"Roth or Traditional IRA: Which Should You Choose?"

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Taylor Larimore
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"Roth or Traditional IRA: Which Should You Choose?"

Post by Taylor Larimore »

Bogleheads:

Karen Wallace, CFP, Morningstars Director of Investor Education, has written this excellent article to help us decide which is the best type IRA for our individual situation. This is the link:

"Roth or Traditional IRA: Which Should You Choose?"

Best wishes.
Taylor
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by wbarabas »

Thank you, she keeps it simple! I appreciate that.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by abuss368 »

Love it Taylor! Timing is good too. I actually finished the last conversion of our Traditional IRA to our Roth IRA today. Simplicity and flexibility.

Best.
Tony
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by ipdiddly »

Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by abuss368 »

ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
This helps frame and put a Roth in very good perspective. Never considered it from that viewpoint.

Tony
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by celia »

From the article:
With that in mind, here is the first question to ask yourself: Do you think you'll be in a higher or lower tax bracket in retirement than you are now?
Although that is a good question, it is misleading in some important ways:

I think anyone just starting their career should contribute to Roth since their wages are likely to be the lowest compared to later in their career (after they have more experience). In addition, many of the young people don't expect SS to be around for them, tricking them into thinking they shouldn't count on any outside retirement money coming their way. So even if you are a young doctor or lawyer and you don't expect to receive SS or a pension, if you rely on that question, you will tend to choose tax-deferred, when you should be choosing Roth instead.

My second rebuttal is to ask: Do you want the power of 40 years of compounding to work on a tax-deferred or Roth account?
That might be a more important question.

Another unexpected problem is that there is only so much you can convert each year in retirement. We have many Bogleheads here who retire with over a million in tax-deferred. When they first retire, they see that they are in very low tax brackets and think that is great. Or they need to use the ACA subsidies, so they intentionally keep their income low until 65, not leaving much time for Roth conversions. How much of a million dollars can you convert in 5 years before you are 70 and SS starts (while the account keeps growing), which then takes up room in your tax bracket? And how much can you even convert in a low tax bracket before being pushed up to the next tax bracket, and then the one after that, and the one after that, etc?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by celia »

abuss368 wrote: Fri Feb 05, 2021 2:00 pm Love it Taylor! Timing is good too. I actually finished the last conversion of our Traditional IRA to our Roth IRA today. Simplicity and flexibility.

Best.
Tony
Congratulations, Tony! That is awesome.

But please keep participating in the Roth conversion threads for retirees. Your experience is a model for others!
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by smitcat »

ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
Count us as saying - "thankfully there was a 401K plan that allowed us to greatly lessen taxes for our retirement".
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by ipdiddly »

My advice to anyone in the first 10-15 years of their career: Go Roth and Go Big (i.e., maximum Roth contribution or backdoor Roth if you have to). You will never regret it. Letting those early contributions grow over the next 25 years will provide a wonderful, tax-free nest egg.

For those that think you will be in a lower tax bracket during retirement, that may not be the case. SS plus pension plus divs/cap gains/cap gain distributions will likely push you into higher brackets than you may realize. Then add RMD's on top of that and you'll wish you had devoted some contributions to Roth. In the early years of retirement, start converting some IRA to Roth before those RMD's kick in.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by WhyNotUs »

Fortunately, we do not have to pick only one. In different years it might make more sense to put into one or the other. I am self-employed with a SEP-IRA and Roth, there is a good use for each. The Roth is all TSM. The IRA has TBM and Wellesley.

I expect tax rates to be higher when I retire than now, the bill is coming due and those with assets and/or income will need to pay it.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by abuss368 »

celia wrote: Sat Feb 06, 2021 4:09 pm
abuss368 wrote: Fri Feb 05, 2021 2:00 pm Love it Taylor! Timing is good too. I actually finished the last conversion of our Traditional IRA to our Roth IRA today. Simplicity and flexibility.

Best.
Tony
Congratulations, Tony! That is awesome.

But please keep participating in the Roth conversion threads for retirees. Your experience is a model for others!
Thanks and will do!
Tony
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by WhyNotUs »

Fortunately, we do not have to pick only one. In different years it might make more sense to put into one or the other. I am self-employed with a SEP-IRA and Roth, there is a good use for each. The Roth is all TSM. The IRA has TBM and Wellesley.

I expect tax rates to be higher when I retire than now, the bill is coming due and those with assets and/or income will need to pay it.
I own the next hot stock- VTSAX
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by utvolfan »

And with a married couple, eventually the surviving spouse will be filing as Single instead of MFJ and then will more than likely be in a higher tax bracket.
And that survivor might also pay more for Medicare as IRMMA kicks in at half the amount for a single compared to MFJ.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by willthrill81 »

This can get extremely complicated but those looking for a simple heuristic, I think that the one below is good.

If you're in the 12% bracket or lower, Roth is probably better. Above the 12% bracket, tax-deferred is probably better unless you already have a really big tax-deferred balance (minimum of $1 million and probably above that) and/or will have significant non-portfolio income in retirement.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by abuss368 »

Every investor is different. Facts and circumstances are different. Whether to Roth, Traditional, or some combination of both can be different.

Tony
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by willthrill81 »

Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Most of them. The standard deduction in 2021 for a MFJ couple is $25,100, and that is increased by $1,350 for those over 65. Anything over (obviously less deductions and credits) that will be taxed.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

willthrill81 wrote: Sat Feb 06, 2021 7:54 pm
Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Most of them. The standard deduction in 2021 for a MFJ couple is $25,100, and that is increased by $1,350 for those over 65. Anything over (obviously less deductions and credits) that will be taxed.
https://www.google.com/amp/s/www.forbes ... think/amp/
more than 80 percent of those age 75 or older are non-payers.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

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Johm221122 wrote: Sat Feb 06, 2021 8:03 pm
willthrill81 wrote: Sat Feb 06, 2021 7:54 pm
Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Most of them. The standard deduction in 2021 for a MFJ couple is $25,100, and that is increased by $1,350 for those over 65. Anything over (obviously less deductions and credits) that will be taxed.
https://www.google.com/amp/s/www.forbes ... think/amp/
more than 80 percent of those age 75 or older are non-payers.
Thanks. I didn't realize the incomes of so many of the elderly were that low. From that article:
The very old do not pay income tax simply because many make too little to reach the thresholds for owing tax and because Social Security benefits are excluded from Adjusted Gross Income for singles whose income is below $25,000 ($32,000 for couples). Those 65 or older do not even have to file a federal income tax return if they make less than $13,600. Half of those 65 or older receive Social Security benefits of about $15,000 or less.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Triple digit golfer »

ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
I prefer traditional. If we're in a high tax bracket in retirement, then it means we did well and therefore I won't have any regrets. If we do Roth and are in a low bracket and/or struggling, I would think how nice it would have been to have the extra money that I previously gave away in taxes.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by abuss368 »

Johm221122 wrote: Sat Feb 06, 2021 8:03 pm
willthrill81 wrote: Sat Feb 06, 2021 7:54 pm
Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Most of them. The standard deduction in 2021 for a MFJ couple is $25,100, and that is increased by $1,350 for those over 65. Anything over (obviously less deductions and credits) that will be taxed.
https://www.google.com/amp/s/www.forbes ... think/amp/
more than 80 percent of those age 75 or older are non-payers.
Interesting and thanks for sharing. 47%!

Tony
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by grabiner »

Johm221122 wrote: Sat Feb 06, 2021 8:03 pm
willthrill81 wrote: Sat Feb 06, 2021 7:54 pm
Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Most of them. The standard deduction in 2021 for a MFJ couple is $25,100, and that is increased by $1,350 for those over 65. Anything over (obviously less deductions and credits) that will be taxed.
https://www.google.com/amp/s/www.forbes ... think/amp/
more than 80 percent of those age 75 or older are non-payers.
And this makes sense because low-income retirees get much of their income from SS, and little or none of it is taxable. A retired couple with $24K in SS and $20K in other income has adjusted gross income of only $20K because they are at the phase-in limit (other income plus half of SS is $32K). With $24K in other income, they would have $26K in adjusted gross income because of the phase-in of SS taxation, but would still owe no tax.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by dodecahedron »

willthrill81 wrote: Sat Feb 06, 2021 7:54 pm
Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Most of them. The standard deduction in 2021 for a MFJ couple is $25,100, and that is increased by $1,350 for those over 65. Anything over (obviously less deductions and credits) that will be taxed.
Most seniors collect Social Security. Further, a majority of Social Security recipients rely on Social Security for most of their income. For such folks relatively little (if any) of their Social Security is subject to taxation.

According to a tax journalist in Forbes, who was drawing on IRS statistics, in a recent year there were 45 million seniors, 26 million of whom filed returns. But many seniors file returns despite not having any tax liability. They have money withheld from pensions or Social Security just to "be on the safe side" and avoid the unpleasant experience of owing money at tax filing time or because they just like getting tax refunds.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

Triple digit golfer wrote: Sat Feb 06, 2021 8:11 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
I prefer traditional. If we're in a high tax bracket in retirement, then it means we did well and therefore I won't have any regrets. If we do Roth and are in a low bracket and/or struggling, I would think how nice it would have been to have the extra money that I previously gave away in taxes.
This is basically me. As a median income earner, if in retirement I pay higher taxes, I think I won the game. I'm about 80% traditional and 20% ROTH by choice.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Triple digit golfer »

Johm221122 wrote: Sat Feb 06, 2021 8:19 pm
Triple digit golfer wrote: Sat Feb 06, 2021 8:11 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
I prefer traditional. If we're in a high tax bracket in retirement, then it means we did well and therefore I won't have any regrets. If we do Roth and are in a low bracket and/or struggling, I would think how nice it would have been to have the extra money that I previously gave away in taxes.
This is basically me. As a median income earner, if in retirement I pay higher taxes, I think I won the game. I'm about 80% traditional and 20% ROTH by choice.
Nice to have some company in my thought process.

If I am paying higher taxes in retirement, I've done okay. Even if I come out a little behind where I would have been, I'm okay with that. It's better than the alternative of doing all Roth and ending up with not a lot of money. Not paying taxes at that point really wouldn't be any consolation.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by snodog »

Triple digit golfer wrote: Sat Feb 06, 2021 8:11 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
I prefer traditional. If we're in a high tax bracket in retirement, then it means we did well and therefore I won't have any regrets. If we do Roth and are in a low bracket and/or struggling, I would think how nice it would have been to have the extra money that I previously gave away in taxes.
This is my thinking also. Instead of trying to maximize a best case scenario, I would rather try to minimize a worst case scenario.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by averagedude »

ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
+1. I have always said this on the Roth vs Traditional debate. Their is also the behavior aspect because some people will say that they will only invest x amount, so if you are only going to invest x amount than it is better to put x amount in a Roth. Traditional is only better if you are going to invest the tax savings that you earn from doing so. Most people spend frivolously on the added tax refund that they get from the cost savings from investing in a Traditional IRA. Being an "averagedude", I know many people who earn the same income as me who get thousands of dollars in tax refunds every year, but have zero savings for their retirement.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

averagedude wrote: Sat Feb 06, 2021 10:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
+1. I have always said this on the Roth vs Traditional debate. Their is also the behavior aspect because some people will say that they will only invest x amount, so if you are only going to invest x amount than it is better to put x amount in a Roth. Traditional is only better if you are going to invest the tax savings that you earn from doing so. Most people spend frivolously on the added tax refund that they get from the cost savings from investing in a Traditional IRA. Being an "averagedude", I know many people who earn the same income as me who get thousands of dollars in tax refunds every year, but have zero savings for their retirement.
Isn't your largest retirement assets in 401k? And the amount you put in chosen in advance? And taxes adjusted automatically?
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by averagedude »

Johm221122 wrote: Sat Feb 06, 2021 10:48 pm
averagedude wrote: Sat Feb 06, 2021 10:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
+1. I have always said this on the Roth vs Traditional debate. Their is also the behavior aspect because some people will say that they will only invest x amount, so if you are only going to invest x amount than it is better to put x amount in a Roth. Traditional is only better if you are going to invest the tax savings that you earn from doing so. Most people spend frivolously on the added tax refund that they get from the cost savings from investing in a Traditional IRA. Being an "averagedude", I know many people who earn the same income as me who get thousands of dollars in tax refunds every year, but have zero savings for their retirement.
Isn't your largest retirement assets in 401k? And the amount you put in chosen in advance? And taxes adjusted automatically?
If you decide that you are going to invest 15% into your 401k plan, and that is all you are going to invest and you are going to spend the rest, than you will be better off investing into a Roth 401k than you would a Traditional 401k. Yes you will have less money to spend because your tax refund will be less or you may pay more in taxes when you file. This simply means that you have a higher savings rate. Behavior wise, larger tax refunds for most people means extra spending instead of extra savings. Only if extra tax savings means extra investing savings should you even consider a Traditional IRA. Me personally, I do regard extra tax savings as extra investing savings, which is the reason I invest in both. I believe it is best to have some tax diversification by having a mix of both. I personally have 50% traditional, 25% Roth, and 25% in taxable. If my employer had allowed Roth in my 401k when I started investing, I would probably have 50% in Roth and 25% in traditional, but I would have less money total in my accounts. If equities compound at a 5% real return over the next 40 years, I am going to have a tax problem with RMD's when I turn 72, but this will be a problem that I will love to have.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

averagedude wrote: Sat Feb 06, 2021 11:16 pm
Johm221122 wrote: Sat Feb 06, 2021 10:48 pm
averagedude wrote: Sat Feb 06, 2021 10:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
+1. I have always said this on the Roth vs Traditional debate. Their is also the behavior aspect because some people will say that they will only invest x amount, so if you are only going to invest x amount than it is better to put x amount in a Roth. Traditional is only better if you are going to invest the tax savings that you earn from doing so. Most people spend frivolously on the added tax refund that they get from the cost savings from investing in a Traditional IRA. Being an "averagedude", I know many people who earn the same income as me who get thousands of dollars in tax refunds every year, but have zero savings for their retirement.
Isn't your largest retirement assets in 401k? And the amount you put in chosen in advance? And taxes adjusted automatically?
If you decide that you are going to invest 15% into your 401k plan, and that is all you are going to invest and you are going to spend the rest, than you will be better off investing into a Roth 401k than you would a Traditional 401k. Yes you will have less money to spend because your tax refund will be less or you may pay more in taxes when you file. This simply means that you have a higher savings rate. Behavior wise, larger tax refunds for most people means extra spending instead of extra savings. Only if extra tax savings means extra investing savings should you even consider a Traditional IRA. Me personally, I do regard extra tax savings as extra investing savings, which is the reason I invest in both. I believe it is best to have some tax diversification by having a mix of both. I personally have 50% traditional, 25% Roth, and 25% in taxable. If my employer had allowed Roth in my 401k when I started investing, I would probably have 50% in Roth and 25% in traditional, but I would have less money total in my accounts. If equities compound at a 5% real return over the next 40 years, I am going to have a tax problem with RMD's when I turn 72, but this will be a problem that I will love to have.
If you yes blindly invest 15% a ROTH would probably be better assuming you save long enough to accumulate enough to withdraw above Standard deduction.
But most people like us on Bogleheads realize that saving 15% is different in a ROTH account and traditional.
I still don't understand about tax return, your pay and taxes are automatically adjusted when you invest in traditional 401k.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by 000 »

I can't believe anyone (other than in extraordinary circumstances) would take the "nah, tax rates are pretty unlikely to go up" side of the bet.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by averagedude »

Perhaps we both aren't understanding each other. Lets assume that you make 100k per year, with a 20% effective tax rate, and you decide to elect 10% of your income into your 401k plan. This means we are going to save 10k per year. 10k per year equals the same amount of money at retirement in your 401k rather you have the money in Roth or Traditional. Everyone knows that having the same amount of money will be better in a Roth account than it would a Traditional account. The question that you have to ask yourself is, are you going to invest the $2,000 in tax saving (due to the 20% effective tax rate) that you will experience by investing in the Traditional account. If so, you are actually investing 12k per year, instead of 10k per year, which means you will have more money in your Traditional account than you would your Roth, which could skew the math to where a Traditional 401k may be better choice than a Roth 401k. The 401k plan that you have doesn't redirect the two thousand dollars of tax saving into your account. It probably means you are getting a slightly larger paycheck, but you are the one who has to save this extra money. Yes, you could easily do this by electing 12% of your pay into the Traditional 401k plan, but life doesn't always happen this way for most people. My point is that alot of people don't actually save the $2,000 in tax savings, they just spend it. Dave Ramsey, who I don't always agree with, even says to invest in Roth because of this reasoning.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

averagedude wrote: Sun Feb 07, 2021 12:10 am Perhaps we both aren't understanding each other. Lets assume that you make 100k per year, with a 20% effective tax rate, and you decide to elect 10% of your income into your 401k plan. This means we are going to save 10k per year. 10k per year equals the same amount of money at retirement in your 401k rather you have the money in Roth or Traditional.
yes but your current take home pay would be different
Everyone knows that having the same amount of money will be better in a Roth account than it would a Traditional account.
Yes but again most people would either save more if they used traditional or save less in Roth because of the effect on there current income
The question that you have to ask yourself is, are you going to invest the $2,000 in tax saving (due to the 20% effective tax rate) that you will experience by investing in the Traditional account.
Yes and my employer automatically adjusts my pay
If so, you are actually investing 12k per year, instead of 10k per year, which means you will have more money in your Traditional account than you would your Roth, which could skew the math to where a Traditional 401k may be better choice than a Roth 401k.
It's not skew its the way the system works. I save more because I pay less tax
The 401k plan that you have doesn't redirect the two thousand dollars of tax saving into your account.
No you do when you select the amount you put in 401k
It probably means you are getting a slightly larger paycheck, but you are the one who has to save this extra money. Yes, you could easily do this by electing 12% of your pay into the Traditional 401k plan, but life doesn't always happen this way for most people. My point is that alot of people don't actually save the $2,000 in tax savings, they just spend it. Dave Ramsey, who I don't always agree with, even says to invest in Roth because of this reasoning.

That would be great for Dave's target audience but not as accurate here. Most Bogleheads are super savers who crunch the numbers
Last edited by Johm221122 on Sun Feb 07, 2021 1:34 am, edited 1 time in total.
Johm221122
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

000 wrote: Sat Feb 06, 2021 11:49 pm I can't believe anyone (other than in extraordinary circumstances) would take the "nah, tax rates are pretty unlikely to go up" side of the bet.
I think it's more that most people will never be able to withdraw more than standard deduction if they use a safe withdrawal rate. I plan on pay zero tax on most of my retirement money
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by razorbacker »

Flexibility and choice are a couple words I consider important when thinking about retirement years. If there is a retirement year that I want to purchase a big ticket item with tax free money, where would the funds come from? Roth accounts would seem to be the logical answer. I have heavily funded our Roth accounts so I will have this choice and flexibility in the retirement years.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Triple digit golfer »

000 wrote: Sat Feb 06, 2021 11:49 pm I can't believe anyone (other than in extraordinary circumstances) would take the "nah, tax rates are pretty unlikely to go up" side of the bet.
Tax rates can go up and traditional can still be more advantageous than Roth. These two things are not mutually exclusive.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by tin369 »

Stupid question alert - these things make my head spin, how does one know if they will be in higher or lower tax bracket in retirement.
We are currently doing Backdoor Roth because we can't do regular Roth due to over he MAGI limit.

currently fall under the 22% tax bracket.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Ferdinand2014 »

Since I am in the 37% tax bracket It is my understanding I would not be eligible for a Roth except by backdoor which would be very expensive for me. I have about a 40/60 tax deferred (SEP/403b) to taxable mix which I contribute to a minimum of equally and usually more and max 403b/SEP each year. I am very sure my tax bracket will be much, much lower in retirement (Despite my income, my DW and I live on less than 20% of our current income). My RMD's will be highish, but I will have a huge deduction as alimony will be 96,000 year in retirement (I am grandfathered in to get the deduction as it occurred before the new tax law in 2017) and we donate at least 10% of our income yearly to charities. Based on this logic, I may (unless I am not understanding correctly) be the rare individual who wouldn't benefit as much from any backdoor Roth.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by acegolfer »

tin369 wrote: Sun Feb 07, 2021 7:38 am Stupid question alert - these things make my head spin, how does one know if they will be in higher or lower tax bracket in retirement.
We are currently doing Backdoor Roth because we can't do regular Roth due to over he MAGI limit.

currently fall under the 22% tax bracket.
Nobody knows what the tax rate will be 20 yrs from now. But some ppl know how to manage retirement income and keep it much lower than current income.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Johm221122 »

acegolfer wrote: Sun Feb 07, 2021 8:31 am
tin369 wrote: Sun Feb 07, 2021 7:38 am Stupid question alert - these things make my head spin, how does one know if they will be in higher or lower tax bracket in retirement.
We are currently doing Backdoor Roth because we can't do regular Roth due to over he MAGI limit.

currently fall under the 22% tax bracket.
Nobody knows what the tax rate will be 20 yrs from now. But some ppl know how to manage retirement income and keep it much lower than current income.
+1
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by TomatoTomahto »

000 wrote: Sat Feb 06, 2021 11:49 pm I can't believe anyone (other than in extraordinary circumstances) would take the "nah, tax rates are pretty unlikely to go up" side of the bet.
Haha yeah, not when you put it that way! :D

It probably only affects a few high earners who won’t early retire, have saved a lot and loaded up their tax deferrals, etc., but in practice (as opposed to being asked to bet on whether tax rates will go up), they’ll cover their ears, say they can’t hear you, and keep contributing to traditional.

For what it’s worth, while we do contribute to Roth 401k, after some 5 digit conversions to Roth we just didn’t have the appetite to continue doing so at the highest brackets.

ETA: apologies to Celia, who did try to lead this horse to water, but the pain of those voluntary tax bills was too high. Maybe next year!
I get the FI part but not the RE part of FIRE.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by 02nz »

tin369 wrote: Sun Feb 07, 2021 7:38 am Stupid question alert - these things make my head spin, how does one know if they will be in higher or lower tax bracket in retirement.
We are currently doing Backdoor Roth because we can't do regular Roth due to over he MAGI limit.

currently fall under the 22% tax bracket.
One does not "know," but you can make some informed guesses. The most important inputs: 1) current age and anticipated retirement age; 2) current size of tax-deferred balance; 3) pension or other anticipated income in retirement. With those you can make a reasonable guess (or we can help you make one - start your own thread).

Generally speaking, if you make enough to be using the backdoor Roth, you are probably better off (or at least no worse off) going with traditional. But a lot of individual details could change that answer.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by 02nz »

The article is a good overview of the Roth vs traditional question, but probably more relevant for those consideration Roth vs traditional contributiosn to workplace plans, not IRAs. The issue with the traditional IRA is that those with low enough income to deduct the contribution from their taxes are probably better off contributing to a Roth IRA instead. (There are some exceptions, of course.)
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by ipdiddly »

Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Wrong question! What percentage of retired BHers pay federal income tax and, more importantly, significant federal income tax?
BHers constantly write how they are smarter and better savers and investors and do the math, etc. (See, e.g., at least one of the prior commenters.) So be real - taxes in retirement are very important to BHers. If not, why are there so many posts on how to convert IRA to Roth?
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by ipdiddly »

averagedude wrote: Sat Feb 06, 2021 10:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
+1. I have always said this on the Roth vs Traditional debate. Their is also the behavior aspect because some people will say that they will only invest x amount, so if you are only going to invest x amount than it is better to put x amount in a Roth. Traditional is only better if you are going to invest the tax savings that you earn from doing so. Most people spend frivolously on the added tax refund that they get from the cost savings from investing in a Traditional IRA. Being an "averagedude", I know many people who earn the same income as me who get thousands of dollars in tax refunds every year, but have zero savings for their retirement.
Averagedude: You have raised an excellent point. Too many of the math whizzes run calculations to compare $12K invested in IRA vs $10K ($12K minus 20% tax) invested in Roth. However, the real choice is do I invest $12K in IRA or $12K in Roth (and eat the $2K tax). If you are smart, you realize that a $12K investment in Roth is actually a larger retirement investment. In other words, why take a smaller value contribution in the IRA when the gov't is letting you make a larger effective contribution in Roth.

You are correct in your observation of human nature. Most folks are going to spend that $2000 savings from the IRA contribution. Just like the IRA (or 401K) is a forced savings, the Roth (or Roth 401K) is equally a forced savings. So why not make the greater effective contribution. If you are employed, you can decide to contribute 6% of your wages to either regular or Roth 401K, so why not contribute to the vehicle that will give you the biggest retirement benefit. Those extra taxes you pay will not be noticed, whereas the tax savings if you had gone traditional will be frittered away.

On the other end of the scale, I became interested in doing Roth conversions when it was pointed out that I should pay the tax from my taxable account instead of my IRA account. That meant I could effectively make a new Roth contribution - even though, as a retiree, I am no longer eligible to make any IRA/Roth contributions - in the amount of the taxes paid. In other words, if I convert $100K from IRA to Roth and pay the $20K in taxes from my taxable account, I am effectively making a new Roth contribution of $20K. In other words, I am sheltering an additional $20K, plus its growth, from future taxation.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by smitcat »

ipdiddly wrote: Sun Feb 07, 2021 9:25 am
Johm221122 wrote: Sat Feb 06, 2021 7:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
What percentage of retired people pay any federal income tax?
Wrong question! What percentage of retired BHers pay federal income tax and, more importantly, significant federal income tax?
BHers constantly write how they are smarter and better savers and investors and do the math, etc. (See, e.g., at least one of the prior commenters.) So be real - taxes in retirement are very important to BHers. If not, why are there so many posts on how to convert IRA to Roth?
"What percentage of retired BHers pay federal income tax and, more importantly, significant federal income tax?"
We are Bogles and we pay sigificant taxes in retirement.
It was a very good deal to do 401K's and then convert some funds and leave moderate RMD's.
Thankfully we have had 401K's available for many (not all) of the years.

If things had not turned out well for us in later years the 401K would have been even a better deal - who would have known?
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by smitcat »

ipdiddly wrote: Sun Feb 07, 2021 9:43 am
averagedude wrote: Sat Feb 06, 2021 10:45 pm
ipdiddly wrote: Fri Feb 05, 2021 4:14 pm Didn't read the article, but here's a thought. Irrespective of the mathematics involved (and BHers love math), I don't think you'll find a single retiree who would say: "Gee, I wish I didn't have a Roth account." However, there are many retirees who say: "I wish I started Roth conversions sooner! Those RMD's are killing me."
+1. I have always said this on the Roth vs Traditional debate. Their is also the behavior aspect because some people will say that they will only invest x amount, so if you are only going to invest x amount than it is better to put x amount in a Roth. Traditional is only better if you are going to invest the tax savings that you earn from doing so. Most people spend frivolously on the added tax refund that they get from the cost savings from investing in a Traditional IRA. Being an "averagedude", I know many people who earn the same income as me who get thousands of dollars in tax refunds every year, but have zero savings for their retirement.
Averagedude: You have raised an excellent point. Too many of the math whizzes run calculations to compare $12K invested in IRA vs $10K ($12K minus 20% tax) invested in Roth. However, the real choice is do I invest $12K in IRA or $12K in Roth (and eat the $2K tax). If you are smart, you realize that a $12K investment in Roth is actually a larger retirement investment. In other words, why take a smaller value contribution in the IRA when the gov't is letting you make a larger effective contribution in Roth.

You are correct in your observation of human nature. Most folks are going to spend that $2000 savings from the IRA contribution. Just like the IRA (or 401K) is a forced savings, the Roth (or Roth 401K) is equally a forced savings. So why not make the greater effective contribution. If you are employed, you can decide to contribute 6% of your wages to either regular or Roth 401K, so why not contribute to the vehicle that will give you the biggest retirement benefit. Those extra taxes you pay will not be noticed, whereas the tax savings if you had gone traditional will be frittered away.

On the other end of the scale, I became interested in doing Roth conversions when it was pointed out that I should pay the tax from my taxable account instead of my IRA account. That meant I could effectively make a new Roth contribution - even though, as a retiree, I am no longer eligible to make any IRA/Roth contributions - in the amount of the taxes paid. In other words, if I convert $100K from IRA to Roth and pay the $20K in taxes from my taxable account, I am effectively making a new Roth contribution of $20K. In other words, I am sheltering an additional $20K, plus its growth, from future taxation.

"You are correct in your observation of human nature. Most folks are going to spend that $2000 savings from the IRA contribution"
Actually most folks have little or no savings at retirement and all of this is lost on them.

"If you are employed, you can decide to contribute 6% of your wages to either regular or Roth 401K, so why not contribute to the vehicle that will give you the biggest retirement benefit"
That is a great point and exactly what we did - we contributed to a 401K first and then the Roth to our limits.

"Those extra taxes you pay will not be noticed, whereas the tax savings if you had gone traditional will be frittered away."
The Fed and State taxes we 'deferred' were calculated each year and they added up real fast.
We worked in a higher tax State and retired in a no tax State - even better for 401K's and Roth conversions.
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Designairohio »

abuss368 wrote: Fri Feb 05, 2021 2:00 pm Love it Taylor! Timing is good too. I actually finished the last conversion of our Traditional IRA to our Roth IRA today. Simplicity and flexibility.

Best.
Tony
Tony,
Did you convert everything or only to a certain balance?
Can you share the percentages in each type of account?
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by abuss368 »

Designairohio wrote: Sun Feb 07, 2021 10:09 am
abuss368 wrote: Fri Feb 05, 2021 2:00 pm Love it Taylor! Timing is good too. I actually finished the last conversion of our Traditional IRA to our Roth IRA today. Simplicity and flexibility.

Best.
Tony
Tony,
Did you convert everything or only to a certain balance?
Can you share the percentages in each type of account?
Sure. No problem. My wife had a small Traditional IRA years ago. We converted that. I had a larger Traditional IRA and converted that as well years back. Then a few years ago I left an employer with a Pre-Tax 401k that I moved to a Traditional IRA. I converted the last of that now. Our IRAs are 100% Roth. My employer plan is 100% Roth 401k. The only other account is a Joint Taxable.

Essentially no more Pre-Tax 401k or Traditional IRA. I get the math. I still do not want any Traditional IRAs.

I prepared by parents individual tax return yesterday. The RMDs. Wow! It impacts the entire tax year. They do not need the RMDs either. In addition (and I am not so sure many folks are aware) that the RMDs impact income, which impacts the Medicare premium. I bites there as well!

I feel the Roth IRAs have so much more FLEXIBILITY than Traditional. I would rather take the sting of the tax bill now than after decades of compounding. So far that has worked very well.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
Designairohio
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Re: "Roth or Traditional IRA: Which Should You Choose?"

Post by Designairohio »

Thanks Tony,
I’m in the process of doing the same.
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