Questions about this personal finance strategy

[Manny1066]

I have seen people arguing (especially the FIRE folks), that your general strategy for retirement funding should involve the following:

1. Contributing the maximum amount possible into your 401k
2. Retiring early --let's say after 20 years of working.
3. Converting the 401k into a traditional IRA
4. Doing annual Roth conversions on the IRA in retirement.

They argue that this will not only produce superior returns, but also save you tens of thousands in taxes (or more).

But I can't make this math work, no matter how I approach it. I have used online calculators, spreadsheets, etc. Why?

I compare this against my approach, which was:

80% of my retirement portfolio in a standard, taxable brokerage account
20% in a traditional IRA (I am self-employed)

According to current tax law, a married couple filing jointly can pull close to $120,000 a year in capital gains (after taking the standard deduction) and stay within the 0% tax bracket. For additional money, I use municipal bonds. Like the Roth, this is built from after-tax money, but unlike the Roth, it is not subject to withdrawal rules, maximum annual deductions, etc. Stocks are already "tax deferred" (I do not pay tax until I sell them).

The other issue with the above strategy is that we tend to have higher expenses and more income early in retirement (kids are still depending on us--college tuition, etc. We take trips). So we would be doing Roth conversions under a higher tax bracket than 20 years later, when our expenses (and taxes) drop.

Why would I pay up to 12% taxes using Roth conversions for years, when I could be paying 0% taxes on capital gains (and muni bond interest)?

(and then we have the issue of the fees charged in the 401k, lack of investment options, etc. --but that is a different discussion)

Now if I intend on pulling large sums of money out of my retirement accounts every year (like $300,000), the Roth conversion strategy makes a lot more sense. But in retirement, our house will likely be paid off, and we will have no dependents. Expenses later in retirement should be quite low.

Am I missing something here? Because every time I hear someone explain how they will have a "tax free retirement" using this strategy, it doesn't add up when compared to simply using a taxable brokerage account.

[Jack FFR1846]

I think there are a few things.

Some 401k's for people working in companies have matches. So putting away 6% of your salary might come with a 3% match.

Don't forget that you pay ordinary income taxes to put money into taxable up front. With gains, yes, you can pay LTCG on the gain while the 401k, you have to pay ordinary income. But if you're in the 24% bracket, the whole thing is taxed at 24% going in while the FIRE person in the 12% bracket paid nothing going in and 12% coming out.

If you watch the FIRE crowd, they often are booting the kids into community college paid by the kids' own part time work or expecting that they'll be carpenters. Very different from some Bogleheads. Personally, I set aside $1M for my 2 sons. They're done now and I feel college was cheap, having spent less than $400k for the 2 of them. On the other hand, the FIRE crowd may figure they're well into the FAFSA freebie income, so the kids go for free. Same for ACA.

[FiveK]

But I can't make this math work, no matter how I approach it. I have used online calculators, spreadsheets, etc. Why?

Your efforts should show that taxable does not beat Roth, because contributions to both are after-tax but qualified Roth withdrawals are not taxed at all (and don't count toward Taxation of Social Security benefits). Also any interest income is treated more favorably in Roth vs. taxable.

Given that Roth is better than or equal to taxable, then we look at Traditional versus Roth. If traditional is better than Roth for someone, then traditional will be better than taxable for that person.

Does that make sense?

[Manny1066]

it does make sense

but my question is whether a strategy that uses consistent Roth conversions is better than simply opening a taxable brokerage account in your early working years, consistently contributing to it, and then using the 0% capital gains rate to your advantage in retirement?

Let's look at it this way:

In my working years, I am initially in the 12% tax bracket (10 years) and then in the 22% (10 years). My deposits into my brokerage are taxed up-front accordingly (after-tax). In early retirement, 20 years later, I take money out of the account using the 0% capital gains rate, and maybe supplement this with municipal bond interest (tax free).

OR

I contribute to a 401k for 20 years, retire, convert it to a traditional IRA, and then do small Roth conversions for the next 20 years, getting taxed at 12% every time I do it. On paper, I might have come out ahead here?

But now let's say I need to do a bigger conversion because I need more income in a given year (buying a car, house, making tuition payment, etc.), and I begin taking social security. I then go into the higher tax brackets (22%+) and every penny of that conversion is taxed as ordinary income. If I go over the 120k threshold in my brokerage, I will see a 15% capital gains tax rate on that additional income.

I am not sure the additional paperwork, complications and restrictions, and the potential issues surrounding larger conversions justifies choosing this Roth conversion method over simply using a brokerage account --but I am not sure.

and while Roth's are not subject to RMDs, if I die and my kids inherit my Roth, they will be subject to RMDs

but Roth distributions do not count against PPACA subsidy determinations either --which is a big benefit.

[FiveK]

If traditional is better than Roth for someone, then traditional will be better than taxable for that person.

it does make sense

but my question is whether a strategy that uses consistent Roth conversions is better than simply opening a taxable brokerage account in your early working years, consistently contributing to it, and then using the 0% capital gains rate to your advantage in retirement?

If Roth would be better than traditional for someone, then taxable might also be better than traditional.

and while Roth's are not subject to RMDs, if I die and my kids inherit my Roth, they will be subject to RMDs
but Roth distributions do not count against PPACA subsidy determinations either --which is a big benefit.

Roth RMDs are not taxable so those won't affect your kids' taxes when received.

[Geologist]

and while Roth's are not subject to RMDs, if I die and my kids inherit my Roth, they will be subject to RMDs

Your heirs are not subject to RMD's on an inherited Roth IRA because you will always pass before the Required Beginning Date (RBD). They will have to empty the inherited Roth in 10 years, but they will get that additional 10 years of tax-free growth and their ultimate withdrawal is tax-free. How is this less beneficial than a taxable account (even with a step-up in basis)?

[retiredjg]

I compare this against my approach, which was:

80% of my retirement portfolio in a standard, taxable brokerage account
20% in a traditional IRA (I am self-employed)

It seems that you have already done this. If that is correct, nobody can evaluate or comment on your strategy because we don't know what rate you paid taxes while working or what tax rate you would have had if you had not done it this way.

In short, there is no way to support or critique your strategy.

Why would I pay up to 12% taxes using Roth conversions for years, when I could be paying 0% taxes on capital gains (and muni bond interest)?

For people who have deferred taxes along the way, paying taxes now at 12% would be a good choice. More money in the end (unless they were in the 12% bracket all the time they were saving).

Am I missing something here? Because every time I hear someone explain how they will have a "tax free retirement" using this strategy, it doesn't add up when compared to simply using a taxable brokerage account.

I don't recall ever hearing anybody say that.

The point is not to eliminate taxes but reduce the tax rate. If you can pay taxes later at a lower rate, you end up with more money.

[Manny1066]

I was more wondering if anyone here had tried it, or had a better understanding of the consequences

it seems to me that there are a lot of variables here, such as

1. You are not converting the entire amount in the traditional IRA to the Roth, and the assets that remain in that account should continue to go up I value, as well as the assets in the Roth. Are they identical? A small matter maybe, but it makes calculations difficult.
2. The tax liability increases according to the number of years conversions take place, and the amount of the conversions.
3. But the tax impact to the portfolio depends on your lifespan

As others mention here, a Roth is most beneficial to those who believe their tax liability will be higher in retirement. For the traditional IRA, we want our taxes in retirement to be lower.

When we compare investing in a 401k vs. investing in a standard, taxable brokerage account, we can conclude the following (generally)

1. If the company offers you a match of greater than 3%
2. If the annual fees on the 401k are under 1.2%
3. If your retirement lasts around 30 years

Than it is almost always advantageous to contribute the max to the 401k and take the tax hit later on the larger balance. The above is based on calculations I did using online investment calculators and the IRS website.

If fees are high (1.5%+), the match is under 2% (or no match), and your retirement will last more than 30 years, it is more advantageous to simply put money into a brokerage account and leverage capital gains tax rates.

But comparing the Roth to a standard, taxable brokerage account is a little more complicated, especially in a scenario where you are doing conversions over a period of years.

We talked about the benefits of the Roth, such as social security taxation, PPACA subsidies, etc.

But the drawbacks are:

1. A Roth IRA, even if it has millions in it, cannot be used as collateral for private loans. Not a big issue for most people, but for Bogleheads with lots of money, this is an issue. You have tied up money and it will cost you in the credit markets.

2. Misjudging your income needs in retirement could be bad. If I am paying 22%+ in taxes on money to throw into a Roth, only to find myself in the 12% bracket in retirement, I would have been better off using a taxable brokerage account or a traditional IRA. As we get older, our living expenses generally go down

3. The five year rule (for early retirement)

trying not to ramble, but this is good discussion. I am not an accountant, but I have been investing heavily all my life, and I wonder about this stuff

[123]

An astute disciplined investor can achieve spectacular investment results using a taxable account. 401(K)s and IRAs provide enforced segregated investment accounts which can be helpful in encouraging individuals to accumulate assets. But traditional 401(K) accounts and IRAs have higher tax costs than taxable accounts, favorable capital gains tax benefits are lost for investments held in a traditional 401(K) or traditional IRA account.

[sailaway]

An astute disciplined investor can achieve spectacular investment results using a taxable account. 401(K)s and IRAs provide enforced segregated investment accounts which can be helpful in encouraging individuals to accumulate assets. But traditional 401(K) accounts and IRAs have higher tax costs than taxable accounts, favorable capital gains tax benefits are lost for investments held in a traditional 401(K) or traditional IRA account.

This is only true if the tax rate at withdrawal is higher than at deferral. That is rare for the average investor and especially for most early retirees.

An astute, disciplined investor will tip the scales in their favor by investing the tax savings.

[20cm]

But I can't make this math work, no matter how I approach it. I have used online calculators, spreadsheets, etc. Why?

You can't make the math work because the math doesn't work.

Ignoring the super-lean FIRE crowd, it's not realistic to build up enough in an Traditional IRA for a significantly early FIRE unless someone manages to get very lucky investing inside that IRA. As a result, most of us who did FIRE after 20-ish years of work ended up with many multiples of our IRA in our regular brokerage accounts. Unless we had allocated our regular brokerage assets in a way that produces no dividends or capital gains, Roth conversion just pushes our investment income up the tax bracket ladder.

[Manny1066]

But I can't make this math work, no matter how I approach it. I have used online calculators, spreadsheets, etc. Why?

You can't make the math work because the math doesn't work.

Ignoring the super-lean FIRE crowd, it's not realistic to build up enough in an Traditional IRA for a significantly early FIRE unless someone manages to get very lucky investing inside that IRA. As a result, most of us who did FIRE after 20-ish years of work ended up with many multiples of our IRA in our regular brokerage accounts. Unless we had allocated our regular brokerage assets in a way that produces no dividends or capital gains, Roth conversion just pushes our investment income up the tax bracket ladder.

that was my take on all of this

I have a sizable account, and even at age 53 I am not ready to quit working and retire. This whole fire-conversion thing seems to be for people who are going to live off 60k a year and work the lower tax brackets while converting their tax-deferred accounts

as a guy with kids, I know that living doesn't get any cheaper. There is college tuition to pay for, more expensive healthcare costs, rising property taxes, etc. And when we ultimately reach later retirement, we won't have dependent tax deductions, the mortgage interest tax deduction, and other tax breaks.

[calmaniac]

......using the 0% capital gains rate to your advantage in retirement?

More power to you if in retirement you can live off of <<$44,625 as an individual or <<$89,250 as a couple, such that you have sufficient room for 0% capital gains in meaningful amounts.

For many (most?) of us, our passive income in retirement (pension, dividends, Social Security) puts us squarely in the 15% capital gains bracket.

[JBTX]

it does make sense

but my question is whether a strategy that uses consistent Roth conversions is better than simply opening a taxable brokerage account in your early working years, consistently contributing to it, and then using the 0% capital gains rate to your advantage in retirement?

Let's look at it this way:

In my working years, I am initially in the 12% tax bracket (10 years) and then in the 22% (10 years). My deposits into my brokerage are taxed up-front accordingly (after-tax). In early retirement, 20 years later, I take money out of the account using the 0% capital gains rate, and maybe supplement this with municipal bond interest (tax free).

OR

I contribute to a 401k for 20 years, retire, convert it to a traditional IRA, and then do small Roth conversions for the next 20 years, getting taxed at 12% every time I do it. On paper, I might have come out ahead here?

In your early years when at 12% it might make sense to do Roth 401k. Then when I come increases to 22% switch to Traditional.

But now let's say I need to do a bigger conversion because I need more income in a given year (buying a car, house, making tuition payment, etc.), and I begin taking social security. I then go into the higher tax brackets (22%+) and every penny of that conversion is taxed as ordinary income. If I go over the 120k threshold in my brokerage, I will see a 15% capital gains tax rate on that additional income.

I am not sure the additional paperwork, complications and restrictions, and the potential issues surrounding larger conversions justifies choosing this Roth conversion method over simply using a brokerage account --but I am not sure.

and while Roth's are not subject to RMDs, if I die and my kids inherit my Roth, they will be subject to RMDs

but Roth distributions do not count against PPACA subsidy determinations either --which is a big benefit.

In every instance a Roth will be as good or better than a taxable account. So if you don’t think tradtional will give you the best result then go with Roth.

For most people, it is almost always beneficial to have some traditional for those years in retirement that you have lower income. You could conceivably have very low income and high medical expenses, and having traditional would allow you to have some income to offset the deductions.

If you die and kids inherit Roth and have RMDs, so what? Roth RMDS are not taxable. Then those assets become taxable assets. How is that worse than having taxable assets in the first place?

[humblecoder]

One thing you MAY be missing is that fact that your Traditional IRA/401k contribution gets you a tax deduction up front.

If you contribute $100 pre-tax to a Traditional IRA, all $100 goes into it.

If you contribute an equivalent $100 pre-tax to a taxable brokerage, some of that money gets diverted to the IRS since you have to pay taxes on that money first. If you are the 22% tax bracket for instance, then only $88 out of the pre-tax $100 will go into your brokerage account.

[Manny1066]

One thing you MAY be missing is that fact that your Traditional IRA/401k contribution gets you a tax deduction up front.

If you contribute $100 pre-tax to a Traditional IRA, all $100 goes into it.

If you contribute an equivalent $100 pre-tax to a taxable brokerage, some of that money gets diverted to the IRS since you have to pay taxes on that money first. If you are the 22% tax bracket for instance, then only $88 out of the pre-tax $100 will go into your brokerage account.

correct

after doing some math I concluded that a traditional IRA or 401k makes the most sense when your income in your working years is high (22% bracket or above), there is a good employer match (in the case of a 401k, 4%+), and most importantly, fees are low (under 1%). Even then, it looks like you should contribute to the match level, and the left-over money that you *would* be putting in the 401k should be put into a taxable brokerage account.

I think it is very important to stay somewhat liquid, and to utilize that 0% capital gains rate later in life. I know far too many people who have like 1.2 million in their 401k at age 50, and $400 in their checking account, and debt piling up. They are one auto accident or medical emergency away from raiding their retirement account.

[humblecoder]

One thing you MAY be missing is that fact that your Traditional IRA/401k contribution gets you a tax deduction up front.

If you contribute $100 pre-tax to a Traditional IRA, all $100 goes into it.

If you contribute an equivalent $100 pre-tax to a taxable brokerage, some of that money gets diverted to the IRS since you have to pay taxes on that money first. If you are the 22% tax bracket for instance, then only $88 out of the pre-tax $100 will go into your brokerage account.

correct

after doing some math I concluded that a traditional IRA or 401k makes the most sense when your income in your working years is high (22% bracket or above), there is a good employer match (in the case of a 401k, 4%+), and most importantly, fees are low (under 1%). Even then, it looks like you should contribute to the match level, and the left-over money that you *would* be putting in the 401k should be put into a taxable brokerage account.

I think it is very important to stay somewhat liquid, and to utilize that 0% capital gains rate later in life. I know far too many people who have like 1.2 million in their 401k at age 50, and $400 in their checking account, and debt piling up. They are one auto accident or medical emergency away from raiding their retirement account.

What you say makes sense. My person rule of thumb is similar, except I would put money into a Roth IRA/401k instead of taxable brokerage if I were in a lower tax bracket. You get tax free growth and withdrawals.

One thing to keep in mind is that the Roth IRA didn't come into existence until 1998 and the Roth 401k didn't become available until 2006 (and even then not all employers adopted it right away). Therefore, there is a whole generation of workers for whom the Traditional option was the only option during their lower earning years. That's one reason why you see some people in their 50's which such large Traditional balances.

Of course having $1.2M in a retirement account is a good "problem" to have, compared with the vast majority of America's who have $400 in their checking account and nothing else!

[livesoft]

Don't forget that the way income "stacks" on a Form 1040, that if one converts the dollar amount of one's "standard deduction", then that conversion is taxed at 0%. That still leaves the headroom for 0% tax on qualified dividend income and long-term capital gains.

Add in tax-loss harvesting along the way.

And also don't forget that if one bunches deductions (say significant charitable contributions), then even more traditional IRA amounts can be converted to Roth IRA without paying taxes on the conversion.

Of course, it almost goes without saying: Avoid interest (i.e. savings accounts) and non-qualified dividend income as much as possible.

[sc9182]

May want to check another thread where there is somewhat overlapping information/discussion:

viewtopic.php?p=7557190#p7557190

Thanks

[Manny1066]

Don't forget that the way income "stacks" on a Form 1040, that if one converts the dollar amount of one's "standard deduction", then that conversion is taxed at 0%. That still leaves the headroom for 0% tax on qualified dividend income and long-term capital gains.

Add in tax-loss harvesting along the way.

And also don't forget that if one bunches deductions (say significant charitable contributions), then even more traditional IRA amounts can be converted to Roth IRA without paying taxes on the conversion.

Of course, it almost goes without saying: Avoid interest (i.e. savings accounts) and non-qualified dividend income as much as possible.

very true

I watched a seminar on "income stacking" which was very helpful, and the general gist was that in retirement, you want to pull money in the following order:

1. Roth IRA
2. Taxable brokerage account at 0% capital gains rate
3. Tax deferred accounts (taxed at ordinary income)

and social security would enter into the mix whether we like it or not (social security tax torpedo)

My father-in law is relatively wealthy. Has a big stock portfolio, and he is 90 yers old. He lives in a retirement community, and wanted to sell his large unit and move to a much smaller one. But he needed around 300k to purchase the new unit, and didn't want to sell stocks, etc. to free up the cash.

I then found out he got a loan against his stock portfolio at 2%. Snapped up the new unit, and a few months later sold the old one and paid off the loan. And this is in an environment when mortgage rates were like 8% in California.

having that large taxable account that can be used as collateral for loans late in life is a huge benefit people forget. And when he dies, that money will slide over to his heirs after the step-up basis is reset, and unlike a traditional IRA account, the heirs will not be subject to RMDs (I have in inherited IRA from my dad, which is nice, but the RMDs are a pain when tax time comes around)

Looking at the Roth conversions this morning, they only work in limited circumstances. The problem is that if you do conversions in early retirement, it can put you into a higher tax bracket. The other issue is that these conversions need to be stretched out over a pretty long time period to be effective, but how many of us retire at age 45 with a million bucks in our traditional IRAs? Not many.

If you are a FIRE guy living on 40k a year, retire at age 45 with 800k in your IRA, and you start doing conversions for the next 20 years, it will make sense. Otherwise you are far better off taking excess income and putting into a standard, taxable brokerage account

[tibbitts]

If you watch the FIRE crowd, they often are booting the kids into community college paid by the kids' own part time work or expecting that they'll be carpenters. Very different from some Bogleheads. Personally, I set aside $1M for my 2 sons. They're done now and I feel college was cheap, having spent less than $400k for the 2 of them. On the other hand, the FIRE crowd may figure they're well into the FAFSA freebie income, so the kids go for free. Same for ACA.

Correct; at least in some states tuition at any state college or university, including flagships, would be free at the income levels the OP is proposing.

I'll guess that $500k per child would be on the extraordinarily large size, even for Bogleheads.

[livesoft]

I watched a seminar on "income stacking" which was very helpful, and the general gist was that in retirement, you want to pull money in the following order:

1. Roth IRA
2. Taxable brokerage account at 0% capital gains rate
3. Tax deferred accounts (taxed at ordinary income)

and social security would enter into the mix whether we like it or not (social security tax torpedo)

As written, that would be bad order to pull money in retirement. I'd only use Roth IRA money as a last resort myself. Also, taking money from more than one type of account might be beneficial. My order currently is:

1. Spend dividends from taxable holdings. That is, do not reinvest them unless they are so big that there is nothing else to do with them.
2. Sell from taxable brokerage account for expenses as needed, PLUS
3. Convert some tax-deferred assets to Roth. Use money from #1 and #2 above to pay any income taxes.

Eventually when the taxable brokerage account is empty, then do something else. Some folks may want to have their heirs get a stepped up basis, so would not spend from a taxable brokerage account. My heirs probably would rather inherit Roth IRA assets.

We are old enough to withdraw from IRAs penalty-free, but we do not need to make those withdrawals to pay expenses, so we don't withdraw.

I do suppose that folks with low taxable account assets and before age 59.5 might be withdrawing Roth IRA contributions penalty-free to help meet expenses.

[Manny1066]

I watched a seminar on "income stacking" which was very helpful, and the general gist was that in retirement, you want to pull money in the following order:

1. Roth IRA
2. Taxable brokerage account at 0% capital gains rate
3. Tax deferred accounts (taxed at ordinary income)

and social security would enter into the mix whether we like it or not (social security tax torpedo)

As written, that would be bad order to pull money in retirement. I'd only use Roth IRA money as a last resort myself. Also, taking money from more than one type of account might be beneficial. My order currently is:

1. Spend dividends from taxable holdings. That is, do not reinvest them unless they are so big that there is nothing else to do with them.
2. Sell from taxable brokerage account for expenses as needed, PLUS
3. Convert some tax-deferred assets to Roth. Use money from #1 and #2 above to pay any income taxes.

Eventually when the taxable brokerage account is empty, then do something else. Some folks may want to have their heirs get a stepped up basis, so would not spend from a taxable brokerage account. My heirs probably would rather inherit Roth IRA assets.

We are old enough to withdraw from IRAs penalty-free, but we do not need to make those withdrawals to pay expenses, so we don't withdraw.

I do suppose that folks with low taxable account assets and before age 59.5 might be withdrawing Roth IRA contributions penalty-free to help meet expenses.

In early retirement, you are going to want o use that Roth money, because it doesn't count against your premium subsidies for the ACA. Pulling from the Roth could save you $6000+ in annual health insurance expenses.

Now if you are already getting Medicare, you are in a more flexible situation, but you will have the issue of Medicare part B income limits:

https://www.medicareinteractive.org/get ... er-incomes

Which is another reason to use Roth distributions.

If you die, and leave a Roth to your spouse, it is not considered the spouse's account--and she or he will not be able to contribute to it. IF it is left to the kids, they will have to clean out the account within 10 years.

I don't see any reason to not tap the Roth first, vs. the brokerage account. I don't see any reason for keeping the Roth around and not tapping it in retirement.

[sc9182]

Like your FiL - you could also do TLH savings and/or low-cost margin to manage your income/AGI - to be eligible for ACA credits/CSRs etc & Auto-Zero/some FAFSA (hard to do this for CSS/Institutional Colleges; also FAFSA has changed recently - hence, do check Auto-Zero scenarios to model PPY AGI).

[tibbitts]

In early retirement, you are going to want o use that Roth money, because it doesn't count against your premium subsidies for the ACA. Pulling from the Roth could save you $6000+ in annual health insurance expenses.

Now if you are already getting Medicare, you are in a more flexible situation, but you will have the issue of Medicare part B income limits:

https://www.medicareinteractive.org/get ... er-incomes

Which is another reason to use Roth distributions.

If you die, and leave a Roth to your spouse, it is not considered the spouse's account--and she or he will not be able to contribute to it. IF it is left to the kids, they will have to clean out the account within 10 years.

I don't see any reason to not tap the Roth first, vs. the brokerage account. I don't see any reason for keeping the Roth around and not tapping it in retirement.

At the income levels you're talking about you're going to qualify for subsidies by pulling all or most of your expenses from taxable or deferred. The order is extremely dependent on personal circumstances and most Bogleheads will be much better off preserving the Roth.

Your statement about a surviving spouse not being able to contribute to your Roth doesn't make any sense: they could never have contributed to it previously, either. You could have made a spousal contribution to their Roth but that's not your Roth.

[20cm]

As written, that would be bad order to pull money in retirement. I'd only use Roth IRA money as a last resort myself. Also, taking money from more than one type of account might be beneficial. My order currently is:

1. Spend dividends from taxable holdings. That is, do not reinvest them unless they are so big that there is nothing else to do with them.
2. Sell from taxable brokerage account for expenses as needed, PLUS
3. Convert some tax-deferred assets to Roth. Use money from #1 and #2 above to pay any income taxes.

The point of the post that that started this thread, and the reason that the math doesn't work out for the mid-40s retiree, is that if you hit the 'unless' clause in step 1 in your order above, step 3 will not be useful. Step 1 will have already ensured that either your ordinary dividends and interest have put the magical 10-12% tax bracket out of reach of Roth conversions, or if not, then the Roth conversion will be pushing your qualified dividends and long term capital gains out of the 0% bracket. And if Step 1 doesn't make the Roth conversions pointless, part of Step 2 will.

Roth conversions are a strategy for people who retire slightly early (or not really early, since on average is seems Americans end up retiring around 61), have fairly low expenses, and have a relatively small taxable account that they plan to draw down to bridge the gap to SS, pension, and tax-deferred withdrawals. For someone retiring in their mid-40s, the idea that they will do 25-30 years of Roth conversions and dodge significant tax is not realistic unless they are living on a shoestring budget for most of those 25-30 years.

[livesoft]

Oh, I didn't realize that you were writing about retiring early and intending to be poor the rest of your life.

[sailaway]

As written, that would be bad order to pull money in retirement. I'd only use Roth IRA money as a last resort myself. Also, taking money from more than one type of account might be beneficial. My order currently is:

1. Spend dividends from taxable holdings. That is, do not reinvest them unless they are so big that there is nothing else to do with them.
2. Sell from taxable brokerage account for expenses as needed, PLUS
3. Convert some tax-deferred assets to Roth. Use money from #1 and #2 above to pay any income taxes.

The point of the post that that started this thread, and the reason that the math doesn't work out for the mid-40s retiree, is that if you hit the 'unless' clause in step 1 in your order above, step 3 will not be useful. Step 1 will have already ensured that either your ordinary dividends and interest have put the magical 10-12% tax bracket out of reach of Roth conversions, or if not, then the Roth conversion will be pushing your qualified dividends and long term capital gains out of the 0% bracket. And if Step 1 doesn't make the Roth conversions pointless, part of Step 2 will.

Roth conversions are a strategy for people who retire slightly early (or not really early, since on average is seems Americans end up retiring around 61), have fairly low expenses, and have a relatively small taxable account that they plan to draw down to bridge the gap to SS, pension, and tax-deferred withdrawals. For someone retiring in their mid-40s, the idea that they will do 25-30 years of Roth conversions and dodge significant tax is not realistic unless they are living on a shoestring budget for most of those 25-30 years.

For most of us, it takes a high savings rate to retire in your 40s. That makes it highly unlikely to be in the same or higher tax bracket once you leave work, even if you are pulling entirely from tax deferred accounts. Even the 10% penalty won't necessarily push you over the rate you deferred at if you want to live off traditional accounts instead of doing conversions. No one ever said you would be dodging taxes, just be able to optimize taxes with a little planning. It isn't a get rich quick scheme, just a way to stretch things a bit further.

[20cm]

That makes it highly unlikely to be in the same or higher tax bracket once you leave work

The tax bracket you were in pre-retirement has no bearing on the value of doing Roth conversions post-retirement.

[sailaway]

That makes it highly unlikely to be in the same or higher tax bracket once you leave work

The tax bracket you were in pre-retirement has no bearing on the value of doing Roth conversions post-retirement.

Trying to figure out the options has every bearing on whether or not to defer in the first place. With no deferrals, there will be no Roth conversions. That doesn't mean it was the right choice.

[steadyosmosis]

In early retirement, you are going to want o use that Roth money, because it doesn't count against your premium subsidies for the ACA.

Sorry, no can do.
Like Livesoft, I plan to use Roth dollars last.

[20cm]

That makes it highly unlikely to be in the same or higher tax bracket once you leave work

The tax bracket you were in pre-retirement has no bearing on the value of doing Roth conversions post-retirement.

Trying to figure out the options has every bearing on whether or not to defer in the first place. With no deferrals, there will be no Roth conversions. That doesn't mean it was the right choice.

Assuming you get to your early retirement through a combination of high earnings and steady returns, then you don't need to consider future conversions - deferring always makes sense because as you pointed out you will almost certainly be in a lower bracket later. Any potential future conversions would only improve what is already your best option. You'd only choose to not defer if it helped you build up sufficient non-deferred assets to cover you from retirement through to the start of penalty free distributions from the deferred ones. Given the low limits on deferred space that's not a realistic choice you're faced with.

Most of the replies on this thread are looking at pieces of retirement in isolation. It would be informative to try to put together a complete scenario where the originally-posited strategy actually works for someone retiring in their mid 40s. What does the portfolio look like at the time of retirement - what multiple of expenses it is, how is it allocated across accounts, how did it arrive at that allocation (specifically, what are the unrealized gains on the taxable portion) - and what is the required withdrawal rate in relation to the 0% QDI/LTCG tax bracket cutoff(s)?

[Manny1066]

Some considerations

We have right now historically low tax rates. Therefore, the idea that putting in after-tax money into a brokerage account or a Roth, and worrying about the tax consequences, seems foolish to me. There has never been a better time to put after-tax money into anything.

20cm rightfully points out that we need to look at the full picture, especially in regards to early retirement. I think there are some general principles

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account, and the number of distributions from that account in retirement. The former adds to the effectiveness. The latter detracts from it. In other words, if you retire early, and take distributions from the account over a long period, you will lose all tax benefits, and end up worse off than if you had simply contributed to a brokerage account.

2. The effectiveness of Roth conversions is contingent on your overall tax liability during the conversion, the amount converted, and your lifespan. If the money converted pushes you into a higher tax bracket, impacts your ACA subsidy qualification, or has other unintended consequences, it is not worth doing. Likewise, if you die at age 70 after doing 12 years of Roth conversions, you have paid a whole lot of unnecessary taxes, and have left your heirs with less money.

I contend that the uncertainty involving Roth conversions (as a general strategy) is too great.

Returning to the idea that we are in a historically low tax environment (and taxes will be going up with the Trump tax cuts expire in a couple years), I see no reason not to focus on after-tax investment options, with the understanding that

a) The 0% capital gains rate will probably be with us for a long time --seniors and investors will have a fit if that is changed
b) income taxes are likely to rise, which will impact tax-deferred accounts

[sailaway]

20cm rightfully points out that we need to look at the full picture, especially in regards to early retirement. I think there are some general principles

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account, and the number of distributions from that account in retirement. The former adds to the effectiveness. The latter detracts from it. In other words, if you retire early, and take distributions from the account over a long period, you will lose all tax benefits, and end up worse off than if you had simply contributed to a brokerage account.

How do you figure? If I withdrawal at a lower rate, I reap tax benefits. Time doesn't matter for the math except that taking distributions over a long period is more likely to keep the tax rate down.

[Manny1066]

20cm rightfully points out that we need to look at the full picture, especially in regards to early retirement. I think there are some general principles

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account, and the number of distributions from that account in retirement. The former adds to the effectiveness. The latter detracts from it. In other words, if you retire early, and take distributions from the account over a long period, you will lose all tax benefits, and end up worse off than if you had simply contributed to a brokerage account.

How do you figure? If I withdrawal at a lower rate, I reap tax benefits. Time doesn't matter and taking distributions over a long period is more likely to keep the tax rate down.

The length of time determines the value of the portfolio. Selling securities and distributing the proceeds sooner, results in less tax-deferred growth

The longer distributions are taken, the greater the overall tax consequences. Paying 12k per year on distributions for 10 years after age 65 is one thing. Paying 12k for 20 years is another matter

the 401k (or traditional IRA) assumes you will retire at a lower tax rate (which I doubt for many reasons) and your distributions will be limited.

we are more likely to face a higher tax burden in early retirement and have far more distributions than we think

[tibbitts]

a) The 0% capital gains rate will probably be with us for a long time --seniors and investors will have a fit if that is changed

Seniors and investors had a fit over the change requiring distribution of inherited IRAs - even Roths - within 10 years, too. And what happened as a result?

[sailaway]

20cm rightfully points out that we need to look at the full picture, especially in regards to early retirement. I think there are some general principles

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account, and the number of distributions from that account in retirement. The former adds to the effectiveness. The latter detracts from it. In other words, if you retire early, and take distributions from the account over a long period, you will lose all tax benefits, and end up worse off than if you had simply contributed to a brokerage account.

How do you figure? If I withdrawal at a lower rate, I reap tax benefits. Time doesn't matter and taking distributions over a long period is more likely to keep the tax rate down.

The length of time determines the value of the portfolio. Selling securities and distributing the proceeds sooner, results in less tax-deferred growth

You would also sell the taxable account, so that just doesn't factor in whether or not tax deferred was appropriate. Even if I take a 22% tax deferral this year and withdraw at 12% next year, I have come out ahead.

[retiredjg]

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account....

This is incorrect.

Time in the tax-deferred account is not relevant. The money could be there one year or 100 years - it does not matter.

The thing that does matter is tax rate during accumulation vs tax rate during de-cumulation.

If you will pay taxes at a lower rate later on, it is better to defer taxes now than to pay taxes now and put the money in a taxable account.

I think you have formed your conclusions for this thread on the wrong metric - how much one pays in taxes. That is the wrong thing to look at.

[Manny1066]

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account....

This is incorrect.

Time in the tax-deferred account is not relevant. The money could be there one year or 100 years - it does not matter.

The thing that does matter is tax rate during accumulation vs tax rate during de-cumulation.

If you will pay taxes at a lower rate later on, it is better to defer taxes now than to pay taxes now and put the money in a taxable account.

I think you have formed your conclusions for this thread on the wrong metric - how much one pays in taxes. That is the wrong thing to look at.

I disagree.

You are not taking into account the growth of the account in regards to taxation. If I put in 200k of pre-tax dollars over X number of years into the traditional IRA, and it grows to 1.2 million during that time, I will be taking out distributions on ordinary income tax rates on 1 million bucks over 15-20 years

I could have put in 200k after-tax dollars (at 12 or 22%), watched the account grow, and then taken out capital gains at 0% over the number of years I choose, without having to worry about RMDs.

Yes, the rate matters, but so does the number of distributions (time). The account doesn't stay static, it continues to grow, even in retirement, and when we are taking distributions.

If you invested 50k in a Roth (after-tax) you would pay around 10k in taxes up-front (20% for simplicity). If the account grew at an annual rate of 11% for 30 years, you would have 1.33 million. Distributions would be free of tax

If you invested the same amount into a traditional IRA, you would pay no taxes initially. After the account grew to 1.33 million 30 years later, you would pay $250,000 in taxes on 25 years of distributions (50k). It would be more if you continued to take distributions for another 5 years.

[FiveK]

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account....

This is incorrect.

Time in the tax-deferred account is not relevant. The money could be there one year or 100 years - it does not matter.

The thing that does matter is tax rate during accumulation vs tax rate during de-cumulation.

If you will pay taxes at a lower rate later on, it is better to defer taxes now than to pay taxes now and put the money in a taxable account.

I think you have formed your conclusions for this thread on the wrong metric - how much one pays in taxes. That is the wrong thing to look at.

I disagree.

It's a free country so you can...but retiredjg is correct.

You are not taking into account the growth of the account in regards to taxation. If I put in 200k of pre-tax dollars over X number of years into the traditional IRA, and it grows to 1.2 million during that time, I will be taking out distributions on ordinary income tax rates on 1 million bucks over 15-20 years

Growth will be the same in traditional or Roth, and Roth never loses to taxable (unusual situations such as long-term investment losses excepted). See the math behind the Simplest situation.

I could have put in 200k after-tax dollars (at 12 or 22%), watched the account grow, and then taken out capital gains at 0% over the number of years I choose, without having to worry about RMDs.

If you are looking at after-tax contributions only, then Roth >= taxable as above.

Yes, the rate matters, but so does the number of distributions (time). The account doesn't stay static, it continues to grow, even in retirement, and when we are taking distributions.

Nope, only the marginal rates matter. It's just math, whether the simplest situation mentioned above, or More complicated situations.

If you invested 50k in a Roth (after-tax) you would pay around 10k in taxes up-front (20% for simplicity). If the account grew at an annual rate of 11% for 30 years, you would have 1.33 million. Distributions would be free of tax

If you invested the same amount into a traditional IRA, you would pay no taxes initially. After the account grew to 1.33 million 30 years later, you would pay $250,000 in taxes on 25 years of distributions (50k). It would be more if you continued to take distributions for another 5 years.

See the second of two Common misconceptions. As noted, these are "common" so you are far from the first but they are misconceptions.

[Manny1066]

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account....

This is incorrect.

Time in the tax-deferred account is not relevant. The money could be there one year or 100 years - it does not matter.

The thing that does matter is tax rate during accumulation vs tax rate during de-cumulation.

If you will pay taxes at a lower rate later on, it is better to defer taxes now than to pay taxes now and put the money in a taxable account.

I think you have formed your conclusions for this thread on the wrong metric - how much one pays in taxes. That is the wrong thing to look at.

I disagree.

It's a free country so you can...but retiredjg is correct.

You are not taking into account the growth of the account in regards to taxation. If I put in 200k of pre-tax dollars over X number of years into the traditional IRA, and it grows to 1.2 million during that time, I will be taking out distributions on ordinary income tax rates on 1 million bucks over 15-20 years

Growth will be the same in traditional or Roth, and Roth never loses to taxable (unusual situations such as long-term investment losses excepted). See the math behind the Simplest situation.

I could have put in 200k after-tax dollars (at 12 or 22%), watched the account grow, and then taken out capital gains at 0% over the number of years I choose, without having to worry about RMDs.

If you are looking at after-tax contributions only, then Roth >= taxable as above.

Yes, the rate matters, but so does the number of distributions (time). The account doesn't stay static, it continues to grow, even in retirement, and when we are taking distributions.

Nope, only the marginal rates matter. It's just math, whether the simplest situation mentioned above, or More complicated situations.

If you invested 50k in a Roth (after-tax) you would pay around 10k in taxes up-front (20% for simplicity). If the account grew at an annual rate of 11% for 30 years, you would have 1.33 million. Distributions would be free of tax

If you invested the same amount into a traditional IRA, you would pay no taxes initially. After the account grew to 1.33 million 30 years later, you would pay $250,000 in taxes on 25 years of distributions (50k). It would be more if you continued to take distributions for another 5 years.

See the second of two Common misconceptions. As noted, these are "common" so you are far from the first but they are misconceptions.

Some clarifications needed here:

If I invest 200k after-tax dollars into a traditional, taxable brokerage account, consisting of securities

or

if I invest after-tax dollars into a Roth IRA, with securities in it

and that portfolio grows to 1 million 10 years later, and I elect to take under $120,000 in a distribution / capital gains (assuming current standard deduction), my tax liability in both instances with be 0

the Roth is only superior in regards to taxation if I leave that tax bracket and elect to take out more in capital gains, thus entering the 15% zone. The Roth never loses to taxable, but the taxable can be equivalent to Roth, without the limitations on contributions, withdrawal timelines, inability to borrow against the securities in the portfolio, and the five year rule if we are doing conversions.

You are tying money up in order to get a tax break on taxable income that you may never realize. So planning is very important here.

The idea behind the 401k / traditional IRA is that we will retire and require less income, and be in a lower bracket. Regardless of the conceptual argument over seed vs. harvest, you are making a bet that tax rates will stay the same in the future, or decline. You are also making a bet that you will not need to take a large distribution from the taxable account due to a medical issue, home repair, etc. --which would then create an increased tax liability.

That is a big bet

Now that being said, I do have a traditional IRA, because the up-front reduction in taxable income is important to me because of my high income level. But I do not see any real benefit from the account beyond that vs. my brokerage account. Both grow essentially tax-deferred.

[Manny1066]

one more thing:

this statement ""The second misconception is that "it is better to pay tax on the seed than the harvest." In other words, that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case."

is a bit misleading. Why?

Because we would not take money out of the investment to pay the tax up-front on the Roth contribution. We are not investing 40k into the Roth and 50k into the traditional IRA (pulling from the seed). We are investing 50k into both, and paying taxes with cash-on-hand.

conceptually speaking, the statement is correct in that we are paying 20% before or after. But we are not reducing the investment amount in this example to pay taxes.

And if tax rates increase between now and retirement, it changes everything.

[Nohbdy]

Some clarifications needed here:

If I invest 200k after-tax dollars into a traditional, taxable brokerage account, consisting of securities

or

if I invest after-tax dollars into a Roth IRA, with securities in it

and that portfolio grows to 1 million 10 years later, and I elect to take under $120,000 in a distribution / capital gains (assuming current standard deduction), my tax liability in both instances with be 0

What are you investing in that allows you to pay $0 on the dividends in a taxable account during your earning years?

[sailaway]

1. The tax-effectiveness of a tax-deferred account, and its overall benefit, are contingent on the length of time investments grow within the account....

This is incorrect.

Time in the tax-deferred account is not relevant. The money could be there one year or 100 years - it does not matter.

The thing that does matter is tax rate during accumulation vs tax rate during de-cumulation.

If you will pay taxes at a lower rate later on, it is better to defer taxes now than to pay taxes now and put the money in a taxable account.

I think you have formed your conclusions for this thread on the wrong metric - how much one pays in taxes. That is the wrong thing to look at.

I disagree.

It's a free country so you can...but retiredjg is correct.

You are not taking into account the growth of the account in regards to taxation. If I put in 200k of pre-tax dollars over X number of years into the traditional IRA, and it grows to 1.2 million during that time, I will be taking out distributions on ordinary income tax rates on 1 million bucks over 15-20 years

Growth will be the same in traditional or Roth, and Roth never loses to taxable (unusual situations such as long-term investment losses excepted). See the math behind the Simplest situation.

I could have put in 200k after-tax dollars (at 12 or 22%), watched the account grow, and then taken out capital gains at 0% over the number of years I choose, without having to worry about RMDs.

If you are looking at after-tax contributions only, then Roth >= taxable as above.

Yes, the rate matters, but so does the number of distributions (time). The account doesn't stay static, it continues to grow, even in retirement, and when we are taking distributions.

Nope, only the marginal rates matter. It's just math, whether the simplest situation mentioned above, or More complicated situations.

If you invested 50k in a Roth (after-tax) you would pay around 10k in taxes up-front (20% for simplicity). If the account grew at an annual rate of 11% for 30 years, you would have 1.33 million. Distributions would be free of tax

If you invested the same amount into a traditional IRA, you would pay no taxes initially. After the account grew to 1.33 million 30 years later, you would pay $250,000 in taxes on 25 years of distributions (50k). It would be more if you continued to take distributions for another 5 years.

See the second of two Common misconceptions. As noted, these are "common" so you are far from the first but they are misconceptions.

Some clarifications needed here:

If I invest 200k after-tax dollars into a traditional, taxable brokerage account, consisting of securities

or

if I invest after-tax dollars into a Roth IRA, with securities in it

and that portfolio grows to 1 million 10 years later, and I elect to take under $120,000 in a distribution / capital gains (assuming current standard deduction), my tax liability in both instances with be 0

the Roth is only superior in regards to taxation if I leave that tax bracket and elect to take out more in capital gains, thus entering the 15% zone. The Roth never loses to taxable, but the taxable can be equivalent to Roth, without the limitations on contributions, withdrawal timelines, inability to borrow against the securities in the portfolio, and the five year rule if we are doing conversions.

You are tying money up in order to get a tax break on taxable income that you may never realize. So planning is very important here.

The idea behind the 401k / traditional IRA is that we will retire and require less income, and be in a lower bracket. Regardless of the conceptual argument over seed vs. harvest, you are making a bet that tax rates will stay the same in the future, or decline. You are also making a bet that you will not need to take a large distribution from the taxable account due to a medical issue, home repair, etc. --which would then create an increased tax liability.

That is a big bet

Now that being said, I do have a traditional IRA, because the up-front reduction in taxable income is important to me because of my high income level. But I do not see any real benefit from the account beyond that vs. my brokerage account. Both grow essentially tax-deferred.

For traditional, I am not making bets about future tax rates overall. I am comparing my spending to earnings and expecting that even if tax rates increase across the board, I will likely be in a lower bracket. That bet has different odds than the first.

We have saved thousands of dollars during accumulation by using Roth accounts. When we we were last in the 15% LTCG bracket + NIIT DH's Roth and taxable accounts were pretty equal, with similar investments. So for that one year I had a very good view of the value of Roth. Downshifted, we no longer owe NIIT, but we are still in the 15% LTCG, so still reaping that benefit in semi retirement. We acknowledge that access to the mega backdoor Roth has amplified this effect in our case, but it still exists for anyone paying for LTCG in their earning years. Even if I were in the 0% LTCG bracket during accumulation, I would consider Roth as a hedge against policy changes or unexpected income. So the gains are tied up until I am a senior citizen: I need to keep the money to spend then somewhere.

[FiveK]

What are you investing in that allows you to pay $0 on the dividends in a taxable account during your earning years?

Anything, as long as the dividends are qualified and the taxpayer is in the 0% bracket for qualified dividends and long term capital gains.

[FiveK]

If I invest 200k after-tax dollars into a traditional, taxable brokerage account, consisting of securities
or
if I invest after-tax dollars into a Roth IRA, with securities in it
and that portfolio grows to 1 million 10 years later, and I elect to take under $120,000 in a distribution / capital gains (assuming current standard deduction), my tax liability in both instances with be 0

the Roth is only superior in regards to taxation if I leave that tax bracket....

Or if you have
- Social Security benefits and capital gains cause those benefits to become taxable because qualified Roth distributions do not, or
- you are age 63+ and the adjusted gross income (AGI) from the capital gains kicks you into an IRMAA tier, or
- you have an ACA policy and the AGI from the capital gains drops your premium tax credit to $0,
- etc.

You are tying money up in order to get a tax break on taxable income that you may never realize. So planning is very important here.

No argument against planning.

Note that all Roth IRA contributions are immediately withdrawable without tax or penalty, so you aren't tying up any of that. There may be some extra tax if you have to withdraw Roth earnings early, but if you are being forced to deplete the entire Roth account there are probably much bigger problems than where your assets were located.

The idea behind the 401k / traditional IRA is that we will retire and require less income, and be in a lower bracket. Regardless of the conceptual argument over seed vs. harvest, you are making a bet that tax rates will stay the same in the future, or decline. You are also making a bet that you will not need to take a large distribution from the taxable account due to a medical issue, home repair, etc. --which would then create an increased tax liability.
That is a big bet

Not so big if you have a good emergency fund. Or, if it is huge medical expenses then your itemized deductions will also be huge, there will probably be no early distribution penalty, and so your marginal tax rate on that withdrawal will be low (maybe 0%), regardless of what tax rates in general have done.

Now that being said, I do have a traditional IRA, because the up-front reduction in taxable income is important to me because of my high income level. But I do not see any real benefit from the account beyond that vs. my brokerage account. Both grow essentially tax-deferred.

"High income level" and "0% qualified dividend tax" usually don't go together...?

Interesting discussion.

[FiveK]

one more thing:

this statement ""The second misconception is that "it is better to pay tax on the seed than the harvest." In other words, that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case."

is a bit misleading. Why?

Because we would not take money out of the investment to pay the tax up-front on the Roth contribution. We are not investing 40k into the Roth and 50k into the traditional IRA (pulling from the seed). We are investing 50k into both, and paying taxes with cash-on-hand.

conceptually speaking, the statement is correct in that we are paying 20% before or after. But we are not reducing the investment amount in this example to pay taxes.

Yes, in your situation that becomes a "Traditional plus taxable" vs. Roth case, so the math gets a little more complicated. The main point of the second misconception is that it's not the amount of tax one pays, it's the amount remaining after tax that matters, and that applies in all situations.

And if tax rates increase between now and retirement, it changes everything.

Agreed - it's the tax rates that matter.

[tj]

Don't forget that the way income "stacks" on a Form 1040, that if one converts the dollar amount of one's "standard deduction", then that conversion is taxed at 0%. That still leaves the headroom for 0% tax on qualified dividend income and long-term capital gains.

Add in tax-loss harvesting along the way.

And also don't forget that if one bunches deductions (say significant charitable contributions), then even more traditional IRA amounts can be converted to Roth IRA without paying taxes on the conversion.

Of course, it almost goes without saying: Avoid interest (i.e. savings accounts) and non-qualified dividend income as much as possible.

I've averaged like $2k-$3k in interest the past few years from offers such as these - https://www.doctorofcredit.com/best-ban ... t-bonuses/ - why wouldn't I want free $$$ ?

[Manny1066]

If I invest 200k after-tax dollars into a traditional, taxable brokerage account, consisting of securities
or
if I invest after-tax dollars into a Roth IRA, with securities in it
and that portfolio grows to 1 million 10 years later, and I elect to take under $120,000 in a distribution / capital gains (assuming current standard deduction), my tax liability in both instances with be 0

the Roth is only superior in regards to taxation if I leave that tax bracket....

Or if you have
- Social Security benefits and capital gains cause those benefits to become taxable because qualified Roth distributions do not, or
- you are age 63+ and the adjusted gross income (AGI) from the capital gains kicks you into an IRMAA tier, or
- you have an ACA policy and the AGI from the capital gains drops your premium tax credit to $0,
- etc.

You are tying money up in order to get a tax break on taxable income that you may never realize. So planning is very important here.

No argument against planning.

Note that all Roth IRA contributions are immediately withdrawable without tax or penalty, so you aren't tying up any of that. There may be some extra tax if you have to withdraw Roth earnings early, but if you are being forced to deplete the entire Roth account there are probably much bigger problems than where your assets were located.

The idea behind the 401k / traditional IRA is that we will retire and require less income, and be in a lower bracket. Regardless of the conceptual argument over seed vs. harvest, you are making a bet that tax rates will stay the same in the future, or decline. You are also making a bet that you will not need to take a large distribution from the taxable account due to a medical issue, home repair, etc. --which would then create an increased tax liability.
That is a big bet

Not so big if you have a good emergency fund. Or, if it is huge medical expenses then your itemized deductions will also be huge, there will probably be no early distribution penalty, and so your marginal tax rate on that withdrawal will be low (maybe 0%), regardless of what tax rates in general have done.

Now that being said, I do have a traditional IRA, because the up-front reduction in taxable income is important to me because of my high income level. But I do not see any real benefit from the account beyond that vs. my brokerage account. Both grow essentially tax-deferred.

"High income level" and "0% qualified dividend tax" usually don't go together...?

Interesting discussion.

Your point about social security and other forms of taxable income tie into my statement that the efficiency of a tax-deferred account is contingent on the number of years you take distributions. When you begin to take social security, and when RMDs set in, it is much harder to manage the tax liability connected to the distributions. You could easily find yourself in a higher tax bracket.

With my brokerage account (or Roth), I do not have RMDs. I can reallocate in order to lessen the amount of qualified dividends are taken, sell less stock, etc. Social security income will still be an issue, and I do have to watch that.

you write "Note that all Roth IRA contributions are immediately withdrawable without tax or penalty"

but it is my understanding that any time you do a conversion, all of that money is off limits for 5 years (or you get penalized).

"High income level" and "0% qualified dividend tax" usually don't go together."

I am still working--I can't do a Roth conversion right now. I could do them in early retirement, but as to my initial question, I haven't been able to make the math work. My income will go down by 50% or more in retirement, but I am 53.

Carrying a huge emergency fund is money out of your pocket (typically --right now interest rates are good on HYSAs, but they won't stay that way). It isn't money that is invested. If I have a large portfolio of securities and debt instruments in a taxable brokerage account, I can borrow against it at rock-bottom rates in order to free up capital for an emergency expense (or any other kind of expense). I can then pay off that loan with income from my investments. --very few personal finance sites talk about this, but they should.

I can't do that if 80% of my money is tied up in a traditional IRA or a Roth. I can yank contributions from the Roth (sell investments, etc.), but that would be bad.

Now one small wrinkle to my approach is that retirement accounts do offer protections against creditors, unlike standard, taxable brokerage accounts. So you will need an umbrella policy, which will cost you around $200 a year or so. It is an added expense, but a small one.

[ScubaHogg]

Stocks are already "tax deferred" (I do not pay tax until I sell them).

Sorta

Someone might have said it, but the taxable account has an annual tax drag (dividends) during your accumulating years. Over decades that can add up