Whats better to hold, Roth dollars or Tax-deferred dollars ?

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Retired2013
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by Retired2013 » Sun Feb 10, 2019 6:49 am

aristotelian wrote:
Fri Feb 08, 2019 8:58 pm
bertilak wrote:
Fri Feb 08, 2019 8:38 pm
I can tell you, as someone who is now retired, I much prefer to have money in a Roth over a traditional IRA account. It costs me nothing to take the money out of the Roth. It costs a LOT to take money out of a traditional IRA.
Not always true. Keep your withdrawal under $24K (the standard deduction) and it costs 0. Saving pretax can be very powerful if you plan accordingly. Roth may have been optimal for you, but for most folks taxable income is lower in retirement. OP should run numbers for his own situation.
Yes. If you only save around $700k as a couple in tax deferred and have no SS or pension or other income. When you start to receive $50k - $60k annual as a couple for SS and RMD kick in, taxes go up and you can't keep the income low. BH will have more than $700k saved for a life time.

$60.0k SS
$25.5k (700,000 / 27.4 first yr RMD) = $25.5k
-26.6k Standard Deduction > age 65
$1,468 tax due

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Watty
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by Watty » Sun Feb 10, 2019 8:43 am

Whats better to hold, Roth dollars or Tax-deferred dollars ?
It would be best to post your information in this suggested format and ask which is best for you since there is no one general answer.

viewtopic.php?f=1&t=6212

A few points to consider;

1) When I was going through my 50's I saw more people than I would have expected run into career, health, or life setbacks which caused the to have less retirement money than they were planning on.

2) If things are going well in your 50's then many people(including myself) decide to retire a bit early and in a lower tax bracket. While there are some new retirement expenses having a paid off house, kids that on their own, college costs done with, and no more retirement savings can reduce your income needs.

3) The way Social Security is taxed complicates it but before Social Security starts a couple can have over $100K in taxable income and still be in the 12% federal tax bracket.

4) An over 65 couple can have $25K in taxable income and $35K in Social Security and pay almost no Federal income tax. Along with a paid off house that is enough to pay for an above average middle class retirement unless you live in a real expensive area.

5) The consequences of choosing incorrectly are not symmetrical. If you choose a deductible IRA and you end up wealthy in retirement and in a high tax bracket then you might have to pay more taxes and take a shorter cruise than if you had used a Roth. If you choose a Roth but end up short of money in retirement and in a low or zero tax bracket then having put more into a deductible IRA could have allowed you to have more money in retirement to cover your basic needs.

Unless you are below the 12% federal tax bracket choosing a deductible IRA or 401k instead of a Roth is an easy choice for most people. The exceptions would be things like;

1) You are in some special situation like you are pretty sure about getting a large inheritance, or you are in medical school and have relatively low income before your income gets very high.

2) You are within a few years of retirement and your retirement tax situation is pretty clear.

3) You are in a state with no income taxes and you are likely to retire in a state with higher income taxes.

averagedude
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by averagedude » Sun Feb 10, 2019 9:19 am

4) An over 65 couple can have $25K in taxable income and $35K in Social Security and pay almost no Federal income tax. Along with a paid off house that is enough to pay for an above average middle class retirement unless you live in a real expensive

Keep in mind that this isn't indexed to inflation, and for average middle class people in their 20s and 30s, this will become a tax burden. When this tax law was enacted, this only affected a small percentage of people. Today it affects 40% of taxpayers. You can bet, that 30 years from now, it will affect at least two thirds of taxpayers.

dknightd
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by dknightd » Sun Feb 10, 2019 9:31 am

yugaljindle wrote:
Fri Feb 08, 2019 7:29 pm

Updated Question
Where do you think is advantageous to hold money, Roth or tax-deferred ? Why ?
I'd rather have $1 in Roth than $1 in tax-deferred. Because when I take the money out of roth no taxes are due.
Bonus points if in Roth iRA so that there are no RMDs. So I'd rather hold the money in a Roth IRA.
But I have most of my money in tax-defered (about 95%), since that it where I prefer to put money (immediate tax savings).
I think it is a good idea for most people to have some in each type of account. How much of each depends on personal financial details and the unknown future. I expect to rollover some of my tax-defered 403b into Roth IRA between retirement and age 70 (when I plan to claim SS). There is no "best" answer for everybody. YMMV

TravelforFun
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by TravelforFun » Sun Feb 10, 2019 9:42 am

This question should be answered mostly by older folks who are in or approaching retirement. This older folk regrets he has invested too much and too agressively in 401K and IRA during his 42 working years. He is retiring this year and Uncle Sam is calling. In three years, he will be facing a high RMD and combining that with SS and other taxable income, a very high tax rate. He now wish he had more Roth and more taxable.

TravelforFun

danaht
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by danaht » Sun Feb 10, 2019 9:44 am

Since no one knows the future - I think it would be wise to have equal amounts (50/50) of traditional 401k/IRA, and Roth accounts. Since the tax brackets have been lowered recently - I have started to make large partial conversions from my traditional IRAs to Roth. I plan to do this until the individual tax cuts expire in 2025. Once the tax cuts expire in 2025 - I still won't have the 50/50 allocation that I want. But - then I can resume smaller conversions every year when I retire (hopefully not too much longer after 2025). If I live to 70.5 - there hopefully won't be much RMDs in the traditional bucket to take. note: I am 47 right now - and plan to work 10 more years. I also have 2.7 times more in my traditional than I do Roth - so I have a lot of converting to do! Realistically - I will probably never get close to that 1:1 ratio - but I can try.

bradpevans
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by bradpevans » Sun Feb 10, 2019 10:21 am

danaht wrote:
Sun Feb 10, 2019 9:44 am
Since no one knows the future - I think it would be wise to have equal amounts (50/50) of traditional 401k/IRA, and Roth accounts. Since the tax brackets have been lowered recently - I have started to make large partial conversions from my traditional IRAs to Roth. I plan to do this until the individual tax cuts expire in 2025. Once the tax cuts expire in 2025 - I still won't have the 50/50 allocation that I want. But - then I can resume smaller conversions every year when I retire (hopefully not too much longer after 2025). If I live to 70.5 - there hopefully won't be much RMDs in the traditional bucket to take. note: I am 47 right now - and plan to work 10 more years. I also have 2.7 times more in my traditional than I do Roth - so I have a lot of converting to do! Realistically - I will probably never get close to that 1:1 ratio - but I can try.
I doubt 50/50 is optimal and guess more should go to deferred

Why: dollars IN to traditional ALWAYS save your marginal rate based on income
Dollars OUT get taxed at progressive rates, ie some at 0, then at 10-12, then at 22-24 etc.

With Roth is always zero out, true.
But it’s your top end marginal rate going in that costs you for every Roth dollar IN

Saving in Roth in addition after maxing traditional I like

Instead of traditional not sure

So I do the former

bradpevans
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by bradpevans » Sun Feb 10, 2019 10:21 am

danaht wrote:
Sun Feb 10, 2019 9:44 am
Since no one knows the future - I think it would be wise to have equal amounts (50/50) of traditional 401k/IRA, and Roth accounts. Since the tax brackets have been lowered recently - I have started to make large partial conversions from my traditional IRAs to Roth. I plan to do this until the individual tax cuts expire in 2025. Once the tax cuts expire in 2025 - I still won't have the 50/50 allocation that I want. But - then I can resume smaller conversions every year when I retire (hopefully not too much longer after 2025). If I live to 70.5 - there hopefully won't be much RMDs in the traditional bucket to take. note: I am 47 right now - and plan to work 10 more years. I also have 2.7 times more in my traditional than I do Roth - so I have a lot of converting to do! Realistically - I will probably never get close to that 1:1 ratio - but I can try.
I doubt 50/50 is optimal and guess more should go to deferred

Why: dollars IN to traditional ALWAYS save your marginal rate based on income
Dollars OUT get taxed at progressive rates, ie some at 0, then at 10-12, then at 22-24 etc.

With Roth is always zero out, true.
But it’s your top end marginal rate going in that costs you for every Roth dollar IN

Saving in Roth in addition after maxing traditional I like

Instead of traditional not sure

So I do the former

dknightd
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by dknightd » Sun Feb 10, 2019 10:31 am

I guess the answer is nobody can know in advance what is better, or best.
Take your best guess and be willing to adjust as things change.
Edit: perhaps hedge your bet and diversify ;)

infotrader
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by infotrader » Sun Feb 10, 2019 11:05 am

But people have short term memories. Many don’t remember that they agreed to pay the taxes later. All they see is that they get statements showing their tax-deferred account growing. Their name is at the top showing them as the owner. But the account really belongs to them, Uncle Sam, and their state. That’s a small detail they’ve easily forgotten after 30+ years of working.

When they get close to retirement, they estimate they need $x a month for living expenses. But they really need to withdraw about 20-40% more to pay the taxes and have $x left for living expenses.

If they saved over a million in tax-deferred, their large withdrawals could make their Medicare premium increase (as well as supplemental and drug plan premiums). And it could make their SS become taxable. It is not so simple to say someone will be in a low tax bracket in retirement. At age 30, there’s almost no way to tell what someone’s situation will be like in another 30 years.
You are so right.
Also, based on the reporting that "the number of Fidelity 401(k) accounts with a balance of $1 million or more jumped to 133,000 in the third quarter of 2017, up from just 89,000 a year earlier", most people's tax deferred balance is under a million, and it is difficult of them to imagine the tax/ss/medicare complications of huge tIRA balance of 2 million+. On the top of that, these people may also have sizable pension.

Digital Dave
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by Digital Dave » Sun Feb 10, 2019 11:25 am

I think the Roth, IRA, Taxable decisions are made based more with behavioral reasons than sound calculations. (Think of the kid with a marshmallow placed in front of him. He can eat it now, but in 5 minutes, if he hasn't eaten it, he gets a second marshmallow.) Most people will take the instant gratification road.

It's better to find someone near RMD age, who has similar earning and expense history and ask what they think. As someone on the cusp of 69 years old, never earned a lot at work, but saved a lot, I would skip the deferred taxes in place of tax-free growth and spend.

Myself, I started in the mid 80's with an IRA (no 401k available), and when the Roth began, I switched to that and didn't look back. Most of my money is in taxable accounts, so I have a lot of control over how my income is taxed. I don't regret doing it this way at all.
Investing in Mutual Funds, ETF's, P2P Lending, Forever Stamps and Bittulips.

02nz
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by 02nz » Sun Feb 10, 2019 11:41 am

Digital Dave wrote:
Sun Feb 10, 2019 11:25 am
As someone on the cusp of 69 years old, never earned a lot at work, but saved a lot, I would skip the deferred taxes in place of tax-free growth and spend.
Tax-free growth isn't unique to Roth. Neither Roth nor traditional has any advantage over the other in the growth phase. The difference comes down entirely to the tax rate that is applied, whether on the front end (Roth) or back end (traditional). That's the commutative property of multiplication, as has already been pointed out in this thread.

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One Ping
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by One Ping » Sun Feb 10, 2019 1:29 pm

02nz wrote:
Sun Feb 10, 2019 11:41 am
The difference comes down entirely to the tax rate that is applied, whether on the front end (Roth) or back end (traditional). That's the commutative property of multiplication, as has already been pointed out in this thread. [Emphasis added]
This is true, as far as it goes.

One thing for a couple to consider when thinking about this is, even if the pre-retirement and immediate post-retirement tax rates are the same (e.g., 12%), at some point in the future the survivor may end up taking money out of a tax-deferred account and getting taxed on it at the higher SINGLE tax rate (e.g., 22%) for the same size distribution (e.g., RMD).
"Re-verify our range to target ... one ping only."

02nz
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by 02nz » Sun Feb 10, 2019 1:46 pm

One Ping wrote:
Sun Feb 10, 2019 1:29 pm
02nz wrote:
Sun Feb 10, 2019 11:41 am
The difference comes down entirely to the tax rate that is applied, whether on the front end (Roth) or back end (traditional). That's the commutative property of multiplication, as has already been pointed out in this thread. [Emphasis added]
This is true, as far as it goes.

One thing for a couple to consider when thinking about this is, even if the pre-retirement and immediate post-retirement tax rates are the same (e.g., 12%), at some point in the future the survivor may end up taking money out of a tax-deferred account and getting taxed on it at the higher SINGLE tax rate (e.g., 22%) for the same size distribution (e.g., RMD).
Correct, there are a ton of factors that go into figuring out the tax rate at withdrawal. One can be bumped into a higher bracket as a single filer, IRMAA, taxation of Social Security benefits, ... Similarly, the real tax rate on the front end isn't always as simple as looking at the marginal tax rate. The money may span more than one tax bracket, there may be tax credits (EITC, Saver Credit) or other benefits that are income-tested for which one may qualify by deferring compensation (traditional). One might also live in a different state in retirement, again with significant tax implications.

The reason I made that very simple statement is that quite a few people - even some posters with thousands of posts - regularly make the assertion that Roth is better than traditional because it grows tax-free, or that with very long time horizons Roth is better because then the tax-free growth outweighs the difference in tax rates. Mathematically this is nonsense, no matter how many times Suze Orman and the like say it.

Rouster
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Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

Post by Rouster » Sun Feb 10, 2019 2:15 pm

o2nz:

If the federal income tax rates remained constant, you have a point. This is what I found. For 2018, the peak of 12% rate for married couples is $101,400 income, translating to $8,907 in taxes. In 2017, the tax would be $13,653. That is $4,746 higher taxes in the previous year. Thus, you are "saving" less in deferring your taxes in 2018-(2025?). The differential gets progressively greater going back further in time (eg. 2002 would be $19,055 in taxes). When this wave of reduced taxes ends (2025?), expect to pay progressively more on traditional IRA distributions with the increased rates.

Other Roth advantages:
    There is no RMD at 70 1/2
      Accounts can be transferred to heirs and tax-free RMD's are tied to their expected lifetimes, not yours.

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      FiveK
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      Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

      Post by FiveK » Sun Feb 10, 2019 3:08 pm

      Rouster wrote:
      Sun Feb 10, 2019 2:15 pm
      Other Roth advantages:
        Accounts can be transferred to heirs and tax-free RMD's are tied to their expected lifetimes, not yours.
        It's tough enough to predict the best strategy for traditional vs. Roth within one's own lifetime, let alone over multiple generations with different heirs subject to different marginal tax rates.

        In the case of someone subject to a 37% tax on traditional to Roth conversions with an heir subject to 12% tax on mandatory inherited IRA RMDs, it would be much to the heir's advantage if the original holder does not convert. The heir ends up with less spendable money if receiving the IRA in Roth form, compared with receiving it in traditional form.

        nolesrule
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        Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

        Post by nolesrule » Sun Feb 10, 2019 3:12 pm

        Rouster wrote:
        Sun Feb 10, 2019 2:15 pm
        o2nz:

        If the federal income tax rates remained constant, you have a point. This is what I found. For 2018, the peak of 12% rate for married couples is $101,400 income, translating to $8,907 in taxes. In 2017, the tax would be $13,653. That is $4,746 higher taxes in the previous year. Thus, you are "saving" less in deferring your taxes in 2018-(2025?). The differential gets progressively greater going back further in time (eg. 2002 would be $19,055 in taxes). When this wave of reduced taxes ends (2025?), expect to pay progressively more on traditional IRA distributions with the increased rates.

        Other Roth advantages:
          There is no RMD at 70 1/2
            Accounts can be transferred to heirs and tax-free RMD's are tied to their expected lifetimes, not yours.
            Couldn't let the math stand without a correction. Taxes on $101,400 in 2017 were $11,628 (not $13,653, which needed $109,500). I used 2 different 2017 calculators and got the same numbers (MFJ, standard deduction, 2 exemptions). You forgot to include the 2 exemptions, which accounts for the $8100 difference in Gross Income between the 2 numbers.

            02nz
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            Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

            Post by 02nz » Sun Feb 10, 2019 3:22 pm

            nolesrule wrote:
            Sun Feb 10, 2019 3:12 pm
            Rouster wrote:
            Sun Feb 10, 2019 2:15 pm
            o2nz:

            If the federal income tax rates remained constant, you have a point. This is what I found. For 2018, the peak of 12% rate for married couples is $101,400 income, translating to $8,907 in taxes. In 2017, the tax would be $13,653. That is $4,746 higher taxes in the previous year. Thus, you are "saving" less in deferring your taxes in 2018-(2025?). The differential gets progressively greater going back further in time (eg. 2002 would be $19,055 in taxes). When this wave of reduced taxes ends (2025?), expect to pay progressively more on traditional IRA distributions with the increased rates.

            Other Roth advantages:
              There is no RMD at 70 1/2
                Accounts can be transferred to heirs and tax-free RMD's are tied to their expected lifetimes, not yours.
                Couldn't let the math stand without a correction. Taxes on $101,400 in 2017 were $11,628 (not $13,653, which needed $109,500). I used 2 different 2017 calculators and got the same numbers (MFJ, standard deduction, 2 exemptions). You forgot to include the 2 exemptions, which accounts for the $8100 difference in Gross Income between the 2 numbers.
                In addition to the miscalculation (probably due to leaving out the standard deduction/exemptions), Rouster also failed to account for inflation. The tax bracket thresholds are indexed for inflation, so it makes no sense to apply 2002 tax rates to 2018 dollars. In other words, $101,400 in 2002 was equivalent to about $141,000 in 2018, so (setting aside the tax changes in tax rates that have taken place since 2002) of course it would've been taxed higher.

                02nz
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by 02nz » Sun Feb 10, 2019 3:27 pm

                Rouster wrote:
                Sun Feb 10, 2019 2:15 pm
                Other Roth advantages:
                There is no RMD at 70 1/2
                Accounts can be transferred to heirs and tax-free RMD's are tied to their expected lifetimes, not yours.
                Those are wonderful advantages - Roth is great to have. But that doesn't mean paying 37% federal tax or anything close to it is the best way of getting there. (For most people it's to do withdrawals and Roth conversions in years of low/no other income, and to do so before starting Social Security.)

                sc9182
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by sc9182 » Sun Feb 10, 2019 3:57 pm

                02nz wrote:
                Sun Feb 10, 2019 3:27 pm
                Rouster wrote:
                Sun Feb 10, 2019 2:15 pm
                Other Roth advantages:
                There is no RMD at 70 1/2
                Accounts can be transferred to heirs and tax-free RMD's are tied to their expected lifetimes, not yours.
                Those are wonderful advantages - Roth is great to have. But that doesn't mean paying 37% federal tax or anything close to it is the best way of getting there. (For most people it's to do withdrawals and Roth conversions in years of low/no other income, and to do so before starting Social Security.)
                Agree. Unless you already grew you tax-deferred bucket too big., there might be thing which may come as surprises. Disability/Death/Ageing/FIRE etc may hamper your anticipated growth of various buckets (correspondingly) lead to reduced tax brackets down the line. Fill up tax deferred space first/early.

                Docs have low initial years of resident income , hopefully much larger monies during practice. They may choose start off with Roth first model during early years.

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                Epsilon Delta
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by Epsilon Delta » Sun Feb 10, 2019 4:50 pm

                sc9182 wrote:
                Sun Feb 10, 2019 3:57 pm
                Docs have low initial years of resident income , hopefully much larger monies during practice. They may choose start off with Roth first model during early years.
                It is the "near certainty", rather than the "hopefulness", of sharply higher income that makes this attractive for doctors in training. In most other occupations (including professions) starting off with Roths has a much larger measure of counting chickens before they hatch.

                Topic Author
                yugaljindle
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by yugaljindle » Sun Feb 10, 2019 5:09 pm

                Curious,
                - Employer match to 401k -- Is that considered tax-deferred or after-tax ?
                - If as an employee I consider to contribute pre-tax-401k or roth-401k, does that effect what employer's contribution count towards ? (pre-tax or roth-401k?)

                Rouster
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by Rouster » Sun Feb 10, 2019 5:16 pm

                Employer match is always deferred regardless if it is a traditional 401K or Roth 401K contribution.

                danaht
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by danaht » Sun Feb 10, 2019 5:21 pm

                bradpevans wrote:
                Sun Feb 10, 2019 10:21 am
                danaht wrote:
                Sun Feb 10, 2019 9:44 am
                Since no one knows the future - I think it would be wise to have equal amounts (50/50) of traditional 401k/IRA, and Roth accounts. Since the tax brackets have been lowered recently - I have started to make large partial conversions from my traditional IRAs to Roth. I plan to do this until the individual tax cuts expire in 2025. Once the tax cuts expire in 2025 - I still won't have the 50/50 allocation that I want. But - then I can resume smaller conversions every year when I retire (hopefully not too much longer after 2025). If I live to 70.5 - there hopefully won't be much RMDs in the traditional bucket to take. note: I am 47 right now - and plan to work 10 more years. I also have 2.7 times more in my traditional than I do Roth - so I have a lot of converting to do! Realistically - I will probably never get close to that 1:1 ratio - but I can try.
                I doubt 50/50 is optimal and guess more should go to deferred

                Why: dollars IN to traditional ALWAYS save your marginal rate based on income
                Dollars OUT get taxed at progressive rates, ie some at 0, then at 10-12, then at 22-24 etc.

                With Roth is always zero out, true.
                But it’s your top end marginal rate going in that costs you for every Roth dollar IN

                Saving in Roth in addition after maxing traditional I like

                Instead of traditional not sure

                So I do the former
                I think everyone needs to look at their situation and make a decision on what is better. For me - there is a bigger benefit to convert now than contribute to a Roth. (note: Although, I would also contribute to a Roth if I was eligible to do so)
                1) When I contribute to a Roth - I am foregoing $5,500 dollars in taxable income now to put in a Roth.
                2) Similarly when I convert $23,000 of IRA investments to a Roth (in the 24% tax bracket) - I am foregoing $5,520 of taxable income now to put $23,000 in a Roth.

                To me - #2 is actually a better outcome than #1 - because more goes in the Roth ($23,000) for the same amount of taxable income (~$5,500). Now when the tax cuts expire at the end of 2025 - my conversion would mostly be in the 28% bracket - where the benefit will not be as good. So, I'll probably hold off on conversions at that time. I should also note that I am contributing fully to a traditional 401k ($19,000) and a HSA (3400) while doing these conversions. So, I am not doing these conversions instead of contributing to the deferred bucket. That's why it's going to be so difficult for me to get my Roth to a similar level as the traditional.

                Sandi_k
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by Sandi_k » Sun Feb 10, 2019 7:26 pm

                yugaljindle wrote:
                Fri Feb 08, 2019 7:29 pm

                Updated Question
                Where do you think is advantageous to hold money, Roth or tax-deferred ? Why ?
                Roth, since you can presumably afford the tax hit in cash, now. We have too much in tax-deferred accounts, and our RMDs will be substantial.

                Roths allow you to control your taxable income (which is great when doing something complicated tax-wise, like trying to qualify for ACA), AND they are not subject to RMDs.

                Finally, the tax hit for a sole surviving spouse is mitigated. If the RMDs from the joint tax-deferred accounts are sufficient for the survivor's living expenses, the Roth accounts can be left alone, and passed on to the next generation with minimal taxation.

                986racer
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by 986racer » Sun Feb 10, 2019 7:28 pm

                Let's say that you have money in a traditional IRA and you are considering whether or not to convert it to a Roth. Furthermore, you expect that your current marginal tax rate will be the same as your retirement marginal tax rate.

                In that case, there is a potential slight benefit to the Roth conversion depending on you fund the conversion.

                Let's say that your marginal tax rate is 25% and you have 10K in a traditional IRA. If you were to pay the 2500 in taxes from the traditional IRA account (leaving you with 7500 in the Roth), then there is no benefit to the Roth conversion. The two are mathematically equal.

                However, if you have money outside of the account and can pay the taxes from there, you have effectively added another 2500 into the Roth account. You then get tax free growth of that extra money. Depending on how long you have between conversion and final distribution of money will influence how much that extra growth can be worth. There was some article that showed that it could be worth around 3-5%. I.e., if your tax rate is 25% now, you could still conceivably be ahead of converting now even with an expected future tax rate of 30%. (All dependent on how many years are between now and final distribution)

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                FiveK
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by FiveK » Sun Feb 10, 2019 9:54 pm

                986racer wrote:
                Sun Feb 10, 2019 7:28 pm
                There was some article....
                Vanguard had an article on "Break Event Tax Rate (BETR)" but see also Maxing out your retirement accounts for a discussion, plus links to two spreadsheets one can use to evaluate one's specific situation.

                phantom0308
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by phantom0308 » Sun Feb 10, 2019 11:39 pm

                Jags4186 wrote:
                Sat Feb 09, 2019 1:19 pm
                Darth Xanadu wrote:
                Sat Feb 09, 2019 1:07 pm
                Jags4186 wrote:
                Sat Feb 09, 2019 11:26 am
                Very easy to have both. That way no matter which one ends up better you have some of the winner.

                Diversify assets
                Diversify account types
                Diversify tax uncertainty

                That said, I’m a big believer in deferring taxes as long as possible.
                My thinking on this has evolved over the last few years (thanks in large part to BH!) and this reflects my current thinking precisely.
                Another advantage of the traditional 401k is if you live in a high income tax state you can later move to a low or no income tax state. This is one huge benefit of the traditional over the Roth.
                The reverse is also true I suppose. If you work in a low tax state and plan to retire to a higher tax state it might make sense to take the tax hit now.

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                ruralavalon
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by ruralavalon » Mon Feb 11, 2019 1:09 pm

                Duplicate post deleted.
                Last edited by ruralavalon on Mon Feb 11, 2019 1:53 pm, edited 1 time in total.
                "Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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                ruralavalon
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by ruralavalon » Mon Feb 11, 2019 1:12 pm

                The question really can't be answered in the abstract, other than to say that for most people tax-deferred contributions will likely be better.

                Most people will likely be in a lower tax bracket in retirement, after all for most people retirement means an end to employment income, and we have a progressive tax code with lower rates for lower levels of income. Also, because the tax code is progressive only part of a withdrawal in retirement is taxed at the rate called for in the tax bracket you have during retirement. Please see the TFB blog post "The Case Against Roth 401k".

                You are age 30. More details are necessary if you want a more specific answer than what might be better for "most people".

                Will you be eligible for a significant pension? Are you currently contributing the maximum annual employee contribution to your 401k, and the maximum annual contribution to an IRA? How much do you currently have in tax-deferred accounts? What is your current tax bracket, both federal and state? Do you expect to be in a significantly higher tax bracket during most of your working life? At what age might you retire?
                "Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

                02nz
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by 02nz » Mon Feb 11, 2019 1:17 pm

                danaht wrote:
                Sun Feb 10, 2019 5:21 pm
                1) When I contribute to a Roth - I am foregoing $5,500 dollars in taxable income now to put in a Roth.
                2) Similarly when I convert $23,000 of IRA investments to a Roth (in the 24% tax bracket) - I am foregoing $5,520 of taxable income now to put $23,000 in a Roth.

                To me - #2 is actually a better outcome than #1 - because more goes in the Roth ($23,000) for the same amount of taxable income (~$5,500).
                To equate the Roth contribution in #1 with taxes paid on Roth conversion in #2 is a bizarre form of mental accounting.

                Silk McCue
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by Silk McCue » Mon Feb 11, 2019 2:13 pm

                02nz wrote:
                Mon Feb 11, 2019 1:17 pm
                danaht wrote:
                Sun Feb 10, 2019 5:21 pm
                1) When I contribute to a Roth - I am foregoing $5,500 dollars in taxable income now to put in a Roth.
                2) Similarly when I convert $23,000 of IRA investments to a Roth (in the 24% tax bracket) - I am foregoing $5,520 of taxable income now to put $23,000 in a Roth.

                To me - #2 is actually a better outcome than #1 - because more goes in the Roth ($23,000) for the same amount of taxable income (~$5,500).
                To equate the Roth contribution in #1 with taxes paid on Roth conversion in #2 is a bizarre form of mental accounting.
                Not really.
                If your current marginal rate is lower than your expected retirement tax rate, you should convert in preference to any investment except a matched contribution to a retirement plan. If the rates are equal, max out your Roth contribution in preference to converting, but convert in preference to maxing out your 401(k). If your current rate is slightly higher, max out a decent 401(k) or Roth in preference to converting, but convert in preference to investing in a taxable account. If your current rate is much higher, do not convert.
                From the Wiki

                Roth IRA Conversion.

                Cheers

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                grabiner
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by grabiner » Mon Feb 11, 2019 2:48 pm

                02nz wrote:
                Sun Feb 10, 2019 1:46 pm
                The reason I made that very simple statement is that quite a few people - even some posters with thousands of posts - regularly make the assertion that Roth is better than traditional because it grows tax-free, or that with very long time horizons Roth is better because then the tax-free growth outweighs the difference in tax rates. Mathematically this is nonsense, no matter how many times Suze Orman and the like say it.
                While I agree with you, the popular financial journalists such as Suze Orman are also correct for their audience. $6000 in a Roth IRA is always better than $6000 in a traditional IRA. And that is how many people think about retirement savings; they don't consider the choice as saving $6000 in a Roth IRA versus saving $6000 out of pocket with $6000 in a traditional IRA and investing the tax savings somewhere else.

                Mathematically, $4000 in a traditional IRA is better than $3000 in a Roth IRA when you will pay less than 25% tax on the money. If your tax rate is 25%, then $4000 in a traditional IRA is equivalent to $3000 you own tax-free and $1000 the IRS owns, and will have the same returns if invested the same way.
                Wiki David Grabiner

                986racer
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by 986racer » Mon Feb 11, 2019 7:44 pm

                grabiner wrote:
                Mon Feb 11, 2019 2:48 pm
                02nz wrote:
                Sun Feb 10, 2019 1:46 pm
                The reason I made that very simple statement is that quite a few people - even some posters with thousands of posts - regularly make the assertion that Roth is better than traditional because it grows tax-free, or that with very long time horizons Roth is better because then the tax-free growth outweighs the difference in tax rates. Mathematically this is nonsense, no matter how many times Suze Orman and the like say it.
                While I agree with you, the popular financial journalists such as Suze Orman are also correct for their audience. $6000 in a Roth IRA is always better than $6000 in a traditional IRA. And that is how many people think about retirement savings; they don't consider the choice as saving $6000 in a Roth IRA versus saving $6000 out of pocket with $6000 in a traditional IRA and investing the tax savings somewhere else.

                Mathematically, $4000 in a traditional IRA is better than $3000 in a Roth IRA when you will pay less than 25% tax on the money. If your tax rate is 25%, then $4000 in a traditional IRA is equivalent to $3000 you own tax-free and $1000 the IRS owns, and will have the same returns if invested the same way.
                To be fair though, your first example of the $6k choices are not the same. Investing 6k in a Roth is not the same as investing 6k in a traditional IRA and then investing the tax savings elsewhere. This is because those savings will almost certainly be invested in a taxable account and you will then have the tax drag of dividends on that account. The preferred capital gains tax rate on the taxable account will help offset some of that though.

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                FiveK
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                Re: Whats better to hold, Roth dollars or Tax-deferred dollars ?

                Post by FiveK » Mon Feb 11, 2019 8:29 pm

                986racer wrote:
                Mon Feb 11, 2019 7:44 pm
                To be fair though, your first example of the $6k choices are not the same.
                Yes, "not the same" (because one $6K is in a Roth, while the other $6K/(1 - tax_rate) is split between $6K in traditional plus ($6K * tax_rate) in taxable.

                But it is the "fair" comparison.

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