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Subject:  Re: Before or after tax Dollars Date:  10/7/2013  1:00 PM
Author:  BruceCM Number:  73466 of 88542

There are two taxable events that occur with increasing taxed income (ordinary and capital gains) coming into a household: increasing income tax and increasing % of Social Security that is treated as ordinary income. So for most, its not that the marginal or effective tax rates are the same pre and post retirement....its also how much of SS is includable as ordinary income, as murray's calculations show.

But the other point that usually gets skipped over in these calculations is that yes, a deductible contribution to one's retirement plan (employer sponsored or TIRA) does reduce one's income tax for the year....but what do you do with the tax savings? If this is simply absorbed into household cash flow and consumed, then the household lifestyle is that much higher, year after year, and requires that much more income in retirement to be able to sustain the same lifestyle, which requires a greater savings amount. Using after tax dollars, as one would contribute to a Roth, doesn't do this. In fact, like home equity and cash value in life insurance (ugh), the individual reduces available free cash flow in the accumulation years (less available discretion cash flow to spend) and decreases the income tax expense in retirement years while building one's available savings.

And as mentioned, with the individual Roth, one does not have to deal with RMDs, and for amounts in the Roth the retiree does not need, they make great college savings plans for grandchildren.

Each condition is unique and needs to be analyzed based on its own needs and goals. But if given a choice, I think I'd lean towards funding the Roth first.

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