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The power of the Roth lay in adding t it when you were younger and paying a lower rate. By the time Roths came out for many of us, we were already in the 25% or higher bracket, so it only made sense if you maxed out deferred and wanted a flexible after tax account that grew tax free. Thats why I opened mine. But with a measly 5k/ year max until 50, the amount was tiny compared to 401ks. You can only contribute to a Roth if you have earned income, so you cant even add to it in retirement as a contribution unless you work and clear 5k after taxes. Some people call it the Walmart Greeter Retirement account. It makes sense if you can swing it to live off of after tax savings and SS, AND can afford to pay the taxes on the amount of a withdrawal from your 401k/IRA equal the the amount of the 15% tax level rolled in to a Roth. Then you are paying taxes on a marginal under 15% rate for what you would have paid the full amount of tax at 25% on PLUS totally tax free withdrawal of whatever that Roth makes. You would pay 25% on whatever the 401k/IRA made, so the net spending dollar difference is huge. In fact you even still come out ahead normally if you have to pay the taxes from the IRA WITHDRAWAL itself to fund the Roth. Unfortunately for me, (or fortunate, depending on how you look at it) we will have 70k/year in pension, so it doesn't really make much sense to roll over at retirement for me.
yep , once you pass through the lower brackets with retirement income roth conversions can hurt more than help.
once you are beyond getting ss taxed or zero capital gains brackets the big advantage of doing roths when you are younger is gone.
roths big advantage is the most regular folks have decades of rampping up in salary before they hit the higher brackets.
there average tax rate will likely be lower while working than retirement where income will be closer to your final years .
I thought it was clear from the beginning of time that you should contribute to Roth when your marginal tax rate is low and to Traditional when your marginal tax rate is high. Are you stating the obvious or am I missing something?
Well, it wasn't clear to us that weren't really young when they came out in 1998, and most of us didnt know what to think of them until 2001-2 ! At that time i was still working at trying to max my 401k and was well into the 25% bracket. I had one year while switching companies that had a crappy 401k that I started one at Fidelity, then just contributed to it when maxed out in 401k. Did one small rollover, so its only like 130k now. Luckily i went back to my present employer. But it will be what I use to limit income if i have to buy a car, or have other large expense and don't want to spike income.
I thought it was clear from the beginning of time that you should contribute to Roth when your marginal tax rate is low and to Traditional when your marginal tax rate is high. Are you stating the obvious or am I missing something?
for many jobs the first few decades may be at lower tax rates and incomes then the later stages of a job.
but that is what i should have done if they existed. use the roths until i got near my final tax brackets. but most always think in terms of comparing the last years income with retirement and going nope we will be lower in retirement . but their long term average rate may actually be well below their retirement rate .
Last edited by mathjak107; 04-19-2015 at 12:00 PM..
for many jobs the first few decades may be at lower tax rates and incomes then the later stages of a job.
but that is what i should have done if they existed. use the roths until i got near my final tax brackets. but most always think in terms of comparing the last years income with retirement and going nope we will be lower in retirement . but their long term average rate may actually be well below their retirement rate .
Do people really do that?
Like if I'm 20 and making 40k now, am I going to imagine myself making 200k at age 60 and then decide that I'm going Traditional forever?
40k is the 15% bracket for a couple as an example. 75k is 25%. Do you see yourself making 75k 20 years from now ? If yes do a roth if not traditional. But in any case you can't go wrong with the roth.
You still may avoid having a lifetime of ss taxed as well as no rmd's .
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