Why do so many people quote "You will likely be in a lower tax bracket in retirement"

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KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 7:07 pm

yeahman wrote:
Thu May 17, 2018 6:59 pm
Even Roths are subject to tax change risk. It isn't far-fetched to think they could be double taxed in the future. In fact, I rate it as more likely than a rise in the lower marginal income tax rates. The most politically popular tax increases are probably caps and double taxation.
yeahman,

I disagreed. Globally, the governments had lowered their personal and corporate income tax rates and raise some form of consumption tax to compensate that. Politically, it is easier to collect and simpler to raise consumption taxes. And, people volunteer to pay more taxes when they choose to spend more.

KlangFool
Last edited by KlangFool on Thu May 17, 2018 8:25 pm, edited 1 time in total.

azanon
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by azanon » Thu May 17, 2018 8:15 pm

I pondered the traditional vs. Roth for a very long time (since I have both options in my 401(k)), and this is where I finally settled out on:

It's illogical to leave the future tax rate "wildcard" in play, if you can completely take it out of play with a Roth, or Roth 401(k). What are we, some 20 trillion or thereabouts in debt? I don't recall the exact numbers, but in the early 20th century, didn't tax brackets get higher than 50%? So my reasoning? Why leave that question mark out there, when you can just pay Uncle Sam today, and be completely done with it.

Also, I can tell you because I have both, there's something special about looking at a balance of money in whatever software that you use to track your assets, and to know that every dime is yours. That you don't owe anything else on a given amount of money.

So for me, Roth or Roth type accounts win out regardless of your current tax rate vs. whatever future rate you hope to have. It's not worth worry about because even in the worst eventual outcomes, you still got an incredible deal with a Roth vs. a taxable. I guess I'm just a bird in the hand kind of guy. YMMV.

yeahman
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by yeahman » Thu May 17, 2018 8:30 pm

KlangFool wrote:
Thu May 17, 2018 7:07 pm
yeahman wrote:
Thu May 17, 2018 6:59 pm
Even Roths are subject to tax change risk. It isn't far-fetched to think they could be double taxed in the future. In fact, I rate it as more likely than a rise in the lower marginal income tax rates. The most politically popular tax increases are probably caps and double taxation.
yeahman,

I disagreed. Globally, the governments had lowered their personal and corporate income tax rates and raise some form of consumption tax to compensate that. Politically, it is easier to collect and simpler to raise consumption taxes. And, people volunteer to pay more taxes when they choose to spend more.

KlangFool
Did you mean you agree? A consumption tax would be double taxing Roth.

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 8:34 pm

azanon wrote:
Thu May 17, 2018 8:15 pm
I pondered the traditional vs. Roth for a very long time (since I have both options in my 401(k)), and this is where I finally settled out on:

It's illogical to leave the future tax rate "wildcard" in play, if you can completely take it out of play with a Roth, or Roth 401(k). What are we, some 20 trillion or thereabouts in debt? I don't recall the exact numbers, but in the early 20th century, didn't tax brackets get higher than 50%? So my reasoning? Why leave that question mark out there, when you can just pay Uncle Sam today, and be completely done with it.

Also, I can tell you because I have both, there's something special about looking at a balance of money in whatever software that you use to track your assets, and to know that every dime is yours. That you don't owe anything else on a given amount of money.

So for me, Roth or Roth type accounts win out regardless of your current tax rate vs. whatever future rate you hope to have. It's not worth worry about because even in the worst eventual outcomes, you still got an incredible deal with a Roth vs. a taxable. I guess I'm just a bird in the hand kind of guy. YMMV.
azanon,

The other way to look at it is you have given your bird (money) to IRS. You can no longer get it back. Meanwhile, the tax-deferred folks like me keep our bird (money) in our pocket. We contribute to Trad. 401K and put our tax savings into Roth IRAs. The government will have to do something to get those birds (money) from us.

If you believe that inflation rate is going up, money now is worth a lot more than money in the future. The government may get the same or more taxes from the tax-deferred folks. But, we still win because of the inflation.

<<What are we, some 20 trillion or thereabouts in debt? >>

Then, a high inflation rate is a very likely outcome. So, why would you want to pay more taxes now?

KlangFool

yeahman
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by yeahman » Thu May 17, 2018 8:35 pm

azanon wrote:
Thu May 17, 2018 8:15 pm
It's illogical to leave the future tax rate "wildcard" in play, if you can completely take it out of play with a Roth, or Roth 401(k). What are we, some 20 trillion or thereabouts in debt? I don't recall the exact numbers, but in the early 20th century, didn't tax brackets get higher than 50%? So my reasoning? Why leave that question mark out there, when you can just pay Uncle Sam today, and be completely done with it.
If you asked me pre-Trump, I would've bet you anything that tax rates could not go down any more. But even leaving that aside, whether Roths will be taxed in the future is also a wildcard.

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 8:36 pm

yeahman wrote:
Thu May 17, 2018 8:30 pm
KlangFool wrote:
Thu May 17, 2018 7:07 pm
yeahman wrote:
Thu May 17, 2018 6:59 pm
Even Roths are subject to tax change risk. It isn't far-fetched to think they could be double taxed in the future. In fact, I rate it as more likely than a rise in the lower marginal income tax rates. The most politically popular tax increases are probably caps and double taxation.
yeahman,

I disagreed. Globally, the governments had lowered their personal and corporate income tax rates and raise some form of consumption tax to compensate that. Politically, it is easier to collect and simpler to raise consumption taxes. And, people volunteer to pay more taxes when they choose to spend more.

KlangFool
Did you mean you agree? A consumption tax would be double taxing Roth.
yeahman,

A consumption tax is a double tax on every spending. It is not limited to Roth. It does not discriminate.

KlangFool

wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Thu May 17, 2018 8:37 pm

Do you consider sales tax imposed by your locality or state to be "double taxation"? Don't you also pay the local real estate tax and state income tax using post-federal-tax money? Do you believe you are being double taxed? God forbid if there were to be "living wealth tax", would you consider that to be "double tax"? So why would VAT or similar consumption tax is considered to be "double tax"?

Frankly, I would like everybody to willingly pay the taxes up front. That way, the government will NOT come after the tax deferred accounts. It is win-win situation and I would like people like myself and KF to *STOP* trying to convert other people to our way. It is NOT in our interest to do so :-)

azanon
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by azanon » Thu May 17, 2018 8:46 pm

KlangFool wrote:
Thu May 17, 2018 8:34 pm
If you believe that inflation rate is going up, money now is worth a lot more than money in the future. The government may get the same or more taxes from the tax-deferred folks. But, we still win because of the inflation.
If I were completely honest and had to use a crystal ball, I think we're in better shape now than we'll be in the future. So with my basic mindset, that means to me that the government will need more inflation-adjusted dollars in the future than they need today, so they'll set the tax rate to whatever it needs to be to ensure that. Regardless though, from a peace of mind perspective, I just prefer to opt out and put the situation in my control. How? Because I know exactly how much I owe on my Roths and Roth 401(k)s no matter what happens, short of confiscation. Zero.

How the heck does one retirement plan with an account full of traditionals and taxables anyway? What's the tax rate 20 years from now? I'm super glad that's not my problem. Now if I had mostly taxables because I was so wealthy I didn't qualify for the tax-advantaged accounts, I imagine I could manage. :mrgreen:

livesoft
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by livesoft » Thu May 17, 2018 8:55 pm

ad2007 wrote:
Thu May 17, 2018 8:21 am
livesoft wrote:
Wed May 16, 2018 8:10 pm
Another thing that people neglect is that standard deduction and tax brackets are indexed to COLA, so when they have portfolios of $10 million, the standard deduction will be $500,000 or so.
Can you please explain...
Sure, in the year 2102 when you reach a portfolio of $10 million in size, the ravages of inflation will not only make your portfolio bigger, but will also make the standard deduction bigger. A hamburger will cost $100, too.
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wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Thu May 17, 2018 8:57 pm

How the heck does one retirement plan with an account full of traditionals and taxables anyway? What's the tax rate 20 years from now? I'm super glad that's not my problem. Now if I had mostly taxables because I was so wealthy I didn't qualify for the tax-advantaged accounts, I imagine I could manage. :mrgreen:
How in the world do you figure our your expense twenty years down the road? How would you know what could be the inflation? How would you know what would be the local taxes? How would you know what would be your real estate taxes? How would you know what would BHEAD tax which could be there at that time computed based upon your net assets? How would you know what your Chinese/Indian overlords will tax their US subjects? (OK, the last one was throw away :-)

You don't know!

azanon
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by azanon » Thu May 17, 2018 9:00 pm

wrongfunds wrote:
Thu May 17, 2018 8:57 pm
How the heck does one retirement plan with an account full of traditionals and taxables anyway? What's the tax rate 20 years from now? I'm super glad that's not my problem. Now if I had mostly taxables because I was so wealthy I didn't qualify for the tax-advantaged accounts, I imagine I could manage. :mrgreen:
How in the world do you figure our your expense twenty years down the road? How would you know what could be the inflation? How would you know what would be the local taxes? How would you know what would be your real estate taxes? How would you know what would BHEAD tax which could be there at that time computed based upon your net assets? How would you know what your Chinese/Indian overlords will tax their US subjects? (OK, the last one was throw away :-)

You don't know!
Is this helping your point or mine? So you suggest adding one more unknown to that by having money you owe taxes on, and having absolutely no idea what rate you'll have to pay?

.....

I left off a disclaimer: I plan to have ~ 35K pension (in addition to SS x 2), so I do have one known; A lot of tax free or low(er) tax space is already taken in my case. But I'm not sure if that wasn't true that it would change my opinion. But obviously I factored that in.

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MP123
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MP123 » Thu May 17, 2018 9:07 pm

azanon wrote:
Thu May 17, 2018 8:15 pm

It's illogical to leave the future tax rate "wildcard" in play, if you can completely take it out of play with a Roth, or Roth 401(k). What are we, some 20 trillion or thereabouts in debt? I don't recall the exact numbers, but in the early 20th century, didn't tax brackets get higher than 50%? So my reasoning? Why leave that question mark out there, when you can just pay Uncle Sam today, and be completely done with it.
Yes, up to 94% marginal on income over $200k at the end of WWII.

Who knows what the future holds.

azanon
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by azanon » Thu May 17, 2018 9:10 pm

MP123 wrote:
Thu May 17, 2018 9:07 pm
azanon wrote:
Thu May 17, 2018 8:15 pm

It's illogical to leave the future tax rate "wildcard" in play, if you can completely take it out of play with a Roth, or Roth 401(k). What are we, some 20 trillion or thereabouts in debt? I don't recall the exact numbers, but in the early 20th century, didn't tax brackets get higher than 50%? So my reasoning? Why leave that question mark out there, when you can just pay Uncle Sam today, and be completely done with it.
Yes, up to 94% marginal on income over $200k at the end of WWII.

Who knows what the future holds.
Yeah even the possibility of something even close to that terrifies me. But I would absolutely hate myself after-the-fact, if I had to be constantly reminded that I had the choice to use a Roth and didn't....... If it goes the other way though, I'll just shoulder shrug and be reminded that insurance isn't free, but that didn't make buying the insurance wrong just because I didn't use it.

yeahman
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by yeahman » Thu May 17, 2018 9:22 pm

KlangFool wrote:
Thu May 17, 2018 8:36 pm
yeahman,

A consumption tax is a double tax on every spending. It is not limited to Roth. It does not discriminate.

KlangFool
A consumption tax is a double tax only if it was taxed the first time as in a Roth but unlike a traditional.

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JoMoney
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JoMoney » Thu May 17, 2018 9:28 pm

By using a pre-tax traditional account I get the tax benefit today, and the optionality of being able to pay taxes on it and convert to Roth in the future.

Thanks to the Tax Cuts and Jobs Act of 2017, I could convert money over to Roth today and be better off than had I paid taxes on it and directly contributed it to a Roth in years past.
I don't think I'll do that though, because I think there might be even better tax opportunities for my situation. If I quit my job/retired I could start converting the money to Roth, or withdrawing it via 72(t) SEPP and only paying my much lower bottom up marginal rate and applying standard deduction to it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

yeahman
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by yeahman » Thu May 17, 2018 9:30 pm

wrongfunds wrote:
Thu May 17, 2018 8:37 pm
Do you consider sales tax imposed by your locality or state to be "double taxation"? Don't you also pay the local real estate tax and state income tax using post-federal-tax money? Do you believe you are being double taxed? God forbid if there were to be "living wealth tax", would you consider that to be "double tax"? So why would VAT or similar consumption tax is considered to be "double tax"?
If we were to switch to a consumption tax:

New income: Pay consumption tax only.

Traditional IRA/401k: Pay consumption tax only.

Roth IRA/401k: Pay income tax and consumption tax.

It would be double taxed in relation to everything else. Alternatively, you can call everything else tax-advantaged but that would be even odder.

TravelforFun
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by TravelforFun » Thu May 17, 2018 9:51 pm

Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable will be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.

TravelforFun

yeahman
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by yeahman » Thu May 17, 2018 9:54 pm

TravelforFun wrote:
Thu May 17, 2018 9:51 pm
Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable will be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.

TravelforFun
This misconception is still around?

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 10:02 pm

yeahman wrote:
Thu May 17, 2018 9:22 pm
KlangFool wrote:
Thu May 17, 2018 8:36 pm
yeahman,

A consumption tax is a double tax on every spending. It is not limited to Roth. It does not discriminate.

KlangFool
A consumption tax is a double tax only if it was taxed the first time as in a Roth but unlike a traditional.
yeahman,

So does every dollar that you used for spending.

KlangFooll

sc9182
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by sc9182 » Thu May 17, 2018 10:06 pm

yeahman wrote:
Thu May 17, 2018 9:54 pm
TravelforFun wrote:
Thu May 17, 2018 9:51 pm
Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable will be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.

TravelforFun
This misconception is still around?
Think TravelforFun referring to - don't ignore the power of Taxable account's 15% LTCG rate, better yet, 0% LTCG rate if you can keep AGI & income under certain thresholds. Some folks go beyond IRA/Roth contribution limits due to current high income. Don't fret much, Taxable ain't all that bad, especially with LTCG, and ability to do Tax-loss harvesting (which you can't do in Tax-advantaged spaces efficiently, except for possible Roth conversion)

Diversification is the keyword ..

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JoMoney
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JoMoney » Thu May 17, 2018 10:10 pm

A consumption tax will impact the spending form both a Roth and a traditional account. The argument should be over which one will leave you with more spendable income.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 10:12 pm

yeahman wrote:
Thu May 17, 2018 9:30 pm
wrongfunds wrote:
Thu May 17, 2018 8:37 pm
Do you consider sales tax imposed by your locality or state to be "double taxation"? Don't you also pay the local real estate tax and state income tax using post-federal-tax money? Do you believe you are being double taxed? God forbid if there were to be "living wealth tax", would you consider that to be "double tax"? So why would VAT or similar consumption tax is considered to be "double tax"?
If we were to switch to a consumption tax:

New income: Pay consumption tax only.

Traditional IRA/401k: Pay consumption tax only.

Roth IRA/401k: Pay income tax and consumption tax.

It would be double taxed in relation to everything else. Alternatively, you can call everything else tax-advantaged but that would be even odder.
yeahman,

You are assuming a consumption tax only system. But, globally, the system is a high consumption tax plus low-income tax system.

Everything is double taxed.

KlangFool

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 10:19 pm

JoMoney wrote:
Thu May 17, 2018 10:10 pm
A consumption tax will impact the spending form both a Roth and a traditional account. The argument should be over which one will leave you with more spendable income.
JoMoney,

Globally, the trend is to lower the income tax rate while implementing the consumption tax. And, gradually lower the income tax rate further while increasing the consumption tax rate.

KlangFool

TravelforFun
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by TravelforFun » Thu May 17, 2018 10:21 pm

yeahman wrote:
Thu May 17, 2018 9:54 pm
TravelforFun wrote:
Thu May 17, 2018 9:51 pm
Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable would be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.

TravelforFun
This misconception is still around?
How is this a misconception?

TravelforFun

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 10:22 pm

wrongfunds wrote:
Thu May 17, 2018 8:37 pm
Do you consider sales tax imposed by your locality or state to be "double taxation"? Don't you also pay the local real estate tax and state income tax using post-federal-tax money? Do you believe you are being double taxed? God forbid if there were to be "living wealth tax", would you consider that to be "double tax"? So why would VAT or similar consumption tax is considered to be "double tax"?

Frankly, I would like everybody to willingly pay the taxes up front. That way, the government will NOT come after the tax deferred accounts. It is win-win situation and I would like people like myself and KF to *STOP* trying to convert other people to our way. It is NOT in our interest to do so :-)
wrongfunds,

Don't worry because most folks will not listen to us anyhow.

KlangFool

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MP123
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MP123 » Thu May 17, 2018 10:23 pm

sc9182 wrote:
Thu May 17, 2018 10:06 pm
yeahman wrote:
Thu May 17, 2018 9:54 pm
TravelforFun wrote:
Thu May 17, 2018 9:51 pm
Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable will be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.

TravelforFun
This misconception is still around?
Think TravelforFun referring to - don't ignore the power of Taxable account's 15% LTCG rate, better yet, 0% LTCG rate if you can keep AGI & income under certain thresholds. Some folks go beyond IRA/Roth contribution limits due to current high income. Don't fret much, Taxable ain't all that bad, especially with LTCG, and ability to do Tax-loss harvesting (which you can't do in Tax-advantaged spaces efficiently, except for possible Roth conversion)

Diversification is the keyword ..
Yes, and with 0% LTCG up to $77,400 AGI MFJ with a $24k standard deduction taxable isn't looking bad at all.

At this point...

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JoMoney
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JoMoney » Thu May 17, 2018 10:23 pm

KlangFool wrote:
Thu May 17, 2018 10:19 pm
JoMoney wrote:
Thu May 17, 2018 10:10 pm
A consumption tax will impact the spending form both a Roth and a traditional account. The argument should be over which one will leave you with more spendable income.
JoMoney,

Globally, the trend is to lower the income tax rate while implementing the consumption tax. And, gradually lower the income tax rate further while increasing the consumption tax rate.

KlangFool
Maybe... sure... trends might change, but to clarify, you're arguing that using a pre-tax traditional tax defered account is likely to leave someone more spendable income than a Roth ?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 10:32 pm

JoMoney wrote:
Thu May 17, 2018 10:23 pm
KlangFool wrote:
Thu May 17, 2018 10:19 pm
JoMoney wrote:
Thu May 17, 2018 10:10 pm
A consumption tax will impact the spending form both a Roth and a traditional account. The argument should be over which one will leave you with more spendable income.
JoMoney,

Globally, the trend is to lower the income tax rate while implementing the consumption tax. And, gradually lower the income tax rate further while increasing the consumption tax rate.

KlangFool
Maybe... sure... trends might change, but to clarify, you're arguing that using a pre-tax traditional tax defered account is likely to leave someone more spendable income than a Roth ?
JoMoney,

My position is to max Trad. 401K/403B/457 contribution and put the tax savings into Roth IRAs and the taxable account. Then, you have money in all 3 buckets. You have complete tax diversification.

KlangFool

sc9182
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by sc9182 » Thu May 17, 2018 10:40 pm

JoMoney wrote:
Thu May 17, 2018 10:23 pm
KlangFool wrote:
Thu May 17, 2018 10:19 pm
JoMoney wrote:
Thu May 17, 2018 10:10 pm
A consumption tax will impact the spending form both a Roth and a traditional account. The argument should be over which one will leave you with more spendable income.
JoMoney,

Globally, the trend is to lower the income tax rate while implementing the consumption tax. And, gradually lower the income tax rate further while increasing the consumption tax rate.

KlangFool
Maybe... sure... trends might change, but to clarify, you're arguing that using a pre-tax traditional tax defered account is likely to leave someone more spendable income than a Roth ?
In the limited context of what KF said - yes ("lower future income tax rate while implementing the consumption tax" .. if..)

KlangFool - don't forget to add-in "HSA" to your bucket list - which is /triple/ tax advantaged.

During low/no-income years, Roth conversion and/or LTCG 0% may be well worth doing. If hit with bad returns/markets, consider doing "tax loss" harvesting too (in taxable) ..

Again - Tax diversification is the key ..

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FiveK
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Thu May 17, 2018 10:44 pm

TravelforFun wrote:
Thu May 17, 2018 10:21 pm
yeahman wrote:
Thu May 17, 2018 9:54 pm
TravelforFun wrote:
Thu May 17, 2018 9:51 pm
Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable would be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.
This misconception is still around?
How is this a misconception?
In general, an IRA is taxed only once: either at contribution (for a Roth) or withdrawal (for a traditional). For the same tax rates, the result is identical, but let's use a Roth for comparison with taxable.

A taxable account, like a Roth, is taxed at contribution. One then is subject to annual taxes on interest, dividends, and any realized capital gains. When withdrawn, all capital gains are subject to tax. Thus, at best (in the case of no annual tax and no capital gains tax), a taxable account can equal an IRA. In most cases there will be taxes and then a taxable account is worse than an IRA.

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Thu May 17, 2018 10:52 pm

FiveK wrote:
Thu May 17, 2018 10:44 pm
TravelforFun wrote:
Thu May 17, 2018 10:21 pm
yeahman wrote:
Thu May 17, 2018 9:54 pm
TravelforFun wrote:
Thu May 17, 2018 9:51 pm
Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable would be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.
This misconception is still around?
How is this a misconception?
In general, an IRA is taxed only once: either at contribution (for a Roth) or withdrawal (for a traditional). For the same tax rates, the result is identical, but let's use a Roth for comparison with taxable.

A taxable account, like a Roth, is taxed at contribution. One then is subject to annual taxes on interest, dividends, and any realized capital gains. When withdrawn, all capital gains are subject to tax. Thus, at best (in the case of no annual tax and no capital gains tax), a taxable account can equal an IRA. In most cases there will be taxes and then a taxable account is worse than an IRA.
FiveK,

Yes, but in some cases, it could be better.

1) During the market downturn, use TLH to stock up tax loss to deduct higher taxed income up to $3,000 per year.

2) Then, do tax gain harvesting to pay lower long-term gain tax versus higher income tax rate

3) Roth conversion of tax-deferred account is taxed on ordinary income tax rate.

It will take some additional effort. But, it could be worthwhile.

KlangFool

sc9182
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by sc9182 » Thu May 17, 2018 10:55 pm

FiveK wrote:
Thu May 17, 2018 10:44 pm
TravelforFun wrote:
Thu May 17, 2018 10:21 pm
yeahman wrote:
Thu May 17, 2018 9:54 pm
TravelforFun wrote:
Thu May 17, 2018 9:51 pm
Another important factor to take into consideration when deciding on taxable vs. IRA is that IRA money when withdrawn would be taxed as ordinary income, but the gain in taxable would be taxed as long term capital gain or 15% for most people. The 15% tax rate is very attractive.
This misconception is still around?
How is this a misconception?
In general, an IRA is taxed only once: either at contribution (for a Roth) or withdrawal (for a traditional). For the same tax rates, the result is identical, but let's use a Roth for comparison with taxable.

A taxable account, like a Roth, is taxed at contribution. One then is subject to annual taxes on interest, dividends, and any realized capital gains. When withdrawn, all capital gains are subject to tax. Thus, at best (in the case of no annual tax and no capital gains tax), a taxable account can equal an IRA. In most cases there will be taxes and then a taxable account is worse than an IRA.
Can think of Tax-loss harvesting, Step-Up basis upon Death of a Spouse would help Taxable accounts. A death of spouse and/or RMDs could increase tax-burden of 401k/ira withdrawals., where as the opposite is true on Taxable accounts. Also, there are limits on Income/AGI to limit contributions to IRAs .. while taxable doesn't impose such limits. Yes, at times Taxables do come-out ahead of IRAs (especially with 0% LTCG possibility & Tax-loss harvesting abilities; Step-up basis too!). Prefer 401k/IRA over Taxable, but Taxable if invested tax-efficiently, ain't all that bad choice - also helping towards Tax-diversification of portfolio.

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FiveK
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Thu May 17, 2018 11:01 pm

KlangFool wrote:
Thu May 17, 2018 10:52 pm
Yes, but in some cases, it could be better.

1) During the market downturn, use TLH to stock up tax loss to deduct higher taxed income up to $3,000 per year.

2) Then, do tax gain harvesting to pay lower long-term gain tax versus higher income tax rate

3) Roth conversion of tax-deferred account is taxed on ordinary income tax rate.

It will take some additional effort. But, it could be worthwhile.
It could be, but in general it won't be.

If one really thinks Tax Loss Harvesting (TLH) will make taxable better than tax-advantaged, then one should not invest (other than perhaps to get an employer match) in any tax-advantaged plan at all. That's probably not a generic recommendation most would support. ;)

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FiveK
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Thu May 17, 2018 11:11 pm

sc9182 wrote:
Thu May 17, 2018 10:55 pm
...Step-Up basis upon Death of a Spouse would help Taxable accounts. A death of spouse and/or RMDs could increase tax-burden of 401k/ira withdrawals., where as the opposite is true on Taxable accounts. Also, there are limits on Income/AGI to limit contributions to IRAs .. while taxable doesn't impose such limits. Yes, at times Taxables do come-out ahead of IRAs (especially with 0% LTCG possibility & Tax-loss harvesting abilities; Step-up basis too!). Prefer 401k/IRA over Taxable, but Taxable if invested tax-efficiently, ain't all that bad choice - also helping towards Tax-diversification of portfolio.
Step-Up basis is effectively the same as no tax on capital gains when withdrawn so it can't make taxable better than a Roth IRA.

If one makes the "wrong" choice in using a traditional IRA, the choice is wrong only if the withdrawal tax rate is higher than the contribution tax rate. But if that happens, the likelihood of a 0% capital gains tax is vanishingly small.

Yes, one can probably construct scenarios in which taxable beats tax-advantaged, but the odds are not favorable.

inbox788
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by inbox788 » Thu May 17, 2018 11:20 pm

KlangFool wrote:
Thu May 17, 2018 10:12 pm
yeahman wrote:
Thu May 17, 2018 9:30 pm
wrongfunds wrote:
Thu May 17, 2018 8:37 pm
Do you consider sales tax imposed by your locality or state to be "double taxation"? Don't you also pay the local real estate tax and state income tax using post-federal-tax money? Do you believe you are being double taxed? God forbid if there were to be "living wealth tax", would you consider that to be "double tax"? So why would VAT or similar consumption tax is considered to be "double tax"?
If we were to switch to a consumption tax:

New income: Pay consumption tax only.

Traditional IRA/401k: Pay consumption tax only.

Roth IRA/401k: Pay income tax and consumption tax.

It would be double taxed in relation to everything else. Alternatively, you can call everything else tax-advantaged but that would be even odder.
yeahman,

You are assuming a consumption tax only system. But, globally, the system is a high consumption tax plus low-income tax system.

Everything is double taxed.

KlangFool
Or triple taxed. Or quadruple taxed.
https://wallethub.com/edu/states-with-h ... den/20494/

Income tax may be levied by more than one government entity and across governments. If you're lucky, treaties allow one to deduct the tax of another, so you're not paying the total tax twice. It used to be that state income tax was deductible, so you didn't have to pay federal tax, but the tax reform changed the rules. Add to that foreign tax, and depending on the country, your tax treatment may be different. It's the stuff that keeps tax accountants in business.

As far as consumption tax, states collect sales tax AND property tax in varying amounts. The Holy Grail is finding a citizenship and residency that doesn't tax income, and spend it in a location that doesn't tax consumption, but alas, that's a super-rich problem.

https://www.worldatlas.com/articles/cou ... e-tax.html
http://nomadcapitalist.com/2017/07/17/u ... istration/

The best we can do is consider decision like NJ/CT vs Brooklyn/Queens or DC vs VA/MD.
Last edited by inbox788 on Thu May 17, 2018 11:24 pm, edited 1 time in total.

sc9182
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by sc9182 » Thu May 17, 2018 11:22 pm

FiveK wrote:
Thu May 17, 2018 11:11 pm
sc9182 wrote:
Thu May 17, 2018 10:55 pm
...Step-Up basis upon Death of a Spouse would help Taxable accounts. A death of spouse and/or RMDs could increase tax-burden of 401k/ira withdrawals., where as the opposite is true on Taxable accounts. Also, there are limits on Income/AGI to limit contributions to IRAs .. while taxable doesn't impose such limits. Yes, at times Taxables do come-out ahead of IRAs (especially with 0% LTCG possibility & Tax-loss harvesting abilities; Step-up basis too!). Prefer 401k/IRA over Taxable, but Taxable if invested tax-efficiently, ain't all that bad choice - also helping towards Tax-diversification of portfolio.
Step-Up basis is effectively the same as no tax on capital gains when withdrawn so it can't make taxable better than a Roth IRA.

If one makes the "wrong" choice in using a traditional IRA, the choice is wrong only if the withdrawal tax rate is higher than the contribution tax rate. But if that happens, the likelihood of a 0% capital gains tax is vanishingly small.

Yes, one can probably construct scenarios in which taxable beats tax-advantaged, but the odds are not favorable.
You are mixing up Roths with Traditional IRAs. Taxable chance of coming out ahead is better against Traditional IRA (in rare but some scenarios, yes, agree; but those scenarios do occur, and can be efficiently executed to some extent). Do try to fill-up tax deferred buckets to hilt before sending additional net savings to Taxable/brokerage.
Again, diversification holds key.

inbox788
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by inbox788 » Thu May 17, 2018 11:34 pm

By the way, if you sort the Sales Tax, you'll find Hawaii and Nevada on top. This is because of their relative small population and large number of visitors, and a way for stick it to the tourists, similar to the high hotel taxes. Arizona and Florida are fairly high on the list, and that benefits the retirees/residents when the income tax is low/reduced/eliminated.

https://wallethub.com/edu/states-with-h ... den/20494/

Moving from NY 13.04% to FL 6.64% has many benefits, including lower overall taxes, not just federal income tax.

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FiveK
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Thu May 17, 2018 11:46 pm

sc9182 wrote:
Thu May 17, 2018 11:22 pm
You are mixing up Roths with Traditional IRAs.
How so? Yes, I am saying that for equal tax rates traditional and Roth IRAs are equivalent, but could you explain "mixing up"?
Taxable chance of coming out ahead is better against Traditional IRA (in rare but some scenarios, yes, agree; but those scenarios do occur, and can be efficiently executed to some extent).
Agreed, if the choice of traditional was wrong because the withdrawal tax rate is higher than the contributory rate. If traditional was the correct choice, however, because the withdrawal tax rate is lower (e.g., 22% saved vs. 12% taxed), then taxable has a very difficult time coming out ahead.

If traditional was the wrong choice, then the fair comparison is between taxable vs. Roth. Otherwise one has "any alternative can be made to look sufficiently good if compared with one sufficiently bad."
Do try to fill-up tax deferred buckets to hilt before sending additional net savings to Taxable/brokerage.
No argument there! :sharebeer

IlliniDave
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by IlliniDave » Fri May 18, 2018 3:48 am

CnC wrote:
Wed May 16, 2018 6:31 pm
I just saw another comment where someone was touting the benefits of a pretax 401k vs a Roth where they said most people will be in a lower tax bracket in retirement so pretax is better.

While that is a pair of factually correct statements. Most people will be in a lower bracket. And if you are in a lower tax bracket in retirement you will be better off pre tax.

But the people they are talking to on this site are maxing out their 401k's, IRA's and funding 529's, HSA's or taxable accounts.

These are not the "typical people" that will be in a lower tax bracket in retirement. Having 25x annual expenses is considered a risky retirement here.

So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?

Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.

Any thoughts?
It could. You really have to think it through for yourself, which would require having a fairly detailed plan. While young it is difficult to see that far ahead so maybe hedging by at least splitting between Roth and pre-tax is the most prudent. For many people starting off with Roth while young and with relatively lower earnings is probably a good way to go (when I was at that stage Roth IRAs did not exist), then perhaps switching to pre-tax when they ascend the tax bracket structure later. Like with many things there's no one-size-fits-all answer to Roth vs. Traditional.

In my case my pre-tax retirement income target ranges from <25% of what I'm earning now to maybe 45% or so once I start taking SS (if I wait until age 70) and begin RMDs. So for me it is clear cut barring a massive change in the tax code: maxing my 401(k) is priority 1.
Don't do something. Just stand there!

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celia
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by celia » Fri May 18, 2018 4:14 am

Getting back to the original question:
CnC wrote:
Wed May 16, 2018 6:31 pm
I just saw another comment where someone was touting the benefits of a pretax 401k vs a Roth where they said most people will be in a lower tax bracket in retirement so pretax is better.
Sure, most people will be in a lower tax bracket in retirement, but not all.

And most people will start Social Security at 62.
And most people have never heard of John Bogle.
And most people have less than a year's salary in savings (not counting the young folks).
And most people have never heard of a "Backdoor Roth".
And most people haven’t calculated their tax rate in retirement. (Of those who have, not many took into account the death of a spouse which would then make them file as Single.)
(Heck, many don't even need to file taxes!)

So, are YOU like "most people"? Or do you know things they don't know?


I assume that since you're posting on Bogleheads, you have read posts and wiki pages here. You've asked questions. You've engaged in reasonable conversations about money. You've learned more than "most people".

So, are YOU like "most people"? Or do you know things they don't know?

This doesn't imply anything about your current or future tax bracket, but does show you have an advantage because of your knowledge.

JustinR
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by JustinR » Fri May 18, 2018 4:37 am

CnC wrote:
Wed May 16, 2018 6:31 pm
I just saw another comment where someone was touting the benefits of a pretax 401k vs a Roth where they said most people will be in a lower tax bracket in retirement so pretax is better.

While that is a pair of factually correct statements. Most people will be in a lower bracket. And if you are in a lower tax bracket in retirement you will be better off pre tax.

But the people they are talking to on this site are maxing out their 401k's, IRA's and funding 529's, HSA's or taxable accounts.

These are not the "typical people" that will be in a lower tax bracket in retirement. Having 25x annual expenses is considered a risky retirement here.

So my question is this, does this "rule" saying people will be in a lower tax bracket in retirement actually lead to misleading advise?

Granted I'm still going with the Roth IRA and pretax 401k but I wonder if the traditional advise is correct for myself and the majority of people here.

Any thoughts?
When you're working, your income > your expenses.

When you're retired, your income = your expenses (which will be even lower when you retire).

Seems pretty straightforward to me?

wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Fri May 18, 2018 7:01 am

It makes perfect sense for a brain surgeon (and similar guaranteed exponential increase in their income) going through residency and fellowship to max out Roth and forgo tax deferred. This is because during those years, she will be in very low tax bracket and once completed and starts earning regular income, she would be in highest tax bracket and could sock away exceedingly high amount towards her retirement account which would easily spill over the $55K limit. When your savings are way higher than those limit, you do not care about losing the tax benefit of that $18.5K (at whatever your marginal tax rate happens to be) and your goal is to sock in as much as you legally could towards tax deferred growth. So even if your marginal rate at retirement could be less, you don't (and shouldn't) care. Your objective is to beef up your retirement and not worry about future taxation.

For everybody else on normal trajectory, mathematically it is better to make use of the tax deferred space.

BUT once again, if you think otherwise, more power to you! Go ahead and give my government more tax money. It definitely helps me!

wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Fri May 18, 2018 7:03 am

When you're working, your income > your expenses.

When you're retired, your income = your expenses (which will be even lower when you retire).

Seems pretty straightforward to me?
NOT for some, who are waiting to "really live" during retirement! They have already told us that they want 140% of their income in their retirement.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by meaghansketch » Fri May 18, 2018 7:47 am

celia wrote:
Fri May 18, 2018 4:14 am
Getting back to the original question:
CnC wrote:
Wed May 16, 2018 6:31 pm
I just saw another comment where someone was touting the benefits of a pretax 401k vs a Roth where they said most people will be in a lower tax bracket in retirement so pretax is better.
Sure, most people will be in a lower tax bracket in retirement, but not all.

And most people will start Social Security at 62.
And most people have never heard of John Bogle.
And most people have less than a year's salary in savings (not counting the young folks).
And most people have never heard of a "Backdoor Roth".
And most people haven’t calculated their tax rate in retirement. (Of those who have, not many took into account the death of a spouse which would then make them file as Single.)
(Heck, many don't even need to file taxes!)

So, are YOU like "most people"? Or do you know things they don't know?
You can know things most people don't know but not be in a situation where we can put those things to good use. I know I should max a 401(k) but one is not offered at my job. (Nor has been, btw, at any job I've worked in my industry, in my 12-year so far career, so it's not just a case of switching jobs). I know it would be nice to have a pension, but I don't have one. I know that if I had self-employment income I would want to start a solo 401(k),but I don't. As a result, my tax-deferred space is extremely limited (to $5500/yr) and it would be almost impossible for me to put enough in there over the course of my career to get my tax rate up to anywhere near my current rate. I followed through my 20s the conventional advice to do a Roth IRA especially if you are early in your career, and only in my early 30s bothered to do the math and realize that I was paying 25% in taxes now to avoid paying 10% in retirement. All this is just to say - just because you're on Bogleheads doesn't mean that you will be in a higher tax bracket in retirement. I don't know what the answer is - people generally want a rule of thumb, especially when they're new to this stuff and don't trust themselves to do the math.

ad2007
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by ad2007 » Fri May 18, 2018 7:54 am

azanon wrote:
Thu May 17, 2018 8:15 pm
Roth or Roth type accounts win out regardless of your current tax rate vs. whatever future rate you
May I ask what is/was your marginal tax rate during your accumulation period?

If you are at the highest tax rate now/while accumulating, aren't you simply betting on higher future tax rates? From what I've seen, those crazy high tax rates were only for brief periods in our history. No?

SGM
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by SGM » Fri May 18, 2018 8:48 am

We are at a higher rate in retirement than in most of our working years. While working we contributed to tax deferred accounts to the maximum. Roth accounts were not available or allowed for someone with our income until 2010. Most of my working years were before Roth accounts even existed. Most of the time we were also able to save in taxable accounts. We currently have only Roth accounts and taxable accounts.

We no longer can put any of our income into tax deferred accounts which decreased our income tax while working. Certainly when one of us is widowed the single income bracket will take more of the survivor's income.

I would rather have high income than pay no taxes. One has the right to use the tax law to one's advantage in lowering taxes. This is not the same as tax evasion, which is of course illegal.

I don't know how much I would put into Roth accounts vs. traditional accounts if I were to start working again. I have better things to think about and do in retirement.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by yeahman » Fri May 18, 2018 9:09 am

KlangFool wrote:
Thu May 17, 2018 10:19 pm
JoMoney wrote:
Thu May 17, 2018 10:10 pm
A consumption tax will impact the spending form both a Roth and a traditional account. The argument should be over which one will leave you with more spendable income.
JoMoney,

Globally, the trend is to lower the income tax rate while implementing the consumption tax. And, gradually lower the income tax rate further while increasing the consumption tax rate.

KlangFool
And therein lies the risk for Roths that isn't shared by tax-deferred accounts. Even if effective tax rates remain the same, a shift away from an income base and towards a consumption base would disadvantage Roths. Those who think that Roths hedge against tax changes are assuming that the tax base will not change and only the rates will. That's not at all a safe assumption.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by azanon » Fri May 18, 2018 9:12 am

ad2007 wrote:
Fri May 18, 2018 7:54 am
azanon wrote:
Thu May 17, 2018 8:15 pm
Roth or Roth type accounts win out regardless of your current tax rate vs. whatever future rate you
May I ask what is/was your marginal tax rate during your accumulation period?

If you are at the highest tax rate now/while accumulating, aren't you simply betting on higher future tax rates? From what I've seen, those crazy high tax rates were only for brief periods in our history. No?
I didn't say that. I said "So for me, Roth or Roth type accounts win out regardless of your current tax rate vs. whatever future rate you hope to have." and in the context of the paragraph I was explaining why I opt for that option as a personal choice.

I wish I was at the highest tax rate now (because that'd mean that I'm making a lot of money), but I'm not even close. I'm 22% marginal. I think that's a pretty good deal, and would rather just go ahead and pay up now. Then someone besides me can worry about how much taxes they're going to have to pay on their retirement accounts sometime later.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by azanon » Fri May 18, 2018 9:15 am

I haven't had a chance to read the entire thread yet, but I would think the really wise folks are going Roth because it provides for the most room for tax sheltered money. Specifically, there is no doubt at all that 18,500 in a Roth is worth more than 18,500 in a traditional.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by mptfan » Fri May 18, 2018 9:26 am

azanon wrote:
Fri May 18, 2018 9:15 am
Specifically, there is no doubt at all that 18,500 in a Roth is worth more than 18,500 in a traditional.
There is lots of doubt about that because it is not true for most people. Consider this analogy: I have a gold coin and I offer to sell it to you and I give you two options:

Option 1: You pay me $750 now, and I will agree to buy it back from you in the future when you are ready to sell for $850.
Option 2: You pay me $1,000 now, and I will agree to buy it back from you in the future when you are ready to sell for $1,000.

Which option will you pick?

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