Roth vs. Traditional for RMD's & Tax Diversification
Roth vs. Traditional for RMD's & Tax Diversification
Should I be splitting my my 401k contributions 50/50 between Traditional and Roth, or contribute 100% to Roth?
I had been splitting *my* (as opposed to my Employer's match) 401k contributions 50/50 between Traditional 401(k) and Roth 401(k) for tax diversification and because of potential for RMDs (Required Minimum Distributions) I might lean more towards the Roth. Of the total contributions going into the 401(k), I'm making about 60% and my Employer is making 40%. However, I just realized that all of my Employer's match is taxable. If there were no RMD's on the Traditional 401k then I'd probably just do that 100% and take the tax break now...but I may end up with a large portfolio (the future is uncertain, but fingers crossed!) and may not require all of the RMD, in which case I'd prefer to keep more assets in the Roth.
I know that advice on this topic is usually given in terms of projected tax bracket in retirement vs. currently, but I'm also thinking in terms of avoiding excessive RMDs.
I had been splitting *my* (as opposed to my Employer's match) 401k contributions 50/50 between Traditional 401(k) and Roth 401(k) for tax diversification and because of potential for RMDs (Required Minimum Distributions) I might lean more towards the Roth. Of the total contributions going into the 401(k), I'm making about 60% and my Employer is making 40%. However, I just realized that all of my Employer's match is taxable. If there were no RMD's on the Traditional 401k then I'd probably just do that 100% and take the tax break now...but I may end up with a large portfolio (the future is uncertain, but fingers crossed!) and may not require all of the RMD, in which case I'd prefer to keep more assets in the Roth.
I know that advice on this topic is usually given in terms of projected tax bracket in retirement vs. currently, but I'm also thinking in terms of avoiding excessive RMDs.
Re: Roth vs. Traditional for RMD's & Tax Diversification
You really need to give more information in terms of savings, age, portfolio and tax status. Look for thread on asking questions up top. The answer can vary dramatically depending on your situation. There is a lot of stuff in the wiki on this too.dvd7e wrote: ↑Fri Oct 06, 2017 2:08 pm Should I be splitting my my 401k contributions 50/50 between Traditional and Roth, or contribute 100% to Roth?
I had been splitting *my* (as opposed to my Employer's match) 401k contributions 50/50 between Traditional 401(k) and Roth 401(k) for tax diversification and because of potential for RMDs (Required Minimum Distributions) I might lean more towards the Roth. Of the total contributions going into the 401(k), I'm making about 60% and my Employer is making 40%. However, I just realized that all of my Employer's match is taxable. If there were no RMD's on the Traditional 401k then I'd probably just do that 100% and take the tax break now...but I may end up with a large portfolio (the future is uncertain, but fingers crossed!) and may not require all of the RMD, in which case I'd prefer to keep more assets in the Roth.
I know that advice on this topic is usually given in terms of projected tax bracket in retirement vs. currently, but I'm also thinking in terms of avoiding excessive RMDs.
Having diversity in tax structure of retirement vehicles is a good idea. That doesn't mean you have to diversify right now.
Re: Roth vs. Traditional for RMD's & Tax Diversification
Age = 32 (same for spouse). Combined salary ~210k. Current retirement savings ~500k, hope to retire at 56. We're both maxing out our 401ks, and we both get around a 10% match, so total contribution is around 55k/year, or 26% of our combined salary. We're Married filing jointly in the 28% tax bracket, plus another ~6% in state taxes. Currently at 85%/15% Stocks/Bonds, will transition to maybe 40 or 50% stocks by age 55.JBTX wrote: ↑Fri Oct 06, 2017 2:13 pmYou really need to give more information in terms of savings, age, portfolio and tax status. Look for thread on asking questions up top. The answer can vary dramatically depending on your situation. There is a lot of stuff in the wiki on this too.dvd7e wrote: ↑Fri Oct 06, 2017 2:08 pm Should I be splitting my my 401k contributions 50/50 between Traditional and Roth, or contribute 100% to Roth?
I had been splitting *my* (as opposed to my Employer's match) 401k contributions 50/50 between Traditional 401(k) and Roth 401(k) for tax diversification and because of potential for RMDs (Required Minimum Distributions) I might lean more towards the Roth. Of the total contributions going into the 401(k), I'm making about 60% and my Employer is making 40%. However, I just realized that all of my Employer's match is taxable. If there were no RMD's on the Traditional 401k then I'd probably just do that 100% and take the tax break now...but I may end up with a large portfolio (the future is uncertain, but fingers crossed!) and may not require all of the RMD, in which case I'd prefer to keep more assets in the Roth.
I know that advice on this topic is usually given in terms of projected tax bracket in retirement vs. currently, but I'm also thinking in terms of avoiding excessive RMDs.
Having diversity in tax structure of retirement vehicles is a good idea. That doesn't mean you have to diversify right now.
Here is a link to monte carlo simulations at Portfolio Visualizer for this scenario:
https://www.portfoliovisualizer.com/fin ... foccurs3=3
Re: Roth vs. Traditional for RMD's & Tax Diversification
OP,
1) What is your annual expense?
2) What is your number for early retirement?
3) Why do you think that you will have an RMD problem at 70 1/2 years old if you early retire at 56 years old?
4) Would you retire at 45 years old if you reach your number?
KlangFool
1) What is your annual expense?
2) What is your number for early retirement?
3) Why do you think that you will have an RMD problem at 70 1/2 years old if you early retire at 56 years old?
4) Would you retire at 45 years old if you reach your number?
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Roth vs. Traditional for RMD's & Tax Diversification
These are good questions that I see are important to answering my original question, and maybe I need to spend some more time thinking about them in detail. I just started using a personal finance software so I hope to get a better handle on my actual expenses to help with that. But off the top of my head, with maybe like 30 seconds of thought, I'd say retirement expenses would be maybe 80k/year, so to be conservative and go with a round number I'll say 100k/year in today's dollars.KlangFool wrote: ↑Fri Oct 06, 2017 3:04 pm OP,
1) What is your annual expense?
2) What is your number for early retirement?
3) Why do you think that you will have an RMD problem at 70 1/2 years old if you early retire at 56 years old?
4) Would you retire at 45 years old if you reach your number?
KlangFool
2) So at a 3% withdrawal rate, that's a 3.3 million dollar portfolio in today's money. (Obviously bigger in future dollars)
3) Maybe I won't. But I was going through some monte carlo simulation results at PortfolioVisualizer.com (the link to my results is above) and there are certain scenarios where the balance could be high enough to where it might be an "issue", e.g. a RMD of ~200k/year (in today's dollars) which is probably a lot more than I would need. Plus when you take into account potential other factors like Social Security, potential inheritance from my parents and in-laws, and rental property income all of which I have ignored.....bumping up against the RMDs is far from a guarantee but definitely seems realistic and something I at least want to be aware of.
4) If I could, yes...except that majority of those savings are in 401k/IRA, and so the 401k would not be accessible to me until 55.5 (assuming I don't leave my employer until then) and my IRA until 59.5 yrs. And being somewhat risk-averse (at least with respect to that decision), I'm not sure I'd totally be able to sleep at night retiring that young unless I was really confident that I had enough money to last 40 years.
Re: Roth vs. Traditional for RMD's & Tax Diversification
dvd7e,dvd7e wrote: ↑Fri Oct 06, 2017 3:35 pm
4) If I could, yes...except that majority of those savings are in 401k/IRA, and so the 401k would not be accessible to me until 55.5 (assuming I don't leave my employer until then) and my IRA until 59.5 yrs. And being somewhat risk-averse (at least with respect to that decision), I'm not sure I'd totally be able to sleep at night retiring that young unless I was really confident that I had enough money to last 40 years.
1) If you early retired, you will leave your employer.
<<and my IRA until 59.5 yrs.>>
2) This is a common faulty assumption. Please read below URL.
http://www.madfientist.com/how-to-acces ... nds-early/
<<I'm not sure I'd totally be able to sleep at night retiring that young unless I was really confident that I had enough money to last 40 years.>>
3) So, what is this number? 4 million? Would you early retire then?
<< Maybe I won't. But I was going through some monte carlo simulation results at PortfolioVisualizer.com (the link to my results is above) and there are certain scenarios where the balance could be high enough to where it might be an "issue", e.g. a RMD of ~200k/year (in today's dollars) which is probably a lot more than I would need. Plus when you take into account potential other factors like Social Security, potential inheritance from my parents and in-laws, and rental property income all of which I have ignored.....bumping up against the RMDs is far from a guarantee but definitely seems realistic and something I at least want to be aware of.>>
4) You are worried that you have too much money at retirement? This is not a problem. Have you considered the other possible outcome? What if you and your spouse are permanently under-employed or unemployed before you reach your number? Then, what? That is the more important thing that you need to worry about.
Do not count your chicken before your egg hatches. Putting more money into the Trad. 401K allow you to save more tax now. It lets you reach your number quicker. The danger zone for you is between now and when you reach your number. After you reach your number, then, you can worry about RMD and other stuff.
Paying more tax at 70 1/2 years old is not a bad thing. It meant you had done well. But, you need to reach your number first before it is safe to assume that.
100% into Trad. 401K now. Invest your tax savings. Nobody can guarantee you that your life will be sunny all the way for the next 24 years.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Roth vs. Traditional for RMD's & Tax Diversification
OP,
You could contribute 100% to Trad. 401K and put the tax savings into Roth IRA. Then, you have both: tax-deferred and Roth.
KlangFool
You could contribute 100% to Trad. 401K and put the tax savings into Roth IRA. Then, you have both: tax-deferred and Roth.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Roth vs. Traditional for RMD's & Tax Diversification
That's helpful, but still you will probably have to dig more into the details.dvd7e wrote: ↑Fri Oct 06, 2017 2:55 pmAge = 32 (same for spouse). Combined salary ~210k. Current retirement savings ~500k, hope to retire at 56. We're both maxing out our 401ks, and we both get around a 10% match, so total contribution is around 55k/year, or 26% of our combined salary. We're Married filing jointly in the 28% tax bracket, plus another ~6% in state taxes. Currently at 85%/15% Stocks/Bonds, will transition to maybe 40 or 50% stocks by age 55.JBTX wrote: ↑Fri Oct 06, 2017 2:13 pmYou really need to give more information in terms of savings, age, portfolio and tax status. Look for thread on asking questions up top. The answer can vary dramatically depending on your situation. There is a lot of stuff in the wiki on this too.dvd7e wrote: ↑Fri Oct 06, 2017 2:08 pm Should I be splitting my my 401k contributions 50/50 between Traditional and Roth, or contribute 100% to Roth?
I had been splitting *my* (as opposed to my Employer's match) 401k contributions 50/50 between Traditional 401(k) and Roth 401(k) for tax diversification and because of potential for RMDs (Required Minimum Distributions) I might lean more towards the Roth. Of the total contributions going into the 401(k), I'm making about 60% and my Employer is making 40%. However, I just realized that all of my Employer's match is taxable. If there were no RMD's on the Traditional 401k then I'd probably just do that 100% and take the tax break now...but I may end up with a large portfolio (the future is uncertain, but fingers crossed!) and may not require all of the RMD, in which case I'd prefer to keep more assets in the Roth.
I know that advice on this topic is usually given in terms of projected tax bracket in retirement vs. currently, but I'm also thinking in terms of avoiding excessive RMDs.
Having diversity in tax structure of retirement vehicles is a good idea. That doesn't mean you have to diversify right now.
Here is a link to monte carlo simulations at Portfolio Visualizer for this scenario:
https://www.portfoliovisualizer.com/fin ... foccurs3=3
And I'll say up front Klang and I often don't exactly agree on the subject, FWIW. He is big into 100% traditional, I tend to prefer to have a blend of traditional and Roth if the numbers are potentially close.
Given your relatively high combined tax rate (because of state income taxes), and given you could move to a state that has no income tax when you retire, and given when you are going to retire well before drawing social security, the numbers are probably going to come down in favor of traditional, assuming you manage it diligently and draw down and/or do Roth conversions to pull your balance down before Social security, and assuming tax rates don't increase materially over 20-30 years before you retire, and assuming social security taxes don't materially impact your situation, then the numbers probably favor traditional.
In my case, I don't make all of those assumptions and prefer to have some diversity between Roth and Traditional.
Re: Roth vs. Traditional for RMD's & Tax Diversification
I am kind of befuddled by this statement.KlangFool wrote: ↑Fri Oct 06, 2017 3:58 pm
Paying more tax at 70 1/2 years old is not a bad thing. It meant you had done well. But, you need to reach your number first before it is safe to assume that.
100% into Trad. 401K now. Invest your tax savings. Nobody can guarantee you that your life will be sunny all the way for the next 24 years.
KlangFool
Re: Roth vs. Traditional for RMD's & Tax Diversification
In the 28% tax bracket with the possibility of early retirement, I'd be using all or mostly traditional 401k, not Roth 401k. This is because you have a good likelihood of falling into the 15% bracket in retirement and you could do Roth conversions then at 15% instead of paying 28% now. You'd have more money in the end.
However, this also has to do with how much money you are saving each year, whether one or both of you are contributing to 401k, if you are able to contribute to Roth IRA also, If money is being saved in a taxable account and if you are willing and able to use the back door to get money into Roth IRA.
If you mean only 1 of the two of you is putting $9k into Roth instead of traditional, that might be OK. If both of you are doing that....probably too much based on the little information we have.
However, this also has to do with how much money you are saving each year, whether one or both of you are contributing to 401k, if you are able to contribute to Roth IRA also, If money is being saved in a taxable account and if you are willing and able to use the back door to get money into Roth IRA.
If you mean only 1 of the two of you is putting $9k into Roth instead of traditional, that might be OK. If both of you are doing that....probably too much based on the little information we have.
Link to Asking Portfolio Questions
Re: Roth vs. Traditional for RMD's & Tax Diversification
dvd7e wrote: ↑Fri Oct 06, 2017 2:08 pm
I had been splitting *my* (as opposed to my Employer's match) 401k contributions 50/50 between Traditional 401(k) and Roth 401(k) for tax diversification and because of potential for RMDs (Required Minimum Distributions) I might lean more towards the Roth. Of the total contributions going into the 401(k), I'm making about 60% and my Employer is making 40%. However, I just realized that all of my Employer's match is taxable.
On the surface these two statements don't seem consistent. One says 10% match, the other said 40%. And what do you mean match is taxable?dvd7e wrote: ↑Fri Oct 06, 2017 2:55 pm
Age = 32 (same for spouse). Combined salary ~210k. Current retirement savings ~500k, hope to retire at 56. We're both maxing out our 401ks, and we both get around a 10% match, so total contribution is around 55k/year, or 26% of our combined salary. We're Married filing jointly in the 28% tax bracket, plus another ~6% in state taxes. Currently at 85%/15% Stocks/Bonds, will transition to maybe 40 or 50% stocks by age 55.
Re: Roth vs. Traditional for RMD's & Tax Diversification
Assuming the numbers above, with no pension and all income from traditional withdrawals, withdrawing ~$94500 could give you ~$80K after tax.
For a couple with standard deduction only, $94500 AGI is the 15% federal bracket.
Saving 28% + 6% state now and paying 15% + (somethings less than 6%) later is a good deal, but you only get that deal if you use traditional accounts now.
Re: Roth vs. Traditional for RMD's & Tax Diversification
I meant that our employers are matching 10% of our salary, and that those employer contributions make up 40% of all the money going into the 401k (obviously the other 60% is from our direct contributions).JBTX wrote: ↑Fri Oct 06, 2017 6:03 pmdvd7e wrote: ↑Fri Oct 06, 2017 2:08 pm
I had been splitting *my* (as opposed to my Employer's match) 401k contributions 50/50 between Traditional 401(k) and Roth 401(k) for tax diversification and because of potential for RMDs (Required Minimum Distributions) I might lean more towards the Roth. Of the total contributions going into the 401(k), I'm making about 60% and my Employer is making 40%. However, I just realized that all of my Employer's match is taxable.
On the surface these two statements don't seem consistent. One says 10% match, the other said 40%. And what do you mean match is taxable?dvd7e wrote: ↑Fri Oct 06, 2017 2:55 pm
Age = 32 (same for spouse). Combined salary ~210k. Current retirement savings ~500k, hope to retire at 56. We're both maxing out our 401ks, and we both get around a 10% match, so total contribution is around 55k/year, or 26% of our combined salary. We're Married filing jointly in the 28% tax bracket, plus another ~6% in state taxes. Currently at 85%/15% Stocks/Bonds, will transition to maybe 40 or 50% stocks by age 55.
About the employer contributions being taxable, I meant that when I withdraw that money it will be subject to income taxes, as opposed to money in a Roth that is tax free at withdrawal
Re: Roth vs. Traditional for RMD's & Tax Diversification
Are you each putting in the maximum allowed 18k/yr into 401k + employer puts additional amount in?
If you have no (non-Roth) IRAs, you can contribute 5500/yr each to a Roth IRA. See "backdoor Roth" in Wiki.
Does your employer have provisions for your adding additional savings that can be transferred to a Roth?
Do you plan to convert some trad. IRA to Roth IRA during lower income years between retirement and SS/RMD at age 70?
Have you cosidered high deductible health insurance with the option of saving pre-tax HSA and using it for future medical costs in retirement tax-free or like a trad. IRA in worst case?
If you have no (non-Roth) IRAs, you can contribute 5500/yr each to a Roth IRA. See "backdoor Roth" in Wiki.
Does your employer have provisions for your adding additional savings that can be transferred to a Roth?
Do you plan to convert some trad. IRA to Roth IRA during lower income years between retirement and SS/RMD at age 70?
Have you cosidered high deductible health insurance with the option of saving pre-tax HSA and using it for future medical costs in retirement tax-free or like a trad. IRA in worst case?
Re: Roth vs. Traditional for RMD's & Tax Diversification
If they have $500K now, lets say for argument sake in 25 years they have $1.25M in today's dollars - that is pretty conservative.FiveK wrote: ↑Fri Oct 06, 2017 9:54 pmAssuming the numbers above, with no pension and all income from traditional withdrawals, withdrawing ~$94500 could give you ~$80K after tax.
For a couple with standard deduction only, $94500 AGI is the 15% federal bracket.
Saving 28% + 6% state now and paying 15% + (somethings less than 6%) later is a good deal, but you only get that deal if you use traditional accounts now.
They are both working and putting amounts in 401k. Obviously their situation could change, but let's just say 20 years times 25K contributions per year = 500k, and we will simplistically increase it by 50% in real terms due to compounding by retirement, = $750k
That's $2M total ($1.25M + $750k, which I would argue is a conservative #) in traditional if all amounts are contributed to traditional.
They retire at 56, draw SS at 68 (or maybe older). Draw on Traditionals for 12 years. Assume draw approx 5%, or $100K, which is just over 15% tax max with standard deductions, etc (either draw for use or Roth conversion to top of 15%). Assume portfolio growth of 3% real. Net decrease of 2% per year for 12 years. Without doing exact math, lets say that leaves 80%, or $1,600,000 in starting at 68.
68-70 live off of social security, and minor withdrawals from traditional 401ks. Assume still at $1.6M at age 70.
RMD at 70.5 = 3.65% on $1.6M = 65700
Social Security for 2 earners = $60,000??? times .85 = $51,000
Total income = $116,700
Less tax deductions = $22,000
Taxable income = $94,700.
That is well above the 25% taxable income threshold of $75,900 (today's dollars).
If they stay in the same state (or move to another high tax state) at this point they are at a push, and actually may favor a Roth marginally, considering Roth after tax contribution dollars (if they are maxing contributions) are worth more than traditional after tax dollars.
If they move to a low or no income tax state, and if nothing changes in terms of tax rates, and ignoring any marginal tax rate affects of the SS, they are better off going with traditional, but not by a whole lot, considering the greater portion invested after tax in a ROTH.
Thus I would argue that given it is fairly close, better to hedge our bets and have both Traditional and Roth, and also have some of the flexibility of the Roths for inheritance, etc.
Is there anything wrong with my math above? Admittedly it is back of the envelope.
PS: They could likely get some of that Roth by contributing to Roths, or backdoor Roths, or maybe even mega back door roths over the years also
Re: Roth vs. Traditional for RMD's & Tax Diversification
Another way to play with this is to hold bonds in traditional and equities in Roth (or better, perhaps small cap and international specifically). If equities go on a tear and your portfolio grows significantly, those gains will be on the Roth side and wouldn't mess with RMD.
I tend to agree with KlangFool and prefer traditional with rare exception. Not having enough money (involuntary retirement, chronic illness, SS insolvency, legislation hostile to Roth, VAT tax) is a much worse problem than having too much and having to pay higher taxes in retirement.
As a younger guy, I look at funding retirement as filling up different buckets. Until I can be assured that the "bucket" of traditional money that fills up the 15% bracket to the very top from the date of retirement until the day I die is full - perhaps this is a few million dollars - I don't need to worry about funding Roth very much.
I tend to agree with KlangFool and prefer traditional with rare exception. Not having enough money (involuntary retirement, chronic illness, SS insolvency, legislation hostile to Roth, VAT tax) is a much worse problem than having too much and having to pay higher taxes in retirement.
As a younger guy, I look at funding retirement as filling up different buckets. Until I can be assured that the "bucket" of traditional money that fills up the 15% bracket to the very top from the date of retirement until the day I die is full - perhaps this is a few million dollars - I don't need to worry about funding Roth very much.
51% US / 34% ex-US / 15% “bond”
Re: Roth vs. Traditional for RMD's & Tax Diversification
The top of 15% is right around $100K for married MFJ, when you add in standard deductions and 2 exemptions. Let's say the couple has $50K combined SS, at 85% taxability that is $42,500. So you would need $57,500 withdrawals to get to top of 15%.camillus wrote: ↑Fri Oct 06, 2017 11:46 pm Another way to play with this is to hold bonds in traditional and equities in Roth (or better, perhaps small cap and international specifically). If equities go on a tear and your portfolio grows significantly, those gains will be on the Roth side and wouldn't mess with RMD.
I tend to agree with KlangFool and prefer traditional with rare exception. Not having enough money (involuntary retirement, chronic illness, SS insolvency, legislation hostile to Roth, VAT tax) is a much worse problem than having too much and having to pay higher taxes in retirement.
As a younger guy, I look at funding retirement as filling up different buckets. Until I can be assured that the "bucket" of traditional money that fills up the 15% bracket to the very top from the date of retirement until the day I die is full - perhaps this is a few million dollars - I don't need to worry about funding Roth very much.
57,500/.0365 = $1,575,000. That's a lot less than "a few million dollars".
Everybody seems to ignore the impact of taxability of social security in retirement.
Also, not sure what "legislation hostile to Roth" is.
Re: Roth vs. Traditional for RMD's & Tax Diversification
First of all, I'm learning as I go. As I said, I'm a young guy (with a 5 figure portfolio). That said:JBTX wrote: ↑Sat Oct 07, 2017 12:09 am The top of 15% is right around $100K for married MFJ, when you add in standard deductions and 2 exemptions. Let's say the couple has $50K combined SS, at 85% taxability that is $42,500. So you would need $57,500 withdrawals to get to top of 15%.
57,500/.0365 = $1,575,000. That's a lot less than "a few million dollars".
Everybody seems to ignore the impact of taxability of social security in retirement.
Also, not sure what "legislation hostile to Roth" is.
If a person retires early and delays taking SS, then you can use the 15% bracket to the top to withdraw from Traditional and fund Roth or Taxable to evade RMD. So for the period between early retirement and SS, to get to the top of the 15% bracket - it would look like:
100k/0.0365 = a portfolio of $2.7 million buckaroos in traditional
Consider too that since the OP is in the 28% bracket, you could play with the 25% bracket as well. Electing to pay some 25% taxes in early retirement may be better than paying 28% for the privilege of investing in Roth.
I don't mean to squabble, the point I'm trying to make is just that traditional money in most cases seems like it should be the lion's share of tax management. If you look up while you are working and see that you have too much money in traditional, retire immediately
(Roth legislation isn't really worth talking about as it is speculation and would get this wonderful thread locked, I shouldn't have mentioned it. Apologies.)
51% US / 34% ex-US / 15% “bond”
Re: Roth vs. Traditional for RMD's & Tax Diversification
The math itself looks fine. And it is certainly possible to put "too much" into traditional plans.
But let's discuss assumptions. E.g., what if
...children enter the picture and one spouse decides to stay home, or
...Mr. & Mrs. OP wake up on their 45th birthday and realize "wow, we could retire today, have plenty for the next 25 years, and then even more when SS kicks in at age 70", or
...etc.?
The earlier they retire, the more favorable traditional; the longer they actually work, the more favorable Roth.
Re: Roth vs. Traditional for RMD's & Tax Diversification
In the OP's case I figured his traditional bucket would be $2M at 56, and he would pull out $100K per year for 12 years until 68, but the balance would grow 3% real, or approx $60K for year - for a net decrease of $40K per year. Over 12 years I said that gets you to approx $1.6M. Let's revise that to $1.5M.camillus wrote: ↑Sat Oct 07, 2017 12:28 amFirst of all, I'm learning as I go. As I said, I'm a young guy (with a 5 figure portfolio). That said:JBTX wrote: ↑Sat Oct 07, 2017 12:09 am The top of 15% is right around $100K for married MFJ, when you add in standard deductions and 2 exemptions. Let's say the couple has $50K combined SS, at 85% taxability that is $42,500. So you would need $57,500 withdrawals to get to top of 15%.
57,500/.0365 = $1,575,000. That's a lot less than "a few million dollars".
Everybody seems to ignore the impact of taxability of social security in retirement.
Also, not sure what "legislation hostile to Roth" is.
If a person retires early and delays taking SS, then you can use the 15% bracket to the top to withdraw from Traditional and fund Roth or Taxable to evade RMD. So for the period between early retirement and SS, to get to the top of the 15% bracket - it would look like:
100k/0.0365 = a portfolio of $2.7 million buckaroos in traditional
$1.5M, when combined with 85% of social security, will get you well into the 25% tax bracket.
I misread, I thought he said he was in 25% bracket, vs 28%. Still, it doesn't alter the calculus dramatically.Consider too that since the OP is in the 28% bracket, you could play with the 25% bracket as well. Electing to pay some 25% taxes in early retirement may be better than paying 28% for the privilege of investing in Roth.
I'm not arguing with "lion's share", or at least majority in traditional. I am arguing against 100%.I don't mean to squabble, the point I'm trying to make is just that traditional money in most cases seems like it should be the lion's share of tax management. If you look up while you are working and see that you have too much money in traditional, retire immediately
Yeah, i wish we could discuss. This isn't the first time I've heard it.(Roth legislation isn't really worth talking about as it is speculation and would get this wonderful thread locked, I shouldn't have mentioned it. Apologies.)
Re: Roth vs. Traditional for RMD's & Tax Diversification
I will agree with that. If you did the math, if you took their current amount of $500K (which I am assuming is all traditional) plus their next couple of years of heavy traditional contributions, the resulting amount, projected 25 years forward, may be enough in itself to get you to the top of the 15% bracket, adding taxable social security on top. So even if kids appear in 5 years, they are already at that threshold. And if you have kids, you probably work longer, and would like to pass some on them via your estate, where Roth is more favorable.FiveK wrote: ↑Sat Oct 07, 2017 12:43 amThe math itself looks fine. And it is certainly possible to put "too much" into traditional plans.
But let's discuss assumptions. E.g., what if
...children enter the picture and one spouse decides to stay home, or
...Mr. & Mrs. OP wake up on their 45th birthday and realize "wow, we could retire today, have plenty for the next 25 years, and then even more when SS kicks in at age 70", or
...etc.?
The earlier they retire, the more favorable traditional; the longer they actually work, the more favorable Roth.
As to retiring in early 40's, yeah, I guess so, but it is just hard for me to get my arms around anybody really wanting to do that. There are so many things that could happen that could turn that into a very risky scenario - prolonged market crashes (Japan), legislation unfavorable to retirement savings, inflation...or god forbid medical advances that cause people to live to 110 (not implausible for 30 year olds). Working for 20 years and retiring for 60-70 years just doesn't make any sense.
Re: Roth vs. Traditional for RMD's & Tax Diversification
Ya, I strongly agree with this, just seems very risky, that’s why I would have to be extra confident in my “number” before pulling the trigger on such an early retirement. Especially with future college expenses for kids still in play.As to retiring in early 40's, yeah, I guess so, but it is just hard for me to get my arms around anybody really wanting to do that. There are so many things that could happen that could turn that into a very risky scenario - prolonged market crashes (Japan), legislation unfavorable to retirement savings, inflation...or god forbid medical advances that cause people to live to 110 (not implausible for 30 year olds). Working for 20 years and retiring for 60-70 years just doesn't make any sense.
I have 1 child, with maybe 2 more someday. That was kind of at the heart of the original question....how to best plan for potential inheritance/legacy given that Roth is a better option for that than the traditional. But I forgot about Traditional to Roth conversions as an option. Although if I’m fortunate enough to be in a high net worth situation, I may make some large charitable donations to reduce my taxable income...which should allow me to convert more money from Traditional to Roth per year before pushing me into the next tax bracket right?And if you have kids, you probably work longer, and would like to pass some on them via your estate, where Roth is more favorable.
Re: Roth vs. Traditional for RMD's & Tax Diversification
I guess I’m just ignorant on this one....why is this topic off limits?(Roth legislation isn't really worth talking about as it is speculation and would get this wonderful thread locked, I shouldn't have mentioned it. Apologies.)
Re: Roth vs. Traditional for RMD's & Tax Diversification
From the forum rules:
I'm not part of the forum management, but I suspect it's because that kind of discussion ends up being a long drawn out debate with nothing actionable being discussed.Note that discussions of proposed laws or regulations are prohibited.
Re: Roth vs. Traditional for RMD's & Tax Diversification
You could contribute 100% to Trad. 401K and put the tax savings into Roth IRA. Then, you have both: tax-deferred and Roth.
Those are both good info. As usual, there is not a definitive answer about what is optimal for the rest of the OP's financial life.The earlier they retire, the more favorable traditional; the longer they actually work, the more favorable Roth.
tIRA is traditional IRA
RIRA is Roth IRA
In early retirement, you can do annual Roth conversions from the 401k rollover/tIRA into the RIRA. Each one seems inconsequential, but after a dozen years of them, the boost in the RIRA is noticeable. Someone wrote that Roth conversions were an indirect form of tax loss harvesting using tax sheltered accounts.
Retirees try to store their low growth bonds in the tIRA, and store the hopefully higher growth equities in the RIRA. Michael H. McClung suggests spending from bonds first to let the equities grow longer, which would also help reduce the future RMDs in the tIRA. We do what looks best at this time, knowing it will likely not be optimal since we do not know the future.
Re: Roth vs. Traditional for RMD's & Tax Diversification
JBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:00 am
As to retiring in early 40's, yeah, I guess so, but it is just hard for me to get my arms around anybody really wanting to do that. There are so many things that could happen that could turn that into a very risky scenario - prolonged market crashes (Japan), legislation unfavorable to retirement savings, inflation...or god forbid medical advances that cause people to live to 110 (not implausible for 30 year olds). Working for 20 years and retiring for 60-70 years just doesn't make any sense.
Both my older brother and older sister early retired at 49 years old. In the case of my older brother, he early retired when both of his children went to college. They had been retired 10+ years. They traveled anywhere in the world as they like.
It is hard for me to imagine that I worked at 60s years old.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Roth vs. Traditional for RMD's & Tax Diversification
To each his own. More power to them. It just seems like a risky strategy to me.KlangFool wrote: ↑Sat Oct 07, 2017 12:29 pmJBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:00 am
As to retiring in early 40's, yeah, I guess so, but it is just hard for me to get my arms around anybody really wanting to do that. There are so many things that could happen that could turn that into a very risky scenario - prolonged market crashes (Japan), legislation unfavorable to retirement savings, inflation...or god forbid medical advances that cause people to live to 110 (not implausible for 30 year olds). Working for 20 years and retiring for 60-70 years just doesn't make any sense.
Both my older brother and older sister early retired at 49 years old. In the case of my older brother, he early retired when both of his children went to college. They had been retired 10+ years. They traveled anywhere in the world as they like.
It is hard for me to imagine that I worked at 60s years old.
KlangFool
As to working at 60 it really depends. If it is something I like doing then that is fine. But I absolutely don't want to working at a job i dislike. Kind of hard to believe that is only six years away. Our situation is somewhat different as we have two teenage kids and one will go to college and the other is special needs who will likely need some sort of long term assistance. So I'm not sure I would ever feel we had "enough".
Re: Roth vs. Traditional for RMD's & Tax Diversification
JBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:10 pmTo each his own. More power to them. It just seems like a risky strategy to me.KlangFool wrote: ↑Sat Oct 07, 2017 12:29 pmJBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:00 am
As to retiring in early 40's, yeah, I guess so, but it is just hard for me to get my arms around anybody really wanting to do that. There are so many things that could happen that could turn that into a very risky scenario - prolonged market crashes (Japan), legislation unfavorable to retirement savings, inflation...or god forbid medical advances that cause people to live to 110 (not implausible for 30 year olds). Working for 20 years and retiring for 60-70 years just doesn't make any sense.
Both my older brother and older sister early retired at 49 years old. In the case of my older brother, he early retired when both of his children went to college. They had been retired 10+ years. They traveled anywhere in the world as they like.
It is hard for me to imagine that I worked at 60s years old.
KlangFool
As to working at 60 it really depends. If it is something I like doing then that is fine. But I absolutely don't want to working at a job i dislike. Kind of hard to believe that is only six years away. Our situation is somewhat different as we have two teenage kids and one will go to college and the other is special needs who will likely need some sort of long term assistance. So I'm not sure I would ever feel we had "enough".
1) One of my nephews is 21 years old. He is autistic and on disability. Many of my family members are autistic. So, I do understand the issues surrounding kids with a special need.
2) The other one of my older brother passed his full physical medical exam without a problem. Then, he fainted in the bathroom. They found a brain tumor in his head. He died 6 months later. Just about time for him to retire. So, there is a risk to work longer too.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Roth vs. Traditional for RMD's & Tax Diversification
Sorry to hear about your brother. I'm sure that was tough.KlangFool wrote: ↑Sat Oct 07, 2017 1:19 pmJBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:10 pmTo each his own. More power to them. It just seems like a risky strategy to me.KlangFool wrote: ↑Sat Oct 07, 2017 12:29 pmJBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:00 am
As to retiring in early 40's, yeah, I guess so, but it is just hard for me to get my arms around anybody really wanting to do that. There are so many things that could happen that could turn that into a very risky scenario - prolonged market crashes (Japan), legislation unfavorable to retirement savings, inflation...or god forbid medical advances that cause people to live to 110 (not implausible for 30 year olds). Working for 20 years and retiring for 60-70 years just doesn't make any sense.
Both my older brother and older sister early retired at 49 years old. In the case of my older brother, he early retired when both of his children went to college. They had been retired 10+ years. They traveled anywhere in the world as they like.
It is hard for me to imagine that I worked at 60s years old.
KlangFool
As to working at 60 it really depends. If it is something I like doing then that is fine. But I absolutely don't want to working at a job i dislike. Kind of hard to believe that is only six years away. Our situation is somewhat different as we have two teenage kids and one will go to college and the other is special needs who will likely need some sort of long term assistance. So I'm not sure I would ever feel we had "enough".
1) One of my nephews is 21 years old. He is autistic and on disability. Many of my family members are autistic. So, I do understand the issues surrounding kids with a special need.
2) The other one of my older brother passed his full physical medical exam without a problem. Then, he fainted in the bathroom. They found a brain tumor in his head. He died 6 months later. Just about time for him to retire. So, there is a risk to work longer too.
KlangFool
There is indeed a balance and sometimes that is hard to find. At this point I won't work a job I hate and if I make less money that is fine. I haven't worked for a few months and while it has its perks it isn't in itself fulfilling. With two kids in school and a working spouse (who luckily has good income and enjoys her job) it isn't as if I have the option of traveling the world. I am starting to learn more about what our sons long term care strategies may be. That will be a process in itself.
Re: Roth vs. Traditional for RMD's & Tax Diversification
JBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:38 pm
Sorry to hear about your brother. I'm sure that was tough.
There is indeed a balance and sometimes that is hard to find. At this point I won't work a job I hate and if I make less money that is fine. I haven't worked for a few months and while it has its perks it isn't in itself fulfilling. With two kids in school and a working spouse (who luckily has good income and enjoys her job) it isn't as if I have the option of traveling the world. I am starting to learn more about what our sons long term care strategies may be. That will be a process in itself.
1) I had been unemployed for more than 1 year a few times. The last time was about 2 to 3 years ago when both of my kids about to enter college. My only advice to you is you should exercise regularly.
<<it isn't in itself fulfilling.>>
2) I had accomplished enough in my career that I no longer look towards my job for fulfillment. It is just something that I do to make money.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Roth vs. Traditional for RMD's & Tax Diversification
Yes I agree and I'm disappointed in myself for not really doing this. I have the time, but not the motivation. I'm going to try to get back on it this week.KlangFool wrote: ↑Sat Oct 07, 2017 1:57 pmJBTX,JBTX wrote: ↑Sat Oct 07, 2017 1:38 pm
Sorry to hear about your brother. I'm sure that was tough.
There is indeed a balance and sometimes that is hard to find. At this point I won't work a job I hate and if I make less money that is fine. I haven't worked for a few months and while it has its perks it isn't in itself fulfilling. With two kids in school and a working spouse (who luckily has good income and enjoys her job) it isn't as if I have the option of traveling the world. I am starting to learn more about what our sons long term care strategies may be. That will be a process in itself.
1) I had been unemployed for more than 1 year a few times. The last time was about 2 to 3 years ago when both of my kids about to enter college. My only advice to you is you should exercise regularly.
I am generally the same way. Fulfilling isn't the best word. I guess I enjoy being busy doing something I like to do, and I do enjoy it when I feel like I've added value. I tended to get more of that when working consulting/1099 gigs. Employment is much more complicated, and generally not as enjoyable.<<it isn't in itself fulfilling.>>
2) I had accomplished enough in my career that I no longer look towards my job for fulfillment. It is just something that I do to make money.
KlangFool