is kidding themselves. Nobody knows the future of tax laws.
5) Changing tax code - can't predict the future.
Yup.
So which makes sense for me: Trad’l or Roth?
I usually like to have a mix of options available to me in retirement.
That said, I also like to get a real tax break now, rather than a potential tax break somewhere down the road.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by celia »

privateID wrote: Fri Jan 13, 2023 4:26 pm 5) Changing tax code - can't predict the future.
Although we can’t predict the future and can’t talk about potential future laws in the forum, knowing that we are currently in historically low tax brackets now, we can each have an opinion of which direction future tax rates might go.
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: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by rivercrosser »

cowdogman wrote: Sun Jan 15, 2023 12:28 pm
rivercrosser wrote: Sat Jan 14, 2023 10:25 pm
cowdogman wrote: Sat Jan 14, 2023 1:24 pm
Watty wrote: Sat Jan 14, 2023 11:21 am
One thing you are missing is that at least until you are 60 then you will have a tax saving for any traditional accounts and that money can be invested.
But that is offset by the tax payable on the gain in the tIRA.

Consider the following example:

Assume 10% pa return and 25% tax rate on both.

59 YO contributes $7,000 to tIRA and withdraws balance one year later and pays tax.

vs.

59YO who contributes $5,250 ($7,000 x 25% tax rate) to Roth IRA and withdraws balance one year later (no tax).

tIRA: The $7,000 grows to $7,700 and the tax on withdrawal is $1,925, for a net of $5,775.

Roth: The $5,250 grows to $5,775 with no tax on withdrawal.

As long as the returns on the Roth and tIRA are the same and the tax bracket is the same, there is no difference. The only relevant issue when comparing Roth and tIRA is tax bracket now vs tax bracket later.

It took me a while to accept the above argument, thinking it had to be more complicated, but it's not.

What about if you don't need it and have to start taking RMDs and depending on income more of your SS is taxable.
If the returns and the tax rates are the same, it makes no difference. However, SS income goes into determining what your tax rate is.
Exactly, if you're paying more tax on your SS then your taxable income went up. Once you take an RMD any growth on it is taxed. I keep reading how theirs no difference in the end for Traditional vs Roth but that's simply not the case for everyone. Every situation is different but for me the Roth is already paying off.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by Olemiss540 »

02nz wrote: Sun Jan 15, 2023 2:33 pm
Olemiss540 wrote: Sun Jan 15, 2023 2:08 pm
02nz wrote: Sun Jan 15, 2023 9:02 am
Olemiss540 wrote: Sun Jan 15, 2023 8:09 am I'll bow out of this thread as others seem to better grasp the OPs current situation but stand by the statement that if the tax cost is a coin flip after analysis (meaning the marginal rates are the same pre and post retirement), than Roth contributions are always preferred as the cost is equal but the benefits of the Roth far outweigh the traditional.
As a general statement, I strongly disagree. If the tax cost is truly the same during working years and withdrawal, then it's a wash. However, there are strong reasons to lean toward traditional when it's a coin flip, such as asymmetric risk, possibility of unexpected low-income years due to unemployment or earlier retirement than planned, possibility of lower than anticipated returns resulting in smaller portfolio at retirement, etc. It does make sense to have some of both, and generally the closer one is to retirement the more certainty (making more sense to lean toward Roth if tax-deferred balances are getting very large).

The flexibility of tax-deferred accounts is often greatly underappreciated even by those on this board. This blog post was very educational for me.
I am not one that underappreciates the flexibility one has with withdrawal rates and the high level of variability in potential returns. The conservative (and smart approach) is to err on the side of more money (trad ira) but the OP's post led me to believe they were close to retirement. I am talking to the OP, not to a 28 year old that has 300k in a Tira and is projecting marginal rates at retirement 40 years from now. Apologies if I missed the OPs age and was speaking out of line but no need to strongly disagree as we generally DO agree based on my previous posts. Sheesh.
These threads don't exist only for the benefit of the OP. You wrote that "if the tax cost is a coin flip after analysis then Roth contributions are always preferred" (emphasis mine). That statement, without any qualification whatsoever about age, current size of tax-deferred portfolio, or any other relevant factors, and coming right after you "bowed out of the thread," certainly sounded like a general statement you thought held true for all situations, and that's what I take issue with, because it's not good general advice.
Well done and I agree entirely. With everything above, especially the emphasized portion after I bowed out of the thread. I think your teachings on this deserve a new thread to not distract from the OP's questions but lots of valuable points you have made for others not in the OPs position close to retirement.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by JoeRetire »

rivercrosser wrote: Sun Jan 15, 2023 3:14 pmEvery situation is different but for me the Roth is already paying off.
Can you explain how it could already be paying off? What is the payoff?
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by rivercrosser »

JoeRetire wrote: Sun Jan 15, 2023 3:20 pm
rivercrosser wrote: Sun Jan 15, 2023 3:14 pmEvery situation is different but for me the Roth is already paying off.
Can you explain how it could already be paying off? What is the payoff?
Knowing I won't have any RMD's and staying in a lower tax bracket is my payoff. I started converting back in 1998 when they first came out and later with the Roth 401k when they switched from a pension to a 401K plan at work. After I retired, I slowly converted the company contributions. Did the last little bit in 2022. Wife still has a small 403B which won't be enough to make a difference.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by JoeRetire »

rivercrosser wrote: Sun Jan 15, 2023 4:02 pm
JoeRetire wrote: Sun Jan 15, 2023 3:20 pm
rivercrosser wrote: Sun Jan 15, 2023 3:14 pmEvery situation is different but for me the Roth is already paying off.
Can you explain how it could already be paying off? What is the payoff?
Knowing I won't have any RMD's and staying in a lower tax bracket is my payoff.
So it's not already paying off, but you feel it will pay off down the road, despite having to pay the taxes up front.

RMDs are required for Roth 401ks.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by rivercrosser »

JoeRetire wrote: Sun Jan 15, 2023 4:06 pm
rivercrosser wrote: Sun Jan 15, 2023 4:02 pm
JoeRetire wrote: Sun Jan 15, 2023 3:20 pm
rivercrosser wrote: Sun Jan 15, 2023 3:14 pmEvery situation is different but for me the Roth is already paying off.
Can you explain how it could already be paying off? What is the payoff?
Knowing I won't have any RMD's and staying in a lower tax bracket is my payoff.
So it's not already paying off, but you feel it will pay off down the road, despite having to pay the taxes up front.

RMDs are required for Roth 401ks.
RMDs are required for Roth 401ks. Thats why I rolled it over to my Roth IRA.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by privateID »

Some answers to questions asked:
1) From 60 to 65 I have the ability to continue my employer's insurance. I know it will be more expensive without the company subsidizing it. But I think the rate is favorable as a large company group rate. My employer also has a special account that will contribute a little over $30K toward this expense. In addition, I'm hoping my HSA will also help pay. I have not investigated this fully, but that is my thinking.

2) I believe I have said this already, but I'm 56 and plan to retire at 60.

The big point I realized this weekend is with the increase to IRA limits this year (my IRA is a Roth and my wife's IRA is in trad'l because she doesn't have large TDA accounts and I want to get her state tax-free savings) and the increase to 401K limits (up to $30K) for me, I am getting closer to the AOTC if I max out my 401K with Roth. In fact, I am also getting some RSUs this year (maybe $16K worth) and that will add more income as well. Assuming I get a raise this year, I think I am going to be right at the AOTC education credit limit. So, I think I will probably be taking a middle of the road approach this year. In the following 3 years, I expect to need to contribute less and less to my Roth 401K if I want to stay eligible for the AOTC. Now, if it makes sense to me put the whole 401K in trad'l, then the AOTC limit will not be an issue at all. As I said earlier, I expect to be at $1.5M at age 70. That's not horrible, but I think a little high.
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Re: When you have a close call for Roth vs Trad’l, thoughts on this approach?

Post by JoeRetire »

rivercrosser wrote: Sun Jan 15, 2023 4:14 pm
JoeRetire wrote: Sun Jan 15, 2023 4:06 pm
rivercrosser wrote: Sun Jan 15, 2023 4:02 pm
JoeRetire wrote: Sun Jan 15, 2023 3:20 pm
rivercrosser wrote: Sun Jan 15, 2023 3:14 pmEvery situation is different but for me the Roth is already paying off.
Can you explain how it could already be paying off? What is the payoff?
Knowing I won't have any RMD's and staying in a lower tax bracket is my payoff.
So it's not already paying off, but you feel it will pay off down the road, despite having to pay the taxes up front.

RMDs are required for Roth 401ks.
RMDs are required for Roth 401ks. Thats why I rolled it over to my Roth IRA.
That's good, and smart. So the Roth might pay off somewhere down the road, and might become more lucrative than the taxes you have already paid.

It's not yet "already paying off".
Last edited by JoeRetire on Sun Jan 15, 2023 4:22 pm, edited 1 time in total.
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