Are Roth Accounts Overrated?

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Dinosaur Dad
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Re: Are Roth Accounts Overrated?

Post by Dinosaur Dad »

celia wrote: Wed Apr 21, 2021 9:44 pm
bsteiner wrote: Wed Apr 21, 2021 7:00 pm No. While each case is different, the Roth is underrated. I think there are many more cases where people should have done them but didn't than there are cases where people did them but shouldn't have.
+100

If people took appropriate advantage of Roths, we wouldn’t have to keep calling them to their attention.

Tax law (and tax brackets) change about every 10 years. It is best to pay the taxes in the years when your tax bracket is lower, either due to tax law and/or your own circumstances.

When you are starting your first job, you probably aren’t thinking about retirement, but that is the perfect time to contribute to Roth, because you tend to be in a low tax bracket and have lots of time for the account to compound. As your work experience increases, you usually get raises and eventually get pushed into higher tax brackets. Along the way, you probably signed up for an employer-sponsored retirement plan since the employer encourages it by also contributing along with you (Free money!!!). The employer plans (401K, 457, SEP IRA) are usually tax-deferred (taxes will be due when you withdraw or convert to Roth).

As you go along and have reduced income for a year or two (laid off, illness, family leave, etc), you could use those low-income years to do Roth conversions. When you can, you go back to work and save enough until you can afford to retire.

One day you are ready to retire. If you retired early all your expenses need to be paid from your savings and you will have to fund more years than someone who retired in their 60s. Say you’re only 50. Then you should have started a Roth conversion ladder by converting a year’s living expenses into a Roth where it can grow for 5 years before you spend it. You keep doing this for several years, knowing you can always withdraw the contributions and Roth conversions at any time, but the growth will be taxed, unless the Roth was opened 5 years previously and you are over 59.5. (You need to keep a chart of how much was contributed, converted, and withdrawn each year from the Roth so you can show the IRS, if audited.)

While in early retirement or regular retirement (in your 60s), you should be looking at all your income steams (SS, pensions, annuities, dividends, RMDs) that will become available and their start years. I’ve found that those who are Single with $500K in tax-deferred or married with $1 million in tax-deferred, are at about the point when future RMDs will start to impact their future tax brackets. Those in stronger financial positions often decide it is to their advantage to do large Roth conversions to keep their future tax brackets from jumping up too much. When they project the value of their tax-deferred accounts to age 72 (when RMDs start) and apply a withdrawal rate that starts at about 4%, they often see that their tax bracket at age 72 is higher than when working and higher than their early retirement tax bracket. For these people, it is better to ‘level out’ their Taxable Income (and thus their tax brackets) from then through the rest of their life, rather than have a few years of low Taxable income (and taxes) followed by the their remaining years (72 and older) having high Taxable income (and tax brackets). So, to ‘level out’ their Taxable Income, they start doing Roth conversions and pay the taxes on each dollar converted, where it can then continue growing tax-free. So the Roths are then seen as tax-planning tools.

For a married couple, they should be aware that after one of them dies, the survivor will then have to file as Single but still need to remove about the same RMD as when married (assuming they are close in age). But the space in the tax brackets for Singles is half as much as for MFJ. This can easily cause the survivor to be pushed into a higher tax bracket. But if they already paid the Roth conversion taxes when they were married, that Roth money won’t be subject to the higher taxes.

Putting money in Roths is also good for your heirs. If you die in your 70s or 80s, your kids will likely still be working and in their high-income years. As they withdraw from your remaining tax-deferred accounts, the money will be added to their own Taxable incomes which could push them into higher tax brackets. But withdrawing from your Roth accounts won’t do that.

If you have an unusual financial year in retirement one year and want to ‘control’ what tax bracket you are in, you can always withdraw Roth money and spend it on the extra expense without it increasing your tax bracket (say, for a new car or roof).


And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

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.
+1, very thoughtful (and thorough) post
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teen persuasion
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Re: Are Roth Accounts Overrated?

Post by teen persuasion »

Roth accounts are much more advantageous to us than taxable accounts.

Investment income is taxed as ordinary income at the state level.

Investment income over ~$3600 would make us ineligible for federal EITC (max ~$6600) and thus state EITC, too (30% of federal).

Even in the zero LTCG bracket, LTCG push up your AGI. In future years, this would make more of our SS taxable (using up more of the standard deduction and zero LTCG space). It could also drive up our FAFSA SAI (calculations start with AGI, and certain special conditions use AGI as a cliff test).

Again on the FAFSA, retirement account assets are not included in SAI calculations, but taxable assets are included at 12%, driving up SAI numbers and reducing aid.
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Re: Are Roth Accounts Overrated?

Post by momvesting »

OP, there is a portion of your argument that holds water if your tax bracket will be the same or lower in retirement. I like to hold different accounts for different purposes. In retirement, I want to draw down 401ks and traditional IRAs slowly, take only what I need to live on a regular basis, until RMDs hit. I will easily be able to manipulate income to stay under various limitations, such as the now defunct ACA cliff. I can utilize Roth for anything that would be an unusual, "lumpy" type of expense. For example, I can bump along living on $50k or $60k/year easily, but if one particular year I have a large purchase, like a car, I can carefully stay in my tax bracket or under any sort of cliff I need to by withdrawing Roth funds to make up the difference. It just sort of offers some "wiggle room" when you need to keep your income under a certain amount for any reason.
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

ThankYouJack wrote: Wed Apr 21, 2021 9:59 pm
willthrill81 wrote: Wed Apr 21, 2021 8:58 pm
CoastLawyer2030 wrote: Wed Apr 21, 2021 5:24 pm If that is the case perhaps the tax drag you speak of is very minor?
The tax drag on stock index funds can be quite low. You can observe this for Vanguard's funds by clicking on the 'performance' tab when observing a given fund on their website. For VTI, their TSM ETF, the tax drag at the highest tax rates over the last 10 years would have reduced returns from 13.79% annualized to 13.30%. A large number of funds still have expense ratios larger than that.
That seems significant to me, especially if it's over a long period of time. Also Vanguard doesn't factor in state and local taxes.
It's certainly not nothing, and you're right that SALT isn't included in that figure, though most of us mortals in the lower brackets wouldn't encounter as much drag as Vanguard estimates. I suspect that many think that the tax drag would be significantly higher than what it's actually been. But many, myself included, are very likely to see a much bigger advantage from using tax-deferred accounts over taxable than the advantage of Roth over taxable.
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

momvesting wrote: Wed Apr 21, 2021 10:38 pm OP, there is a portion of your argument that holds water if your tax bracket will be the same or lower in retirement.
Correct. And from what I've seen, those currently in the 12% bracket who are also likely to remain there in retirement aren't likely to see much benefit from using Roth over taxable, at least under current tax law.
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Re: Are Roth Accounts Overrated?

Post by FiveK »

willthrill81 wrote: Wed Apr 21, 2021 11:50 pm ...those currently in the 12% bracket who are also likely to remain there in retirement aren't likely to see much benefit from using Roth over taxable....
Except for that pesky Taxation of Social Security benefits, which can cause federal tax effects for qualified dividends and LTCG, even when one is in the "0%" QD&LTCG bracket.
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Re: Are Roth Accounts Overrated?

Post by Admiral »

celia wrote: Wed Apr 21, 2021 9:44 pm
bsteiner wrote: Wed Apr 21, 2021 7:00 pm No. While each case is different, the Roth is underrated. I think there are many more cases where people should have done them but didn't than there are cases where people did them but shouldn't have.
+100

If people took appropriate advantage of Roths, we wouldn’t have to keep calling attention to them.

Tax law (and tax brackets) change about every 10 years. It is best to pay the taxes in the years when your tax bracket is lower, either due to tax law and/or your own circumstances. (Note that we are currently in historically low tax brackets.)


Roth accounts can help us in just about every stage of life:

When you are starting your first job, you probably aren’t thinking about retirement, but that is the perfect time to contribute to Roth, because you tend to be in a low tax bracket and have lots of time for the account to compound. As your work experience increases, you usually get raises and eventually get pushed into higher tax brackets. Along the way, you probably signed up for an employer-sponsored retirement plan since the employer encourages it by also contributing along with you (Free money!!!). The employer plans (401K, 457, SEP IRA) are usually tax-deferred (taxes will be due when you withdraw or convert to Roth).

As you go along and have reduced income for a year or two (laid off, illness, family leave, etc), you could use those low-income years to do Roth conversions. When you can, you go back to work and save enough until you can afford to retire.

One day you are ready to retire. If you retired early all your expenses need to be paid from your savings and you will have to fund more years than someone who retired in their 60s. Say you’re only 50. Then you can start a Roth conversion ladder by converting a year’s living expenses into a Roth where it can grow for 5 years before you can withdraw it. You keep doing this for several years, knowing you can always withdraw the contributions at any time and you can withdraw the Roth conversions after 5 years. However, the growth will be taxed, unless the Roth was opened 5 years previously and you are over 59.5. So you wait until you are over 59.5 to withdraw the earlier growth. (You need to keep a chart of how much was contributed, converted, and withdrawn each year from the Roth so you can show the IRS, if audited.)

While in early retirement or regular retirement (in your 60s), you should be looking at all your income steams (SS, pensions, annuities, dividends, RMDs) that will become available and their start years. I’ve found that those who are Single with $500K in tax-deferred or married with $1 million in tax-deferred, are at about the point when future RMDs will start to impact their future tax brackets. Those in stronger financial positions often decide it is to their advantage to do large Roth conversions to keep their future tax brackets from jumping up too much. When they project the value of their tax-deferred accounts to age 72 (when RMDs start) and apply a withdrawal rate that starts at about 4%, they often see that their tax bracket at age 72 is higher than when working and higher than their early retirement tax bracket. For these people, it is better to ‘level out’ their Taxable Income (and thus their tax brackets) from then through the rest of their life, rather than have a few years of low Taxable income (and taxes) followed by the their remaining years (72 and older) having high Taxable income (and tax brackets). So, to ‘level out’ their Taxable Income, they start doing Roth conversions and pay the taxes on each dollar converted, where it can then continue growing tax-free. So the Roths are then seen as tax-planning tools.

For a married couple, they should be aware that after one of them dies, the survivor will then have to file as Single but still need to remove about the same RMD as when married (assuming they are close in age). But the space in the tax brackets for Singles is half as much as for MFJ. This can easily cause the survivor to be pushed into a higher tax bracket. But if they already paid the Roth conversion taxes when they were married, that Roth money won’t be subject to the higher taxes.

Putting money in Roths is also good for your heirs. If you die in your 70s or 80s, your kids will likely still be working and in their high-income years. As they withdraw from your remaining tax-deferred accounts, the money will be added to their own Taxable incomes which could push them into higher tax brackets. But withdrawing from your Roth accounts won’t do that.

If you have an unusual financial year in retirement one year and want to ‘control’ what tax bracket you are in, you can always withdraw Roth money and spend it on the extra expense without it increasing your tax bracket (say, for a new car or roof).


And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

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.
This is a good post and I agree with it. But I will point out one thing:

Most single people never accumulate anywhere near $500k, and most couples never accumulate $1m. Yes, I realize which message board this is. That said, RMDs are not a concern for most people, and certainly not to the level where they may raise one's marginal tax rate to a point where it becomes higher than it was while working.

In the US, even among the top 1% of earners, the median balance across ALL accounts (not just retirement accounts) is $1.13 million.
(https://www.cnbc.com/2018/10/08/how-muc ... ounts.html)

This is not to negate celia's valid points, only to point out that for most savers, the benefits of saving in traditional outweigh the future tax liability.
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

celia wrote: Wed Apr 21, 2021 9:44 pm
bsteiner wrote: Wed Apr 21, 2021 7:00 pm No. While each case is different, the Roth is underrated. I think there are many more cases where people should have done them but didn't than there are cases where people did them but shouldn't have.
+100

If people took appropriate advantage of Roths, we wouldn’t have to keep calling attention to them.

Tax law (and tax brackets) change about every 10 years. It is best to pay the taxes in the years when your tax bracket is lower, either due to tax law and/or your own circumstances. (Note that we are currently in historically low tax brackets.)


Roth accounts can help us in just about every stage of life:

When you are starting your first job, you probably aren’t thinking about retirement, but that is the perfect time to contribute to Roth, because you tend to be in a low tax bracket and have lots of time for the account to compound. As your work experience increases, you usually get raises and eventually get pushed into higher tax brackets. Along the way, you probably signed up for an employer-sponsored retirement plan since the employer encourages it by also contributing along with you (Free money!!!). The employer plans (401K, 457, SEP IRA) are usually tax-deferred (taxes will be due when you withdraw or convert to Roth).

As you go along and have reduced income for a year or two (laid off, illness, family leave, etc), you could use those low-income years to do Roth conversions. When you can, you go back to work and save enough until you can afford to retire.

One day you are ready to retire. If you retired early all your expenses need to be paid from your savings and you will have to fund more years than someone who retired in their 60s. Say you’re only 50. Then you can start a Roth conversion ladder by converting a year’s living expenses into a Roth where it can grow for 5 years before you can withdraw it. You keep doing this for several years, knowing you can always withdraw the contributions at any time and you can withdraw the Roth conversions after 5 years. However, the growth will be taxed, unless the Roth was opened 5 years previously and you are over 59.5. So you wait until you are over 59.5 to withdraw the earlier growth. (You need to keep a chart of how much was contributed, converted, and withdrawn each year from the Roth so you can show the IRS, if audited.)

While in early retirement or regular retirement (in your 60s), you should be looking at all your income steams (SS, pensions, annuities, dividends, RMDs) that will become available and their start years. I’ve found that those who are Single with $500K in tax-deferred or married with $1 million in tax-deferred, are at about the point when future RMDs will start to impact their future tax brackets. Those in stronger financial positions often decide it is to their advantage to do large Roth conversions to keep their future tax brackets from jumping up too much. When they project the value of their tax-deferred accounts to age 72 (when RMDs start) and apply a withdrawal rate that starts at about 4%, they often see that their tax bracket at age 72 is higher than when working and higher than their early retirement tax bracket. For these people, it is better to ‘level out’ their Taxable Income (and thus their tax brackets) from then through the rest of their life, rather than have a few years of low Taxable income (and taxes) followed by the their remaining years (72 and older) having high Taxable income (and tax brackets). So, to ‘level out’ their Taxable Income, they start doing Roth conversions and pay the taxes on each dollar converted, where it can then continue growing tax-free. So the Roths are then seen as tax-planning tools.

For a married couple, they should be aware that after one of them dies, the survivor will then have to file as Single but still need to remove about the same RMD as when married (assuming they are close in age). But the space in the tax brackets for Singles is half as much as for MFJ. This can easily cause the survivor to be pushed into a higher tax bracket. But if they already paid the Roth conversion taxes when they were married, that Roth money won’t be subject to the higher taxes.

Putting money in Roths is also good for your heirs. If you die in your 70s or 80s, your kids will likely still be working and in their high-income years. As they withdraw from your remaining tax-deferred accounts, the money will be added to their own Taxable incomes which could push them into higher tax brackets. But withdrawing from your Roth accounts won’t do that.

If you have an unusual financial year in retirement one year and want to ‘control’ what tax bracket you are in, you can always withdraw Roth money and spend it on the extra expense without it increasing your tax bracket (say, for a new car or roof).


And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

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.
This is a great counterargument and I appreciate you taking the time to write it. I actually agree with more than what I disagree with, so I will raise my three objections.

First, I plan to early retire. My accountant has advised that when you pull from a Roth, they do it on a cost basis just like they would from a brokerage. So even if you have contributed, say, $12,000, now the account is worth $16,000; and you want to withdraw $8,000, they will consider 75% of the distribution as part of your contribution (so no penalty) and 25% of the distribution as being from gains. Is this true?

Second, I just do not find that Roth conversions are worth it. I have done the math probably dozens of times and as long as you are not extremely high net worth, the juice isn't worth the squeeze.

Third, and I'm still thinking about this (which is why I posted this thread), but your point about funds being available and their start dates -- that's why I might value a brokerage over a Roth, even with the tax drag. I can access *all* of the money with extremely minimal tax consequences. To me it's a matter of comparing that increased flexibility with the tax benefits of the Roth.

All in all I appreciate your points.
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Re: Are Roth Accounts Overrated?

Post by FiveK »

CoastLawyer2030 wrote: Thu Apr 22, 2021 7:32 am My accountant has advised that when you pull from a Roth, they do it on a cost basis just like they would from a brokerage. So even if you have contributed, say, $12,000, now the account is worth $16,000; and you want to withdraw $8,000, they will consider 75% of the distribution as part of your contribution (so no penalty) and 25% of the distribution as being from gains. Is this true?
No, not from a Roth IRA. See Treatment of distributions summarized in table form. Gains on contributions don't come out until everything else has been taken.

That's why, if you have to withdraw Roth gains before age 59.5, you are probably in a bad situation. Conversely, if you have planned things well, there should be no need for withdrawing Roth gains that early.
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

FiveK wrote: Thu Apr 22, 2021 12:12 am
willthrill81 wrote: Wed Apr 21, 2021 11:50 pm ...those currently in the 12% bracket who are also likely to remain there in retirement aren't likely to see much benefit from using Roth over taxable....
Except for that pesky Taxation of Social Security benefits, which can cause federal tax effects for qualified dividends and LTCG, even when one is in the "0%" QD&LTCG bracket.
Yes, that particular taxation is pesky indeed, partly because it can result in high marginal tax rates at comparatively low income levels.
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

willthrill81 wrote: Thu Apr 22, 2021 9:08 am
FiveK wrote: Thu Apr 22, 2021 12:12 am
willthrill81 wrote: Wed Apr 21, 2021 11:50 pm ...those currently in the 12% bracket who are also likely to remain there in retirement aren't likely to see much benefit from using Roth over taxable....
Except for that pesky Taxation of Social Security benefits, which can cause federal tax effects for qualified dividends and LTCG, even when one is in the "0%" QD&LTCG bracket.
Yes, that particular taxation is pesky indeed, partly because it can result in high marginal tax rates at comparatively low income levels.
Don't want to get political, but these threads just always remind me of how much I loathe our tax policies. Taxes come from literally every direction in your life and no matter what you almost always somehow get screwed in the end.

The reason for a lot of my contrarian takes (e.g., Roth conversion ladders aren't worth it, Roths are overrated, etc.) is because I oscillate between trying to beat the system and just giving up.
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:19 am
willthrill81 wrote: Thu Apr 22, 2021 9:08 am
FiveK wrote: Thu Apr 22, 2021 12:12 am
willthrill81 wrote: Wed Apr 21, 2021 11:50 pm ...those currently in the 12% bracket who are also likely to remain there in retirement aren't likely to see much benefit from using Roth over taxable....
Except for that pesky Taxation of Social Security benefits, which can cause federal tax effects for qualified dividends and LTCG, even when one is in the "0%" QD&LTCG bracket.
Yes, that particular taxation is pesky indeed, partly because it can result in high marginal tax rates at comparatively low income levels.
Don't want to get political, but these threads just always remind me of how much I loathe our tax policies. Taxes come from literally every direction in your life and no matter what you almost always somehow get screwed in the end.

The reason for a lot of my contrarian takes (e.g., Roth conversion ladders aren't worth it, Roths are overrated, etc.) is because I oscillate between trying to beat the system and just giving up.
Trying to keep this thread from turning into a rant, which will result in a lock, I try to occasionally remind folks that tax laws changing in the future does not necessarily mean that Roth accounts will be superior vehicles over tax-deferred accounts. Roth withdrawals could be taxed in some way in the future. While speculation about changes in the law is not allowed on the forum, we can remind folks that laws are fluid and definitely not static, especially over the decades that comprise the remaining horizons of many here.
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:19 am
willthrill81 wrote: Thu Apr 22, 2021 9:08 am
FiveK wrote: Thu Apr 22, 2021 12:12 am
willthrill81 wrote: Wed Apr 21, 2021 11:50 pm ...those currently in the 12% bracket who are also likely to remain there in retirement aren't likely to see much benefit from using Roth over taxable....
Except for that pesky Taxation of Social Security benefits, which can cause federal tax effects for qualified dividends and LTCG, even when one is in the "0%" QD&LTCG bracket.
Yes, that particular taxation is pesky indeed, partly because it can result in high marginal tax rates at comparatively low income levels.
Don't want to get political, but these threads just always remind me of how much I loathe our tax policies. Taxes come from literally every direction in your life and no matter what you almost always somehow get screwed in the end.

The reason for a lot of my contrarian takes (e.g., Roth conversion ladders aren't worth it, Roths are overrated, etc.) is because I oscillate between trying to beat the system and just giving up.
I’ve been down that thought process. The conclusion I came to was that my access to tax advantaged contributions is so low relative to my savings rate, I might as well just contribute the maximum without trying to eke out additional tax deferred dollars or do conversions.
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Re: Are Roth Accounts Overrated?

Post by AnEngineer »

CoastLawyer2030 wrote: Thu Apr 22, 2021 7:32 am Second, I just do not find that Roth conversions are worth it. I have done the math probably dozens of times and as long as you are not extremely high net worth, the juice isn't worth the squeeze.
What's the context?

If you're looking at early retirement, then you can end up converting using standard deduction and never pay any income tax on that money. This situation is a clear win.
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

AnEngineer wrote: Thu Apr 22, 2021 9:40 am
CoastLawyer2030 wrote: Thu Apr 22, 2021 7:32 am Second, I just do not find that Roth conversions are worth it. I have done the math probably dozens of times and as long as you are not extremely high net worth, the juice isn't worth the squeeze.
What's the context?

If you're looking at early retirement, then you can end up converting using standard deduction and never pay any income tax on that money. This situation is a clear win.
Looking at the Roth conversions in isolation makes them appear like a clear win, but in my opinion you have to look at them globally.

Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work. Doing these conversions might have little income tax consequences but it also boots you out of several credits and subsidies. I think the only time it comes out as a clear, no-brainer win is if you can spread them out over 15-20 years.

This is kind of what I was getting at with my last post -- taxes generally come from you at every angle, and there are landmines everywhere. Pulling one lever results in a hole opening in the floor somewhere else.
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Re: Are Roth Accounts Overrated?

Post by willthrill81 »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work.
There are other paths to Roth conversions. You can use withdrawals from tax-deferred accounts to fund your spending needs (or early withdrawals via the SEPP exception before 59.5) while also doing Roth conversions to the top of your existing bracket. That's precisely what we're planning on doing during the interval between my planned retirement at age 52 and starting SS benefits at age 70. We have no taxable account and don't expect to ever need one at all.
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Re: Are Roth Accounts Overrated?

Post by KlangFool »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am
I live in a LCOL area, so this is certainly location specific. I can live extremely well with an AGI of $80,000, and I get that can't be said for everywhere in the country.
CoastLawyer2030,

How do you plan to get your health insurance? At that AGI, you would not be getting the about 10K per year of ACA insurance premium subsidy. Is your 80K per year include health insurance?

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Re: Are Roth Accounts Overrated?

Post by AnEngineer »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work.
willthrill81 wrote: Thu Apr 22, 2021 9:52 am There are other paths to Roth conversions. You can use withdrawals from tax-deferred accounts to fund your spending needs (or early withdrawals via the SEPP exception before 59.5) while also doing Roth conversions to the top of your existing bracket. That's precisely what we're planning on doing during the interval between my planned retirement at age 52 and starting SS benefits at age 70. We have no taxable account and don't expect to ever need one at all.
You could also withdraw Roth contributions (or HSA against previously accumulated expenses).

But even if you rely on five years of non-tax sheltered expenses, I don't see how that makes Roth conversions a bad move, unless you think that means you deliberately left tax-advantaged accounts under utilized (didn't hit the limit when you could) in order to accumulate a taxable account.
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Re: Are Roth Accounts Overrated?

Post by RickBoglehead »

Right now, we have 87% of our retirement accounts in Roth. Between retirement and 70, we will likely convert the rest. Our expectation is that we won't need any of those funds in retirement, funding it totally from our taxable accounts. Therefore, our heirs will inherit 100% tax free money that we expect to grow substantially (equity and long term bond index funds) by the time we pass away. For us, Roth has proven to be a great alternative. We also maximized any 401k / 403b options.

Since I see ACA mentioned, my wife elected to stick out 10 years in a public school job to qualify for a lousy pension, and the ability to purchase medical benefits from the state for life. Policy is a standard PPO, not high deductible, and monthly cost pre- and post-Medicare is below ACA cost while providing better benefits. That poor paying job went 100% into her 403b, some taxable, some Roth. We switched to taxable a few years back, because we can do Roth conversions at any time if we have tax bracket space.
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Re: Are Roth Accounts Overrated?

Post by KlangFool »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work.
CoastLawyer2030,

What is your annual savings? Usually, for someone aiming to retire early, they save a lot more than their tax-advantaged account spaces. Hence, they would have fair amount of investment in the taxable account. There is no other alternative.

With a single income household, annual saving of 50K to 60K per year, 45% of my portfolio is in the taxable account.

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Last edited by KlangFool on Thu Apr 22, 2021 10:34 am, edited 1 time in total.
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Re: Are Roth Accounts Overrated?

Post by KlangFool »

momvesting wrote: Wed Apr 21, 2021 10:38 pm OP, there is a portion of your argument that holds water if your tax bracket will be the same or lower in retirement. I like to hold different accounts for different purposes. In retirement, I want to draw down 401ks and traditional IRAs slowly, take only what I need to live on a regular basis, until RMDs hit. I will easily be able to manipulate income to stay under various limitations, such as the now defunct ACA cliff. I can utilize Roth for anything that would be an unusual, "lumpy" type of expense. For example, I can bump along living on $50k or $60k/year easily, but if one particular year I have a large purchase, like a car, I can carefully stay in my tax bracket or under any sort of cliff I need to by withdrawing Roth funds to make up the difference. It just sort of offers some "wiggle room" when you need to keep your income under a certain amount for any reason.
momvesting,

<< the now defunct ACA cliff.>>

I believe it is only for 2021 and 2022.

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teen persuasion
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Re: Are Roth Accounts Overrated?

Post by teen persuasion »

AnEngineer wrote: Thu Apr 22, 2021 9:58 am
CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work.
willthrill81 wrote: Thu Apr 22, 2021 9:52 am There are other paths to Roth conversions. You can use withdrawals from tax-deferred accounts to fund your spending needs (or early withdrawals via the SEPP exception before 59.5) while also doing Roth conversions to the top of your existing bracket. That's precisely what we're planning on doing during the interval between my planned retirement at age 52 and starting SS benefits at age 70. We have no taxable account and don't expect to ever need one at all.
You could also withdraw Roth contributions (or HSA against previously accumulated expenses).

But even if you rely on five years of non-tax sheltered expenses, I don't see how that makes Roth conversions a bad move, unless you think that means you deliberately left tax-advantaged accounts under utilized (didn't hit the limit when you could) in order to accumulate a taxable account.
+1

We also have no taxable account, partly because of EITC (don't want investment income to make us ineligible), partly because we can't quite fill all the tax advantaged accounts available to us so no need to resort to taxable.

We intend to cover the first 5 years of expenses from Roth IRA contributions and/or HSA withdrawals for previous expenses we paid OOP. At least, that was the original plan (zero earned income, Roth convert in zero bracket, Roth withdrawals for expenses) - the latest version has me continuing part-time earning to take advantage of EITC while we still have a dependent, and to take advantage of opportunity to fill a SIMPLE IRA in my name for a few more years. This will better shift the tIRA balance between DH's and my side, for better future state taxation.

I think the key with conflicting tax issues/goals is research - learn what the pros and cons are, how they interact, when they are applicable (and not). Then you can try to model things out, and steer around the potholes. Look at how different stages of your life will interact: young children, college expenses and positioning for financial aid, empty nest, early vs late retirement, Roth conversions, SS, RMDs, pensions, etc. Look at how different types of income are treated on federal and state taxes. Will you relocate at some point (new state tax paradigm)?

Yes, things will change before you get there, but you still have a better chance of steering a safer course if you do a bit of searching/learning beforehand, so you can reroute your course more easily.
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Re: Are Roth Accounts Overrated?

Post by FlamePoint »

celia wrote: Wed Apr 21, 2021 9:44 pm
bsteiner wrote: Wed Apr 21, 2021 7:00 pm No. While each case is different, the Roth is underrated. I think there are many more cases where people should have done them but didn't than there are cases where people did them but shouldn't have.
+100

If people took appropriate advantage of Roths, we wouldn’t have to keep calling attention to them.

Tax law (and tax brackets) change about every 10 years. It is best to pay the taxes in the years when your tax bracket is lower, either due to tax law and/or your own circumstances. (Note that we are currently in historically low tax brackets.)


Roth accounts can help us in just about every stage of life:


When you are starting your first job, you probably aren’t thinking about retirement, but that is the perfect time to contribute to Roth, because you tend to be in a low tax bracket and have lots of time for the account to compound. As your work experience increases, you usually get raises and eventually get pushed into higher tax brackets. Along the way, you probably signed up for an employer-sponsored retirement plan since the employer encourages it by also contributing along with you (Free money!!!). The employer plans (401K, 457, SEP IRA) are usually tax-deferred (taxes will be due when you withdraw or convert to Roth).

As you go along and have reduced income for a year or two (laid off, illness, family leave, etc), you could use those low-income years to do Roth conversions. When you can, you go back to work and save enough until you can afford to retire.

One day you are ready to retire. If you retired early all your expenses need to be paid from your savings and you will have to fund more years than someone who retired in their 60s. Say you’re only 50. Then you can start a Roth conversion ladder by converting a year’s living expenses into a Roth where it can grow for 5 years before you can withdraw it. You keep doing this for several years, knowing you can always withdraw the contributions at any time and you can withdraw the Roth conversions after 5 years. However, the growth will be taxed, unless the Roth was opened 5 years previously and you are over 59.5. So you wait until you are over 59.5 to withdraw the earlier growth. (You need to keep a chart of how much was contributed, converted, and withdrawn each year from the Roth so you can show the IRS, if audited.)

While in early retirement or regular retirement (in your 60s), you should be looking at all your income steams (SS, pensions, annuities, dividends, RMDs) that will become available and their start years. I’ve found that those who are Single with $500K in tax-deferred or married with $1 million in tax-deferred, are at about the point when future RMDs will start to impact their future tax brackets. Those in stronger financial positions often decide it is to their advantage to do large Roth conversions to keep their future tax brackets from jumping up too much. When they project the value of their tax-deferred accounts to age 72 (when RMDs start) and apply a withdrawal rate that starts at about 4%, they often see that their tax bracket at age 72 is higher than when working and higher than their early retirement tax bracket. For these people, it is better to ‘level out’ their Taxable Income (and thus their tax brackets) from then through the rest of their life, rather than have a few years of low Taxable income (and taxes) followed by the their remaining years (72 and older) having high Taxable income (and tax brackets). So, to ‘level out’ their Taxable Income, they start doing Roth conversions and pay the taxes on each dollar converted, where it can then continue growing tax-free. So the Roths are then seen as tax-planning tools.

For a married couple, they should be aware that after one of them dies, the survivor will then have to file as Single but still need to remove about the same RMD as when married (assuming they are close in age). But the space in the tax brackets for Singles is half as much as for MFJ. This can easily cause the survivor to be pushed into a higher tax bracket. But if they already paid the Roth conversion taxes when they were married, that Roth money won’t be subject to the higher taxes.

Putting money in Roths is also good for your heirs. If you die in your 70s or 80s, your kids will likely still be working and in their high-income years. As they withdraw from your remaining tax-deferred accounts, the money will be added to their own Taxable incomes which could push them into higher tax brackets. But withdrawing from your Roth accounts won’t do that.

If you have an unusual financial year in retirement one year and want to ‘control’ what tax bracket you are in, you can always withdraw Roth money and spend it on the extra expense without it increasing your tax bracket (say, for a new car or roof).


And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

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.

Celia is spot on!

We retired at age 58 with close to $4M in tax-deferred. We will also both be receiving close to the max SS income. Based on this, we are doing aggressive Roth conversions between now and age 62. May continue up to age 70, but at a lower rate to align with IRMAA tiers. Without these conversions we are on track for a tax bomb once RMD’s begin.
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Re: Are Roth Accounts Overrated?

Post by sailaway »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
AnEngineer wrote: Thu Apr 22, 2021 9:40 am
CoastLawyer2030 wrote: Thu Apr 22, 2021 7:32 am Second, I just do not find that Roth conversions are worth it. I have done the math probably dozens of times and as long as you are not extremely high net worth, the juice isn't worth the squeeze.
What's the context?

If you're looking at early retirement, then you can end up converting using standard deduction and never pay any income tax on that money. This situation is a clear win.
Looking at the Roth conversions in isolation makes them appear like a clear win, but in my opinion you have to look at them globally.

Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work. Doing these conversions might have little income tax consequences but it also boots you out of several credits and subsidies. I think the only time it comes out as a clear, no-brainer win is if you can spread them out over 15-20 years.

This is kind of what I was getting at with my last post -- taxes generally come from you at every angle, and there are landmines everywhere. Pulling one lever results in a hole opening in the floor somewhere else.
Wait, you were the one who was trying to tell us that brokerage was better than Roth in the first place, now you are calling saving some money in a brokerage a tax inefficiency?! As KlangFool pointed out, for most people, and I would imagine especially for someone who wants to retire <50yo with $80k spending, early retirement is made possible by maxing out all of the tax advantaged possibilities, then saving a bit more.

Besides, no one said you have to save it all in a brokerage account. A quick peek at my spreadsheet tells me that we have 2+ years expenses in contributions and another three years in mega backdoor conversions sitting in our Roth accounts already, and are planning another MBR this year. If you can save ten years expenses in brokerage + Roth contributions, you only have to convert half of your expenses each year for the ladder and may still qualify for the credits and subsidies you mentioned.

Taxes are not landmines. They are a part of living with a functioning government. Being aware of them allows you to find the best path for your own situation.
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Re: Are Roth Accounts Overrated?

Post by bltn »

Why would anyone with an interest in a 529 plan not have an interest in a Roth?
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Re: Are Roth Accounts Overrated?

Post by sc9182 »

Couple of more things to consider: Do Mega-Backdoor Roth (MBR) in 401K (assuming your employer plan allows), and brokerage with excess savings.

Also - if you are in highly taxed state(s) -- save in regular IRA to save Fed/State/Local taxes -- then, may be at the time of Roth conversions and/or IRA withdrawal/RMD times - tax geo-arbitrage to low-tax/no-tax state, further saving 3-8 % additionally !?

Also consider doing Roth/Backdoor-Roth/MBR/Roth-convert in low/no state-tax state, or Roth-convert when markets taken to cleaners, then can move to higher-taxed state afterwards without incurring much tax pain due to higher Roth amounts .. ?
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Re: Are Roth Accounts Overrated?

Post by ThankYouJack »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
This is kind of what I was getting at with my last post -- taxes generally come from you at every angle, and there are landmines everywhere. Pulling one lever results in a hole opening in the floor somewhere else.
People on here are excellent at helping navigate and educate about the "landmines".
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

ThankYouJack wrote: Thu Apr 22, 2021 12:47 pm
CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
This is kind of what I was getting at with my last post -- taxes generally come from you at every angle, and there are landmines everywhere. Pulling one lever results in a hole opening in the floor somewhere else.
People on here are excellent at helping navigate and educate about the "landmines".
I am discovering this, which is why I post!

There is a subreddit on Reddit that's called, "Convince me I'm wrong," and the Bogleheads community embodies that more than any other personal finance community. There have been some extremely good counterarguments made, enough so that I am probably back on the Roth train.

But one more admittedly perhaps irrational thought/justification -- the reason I like the idea of building up the brokerage is because the brokerage, to me, is my freedom account.

I have posted in other threads that I generally plan to slow down at work in 4-5 years; and further, that I would like to "retire" my mortgage by saving enough in a brokerage account that it would be the mortgage off.

The brokerage account gives me more flexibility and an immediate sense of security than almost any other type of account. As someone has already pointed out, a Roth is a "retirement" account, and pulling from those makes me feel dirty inside. I feel like it should not be touched, period.

Meanwhile, I would have no qualms about dipping into my brokerage account. Want to go to Europe for the summer? Cool, let's go.

A Roth is certainly a tool that goes in the toolbox, though.
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Re: Are Roth Accounts Overrated?

Post by H-Town »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:52 am There is a general consensus on the forums that you should take advantage of any and all tax advantaged space that you can. This means contributing to pre-tax accounts (401k, 403b, 457, etc.) and also Roth IRAs. This follows conventional personal finance thinking, but I think I am starting to lean against contributing to Roth IRAs.

Capital gains have always been pretty favorably taxed. Pre-TCJA I believe the first $72,000 in gains were tax free. The TCJA improved tax rates, meaning you can now pull up to $80,000 in gains annually tax free. https://www.nerdwallet.com/article/taxe ... -tax-rates

Alternatively, even if you earn ordinary income, if you take your deductions elsewhere (by contributing to pre-tax accounts), and you can still pull quite a bit of gains from a brokerage if you can keep your total AGI (gains included) under $80,000.

Basically, there are zero strings attached with a brokerage. You can get the money you want penalty-free, whenever you want, and you just have to move around some numbers to make sure your AGI falls where you want it to fall. Odds are that your effective tax on any withdrawal is extremely minimal.

Meanwhile, Roth IRAs promise tax free growth that is accessible once you are 59.5, but there are strings attached. You can only pull your contributions penalty free. Meanwhile, any gains you pull are taxed at your regular income tax rate PLUS a ten percent penalty.

I live in a LCOL area, so this is certainly location specific. I can live extremely well with an AGI of $80,000, and I get that can't be said for everywhere in the country.

But in sum, my working theory is that the tax benefits of Roths are limited when you consider (a) the strings attached to pulling from a Roth, and (b) how favorably capital gains are taxed.

Editing to Add: I am posting this in the context of my own personal situation. I live in a very LCOL area and can live very comfortably on an AGI of $80,000. Moreover, I intend to retire well before 59.5.
Generally if early retirement is a goal, one should save more than the maximum contribution to tax advantaged accounts. If you max-out tax advantage accounts and then save even more in taxable brokerage account, why do you have to concern about Roth v. taxable? Just max out all the tax advantage accounts you can, and then put the rest of saving to taxable accounts.

It's not like you need to withdraw everything on the day that you decide to retire early. You should do more research on Roth conversion and how to pay zero federal tax during the years of early retirement.
Time is the ultimate currency.
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

KlangFool wrote: Thu Apr 22, 2021 10:03 am
CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work.
CoastLawyer2030,

What is your annual savings? Usually, for someone aiming to retire early, they save a lot more than their tax-advantaged account spaces. Hence, they would have fair amount of investment in the taxable account. There is no other alternative.

With a single income household, annual saving of 50K to 60K per year, 45% of my portfolio is in the taxable account.

KlangFool
Income: $175,000

City Pension: $16,000 (this in addition to income)

Wife 401k: $12,000 (12 weeks of maternity this year is lowering this somewhat)

My Deferred Comp (457): $19,500

Taxes: $20,000 (Estimate)

Total Retirement Savings: $47,500

Expenses: $75,000

Left Over: $48,500 --> it is these funds where I'm trying to figure out to Roth/brokerage/529.

Note that I also have a Solo 401k for my solo law practice that I don't use (yet); I previously thought I could not contribute to both a 457 and a Solo 401k, but I can contribute to both. I've weighed this throughout this year, but generally, I just don't find it rational to put so much into pre-tax that I have nothing immediately accessible.

Again, convince me I'm wrong!
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Re: Are Roth Accounts Overrated?

Post by aristotelian »

I agree that traditional has much more upside benefit particularly for folks in high tax brackets while in accumulation. One important assumption here is that current capital gains tax rates will stay forever. Roth protects you against changes in the tax code.
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Re: Are Roth Accounts Overrated?

Post by ThankYouJack »

CoastLawyer2030 wrote: Thu Apr 22, 2021 12:56 pm
ThankYouJack wrote: Thu Apr 22, 2021 12:47 pm
CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
This is kind of what I was getting at with my last post -- taxes generally come from you at every angle, and there are landmines everywhere. Pulling one lever results in a hole opening in the floor somewhere else.
People on here are excellent at helping navigate and educate about the "landmines".
I am discovering this, which is why I post!

There is a subreddit on Reddit that's called, "Convince me I'm wrong," and the Bogleheads community embodies that more than any other personal finance community. There have been some extremely good counterarguments made, enough so that I am probably back on the Roth train.

But one more admittedly perhaps irrational thought/justification -- the reason I like the idea of building up the brokerage is because the brokerage, to me, is my freedom account.

I have posted in other threads that I generally plan to slow down at work in 4-5 years; and further, that I would like to "retire" my mortgage by saving enough in a brokerage account that it would be the mortgage off.

The brokerage account gives me more flexibility and an immediate sense of security than almost any other type of account. As someone has already pointed out, a Roth is a "retirement" account, and pulling from those makes me feel dirty inside. I feel like it should not be touched, period.

Meanwhile, I would have no qualms about dipping into my brokerage account. Want to go to Europe for the summer? Cool, let's go.

A Roth is certainly a tool that goes in the toolbox, though.
I actually feel similar about 529 accounts as you seem to feel about Roths. I don't get a state deduction on 529s and have decided just to save in a brokerage account. I'll likely pay a little more in taxes but I like the "freedom" and flexibility. However, with a Roth vs taxable, the savings is more substantial at least for my situation so I load up as much pre-tax, then Roth, and then taxable (if there's any left over) as I can.

Personal finance is very personal -- everyone's situation and feelings are different so there's no one size fits all.
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

CoastLawyer2030 wrote: Thu Apr 22, 2021 1:02 pm [
Left Over: $48,500 --> it is these funds where I'm trying to figure out to Roth/brokerage/529.

Note that I also have a Solo 401k for my solo law practice that I don't use (yet); I previously thought I could not contribute to both a 457 and a Solo 401k, but I can contribute to both. I've weighed this throughout this year, but generally, I just don't find it rational to put so much into pre-tax that I have nothing immediately accessible.

Again, convince me I'm wrong!
When the limit for two people is a paltry 13k, I don’t see the hesitation.

I can sort of understand wanting to not put in the full 55k into tax deferred accounts though. Especially if it actually costs money to be able to do it, but any low hanging fruit is a no brainier IMO.
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Re: Are Roth Accounts Overrated?

Post by FrugalProfessor »

aristotelian wrote: Thu Apr 22, 2021 1:06 pm I agree that traditional has much more upside benefit particularly for folks in high tax brackets while in accumulation. One important assumption here is that current capital gains tax rates will stay forever. Roth protects you against changes in the tax code.
+ 1.

My MTR is 24% state + 7% fed = 31%. I'm planning on withdrawing that at 0% in retirement. 31% tax alpha (e.g. https://frugalprofessor.com/hierarchy-of-dissavings/). Trad > Roth if your MTR is high today.

OP is right that, under current laws, taxable brokerage is taxed favorably. However, who knows how tax laws will evolve over time. As a result, Roth > taxable.

What are the downsides of Roth? The interest is indeed locked up, but the principal is not. I think this minor shortcoming is substantially outweighed by the tax hedging benefits of contributing to a Roth today and locking in 0% taxes for life (no dividend no cap gains). Assuming, of course, that they don't pull the rug out from us and change Roth taxation down the road....
I blog here: https://www.frugalprofessor.com/
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Re: Are Roth Accounts Overrated?

Post by KlangFool »

CoastLawyer2030 wrote: Thu Apr 22, 2021 1:02 pm
Income: $175,000

City Pension: $16,000 (this in addition to income)

Wife 401k: $12,000 (12 weeks of maternity this year is lowering this somewhat)

My Deferred Comp (457): $19,500

Taxes: $20,000 (Estimate)

Total Retirement Savings: $47,500

Expenses: $75,000

Left Over: $48,500 --> it is these funds where I'm trying to figure out to Roth/brokerage/529.

Note that I also have a Solo 401k for my solo law practice that I don't use (yet); I previously thought I could not contribute to both a 457 and a Solo 401k, but I can contribute to both. I've weighed this throughout this year, but generally, I just don't find it rational to put so much into pre-tax that I have nothing immediately accessible.

Again, convince me I'm wrong!
CoastLawyer2030,

1) Even if you max up all you tax-advantaged accounts, you still have money left over for your brokerage account.

2) There is no early withdrawal penalty for 457. You just need to pay tax on the withdrawal.

3) What is wrong about maxing up all your tax-deferred accounts: 401K, 457 and put the tax savings into Roth IRAs and taxable account?

<< I just don't find it rational to put so much into pre-tax that I have nothing immediately accessible.>>

4) What is rational about paying more taxes instead of spending your own money? At your marginal tax rate, even if you have to pay 10% tax penalty plus 10% tax, you may still come out ahead by deferring tax now.

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Re: Are Roth Accounts Overrated?

Post by ThankYouJack »

CoastLawyer2030 wrote: Thu Apr 22, 2021 1:02 pm
KlangFool wrote: Thu Apr 22, 2021 10:03 am
CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work.
CoastLawyer2030,

What is your annual savings? Usually, for someone aiming to retire early, they save a lot more than their tax-advantaged account spaces. Hence, they would have fair amount of investment in the taxable account. There is no other alternative.

With a single income household, annual saving of 50K to 60K per year, 45% of my portfolio is in the taxable account.

KlangFool
Income: $175,000

City Pension: $16,000 (this in addition to income)

Wife 401k: $12,000 (12 weeks of maternity this year is lowering this somewhat)

My Deferred Comp (457): $19,500

Taxes: $20,000 (Estimate)

Total Retirement Savings: $47,500

Expenses: $75,000

Left Over: $48,500 --> it is these funds where I'm trying to figure out to Roth/brokerage/529.

Note that I also have a Solo 401k for my solo law practice that I don't use (yet); I previously thought I could not contribute to both a 457 and a Solo 401k, but I can contribute to both. I've weighed this throughout this year, but generally, I just don't find it rational to put so much into pre-tax that I have nothing immediately accessible.

Again, convince me I'm wrong!
What's your current marginal tax rate (including state)? What is your estimated marginal tax rate at the time of withdrawal?

You can also withdrawal your 457 penalty free once you FIRE. So I think you have more flexibility there than you may realize.

I personally load up on as much pretax (including Solo 401k), then Roth, then brokerage, and $0 in the 529 since I get no state tax deduction.
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

KlangFool wrote: Thu Apr 22, 2021 1:18 pm
CoastLawyer2030 wrote: Thu Apr 22, 2021 1:02 pm
Income: $175,000

City Pension: $16,000 (this in addition to income)

Wife 401k: $12,000 (12 weeks of maternity this year is lowering this somewhat)

My Deferred Comp (457): $19,500

Taxes: $20,000 (Estimate)

Total Retirement Savings: $47,500

Expenses: $75,000

Left Over: $48,500 --> it is these funds where I'm trying to figure out to Roth/brokerage/529.

Note that I also have a Solo 401k for my solo law practice that I don't use (yet); I previously thought I could not contribute to both a 457 and a Solo 401k, but I can contribute to both. I've weighed this throughout this year, but generally, I just don't find it rational to put so much into pre-tax that I have nothing immediately accessible.

Again, convince me I'm wrong!
CoastLawyer2030,

1) Even if you max up all you tax-advantaged accounts, you still have money left over for your brokerage account.

2) There is no early withdrawal penalty for 457. You just need to pay tax on the withdrawal.

3) What is wrong about maxing up all your tax-deferred accounts: 401K, 457 and put the tax savings into Roth IRAs and taxable account?

<< I just don't find it rational to put so much into pre-tax that I have nothing immediately accessible.>>

4) What is rational about paying more taxes instead of spending your own money? At your marginal tax rate, even if you have to pay 10% tax penalty plus 10% tax, you may still come out ahead by deferring tax now.

KlangFool
Regarding #1 and #3, I am working on building up cash to pay off my student loans at end of September. So that's an "expense" I'm not accounting for in my expenses totals. But we have about $102k cash now and $104k in student loans. I'd like to get to about $125k cash by September and see what Biden does then.

Next year I am going to take a much harder look at the Solo 401k.

Regarding #2, that is why I love my 457 over every other account. I consider this a "flex" asset (my own name) and not a retirement asset due to its awesome flexibility once I FIRE.

Regarding #4, I have posted about this in a separate thread, but I think we are in a rather unique tax environment in 2021 with the $3,600 child tax credits. My marginal rate is 22% but these credits ($1,600 over the old ones, so $3,200 total) effectively take care of about $17,000 in income taxed at 22%. Why not get this money into more flexible accounts now with what seems like a once in a generation gift?
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Lee_WSP
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

CoastLawyer2030 wrote: Thu Apr 22, 2021 1:29 pm [
Regarding #4, I have posted about this in a separate thread, but I think we are in a rather unique tax environment in 2021 with the $3,600 child tax credits. My marginal rate is 22% but these credits ($1,600 over the old ones, so $3,200 total) effectively take care of about $17,000 in income taxed at 22%. Why not get this money into more flexible accounts now with what seems like a once in a generation gift?
Because Roth is the best place to put it....

If you want to spend it. You’re on the wrong forum
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CoastLawyer2030
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Re: Are Roth Accounts Overrated?

Post by CoastLawyer2030 »

Lee_WSP wrote: Thu Apr 22, 2021 1:31 pm
CoastLawyer2030 wrote: Thu Apr 22, 2021 1:29 pm [
Regarding #4, I have posted about this in a separate thread, but I think we are in a rather unique tax environment in 2021 with the $3,600 child tax credits. My marginal rate is 22% but these credits ($1,600 over the old ones, so $3,200 total) effectively take care of about $17,000 in income taxed at 22%. Why not get this money into more flexible accounts now with what seems like a once in a generation gift?
Because Roth is the best place to put it....

If you want to spend it. You’re on the wrong forum
No, I want to invest it. And as I mentioned up thread this thread has convinced back to doing the Roth.
KlangFool
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Re: Are Roth Accounts Overrated?

Post by KlangFool »

CoastLawyer2030 wrote: Thu Apr 22, 2021 1:29 pm
Regarding #4, I have posted about this in a separate thread, but I think we are in a rather unique tax environment in 2021 with the $3,600 child tax credits. My marginal rate is 22% but these credits ($1,600 over the old ones, so $3,200 total) effectively take care of about $17,000 in income taxed at 22%. Why not get this money into more flexible accounts now with what seems like a once in a generation gift?
CoastLawyer2030,

The tax credit is refundable. Hence, you can have both. Defer the tax down to zero and collect the tax credit.

https://www.hrblock.com/tax-center/irs/ ... ax-credit/
<<New Child Tax Credit 2021 changes

The most recent Child Tax Credit changes from the ARP Act are a summarized in these points:

Credit amount increases
Expanded Credit phaseouts
Credit amounts are now fully refundable
Advance payments of up to half of Credit will be distributed in equal periodic payments by the IRS during the second half of 2021, instead of just as part of filing your tax return>>

KlangFool
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Lee_WSP
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Re: Are Roth Accounts Overrated?

Post by Lee_WSP »

CoastLawyer2030 wrote: Thu Apr 22, 2021 1:35 pm
Lee_WSP wrote: Thu Apr 22, 2021 1:31 pm
CoastLawyer2030 wrote: Thu Apr 22, 2021 1:29 pm [
Regarding #4, I have posted about this in a separate thread, but I think we are in a rather unique tax environment in 2021 with the $3,600 child tax credits. My marginal rate is 22% but these credits ($1,600 over the old ones, so $3,200 total) effectively take care of about $17,000 in income taxed at 22%. Why not get this money into more flexible accounts now with what seems like a once in a generation gift?
Because Roth is the best place to put it....

If you want to spend it. You’re on the wrong forum
No, I want to invest it. And as I mentioned up thread this thread has convinced back to doing the Roth.
Then, if you believe your tax rate today is going to be lower, you can look into Roth solo k contributions.
tj
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Re: Are Roth Accounts Overrated?

Post by tj »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:46 am
AnEngineer wrote: Thu Apr 22, 2021 9:40 am
CoastLawyer2030 wrote: Thu Apr 22, 2021 7:32 am Second, I just do not find that Roth conversions are worth it. I have done the math probably dozens of times and as long as you are not extremely high net worth, the juice isn't worth the squeeze.
What's the context?

If you're looking at early retirement, then you can end up converting using standard deduction and never pay any income tax on that money. This situation is a clear win.
Looking at the Roth conversions in isolation makes them appear like a clear win, but in my opinion you have to look at them globally.

Roth conversions require tax inefficiency on the front end because you have to save five years of expenses in a brokerage account to make the whole thing work. Doing these conversions might have little income tax consequences but it also boots you out of several credits and subsidies. I think the only time it comes out as a clear, no-brainer win is if you can spread them out over 15-20 years.

This is kind of what I was getting at with my last post -- taxes generally come from you at every angle, and there are landmines everywhere. Pulling one lever results in a hole opening in the floor somewhere else.
No, this is you're wrong. You contribute to Roth IRA and Roth 401k when yo uare in the 12% bracket, those contributions don't have the hold-up period. Now if you're starting out as a massive income earner, sure, Roth probably isn't the best move, but most massive earners are already investing a taxable account, too.
corp_sharecropper
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Re: Are Roth Accounts Overrated?

Post by corp_sharecropper »

aristotelian wrote: Thu Apr 22, 2021 1:06 pm I agree that traditional has much more upside benefit particularly for folks in high tax brackets while in accumulation. One important assumption here is that current capital gains tax rates will stay forever. Roth protects you against changes in the tax code.
LoL, nice timing! This is a large part of the appeal of a Roth right here, you have certainty on one aspect of a circumstance (retirement planning) that is full of uncertainty when you're years away. I hope to tow the delicate line with the post that, yes, I fully understand congress' constitutional authority over taxation but I definitely hedge it by using multiple account types and certainly think about what is politically feasible, Roth always seems like a fantastic deal to me, HSA also, and it looks a little better vs taxable today.
AlienGrrrl
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Re: Are Roth Accounts Overrated?

Post by AlienGrrrl »

celia wrote: Wed Apr 21, 2021 9:44 pm
If people took appropriate advantage of Roths, we wouldn’t have to keep calling attention to them.

Tax law (and tax brackets) change about every 10 years. It is best to pay the taxes in the years when your tax bracket is lower, either due to tax law and/or your own circumstances. (Note that we are currently in historically low tax brackets.)


Roth accounts can help us in just about every stage of life:

When you are starting your first job, you probably aren’t thinking about retirement, but that is the perfect time to contribute to Roth, because you tend to be in a low tax bracket and have lots of time for the account to compound. As your work experience increases, you usually get raises and eventually get pushed into higher tax brackets. Along the way, you probably signed up for an employer-sponsored retirement plan since the employer encourages it by also contributing along with you (Free money!!!). The employer plans (401K, 457, SEP IRA) are usually tax-deferred (taxes will be due when you withdraw or convert to Roth).

As you go along and have reduced income for a year or two (laid off, illness, family leave, etc), you could use those low-income years to do Roth conversions. When you can, you go back to work and save enough until you can afford to retire.

One day you are ready to retire. If you retired early all your expenses need to be paid from your savings and you will have to fund more years than someone who retired in their 60s. Say you’re only 50. Then you can start a Roth conversion ladder by converting a year’s living expenses into a Roth where it can grow for 5 years before you can withdraw it. You keep doing this for several years, knowing you can always withdraw the contributions at any time and you can withdraw the Roth conversions after 5 years. However, the growth will be taxed, unless the Roth was opened 5 years previously and you are over 59.5. So you wait until you are over 59.5 to withdraw the earlier growth. (You need to keep a chart of how much was contributed, converted, and withdrawn each year from the Roth so you can show the IRS, if audited.)

While in early retirement or regular retirement (in your 60s), you should be looking at all your income steams (SS, pensions, annuities, dividends, RMDs) that will become available and their start years. I’ve found that those who are Single with $500K in tax-deferred or married with $1 million in tax-deferred, are at about the point when future RMDs will start to impact their future tax brackets. Those in stronger financial positions often decide it is to their advantage to do large Roth conversions to keep their future tax brackets from jumping up too much. When they project the value of their tax-deferred accounts to age 72 (when RMDs start) and apply a withdrawal rate that starts at about 4%, they often see that their tax bracket at age 72 is higher than when working and higher than their early retirement tax bracket. For these people, it is better to ‘level out’ their Taxable Income (and thus their tax brackets) from then through the rest of their life, rather than have a few years of low Taxable income (and taxes) followed by the their remaining years (72 and older) having high Taxable income (and tax brackets). So, to ‘level out’ their Taxable Income, they start doing Roth conversions and pay the taxes on each dollar converted, where it can then continue growing tax-free. So the Roths are then seen as tax-planning tools.

For a married couple, they should be aware that after one of them dies, the survivor will then have to file as Single but still need to remove about the same RMD as when married (assuming they are close in age). But the space in the tax brackets for Singles is half as much as for MFJ. This can easily cause the survivor to be pushed into a higher tax bracket. But if they already paid the Roth conversion taxes when they were married, that Roth money won’t be subject to the higher taxes.

Putting money in Roths is also good for your heirs. If you die in your 70s or 80s, your kids will likely still be working and in their high-income years. As they withdraw from your remaining tax-deferred accounts, the money will be added to their own Taxable incomes which could push them into higher tax brackets. But withdrawing from your Roth accounts won’t do that.

If you have an unusual financial year in retirement one year and want to ‘control’ what tax bracket you are in, you can always withdraw Roth money and spend it on the extra expense without it increasing your tax bracket (say, for a new car or roof).


And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

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.
I've always believed that the Roths are vastly underrated. I'm in a MCOL area and I've never earned a massive salary, but have been an aggressive saver & Roth utilizer from day one ... in addition to maxing out my Roth IRA each year, along the way I was able to do some conversions from previous employer 401ks during low-income years, because it just seemed like a prudent thing to do at the time. When my employer starting allowing Roth 457b's I started doing a hybrid pretax/Roth but have switched to 100% Roth. I'm well aware I'm forgoing some tax benefits now, and that I could use the funds from such tax savings for other non-retirement investments, but the Roth gives me a lot of peace of mind and I've done a decent job with non-retirement fund savings. The taxes get paid one way or another, by someone sometime, but right now when I have an income and have been a diligent uber-saver it feels less painful to absorb them now, then later when I have no "active" income. (Even still I need to start thinking about whether I will want to convert some or all of my pre-tax 457 funds into Roth at some point after I retire and before the RMDs kick in ... that's still a few decades into the future and what I have in there now could double a few times if all goes well... and if I add that to a very modest pension, social security, and the creeping dividends from my non-retirement fund savings as those continue to grow, it all adds up if I'm fortunate enough to make it into my 70s)
WS1
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Re: Are Roth Accounts Overrated?

Post by WS1 »

CoastLawyer2030 wrote: Thu Apr 22, 2021 9:19 am
willthrill81 wrote: Thu Apr 22, 2021 9:08 am
FiveK wrote: Thu Apr 22, 2021 12:12 am
willthrill81 wrote: Wed Apr 21, 2021 11:50 pm ...those currently in the 12% bracket who are also likely to remain there in retirement aren't likely to see much benefit from using Roth over taxable....
Except for that pesky Taxation of Social Security benefits, which can cause federal tax effects for qualified dividends and LTCG, even when one is in the "0%" QD&LTCG bracket.
Yes, that particular taxation is pesky indeed, partly because it can result in high marginal tax rates at comparatively low income levels.
Don't want to get political, but these threads just always remind me of how much I loathe our tax policies. Taxes come from literally every direction in your life and no matter what you almost always somehow get screwed in the end.

The reason for a lot of my contrarian takes (e.g., Roth conversion ladders aren't worth it, Roths are overrated, etc.) is because I oscillate between trying to beat the system and just giving up.
For reals. Henry George was right.
bltn
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Re: Are Roth Accounts Overrated?

Post by bltn »

celia wrote: Wed Apr 21, 2021 9:44 pm
bsteiner wrote: Wed Apr 21, 2021 7:00 pm No. While each case is different, the Roth is underrated. I think there are many more cases where people should have done them but didn't than there are cases where people did them but shouldn't have.
+100

If people took appropriate advantage of Roths, we wouldn’t have to keep calling attention to them.

Tax law (and tax brackets) change about every 10 years. It is best to pay the taxes in the years when your tax bracket is lower, either due to tax law and/or your own circumstances. (Note that we are currently in historically low tax brackets.)


Roth accounts can help us in just about every stage of life:

When you are starting your first job, you probably aren’t thinking about retirement, but that is the perfect time to contribute to Roth, because you tend to be in a low tax bracket and have lots of time for the account to compound. As your work experience increases, you usually get raises and eventually get pushed into higher tax brackets. Along the way, you probably signed up for an employer-sponsored retirement plan since the employer encourages it by also contributing along with you (Free money!!!). The employer plans (401K, 457, SEP IRA) are usually tax-deferred (taxes will be due when you withdraw or convert to Roth).

As you go along and have reduced income for a year or two (laid off, illness, family leave, etc), you could use those low-income years to do Roth conversions. When you can, you go back to work and save enough until you can afford to retire.

One day you are ready to retire. If you retired early all your expenses need to be paid from your savings and you will have to fund more years than someone who retired in their 60s. Say you’re only 50. Then you can start a Roth conversion ladder by converting a year’s living expenses into a Roth where it can grow for 5 years before you can withdraw it. You keep doing this for several years, knowing you can always withdraw the contributions at any time and you can withdraw the Roth conversions after 5 years. However, the growth will be taxed, unless the Roth was opened 5 years previously and you are over 59.5. So you wait until you are over 59.5 to withdraw the earlier growth. (You need to keep a chart of how much was contributed, converted, and withdrawn each year from the Roth so you can show the IRS, if audited.)

While in early retirement or regular retirement (in your 60s), you should be looking at all your income steams (SS, pensions, annuities, dividends, RMDs) that will become available and their start years. I’ve found that those who are Single with $500K in tax-deferred or married with $1 million in tax-deferred, are at about the point when future RMDs will start to impact their future tax brackets. Those in stronger financial positions often decide it is to their advantage to do large Roth conversions to keep their future tax brackets from jumping up too much. When they project the value of their tax-deferred accounts to age 72 (when RMDs start) and apply a withdrawal rate that starts at about 4%, they often see that their tax bracket at age 72 is higher than when working and higher than their early retirement tax bracket. For these people, it is better to ‘level out’ their Taxable Income (and thus their tax brackets) from then through the rest of their life, rather than have a few years of low Taxable income (and taxes) followed by the their remaining years (72 and older) having high Taxable income (and tax brackets). So, to ‘level out’ their Taxable Income, they start doing Roth conversions and pay the taxes on each dollar converted, where it can then continue growing tax-free. So the Roths are then seen as tax-planning tools.

For a married couple, they should be aware that after one of them dies, the survivor will then have to file as Single but still need to remove about the same RMD as when married (assuming they are close in age). But the space in the tax brackets for Singles is half as much as for MFJ. This can easily cause the survivor to be pushed into a higher tax bracket. But if they already paid the Roth conversion taxes when they were married, that Roth money won’t be subject to the higher taxes.

Putting money in Roths is also good for your heirs. If you die in your 70s or 80s, your kids will likely still be working and in their high-income years. As they withdraw from your remaining tax-deferred accounts, the money will be added to their own Taxable incomes which could push them into higher tax brackets. But withdrawing from your Roth accounts won’t do that.

If you have an unusual financial year in retirement one year and want to ‘control’ what tax bracket you are in, you can always withdraw Roth money and spend it on the extra expense without it increasing your tax bracket (say, for a new car or roof).


And in retirement, you may need to consider the after-tax spending power of each dollar you own because:

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.
Very nice discussion explaining some of the best way to accumulate a Roth and some if the Roth s benefits.

This post is a good example of the valuable education this forum provides.
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FIREchief
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Re: Are Roth Accounts Overrated?

Post by FIREchief »

MarkNYC wrote: Wed Apr 21, 2021 9:24 pm
Lee_WSP wrote: Wed Apr 21, 2021 8:48 pm
marcopolo wrote: Wed Apr 21, 2021 8:22 pm
Lee_WSP wrote: Wed Apr 21, 2021 8:05 pm
marcopolo wrote: Wed Apr 21, 2021 8:00 pm

I think this is not correct under the conditions specified.
If AGI is below $80k, there is no 15% tax rate. Qualified dividends would have 0% rate, and the small amount ordinary dividends most funds/etfs pay would be taxed at 12%.
While I do not like quoting nerdwallet and investopedia, the IRS does not disagree. OP is currently making more than 80k MFJ; OP is contemplating <80k in early retirement.

https://www.nerdwallet.com/blog/taxes/d ... tax%20rate

https://www.investopedia.com/terms/q/qu ... vidend.asp
Your own post stipulates AGI<$80k. I was referring to the bolded part of your comment above.
I don't understand your confusion. If the MFJ AGI is under 80k, then there is almost no drag. What's the confusion?
The preferential tax rate on capital gains and qualified dividends is not based on AGI, it is based on taxable income. Taxable income can be significantly less than AGI.
Thanks Mark. I don't know why so many are talking about AGI in this thread, when it's the taxable income that determines the top of the zero percent LTCG bracket. I tried to illustrate that earlier in the thread, but it didn't "stick."
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
RCL
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Re: Are Roth Accounts Overrated?

Post by RCL »

momvesting wrote: Wed Apr 21, 2021 10:38 pm ..... I can utilize Roth for anything that would be an unusual, "lumpy" type of expense. For example, I can bump along living on $50k or $60k/year easily, but if one particular year I have a large purchase, like a car, I can carefully stay in my tax bracket or under any sort of cliff I need to by withdrawing Roth funds to make up the difference. It just sort of offers some "wiggle room" when you need to keep your income under a certain amount for any reason.
This is a perfect example of the benefits of having a Roth. :D
colejr
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Re: Are Roth Accounts Overrated?

Post by colejr »

A lot of unknowns here. In retirement, under current law, you marginal rate on capital gains in the 0% CG bracket might really be up to 12.75%, because Social Security (0% + .15%*.85) And if you miscalculate, just above the CG 0% rate, instead of 15%, your marginal rate on capital gains might be as high as 40%!
Charon
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Re: Are Roth Accounts Overrated?

Post by Charon »

Admiral wrote: Thu Apr 22, 2021 6:13 am Most single people never accumulate anywhere near $500k, and most couples never accumulate $1m. Yes, I realize which message board this is. That said, RMDs are not a concern for most people, and certainly not to the level where they may raise one's marginal tax rate to a point where it becomes higher than it was while working.

In the US, even among the top 1% of earners, the median balance across ALL accounts (not just retirement accounts) is $1.13 million.
(https://www.cnbc.com/2018/10/08/how-muc ... ounts.html)
I'm normally quite happy to point out how skewed this forum is to higher income and higher net worth people, but you're not citing the right thing. This is about account balances. I don't know about you, but between a credit union, an online high-interest bank, CDs, single accounts, joint accounts, three different kinds of retirement savings at work, an IRA, a Roth IRA... I have a lot of accounts. Many of them have very little money in them; for example, a few accounts that have $500 each just for some promotional rate.

Don't confuse median account balance with median net worth. To get into the top 1%, by your early 40s you need nearly $8M net worth ( https://dqydj.com/net-worth-by-age-calc ... ed-states/ ). By one's early 50s, it's over $13M.

Bogleheads is a forum largely for those in the 75th to 98th net worth percentiles, ish. The group for whom playing around within the existing system can optimize our retirements and help us feel secure. Those in the top 0.1% are secure no matter what (absent a French Revolution part II), and those in the bottom 25% are too busy trying to survive to save any appreciable amount for retirement. One could imagine arguing for government actions to help secure everyone's retirement, but such things are off limits on this forum.
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