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Old 10-02-2017, 12:36 PM
 
Location: RVA
2,175 posts, read 1,275,056 times
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Indeed, a Roth is useless to low income people that will remain low income all their lives
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Old 10-02-2017, 02:50 PM
 
Location: Gilbert, AZ
3,208 posts, read 1,975,683 times
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Quote:
Originally Posted by SierraCountyMtnBiker View Post
Regarding taxes, the Standard deduction + personal exemption ads up to about $22,500 a year (last time I checked for a married couple)
YET this ISN'T the formula followed for taxing social security checks.
Senior married couple can make up to $32,000 per year in Social Security checks and not be taxed.

EXAMPLE-
$32,0000 earnings in combined social security checks
-$22,500 standard deduction+ Personal exemptions (for married couple)
-------
$9500 remaining. That $9500 isn't taxed but if this were wages earned by younger people, it would be taxed.
It's a lot more convoluted than this, but actually pretty nice for people who have large SS checks plus little or no other income. I have never seen a written description that clearly describes how it works, and I've had to resort to tax software or the IRS worksheet to get some idea what's happening.

IMO, the executive summary is that SS and ordinary income do not always play well together. Just as one example, let's take a married couple getting combined SS benefits of $75,000 annually. On that income alone they would have zero federal tax liability. They can take a little bit of taxable money out of a Trad IRA account and still pay no tax... about $12,000 annually. But if they take more from the IRA they will soon find themselves with an effective marginal rate of 18.5%. Where did that come from?? It's 10% direct tax on the IRA distribution plus another 8.5% because for every dollar of IRA money pulled out one is making 85 cents of SS benefits taxable. Once all of the SS check becomes taxable this multiplier effect ends, but the effect can initially hit in different marginal brackets for different folks, and can even span more than a single marginal bracket. It's quite a mess.
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Old 10-02-2017, 03:21 PM
 
72,010 posts, read 72,043,164 times
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Quote:
Originally Posted by SierraCountyMtnBiker View Post
Actually the difference is that taxes get paid. Otherwise if you have a couple who gets $1600 month in Social Security and choses to withdraw $3800, there is no taxes paid. That's an extra $318 per month this couple could have tax free.

Just one example. Also with Social Security being favorably taxed, it is often wiser to wait until your Senior years to withdraw as you'll pay so much less.
keep in mind once you retire you have less deductions no longer raising a family as well as no more big 401k deductions . the biggest problem can be rmd's when you lose a spouse and have to file single
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Old 10-02-2017, 03:45 PM
 
Location: Gilbert, AZ
3,208 posts, read 1,975,683 times
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Quote:
Originally Posted by mathjak107 View Post
the biggest problem can be rmd's when you lose a spouse and have to file single

Yup. I don't see a lot of discussion on this topic. To me it seems like extra motivation to delay SS benefits and accelerate taxable withdrawals, at least to a point. Surviving spouse is better off with a higher SS check and lower 401k balance, since the provisional income thresholds for single filer are bigger than 1/2 the married filing joint thresholds.
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Old 10-02-2017, 05:07 PM
 
Location: Sierra County
271 posts, read 117,548 times
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Quote:
Originally Posted by bigbear99 View Post
SCMB, I see your thinking on younger people. Your math is off a bit though, because you neglected to consider Provisional Income. Kiplinger's says it better than I can, and you can see the complexity.



18 lines! And that's where strange interaction effects lie.
True bigbear

My goal was to point out that those people, and there seem to be many on this board, who promote these untruths regarding people will certainly pay taxes on that money at some point. Thus they do not want traditional 401k's which allow pre-tax $$. Instead promoting roths.

Not everyone will eventually pay taxes on that money when withdrawn. Not everyone will want to. If you are poor enough and fall within certain income guidelines, it may behoove the person to not withdraw much $$ out of the 401k anyhow.
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Old 10-02-2017, 05:28 PM
 
2,718 posts, read 1,560,071 times
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The other thing the Ross fans don't discuss is that, for the same after tax income when working, you will save less in a Roth. After all, you paid taxes on it - FICA, Income Tax and such, so your amount saved will be lower, much lower in most cases with a combined marginal tax rate of 22.65% or 32.65%. The marginal rate will hit all of the Roth $. Remember this is every year. It's like a mutual fund with a big, big load. I have not done the math to see what the investment hurdle rate is. And of course it depends on marginal tax rates working and retired. Anyone do the math?
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Old 10-02-2017, 07:42 PM
 
Location: Sierra County
271 posts, read 117,548 times
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Quote:
Originally Posted by bigbear99 View Post
The other thing the Ross fans don't discuss is that, for the same after tax income when working, you will save less in a Roth. After all, you paid taxes on it - FICA, Income Tax and such, so your amount saved will be lower, much lower in most cases with a combined marginal tax rate of 22.65% or 32.65%. The marginal rate will hit all of the Roth $. Remember this is every year. It's like a mutual fund with a big, big load. I have not done the math to see what the investment hurdle rate is. And of course it depends on marginal tax rates working and retired. Anyone do the math?
Yes I didn't consider that aspect. So very few people really benefit replacing 401k's with Roths since they'll loose all that compound interest.

Considering the funds are doing alright
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Old 10-03-2017, 03:11 AM
 
72,010 posts, read 72,043,164 times
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Quote:
Originally Posted by bigbear99 View Post
The other thing the Ross fans don't discuss is that, for the same after tax income when working, you will save less in a Roth. After all, you paid taxes on it - FICA, Income Tax and such, so your amount saved will be lower, much lower in most cases with a combined marginal tax rate of 22.65% or 32.65%. The marginal rate will hit all of the Roth $. Remember this is every year. It's like a mutual fund with a big, big load. I have not done the math to see what the investment hurdle rate is. And of course it depends on marginal tax rates working and retired. Anyone do the math?
this is not correct . you pay fica on the full amount you earn before any deductions . you also can't compare using after tax income , you must compare pre tax income .

you are also not comparing the amounts correctly .

you actually need more than 5k to put 5k in a roth since you are paying the taxes up front with outside money .

how about if we even it up . guess what ? no difference in after tax money .

so hypothetically lets take rounded off 6665.00 in pretax dollars and a 25% marginal tax bracket . that will yield 5k in a roth 401k . if the roth doubles you have 10k in after tax dollars .

the traditional 401k would get the full 6665.00 . if that doubles you have 13,330.00 . assuming the same 25% bracket that nets at the same 10k

Last edited by mathjak107; 10-03-2017 at 03:28 AM..
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Old 10-03-2017, 03:18 AM
 
72,010 posts, read 72,043,164 times
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Quote:
Originally Posted by SierraCountyMtnBiker View Post
Yes I didn't consider that aspect. So very few people really benefit replacing 401k's with Roths since they'll loose all that compound interest.

Considering the funds are doing alright
this is false . see above and below . in fact if dealing with ira's and not 401k's you can get more money in the ira with the roth . to even up the amounts to match 5k in a roth you need to put in 6665.00 in a traditional and you can't .if over 50 you still come up short at 6500.00 , under 50 and not even close .

the best you can do is 5k in a tradional and invest the difference in a taxable account but you still won't do as well and lose a lot of the income based advantages i listed below in the taxable account .

Last edited by mathjak107; 10-03-2017 at 03:33 AM..
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Old 10-03-2017, 03:19 AM
 
72,010 posts, read 72,043,164 times
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usually simple answers to complex questions are the wrong answers .

forget worrying about whether tax rates will be higher or lower for the most part . there are so many major issues tied to your taxable retirement income whether rates change or not .

having just retired and learning all i could far to late about retirement i realized the thinking above about taking the tax deduction now was a huge mistake because i was missing all the other things i did not know about until to late ..

will your social security get taxed with roths or not is a major issue , don't know ? err on the side of caution and shoot for as much tax free income in retirement as you can because getting tens of thousands of dollars taxed a year at 85% when you didn't have to get any taxed is a huge issue .. .

will you retire at 62 and need medical insurance ? a subsidized aca plan is tied to taxable income . had i had roth income i would be getting a few thousand a year from 62 to 65 in medical insurance subsidy .

if your taxable income goes over certain levels you pay more for medicare - as much as almost 2x .

there are aca tax surcharges if your income is high enough as well and those are in addition to paying more for medicare . .

what will happen when those rmd's kick in at 70-1/2 ? how will your tax rate jump and will any of the above trigger points be hit ?

what will you do with the money you have to take out in rmd's ? if you are going to reinvest it in a taxable account then you get hit there tax wise forever going forward . a roth would have all future gains and distributions tax free with no rmd's . that reinvested rmd mone you had to take by not having roths is now going to be taxed forever going forward from 70-1/2 on .

what about a spouse who loses the other spouse , now they have rmd's filing single !

the biggest question is what does your job potential look like .

if like most careers you start out in very low tax brackets and ramp up over decades higher and higher odds are your average tax rate will be lower than your final years working .

folks ,make this mistake all the time , they judge by looking at only their final years income and go once the pay checks stop we will be in a lower tax bracket .

but that isn't the whole story . it is all about what was your careers lifetime average tax bracket ?

odds are it lower than your final years and you will actually be in higher tax bracket at retirement then your long term average making the roth a clear winner .

just this fact alone can give you 20% more spendable cash in retirement making a roth the clear cut winnr even if tax rates stay the same or even go down .

unless you enter the work force already in the highest brackets like a doctor or lawyer then there is a good chance roths will be a slam dunk in the end .

studies by t.rowe show up to a 20% difference in spendable cash flow with the roth even at the same tax brackets . taxes could actually go up a bit and the roth would still be a head because of all the reasons above

Last edited by mathjak107; 10-03-2017 at 03:45 AM..
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