Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Correct, still in 25% bracket. But if you need to access to $100k NOW, now you are in a new tax bracket. If one of the couple dies, the Roth is still tax free, but the deferred accounts are now all in a higher tax bracket for single. I know savers that defer everything to keep their EQUIVALENT tax bite as low as possible while working. Your equivalent tax is much higher if you are closer to the top of the 25% bracket than the bottom. So when they retire, if they have large RMDs, pension, and SS they are near the top of the 25% or in the 28. If you KNEW for sure where younwould be tax wise, 20 years from now, it would be easy. But since a Roth is at LEAST a wash (assuming same tax bracket), the diversity is worth it. If you KNOW for a fact you will be in a lower tax bracket in retirement, a Roth has little value, mainly for the surviving spouse. The people I am talking about are all in the same or higher brackets, and have no deductions now that house is paid off, etc. They only though about saving as much as possible, all deferred. And are finding they deferred to pay more tax in retirement than if they had paid it up front.
To be perfectly clear, I am not tallking about huge sums here, on average. Maybe $8-10k at most in tax differences on $150-75k retirement income. Real first world problem to have. Now having to pull $100k or $200k and it IS a big deal.. $278k having to be pulled out to pay taxes in order to get $200k left in the 28% bracket on a deferred account.
Last edited by Perryinva; 06-06-2017 at 04:51 PM..
Now let's assume that by contributing the max into the tradional 401k it puts you in the 25% bracket rather then the 28%. Would you still go Roth?
As far as things look now we will be in the 25% in retirement as well. Does that change anything you would do?
For most people it's not so simple as just a single number like 25%. There are a lot of considerations. You need to know what all of your sources of income will be, when you plan to retire, when you plan to take SS, when you plan to take pension(s) if applicable. Obviously all of this isn't possible when you are young, so you just give it your best guess.
Just as an example. Let's say you plan to retire at age 62 and will start SS at 67. You are funding your retirement with only SS and your 401k/IRA accounts. If you are filing a joint return with your spouse, during each of those first five years you could pull nearly $100k/year and be paying federal tax at rates of 0%, 10%, and 15%. That's a pretty nice win if you were taking the deduction at 25% or higher when the money was going in, so certainly you would want a good amount in a Traditional 401k account. Some $$ in Roth might make sense too, however.
As another example let's take someone who is going to work until age 65, and then immediately start collecting a pension and SS benefits. They would probably be best off in Roth accounts because their other sources of income will be "using up" the lower tax brackets from day one of retirement. RMDs may eventually become an unwanted tax headache, and Roth IRA does not (currently, anyway) have mandatory withdrawals.
Exactly and great examples. Its sad, but "it depends" is the real answer. If you are close to the 28% bracket now, and expect to be in the mid to lower 25% in retirement, loke the first example above, then you want to open a Roth and put in a token amount, maybe $3k, somit can have enought to be invested in an index fund. That starts the clock on the 5 year wait. THEN, if the first few years of retirement. when you have access to tax deferred withdrawals at lower than your post SS rate, you can roll those funds in to the Roth and take full advantage of the low rate. Then that money grows tax free until you need it and you would have reduced tour RMDs as well.
there is more to what perry is saying and something i reinforce all the time .
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 on 85% of it when you didn't have to get any taxed is a huge issue .. .
will you retire at 62 and need medical insurance ? as of now 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 3x more.
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 money you had to take by not having roths is now going to be taxed forever going forward from 70-1/2 on .
having low taxable income sources in retirement can let you possibly use the zero capital gains brackets if delaying ss as well as draw ira money you deducted at zero tax using standard deductions and expemptions .
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 .
But really without any hard numbers how can one tell if they will come across issues down the road?!?!
Do you have the numbers for these points that you posted?....
will you retire at 62 and need medical insurance ? as of now 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 3x more.
there are aca tax surcharges if your income is high enough as well and those are in addition to paying more for medicare . .
Boy-oh-Boy do I wish this kind of information was available to me when I still had time to do something with it. Hard to watch people ignore perfectly good info.
Don't beat yourself up too much over it, as a lot of it is 20-20 hindsight. That was why I simplified my answers. The unfortunate reality is that 15 years ago, when Roths came out, no one COULD have known ACA was a factor, or that the SS rules did or didn't change etc, etc. Even basing a go/no go decision of whether a Roth makes sense on just tax rates so far in advance is just guessing. But if you have a diversified set of savings vehicles, at least you have a CHANCE of being able to use of not use as your retirement picture gels.
I've mentioned before, I have a LOT of friends, many 2 earners, both with company pensions that are scratching their heads wondering how they will be paying higher taxes in retirement, than they did much of their working careers and would have been better off saving in after tax vehicles. They didn't even consider a Roth because they thought they were paying too many taxesat the time, and it looked smarter to avoid them now.
Not to be redundant, but while it IS a nice problem to have, it's still a mistake of planning. My point is if they had looked at it even 5-10 years ago, they could be saving $50-60k, maybe more, in unnecessary taxes, over the life of their rather envious retirement.
Boy-oh-Boy do I wish this kind of information was available to me when I still had time to do something with it. Hard to watch people ignore perfectly good info.
this is why most of us are so foolish . we think because we buy voo and agg we know everything we need to know and we never seek help from a pro .
we only know what we know and we know nothing about the fact we really know little .
if you think the price of good advice is expensive , just wait and see what free costs
Last edited by mathjak107; 06-10-2017 at 03:25 AM..
I
In 2016, I was employed from March 28th and for the rest of the year, and I'm still employed since then as of today. Prior to March 28, 2016, I was unemployed since September 17th, 2015. I don't know if this matters though. When employed, I was always a W-2 employee.
It does. Unemployment reduces SS earnings projections, just as it does SS future checks.
SS basis is your top 35 years, whether you worked one day or full year, divided by 35. Future earnings are based on latest data. Your employer reports every quarter your earnings for unemployment purposes, and files an employer SS tax form with full detail by each employee.
So when you worked 1/1/15-9/17/15 making lets say $68k annually, by September your gross would be about $46k. If you paid $3k in Health Care premiums, and had 10% ($4,600) taken out for 401k deductions, your SS earnings basis would get reduced by them as neither you nor employer paid such tax. So your SS basis that year was $ 38,400. Exactly the same as a guy who made $38,400, worked 12 months, paid no Health Insurance premiums via payroll, and had no 401K deduction.
Partial work years severely reduce your SS check later on. To have a good SS check, given almost 2 years of collecting spread over what 4 years, you will likely have to work 40 plus years, so the bottom 5 drop off from what they use (top 35).
Last edited by BobNJ1960; 06-10-2017 at 08:02 AM..
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
