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The average american is not going to be in a lower bracket at retirement. Why?
Because your retirement tax bracket is not based on your final years pay vs retirement . It is about your average bracket over decades.
Most americans ramp up over decades from low pay to higher pay . They ramp through lower brackets and ramp up to higher brackets.
Looking at the bracket averages over a career roths are a clear winner . That does not even take in the effect of maybe not getting ss taxed , rmds, higher medicare premiums etc since so much is based on taxable income .
Also at 70-1/2 any money reinvested from rmds is taxed on gains going forward roths are not
Unless you are entering the work force at the highest brackets roths are the best choice until you reach the highest brackets. Don' t make the mistake of comparing your peak earning years with retirement brackets. It is about contributing over decades.
I’m not sure how you surmise the majority of people are better off pretax instead of the roth. The fact that taxable income in retirement can impact many taxes that you don’t deal with or at least not at the same level pre retirement should give some pause to your blanket claim
I wish i did roths. For the 3 years from 62 to 65 i could have been given a rebate on my health insurance via the aca. I certainly would have had a lot better options tax wise while i delayed ss like using the zero capital gains brackets too.
There are just so many advantages to doing roths early.
Those rmds are going to be painful for us too. They really can be a lot. What is worse is if i die my wife has to file siingle and pay taxes on those rmds that were deducted at a lower rate when married with a traditional . That is a big difference that few consider
Last edited by mathjak107; 04-20-2018 at 05:48 AM..
I've been reading A LOT about this subject since I'm a bit of a novice myself to investing (but well experienced in personal finance), and the conventional wisdom is the following order, adjusting for what you have access to:
1) 401k up to employer match
2) HSA to maximum
3) ROTH IRA to maximum
4) 401k up to maximum
5) Personal investment accounts
If you have a high deductible health plan (HDHP) at your employer, you have access to a HSA. You can invest all of the money you put into a HSA and you avoid paying FICA taxes on top of other federal taxes. The reason why 401k to the max is lower on the list is because the majority of 401k plans have limited options and costs are going to potentially be more expensive than choosing your own investments in HSA or ROTH.
This is a decision where there is simply no universal advice that can apply to everyone. Most people here are making suggestions based on their own experience, which is fine if they include that qualification. But to suggest that their own experience will apply to nearly everyone in the country is not appropriate.
Also, one's "tax bracket" is not the way to look at all this. All of the dollars that are withdrawn may not be taxed at your highest rate. Some of our own withdrawals will be coming out at 0%, and quite a lot at 12% (and 15% if the new rules lapse), just as an example. A lot of this depends on what other sources of income you will have in retirement, when you plan to retire, and when you plan to take SS.
i am trying to figure out if i should contribute to my IRAs this year. i am never going to need to take the money out of them. so maybe its more of an estate planning matter. maybe it would be a good estate planning thing if i converted to a roth IRA? who knows if those benefits would exist for generations though.
maybe i will call either my fidelity advisor (who i never really called for advice before) or i can call the jp morgan team. i guess jp morgan would probably be better even though i dont have any accounts with them (take advantage of their relationship with my dad).
my accountant always pushes for it but i think he view is more narrow than what i need.
i am trying to figure out if i should contribute to my IRAs this year. i am never going to need to take the money out of them. so maybe its more of an estate planning matter. maybe it would be a good estate planning thing if i converted to a roth IRA? who knows if those benefits would exist for generations though.
maybe i will call either my fidelity advisor (who i never really called for advice before) or i can call the jp morgan team. i guess jp morgan would probably be better even though i dont have any accounts with them (take advantage of their relationship with my dad).
my accountant always pushes for it but i think he view is more narrow than what i need.
Always contributed to IRAs as well as employer sponsored plans. We converted all our traditional IRAs to ROTHs, and are very glad we did. Of course, the younger a person is, the more advantageous. Tax rates are historically low and may not always stay that way. It's a good idea to diversify by having some tax-free income, just in case.
Always contributed to IRAs as well as employer sponsored plans. We converted all our traditional IRAs to ROTHs, and are very glad we did. Of course, the younger a person is, the more advantageous. Tax rates are historically low and may not always stay that way. It's a good idea to diversify by having some tax-free income, just in case.
the way that my accountant seems to see it is simply that it reduces my taxes now. but thats not really important to me at all, i am saving plenty now. id rather pay the taxes now and then have no more tax obligations in the future. id rather take that risk than avoid taxes today and wait and see if i can benefit in the future.
I’m not sure how you surmise the majority of people are better off pretax instead of the roth. The fact that taxable income in retirement can impact many taxes that you don’t deal with or at least not at the same level pre retirement should give some pause to your blanket claim
I think the majority of people are better off with pre-tax because it's not news that most people don't save much. Despite the fact that many people on CD claim that a $1M 401k balance is "nothing" these days, most people aren't going to have balances that large, so they might as well get the tax break now. Even better if they take the money from that tax break and save more than they otherwise would.
the way that my accountant seems to see it is simply that it reduces my taxes now. but thats not really important to me at all, i am saving plenty now. id rather pay the taxes now and then have no more tax obligations in the future. id rather take that risk than avoid taxes today and wait and see if i can benefit in the future.
Your accountant is thinking most people are in a lower tax bracket at retirement. With the surging deficit and historically low tax rates, rates are likely to increase at some point. No one knows when or how much. I like the idea of diversifying so that you have some taxable and some tax-free income during retirement years.
I think the majority of people are better off with pre-tax because it's not news that most people don't save much. Despite the fact that many people on CD claim that a $1M 401k balance is "nothing" these days, most people aren't going to have balances that large, so they might as well get the tax break now. Even better if they take the money from that tax break and save more than they otherwise would.
Well it’s either one or the other imo. People who don’t save much aren’t going to attempt to save more because of a tax delta. Also all else being equal I believe with the same tax rates and factoring in the pretax/post current savings delta the roth provides more spendable monies in the end
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