Another Roth vs Traditional Debate

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sergio
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Joined: Sat Jun 20, 2015 6:52 pm

Another Roth vs Traditional Debate

Post by sergio » Mon Aug 13, 2018 7:44 pm

Up until this point I've been maxing out my pre-tax 401k, Roth IRA, and HSA. I will soon open a spousal IRA for my wife.

Income
Salary: $110k (wife doesn't work)
Distributions: $10-25k/yr (qualified dividends)

Taxes
Filing Status: married filing jointly
Federal tax bracket: 12%
State tax bracket: 7% :annoyed

Assets:
401k: $95k
Roth IRA: $28k
HSA Investments: $17k
529: $1k
Cash + HSA Money Market: $19k

I'm starting to think at this point I should go 100% Roth for the 401k beyond the company match (company only matches pre-tax). So I'd be putting in $6k pre-tax, and $12k post-tax. Same with my IRA and IRA - all Roth. HSA is still pre-tax.

What makes me hesitate is that while we're in a low federal bracket, we're in a super high state bracket. I will certainly not be retiring in this state, in fact we may retire in my wife's home country down the road where $20-30k/yr gets a really nice QOL. Also, there are a lot of state credits that we still qualify for with an AGI in the 55-70k range. But, the thought of all that tax free growth is really really appealing especially with tax rates so low now.

Any mistakes I'm making in my logic?

H-Town
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Re: Another Roth vs Traditional Debate

Post by H-Town » Mon Aug 13, 2018 7:49 pm

Does your state offer 529 plan and do you want to save for your kids' college? One way to decrease state tax impact.

At that tax bracket, I'd do Roth as well.

Lou354
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Re: Another Roth vs Traditional Debate

Post by Lou354 » Mon Aug 13, 2018 7:59 pm

Company matching contributions have to be pre-tax. But are you sure your Roth contributions won’t be matched by company pre-tax contributions? I’ve never heard of such a thing and I can’t think of a reason why it should matter. I’m suggesting that perhaps all of your contributions could be Roth if that’s what you want. Also the contribution limit for 2018 is $18,500.

MotoTrojan
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Re: Another Roth vs Traditional Debate

Post by MotoTrojan » Mon Aug 13, 2018 8:01 pm

You seem confused. If you use a Roth you are locking in having to pay your high state income tax now and get no benefit when/if you move somewhere without it. With the pre-tax you are putting all of your earnings into the 401k without the state tax, and then can withdraw it (and growth) in the future potentially without the state tax.

It is important to note that $18.5K in a Roth has a lot more spending power than $18.5K in a traditional, but Roth will require more out-of-pocket contribution. If you want to model the situations you'll need to assume that the tax savings of the traditional route are invested into a taxable account, ideally in a tax-efficient manner.

Either way though, being in a higher tax state than you plan to retire in always tips things in favor of pre-tax (traditional). I would keep this 100% traditional and then max out a Roth IRA for both of you ($11K/year). That way you have a very diverse set of assets to choose in retirement.

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Peter Foley
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Re: Another Roth vs Traditional Debate

Post by Peter Foley » Mon Aug 13, 2018 8:14 pm

Can you clarify the qualified dividends income? As presented it seems like it is in addition to your $110 salary.

If you went to Roth, would those qualified dividends be taxable?

$110,000 - $24,000 (MFJ deduction) = $86,000 in taxable income. Dividends would be taxed above $77,300 in taxable income.

To keep some of your dividends from being taxed at 15% you need some headroom below $77,300. For example a $20,000 contribution to a 401k would put taxable income at $66,000 and allow $11,300 in dividends to be tax free.

Unknown in this is how your state taxes are calculated. Based on your federal adjusted gross income, federal taxable income, other?

SelfEmployed123
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Re: Another Roth vs Traditional Debate

Post by SelfEmployed123 » Mon Aug 13, 2018 8:19 pm

I'm just not sure I buy the argument for using a Roth for just about anyone in the accumulation phase unless you are at the bottom of the tax bracket and expect your income to go up in the near future. Even for someone with a Federal + State tax rate of 19%, I still think go traditional and here is why:

1) By contributing to a Roth IRA/401k today you are assuming your net worth in retirement will put you into a higher effective tax bracket. If you are at the top of the 12% income tax bracket (currently $82500 after your deductions), you'd need more than a $2 million nest egg assuming a 4% withdrawal rate to bump you into the higher tax bracket. For reference, the median Boglehead Net Worth not counting Social Security or Pensions as of the 2015 survey was $1.2 million, so to save $2 million or more you'd be doing VERY well by Boglehead standards. If you plan to retire with less than $2 million, you would have been better off with making traditional contributions.

2) People post on this site every day about trying to time the market, should they invest in stocks or bonds given that there has been a bull market for the past 10 years, etc. Any time you are trying to decide between traditional versus Roth contributions, you're also trying to predict what the IRS and Congress will decide when you retire. When is that for you? 10 years from now? 20? 30? No one knows what Congress or the IRS is going to do next year let alone 20 or 30 years from now. Why not take a guaranteed tax deduction now? If you max your deductions now, you can damn near not pay any taxes at all: https://rootofgood.com/make-six-figure- ... ay-no-tax/

3) Related to the above, there is no telling what Congress will do to Roth accounts in 20 or 30 years. Will the Roth still exist? Will they still have their revered tax-free status? The Roth didn't even exist until the late 1990s. Who knows what will happen to it?

4) If you are planning on achieving financial independence, it is more advantageous to make traditional contributions to an IRA/401k now and then rollover your contributions to a Roth IRA at a time of your choosing when it is most advantageous to you. Doing so when you have low or no income means you are paying almost no tax on the conversions at all. Please see here for more details: https://rootofgood.com/roth-ira-convers ... etirement/

If it were me, I'd make tax-deductible contributions, retire and live off of your taxable account, and then follow step 4 above.

Best of luck!
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

ExitStageLeft
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Re: Another Roth vs Traditional Debate

Post by ExitStageLeft » Mon Aug 13, 2018 8:36 pm

If you were to be living off your tax-deferred savings in retirement, you could have about the same standard of living and pay lower taxes.

Based on current tax rates:

Income from tax-deferred: $100k
Standard deduction: $24k
Taxable Income: $76k
Tax:$8,739
Effective tax rate: 8.74%

That is quite a bit lower than the 19% you currently have. In order to pay that high of an effective tax in the future, you would have to be pulling over $200k per year from your tax-deferred accounts.

I'm coming around to the idea that for someone with no pension and who will have many years of retirement without social security, the best plan is to have about 75% tax-deferred and 25% Roth savings.

JBTX
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Re: Another Roth vs Traditional Debate

Post by JBTX » Mon Aug 13, 2018 9:04 pm

sergio wrote:
Mon Aug 13, 2018 7:44 pm
Up until this point I've been maxing out my pre-tax 401k, Roth IRA, and HSA. I will soon open a spousal IRA for my wife.

Income
Salary: $110k (wife doesn't work)
Distributions: $10-25k/yr (qualified dividends)

Taxes
Filing Status: married filing jointly
Federal tax bracket: 12%
State tax bracket: 7% :annoyed

Assets:
401k: $95k
Roth IRA: $28k
HSA Investments: $17k
529: $1k
Cash + HSA Money Market: $19k

I'm starting to think at this point I should go 100% Roth for the 401k beyond the company match (company only matches pre-tax). So I'd be putting in $6k pre-tax, and $12k post-tax. Same with my IRA and IRA - all Roth. HSA is still pre-tax.

What makes me hesitate is that while we're in a low federal bracket, we're in a super high state bracket. I will certainly not be retiring in this state, in fact we may retire in my wife's home country down the road where $20-30k/yr gets a really nice QOL. Also, there are a lot of state credits that we still qualify for with an AGI in the 55-70k range. But, the thought of all that tax free growth is really really appealing especially with tax rates so low now.

Any mistakes I'm making in my logic?
At 19%, It really depends on quite a few factors. Do you expect your income in the future to grow substantially? How old are you? Do you plan to retire prior to drawing social security? Do you expect to have other sources of income in retirement beyond your investments and social security?

Assuming no other sources of retirement income, It is worth having a certain base amount in traditional to take account of the "zero" percent tax rate (standard deduction). Currently that would be around $500k to $600k. (600k times 4% withdrawal rate = $24k is approx MFJ standard deduction. ). Then for every year you retire prior to drawing social security you can add another $100k to that $600k number ($100k is approx top of 12%/15% tax bracket plus standard deduction. So if you plan to retire 5 years before social security that is approximately $1.0M to $1.1M before considering Roth.

So it really gets down to how old you are and how fast will your income grow?

If you are less than 30 with your amount of savings and you expect your income to grow rapidly, you can make the case for doing some of it Roth.

If you are 40 or over and don't expect much salary growth, stay traditional because the odds of getting to $1 million in traditional given your current 401k savings are fairly low.

Of course tax laws change and we cant predict the future. It's always a good idea to have some of both.

sergio
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Re: Another Roth vs Traditional Debate

Post by sergio » Mon Aug 13, 2018 9:28 pm

SelfEmployed123 wrote:
Mon Aug 13, 2018 8:19 pm
I'm just not sure I buy the argument for using a Roth for just about anyone in the accumulation phase unless you are at the bottom of the tax bracket and expect your income to go up in the near future. Even for someone with a Federal + State tax rate of 19%, I still think go traditional and here is why:

1) By contributing to a Roth IRA/401k today you are assuming your net worth in retirement will put you into a higher effective tax bracket. If you are at the top of the 12% income tax bracket (currently $82500 after your deductions), you'd need more than a $2 million nest egg assuming a 4% withdrawal rate to bump you into the higher tax bracket. For reference, the median Boglehead Net Worth not counting Social Security or Pensions as of the 2015 survey was $1.2 million, so to save $2 million or more you'd be doing VERY well by Boglehead standards. If you plan to retire with less than $2 million, you would have been better off with making traditional contributions.

2) People post on this site every day about trying to time the market, should they invest in stocks or bonds given that there has been a bull market for the past 10 years, etc. Any time you are trying to decide between traditional versus Roth contributions, you're also trying to predict what the IRS and Congress will decide when you retire. When is that for you? 10 years from now? 20? 30? No one knows what Congress or the IRS is going to do next year let alone 20 or 30 years from now. Why not take a guaranteed tax deduction now? If you max your deductions now, you can damn near not pay any taxes at all: https://rootofgood.com/make-six-figure- ... ay-no-tax/

3) Related to the above, there is no telling what Congress will do to Roth accounts in 20 or 30 years. Will the Roth still exist? Will they still have their revered tax-free status? The Roth didn't even exist until the late 1990s. Who knows what will happen to it?

4) If you are planning on achieving financial independence, it is more advantageous to make traditional contributions to an IRA/401k now and then rollover your contributions to a Roth IRA at a time of your choosing when it is most advantageous to you. Doing so when you have low or no income means you are paying almost no tax on the conversions at all. Please see here for more details: https://rootofgood.com/roth-ira-convers ... etirement/

If it were me, I'd make tax-deductible contributions, retire and live off of your taxable account, and then follow step 4 above.

Best of luck!
This is a great post and I have considered most of these factors. I agree 100% with your assessment of the Roth - it's always seemed one of the more heavily scrutinized savings vehicles. If there were to be a change or some sort of "luxury tax" imposed onto retirement accounts, I think the Roth accounts would be first in line to get hit. Traditional IRAs are the only tax-advantaged account some people have (i.e. my self-employed dad) so they seem to fly under the radar. Right now I can fully deduct $11k in a traditional IRA - not sure I'll be able to do that in the future if my income goes up. There is also some peace of mind to getting the tax benefit now vs. 25+ years out, hoping the whole time things don't change.

We'll probably be retiring with 1.5-2mil, but these is an incredibly preliminary and unstable calculations.

sergio
Posts: 202
Joined: Sat Jun 20, 2015 6:52 pm

Re: Another Roth vs Traditional Debate

Post by sergio » Mon Aug 13, 2018 9:36 pm

Peter Foley wrote:
Mon Aug 13, 2018 8:14 pm
Can you clarify the qualified dividends income? As presented it seems like it is in addition to your $110 salary.

If you went to Roth, would those qualified dividends be taxable?

$110,000 - $24,000 (MFJ deduction) = $86,000 in taxable income. Dividends would be taxed above $77,300 in taxable income.

To keep some of your dividends from being taxed at 15% you need some headroom below $77,300. For example a $20,000 contribution to a 401k would put taxable income at $66,000 and allow $11,300 in dividends to be tax free.

Unknown in this is how your state taxes are calculated. Based on your federal adjusted gross income, federal taxable income, other?
Yes, I am a partner at my company. The qualified dividends are in addition to my base salary of $110k. I max out my (traditional) 401k, HSA, and also deduct $7k in insurance premiums, so my dividends will be taxed at 0%.

State income tax is based off of federal taxable income + dividends/capital gains

JBTX
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Re: Another Roth vs Traditional Debate

Post by JBTX » Mon Aug 13, 2018 10:05 pm

SelfEmployed123 wrote:
Mon Aug 13, 2018 8:19 pm
I'm just not sure I buy the argument for using a Roth for just about anyone in the accumulation phase unless you are at the bottom of the tax bracket and expect your income to go up in the near future. Even for someone with a Federal + State tax rate of 19%, I still think go traditional and here is why:

1) By contributing to a Roth IRA/401k today you are assuming your net worth in retirement will put you into a higher effective tax bracket. If you are at the top of the 12% income tax bracket (currently $82500 after your deductions), you'd need more than a $2 million nest egg assuming a 4% withdrawal rate to bump you into the higher tax bracket. For reference, the median Boglehead Net Worth not counting Social Security or Pensions as of the 2015 survey was $1.2 million, so to save $2 million or more you'd be doing VERY well by Boglehead standards. If you plan to retire with less than $2 million, you would have been better off with making traditional contributions.
You seem to be ignoring the impact of social security on income taxes which tends to increase your marginal rate in retirement in non intuitive ways. It certainly makes sense to have enough traditional with RMDs to offset standard deduction in retirement, but after that your start to get into the taxability of social security which increases your marginal rate upon withdrawal.
2) People post on this site every day about trying to time the market, should they invest in stocks or bonds given that there has been a bull market for the past 10 years, etc. Any time you are trying to decide between traditional versus Roth contributions, you're also trying to predict what the IRS and Congress will decide when you retire. When is that for you? 10 years from now? 20? 30? No one knows what Congress or the IRS is going to do next year let alone 20 or 30 years from now. Why not take a guaranteed tax deduction now? If you max your deductions now, you can damn near not pay any taxes at all: https://rootofgood.com/make-six-figure- ... ay-no-tax/
It is all about estimated probabilities. They are educated guesses. I don't agree with the logic that since I can't estimate future tax rates, let's treat them as if they are zero. You can look at the history of US tax rates, and the fact that rates by law go up in 2026, and then look at future CBO fiscal projections. People will have differing interpretations of what that implies, but most won't default to "let's assume zero future tax rate"

3) Related to the above, there is no telling what Congress will do to Roth accounts in 20 or 30 years. Will the Roth still exist? Will they still have their revered tax-free status? The Roth didn't even exist until the late 1990s. Who knows what will happen to it?
One of the arguments for going traditional is you can do Roth conversions in later years. Your scenario blows that up.

I've never understood the argument that Roths may be banned and taxed retroactively (which would be extraordinary) but tax rates won't go up (which has happened frequently historically)
4) If you are planning on achieving financial independence, it is more advantageous to make traditional contributions to an IRA/401k now and then rollover your contributions to a Roth IRA at a time of your choosing when it is most advantageous to you. Doing so when you have low or no income means you are paying almost no tax on the conversions at all. Please see here for more details: https://rootofgood.com/roth-ira-convers ... etirement/

If it were me, I'd make tax-deductible contributions, retire and live off of your taxable account, and then follow step 4 above.

Best of luck!
Again relying on future conversions when you speculate they may be banned.

I don't necessarily disagree with your conclusions. Going full traditional is certainly a very arguable position. But i disagree with some of the points you make to get you there.

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FiveK
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Re: Another Roth vs Traditional Debate

Post by FiveK » Tue Aug 14, 2018 12:02 am

ExitStageLeft wrote:
Mon Aug 13, 2018 8:36 pm
Effective tax rate: 8.74%

That is quite a bit lower than the 19% you currently have.
Yes, but effective rate on withdrawals is irrelevant when deciding between traditional vs. Roth. This has been discussed thoroughly. One can start with the wiki article on The reason to use marginal tax rates in this decision, or find numerous threads on this.

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FiveK
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Re: Another Roth vs Traditional Debate

Post by FiveK » Tue Aug 14, 2018 12:18 am

sergio wrote:
Mon Aug 13, 2018 7:44 pm
Any mistakes I'm making in my logic?
The way qualified dividends are taxed, your marginal tax saving rate on t401k contributions could be very high. E.g., assuming
- $110K gross
- $7K pre-tax insurance
- $6900 employer-sponsored HSA
- $17.5K qualified dividends
- MN state tax
your marginal rates for $0-$18.5K of t401k contributions are below.

Image

You can download the personal finance toolbox spreadsheet and enter more accurate numbers to see what you get.

SelfEmployed123
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Re: Another Roth vs Traditional Debate

Post by SelfEmployed123 » Tue Aug 14, 2018 7:51 am

sergio wrote:
Mon Aug 13, 2018 9:28 pm
This is a great post and I have considered most of these factors. I agree 100% with your assessment of the Roth - it's always seemed one of the more heavily scrutinized savings vehicles. If there were to be a change or some sort of "luxury tax" imposed onto retirement accounts, I think the Roth accounts would be first in line to get hit. Traditional IRAs are the only tax-advantaged account some people have (i.e. my self-employed dad) so they seem to fly under the radar. Right now I can fully deduct $11k in a traditional IRA - not sure I'll be able to do that in the future if my income goes up. There is also some peace of mind to getting the tax benefit now vs. 25+ years out, hoping the whole time things don't change.

We'll probably be retiring with 1.5-2mil, but these is an incredibly preliminary and unstable calculations.
I think that people in general are tax averse which makes the idea of the Roth so appealing. You are STILL paying taxes with a Roth, just today rather than tomorrow. If I were to tell you that the government could give you an interest free loan that you could use to invest. Then over decades you could have the magic of compounding turn that money into a lot more money so that in the end your net worth is higher, wouldn't you take the free money? That's effectively what traditional contributions are: a gift from the government. I do agree Roth contributions make sense for some, but I do believe the majority of people will benefit from traditional contributions...unless your effective tax rate in retirement is going to be higher than it is now. Most people will not be generating high income in retirement. The counter to that is the idea that income tax rates are going to go up in the future (they have nowhere to go but up say some). My counter to that is we just don't know for sure so take the guaranteed deduction today.
JBTX wrote:
Mon Aug 13, 2018 10:05 pm
SelfEmployed123 wrote:
Mon Aug 13, 2018 8:19 pm
I'm just not sure I buy the argument for using a Roth for just about anyone in the accumulation phase unless you are at the bottom of the tax bracket and expect your income to go up in the near future. Even for someone with a Federal + State tax rate of 19%, I still think go traditional and here is why:

1) By contributing to a Roth IRA/401k today you are assuming your net worth in retirement will put you into a higher effective tax bracket. If you are at the top of the 12% income tax bracket (currently $82500 after your deductions), you'd need more than a $2 million nest egg assuming a 4% withdrawal rate to bump you into the higher tax bracket. For reference, the median Boglehead Net Worth not counting Social Security or Pensions as of the 2015 survey was $1.2 million, so to save $2 million or more you'd be doing VERY well by Boglehead standards. If you plan to retire with less than $2 million, you would have been better off with making traditional contributions.
You seem to be ignoring the impact of social security on income taxes which tends to increase your marginal rate in retirement in non intuitive ways. It certainly makes sense to have enough traditional with RMDs to offset standard deduction in retirement, but after that your start to get into the taxability of social security which increases your marginal rate upon withdrawal.
2) People post on this site every day about trying to time the market, should they invest in stocks or bonds given that there has been a bull market for the past 10 years, etc. Any time you are trying to decide between traditional versus Roth contributions, you're also trying to predict what the IRS and Congress will decide when you retire. When is that for you? 10 years from now? 20? 30? No one knows what Congress or the IRS is going to do next year let alone 20 or 30 years from now. Why not take a guaranteed tax deduction now? If you max your deductions now, you can damn near not pay any taxes at all: https://rootofgood.com/make-six-figure- ... ay-no-tax/
It is all about estimated probabilities. They are educated guesses. I don't agree with the logic that since I can't estimate future tax rates, let's treat them as if they are zero. You can look at the history of US tax rates, and the fact that rates by law go up in 2026, and then look at future CBO fiscal projections. People will have differing interpretations of what that implies, but most won't default to "let's assume zero future tax rate"

3) Related to the above, there is no telling what Congress will do to Roth accounts in 20 or 30 years. Will the Roth still exist? Will they still have their revered tax-free status? The Roth didn't even exist until the late 1990s. Who knows what will happen to it?
One of the arguments for going traditional is you can do Roth conversions in later years. Your scenario blows that up.

I've never understood the argument that Roths may be banned and taxed retroactively (which would be extraordinary) but tax rates won't go up (which has happened frequently historically)
4) If you are planning on achieving financial independence, it is more advantageous to make traditional contributions to an IRA/401k now and then rollover your contributions to a Roth IRA at a time of your choosing when it is most advantageous to you. Doing so when you have low or no income means you are paying almost no tax on the conversions at all. Please see here for more details: https://rootofgood.com/roth-ira-convers ... etirement/

If it were me, I'd make tax-deductible contributions, retire and live off of your taxable account, and then follow step 4 above.

Best of luck!
Again relying on future conversions when you speculate they may be banned.

I don't necessarily disagree with your conclusions. Going full traditional is certainly a very arguable position. But i disagree with some of the points you make to get you there.
I appreciate your feedback. The median net worth of Bogleheads taking into account social security and pension income in the 2015 survey was $1.8 million. I can see that factoring that into your retirement income estimates would be an important thing to do. As for relying on future conversions when I speculate they may be banned, my own position is I just don't know what the IRS is going to do. Why not take the tax deduction today and worry about conversions when the time comes? Worst comes to worst conversions won't be allowed and I will just pay taxes on the IRA/401k balances. If that comes to pass then people with Roth accounts are going to be even more unhappy.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

bloom2708
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Re: Another Roth vs Traditional Debate

Post by bloom2708 » Tue Aug 14, 2018 9:09 am

Stick with pre-tax 401k + Roth IRA + HSA

There are so many unknowns ahead.

You can do Roth conversions. You might be in a 0% tax state. The worst scenario is you have a huge pile of investments and when your RMDs kick in, you pay more tax. To me, those are not that bad. First, you made it to RMD years. Second, paying tax in your 70s, 80s is not the end of the world.

I'm still of the mind that 90% are better off with pre-tax 401k. I could be proven wrong, but my points above are not likely to cause me to lose sleep. I'll be in my 70s,80s and have a large pile. :wink:
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

randomguy
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Re: Another Roth vs Traditional Debate

Post by randomguy » Tue Aug 14, 2018 10:05 am

SelfEmployed123 wrote:
Mon Aug 13, 2018 8:19 pm
I'm just not sure I buy the argument for using a Roth for just about anyone in the accumulation phase unless you are at the bottom of the tax bracket and expect your income to go up in the near future. Even for someone with a Federal + State tax rate of 19%, I still think go traditional and here is why:

In general, yeah. The big exceptions to think about
a) Your income is going up and you expect to be in the 22%+ brackets in retirement AND your filling up the 12% with ordinary income (pensions,SS, Itax advantaged distributions)
b) you are maxing out tax savings space. 18k in a ROTH is more money than 18k in a traditional. Having the 3k or so in taxable suffers from tax drag and the like. Given that the poster can save like 35k+ (18.5k 401(k), 11k IRA, 5k HSA, 529+) in tax advantaged space, I am not sure this is an issue.
c) you expect to move to a higher tax (on income) state during retirement. This is really just a variation of a.

sergio
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Re: Another Roth vs Traditional Debate

Post by sergio » Tue Aug 14, 2018 11:46 am

Thanks everyone for the great feedback.

After thinking this over, I think I'm probably going stick with the following order
1. Pre-tax 401k (100%)
2. HSA
3. Roth or Trad IRA (myself + spousal account)
4. 529

I'm keeping my options open on the IRA until January. If our company has a huge distribution late 2018 or if I creep above the 22% bracket, I can then offset up to $11k of that with the traditional IRA (assuming MAGI is still low enough), and put the rest into a Roth. I actually think in a perfect world, 100% traditional would be the mathematically best approach assuming nothing changes in the next 25-30 years, but that's not realistic, so we do want some diversity in our holdings.

Deep down we're 99% sure that we're not going to have a super high income in retirement. We're both huge savers and pretty low-key. We will almost certainly not stay in our current high-tax state, and we may end up spending a substantial amount of time in my wife's home country, where to COL is a fraction of that in the US.

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patrick013
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Re: Another Roth vs Traditional Debate

Post by patrick013 » Tue Aug 14, 2018 2:27 pm

sergio wrote:
Mon Aug 13, 2018 7:44 pm
Up until this point I've been maxing out my pre-tax 401k, Roth IRA, and HSA. I will soon open a spousal IRA for my wife.

Distributions: $10-25k/yr (qualified dividends)
It's not very common but it is possible to put the stocks into a
Roth IRA. This would further reduce your taxable income.
Ask your broker.

Otherwise, according to your most complete tax estimate the
tax level is the primary event. Present marginal rate vs. future
marginal tax rate (even when retired).

Here's a fresh perspective. 3 reasons to invest in a Roth IRA
When a 401k-Roth just roll it into a regular Roth-IRA for more flexible
features after retirement.
age in bonds, buy-and-hold, 10 year business cycle

Engineer250
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Re: Another Roth vs Traditional Debate

Post by Engineer250 » Tue Aug 14, 2018 6:51 pm

JBTX wrote:
Mon Aug 13, 2018 10:05 pm
One of the arguments for going traditional is you can do Roth conversions in later years. Your scenario blows that up.

I've never understood the argument that Roths may be banned and taxed retroactively (which would be extraordinary) but tax rates won't go up (which has happened frequently historically)
I agree with this so much, and it sums up my frustration with every Roth vs. traditional thread.

Also, for most people's "early retirement Roth conversion" strategy to work, you need a large taxable account to be pulling from. A lot of people on here do have that scenario but not everyone. I've got two 401ks, two Roth IRAs, and two mega backdoor Roths I can fill up. I am not wealthy enough to need to even start trying to invest in taxable.
Where the tides of fortune take us, no man can know.

randomguy
Posts: 6614
Joined: Wed Sep 17, 2014 9:00 am

Re: Another Roth vs Traditional Debate

Post by randomguy » Tue Aug 14, 2018 7:44 pm

JBTX wrote:
Mon Aug 13, 2018 10:05 pm


I've never understood the argument that Roths may be banned and taxed retroactively (which would be extraordinary) but tax rates won't go up (which has happened frequently historically)
Not to be too political but VATs, national sales taxations and variations regularly make appearance as candidates from both parties tax plans. Think about how Herman Cains 9-9-9 plan would change what choice you should be making today. Obviously figuring if a change will happen is impossible. Don't forgot that an income tax is extraordinary. We had to append our constitution to make it possible:)

MrBeaver
Posts: 240
Joined: Tue Nov 14, 2017 4:45 pm

Re: Another Roth vs Traditional Debate

Post by MrBeaver » Tue Aug 14, 2018 9:04 pm

FiveK wrote:
Tue Aug 14, 2018 12:18 am
sergio wrote:
Mon Aug 13, 2018 7:44 pm
Any mistakes I'm making in my logic?
The way qualified dividends are taxed, your marginal tax saving rate on t401k contributions could be very high. E.g., assuming
- $110K gross
- $7K pre-tax insurance
- $6900 employer-sponsored HSA
- $17.5K qualified dividends
- MN state tax
your marginal rates for $0-$18.5K of t401k contributions are below.

Image

You can download the personal finance toolbox spreadsheet and enter more accurate numbers to see what you get.
^^^ This. This is often not understood however.

In words, this shows that the marginal tax savings of your first ~12k of 401k contributions is 34%. How? Because one less dollar of taxable income reduces the federal and state income taxes (19%) on that dollar, but also causes a dollar of LTCG to be taxed at 0% instead of 15%. Therefore, your marginal rate on that 12k is 19% + 15% = 34%.

While social security taxation humps and other issues often cause people’s marginal rates in retirement to be higher than they thought, 34% is very high.

What I do now:
1. Do Traditional
2. Tax gain harvest at 0% up to my estimated 77,200 (top of 0% LTCG rate)
3. Adjust with spousal IRA/Roth split to hit the number.

You have more LTCG than I have, so this is a no-brainer for you, IMO.

JBTX
Posts: 4243
Joined: Wed Jul 26, 2017 12:46 pm

Re: Another Roth vs Traditional Debate

Post by JBTX » Tue Aug 14, 2018 10:00 pm

Engineer250 wrote:
Tue Aug 14, 2018 6:51 pm
JBTX wrote:
Mon Aug 13, 2018 10:05 pm
One of the arguments for going traditional is you can do Roth conversions in later years. Your scenario blows that up.

I've never understood the argument that Roths may be banned and taxed retroactively (which would be extraordinary) but tax rates won't go up (which has happened frequently historically)
I agree with this so much, and it sums up my frustration with every Roth vs. traditional thread.

Also, for most people's "early retirement Roth conversion" strategy to work, you need a large taxable account to be pulling from. A lot of people on here do have that scenario but not everyone. I've got two 401ks, two Roth IRAs, and two mega backdoor Roths I can fill up. I am not wealthy enough to need to even start trying to invest in taxable.
The live on a shoestring, retire early and do roth conversions for a decade (paying tax from liquid savings) prior to social security is a pretty optimized scenario and not applicable to most people. Like you, I have almost all our savings tied up in Traditional and Roth instruments, and relatively little taxable. I suspect we will have some income up to the point of where I draw social security, so our opportunity for low rate Roth conversions may be modest.

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