Why traditional IRA better than Roth IRA

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FireAway
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Re: Why traditional IRA better than Roth IRA

Post by FireAway » Fri Apr 13, 2018 10:28 am

A law is not a contract. It can be changed at any time, one party (the legislator, that is) can rip it up and rewrite it at any time, no correction is available through the court system.

aristotelian
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Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Fri Apr 13, 2018 10:31 am

JBTX wrote:
Fri Apr 13, 2018 10:14 am

Maybe but effective rate is irrelevant.
Yes and no. What is relevant is the effective rate on the IRA distribution. That is different from both the overall effective rate and the marginal rate.

wrongfunds
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Re: Why traditional IRA better than Roth IRA

Post by wrongfunds » Fri Apr 13, 2018 10:41 am

You are so right. When has taxes ever gone down? They always go up!


Oops, never mind :-)

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celia
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Re: Why traditional IRA better than Roth IRA

Post by celia » Fri Apr 13, 2018 11:51 am

misterno wrote:
Wed Apr 11, 2018 4:21 pm
Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning. Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year
OP, Where does your family member get the number $72K from as some kind of threshold? Is the taxpayer assumed to be Single or Married? Is it assumed they are over 65 when they withdraw? (There seems to be some assumptions here that weren't stated although the entire hypothesis is faulty.)

As far as comparing your current tax rates to those in effect when you retire, keep in mind that tax laws and rates change about every 10 years. So the laws can change several times between now and when you turn 50 1/2. We are at historically low tax rates at the moment, so it makes sense to me to pay taxes at the current rates.

It also depends on where you are in your career. If you are young and just starting your working years, you can probably expect your wages (and thus your marginal tax bracket) to go up in the future. In this case, you probably want to contribute to a Roth now and pay taxes on the lower income. When you get to mid-career years, it often makes sense to defer the taxes by contributing to Traditional instead, if you have a better sense that your retirement years' tax brackets will be the same or lower.

Bfwolf wrote:
Thu Apr 12, 2018 7:42 pm
Let's compare $10,000 and a decision to contribute it to a traditional IRA and pay taxes later vs pay taxes on it now and contribute to a Roth IRA. Let's assume a 20% marginal tax bracket both now and in retirement in 10 years. Let's assume a 6% compound annual growth rate.

Scenario 1, traditional IRA: You put $10,000 in the traditional IRA. In 10 years, it grows to $17,908.48. You withdraw it, and pay 20% in taxes, leaving you with $14,326.78.

Scenario 2, Roth IRA: You pay 20% in taxes up front and so put $8,000 in the Roth IRA. In 10 years, it grows to $14,326.78.
This example is true only when you pay the taxes from the pot of money, when it goes in, and when it comes out. But why would you waste your tax-deferred dollars on taxes if you can pay the taxes out of your income or taxable assets? This is especially true for a Roth conversion. If you decide to do a partial Roth conversion at some point, you should try to get all of those dollars into the Roth, not some to the taxman.

Looking at Scenario 1, If you put $10,000 in a traditional IRA and withdraw it when it grows to $17,908.48, you will have to pay more in taxes than if you had just paid taxes on the original $10,000. So keep in mind that your future taxes on today's tax-deferred contribution will be based on a likely much bigger value in the future, especially if you have more than 10 years for the money to grow.

(also see my signature below)
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: Why traditional IRA better than Roth IRA

Post by Bfwolf » Fri Apr 13, 2018 12:22 pm

celia wrote:
Fri Apr 13, 2018 11:51 am
This example is true only when you pay the taxes from the pot of money, when it goes in, and when it comes out. But why would you waste your tax-deferred dollars on taxes if you can pay the taxes out of your income or taxable assets? This is especially true for a Roth conversion. If you decide to do a partial Roth conversion at some point, you should try to get all of those dollars into the Roth, not some to the taxman.

Looking at Scenario 1, If you put $10,000 in a traditional IRA and withdraw it when it grows to $17,908.48, you will have to pay more in taxes than if you had just paid taxes on the original $10,000. So keep in mind that your future taxes on today's tax-deferred contribution will be based on a likely much bigger value in the future, especially if you have more than 10 years for the money to grow.

(also see my signature below)
I believe what I showed is the true apples to apples comparison. I suppose it is true that since IRA contributions are capped, putting the max in a Roth IRA is a bit more attractive than putting the money in a tIRA. Let's assume taxable accounts only grow at 5.7% instead of 6% due to dividend tax drag and that there's either a 0% or 15% capital gains tax at the end (would depend on the tax bracket).

Scenario 1, traditional IRA: Same as I listed above. You end up with $14,326.78

Scenario 2, Roth IRA. You contribute $10,000 and over 10 years it grows to $17,908.48. But you had to pay $2,000 in taxes from a taxable account when you made the contribution. Growing at 5.7% per year, that $2,000 would've grown to $3,481.61. So in a 0% capital gains tax bracket, you'd end up with $17,908.48 - $3,481.61 = $14,426.87. About $100 ahead of the tIRA. In a 15% capital gains tax bracket, you'd end up with $14,649.11. A more significant difference.

Over more years, this adds up to bigger $ amounts. So I think it's a fair point. But even over a 30 year period, you come out ahead with the tIRA if your tax bracket in retirement is 15% versus the 20% while working, and that's assuming you pay the full 15% in capital gains. I think most people on this forum expect their tax bracket to drop by more than 5% when they retire.

Chip
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Re: Why traditional IRA better than Roth IRA

Post by Chip » Fri Apr 13, 2018 12:27 pm

FireAway wrote:
Fri Apr 13, 2018 10:28 am
A law is not a contract. It can be changed at any time, one party (the legislator, that is) can rip it up and rewrite it at any time, no correction is available through the court system.
Absolutely.

Real estate passive losses were immediately deductible against other ordinary income by nearly all individual taxpayers as a matter of law. Until they weren't, starting in 1987.

As mentioned above, Social Security benefits were once explicitly excluded from federal income taxation. Until they weren't, starting in 1984. Then, by law, only a maximum of 50% of benefits was taxed. Until the maximum amount subject to taxation was changed to 85%, by law, in 1993.

60% of long term capital gains used to be excluded from gross income, by law. Until that law was changed in 1986.

JBTX
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Re: Why traditional IRA better than Roth IRA

Post by JBTX » Fri Apr 13, 2018 12:31 pm

aristotelian wrote:
Fri Apr 13, 2018 10:31 am
JBTX wrote:
Fri Apr 13, 2018 10:14 am

Maybe but effective rate is irrelevant.
Yes and no. What is relevant is the effective rate on the IRA distribution. That is different from both the overall effective rate and the marginal rate.
What is relevant is the marginal rate of the distribution. Not all dollars will be distributed at the same marginal rate. In the example I responded to, you could distribute something around $24,000 and have no income tax, even if receiving social security. The marginal tax rate of those distributions is zero. The next $16,000 of distributions generates taxes of around $5000, thus something around 28% marginal rate on that 16,000. So from a contribution perspective, doing enough traditional contributions to get to about $24,000 of annual distribution income in retirement (give or take) is a no brainer. That would be approximately $600,000. Above that it gets really tricky.

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Re: Why traditional IRA better than Roth IRA

Post by White Coat Investor » Fri Apr 13, 2018 12:32 pm

misterno wrote:
Wed Apr 11, 2018 4:21 pm
So I have this discussion with a family member. I was gonna support Roth IRA but it turns out traditional IRA is a way better idea

Here is what he said

Traditional IRA is way better than Roth IRA because you do not pay tax in the beginning. Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year

That way you don't pay tax ever. It turns out IRS does not tax dividends and capital gains up to 72K/year if you have no other income.

Are these all true? Then why is Roth IRA so popular in this forum?
The main problem with a traditional IRA is that very few people on this forum are choosing between a deductible traditional IRA and a Roth IRA. In fact, lots of us can't deduct a traditional IRA contribution OR contribute directly to a Roth IRA. We're choosing between a taxable account, a non-deductible traditional IRA, and a Backdoor Roth IRA. In that calculation, the Backdoor Roth IRA ALWAYS wins.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

JBTX
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Re: Why traditional IRA better than Roth IRA

Post by JBTX » Fri Apr 13, 2018 12:54 pm

Bfwolf wrote:
Fri Apr 13, 2018 12:22 pm
celia wrote:
Fri Apr 13, 2018 11:51 am
This example is true only when you pay the taxes from the pot of money, when it goes in, and when it comes out. But why would you waste your tax-deferred dollars on taxes if you can pay the taxes out of your income or taxable assets? This is especially true for a Roth conversion. If you decide to do a partial Roth conversion at some point, you should try to get all of those dollars into the Roth, not some to the taxman.

Looking at Scenario 1, If you put $10,000 in a traditional IRA and withdraw it when it grows to $17,908.48, you will have to pay more in taxes than if you had just paid taxes on the original $10,000. So keep in mind that your future taxes on today's tax-deferred contribution will be based on a likely much bigger value in the future, especially if you have more than 10 years for the money to grow.

(also see my signature below)
I believe what I showed is the true apples to apples comparison. I suppose it is true that since IRA contributions are capped, putting the max in a Roth IRA is a bit more attractive than putting the money in a tIRA. Let's assume taxable accounts only grow at 5.7% instead of 6% due to dividend tax drag and that there's either a 0% or 15% capital gains tax at the end (would depend on the tax bracket).

Scenario 1, traditional IRA: Same as I listed above. You end up with $14,326.78

Scenario 2, Roth IRA. You contribute $10,000 and over 10 years it grows to $17,908.48. But you had to pay $2,000 in taxes from a taxable account when you made the contribution. Growing at 5.7% per year, that $2,000 would've grown to $3,481.61. So in a 0% capital gains tax bracket, you'd end up with $17,908.48 - $3,481.61 = $14,426.87. About $100 ahead of the tIRA. In a 15% capital gains tax bracket, you'd end up with $14,649.11. A more significant difference.

Over more years, this adds up to bigger $ amounts. So I think it's a fair point. But even over a 30 year period, you come out ahead with the tIRA if your tax bracket in retirement is 15% versus the 20% while working, and that's assuming you pay the full 15% in capital gains. I think most people on this forum expect their tax bracket to drop by more than 5% when they retire.
The Way I look at it is if you contribute the max, then with the traditional you need to invest the tax savings in a taxable account. Typically over decades by the time you pull it out you have increased distribution marginal rates by 2% to 3%, which is generally consistent with that you are saying.

While everybody here automatically assumes you will invest the tax savings of the traditional in a taxable account until retirment, I don’t think that is the default assumption for your typical investor.

If both spouses plan to retire well before either draws social security, then they likely can do conversions to Roth in a lower rate. Once you start drawing social security, the computation gets much more complicated. You can safely withdraw $20-$24k with no taxes, but once the social security taxability thresholds are met $32k and $44k but declining in real inflation adjusted terms, the marginal rate increases substantially.

As I see it, there are numerous advantages to Roth that make it worthwhile even if you expect the withdrawal rate to be 5% higher. No RMDs or RMD income. If you kept the Roth invested it would do slightly better than the taxable account filled by RMD income (depends on rate). If you plan to pass on to heirs then Roth has big advantage, especially if you want to leave money to heirs in trust (see BSteiner post above).

fujiters
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Re: Why traditional IRA better than Roth IRA

Post by fujiters » Fri Apr 13, 2018 2:09 pm

aristotelian wrote:
Thu Apr 12, 2018 7:41 pm
JBTX wrote:
Thu Apr 12, 2018 4:49 pm
livesoft wrote:
Wed Apr 11, 2018 6:48 pm


I haven't run the numbers, but suppose a MFJ family had $72K a year from $30K Social Security checks and $42K from a traditional IRA withdrawal. How much Federal income tax would they pay?
You might be surprised.

If you assume someone around 54 currently, and assume tax rates revert to 2017 rates and brackets, as per current law, the total amount would be around $5300.

That would actually fall into a 27.75% marginal rate, due to taxability of social security impact.
But that is only a 7% effective rate.
And the money that was put in would have been taxed entirely at whatever your marginal rate was (likely much higher than 7%).

Pigeye Brewster
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Re: Why traditional IRA better than Roth IRA

Post by Pigeye Brewster » Fri Apr 13, 2018 2:15 pm

Chip wrote:
Fri Apr 13, 2018 12:27 pm
FireAway wrote:
Fri Apr 13, 2018 10:28 am
A law is not a contract. It can be changed at any time, one party (the legislator, that is) can rip it up and rewrite it at any time, no correction is available through the court system.
Absolutely.

Real estate passive losses were immediately deductible against other ordinary income by nearly all individual taxpayers as a matter of law. Until they weren't, starting in 1987.

As mentioned above, Social Security benefits were once explicitly excluded from federal income taxation. Until they weren't, starting in 1984. Then, by law, only a maximum of 50% of benefits was taxed. Until the maximum amount subject to taxation was changed to 85%, by law, in 1993.

60% of long term capital gains used to be excluded from gross income, by law. Until that law was changed in 1986.
Agree 100% on this. No current legislative body, e.g. Congress, can pass a law that is binding on a future legislative body. Congress is really limited only by the Constitution in terms of what legislation they could pass. Since qualified Roth withdrawals being exempt from taxation is not in the Constitution, a future Congress could subject them to taxation.

However, there would likely be a steep political price to pay for doing so. Senior citizens tend to vote at higher levels and taxing Roth withdrawals would directly affect many in that demographic. Social Security is often called the "third rail of American politics" for this very reason.

MrPotatoHead
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Re: Why traditional IRA better than Roth IRA

Post by MrPotatoHead » Fri Apr 13, 2018 2:25 pm

One thing I do not think anyone has mentioned so far is, in general (thought not absolute) a ROTH IRA is normally preferred as part of an inheritance. So for legacy builders, that is an important consideration. This is not a minor point if you wish to pass assets to another generation.

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JoMoney
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Re: Why traditional IRA better than Roth IRA

Post by JoMoney » Fri Apr 13, 2018 2:28 pm

Taxes could change in any number of ways. We could speculate all day about whether or not future tax law might in some way apply a tax to roth funds, or even change other taxes to make roth less desirable on a relative basis... what if we ended income tax and moved to a consumption/sales/VAT tax? What if taxes were lowered on traditional IRAs and other retirement funds? What if it modified total income and put other income like social security into a higher bracket? What if ... ?
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Re: Why traditional IRA better than Roth IRA

Post by BigJohn » Fri Apr 13, 2018 2:45 pm

Who wrote:
Fri Apr 13, 2018 9:53 am
I don't understand the example of Social Security taxation. "Common belief" is not law. If it isn't written into law that Social Security will not be taxed, then of course it can (will) be taxed in the future.
Other have addressed the point that a law is not a contract. For the history of SS taxation, https://www.ssa.gov/history/taxationofbenefits.html
Since a pair of 1938 Treasury Department Tax Rulings, and another in 1941, Social Security benefits have been explicitly excluded from federal income taxation. (A revision was issued in 1970, but it made no changes in the existing policy.) This changed for the first time with the passage of the 1983 Amendments to the Social Security Act. Beginning in 1984, a portion of Social Security benefits have been subject to federal income taxes.
The rulings were presumable an interpretation of the existing law which was subsequently changed.

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Re: Why traditional IRA better than Roth IRA

Post by Miriam2 » Fri Apr 13, 2018 3:36 pm

Bfwolf wrote:
misterno wrote: when withdrawal time comes total money will be much bigger and with Roth I am not paying any tax whereas with traditional I would be.
This is a common fallacy. It doesn't matter that the money will be greater when you take it out. Here's a simple exercise to prove the point.

Let's compare $10,000 and a decision to contribute it to a traditional IRA and pay taxes later vs pay taxes on it now and contribute to a Roth IRA. Let's assume a 20% marginal tax bracket both now and in retirement in 10 years. Let's assume a 6% compound annual growth rate.

Scenario 1, traditional IRA: You put $10,000 in the traditional IRA. In 10 years, it grows to $17,908.48. You withdraw it, and pay 20% in taxes, leaving you with $14,326.78.

Scenario 2, Roth IRA: You pay 20% in taxes up front and so put $8,000 in the Roth IRA. In 10 years, it grows to $14,326.78.

As you can see, you end up with the same amount of money both ways, despite the fact that you paid tax on a much bigger number with the tIRA since taxes were deferred.

The key driver for why you should prefer a tIRA to a Roth IRA is tax bracket....if you will be in a lower tax bracket in retirement, choose traditional. Vice versa, choose Roth.

Being able to withdraw your Roth contribution, which you mentioned, is another Roth benefit.
Bfwolf, I understand your simple tax example, tax in or tax out on X amount - but what about the Roth refrain: "years of tax-free compounding interest from now till we depart then stretched out for our dear heirs . . . ?

Where in your example would the benefit of years of tax-free growth in the Roth best the years of tax-deferred growth in the traditional IRA?

I'm not talking about 401k's 8-)
Bfwolf wrote:Edited to change "CAGR" to "compound annual growth rate" to avoid acronymitis
Thank you :D and I like the term "acronymitis"

Cmb3248
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Re: Why traditional IRA better than Roth IRA

Post by Cmb3248 » Fri Apr 13, 2018 4:36 pm

Miriam2 wrote:
Fri Apr 13, 2018 3:36 pm
Bfwolf wrote:
misterno wrote: when withdrawal time comes total money will be much bigger and with Roth I am not paying any tax whereas with traditional I would be.
This is a common fallacy. It doesn't matter that the money will be greater when you take it out. Here's a simple exercise to prove the point.

Let's compare $10,000 and a decision to contribute it to a traditional IRA and pay taxes later vs pay taxes on it now and contribute to a Roth IRA. Let's assume a 20% marginal tax bracket both now and in retirement in 10 years. Let's assume a 6% compound annual growth rate.

Scenario 1, traditional IRA: You put $10,000 in the traditional IRA. In 10 years, it grows to $17,908.48. You withdraw it, and pay 20% in taxes, leaving you with $14,326.78.

Scenario 2, Roth IRA: You pay 20% in taxes up front and so put $8,000 in the Roth IRA. In 10 years, it grows to $14,326.78.

As you can see, you end up with the same amount of money both ways, despite the fact that you paid tax on a much bigger number with the tIRA since taxes were deferred.

The key driver for why you should prefer a tIRA to a Roth IRA is tax bracket....if you will be in a lower tax bracket in retirement, choose traditional. Vice versa, choose Roth.

Being able to withdraw your Roth contribution, which you mentioned, is another Roth benefit.
Bfwolf, I understand your simple tax example, tax in or tax out on X amount - but what about the Roth refrain: "years of tax-free compounding interest from now till we depart then stretched out for our dear heirs . . . ?

Where in your example would the benefit of years of tax-free growth in the Roth best the years of tax-deferred growth in the traditional IRA?

I'm not talking about 401k's 8-)
Bfwolf wrote:Edited to change "CAGR" to "compound annual growth rate" to avoid acronymitis
Thank you :D and I like the term "acronymitis"
In general, the Roth beats the tIRA for almost all taxpayers in the new 24% and under brackets (under $315k a year aAGI, or about 98% of Americans). Doing the math over 10, 20, or 30 years, Roth wins.

A pretty simple way to calculate whether the Roth would be a better deal or not is to run the $11k max Roth contribution through a ROI calculator for the given period of time, then run the tax savings ($1320 at the 12% bracket, $2420 at the 22% bracket, or $2640 at the 24% bracket) through the same ROI calculator, take out predicted capital gains taxes from the tax savings, and divide the net savings by the Roth amount. That would be the percent your taxes would have to drop by in retirement to make the traditional IRA a better investment.

At the 24% brackets and below, the Roth generally wins unless you think your tax rate is going to drop by more than 5%. There are really only 2 places in the brackets where that happens: at $315k from 32% to 24%, and at $77,401k from 22% to 12% (which is basically where the 25 to 15 drop happened under the 2017 brackets). If your income will likely drop from one side of that threshold to the other in retirement (adjusted for inflation), traditional is the better deal, but most people won’t have that big of a drop so the roth is a better deal. If your household AGI now is in the $20k-$75k or $100k to $400k range, Roth will likely be the better answer.

And, if you’re like me, you see the huge deficits we’re running now and see the fact that the taxpayer-to-retiree ratio is rapidly dwindling and think “there’s no possible way that taxes don’t go up in the future to pay for this” and assume that even if you are proportionately in a lower tax bracket in retirement, all the brackets will probably be higher so traditional is probably not the right choice unless you’re trying to do a backdoor Roth conversion.

Rainmaker41
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Re: Why traditional IRA better than Roth IRA

Post by Rainmaker41 » Fri Apr 13, 2018 5:50 pm

I agree with the above assessment that Roth is better than Traditional at low brackets.

However, doesn't the calculus change substantially if you can get under one of the Saver's Credit tiers?

Example:

A married couple at at $38,000 AGI pays $1,400 in federal income taxes in 2018. If they get just under $38,000 AGI, and have contributed at least $2,800 to pre-tax retirement accounts, they get 50% of that (entire federal tax liability) eliminated. Isn't coming under that tax cliff and getting the Saver's Credit worth more than the advantage of the Roth?
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Re: Why traditional IRA better than Roth IRA

Post by TropikThunder » Fri Apr 13, 2018 6:06 pm

JoMoney wrote:
Fri Apr 13, 2018 2:28 pm
Taxes could change in any number of ways. We could speculate all day about whether or not future tax law might in some way apply a tax to roth funds, or even change other taxes to make roth less desirable on a relative basis... what if we ended income tax and moved to a consumption/sales/VAT tax? What if taxes were lowered on traditional IRAs and other retirement funds? What if it modified total income and put other income like social security into a higher bracket? What if ... ?
I raised the possibility of future changes to Roth rules only to counter another poster's over-confident belief that he was grandfathered into current law if future law changed ("But Roth account withdrawal rules are guaranteed -- as guaranteed as they can be. They are guaranteed because they are in written law, in effect today"). My point (supported by the Kitces quote) was that a future Congress could make Roth withdrawals taxable regardless of how unlikely it is. Just another data point arguing for tax diversification and that neither Roth nor traditional are always better. In fact, the main decider of Roth vs traditional is usually "what the tax rate will be during withdrawal", which is unknowable.

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Re: Why traditional IRA better than Roth IRA

Post by retiredjg » Fri Apr 13, 2018 6:21 pm

Rainmaker41 wrote:
Fri Apr 13, 2018 5:50 pm
I agree with the above assessment that Roth is better than Traditional at low brackets.

However, doesn't the calculus change substantially if you can get under one of the Saver's Credit tiers?
Yes, it does change (in my opinion) if tIRA helps a person get the Saver's Credit. If one is not eligible for the Saver's Credit, I think Roth is best when one is in a low tax bracket.

aristotelian
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Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Fri Apr 13, 2018 6:32 pm

Cmb3248 wrote:
Fri Apr 13, 2018 4:36 pm
In general, the Roth beats the tIRA for almost all taxpayers in the new 24% and under brackets (under $315k a year aAGI, or about 98% of Americans). Doing the math over 10, 20, or 30 years, Roth wins.

A pretty simple way to calculate whether the Roth would be a better deal or not is to run the $11k max Roth contribution through a ROI calculator for the given period of time, then run the tax savings ($1320 at the 12% bracket, $2420 at the 22% bracket, or $2640 at the 24% bracket) through the same ROI calculator, take out predicted capital gains taxes from the tax savings, and divide the net savings by the Roth amount. That would be the percent your taxes would have to drop by in retirement to make the traditional IRA a better investment.

At the 24% brackets and below, the Roth generally wins unless you think your tax rate is going to drop by more than 5%. There are really only 2 places in the brackets where that happens: at $315k from 32% to 24%, and at $77,401k from 22% to 12% (which is basically where the 25 to 15 drop happened under the 2017 brackets). If your income will likely drop from one side of that threshold to the other in retirement (adjusted for inflation), traditional is the better deal, but most people won’t have that big of a drop so the roth is a better deal. If your household AGI now is in the $20k-$75k or $100k to $400k range, Roth will likely be the better answer.
That is not true at all. Previous threads have proven it is possible to pay zero tax in retirement with as much as $100K spending. viewtopic.php?t=87471

If you retire just a few years early at 60, you will have 10 years until SS when you can have very favorable withdrawal rates on your Traditional accounts. I would say Traditional definitely makes sense in the 22% bracket and sometimes lower. See also: https://www.gocurrycracker.com/roth-sucks/

What your math also leaves out is that $5,500 in Traditional in the 22% bracket gives you $1210 extra to invest in your taxable account, which will have compounding gains taxed at a max of 15% (but sometimes 0%).

I do believe in Roth for tax diversification but only on the assumption that Traditional 401k is the primary vehicle.

boglebill2015
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Re: Why traditional IRA better than Roth IRA

Post by boglebill2015 » Fri Apr 13, 2018 8:20 pm

Who wrote:
Thu Apr 12, 2018 6:35 am
Can't tax brackets change over time?

In 30 or 40 years, at any specific income level (adjusted for inflation), is there any guarantee that the tax rate will be the same as it is now? Is there any guarantee that the tax will even be "close" to what it is now? There is no guarantee that I know of. And I don't know if it is a safe bet that the tax brackets will not change substantially. This is debatable, but I'd think that at some time in the future we'd have to start paying off our national debt. There might be some unfortunate changes to our tax brackets that comes with that.

I'm paying my tax now. I don't care what tax brackets are in the future. I will pay no tax when I take my Roth distributions.
Have you considered that the future your "fair share" might include taxes on Roths above a certain size? If the futures rates are quite different it might considered "unfair" that you got to place funds into the Roth at the old "low" rates.

Probably low risk of this, but you say " I will pay no tax" more confidently than I would. And given your speculation above about unfortunate changes to tax brackets, why do you think Roths will be untouchable?

Bfwolf
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Re: Why traditional IRA better than Roth IRA

Post by Bfwolf » Fri Apr 13, 2018 9:53 pm

aristotelian wrote:
Fri Apr 13, 2018 6:32 pm
Cmb3248 wrote:
Fri Apr 13, 2018 4:36 pm
In general, the Roth beats the tIRA for almost all taxpayers in the new 24% and under brackets (under $315k a year aAGI, or about 98% of Americans). Doing the math over 10, 20, or 30 years, Roth wins.

A pretty simple way to calculate whether the Roth would be a better deal or not is to run the $11k max Roth contribution through a ROI calculator for the given period of time, then run the tax savings ($1320 at the 12% bracket, $2420 at the 22% bracket, or $2640 at the 24% bracket) through the same ROI calculator, take out predicted capital gains taxes from the tax savings, and divide the net savings by the Roth amount. That would be the percent your taxes would have to drop by in retirement to make the traditional IRA a better investment.

At the 24% brackets and below, the Roth generally wins unless you think your tax rate is going to drop by more than 5%. There are really only 2 places in the brackets where that happens: at $315k from 32% to 24%, and at $77,401k from 22% to 12% (which is basically where the 25 to 15 drop happened under the 2017 brackets). If your income will likely drop from one side of that threshold to the other in retirement (adjusted for inflation), traditional is the better deal, but most people won’t have that big of a drop so the roth is a better deal. If your household AGI now is in the $20k-$75k or $100k to $400k range, Roth will likely be the better answer.
That is not true at all. Previous threads have proven it is possible to pay zero tax in retirement with as much as $100K spending. viewtopic.php?t=87471

If you retire just a few years early at 60, you will have 10 years until SS when you can have very favorable withdrawal rates on your Traditional accounts. I would say Traditional definitely makes sense in the 22% bracket and sometimes lower. See also: https://www.gocurrycracker.com/roth-sucks/

What your math also leaves out is that $5,500 in Traditional in the 22% bracket gives you $1210 extra to invest in your taxable account, which will have compounding gains taxed at a max of 15% (but sometimes 0%).

I do believe in Roth for tax diversification but only on the assumption that Traditional 401k is the primary vehicle.
I agree that for most taxpayers in the 22% and up tax brackets, traditional is a better deal than Roth. 32% and up, it becomes pretty close to a no brainer.

I think that if you polled Bogleheads here about how their tax bracket changed in retirement, the majority would say it dropped > 5%.

Cmb3248
Posts: 8
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Re: Why traditional IRA better than Roth IRA

Post by Cmb3248 » Sat Apr 14, 2018 7:12 am

aristotelian wrote:
Fri Apr 13, 2018 6:32 pm
Cmb3248 wrote:
Fri Apr 13, 2018 4:36 pm
In general, the Roth beats the tIRA for almost all taxpayers in the new 24% and under brackets (under $315k a year aAGI, or about 98% of Americans). Doing the math over 10, 20, or 30 years, Roth wins.

A pretty simple way to calculate whether the Roth would be a better deal or not is to run the $11k max Roth contribution through a ROI calculator for the given period of time, then run the tax savings ($1320 at the 12% bracket, $2420 at the 22% bracket, or $2640 at the 24% bracket) through the same ROI calculator, take out predicted capital gains taxes from the tax savings, and divide the net savings by the Roth amount. That would be the percent your taxes would have to drop by in retirement to make the traditional IRA a better investment.

At the 24% brackets and below, the Roth generally wins unless you think your tax rate is going to drop by more than 5%. There are really only 2 places in the brackets where that happens: at $315k from 32% to 24%, and at $77,401k from 22% to 12% (which is basically where the 25 to 15 drop happened under the 2017 brackets). If your income will likely drop from one side of that threshold to the other in retirement (adjusted for inflation), traditional is the better deal, but most people won’t have that big of a drop so the roth is a better deal. If your household AGI now is in the $20k-$75k or $100k to $400k range, Roth will likely be the better answer.
That is not true at all. Previous threads have proven it is possible to pay zero tax in retirement with as much as $100K spending. viewtopic.php?t=87471

If you retire just a few years early at 60, you will have 10 years until SS when you can have very favorable withdrawal rates on your Traditional accounts. I would say Traditional definitely makes sense in the 22% bracket and sometimes lower. See also: https://www.gocurrycracker.com/roth-sucks/

What your math also leaves out is that $5,500 in Traditional in the 22% bracket gives you $1210 extra to invest in your taxable account, which will have compounding gains taxed at a max of 15% (but sometimes 0%).

I do believe in Roth for tax diversification but only on the assumption that Traditional 401k is the primary vehicle.
While it might be possible to spend $100k plus in retirement but pay no tax, it’s unlikely; also, in most circumstances the people with the tax conditions that would make that possible already have a lot of deductions and probably aren’t at 22% to begin with. Having someone presume that this is the norm is dangerous.

Also, my post does not leave out that the $5500 traditional gives you extra to invest. It specifically says “then run the tax savings ($1320 at the 12% bracket, $2420 at the 22% bracket, or $2640 at the 24% bracket)”.

Suppose a couple making $165k AGI. The taxes on an $11k IRA contribution are $2,320 per year at 22%

Over 10 years, even assuming 6% growth and no capital gains tax, the taxes grow to $4155. Over 20 years, $7441. Over 30 years, it’s $13,325.

The IRA contribution grows to $19,699 over 10 years, $35,278 over 20 years, and $63,178 over 30 years.

To figure out if Roth is a better deal, you’d do IRA Contributions=(IRA Contributions)(1-marginal tax rate) + (tax savings)*(1-long term cap gains tax rate). If you plug x in for the marginal tax rate and assume cap gains tax is 0 (unlikely):

10 years: 19,699 = 19699*(1-x) + 4155. X has to be lower than 21.09% for the traditional to be better.
20 years: 35278 = 35278*(1-x) + 7441. Again, X has to be lower than 21.09% for the traditional to be better.
30 years: 63178 = 63178*(1-x)) + 13325. Again, X has to be lower than 21.09% for the traditional to be better.

But all those assume that 1. There would be no capital gains tax on people in a 21.09% tax bracket (unlikely) and 2. That the taxable account would grow at the same 6% rate as the IRA (which just because of dividend and interest taxes can’t happen). If you ignore #2 but put the capital gains tax rate at 15%, the marginal tax rate during retirement has to be below 17.93% for the traditional to be advantageous. If you include the fact that the taxable account probably grows 0.3%+ less than the tax-advantaged account does, the gap widens even more.

The “Great Roth controversy” article you cite sees to make a lot of assumptions that are just not going to be applicable to most people, like saving $17k on a $54k gross income (good luck doing that with kids and a mortgage), and then “living on $23k in retirement”. But beyond that, it’s entire focus is on “with which vehicle will you pay a lower income tax rate” and not “with which vehicle will you have more money in retirement.”

I think my original statement that you need a 5%+ drop in your marginal tax rate for Traditional to be a better IRA choice stands. I’m not sure about for most Bogleheads, because a lot of people on here are above the 24% bracket, but for the average American, and certainly someone asking a question like the OP, I don’t think it’s likely many people will manage dropping from 22% to 12%, at least not without a significant drop in quality of life.

aristotelian
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Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Sat Apr 14, 2018 7:33 am

Cmb3248 wrote:
Sat Apr 14, 2018 7:12 am
I think my original statement that you need a 5%+ drop in your marginal tax rate for Traditional to be a better IRA choice stands. I’m not sure about for most Bogleheads, because a lot of people on here are above the 24% bracket, but for the average American, and certainly someone asking a question like the OP, I don’t think it’s likely many people will manage dropping from 22% to 12%, at least not without a significant drop in quality of life.
I would agree with the first statement, but rather than encouraging people to simply choose Roth, I would encourage them to plan toward lower taxes in retirement. I think 5% delta is easily attainable and livesoft's thread showed it can be done without much reduction in lifestyle. If you aim to spend more than $100K in retirement, that probably means you are in a higher bracket while working, making pretax all the more favorable (although in that case you probably don't qualify for the deduction). Remember, the 5% delta does not need to hold through your whole retirement, just while you are withdrawing from your IRA. If you delay SS and/or retire early, you will almost certainly be in a lower bracket than when you were at the peak of your working career.

I would love to see a Boglehead poll of retirees and their marginal rate in retirement vs working. I would guess most of them are lower in retirement.

In any case, we might give OP a few guidelines for factors that might lead to higher taxes in retirement vs lower.

Higher taxes in retirement (favoring Roth):
-You are a student or just beginning your career with higher expected earnings in the future.
-You are in a low tax bracket now.
-You plan to work until SS/Pension
-You plan to be in a high tax bracket due to large SS/Pension
-You currently have the bulk of your portfolio in 401k/pretax funds subject to RMDs.

Lower taxes in retirement (favoring Traditional):
-You are at the peak of your career.
-You have a high savings rate with low lifestyle expenses.
-You plan to retire early and/or delay SS.

OP, do any of these apply to you?

JBTX
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Re: Why traditional IRA better than Roth IRA

Post by JBTX » Sat Apr 14, 2018 11:42 am

aristotelian wrote:
Sat Apr 14, 2018 7:33 am
Cmb3248 wrote:
Sat Apr 14, 2018 7:12 am
I think my original statement that you need a 5%+ drop in your marginal tax rate for Traditional to be a better IRA choice stands. I’m not sure about for most Bogleheads, because a lot of people on here are above the 24% bracket, but for the average American, and certainly someone asking a question like the OP, I don’t think it’s likely many people will manage dropping from 22% to 12%, at least not without a significant drop in quality of life.
I would agree with the first statement, but rather than encouraging people to simply choose Roth, I would encourage them to plan toward lower taxes in retirement. I think 5% delta is easily attainable and livesoft's thread showed it can be done without much reduction in lifestyle. If you aim to spend more than $100K in retirement, that probably means you are in a higher bracket while working, making pretax all the more favorable (although in that case you probably don't qualify for the deduction). Remember, the 5% delta does not need to hold through your whole retirement, just while you are withdrawing from your IRA. If you delay SS and/or retire early, you will almost certainly be in a lower bracket than when you were at the peak of your working career.

I would love to see a Boglehead poll of retirees and their marginal rate in retirement vs working. I would guess most of them are lower in retirement.

In any case, we might give OP a few guidelines for factors that might lead to higher taxes in retirement vs lower.

Higher taxes in retirement (favoring Roth):
-You are a student or just beginning your career with higher expected earnings in the future.
-You are in a low tax bracket now.
-You plan to work until SS/Pension
-You plan to be in a high tax bracket due to large SS/Pension
-You currently have the bulk of your portfolio in 401k/pretax funds subject to RMDs.

Lower taxes in retirement (favoring Traditional):
-You are at the peak of your career.
-You have a high savings rate with low lifestyle expenses.
-You plan to retire early and/or delay SS.

OP, do any of these apply to you?
It is true that those who may have an extended early/pre social security retirement would benefit from accumulating a large traditonal balance. However not everybody fits that criteria. Some people may have greater age difference between spouses. Some may need to work longer. Some may choose to work longer. Some have pension or other income in retirement. In some cases one spouse may die early. Or you could get divorced.

You can almost definitely say - for those that will have no other retirement income, it is advantageous to accrue something around $500,000 to $600,000 in traditonal which if taken out at 4% (or RMD level) will generate retirement income in the zero percent bracket. Then for every year that BOTH of you retires before EITHER of you draw social security, you could accrue another approx $100,000 for each early retirment year and stay in the 12/15% bracket. That would be $1.5 million in traditional total - for that cherry picked situation. Beyond that it gets very iffy.

For some people currently in the 22% bracket, they may feel the various estate planning benefits to Roth and security knowing that they can’t be affected by rising rates (apart from unlikely scenario of Roth getting taxed) is worth it even if they are going to be in the 15% bracket in retirement.

I agree with others that it pays to have a mix for tax diversification purposes.

For those who keep saying most bogleheads in retirement are probably in lower rates, of course they are. They have lived through an unprecedented era of tax cuts.

aristotelian
Posts: 3893
Joined: Wed Jan 11, 2017 8:05 pm

Re: Why traditional IRA better than Roth IRA

Post by aristotelian » Sat Apr 14, 2018 12:03 pm

JBTX wrote:
Sat Apr 14, 2018 11:42 am
It is true that those who may have an extended early/pre social security retirement would benefit from accumulating a large traditonal balance. However not everybody fits that criteria. Some people may have greater age difference between spouses. Some may need to work longer. Some may choose to work longer. Some have pension or other income in retirement. In some cases one spouse may die early. Or you could get divorced.

You can almost definitely say - for those that will have no other retirement income, it is advantageous to accrue something around $500,000 to $600,000 in traditonal which if taken out at 4% (or RMD level) will generate retirement income in the zero percent bracket. Then for every year that BOTH of you retires before EITHER of you draw social security, you could accrue another approx $100,000 for each early retirment year and stay in the 12/15% bracket. That would be $1.5 million in traditional total - for that cherry picked situation. Beyond that it gets very iffy.

For some people currently in the 22% bracket, they may feel the various estate planning benefits to Roth and security knowing that they can’t be affected by rising rates (apart from unlikely scenario of Roth getting taxed) is worth it even if they are going to be in the 15% bracket in retirement.

I agree with others that it pays to have a mix for tax diversification purposes.

For those who keep saying most bogleheads in retirement are probably in lower rates, of course they are. They have lived through an unprecedented era of tax cuts.
I agree with all of the above. Those are very helpful guidelines. You and I may differ over what may work for most Bogleheads versus what is "cherry picked". In my case, I am sure I am projecting my own plan onto others. But I think my plan is a good plan. :sharebeer :mrgreen:

JBTX
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Joined: Wed Jul 26, 2017 12:46 pm

Re: Why traditional IRA better than Roth IRA

Post by JBTX » Sat Apr 14, 2018 12:19 pm

aristotelian wrote:
Sat Apr 14, 2018 12:03 pm
JBTX wrote:
Sat Apr 14, 2018 11:42 am
It is true that those who may have an extended early/pre social security retirement would benefit from accumulating a large traditonal balance. However not everybody fits that criteria. Some people may have greater age difference between spouses. Some may need to work longer. Some may choose to work longer. Some have pension or other income in retirement. In some cases one spouse may die early. Or you could get divorced.

You can almost definitely say - for those that will have no other retirement income, it is advantageous to accrue something around $500,000 to $600,000 in traditonal which if taken out at 4% (or RMD level) will generate retirement income in the zero percent bracket. Then for every year that BOTH of you retires before EITHER of you draw social security, you could accrue another approx $100,000 for each early retirment year and stay in the 12/15% bracket. That would be $1.5 million in traditional total - for that cherry picked situation. Beyond that it gets very iffy.

For some people currently in the 22% bracket, they may feel the various estate planning benefits to Roth and security knowing that they can’t be affected by rising rates (apart from unlikely scenario of Roth getting taxed) is worth it even if they are going to be in the 15% bracket in retirement.

I agree with others that it pays to have a mix for tax diversification purposes.

For those who keep saying most bogleheads in retirement are probably in lower rates, of course they are. They have lived through an unprecedented era of tax cuts.
I agree with all of the above. Those are very helpful guidelines. You and I may differ over what may work for most Bogleheads versus what is "cherry picked". In my case, I am sure I am projecting my own plan onto others. But I think my plan is a good plan. :sharebeer :mrgreen:
I’ve learned to adjust my thinking since coming here. Before coming here I was pretty knee jerk Roth over traditional. In my particular case where spouse and I are six years apart, and my wife likes her job and very well may work until 60 (which would put me at 65), dual income driving higher social security in retirement,and the potential benefits of retiring early to get disability benefits for son, and also for estate planning purposes where we plan to pass on money in trust, Roths work very well. For you or livesoft or KlangFool who plan to retire early and have long pre social security retirement span (and this also implies you will live frugally during those years) clearly accumulating large traditional balance is beneficial. I agree we each tend to project our own situation onto other posters. The truth is every situation is different and you really need a LOT of information to give the best recommendation for any particular poster.

Cmb3248
Posts: 8
Joined: Sun Feb 04, 2018 2:03 pm

Re: Why traditional IRA better than Roth IRA

Post by Cmb3248 » Sat Apr 14, 2018 1:04 pm

JBTX wrote:
Sat Apr 14, 2018 11:42 am
aristotelian wrote:
Sat Apr 14, 2018 7:33 am
Cmb3248 wrote:
Sat Apr 14, 2018 7:12 am
I think my original statement that you need a 5%+ drop in your marginal tax rate for Traditional to be a better IRA choice stands. I’m not sure about for most Bogleheads, because a lot of people on here are above the 24% bracket, but for the average American, and certainly someone asking a question like the OP, I don’t think it’s likely many people will manage dropping from 22% to 12%, at least not without a significant drop in quality of life.
I would agree with the first statement, but rather than encouraging people to simply choose Roth, I would encourage them to plan toward lower taxes in retirement. I think 5% delta is easily attainable and livesoft's thread showed it can be done without much reduction in lifestyle. If you aim to spend more than $100K in retirement, that probably means you are in a higher bracket while working, making pretax all the more favorable (although in that case you probably don't qualify for the deduction). Remember, the 5% delta does not need to hold through your whole retirement, just while you are withdrawing from your IRA. If you delay SS and/or retire early, you will almost certainly be in a lower bracket than when you were at the peak of your working career.

I would love to see a Boglehead poll of retirees and their marginal rate in retirement vs working. I would guess most of them are lower in retirement.

In any case, we might give OP a few guidelines for factors that might lead to higher taxes in retirement vs lower.

Higher taxes in retirement (favoring Roth):
-You are a student or just beginning your career with higher expected earnings in the future.
-You are in a low tax bracket now.
-You plan to work until SS/Pension
-You plan to be in a high tax bracket due to large SS/Pension
-You currently have the bulk of your portfolio in 401k/pretax funds subject to RMDs.

Lower taxes in retirement (favoring Traditional):
-You are at the peak of your career.
-You have a high savings rate with low lifestyle expenses.
-You plan to retire early and/or delay SS.

OP, do any of these apply to you?
It is true that those who may have an extended early/pre social security retirement would benefit from accumulating a large traditonal balance. However not everybody fits that criteria. Some people may have greater age difference between spouses. Some may need to work longer. Some may choose to work longer. Some have pension or other income in retirement. In some cases one spouse may die early. Or you could get divorced.

You can almost definitely say - for those that will have no other retirement income, it is advantageous to accrue something around $500,000 to $600,000 in traditonal which if taken out at 4% (or RMD level) will generate retirement income in the zero percent bracket. Then for every year that BOTH of you retires before EITHER of you draw social security, you could accrue another approx $100,000 for each early retirment year and stay in the 12/15% bracket. That would be $1.5 million in traditional total - for that cherry picked situation. Beyond that it gets very iffy.

For some people currently in the 22% bracket, they may feel the various estate planning benefits to Roth and security knowing that they can’t be affected by rising rates (apart from unlikely scenario of Roth getting taxed) is worth it even if they are going to be in the 15% bracket in retirement.

I agree with others that it pays to have a mix for tax diversification purposes.

For those who keep saying most bogleheads in retirement are probably in lower rates, of course they are. They have lived through an unprecedented era of tax cuts.
That last sentence is the most important.

Since 1974, someone at an inflation-adjusted equivalent to today’s $77,400 has gone from paying 25% from 1974-1981, 29% from 1982-1987, 25% from 1993-2002, 15% from 2003-2007, to 12% now.

At an equivalent to today’s $165,000, it’s gone from 42% in 1974 to 45% in 1977 to 49% in 1982 all the way down to 28% in 1987, up to 31% in 1993, back down to 28% in 2003, and now down to 22%.

At the equivalent to $315,000, it has gone from 53% to 55% to 50% to 28% to 36% to 33% to 24%.

If people are hedging their bets on that kind of thing happening again, they’re deluding themselves. We’re already running massive deficits and I think it’s highly unlikely they’re going to find the room to cut marginal rates even further than this current plan. At some point, they might decide to cut those deficits by increasing taxes. I think at a minimum we’ll be seeing a return to the 2003-2017 rates in the near future.

I also don’t think the “retire at 60, spend $100k and owe no taxes” scenario is realistic even for most people on here who are saving for early retirement. I think that’s an extreme example of something possible, but I think most people, even on Bogleheads, using tax-advantaged savings vehicles are going to have at least some income tax in retirement.

I definitely agree with the fact that we often try to project our own situation onto others and that we should give the best recommendation for each person. I, for one, often don’t take social security and the myriad complexities related to it into account since I’m a teacher and don’t pay into it. I also don’t plan on retiring before my pension vests at 62, so that also impacts my assessment and knowledge of things.

The one consistent thing about marginal tax rates since 1987 is that they have included a big jump in taxes of 10-13%. Since 2003 that jump has occurred more or less at $77k in 2018 dollars. So if you use that as a baseline, and make an assumption (perhaps a risky one) that future tax codes will include a similar jump, then if you believe that you will be on the higher side of that line while earning and on the lower side of that line in retirement, then Traditional is the better choice for you. If you think you’ll consistently be on one side of the line or the other, making Roth contributions seems to be a better choice to me.

But then again, there’s always the possibility (a strong one, in my opinion) that even the lowest tax brackets will be paying 15%+ by the time I’m retiring in 34 years. I think most people plan on living at least that long in retirement (especially those planning early retirement), so that’s something to consider before jumping all-in to the Traditional boat.

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Re: Why traditional IRA better than Roth IRA

Post by Ben Mathew » Sat Apr 14, 2018 1:11 pm

In addition to other points mentioned above, Roth is also attractive if you are maxed out on traditional tax-shielded accounts and want to save more. $5500 of Roth money is more than $5500 of traditional because it's after-tax money. Roth IRA is equivalent to a traditional IRA plus an invisible tax-shielded account that contains the money needed to cover the tax on withdrawals. So if you want to max out your tax-shielded space, you'd contribute to your Roth accounts.

I'd say for most people who can deduct traditional contributions, it's best to contribute to traditional if not maxing out, and Roth only if maxed out. That leaves the door open to maximizing tax-shielded space by converting traditional accounts to Roth in later years.
Last edited by Ben Mathew on Sat Apr 14, 2018 1:19 pm, edited 1 time in total.

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rustymutt
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Re: Why traditional IRA better than Roth IRA

Post by rustymutt » Sat Apr 14, 2018 1:17 pm

Misinformation is all about. IRAs are taxed as ordinary income. Make no major financial decisions without first getting professional advice. This is true especially if you're just starting out. Be eager to learn about your own financial situation.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

JBTX
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Re: Why traditional IRA better than Roth IRA

Post by JBTX » Sat Apr 14, 2018 1:34 pm

Cmb3248 wrote:
Sat Apr 14, 2018 1:04 pm
JBTX wrote:
Sat Apr 14, 2018 11:42 am
aristotelian wrote:
Sat Apr 14, 2018 7:33 am
Cmb3248 wrote:
Sat Apr 14, 2018 7:12 am
I think my original statement that you need a 5%+ drop in your marginal tax rate for Traditional to be a better IRA choice stands. I’m not sure about for most Bogleheads, because a lot of people on here are above the 24% bracket, but for the average American, and certainly someone asking a question like the OP, I don’t think it’s likely many people will manage dropping from 22% to 12%, at least not without a significant drop in quality of life.
I would agree with the first statement, but rather than encouraging people to simply choose Roth, I would encourage them to plan toward lower taxes in retirement. I think 5% delta is easily attainable and livesoft's thread showed it can be done without much reduction in lifestyle. If you aim to spend more than $100K in retirement, that probably means you are in a higher bracket while working, making pretax all the more favorable (although in that case you probably don't qualify for the deduction). Remember, the 5% delta does not need to hold through your whole retirement, just while you are withdrawing from your IRA. If you delay SS and/or retire early, you will almost certainly be in a lower bracket than when you were at the peak of your working career.

I would love to see a Boglehead poll of retirees and their marginal rate in retirement vs working. I would guess most of them are lower in retirement.

In any case, we might give OP a few guidelines for factors that might lead to higher taxes in retirement vs lower.

Higher taxes in retirement (favoring Roth):
-You are a student or just beginning your career with higher expected earnings in the future.
-You are in a low tax bracket now.
-You plan to work until SS/Pension
-You plan to be in a high tax bracket due to large SS/Pension
-You currently have the bulk of your portfolio in 401k/pretax funds subject to RMDs.

Lower taxes in retirement (favoring Traditional):
-You are at the peak of your career.
-You have a high savings rate with low lifestyle expenses.
-You plan to retire early and/or delay SS.

OP, do any of these apply to you?
It is true that those who may have an extended early/pre social security retirement would benefit from accumulating a large traditonal balance. However not everybody fits that criteria. Some people may have greater age difference between spouses. Some may need to work longer. Some may choose to work longer. Some have pension or other income in retirement. In some cases one spouse may die early. Or you could get divorced.

You can almost definitely say - for those that will have no other retirement income, it is advantageous to accrue something around $500,000 to $600,000 in traditonal which if taken out at 4% (or RMD level) will generate retirement income in the zero percent bracket. Then for every year that BOTH of you retires before EITHER of you draw social security, you could accrue another approx $100,000 for each early retirment year and stay in the 12/15% bracket. That would be $1.5 million in traditional total - for that cherry picked situation. Beyond that it gets very iffy.

For some people currently in the 22% bracket, they may feel the various estate planning benefits to Roth and security knowing that they can’t be affected by rising rates (apart from unlikely scenario of Roth getting taxed) is worth it even if they are going to be in the 15% bracket in retirement.

I agree with others that it pays to have a mix for tax diversification purposes.

For those who keep saying most bogleheads in retirement are probably in lower rates, of course they are. They have lived through an unprecedented era of tax cuts.
That last sentence is the most important.

Since 1974, someone at an inflation-adjusted equivalent to today’s $77,400 has gone from paying 25% from 1974-1981, 29% from 1982-1987, 25% from 1993-2002, 15% from 2003-2007, to 12% now.

At an equivalent to today’s $165,000, it’s gone from 42% in 1974 to 45% in 1977 to 49% in 1982 all the way down to 28% in 1987, up to 31% in 1993, back down to 28% in 2003, and now down to 22%.

At the equivalent to $315,000, it has gone from 53% to 55% to 50% to 28% to 36% to 33% to 24%.

If people are hedging their bets on that kind of thing happening again, they’re deluding themselves. We’re already running massive deficits and I think it’s highly unlikely they’re going to find the room to cut marginal rates even further than this current plan. At some point, they might decide to cut those deficits by increasing taxes. I think at a minimum we’ll be seeing a return to the 2003-2017 rates in the near future.

I also don’t think the “retire at 60, spend $100k and owe no taxes” scenario is realistic even for most people on here who are saving for early retirement. I think that’s an extreme example of something possible, but I think most people, even on Bogleheads, using tax-advantaged savings vehicles are going to have at least some income tax in retirement.

I definitely agree with the fact that we often try to project our own situation onto others and that we should give the best recommendation for each person. I, for one, often don’t take social security and the myriad complexities related to it into account since I’m a teacher and don’t pay into it. I also don’t plan on retiring before my pension vests at 62, so that also impacts my assessment and knowledge of things.

The one consistent thing about marginal tax rates since 1987 is that they have included a big jump in taxes of 10-13%. Since 2003 that jump has occurred more or less at $77k in 2018 dollars. So if you use that as a baseline, and make an assumption (perhaps a risky one) that future tax codes will include a similar jump, then if you believe that you will be on the higher side of that line while earning and on the lower side of that line in retirement, then Traditional is the better choice for you. If you think you’ll consistently be on one side of the line or the other, making Roth contributions seems to be a better choice to me.

But then again, there’s always the possibility (a strong one, in my opinion) that even the lowest tax brackets will be paying 15%+ by the time I’m retiring in 34 years. I think most people plan on living at least that long in retirement (especially those planning early retirement), so that’s something to consider before jumping all-in to the Traditional boat.
While I enjoy conversations on future tax policy and macroeconomic budget trends, the impact of those items on your investment strategy is not a conversation that is allowed here, for understandable reasons.

I will say that another way taxes could be raised to address such issues is a consumption /VAT tax which would not increase income tax rates, so we just don’t know what is going to happen. More reason IMO to have a diversified approach.

I think the hypothetical no tax scenario is instructional, but as I said it is a highly cherry picked scenario. It is based on many assumptions, and deviating from one or two of those assumptions might blow up the scenario. Any one of those assumptions may be reasonable and likely, but the chance that ALL of those assumptions will apply to any particular situation is much lower.

It also seems a bit of tax tail wagging investment strategy dog. It is as if some people are designing their retirement to minimize taxes. While tax minimization is always important, for those that want to work, working more will ALWAYS be financially beneficial. Personally, I am just not comfortable with a retire early scenario, draw your retirement down substantially before you take social security, and heavily rely on social security and future investment returns to keep you flush after that. That scenario has worked fine in recent years because tax rates keep going down and the market keeps going up double digits. Like you I’m not going to assume those trends will continue in the future

Dandy
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Re: Why traditional IRA better than Roth IRA

Post by Dandy » Sat Apr 14, 2018 1:34 pm

Then when you reach 59 1/2 years old you make sure your withdrawals are at or less than $72K/year
You can determine the amount to withdraw up until the year you reach 701/2 then the minimum is determined by Uncle Sam.
If you save in a TIRA or 401k aggressively and have at least a moderately aggressive investment allocation you might be paying a lot of taxes when you reach 701/2.

That is the position I am in at age 70 with a moderate pension and collecting SS this year. I did do some Roth conversions but the RMDs will likely keep my in a high tax bracket for the rest of my life. The most aggressive allocation overall was 55/45 and my TIRA was much more conservative.

So tax deductions are great while working but you need to look at when you might want to allocate some contributions to Roth and/or do some aggressive Roth conversions if you stop working before age 70.

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Re: Why traditional IRA better than Roth IRA

Post by JBTX » Sat Apr 14, 2018 1:40 pm

Ben Mathew wrote:
Sat Apr 14, 2018 1:11 pm
In addition to other points mentioned above, Roth is also attractive if you are maxed out on traditional tax-shielded accounts and want to save more. $5500 of Roth money is more than $5500 of traditional because it's after-tax money. Roth IRA is equivalent to a traditional IRA plus an invisible tax-shielded account that contains the money needed to cover the tax on withdrawals. So if you want to max out your tax-shielded space, you'd contribute to your Roth accounts.

I'd say for most people who can deduct traditional contributions, it's best to contribute to traditional if not maxing out, and Roth only if maxed out. That leaves the door open to maximizing tax-shielded space by converting traditional accounts to Roth in later years.
You bring up an important point. For many bogleheads, the assumption that you would reinvest tax savings in a taxable account and hold it to retirement is automatic to them. I don’t think it is automatic to most non bogleheads. Chances are some that tax savings will be consumed, some of it will go into a bigger house, some of it will go into mortgage payoff, or taxable accounts may be invested more conservatively (sitting in bank accounts). That changes the calculations.

There is something to be said for the increased forced savings of a Roth.

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Re: Why traditional IRA better than Roth IRA

Post by grabiner » Sat Apr 14, 2018 3:45 pm

Cmb3248 wrote:
Fri Apr 13, 2018 4:36 pm
In general, the Roth beats the tIRA for almost all taxpayers in the new 24% and under brackets (under $315k a year aAGI, or about 98% of Americans). Doing the math over 10, 20, or 30 years, Roth wins.

A pretty simple way to calculate whether the Roth would be a better deal or not is to run the $11k max Roth contribution through a ROI calculator for the given period of time, then run the tax savings ($1320 at the 12% bracket, $2420 at the 22% bracket, or $2640 at the 24% bracket) through the same ROI calculator, take out predicted capital gains taxes from the tax savings, and divide the net savings by the Roth amount. That would be the percent your taxes would have to drop by in retirement to make the traditional IRA a better investment.
This is correct if your only tax-deferred savings is from an IRA, or if you are already maxing out your employer plan. But if you can't afford to max out your retirement savings (which is true for most investors with 401(k) accounts), the break-even point is an equal tax rate. In the 22% tax bracket, the choice may be between contributing $7800 to Roth accounts or $10,000 to traditional accounts; the Roth is better only if you retire at a 22% or higher tax rate.
At the 24% brackets and below, the Roth generally wins unless you think your tax rate is going to drop by more than 5%. There are really only 2 places in the brackets where that happens: at $315k from 32% to 24%, and at $77,401k from 22% to 12% (which is basically where the 25 to 15 drop happened under the 2017 brackets).
And the 22% to 12% (or to 15% if the old tax rates come back) is very common for retirees. If you invest in Roth accounts, you will be able to spend a much higher fraction of your income in retirement, as you won't be paying tax on the money you contributed to Roths and to Social Security while you were working, and at most 85% of your Social Security will be taxable. And if you have a taxable account, you will pay tax on only part of that money when you withdraw it in retirement, as only the dividends and any capital gains on sales are taxed. Thus, even if you spend just as much money in retirement as while working (and most retirees spend less), you may be in a lower tax bracket.
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MathWizard
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Re: Why traditional IRA better than Roth IRA

Post by MathWizard » Sat Apr 14, 2018 4:23 pm

22twain wrote:
Thu Apr 12, 2018 12:28 am
MathWizard wrote:
Wed Apr 11, 2018 7:15 pm
families normally don't move up in tax brackets when they retire.
Except on this forum, of course, with our Prodigious Accumulators of Wealth. :wink:
BHs are definitely not the norm.

I feel like I'm on the low end of NW for my age on this board,
even while being in the top 10% of wealth for the US.

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Portfolio7
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Re: Why traditional IRA better than Roth IRA

Post by Portfolio7 » Mon Apr 16, 2018 10:50 am

MathWizard wrote:
Sat Apr 14, 2018 4:23 pm
22twain wrote:
Thu Apr 12, 2018 12:28 am
MathWizard wrote:
Wed Apr 11, 2018 7:15 pm
families normally don't move up in tax brackets when they retire.
Except on this forum, of course, with our Prodigious Accumulators of Wealth. :wink:
BHs are definitely not the norm.

I feel like I'm on the low end of NW for my age on this board,
even while being in the top 10% of wealth for the US.
+1. As above-average-but-not-yet-prodigious accumulators of wealth, but without a pension, I am bothered by the likelihood that part of our SS will be taxed because of our significant 401K savings. Once the snowball starts rolling, it can be hard to shift the direction.
An investment in knowledge pays the best interest.

bradpevans
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Re: Why traditional IRA better than Roth IRA

Post by bradpevans » Mon Apr 16, 2018 3:46 pm

grabiner wrote:
Sat Apr 14, 2018 3:45 pm

This is correct if your only tax-deferred savings is from an IRA, or if you are already maxing out your employer plan. But if you can't afford to max out your retirement savings (which is true for most investors with 401(k) accounts), the break-even point is an equal tax rate. In the 22% tax bracket, the choice may be between contributing $7800 to Roth accounts or $10,000 to traditional accounts; the Roth is better only if you retire at a 22% or higher tax rate.
^^^this
To me its simply tax rate in vs. tax rate out as far as the dollars amount. With traditional you know the front end savings (ie your tax rate "in"), and, ideally you take it "out" when that rate is lower. Roth you know the tax rate is 0 going out.

But traditional has other implications: amount of tax paid on your SS, tax on your pension, and eventually RMDs, which again may have an impact on other parts of your income

And the "inheritability" of Roth is friendlier

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SeeMoe
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Re: Why traditional IRA better than Roth IRA

Post by SeeMoe » Mon Apr 16, 2018 5:52 pm

We took advantage of the Traditional IRA ACCOUNTS when they first started back in the early 1980’s. The Tax deferrals really were helpful to this working couple at the time. Then we both took advantage of then also new 457b DCP Scheme and were in hog heaven as we recall with even more Tax deferrals! It was unbelievable, and allowed us to live well, take vacations, buy a new car every so often and save big time for the future....Unbelievable largesse! Then we started saving/ investing in a taxable Vanguard folio and still do today in our mid 70’s with the RMD’s and good pensions. Sure we pay taxes, and it is a privilege to do so in this great country that made us millionaires....

SeeMoe.. :moneybag
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

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