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

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
sc9182
Posts: 206
Joined: Wed Aug 17, 2016 7:43 pm

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

Post by sc9182 » Fri May 18, 2018 9:36 am

azanon wrote:
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.
I think your interpretation of many others is not much based on facts. Roths can be be used like "barbells" - contribution/possible-conversion during low-earning stages/early-part-of career, and towards Post-high-earning/tail-end-of times of career (call it early retirement, or pre-SS, or full-retirement - what may) -- you could do Roth conversions for tax optimization and diversification.

To put "All in Roth" - NO, not me, not many suppose., especially during your earning (or high earning) stage of career.

Don't underestimate the power of larger possible kitty of Traditional IRA/401K, as these allows to fill lower-tax brackets, QCDs, or to pass generational wealth to lower-earning/bracket kids. Especially, power of ERISA protection bestowed upon 401ks and Rollover IRAs.

azanon
Posts: 1882
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

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 9:37 am

mptfan wrote:
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?
LOL, I meant after the fact/after taxes are paid. Let's say you're doing so well, you have $24,000 to save for retirement (assume taxes for that year paid), and your savings options are a $18.500 Roth/Traditional from your employer and a $5,500 Roth/Traditional IRA. Regardless of your tax rate, surely, you wouldn't opt for the traditional account!

My point was if you're an ultra saver, you're going to use as much tax advantaged space as possible, and of course Roths provide more in the end because you can put "after-tax" money in them.

azanon
Posts: 1882
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

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 9:40 am

sc9182 wrote:
Fri May 18, 2018 9:36 am
azanon wrote:
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.
I think your interpretation of many others is not much based on facts. Roths can be be used like "barbells" - contribution/possible-conversion during low-earning stages/early-part-of career, and towards Post-high-earning/tail-end-of times of career (call it early retirement, or pre-SS, or full-retirement - what may) -- you could do Roth conversions for tax optimization and diversification.

To put "All in Roth" - NO, not me, not many suppose., especially during your earning (or high earning) stage of career.
Huh?
sc9182 wrote:
Fri May 18, 2018 9:36 am
Don't underestimate the power of larger possible kitty of Traditional IRA/401K, as these allows to fill lower-tax brackets, QCDs, or to pass generational wealth to lower-earning/bracket kids. Especially, power of ERISA protection bestowed upon 401ks and Rollover IRAs.
Traditionals leave your heirs with a tax bill, Roth's don't. Roth 401(k)'s have ERISA protection just like Traditional 401(k)'s.

wrongfunds
Posts: 1728
Joined: Tue Dec 21, 2010 3:55 pm

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 9:43 am

Let's say you're doing so well, you have $24,000 to save for retirement (assume taxes for that year paid), and your savings options are a $18.500 Roth/Traditional from your employer and a $5,500 Roth/Traditional IRA. Regardless of your tax rate, surely, you wouldn't opt for the traditional account!
Do you realize that if you were to put $18,500 in the traditional you would have more than $24,000 to save for the retirement? It is only when you have $200K (that is over $55K) to save, you need to run the what if scenario.

azanon
Posts: 1882
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

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 9:48 am

wrongfunds wrote:
Fri May 18, 2018 9:43 am
Let's say you're doing so well, you have $24,000 to save for retirement (assume taxes for that year paid), and your savings options are a $18.500 Roth/Traditional from your employer and a $5,500 Roth/Traditional IRA. Regardless of your tax rate, surely, you wouldn't opt for the traditional account!
Do you realize that if you were to put $18,500 in the traditional you would have more than $24,000 to save for the retirement? It is only when you have $200K (that is over $55K) to save, you need to run the what if scenario.
This is being made unnecessarily confusing. My household gross income is well under 200K, but I'm able to completely fund a $18,500 Roth 401(k) and 2, $5,500 Roth IRA accounts, despite the taxes my wife and I owe on our income. If one can do that, it is easily a better choice than using traditionals instead, then saving the leftover money (cause you got the tax break) into a taxable account. Hope that clears up what I'm saying.

randomguy
Posts: 6162
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Fri May 18, 2018 9:50 am

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.

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

TravelforFun
It is a misconception cause you aren't really saving on taxes
a) TIRA - pay 15% on 100k and have 85k
b) pay 15% on 50k, and have your 42.5k double to 85k?

Now there are some details about tax drag, investment options, and the effects of 100k of income versus 42.5k but in general the lower LTGC rate isn't worth anything since you have to pay OI tax rates to get there. Now if your OI are changing you might come out ahead (or behind) but that is sort of a different question.

CnC
Posts: 536
Joined: Thu May 11, 2017 12:41 pm

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

Post by CnC » Fri May 18, 2018 9:57 am

mptfan wrote:
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?
That analogy literally has nothing to do with Roth.
It makes no sense what so ever. You may as well say how about I give you 4 carrots and you give me back a goose and you would be closer to Roth vs pretax 401k's
You are saying that money in pretax grows but Roth doesn't. You are also saying that you don't pay taxes in retirement either.



Your money in a Roth is worth 25%-50% more than your money in pretax account. You likely will have less but the money is worth more dollar for dollar.

5 million in a Roth is worth anywhere between 6.25m and 7.5m in pretax. Milage may vary based on individual situation. But

mptfan
Posts: 4621
Joined: Mon Mar 05, 2007 9:58 am

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 10:01 am

CnC wrote:
Fri May 18, 2018 9:57 am
You are saying that money in pretax grows but Roth doesn't. You are also saying that you don't pay taxes in retirement either.
I didn't say either of those things.

bloom2708
Posts: 4634
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

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

Post by bloom2708 » Fri May 18, 2018 10:04 am

azanon wrote:
Fri May 18, 2018 9:48 am
wrongfunds wrote:
Fri May 18, 2018 9:43 am
Let's say you're doing so well, you have $24,000 to save for retirement (assume taxes for that year paid), and your savings options are a $18.500 Roth/Traditional from your employer and a $5,500 Roth/Traditional IRA. Regardless of your tax rate, surely, you wouldn't opt for the traditional account!
Do you realize that if you were to put $18,500 in the traditional you would have more than $24,000 to save for the retirement? It is only when you have $200K (that is over $55K) to save, you need to run the what if scenario.
This is being made unnecessarily confusing. My household gross income is well under 200K, but I'm able to completely fund a $18,500 Roth 401(k) and 2, $5,500 Roth IRA accounts, despite the taxes my wife and I owe on our income. If one can do that, it is easily a better choice than using traditionals instead, then saving the leftover money (cause you got the tax break) into a taxable account. Hope that clears up what I'm saying.
That is the entire point of this thread. You can do $18,500 Roth 401k + 2 x $5,500 into Roth IRAs. You are paying the tax at your highest marginal rate on those dollars. The tax is paid. Never getting it back. It took ~$40k of your gross income to fund those post-tax dollars.

You could have put $18,500 in pre-tax, $11,000 Roth and some $ to your taxable. More to grow for 30 or 40 years. Invest early and often.

You can think "Whew, I am done paying that tax now.." but in the future there are many scenarios where you might not have to pay the tax or pay lower tax on chunks of that money as you draw down. Being able to and being tax efficient are two different things.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend very little time here! | 3. You have no control <--spend no time here

randomguy
Posts: 6162
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Fri May 18, 2018 10:07 am

azanon wrote:
Fri May 18, 2018 9:48 am
wrongfunds wrote:
Fri May 18, 2018 9:43 am
Let's say you're doing so well, you have $24,000 to save for retirement (assume taxes for that year paid), and your savings options are a $18.500 Roth/Traditional from your employer and a $5,500 Roth/Traditional IRA. Regardless of your tax rate, surely, you wouldn't opt for the traditional account!
Do you realize that if you were to put $18,500 in the traditional you would have more than $24,000 to save for the retirement? It is only when you have $200K (that is over $55K) to save, you need to run the what if scenario.
This is being made unnecessarily confusing. My household gross income is well under 200K, but I'm able to completely fund a $18,500 Roth 401(k) and 2, $5,500 Roth IRA accounts, despite the taxes my wife and I owe on our income. If one can do that, it is easily a better choice than using traditionals instead, then saving the leftover money (cause you got the tax break) into a taxable account. Hope that clears up what I'm saying.
No it isn't easily a better choice. You would have to run a bunch of math on your situation to see if a ROTH beats traditional + taxable. The tax drag on taxable might very well be balanced out by lower taxes (i.e. think about the money that you paid at 15%/25% that will now be taxed at 12%/22%) in retirement. And of course guessing on the next 40+ years of taxes is crap shoot at best:). In general the ROTH versus traditional is a wash. In a few cases you can expect big drops in income during retirement (i.e. I expect to be mainly in the 24% bracket during retirement with maybe a bit of slop into the 32% so not paying 37% today is an easy choice.) which make the deferred choices the obvious move. Or you expect big income increases (i.e.you go from a resident to a doctor and have your income go up 5x) which makes ROTHs an easy choice. Most of the other times you are trying to figure out 5% differences in spendable money.

If I had to give advice to people with no specific situational knowledge, it would be go traditional until you have about 1-2 million bucks there. Then think about ROTHs. It is far from perfect for every situation but I from what I have seen for the average 75-200k family with SS and no pensions, it tends to work out pretty well. And the cases where the ROTH wins tends to be the good ones (i.e. high returns and account balances). I think making the worst cases (low returns, early job loss,..) better is more important than maximizing the good cases.

User avatar
JoMoney
Posts: 5539
Joined: Tue Jul 23, 2013 5:31 am

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

Post by JoMoney » Fri May 18, 2018 10:09 am

It potentially costs you more for each dollar going into a Roth, but it is likely worth more to you after it's already in (provided you will only withdraw it after age 59.5 when you can make qualified tax-free withdrawals).
If you don't have other taxable income to bring your marginal rate up to what it was when you put it in though, it probably wasn't the most tax optimal way to save.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

randomguy
Posts: 6162
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Fri May 18, 2018 10:16 am

CnC wrote:
Fri May 18, 2018 9:57 am


Your money in a Roth is worth 25%-50% more than your money in pretax account. You likely will have less but the money is worth more dollar for dollar.

5 million in a Roth is worth anywhere between 6.25m and 7.5m in pretax. Milage may vary based on individual situation. But
Of course. And the corollary is that you will have 25-50% more in a traditional account than in your ROTH. If that percentage stays constant for you, it doesn't matter which one you choose. The issue for everyone is making guesses on what that number will do over their investing/retirement lifespan.

If everything is equal, ROTHs do have some pluses
a) things like inheritances don't do tax adjustments. If you give 1 million dollars to your kid in NJ, you will owe inheritance tax. Give 650k, and it is tax free.
b) there are bunch of things that have income limitations. ROTH withdrawals don't count as income.
c) the no RMD thing for the oversavers:)

And tIRA have that whole marginal versus effective thing for people that haven't already filled up their tax brackets.

rkhusky
Posts: 5400
Joined: Thu Aug 18, 2011 8:09 pm

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

Post by rkhusky » Fri May 18, 2018 10:18 am

azanon wrote:
Fri May 18, 2018 9:37 am
LOL, I meant after the fact/after taxes are paid. Let's say you're doing so well, you have $24,000 to save for retirement (assume taxes for that year paid), and your savings options are a $18.500 Roth/Traditional from your employer and a $5,500 Roth/Traditional IRA. Regardless of your tax rate, surely, you wouldn't opt for the traditional account!
If I was in the 22% tax bracket, I would definitely use Traditional 401k, because then the IRS would be sending me $4,070 next April, which I could then invest. I would use Traditional IRA if I could also get back the additional $1,010, but since that is unlikely, I would use Roth IRA.
azanon wrote:
Fri May 18, 2018 9:40 am
Roth 401(k)'s have ERISA protection just like Traditional 401(k)'s.
Roth 401(k)'s also have RMD's, just like Traditional 401(k)'s.

randomguy
Posts: 6162
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Fri May 18, 2018 10:26 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?
The income tax has only been around for ~100 years. You can't really compare rates across eras as a lot of other details matter like what is deductible and where the brackets were. For example we had a 90% tax in the 1950s but it would have started at about 3 million dollars. The effective tax on the .01% back in the 50% was ~45% after the various tax shelters (using real estate and business to shelter income was pretty common. 1986 cleaned up a lot of that.)

KlangFool
Posts: 9937
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri May 18, 2018 10:28 am

azanon wrote:
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 the 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.
azanon,

I disagreed. The comparison is invalid in the first place. The correct comparison is

A) $18,500 in Roth 401K

Versus

B) $18,500 in Trad. 401K and the tax savings into Roth IRAs.

(B) win most of the time except for someone with a sizable pension.

If we factored in inflation over 10 to 30 years, (B) may even win for someone with a sizable pension.

You cannot have it both way. If you assumed that the government's debt is a huge problem, then, there will be significant inflation down the road. If you believe that, money now is worth a lot more than money in the future. Then deferring tax is the best option.

Philosophically, at 22% tax bracket, putting money into Roth 401K is not good for tax diversification. At that income level, the IRAs will be Roth IRAs. Putting money into Roth 401K causes the person to overload on Roth space. Putting money into Trad. 401K and put the tax savings into Roth IRAs and the taxable account provide maximum tax diversification.

I have money in all 4 buckets including HSA. I have maximum flexibility to tax manage my withdrawal to face any future tax systems.

KlangFool

wrongfunds
Posts: 1728
Joined: Tue Dec 21, 2010 3:55 pm

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 10:30 am

This is being made unnecessarily confusing. My household gross income is well under 200K, but I'm able to completely fund a $18,500 Roth 401(k) and 2, $5,500 Roth IRA accounts, despite the taxes my wife and I owe on our income. If one can do that, it is easily a better choice than using traditionals instead, then saving the leftover money (cause you got the tax break) into a taxable account. Hope that clears up what I'm saying.
Other posters have already told you but let me remind you that if you have excess money, you can put that in the after-tax 401K (up to total $55K per person) and do the in plan roth conversion to grow AND withdraw that money tax free going forward. It is only when you have even more money left over after that $55K, you need to consider if you should give up the $18.5K of taxable space or not.

azanon
Posts: 1882
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

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 10:40 am

JoMoney wrote:
Fri May 18, 2018 10:09 am
It potentially costs you more for each dollar going into a Roth, but it is likely worth more to you after it's already in (provided you will only withdraw it after age 59.5 when you can make qualified tax-free withdrawals).
If you don't have other taxable income to bring your marginal rate up to what it was when you put it in though, it probably wasn't the most tax optimal way to save.
You can withdraw Roth contributions penalty free at any time (per Roth rules, and logically because you already paid taxes on it). Now the same is generally not true with a Roth 401(k), but that's because of rules specific to 401(k)s.

randomguy
Posts: 6162
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Fri May 18, 2018 10:41 am

azanon wrote:
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.
And if we get rid of the income tax and institute a 24% vat (i.e. about the same probability of having 94% marginal tax at numbers that effect you? 200k in 1945 is about 3.5 million dollars today)? How will you feel about paying for both taxes and insurance? Are you going to hate yourself since you had the option to use tax deferred instead and avoid paying income taxes? Seems like if you can shoulder shrug one risk, you can sure do it for the other. And while that is an extreme case, switching to a combo system of both VAT and income tax has been something that has been suggested by members of both parties. It is far from a crazy idea.

It is very, very hard to avoid risks. You tend to shuffle things around and have to choose what risks you want to take. for this particular one, there isn't much political will to raise taxes on middle/upper middle class people (i.e. Obama extending tax cuts on the <250k crowd) from either said. I wouldn't hedge against that risk. Now if I was rich (i.e. was expecting 500k+ of income in retirement), I might be will to gamble that todays rates are about as good as I can get.

azanon
Posts: 1882
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

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 10:42 am

wrongfunds wrote:
Fri May 18, 2018 10:30 am
This is being made unnecessarily confusing. My household gross income is well under 200K, but I'm able to completely fund a $18,500 Roth 401(k) and 2, $5,500 Roth IRA accounts, despite the taxes my wife and I owe on our income. If one can do that, it is easily a better choice than using traditionals instead, then saving the leftover money (cause you got the tax break) into a taxable account. Hope that clears up what I'm saying.
Other posters have already told you but let me remind you that if you have excess money, you can put that in the after-tax 401K (up to total $55K per person) and do the in plan roth conversion to grow AND withdraw that money tax free going forward. It is only when you have even more money left over after that $55K, you need to consider if you should give up the $18.5K of taxable space or not.
I don't have access to an after-tax 401(k). My "401(k)" (as a federal employee) is the TSP, and the TSP limit in 2018 is 18,500 with both Roth and Traditional options. If I'm wrong about that, please send me to a link that shows I can invest in an after-tax 401(k), despite the fact that I'm not self-employed.

wrongfunds
Posts: 1728
Joined: Tue Dec 21, 2010 3:55 pm

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 10:50 am

I do not know that. But if indeed you have too much money to save with respect to your tax advantaged space (i.e. instead of using the $55K in the calculations, you will be using $18.5K), then YES, it might make sense for you to put all in the post tax Roth. But then you have made this irrevocable decision of paying the 22% in federal taxes (and add the state income taxes if you have any) vs keeping that decision open for later if you find it advantageous to do at later time.

WanderingDoc
Posts: 1023
Joined: Sat Aug 05, 2017 8:21 pm

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

Post by WanderingDoc » Fri May 18, 2018 10:53 am

azanon wrote:
Fri May 18, 2018 9:37 am
mptfan wrote:
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?
LOL, I meant after the fact/after taxes are paid. Let's say you're doing so well, you have $24,000 to save for retirement (assume taxes for that year paid), and your savings options are a $18.500 Roth/Traditional from your employer and a $5,500 Roth/Traditional IRA. Regardless of your tax rate, surely, you wouldn't opt for the traditional account!

My point was if you're an ultra saver, you're going to use as much tax advantaged space as possible, and of course Roths provide more in the end because you can put "after-tax" money in them.
Hypothetically.. if one is in the 24% bracket, saves $100K post tax per year, and wants to invest $24K into the markets, you would suggest all Roth 401k? Or a combination?
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

wrongfunds
Posts: 1728
Joined: Tue Dec 21, 2010 3:55 pm

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 11:03 am

The easy philosophical answer is that by the time I get to enjoy the retirement, I would have thoroughly got used to paying substantial amount of my earnings to taxes. The only way I will be paying even more taxes after retirement would be if my retirement income were to shoot up. I guess I am willing to take that risk!

I have accepted the fact that if I have lot of income, I will have to pay more in taxes whether before retirement or after retirement. Generally speaking, I will have to be extremely lucky to have retirement income exceed the working income or have to be extremely unlucky to have working income drop substantially just before retirement.

I prefer to pay taxes as I go method even if sometimes pre-paying might be advantageous under certain "assumed" conditions.

The thing some of you do not get is that your retirement account is not designed to be drained in an instant. Only when looked at it that way, you have discount the value of it by the assumed taxes.

How would you handle it if you were to pay taxes upfront but then the whole account were to do be dropped by the market going down? Won't you hate yourself then?

azanon
Posts: 1882
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

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 12:22 pm

KlangFool wrote:
Fri May 18, 2018 10:28 am
azanon wrote:
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 the 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.
Philosophically, at 22% tax bracket, putting money into Roth 401K is not good for tax diversification. At that income level, the IRAs will be Roth IRAs. Putting money into Roth 401K causes the person to overload on Roth space. Putting money into Trad. 401K and put the tax savings into Roth IRAs and the taxable account provide maximum tax diversification.

I have money in all 4 buckets including HSA. I have maximum flexibility to tax manage my withdrawal to face any future tax systems.

KlangFool
Klang - just wanted to acknowledge you're making good counterarguments, and to that, I would just point back to my original post in this thread which said or suggested that I wrestled with the choice for quite a long time before making it myself.

While I said above I'm 22% tax bracket today, I also said I expect to have a ~ 35K/year pension and 2 social securities (probably combined good for another 30K). In short, those 0 tax and low tax brackets will be filled by that 60K. So I'm going to completely fill up the 0% bracket, and almost fill up the 12% bracket if they are the same when I retire vs. today, and the next bracket is the one I'm in now. Also, I'm already stuck with a good chuck of traditional IRA money anyway on top of that because the TSP didn't add a Roth option until just a few years ago.

inbox788
Posts: 5383
Joined: Thu Mar 15, 2012 5:24 pm

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

Post by inbox788 » Fri May 18, 2018 12:27 pm

CnC wrote:
Fri May 18, 2018 9:57 am
mptfan wrote:
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?
That analogy literally has nothing to do with Roth.
It makes no sense what so ever. You may as well say how about I give you 4 carrots and you give me back a goose and you would be closer to Roth vs pretax 401k's
You are saying that money in pretax grows but Roth doesn't. You are also saying that you don't pay taxes in retirement either.



Your money in a Roth is worth 25%-50% more than your money in pretax account. You likely will have less but the money is worth more dollar for dollar.

5 million in a Roth is worth anywhere between 6.25m and 7.5m in pretax. Milage may vary based on individual situation. But
I didn't get the comparison either. And choosing between 2 options means you have a choice and pass on the other. Many folks don't always have the same flexibility to make those choices, but when they do, there are 2 decision, the immediate one and the one down the road. The consequences of the immediate decision are fairly predictable, but the ones down the road are subject to a lot of variables, hence the dilema as to what to do with asset location. I've been trying to get a better grasps on this issue and these related links/threads are on my reading list:

viewtopic.php?t=211502
viewtopic.php?t=228256
viewtopic.php?t=217028

It's tricky because you have to get the prediction right about how things go between now and then, AND you have to make the right plans and choices. Get either of those are wrong, and you don't wind up with optimal result.

KlangFool
Posts: 9937
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri May 18, 2018 12:38 pm

azanon wrote:
Fri May 18, 2018 12:22 pm
KlangFool wrote:
Fri May 18, 2018 10:28 am
azanon wrote:
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 the 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.
Philosophically, at 22% tax bracket, putting money into Roth 401K is not good for tax diversification. At that income level, the IRAs will be Roth IRAs. Putting money into Roth 401K causes the person to overload on Roth space. Putting money into Trad. 401K and put the tax savings into Roth IRAs and the taxable account provide maximum tax diversification.

I have money in all 4 buckets including HSA. I have maximum flexibility to tax manage my withdrawal to face any future tax systems.

KlangFool
Klang - just wanted to acknowledge you're making good counterarguments, and to that, I would just point back to my original post in this thread which said or suggested that I wrestled with the choice for quite a long time before making it myself.

While I said above I'm 22% tax bracket today, I also said I expect to have a ~ 35K/year pension and 2 social securities (probably combined good for another 30K). In short, those 0 tax and low tax brackets will be filled by that 60K. So I'm going to completely fill up the 0% bracket, and almost fill up the 12% bracket if they are the same when I retire vs. today, and the next bracket is the one I'm in now. Also, I'm already stuck with a good chuck of traditional IRA money anyway on top of that because the TSP didn't add a Roth option until just a few years ago.
azanon,

You may or may not be right in your assumption. But, at the minimum, you should be consistent with your assumptions.

If you assume that the law will not change, then, you will have to assume that the standard deduction and the tax brackets will be adjusted upward by annual inflation.

<<So I'm going to completely fill up the 0% bracket, and almost fill up the 12% bracket if they are the same when I retire vs. today,>>

1) It will not if the law stays the same. At the minimum, you should assume 2% to 3% inflation rate and adjust the standard deduction and tax bracket upward accordingly.

2) If you assume that the tax bracket stays the same, then, all bets are off. You are assuming that the tax law will change. Then, you can do any kind of assumptions to prove that you are right.

Conversely, if you assume 2% to 3% inflation, how could pay taxes now make any sense? Depending on the time period, even if you pay more taxes later, you still win.

Please be consistent. And, that was my only point regarding your situation.

KlangFool

User avatar
FiveK
Posts: 5369
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK » Fri May 18, 2018 12:38 pm

azanon wrote:
Fri May 18, 2018 12:22 pm
While I said above I'm 22% tax bracket today, I also said I expect to have a ~ 35K/year pension and 2 social securities (probably combined good for another 30K). In short, those 0 tax and low tax brackets will be filled by that 60K. So I'm going to completely fill up the 0% bracket, and almost fill up the 12% bracket if they are the same when I retire vs. today, and the next bracket is the one I'm in now. Also, I'm already stuck with a good chuck of traditional IRA money anyway on top of that because the TSP didn't add a Roth option until just a few years ago.
By "2 social securities" I'm assuming MFJ...?

If so, it will take $45,900/yr of traditional withdrawals, when combined with $30K pension and $30K SS, to reach the top of the 12% bracket. Note that only 85% of the SS is taxable and this also assumes the $24K standard deduction.

At a 4% withdrawal rate, that's $1,147,500 needed in traditional accounts; at a 3% WR, $1,530,000.

If you expect to have that much (or less if you have $65K "guaranteed" income), then using Roth now may be beneficial. Otherwise traditional appears best. And you can always reevaluate next year, the year after, etc., as your retirement picture gets clearer.

azanon
Posts: 1882
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

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 12:59 pm

FiveK wrote:
Fri May 18, 2018 12:38 pm
azanon wrote:
Fri May 18, 2018 12:22 pm
While I said above I'm 22% tax bracket today, I also said I expect to have a ~ 35K/year pension and 2 social securities (probably combined good for another 30K). In short, those 0 tax and low tax brackets will be filled by that 60K. So I'm going to completely fill up the 0% bracket, and almost fill up the 12% bracket if they are the same when I retire vs. today, and the next bracket is the one I'm in now. Also, I'm already stuck with a good chuck of traditional IRA money anyway on top of that because the TSP didn't add a Roth option until just a few years ago.
By "2 social securities" I'm assuming MFJ...?

If so, it will take $45,900/yr of traditional withdrawals, when combined with $30K pension and $30K SS, to reach the top of the 12% bracket. Note that only 85% of the SS is taxable and this also assumes the $24K standard deduction.
Oh yeah I did forget about the standard deduction, and didn't know that about SS having 15% that's exempt from taxes. hmm That does change the math a little, heh.

CnC
Posts: 536
Joined: Thu May 11, 2017 12:41 pm

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

Post by CnC » Fri May 18, 2018 1:13 pm

Quoted wrong person.

This was aimed at Klang.

You are assuming that he is talking about his pension and social security in future dollars.

That is not correct, atleast on the social security aspect. Social security for someone making in the low 70's now will be 45-80k a year 30 years from now.

30 years from now the standard mfj deduction is in the ballpark of 40k.
The 22% tax bracket will start at around 125k.

That means ±165k and he will be back in the 22% bracket. 2 social security payments and a modest pension will fill the majority of that no problem.


Why is inflation relevant?

Assuming inflation is 10% or 1% his investment will just grow by inflation+ real returns.
Last edited by CnC on Fri May 18, 2018 1:16 pm, edited 1 time in total.

User avatar
celia
Posts: 8208
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

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 1:16 pm

meaghansketch wrote:
Fri May 18, 2018 7:47 am
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.
Although your choices are limited, that Roth is still a no-brainer in your early years. You paid the same taxes whether you put it in Roth or taxable. But all the GROWTH in that account will be taxed at 0%. At some point, the growth will surpass the contributions. I hope it is invested in stock funds, rather than bonds, to maximize the biggest tax-free growth.

As far as not having a 401K available at work, the usual advice here is to start lobbying for one with your co-workers. You employer may not have an incentive to get one if your competitors don't have one, but it is an employee benefit that is good for recruiting the best job candidates. This is not a short-term project and doesn't have to be contentious. Look at it as an educational objective. Start with your co-workers to see what they think and share stories illustrating the benefits. When they are on-board, bring it up with management and talk about how it will benefit them. Finally, the company needs to be informed and know what the benefits are for them. If you are in a union, they should be asked (repeatedly) to work on it.

If you don't ask, you likely won't get one. If you do ask, who knows, maybe you will get one some day.
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.

CnC
Posts: 536
Joined: Thu May 11, 2017 12:41 pm

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

Post by CnC » Fri May 18, 2018 1:19 pm

Regardless of what, I hope capital gains are still taxed at 0% up till a certain point.

In the years prior to starting my pension I hope to pay no capital gains.

KlangFool
Posts: 9937
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri May 18, 2018 1:39 pm

CnC wrote:
Fri May 18, 2018 1:13 pm
Quoted wrong person.

This was aimed at Klang.

You are assuming that he is talking about his pension and social security in future dollars.

That is not correct, atleast on the social security aspect. Social security for someone making in the low 70's now will be 45-80k a year 30 years from now.

30 years from now the standard mfj deduction is in the ballpark of 40k.
The 22% tax bracket will start at around 125k.

That means ±165k and he will be back in the 22% bracket. 2 social security payments and a modest pension will fill the majority of that no problem.


Why is inflation relevant?

Assuming inflation is 10% or 1% his investment will just grow by inflation+ real returns.
CnC,

1) You are assuming that the pension is inflation adjusted. Which may or may not be true.

<<That means ±165k and he will be back in the 22% bracket. >>

2) Please note that he is in the 22% bracket now. If he is in the 22% bracket at the time of retirement, it is a no win-no lose situation. Aka, he breaks even. Only if he is in the next tax bracket during retirement, he wins with his decision.

<<Assuming inflation is 10% or 1% his investment will just grow by inflation+ real returns.>>

This is not needed. He does not need to project his tax-deferred portfolio growth. He could change his contribution to Roth 401K at any year if and when the tax-deferred portfolio is big enough. It is 29K per year.

KlangFool

cusetownusa
Posts: 313
Joined: Thu Mar 27, 2014 9:54 am

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

Post by cusetownusa » Fri May 18, 2018 1:48 pm

stlutz wrote:
Wed May 16, 2018 10:05 pm
Also keep in mind that it's your effective tax rate that matters when you withdraw. When you save it's the marginal rate.

When I contribute to my 401K, it reduces my taxable income--thus I'm taking money "off the top" in terms of income. Whatever bracket I'm in, I'm getting a deduction at my marginal rate.

When I withdraw that money, it's actually taxed at a variety of rates. So even if you were in the same marginal rate as when you are working, the average rate per dollar is still lower.
This ^

I was going to respond but then I read this response and realized that stlutz did a much better job explaining my thoughts than I would have.

wrongfunds
Posts: 1728
Joined: Tue Dec 21, 2010 3:55 pm

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 1:52 pm

It is 29K per year.
I do not get the above part.

peseta
Posts: 64
Joined: Mon Mar 09, 2015 11:40 pm

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

Post by peseta » Fri May 18, 2018 1:54 pm

A few days ago, Clark Howard recommended that anyone making under 315k married household AGI contribute to Roth 401k, not traditional. That, of course, matches up exactly to the top of the new 24% bracket.

This is probably based on speculation on future tax rates, of course, but I found this interesting, since his opinion is one I take seriously, and I know others on this board do as well.

peseta

Copernicus
Posts: 322
Joined: Thu May 16, 2013 4:38 pm

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

Post by Copernicus » Fri May 18, 2018 1:59 pm

flyingaway wrote:
Wed May 16, 2018 7:10 pm
Because otherwise you would have worked too long.
+1 !!

KlangFool
Posts: 9937
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri May 18, 2018 2:05 pm

peseta wrote:
Fri May 18, 2018 1:54 pm
A few days ago, Clark Howard recommended that anyone making under 315k married household AGI contribute to Roth 401k, not traditional. That, of course, matches up exactly to the top of the new 24% bracket.

This is probably based on speculation on future tax rates, of course, but I found this interesting, since his opinion is one I take seriously, and I know others on this board do as well.

peseta
peseta,

I could speculate that the income tax system will be abolished and replaced 100% by the consumption tax. And, in my case, I would have a stronger case based on the global trend.

Anyone could justify their reasoning by pure speculation of the future tax rates.

In any case, it comes down to tax diversification.

A) Money in all 4 buckets: HSA, Tax-deferred, Roth, and the Taxable.

versus

B) Money in Roth account only

(A) is balanced and diversified across all possible future tax scenarios. (B) only works out in one possible outcome. Do you really want to bet all your retirement outcome on one tax basket?

KlangFool

User avatar
FiveK
Posts: 5369
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK » Fri May 18, 2018 2:20 pm

cusetownusa wrote:
Fri May 18, 2018 1:48 pm
stlutz wrote:
Wed May 16, 2018 10:05 pm
Also keep in mind that it's your effective tax rate that matters when you withdraw. When you save it's the marginal rate.

When I contribute to my 401K, it reduces my taxable income--thus I'm taking money "off the top" in terms of income. Whatever bracket I'm in, I'm getting a deduction at my marginal rate.

When I withdraw that money, it's actually taxed at a variety of rates. So even if you were in the same marginal rate as when you are working, the average rate per dollar is still lower.
This ^
I was going to respond but then I read this response and realized that stlutz did a much better job explaining my thoughts than I would have.
Big Dutch wrote:
Thu May 17, 2018 8:48 am
Good post, well put!
As already discussed elsewhere in this thread - and in many other threads ;) - comparing marginal vs. effective is not correct. It incorrectly favors traditional, just as comparing "amount of tax paid" incorrectly favors Roth.

When deciding on this year's contribution, note that any traditional withdrawals will come on top of withdrawals from money contributed to traditional accounts in years past.

If you can save 12% on a traditional contribution this year but have to pay 22% on the extra withdrawals you can make as a result, that's a bad deal even if your future effective rate is only 10%.

cusetownusa
Posts: 313
Joined: Thu Mar 27, 2014 9:54 am

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

Post by cusetownusa » Fri May 18, 2018 2:28 pm

FiveK wrote:
Fri May 18, 2018 2:20 pm
cusetownusa wrote:
Fri May 18, 2018 1:48 pm
stlutz wrote:
Wed May 16, 2018 10:05 pm
Also keep in mind that it's your effective tax rate that matters when you withdraw. When you save it's the marginal rate.

When I contribute to my 401K, it reduces my taxable income--thus I'm taking money "off the top" in terms of income. Whatever bracket I'm in, I'm getting a deduction at my marginal rate.

When I withdraw that money, it's actually taxed at a variety of rates. So even if you were in the same marginal rate as when you are working, the average rate per dollar is still lower.
This ^
I was going to respond but then I read this response and realized that stlutz did a much better job explaining my thoughts than I would have.
Big Dutch wrote:
Thu May 17, 2018 8:48 am
Good post, well put!
As already discussed elsewhere in this thread - and in many other threads ;) - comparing marginal vs. effective is not correct. It incorrectly favors traditional, just as comparing "amount of tax paid" incorrectly favors Roth.

When deciding on this year's contribution, note that any traditional withdrawals will come on top of withdrawals from money contributed to traditional accounts in years past.

If you can save 12% on a traditional contribution this year but have to pay 22% on the extra withdrawals you can make as a result, that's a bad deal even if your future effective rate is only 10%.
I guess I don't understand what you are saying because I don't understand how comparing marginal vs effective is not correct in this situation.

Most of my career I have been contributing into my trad 401k while in a 24% or higher federal tax bracket. If I retired tomorrow and started to withdraw that money to live on I would be paying 0% for the first $24,000, then 12%, then maybe a bit into 22%. My effective tax rate would be less than 10%. Why wouldn't I compare the 24% to the sub 10%?

If that is the wrong way to look at it then I have been contributing to my tax deferred accounts based on faulty logic and will need to rethink my strategy ASAP.
Last edited by cusetownusa on Fri May 18, 2018 2:32 pm, edited 1 time in total.

User avatar
ruralavalon
Posts: 13719
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

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

Post by ruralavalon » Fri May 18, 2018 2:31 pm

azanon wrote:
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.
I think that "really wise folks" base the traditional vs Roth decision on personal facts like their tax bracket, earning capacity, health, ability to make maximum contributions, eligibility to make Roth IRA contributions, availability of pension income, size of traditional accounts, etc.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
FiveK
Posts: 5369
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK » Fri May 18, 2018 2:35 pm

cusetownusa wrote:
Fri May 18, 2018 2:28 pm
I guess I don't understand what you are saying because I don't understand how comparing marginal vs effective is not correct in this situation.

Most of my career I have been contributing into my trad 401k while in a 24% or higher federal tax bracket. If I retired tomorrow and started to withdraw that money to live on I would be paying 0% for the first $24,000, then 12%, then 22%. My effective tax rate would be around 10% give or take. Why wouldn't I compare the 24% to the 10%?
You can do that if you want to evaluate the overall effect of your past choices. But, good or bad, you can't change those.

Going forward, however, you do get to choose. If you don't make another dollar of traditional contributions, by your post you expect to be in the 22% bracket, correct? That means any additional traditional contributions will be withdrawn starting at a 22% rate. In other words, you should compare your marginal tax saving rate now vs. your expected marginal tax rate on withdrawals.

Does that make sense?

Silk McCue
Posts: 1117
Joined: Thu Feb 25, 2016 7:11 pm

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

Post by Silk McCue » Fri May 18, 2018 2:45 pm

ruralavalon wrote:
Fri May 18, 2018 2:31 pm
azanon wrote:
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.
I think that "really wise folks" base the traditional vs Roth decision on personal facts like their tax bracket, earning capacity, health, ability to make maximum contributions, eligibility to make Roth IRA contributions, availability of pension income, size of traditional accounts, etc.
As I have posted earlier I am strategically doing Roth conversions based upon my own circumstances and I strongly believe it can be a good approach for many. However, once I have completed our Roth conversions to the point that all of our RMDs at 70.5, plus a bit more will be used for QCDs resulting in a 0% tax rate on those funds. I expect to leave little behind in traditional and a lot in Roth unless circumstances dictate the need to spend it.

I never paid tax on those tax deferred funds and I will eventually pay no tax when I spend them. In my case $18,500 in my traditional will be just as valuable as $18,500 in my Roth but I "paid less" for the $18,500 in the traditional than I did in the Roth.

Cheers

cusetownusa
Posts: 313
Joined: Thu Mar 27, 2014 9:54 am

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

Post by cusetownusa » Fri May 18, 2018 2:55 pm

FiveK wrote:
Fri May 18, 2018 2:35 pm
cusetownusa wrote:
Fri May 18, 2018 2:28 pm
I guess I don't understand what you are saying because I don't understand how comparing marginal vs effective is not correct in this situation.

Most of my career I have been contributing into my trad 401k while in a 24% or higher federal tax bracket. If I retired tomorrow and started to withdraw that money to live on I would be paying 0% for the first $24,000, then 12%, then 22%. My effective tax rate would be around 10% give or take. Why wouldn't I compare the 24% to the 10%?
You can do that if you want to evaluate the overall effect of your past choices. But, good or bad, you can't change those.

Going forward, however, you do get to choose. If you don't make another dollar of traditional contributions, by your post you expect to be in the 22% bracket, correct? That means any additional traditional contributions will be withdrawn starting at a 22% rate. In other words, you should compare your marginal tax saving rate now vs. your expected marginal tax rate on withdrawals.

Does that make sense?
I see the point you are making now...I don't have nearly enough in my tax deferred accounts to where any additional contribution will be taxed at a higher marginal tax rate. Most likely I will never get to that point as that means I could have retired much sooner and kept my same standard of living.

Since my current income is way higher than my expenses I will probably always benefit from maxing out my tax deferred space.

wrongfunds
Posts: 1728
Joined: Tue Dec 21, 2010 3:55 pm

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 3:27 pm

If you don't make another dollar of traditional contributions, by your post you expect to be in the 22% bracket, correct? That means any additional traditional contributions will be withdrawn starting at a 22% rate.
I am not understanding this. How are these two 22% brackets related to each other? All we know is that his *current* tax bracket is 22%. Has he told us what will be his future tax bracket at retirement when he is will taking distribution?

peseta
Posts: 64
Joined: Mon Mar 09, 2015 11:40 pm

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

Post by peseta » Fri May 18, 2018 3:31 pm

KlangFool wrote:
Fri May 18, 2018 2:05 pm
(A) is balanced and diversified across all possible future tax scenarios. (B) only works out in one possible outcome. Do you really want to bet all your retirement outcome on one tax basket?
I don't think we disagree. For me, getting closer to position (A) has meant focusing more on Roth these days, since most of my tax-privileged investment has been pre-tax. I suspect this is true for the vast majority of people, since the Roth 401(k) is so new. Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many.

I must say that the recent tax reform influenced this decision. My marginal rate fell 4%, which matters.

peseta

KlangFool
Posts: 9937
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri May 18, 2018 3:44 pm

peseta wrote:
Fri May 18, 2018 3:31 pm
KlangFool wrote:
Fri May 18, 2018 2:05 pm
(A) is balanced and diversified across all possible future tax scenarios. (B) only works out in one possible outcome. Do you really want to bet all your retirement outcome on one tax basket?
I don't think we disagree. For me, getting closer to position (A) has meant focusing more on Roth these days, since most of my tax-privileged investment has been pre-tax. I suspect this is true for the vast majority of people, since the Roth 401(k) is so new. Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many.

I must say that the recent tax reform influenced this decision. My marginal rate fell 4%, which matters.

peseta
peseta,

1) If your tax-deferred portfolio is more than 1 million, you might be right. If not, Trad. 401K probably is still the right answer for you.

2) Don't forget about the taxable account too.

<<Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many. >>

I disagreed. If someone can contribute to Roth 401K, that person could contribute to Trad. 401K and put the tax saving into Roth IRAs and the taxable account. A tilt towards Roth 401K is overloading the Roth space.

KlangFool

User avatar
FiveK
Posts: 5369
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK » Fri May 18, 2018 4:05 pm

cusetownusa wrote:
Fri May 18, 2018 2:55 pm
I see the point you are making now...I don't have nearly enough in my tax deferred accounts to where any additional contribution will be taxed at a higher marginal tax rate. Most likely I will never get to that point as that means I could have retired much sooner and kept my same standard of living.
And that makes perfect sense!

peseta
Posts: 64
Joined: Mon Mar 09, 2015 11:40 pm

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

Post by peseta » Fri May 18, 2018 4:07 pm

KlangFool wrote:
Fri May 18, 2018 3:44 pm
I disagreed. If someone can contribute to Roth 401K, that person could contribute to Trad. 401K and put the tax saving into Roth IRAs and the taxable account. A tilt towards Roth 401K is overloading the Roth space.
Again, I don't entirely disagree with your reasoning. But this assumes someone is not a max saver. If he is, there is no investment of the tax savings in Roth and the Roth 401(k) thus permits sheltering of more post-tax money.

I think the amount of savings (e.g., 1M) is less important than the ratio of traditional to Roth. Take a max saver with a 5K employer match. If that person has max-saved for a while in a traditional 401k and a regular/backdoor Roth, he will be investing in approximately a 23.5:5.5 ratio. Even discounting the 23.5k for future taxes, that is not exactly in balance.

Of course, if someone is not a max-saver, your point is very much on-target.

peseta

CnC
Posts: 536
Joined: Thu May 11, 2017 12:41 pm

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

Post by CnC » Fri May 18, 2018 4:10 pm

KlangFool wrote:
Fri May 18, 2018 3:44 pm
peseta wrote:
Fri May 18, 2018 3:31 pm
KlangFool wrote:
Fri May 18, 2018 2:05 pm
(A) is balanced and diversified across all possible future tax scenarios. (B) only works out in one possible outcome. Do you really want to bet all your retirement outcome on one tax basket?
I don't think we disagree. For me, getting closer to position (A) has meant focusing more on Roth these days, since most of my tax-privileged investment has been pre-tax. I suspect this is true for the vast majority of people, since the Roth 401(k) is so new. Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many.

I must say that the recent tax reform influenced this decision. My marginal rate fell 4%, which matters.

peseta
peseta,

1) If your tax-deferred portfolio is more than 1 million, you might be right. If not, Trad. 401K probably is still the right answer for you.

2) Don't forget about the taxable account too.

<<Thus, if one in the accumulation phase has a goal of increasing tax diversification, that means a tilt towards Roth 401(k) for many. >>

I disagreed. If someone can contribute to Roth 401K, that person could contribute to Trad. 401K and put the tax saving into Roth IRAs and the taxable account. A tilt towards Roth 401K is overloading the Roth space.

KlangFool


Klang are you suggesting once you hit 1 million tax deferred you should start seriously considering Roth 401k contributions?

Not nessissarly do them but consider them once you hit the 1 million mark in pretax?


If so I agree, there is no logical sense in having $0 tax deferred coming in each year. I would agree that you need ±1mil tax deferred for flexibility even if a Roth is your savings vehicle of choice.

I just think once you hit a magic number pretax contributions do not make sense. You run into a host of problems that are just not a good idea to deal with.

RMD's, inheritance taxes, spouse death none of these are an issue for Roth money. For example my FL is going to be 70 this year he has a pretty easy job that gives him something to complain about so he is still working. He owns some land and rentals and has a younger wife still working. RMD's will be painful for him, now I don't know the details of his lifetime tax history if Roth vs pretax would have been the most monetarily satisfying.

But the idea that he is being Forced to take out and pay taxes on money he does not need is causing him stress that would not be there with a Roth.
Last edited by CnC on Fri May 18, 2018 4:18 pm, edited 1 time in total.

User avatar
FiveK
Posts: 5369
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK » Fri May 18, 2018 4:12 pm

wrongfunds wrote:
Fri May 18, 2018 3:27 pm
If you don't make another dollar of traditional contributions, by your post you expect to be in the 22% bracket, correct? That means any additional traditional contributions will be withdrawn starting at a 22% rate.
I am not understanding this. How are these two 22% brackets related to each other? All we know is that his *current* tax bracket is 22%. Has he told us what will be his future tax bracket at retirement when he is will taking distribution?
Yes. The quote is
cusetownusa wrote:
Fri May 18, 2018 2:28 pm
If I retired tomorrow and started to withdraw that money to live on I would be paying 0% for the first $24,000, then 12%, then maybe a bit into 22%.
The general point is that after several years of traditional contributions, the 0% (and, depending on the definition of "several", the 10%, etc.) brackets are already "spoken for". It is thus incorrect to assume future traditional contributions can use those lower brackets.

User avatar
FiveK
Posts: 5369
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK » Fri May 18, 2018 4:17 pm

peseta wrote:
Fri May 18, 2018 4:07 pm
Again, I don't entirely disagree with your reasoning. But this assumes someone is not a max saver. If he is, there is no investment of the tax savings in Roth and the Roth 401(k) thus permits sheltering of more post-tax money.
The math does change somewhat for max savings. For "how much", see either of the two spreadsheets referenced in Maxing out your retirement accounts and enter your personal situation.

It makes Roth somewhat more attractive, but the "correct" answer still depends on the amount in traditional and thus the marginal rate taxed on withdrawals.

Post Reply