Are Roth Accounts Overrated?

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LilyFleur
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Re: Are Roth Accounts Overrated?

Post by LilyFleur »

FrugalProfessor wrote: Thu Apr 22, 2021 1:12 pm
aristotelian wrote: Thu Apr 22, 2021 1:06 pm I agree that traditional has much more upside benefit particularly for folks in high tax brackets while in accumulation. One important assumption here is that current capital gains tax rates will stay forever. Roth protects you against changes in the tax code.
+ 1.

My MTR is 24% state + 7% fed = 31%. I'm planning on withdrawing that at 0% in retirement. 31% tax alpha (e.g. https://frugalprofessor.com/hierarchy-of-dissavings/). Trad > Roth if your MTR is high today.

OP is right that, under current laws, taxable brokerage is taxed favorably. However, who knows how tax laws will evolve over time. As a result, Roth > taxable.

What are the downsides of Roth? The interest is indeed locked up, but the principal is not. I think this minor shortcoming is substantially outweighed by the tax hedging benefits of contributing to a Roth today and locking in 0% taxes for life (no dividend no cap gains). Assuming, of course, that they don't pull the rug out from us and change Roth taxation down the road....
It's highly personal, and your blog is premised upon being married and living in a no-tax state and no pension.

Lots of us live in a different situation. Even a modest pension changes your tax bracket. And, if you are currently married, chances are quite high that one person in a marriage will become single and enter that tax bracket at some point.

It's complex and definitely not one-size-fits all. I do find that more Bogleheads are married than not, although, sadly, more are becoming widowed and divorced as the years go by.
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Re: Are Roth Accounts Overrated?

Post by AnEngineer »

Charon wrote: Sat Apr 24, 2021 5:49 pm
Admiral wrote: Thu Apr 22, 2021 6:13 am Most single people never accumulate anywhere near $500k, and most couples never accumulate $1m. Yes, I realize which message board this is. That said, RMDs are not a concern for most people, and certainly not to the level where they may raise one's marginal tax rate to a point where it becomes higher than it was while working.

In the US, even among the top 1% of earners, the median balance across ALL accounts (not just retirement accounts) is $1.13 million.
(https://www.cnbc.com/2018/10/08/how-muc ... ounts.html)
I'm normally quite happy to point out how skewed this forum is to higher income and higher net worth people, but you're not citing the right thing. This is about account balances. I don't know about you, but between a credit union, an online high-interest bank, CDs, single accounts, joint accounts, three different kinds of retirement savings at work, an IRA, a Roth IRA... I have a lot of accounts. Many of them have very little money in them; for example, a few accounts that have $500 each just for some promotional rate.

Don't confuse median account balance with median net worth. To get into the top 1%, by your early 40s you need nearly $8M net worth ( https://dqydj.com/net-worth-by-age-calc ... ed-states/ ). By one's early 50s, it's over $13M.

Bogleheads is a forum largely for those in the 75th to 98th net worth percentiles, ish. The group for whom playing around within the existing system can optimize our retirements and help us feel secure. Those in the top 0.1% are secure no matter what (absent a French Revolution part II), and those in the bottom 25% are too busy trying to survive to save any appreciable amount for retirement. One could imagine arguing for government actions to help secure everyone's retirement, but such things are off limits on this forum.
Also, don't confuse the fact that high earning 20 somethings may not have accumulated much net worth with the idea that they never will. If you don't filter by age, comparing net worth is pretty meaningless.
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

To be honest, tax-advantaged accounts in general don't typically benefit accumulators in the 12% or lower brackets nearly as much as they do for those in higher brackets. Tax-deferred accounts don't help the '12% and lower' folks much because with the taxation of SS benefits, they are likely to be in at least the 12% bracket through most of their retirement (and likely all of it if they start SS benefits as soon as they retire, which most do). Roth accounts are certainly better than taxable accounts due to the lack of tax drag, but long-term capital gains in the 12% bracket are zero anyway.

Where tax-deferred accounts can really help those in the 12% bracket is in early retirement, when substantial portions of the withdrawals 'fill up' the standard deduction and 10% brackets and when Roth conversions allow the retiree to 'lock in' their tax rate on the converted amount.
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Re: Are Roth Accounts Overrated?

Post by jello_nailer »

LilyFleur wrote: Wed Apr 21, 2021 12:08 pm My son, who just started his first job two years ago, is contributing to a Roth while his income is lower (at the beginning of his career), on the advice of my Schwab advisor.
I advised my kids the same. Paying basically peanuts in taxes now just starting. One of them I offered to help pay the tax delta if they went Roth, the gift that keeps on giving.
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Re: Are Roth Accounts Overrated?

Post by anon_investor »

willthrill81 wrote: Sat Apr 24, 2021 10:12 pm To be honest, tax-advantaged accounts in general don't typically benefit accumulators in the 12% or lower brackets nearly as much as they do for those in higher brackets. Tax-deferred accounts don't help the '12% and lower' folks much because with the taxation of SS benefits, they are likely to be in at least the 12% bracket through most of their retirement (and likely all of it if they start SS benefits as soon as they retire, which most do). Roth accounts are certainly better than taxable accounts due to the lack of tax drag, but long-term capital gains in the 12% bracket are zero anyway.

Where tax-deferred accounts can really help those in the 12% bracket is in early retirement, when substantial portions of the withdrawals 'fill up' the standard deduction and 10% brackets and when Roth conversions allow the retiree to 'lock in' their tax rate on the converted amount.
Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
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Re: Are Roth Accounts Overrated?

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anon_investor wrote: Sat Apr 24, 2021 10:26 pm
willthrill81 wrote: Sat Apr 24, 2021 10:12 pm To be honest, tax-advantaged accounts in general don't typically benefit accumulators in the 12% or lower brackets nearly as much as they do for those in higher brackets. Tax-deferred accounts don't help the '12% and lower' folks much because with the taxation of SS benefits, they are likely to be in at least the 12% bracket through most of their retirement (and likely all of it if they start SS benefits as soon as they retire, which most do). Roth accounts are certainly better than taxable accounts due to the lack of tax drag, but long-term capital gains in the 12% bracket are zero anyway.

Where tax-deferred accounts can really help those in the 12% bracket is in early retirement, when substantial portions of the withdrawals 'fill up' the standard deduction and 10% brackets and when Roth conversions allow the retiree to 'lock in' their tax rate on the converted amount.
Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
I get your point, but the law could also be changed to allow for taxation of Roth withdrawals. The 'laws can be changed' argument swings both ways.
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anon_investor
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Re: Are Roth Accounts Overrated?

Post by anon_investor »

willthrill81 wrote: Sat Apr 24, 2021 10:37 pm
anon_investor wrote: Sat Apr 24, 2021 10:26 pm
willthrill81 wrote: Sat Apr 24, 2021 10:12 pm To be honest, tax-advantaged accounts in general don't typically benefit accumulators in the 12% or lower brackets nearly as much as they do for those in higher brackets. Tax-deferred accounts don't help the '12% and lower' folks much because with the taxation of SS benefits, they are likely to be in at least the 12% bracket through most of their retirement (and likely all of it if they start SS benefits as soon as they retire, which most do). Roth accounts are certainly better than taxable accounts due to the lack of tax drag, but long-term capital gains in the 12% bracket are zero anyway.

Where tax-deferred accounts can really help those in the 12% bracket is in early retirement, when substantial portions of the withdrawals 'fill up' the standard deduction and 10% brackets and when Roth conversions allow the retiree to 'lock in' their tax rate on the converted amount.
Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
I get your point, but the law could also be changed to allow for taxation of Roth withdrawals. The 'laws can be changed' argument swings both ways.
As much as I would love to debate potential tax law changes, we cannot here. However, I think it is acceptable to state changes in tax brackets/rates and capital gains treatment have occured numberous times since Roth IRAs became available. However, what has not changed is that qualified Roth withdrawals are not taxed. Personally, for a variey of reasons, I do not think qualified Roth IRA withdrawals will ever be taxed, I will take that bet.

It was mentioned by someone else, Roth IRAs offer protection from creditors in many states, something that is not afforded taxable accounts. Another benefit of Roth IRAs.

To me, Roth accounts are just plain better than taxable accounts for everyone.
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Re: Are Roth Accounts Overrated?

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anon_investor wrote: Sat Apr 24, 2021 11:27 pm
willthrill81 wrote: Sat Apr 24, 2021 10:37 pm
anon_investor wrote: Sat Apr 24, 2021 10:26 pm
willthrill81 wrote: Sat Apr 24, 2021 10:12 pm To be honest, tax-advantaged accounts in general don't typically benefit accumulators in the 12% or lower brackets nearly as much as they do for those in higher brackets. Tax-deferred accounts don't help the '12% and lower' folks much because with the taxation of SS benefits, they are likely to be in at least the 12% bracket through most of their retirement (and likely all of it if they start SS benefits as soon as they retire, which most do). Roth accounts are certainly better than taxable accounts due to the lack of tax drag, but long-term capital gains in the 12% bracket are zero anyway.

Where tax-deferred accounts can really help those in the 12% bracket is in early retirement, when substantial portions of the withdrawals 'fill up' the standard deduction and 10% brackets and when Roth conversions allow the retiree to 'lock in' their tax rate on the converted amount.
Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
I get your point, but the law could also be changed to allow for taxation of Roth withdrawals. The 'laws can be changed' argument swings both ways.
As much as I would love to debate potential tax law changes, we cannot here. However, I think it is acceptable to state changes in tax brackets/rates and capital gains treatment have occured numberous times since Roth IRAs became available. However, what has not changed is that qualified Roth withdrawals are not taxed. Personally, for a variey of reasons, I do not think qualified Roth IRA withdrawals will ever be taxed, I will take that bet.

It was mentioned by someone else, Roth IRAs offer protection from creditors in many states, something that is not afforded taxable accounts. Another benefit of Roth IRAs.

To me, Roth accounts are just plain better than taxable accounts for everyone.
I don't and haven't disputed that Roth accounts are better than taxable. My post above merely stated that tax-advantaged accounts in general offer much more relative benefit for those in tax brackets higher than 12% than for those in the 12% or lower brackets.

For instance, someone who would otherwise be in the 22% bracket can potentially use tax-deferred accounts, to never pay more than 12% on any of it, a 45.5% tax savings (this is basically our plan). Those in the 12% bracket have a much harder, if not impossible, task to achieve that much tax arbitrage.
Last edited by willthrill81 on Sat Apr 24, 2021 11:48 pm, edited 1 time in total.
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

anon_investor wrote: Sat Apr 24, 2021 11:27 pm
willthrill81 wrote: Sat Apr 24, 2021 10:37 pm
anon_investor wrote: Sat Apr 24, 2021 10:26 pm
willthrill81 wrote: Sat Apr 24, 2021 10:12 pm To be honest, tax-advantaged accounts in general don't typically benefit accumulators in the 12% or lower brackets nearly as much as they do for those in higher brackets. Tax-deferred accounts don't help the '12% and lower' folks much because with the taxation of SS benefits, they are likely to be in at least the 12% bracket through most of their retirement (and likely all of it if they start SS benefits as soon as they retire, which most do). Roth accounts are certainly better than taxable accounts due to the lack of tax drag, but long-term capital gains in the 12% bracket are zero anyway.

Where tax-deferred accounts can really help those in the 12% bracket is in early retirement, when substantial portions of the withdrawals 'fill up' the standard deduction and 10% brackets and when Roth conversions allow the retiree to 'lock in' their tax rate on the converted amount.
Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
I get your point, but the law could also be changed to allow for taxation of Roth withdrawals. The 'laws can be changed' argument swings both ways.
As much as I would love to debate potential tax law changes, we cannot here. However, I think it is acceptable to state changes in tax brackets/rates and capital gains treatment have occured numberous times since Roth IRAs became available. However, what has not changed is that qualified Roth withdrawals are not taxed. Personally, for a variey of reasons, I do not think qualified Roth IRA withdrawals will ever be taxed, I will take that bet.

It was mentioned by someone else, Roth IRAs offer protection from creditors in many states, something that is not afforded taxable accounts. Another benefit of Roth IRAs.

To me, Roth accounts are just plain better than taxable accounts for everyone.
Agreed. Also the super majority of states allow IRA protections and several states allow for inherited IRA protections. As of my last canvassing of the issue anyway.
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Re: Are Roth Accounts Overrated?

Post by abuss368 »

I think there are a lot of advantages and flexibility with Roth accounts. One little known fact of having a Roth IRA is that it keeps the Medicare premiums down. The distributions from a Roth IRA are not reported on your tax return (which is used to set premiums).

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Re: Are Roth Accounts Overrated?

Post by abuss368 »

anon_investor wrote: Sat Apr 24, 2021 11:27 pm
willthrill81 wrote: Sat Apr 24, 2021 10:37 pm
anon_investor wrote: Sat Apr 24, 2021 10:26 pm
willthrill81 wrote: Sat Apr 24, 2021 10:12 pm To be honest, tax-advantaged accounts in general don't typically benefit accumulators in the 12% or lower brackets nearly as much as they do for those in higher brackets. Tax-deferred accounts don't help the '12% and lower' folks much because with the taxation of SS benefits, they are likely to be in at least the 12% bracket through most of their retirement (and likely all of it if they start SS benefits as soon as they retire, which most do). Roth accounts are certainly better than taxable accounts due to the lack of tax drag, but long-term capital gains in the 12% bracket are zero anyway.

Where tax-deferred accounts can really help those in the 12% bracket is in early retirement, when substantial portions of the withdrawals 'fill up' the standard deduction and 10% brackets and when Roth conversions allow the retiree to 'lock in' their tax rate on the converted amount.
Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
I get your point, but the law could also be changed to allow for taxation of Roth withdrawals. The 'laws can be changed' argument swings both ways.
As much as I would love to debate potential tax law changes, we cannot here. However, I think it is acceptable to state changes in tax brackets/rates and capital gains treatment have occured numberous times since Roth IRAs became available. However, what has not changed is that qualified Roth withdrawals are not taxed. Personally, for a variey of reasons, I do not think qualified Roth IRA withdrawals will ever be taxed, I will take that bet.

It was mentioned by someone else, Roth IRAs offer protection from creditors in many states, something that is not afforded taxable accounts. Another benefit of Roth IRAs.

To me, Roth accounts are just plain better than taxable accounts for everyone.
Agree and very well said. I believe the Federal TSP added a Roth IRA feature not to long ago. It is certainly moving in that direct more and more.

Tony
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Re: Are Roth Accounts Overrated?

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willthrill81 wrote: Sat Apr 24, 2021 10:37 pm
anon_investor wrote: Sat Apr 24, 2021 10:26 pm Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
I get your point, but the law could also be changed to allow for taxation of Roth withdrawals. The 'laws can be changed' argument swings both ways.
Even if Roth withdrawals were to be taxed, they would have to be taxed more favorably than TIRA withdrawals, where every single dollar is taxed like regular income.

And Senator William Roth, who co-sponsored the legislation creating them, would be rolling over in his grave.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Are Roth Accounts Overrated?

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celia wrote: Sun Apr 25, 2021 11:39 am
willthrill81 wrote: Sat Apr 24, 2021 10:37 pm
anon_investor wrote: Sat Apr 24, 2021 10:26 pm Who knows what future tax brackets and rates will be or whether long term capital gains will continue to receive favorable tax treatment. These things have all changed in the past and can change again. Roth provides a level of certainty as well as no tax drag compared to taxable. So someone in the 12% tax bracket today can still benefit with direct Roth contributions.
I get your point, but the law could also be changed to allow for taxation of Roth withdrawals. The 'laws can be changed' argument swings both ways.
Even if Roth withdrawals were to be taxed, they would have to be taxed more favorably than TIRA withdrawals, where every single dollar is taxed like regular income.

And Senator William Roth, who co-sponsored the legislation creating them, would be rolling over in his grave.
I'm not saying that anyone should avoid Roths due to the possibility of disadvantageous changes in the laws governing them nor commenting on the likelihood of such potential changes, merely pointing out that the 'laws can be changed' argument applies to everything.
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Re: Are Roth Accounts Overrated?

Post by abuss368 »

Roth IRAs are very flexible in my opinion. I converted our Traditional IRAs many years ago. In hindsight it was a very good decision.

Thanks.
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Re: Are Roth Accounts Overrated?

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Admiral wrote: Thu Apr 22, 2021 6:13 am Most single people never accumulate anywhere near $500k, and most couples never accumulate $1m. Yes, I realize which message board this is. That said, RMDs are not a concern for most people, and certainly not to the level where they may raise one's marginal tax rate to a point where it becomes higher than it was while working.
We aren’t here to discuss the ‘average’ taxpayer (of which a good portion don’t even have to file). We are a collective self-help group. We learn from each other. We discuss opposing viewpoints. But the fact that you’re even here reading this implies you tend to have some savings/assets and need to understand taxes. Unless something unfortunate impacts your life severely (like death), you will eventually retire and should be aware of your options.

This thread, RMD Coming....., has lots of people in their late 60s posting about how the wished they had done Roth conversions earlier. They never expected to be where they are today. Some of the thread so far is shared commiserating and some is about taking action to still convert.

I encourage those who are still young (far from retirement) to visit that thread.

In the US, even among the top 1% of earners, the median balance across ALL accounts (not just retirement accounts) is $1.13 million.
(https://www.cnbc.com/2018/10/08/how-muc ... ounts.html)
I take all these surveys with a ‘grain of salt’. They pose as news stories as the writer has to write something. But they rarely tell where their data comes from and what questions (if any) were asked. They only use one source from an institution that makes statististcs available. The group of people may contain young people. And people can have accounts at multiple places.

Even an analysis of IRS data only tells you what happened in a particular year and only on assets that were reported on. If you didn’t take any capital gains or sell your house or gold bars...or a multitude of other things, this won’t show what a person’s/family’s net worth is.

This is not to negate celia's valid points, only to point out that for most savers, the benefits of saving in traditional outweigh the future tax liability.
I disagree wholeheartedly and most of the people in the referenced thread would probably agree with me. Rarely does anyone expect their retirement tax bracket to be higher than when working. I was even surprised when ours went up, even without doing Roth conversions. After I was done converting, I realized that our bracket was higher because we no longer itemized our deductions, once the mortgage was paid off. If itemizing, the interest you pay each year just shrinks gradually, then suddenly disappears. Somehow, that was ‘unexpected’ to me because I wasn’t thinking ahead more than a few years.
:oops:

Also, see my signature line regarding spending power of your accounts.
Last edited by celia on Sun Apr 25, 2021 1:09 pm, edited 1 time in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Are Roth Accounts Overrated?

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A partisan political post was removed. Please keep politics out of the discussion.

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Re: Are Roth Accounts Overrated?

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Admiral wrote: Thu Apr 22, 2021 6:13 am
This is not to negate celia's valid points, only to point out that for most savers, the benefits of saving in traditional outweigh the future tax liability.
While you're not wrong, Bogle heads are not your average saver either. We're super savers.
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Re: Are Roth Accounts Overrated?

Post by abuss368 »

Lee_WSP wrote: Sun Apr 25, 2021 1:10 pm
Admiral wrote: Thu Apr 22, 2021 6:13 am
This is not to negate celia's valid points, only to point out that for most savers, the benefits of saving in traditional outweigh the future tax liability.
While you're not wrong, Bogle heads are not your average saver either. We're super savers.
Indeed!
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Re: Are Roth Accounts Overrated?

Post by DetroitRick »

It's just another tool, neither underrated or overrated. It's a wonderful device for managing tax liability, but it needs to implemented based on personal situations. And those situations are seldom stagnant over lifetimes.

Most people in general don't even understand their current tax situation (the one totally predictable data point), let alone their future situation, or even general tax code changes over time. So for many, tax vehicle diversification is probably simplistically prudent. Those tax code changes are inevitable and massive in impact. Heck, in my lifetime, I've spanned almost all of the tax brackets at one point or another - making my personal situation more difficult (in a good way I suppose). And the ACA would be but one specific example of those massive tax code changes, albeit one that those not using often do not fully grasp. Look too at capital gains rates - now, years ago, years ahead. And Medicare IRMAA issues, for those affected. This is the tax foundation that is always shifting. There is no "one size fits all" answer. What else is new?

I have substantial Roth holdings, although far smaller than traditional IRA. Frankly I'd like to have slightly more, but ACA impacts would make that decision stupid right now, in our case. So..., great tool, simply one of many. It will always be part of my mix.
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Re: Are Roth Accounts Overrated?

Post by celia »

DetroitRick wrote: I have substantial Roth holdings, although far smaller than traditional IRA. Frankly I'd like to have slightly more, but ACA impacts would make that decision stupid right now, in our case.
Have you calculated and compared the numbers for what you’re doing now vs. not taking the subsidy** (pay more for insurance), do a large Roth conversion, and pay less in age 72 taxes on smaller RMDs (and possibly avoid IRMAA fees)? The amount converted now and its growth over the years will no longer be subject to those future taxes, not just in the year you turn 72, but also the years afterwards.

Taking the subsidy now is a form of enjoying lower taxes now in exchange for higher taxes later. And I am suggesting only one year of doing this, if it makes financial sense. Possibly you will be insuring a different number of people now vs. then or have higher insurance rates as you age, which might need to be factored in.

**And isn’t that subsidy not subject to Taxable Income this year and next? (I don’t know that much about the ACA rules.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

celia wrote: Sun Apr 25, 2021 12:49 pm I take all these surveys with a ‘grain of salt’. They pose as news stories as the writer has to write something. But they rarely tell where their data comes from and what questions (if any) were asked. They only use one source from an institution that makes statististcs available. The group of people may contain young people. And people can have accounts at multiple places.
Well said. In evaluating such research, consistency among a variety of sources is necessary before anything resembling strong confidence the results can exist. To your last point, our single largest investment account currently has under 40% of our total portfolio.
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Re: Are Roth Accounts Overrated?

Post by DetroitRick »

celia wrote: Mon Apr 26, 2021 1:50 pm
DetroitRick wrote: I have substantial Roth holdings, although far smaller than traditional IRA. Frankly I'd like to have slightly more, but ACA impacts would make that decision stupid right now, in our case.
Have you calculated and compared the numbers for what you’re doing now vs. not taking the subsidy** (pay more for insurance), do a large Roth conversion, and pay less in age 72 taxes on smaller RMDs (and possibly avoid IRMAA fees)? The amount converted now and its growth over the years will no longer be subject to those future taxes, not just in the year you turn 72, but also the years afterwards.

Taking the subsidy now is a form of enjoying lower taxes now in exchange for higher taxes later. And I am suggesting only one year of doing this, if it makes financial sense. Possibly you will be insuring a different number of people now vs. then or have higher insurance rates as you age, which might need to be factored in.

**And isn’t that subsidy not subject to Taxable Income this year and next? (I don’t know that much about the ACA rules.)
No, this is far too simplistic. That "subsidy" is not just the premium tax credit alone, but also a potentially massive reduction in out-of-pocket medical and prescription costs that ACA can provide at certain income tiers as well. Medical deductibles and out of pocket maxes are otherwise pretty massive above 250% of federal poverty level with most insurers in most states. So this is impacted by income and you have to look at both aspects together. Weird, unprecedented, but that's the program since 2013. These issues, for us, collectively dwarf those future taxes. This is true for millions of people, but of course not for everybody. Which is my main point - the Roth decision may involve lots of moving parts in some common cases. We are not talking a mere $1k or so here, it can be far more than. Nor is it necessarily a form of enjoying lower taxes now IN EXCHANGE for higher taxes later. You have literally no idea what my future taxes will be because you have no information about me and the composition/size of my income. Let alone what future tax structures will be in effect later in my life (which is a bit of a guess for me too).

So, of course I have considered impact of future traditional IRA RMD's on my taxes (and potential IRMAA) as well - otherwise I would have only been doing a very incomplete analysis. There is absolutely no way I should do Roth conversions right now barring a future marginal tax rate many multiples of my current rate. So I did both contributions and conversions when it did make sense and have now paused. I will likely do more conversions 4, 5 and 6 years from now (when my wife exits ACA, I'm out this past February) - beyond that we won't have a need and aren't concerned with marginal tax rates of our heirs. But this is again based on my facts, and applies to my situation.

RE subsidy and taxable income - The subsidy represents a refundable tax credit. It is based on Federal adjusted gross income for the household, with (up to 3) possible adjustments. It does not impact taxable income, nor do the aforementioned cost-sharing reductions. The credit can be paid in advance as a premium reduction (up to 100% of estimated credit amount). Whatever is not taken, is "trued up to actual income" when you file your Federal tax return. Cost-sharing reductions are not "trued up" at tax time and have no impact beyond a given insurance year. And 3 differences came with recent March legislation: one-time forgiveness of premium credit repayment for 2020, higher premium tax credits plus elimination of 400% cliff for 2021 and 2022 only, and changes in (higher) subsidies for people unemployed in 2021.
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Re: Are Roth Accounts Overrated?

Post by marcopolo »

DetroitRick wrote: Mon Apr 26, 2021 3:22 pm
celia wrote: Mon Apr 26, 2021 1:50 pm
DetroitRick wrote: I have substantial Roth holdings, although far smaller than traditional IRA. Frankly I'd like to have slightly more, but ACA impacts would make that decision stupid right now, in our case.
Have you calculated and compared the numbers for what you’re doing now vs. not taking the subsidy** (pay more for insurance), do a large Roth conversion, and pay less in age 72 taxes on smaller RMDs (and possibly avoid IRMAA fees)? The amount converted now and its growth over the years will no longer be subject to those future taxes, not just in the year you turn 72, but also the years afterwards.

Taking the subsidy now is a form of enjoying lower taxes now in exchange for higher taxes later. And I am suggesting only one year of doing this, if it makes financial sense. Possibly you will be insuring a different number of people now vs. then or have higher insurance rates as you age, which might need to be factored in.

**And isn’t that subsidy not subject to Taxable Income this year and next? (I don’t know that much about the ACA rules.)
No, this is far too simplistic. That "subsidy" is not just the premium tax credit alone, but also a potentially massive reduction in out-of-pocket medical and prescription costs that ACA can provide at certain income tiers as well. Medical deductibles and out of pocket maxes are otherwise pretty massive above 250% of federal poverty level with most insurers in most states. So this is impacted by income and you have to look at both aspects together. Weird, unprecedented, but that's the program since 2013. These issues, for us, collectively dwarf those future taxes. This is true for millions of people, but of course not for everybody. Which is my main point - the Roth decision may involve lots of moving parts in some common cases. We are not talking a mere $1k or so here, it can be far more than. Nor is it necessarily a form of enjoying lower taxes now IN EXCHANGE for higher taxes later. You have literally no idea what my future taxes will be because you have no information about me and the composition/size of my income. Let alone what future tax structures will be in effect later in my life (which is a bit of a guess for me too).

So, of course I have considered impact of future traditional IRA RMD's on my taxes (and potential IRMAA) as well - otherwise I would have only been doing a very incomplete analysis. There is absolutely no way I should do Roth conversions right now barring a future marginal tax rate many multiples of my current rate. So I did both contributions and conversions when it did make sense and have now paused. I will likely do more conversions 4, 5 and 6 years from now (when my wife exits ACA, I'm out this past February) - beyond that we won't have a need and aren't concerned with marginal tax rates of our heirs. But this is again based on my facts, and applies to my situation.

RE subsidy and taxable income - The subsidy represents a refundable tax credit. It is based on Federal adjusted gross income for the household, with (up to 3) possible adjustments. It does not impact taxable income, nor do the aforementioned cost-sharing reductions. The credit can be paid in advance as a premium reduction (up to 100% of estimated credit amount). Whatever is not taken, is "trued up to actual income" when you file your Federal tax return. Cost-sharing reductions are not "trued up" at tax time and have no impact beyond a given insurance year. And 3 differences came with recent March legislation: one-time forgiveness of premium credit repayment for 2020, higher premium tax credits plus elimination of 400% cliff for 2021 and 2022 only, and changes in (higher) subsidies for people unemployed in 2021.
You are thinking about this in the correct holistic way.
Roth Conversions are a very nice tool, that are appropriate for many situations.
But, they are not the proverbial "hammer" such that every situation "looks like a nail"

Many people fail to take advantage of Roth conversions when they are appropriate, so it is useful that there are numerous threads here detailing how they can be useful.

But, I do think that message looses some credibility when people insist on pushing for Roth Conversions in situation where they are clearly not warranted, and can actually do financial harm.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Are Roth Accounts Overrated?

Post by Admiral »

celia wrote: Sun Apr 25, 2021 12:49 pm
Admiral wrote: Thu Apr 22, 2021 6:13 am Most single people never accumulate anywhere near $500k, and most couples never accumulate $1m. Yes, I realize which message board this is. That said, RMDs are not a concern for most people, and certainly not to the level where they may raise one's marginal tax rate to a point where it becomes higher than it was while working.
We aren’t here to discuss the ‘average’ taxpayer (of which a good portion don’t even have to file). We are a collective self-help group. We learn from each other. We discuss opposing viewpoints. But the fact that you’re even here reading this implies you tend to have some savings/assets and need to understand taxes. Unless something unfortunate impacts your life severely (like death), you will eventually retire and should be aware of your options.

This thread, RMD Coming....., has lots of people in their late 60s posting about how the wished they had done Roth conversions earlier. They never expected to be where they are today. Some of the thread so far is shared commiserating and some is about taking action to still convert.

I encourage those who are still young (far from retirement) to visit that thread.

In the US, even among the top 1% of earners, the median balance across ALL accounts (not just retirement accounts) is $1.13 million.
(https://www.cnbc.com/2018/10/08/how-muc ... ounts.html)
I take all these surveys with a ‘grain of salt’. They pose as news stories as the writer has to write something. But they rarely tell where their data comes from and what questions (if any) were asked. They only use one source from an institution that makes statististcs available. The group of people may contain young people. And people can have accounts at multiple places.

Even an analysis of IRS data only tells you what happened in a particular year and only on assets that were reported on. If you didn’t take any capital gains or sell your house or gold bars...or a multitude of other things, this won’t show what a person’s/family’s net worth is.

This is not to negate celia's valid points, only to point out that for most savers, the benefits of saving in traditional outweigh the future tax liability.
I disagree wholeheartedly and most of the people in the referenced thread would probably agree with me. Rarely does anyone expect their retirement tax bracket to be higher than when working. I was even surprised when ours went up, even without doing Roth conversions. After I was done converting, I realized that our bracket was higher because we no longer itemized our deductions, once the mortgage was paid off. If itemizing, the interest you pay each year just shrinks gradually, then suddenly disappears. Somehow, that was ‘unexpected’ to me because I wasn’t thinking ahead more than a few years.
:oops:

Also, see my signature line regarding spending power of your accounts.
Yes, we're here to discuss all viewpoints. You may not be average (in terms of income) and nor am I. And in fact I save in Roth. But... so what? A bunch of people posting on a thread about shudda coulda and Roth savings is a tiny self selected sample of people who've saved a lot of money. If you don't believe the stats that I cited regarding the average (or median) amount saved, and you in fact believe that Roth is appropriate for most people, then please provide statistics that compare average marginal rate of tax paid while working versus when retired.

Part of "all viewpoints" means we need to be cognizant that people who are unsophisticated investors who are not high earners read posts like yours (and others, not singling you out) and end up making poor decisions that cause them to pay needless tax.

We can argue about the meaning of "most" or "the majority" and whether that applies to Bogleheads until we're blue in the face. My post(s) are directed at those who may not understand that they are likely to be living on less income when retired than while working and may thus be in a lower tax bracket and who have not saved half a million dollars. If you really, truly believe that most retired Americans will have to worry about RMDs pushing them into a higher marginal bracket then please provide data that supports your contention. I have not seen any such data.

Yes, I agree with you that the 500 people you're speaking to probably need to worry about it. But they are not a representative sample of anything except people with a lot of money. Roth is a great tool. Most people can convert to Roth if needed, they don't need to save in Roth while they are working. There are many pieces of free software (and spreadsheets available here) that can help people estimate their taxes.
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Re: Are Roth Accounts Overrated?

Post by RetiredAL »

Admiral wrote: Sun May 02, 2021 7:55 pm Most people can convert to Roth if needed, they don't need to save in Roth while they are working.
Retired in 2016, but had some residual wage income that allowed us to fund 2017 and 2018 Roth's. Our Roth's were fully funded for nearly 20 years and were contributed at the then 15% rate. Our current deferred withdrawals are about 1/2 of what the RMD will be starting next year, and these withdrawals already have us into the current 22% rate, thanks to the SS Hump. We now have $450K in Roth's.

Someday one of us will be the filing-single survivor. If those extra $ had gone into deferred instead, my modeling says the survivor would likely be into the 33% (reverting back to 36%) by age 80.

I for one, am very glad we did the Roth's all those years vs further funding into deferred.
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Re: Are Roth Accounts Overrated?

Post by 02nz »

celia wrote: Wed Apr 21, 2021 9:44 pm And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

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.
Of course this is true, as written (and you've written it a lot), but it answers the wrong question. The question isn't whether I'd rather have a $1 in Roth, tax-deferred, or taxable - of course anyone would choose a $1 in Roth - but rather what gives me the most spending power for any given amount that's available to contribute during my working years (holding constant the net take-home pay, not the contribution dollar amount). For most people, it will be some mix of the three, and the exactly optimal answer can't really be known. With more uncertainty, one should tilt toward tax-deferred to protect against the downside risk. Most people could do a lot worse than to max both a traditional 401k and a Roth IRA.

To answer OP's question, I think many, perhaps most, people (I'm talking about the general population here) overestimate Roth's advantages or underestimate the advantage of tax deferral. I cannot count how many times posters have said something like, "Roth is great because it grows tax-free!", failing to recognize that in the growth phase tax-deferred accounts enjoy the same advantage. Ultimately it all comes down to you'll pay a higher tax rate on the front or back end.

Invariably in these threads there will be many who say "I wish we had more in Roth, we're getting killed on taxes on distributions from tax-deferred accounts"! But this is a nice a problem to have, a result partly of the runup in the markets and partly of the fact that Roth options are relatively new (so most current retirees had little opportunity to contribute to Roth IRAs and Roth 401k's). Many of those retirees also have pensions, which relatively few of those in the work force now will enjoy. Without significant pension income, tax-deferred accounts become much more favorable.
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Re: Are Roth Accounts Overrated?

Post by 02nz »

abuss368 wrote: Sun Apr 25, 2021 10:31 am I believe the Federal TSP added a Roth IRA feature not to long ago. It is certainly moving in that direct more and more.
TSP added a Roth option in 2012. Just want to make clear though, that has nothing to do with a Roth IRA. (I see Roth workplace plans and Roth IRAs conflated with surprising frequency here.)
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Re: Are Roth Accounts Overrated?

Post by 02nz »

celia wrote: Sun Apr 25, 2021 12:49 pm I disagree wholeheartedly and most of the people in the referenced thread would probably agree with me. Rarely does anyone expect their retirement tax bracket to be higher than when working. I was even surprised when ours went up, even without doing Roth conversions. After I was done converting, I realized that our bracket was higher because we no longer itemized our deductions, once the mortgage was paid off. If itemizing, the interest you pay each year just shrinks gradually, then suddenly disappears. Somehow, that was ‘unexpected’ to me because I wasn’t thinking ahead more than a few years.
:oops:
Post-TCJA far fewer people are itemizing even during their working years, so this is a non-issue for most. Regardless of itemized vs standard deduction, those who face a higher tax rate in retirement than in their working years are a very small sliver of the population - and probably shrinking as pensions become rarer.
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Re: Are Roth Accounts Overrated?

Post by celia »

02nz wrote: Sun May 02, 2021 10:12 pm
abuss368 wrote: Sun Apr 25, 2021 10:31 am I believe the Federal TSP added a Roth IRA feature not to long ago. It is certainly moving in that direct more and more.
TSP added a Roth option in 2012. Just want to make clear though, that has nothing to do with a Roth IRA. (I see Roth workplace plans and Roth IRAs conflated with surprising frequency here.)
02nz, I've never had access to a TSP plan. What is the difference between Roth employer plans and Roth IRAs, in your opinion?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Are Roth Accounts Overrated?

Post by FiveK »

celia wrote: Sun May 02, 2021 10:39 pm What is the difference between Roth employer plans and Roth IRAs...?
Off the top of my head:
a) Contribution limits: $19.5K vs. $6K/$7K
b) RMDs for a Roth 401k; not for a Roth IRA
c) No income test for Roth 401k contributions
02nz
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Re: Are Roth Accounts Overrated?

Post by 02nz »

celia wrote: Sun May 02, 2021 10:39 pm
02nz wrote: Sun May 02, 2021 10:12 pm
abuss368 wrote: Sun Apr 25, 2021 10:31 am I believe the Federal TSP added a Roth IRA feature not to long ago. It is certainly moving in that direct more and more.
TSP added a Roth option in 2012. Just want to make clear though, that has nothing to do with a Roth IRA. (I see Roth workplace plans and Roth IRAs conflated with surprising frequency here.)
02nz, I've never had access to a TSP plan. What is the difference between Roth employer plans and Roth IRAs, in your opinion?
1) Different contribution limits and 2) RMDs applying to Roth 401k's (and I believe also the Roth TSP) but not to Roth IRAs.

But I made the distinction mainly because it's important that we use correct terminology. For example, there was a recent thread where a lot of confusion over contribution limits resulted from conflating the Roth 401k and Roth IRA.
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Re: Are Roth Accounts Overrated?

Post by celia »

02nz wrote: Sun May 02, 2021 10:44 pm 1) Different contribution limits and 2) RMDs applying to Roth 401k's (and I believe also the Roth TSP) but not to Roth IRAs.

But I made the distinction mainly because it's important that we use correct terminology. For example, there was a recent thread where a lot of confusion over contribution limits resulted from conflating the Roth 401k and Roth IRA.
I agree that we need to use the correct terminology or those less familiar with the topic will get the wrong impression of what is recommended/ permitted/ possible (or not). And it keeps us all talking about the same thing.

I already knew those differences but it sounded like there was some "secret benefit" of having one or the other. I find it interesting that in the IRS Rollover Chart, you can rollover a Roth employer plan to a Roth IRA, but not the other way around.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Are Roth Accounts Overrated?

Post by anon_investor »

celia wrote: Sun May 02, 2021 11:00 pm
02nz wrote: Sun May 02, 2021 10:44 pm 1) Different contribution limits and 2) RMDs applying to Roth 401k's (and I believe also the Roth TSP) but not to Roth IRAs.

But I made the distinction mainly because it's important that we use correct terminology. For example, there was a recent thread where a lot of confusion over contribution limits resulted from conflating the Roth 401k and Roth IRA.
I agree that we need to use the correct terminology or those less familiar with the topic will get the wrong impression of what is recommended/ permitted/ possible (or not). And it keeps us all talking about the same thing.

I already knew those differences but it sounded like there was some "secret benefit" of having one or the other. I find it interesting that in the IRS Rollover Chart, you can rollover a Roth employer plan to a Roth IRA, but not the other way around.
In some states, a Roth 401k offers better protection from creditors compared to a Roth IRA.

Mega backdoor Roth 401k allows for even more Roth space. I use it with backdoor Roth to get a lot of Roth space each year.
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Re: Are Roth Accounts Overrated?

Post by Admiral »

RetiredAL wrote: Sun May 02, 2021 9:30 pm
Admiral wrote: Sun May 02, 2021 7:55 pm Most people can convert to Roth if needed, they don't need to save in Roth while they are working.
Retired in 2016, but had some residual wage income that allowed us to fund 2017 and 2018 Roth's. Our Roth's were fully funded for nearly 20 years and were contributed at the then 15% rate. Our current deferred withdrawals are about 1/2 of what the RMD will be starting next year, and these withdrawals already have us into the current 22% rate, thanks to the SS Hump. We now have $450K in Roth's.

Someday one of us will be the filing-single survivor. If those extra $ had gone into deferred instead, my modeling says the survivor would likely be into the 33% (reverting back to 36%) by age 80.

I for one, am very glad we did the Roth's all those years vs further funding into deferred.
Which is great, for you. My argument/point is not directed at those like you who have a big pile of cash spread across accounts and will be in the uppermost brackets. If you (or your surviving spouse) doesn't want to pay the tax, you can donate your shares. People also seem to forget they can can actually spend the money in their tax deferred accounts before RMDs become an issue.
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Re: Are Roth Accounts Overrated?

Post by Admiral »

02nz wrote: Sun May 02, 2021 10:44 pm
celia wrote: Sun May 02, 2021 10:39 pm
02nz wrote: Sun May 02, 2021 10:12 pm
abuss368 wrote: Sun Apr 25, 2021 10:31 am I believe the Federal TSP added a Roth IRA feature not to long ago. It is certainly moving in that direct more and more.
TSP added a Roth option in 2012. Just want to make clear though, that has nothing to do with a Roth IRA. (I see Roth workplace plans and Roth IRAs conflated with surprising frequency here.)
02nz, I've never had access to a TSP plan. What is the difference between Roth employer plans and Roth IRAs, in your opinion?
1) Different contribution limits and 2) RMDs applying to Roth 401k's (and I believe also the Roth TSP) but not to Roth IRAs.

But I made the distinction mainly because it's important that we use correct terminology. For example, there was a recent thread where a lot of confusion over contribution limits resulted from conflating the Roth 401k and Roth IRA.
Just want to add that the RMD rule for workplace Roth plans is (or can be) a non-issue by simply performing a rollover to a Roth IRA. There are no income tests or backdoor contribution issues with workplace plans, as well.
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Re: Are Roth Accounts Overrated?

Post by JS-Elcano »

It's called a RothIRA (individual retirement account) for a reason. If you are planning to use all the money before retirement then there are better options. Being able to withdraw everything tax free, including cap gains, after 59.5 is pretty useful to many people, also for tax planning purposes in combination with withdrawals from pre-tax accounts.
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

JS-Elcano wrote: Mon May 03, 2021 9:04 am It's called a RothIRA (individual retirement account) for a reason. If you are planning to use all the money before retirement then there are better options. Being able to withdraw everything tax free, including cap gains, after 59.5 is pretty useful to many people, also for tax planning purposes in combination with withdrawals from pre-tax accounts.
This goes back to the last line in my post that started this thread -- I was stating this in the context of retiring well before 59.5.

I think many people in my generation (born in the 1980s or later) have absolutely zero intent of working until they are 60.

And in that context (i.e., you are looking to retire early), the point of my post was that the handcuffs on a Roth's funds are not worth the tax benefits.
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Re: Are Roth Accounts Overrated?

Post by sailaway »

CoastLawyer2030 wrote: Mon May 03, 2021 9:13 am
JS-Elcano wrote: Mon May 03, 2021 9:04 am It's called a RothIRA (individual retirement account) for a reason. If you are planning to use all the money before retirement then there are better options. Being able to withdraw everything tax free, including cap gains, after 59.5 is pretty useful to many people, also for tax planning purposes in combination with withdrawals from pre-tax accounts.
This goes back to the last line in my post that started this thread -- I was stating this in the context of retiring well before 59.5.

I think many people in my generation (born in the 1980s or later) have absolutely zero intent of working until they are 60.

And in that context (i.e., you are looking to retire early), the point of my post was that the handcuffs on a Roth's funds are not worth the tax benefits.
And many people have pointed out that those "handcuffs" aren't nearly as stringent as you think, plus Roth has significant benefits over taxable in the accumulation phase. No idea what prompted JS-elcano to emphasize the retirement part after all the previous posts. If you want to use *all* the money before you turn 60, then what will you be living on after 60??
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Re: Are Roth Accounts Overrated?

Post by RetiredAL »

Admiral wrote: Mon May 03, 2021 7:36 am
RetiredAL wrote: Sun May 02, 2021 9:30 pm
Admiral wrote: Sun May 02, 2021 7:55 pm Most people can convert to Roth if needed, they don't need to save in Roth while they are working.
Retired in 2016, but had some residual wage income that allowed us to fund 2017 and 2018 Roth's. Our Roth's were fully funded for nearly 20 years and were contributed at the then 15% rate. Our current deferred withdrawals are about 1/2 of what the RMD will be starting next year, and these withdrawals already have us into the current 22% rate, thanks to the SS Hump. We now have $450K in Roth's.

Someday one of us will be the filing-single survivor. If those extra $ had gone into deferred instead, my modeling says the survivor would likely be into the 33% (reverting back to 36%) by age 80.

I for one, am very glad we did the Roth's all those years vs further funding into deferred.
Which is great, for you. My argument/point is not directed at those like you who have a big pile of cash spread across accounts and will be in the uppermost brackets. If you (or your surviving spouse) doesn't want to pay the tax, you can donate your shares. People also seem to forget they can can actually spend the money in their tax deferred accounts before RMDs become an issue.
My point is that you don't have to have a big pile of cash, as you put it, to get your tax rate elevated. I have $1.4M in deferred, which is not huge. That includes my retirement lump sum which I rolled into an Ira. It will be adequate for us, but not enough to really be considered rich.

The culprit is the SS Hump. With $50K is SS and MFJ, that forces us into 22% by the time we get our total gross income, that's SS + deferred withdrawals + any retirement (I don't have any), into the mid $70K's and above. For a still working stiff, that 22% point is approx $110K gross.

I know we will be stuck with 22-25% going forward. I'm not happy about it, but it is what it is. However, I've taken steps to keep the survivor out the 35% brackets. People should not be burying their head in the sand trying to ignore the issue.

The point you are missing is that the last 15+ years of working, my marginal rate was 15% except for one year that I was a couple of $k into the 25% bracket. I think you will find a substantial percentage of people here on BH are financially similar and they too are surprised at their tax rate in retirement.
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Re: Are Roth Accounts Overrated?

Post by Admiral »

RetiredAL wrote: Mon May 03, 2021 1:40 pm
Admiral wrote: Mon May 03, 2021 7:36 am
RetiredAL wrote: Sun May 02, 2021 9:30 pm
Admiral wrote: Sun May 02, 2021 7:55 pm Most people can convert to Roth if needed, they don't need to save in Roth while they are working.
Retired in 2016, but had some residual wage income that allowed us to fund 2017 and 2018 Roth's. Our Roth's were fully funded for nearly 20 years and were contributed at the then 15% rate. Our current deferred withdrawals are about 1/2 of what the RMD will be starting next year, and these withdrawals already have us into the current 22% rate, thanks to the SS Hump. We now have $450K in Roth's.

Someday one of us will be the filing-single survivor. If those extra $ had gone into deferred instead, my modeling says the survivor would likely be into the 33% (reverting back to 36%) by age 80.

I for one, am very glad we did the Roth's all those years vs further funding into deferred.
Which is great, for you. My argument/point is not directed at those like you who have a big pile of cash spread across accounts and will be in the uppermost brackets. If you (or your surviving spouse) doesn't want to pay the tax, you can donate your shares. People also seem to forget they can can actually spend the money in their tax deferred accounts before RMDs become an issue.
My point is that you don't have to have a big pile of cash, as you put it, to get your tax rate elevated. I have $1.4M in deferred, which is not huge. That includes my retirement lump sum which I rolled into an Ira. It will be adequate for us, but not enough to really be considered rich.

The culprit is the SS Hump. With $50K is SS and MFJ, that forces us into 22% by the time we get our total gross income, that's SS + deferred withdrawals + any retirement (I don't have any), into the mid $70K's and above. For a still working stiff, that 22% point is approx $110K gross.

I know we will be stuck with 22-25% going forward. I'm not happy about it, but it is what it is. However, I've taken steps to keep the survivor out the 35% brackets. People should not be burying their head in the sand trying to ignore the issue.

The point you are missing is that the last 15+ years of working, my marginal rate was 15% except for one year that I was a couple of $k into the 25% bracket. I think you will find a substantial percentage of people here on BH are financially similar and they too are surprised at their tax rate in retirement.
Lol $1.4m is not “huge”?? Compared to whom? Another Bh perhaps. Compared to 95% of retirees it’s a very rare metal indeed: unobtanium.

I have no idea how old you are. You can/could convert substantial sums well before age 72 in the 15 or 22% brackets if you take the standard deduction and delay SS to age 70.
RetiredAL
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Re: Are Roth Accounts Overrated?

Post by RetiredAL »

Admiral wrote: Mon May 03, 2021 2:19 pm
RetiredAL wrote: Mon May 03, 2021 1:40 pm
Admiral wrote: Mon May 03, 2021 7:36 am
RetiredAL wrote: Sun May 02, 2021 9:30 pm
Admiral wrote: Sun May 02, 2021 7:55 pm Most people can convert to Roth if needed, they don't need to save in Roth while they are working.
Retired in 2016, but had some residual wage income that allowed us to fund 2017 and 2018 Roth's. Our Roth's were fully funded for nearly 20 years and were contributed at the then 15% rate. Our current deferred withdrawals are about 1/2 of what the RMD will be starting next year, and these withdrawals already have us into the current 22% rate, thanks to the SS Hump. We now have $450K in Roth's.

Someday one of us will be the filing-single survivor. If those extra $ had gone into deferred instead, my modeling says the survivor would likely be into the 33% (reverting back to 36%) by age 80.

I for one, am very glad we did the Roth's all those years vs further funding into deferred.

Which is great, for you. My argument/point is not directed at those like you who have a big pile of cash spread across accounts and will be in the uppermost brackets. If you (or your surviving spouse) doesn't want to pay the tax, you can donate your shares. People also seem to forget they can can actually spend the money in their tax deferred accounts before RMDs become an issue.
My point is that you don't have to have a big pile of cash, as you put it, to get your tax rate elevated. I have $1.4M in deferred, which is not huge. That includes my retirement lump sum which I rolled into an Ira. It will be adequate for us, but not enough to really be considered rich.

The culprit is the SS Hump. With $50K is SS and MFJ, that forces us into 22% by the time we get our total gross income, that's SS + deferred withdrawals + any retirement (I don't have any), into the mid $70K's and above. For a still working stiff, that 22% point is approx $110K gross.

I know we will be stuck with 22-25% going forward. I'm not happy about it, but it is what it is. However, I've taken steps to keep the survivor out the 35% brackets. People should not be burying their head in the sand trying to ignore the issue.

The point you are missing is that the last 15+ years of working, my marginal rate was 15% except for one year that I was a couple of $k into the 25% bracket. I think you will find a substantial percentage of people here on BH are financially similar and they too are surprised at their tax rate in retirement.
Lol $1.4m is not “huge”?? Compared to whom? Another Bh perhaps. Compared to 95% of retirees it’s a very rare metal indeed: unobtanium.

I have no idea how old you are. You can/could convert substantial sums well before age 72 in the 15 or 22% brackets if you take the standard deduction and delay SS to age 70.
I've converted every year since I retired in May 2016, at age 66. The 401K balance at retirement was not quiet $700K and I rolled in an IRA. The first year's conversion was still at 15%, as only I was receiving SS, but it was only $10K as anything greater would have been 25%. Every other conversion has been at at 22-25% because DW had started her SS the next year. RMD's start next year, and I have not decided if I will continue with conversions as a personal policy, or only if my model predicts the survivor entering the 35% bracket.

If had not taken my retirement as a lump sum into an IRA, the deferred today would a lot less, but those monthly retirement $ would have put us at the same point taxation point. It's not about how much is in deferred, it's about how the SS Hump jacks up the marginal rate much earlier than what most people expect, which affects ANY additional non-SS income, whether it's retirement, supplemental wages, rental income, bank interest, or regular investment income.

I am very thankful that the sequence of returns, during these early years of retirement have been very positive. If going forward we have a sequence of even a few consecutive bad years, the survivor will never reach 35% bracket. But since net impact of 22% paid today is the same at 22% paid in 5 years, I've converted what today seems adequate to avoid the 35%. If during RMD I find we are staring at 35%, I plan to act soon enough when there is still room to stay in the 22-25% and convert $ on top of the RMD.

Work's Roth 401K arrived until too late for me to use. So I'm damn glad I fully funded our Roth's.

This pickle is not about being uber rich. It's about being just a regular Joe in upper-middle-class. Am I better off than many, yes! I also worked hard, first in college, then on the job, to support and raise a family, and still achieve a retirement that would not be caviar, but not dog food either. Yeah it helped my parents were good role models.

I am a firm believer in maxing out one's Roth before maxing out deferred. Fully funding a Roth is unlikely to be a poor choice, and it's much more likely to be a good choice, or even a brilliant choice.
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willthrill81
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

If the 22% bracket I'm currently in is ever increased (e.g., back to 24%), I'll strongly consider doing a big Roth conversion of an old rollover traditional IRA before the new rates go into effect, at least to the top of the 22% bracket. SS benefits and RMDs would certainly push us into a 22.2% marginal tax rate under current law and very likely into an even higher tax rate if the 22% bracket itself is increased.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Kruser64
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Re: Are Roth Accounts Overrated?

Post by Kruser64 »

Taxable account does have the advantage of margin. Not necessarily saying trading on margin is a plus...but still, margin is there for flexibility. Maybe you need to help a brother in law post bail.

Sure you could pull your contributions from the Roth, set up margin and then post bail, but that might take longer than you'd like.
L82GAME
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Re: Are Roth Accounts Overrated?

Post by L82GAME »

Triple digit golfer wrote: Wed Apr 21, 2021 2:41 pm I'll worry about the taxes of the future when I get there.

Tax-deferred
Tax-free
Taxable
+1. Exactly! Tying oneself into pretzel knots speculating about current tax brackets vs. hypothetical future tax scenarios is an imprudent use of one’s time. Control for the known variables; investment and lifestyle costs, and one’s savings rate relative to current tax laws.
"Still I am learning." - Michelangelo
Admiral
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Re: Are Roth Accounts Overrated?

Post by Admiral »

L82GAME wrote: Mon May 03, 2021 10:12 pm
Triple digit golfer wrote: Wed Apr 21, 2021 2:41 pm I'll worry about the taxes of the future when I get there.

Tax-deferred
Tax-free
Taxable
+1. Exactly! Tying oneself into pretzel knots speculating about current tax brackets vs. hypothetical future tax scenarios is an imprudent use of one’s time. Control for the known variables; investment and lifestyle costs, and one’s savings rate relative to current tax laws.
Well I think I'm willing to spend an hour with a spreadsheet to save tens or hundreds of thousands of dollars, that doesn't seem imprudent. That said I do agree that most people don't need to worry about Roth savings until they've accumulated a nice pile. Or at least don't need to prioritize it over pre-tax. Certainly socking some money away in taxable and Roth is wise simply for flexibility in retirement. Lumpy expenditures can be taken from Roth or taxable, which in some cases can help smooth out tax issues and help with things like ACA, IRMAA, etc.
JS-Elcano
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Re: Are Roth Accounts Overrated?

Post by JS-Elcano »

sailaway wrote: Mon May 03, 2021 9:20 am
CoastLawyer2030 wrote: Mon May 03, 2021 9:13 am
JS-Elcano wrote: Mon May 03, 2021 9:04 am It's called a RothIRA (individual retirement account) for a reason. If you are planning to use all the money before retirement then there are better options. Being able to withdraw everything tax free, including cap gains, after 59.5 is pretty useful to many people, also for tax planning purposes in combination with withdrawals from pre-tax accounts.
This goes back to the last line in my post that started this thread -- I was stating this in the context of retiring well before 59.5.

I think many people in my generation (born in the 1980s or later) have absolutely zero intent of working until they are 60.

And in that context (i.e., you are looking to retire early), the point of my post was that the handcuffs on a Roth's funds are not worth the tax benefits.
And many people have pointed out that those "handcuffs" aren't nearly as stringent as you think, plus Roth has significant benefits over taxable in the accumulation phase. No idea what prompted JS-elcano to emphasize the retirement part after all the previous posts. If you want to use *all* the money before you turn 60, then what will you be living on after 60??
I think I was trying to make the point that the RothIRA is the best if you can manage to use only your contributions before 59.5 and then the gains after 59.5 - all tax-free. Sort of what you are saying - why would there even be a need to withdraw the gains before 59.5 as there should be plenty of other funds for early retirement.
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