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Ideal age to retire:
https://www.financialsamurai.com/ideal-age-to-retire/

I don't buy lots of it, but it's interesting to see what someone has to say. The Financial Samurai is a guy who worked in finance in San Fran then retired in his 30s. I think I first started reading his blog thanks to a link on this board where he wrote why either Roths were stupid or regular IRAs are stupid, and even though the real answer is "it depends on your assumptions," I still like to see what his thoughts are.
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No. of Recommendations: 9
I stopped reading when Sam told me I'd have to pay a penalty to take money out of my IRA/401k before age 59-1/2.

In order to retire comfortably, I believe one needs at minimum 20X their average annual expenses in liquid net worth e.g. $100,000 annual spend, $2,000,000 in stocks, bonds, CDs, and cash. I don’t include your pre-tax retirement accounts like the 401(k) and IRA in this calculation due to the penalty one must incur withdrawing before age 59.5. You can retire with less, but you’ll always be looking over your shoulder wondering when the boogey man will get you.

</snip>


A 72(t) SEPP is pretty basic early retirement planning.

https://personal.vanguard.com/pdf/s164.pdf

intercst
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Yeah, that’s a pretty obvious miss.

I think I’m tired of “gurus” touting their “early retirement” when in fact they just became self-employed....
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First, he's assuming a 5% withdrawal rate. Might bite him real hard if he hits a down period in the stock market at age 30.

Second, very few are going to be able to accumulate 20x their annual 'need' and he totally neglected taxes. If you are going to be 'needing' $100,000 after tax, depending where you live, you're likely going to be paying 15 to 25% in 'income' taxes of one form or another. Mre likely, if you're a family, even 4% withdrawal would be stretching it for maybe 70 years of retirement.

If you bail out before 10 years of earnings, you might forfeit SS and Medicare benefits.....although if you retire at 30 now, it's another 40, maybe longer to SS and Medicare likely........

A lot of the decision to retire early is also how much people enjoy their current job. In my case, I did enjoy my job, and at times had great perks, like international travel, trips to technical conventions around the country, etc. At other times, the job sucked.

I bailed out at 52.5 and that was fine for me.

t.
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The Financial Samurai is a guy who worked in finance in San Fran then retired in his 30s.

There are, alas, many people who (effectively) won the lotto and think that it was so easy that everybody could & should do it. Similar to those who confuse a bull market for genius.



I think I first started reading his blog thanks to a link on this board where he wrote why either Roths were stupid or regular IRAs are stupid, and even though the real answer is "it depends on your assumptions,"

I also think that _financially_ both IRAs and Roths are kinda stupid. Looked at it from the viewpoint of your entire life, they just shuffle the timing of WHEN you pay taxes. And for most people that is only a small advantage. Real, but small.

I would say that the primary benefit of IRAs and Roths (and 401k's) is that they trick people into saving part of their income for retirement instead of spending it as it comes in.

Which, by the way, is why so many people have too much income tax withheld from their paychecks so they get a large refund in April. It's an easy way to save money from your paycheck that would otherwise be spend. Like Christmas Club savings accounts. If they tried to save it themselves out of each paycheck, it wouldn't happen.
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Similar to those who confuse a bull market for genius.

Some people confuse picking a home run stock for genius.

I also think that _financially_ both IRAs and Roths are kinda stupid. Looked at it from the viewpoint of your entire life, they just shuffle the timing of WHEN you pay taxes. And for most people that is only a small advantage. Real, but small.

I don't understand your comment about Roths. If you choose to use a Roth (IRA or 401k), your contributions are with after-tax money. If you choose to use a taxable account, your contributions are with after-tax money. The difference is that you don't pay any taxes on your earnings with the Roths. A lifetime of investing can lead to a big advantage.

PSU
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There's no one size-fits all. The right answer has to be when you WANT TO, subject to IF you can afford it. If that's where you are, then go for it.

When I retired (at 62), I got a lot of reminders about how if I waited until 66 or even 70, how much more I'd get in Social Security. Well, duh - yeah, I'd looked at that. But I'd decided years before that I was getting out at 62. The job was driving me nuts. And it was a milestone, or two: 40 years as a CPA, and the last 30 with the same organization (including a merger.) That was it. And with even reduced Social Security at 62, I could afford it. No further deliberations required.

Bill
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The right answer has to be when you WANT TO, subject to IF you can afford it.

Here's my simple retirement checklist:

1. Do you have enough?
2. Have you had enough?
3. Do you have enough to do?

Three "yeses" you’re ready.
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"I think I first started reading his blog thanks to a link on this board where he wrote why either Roths were stupid or regular IRAs are stupid, and even though the real answer is "it depends on your assumptions,"

I also think that _financially_ both IRAs and Roths are kinda stupid. Looked at it from the viewpoint of your entire life, they just shuffle the timing of WHEN you pay taxes. And for most people that is only a small advantage. Real, but small."

----

If you are saving in your 20s, having 50-60-70 years of tax free gains for your ROTH sure can make a lot of difference. If you are in the 20-30% more tax bracket, all those gains are tax free. In a traditional account (non deferred) you are paying taxes annually on gains...interest and dividends and capital gains.

For many, if a company contributes a 50% match up to 6% or something like that, that too is a nice incentive...... for a 401K or Roth 401K......

If you're in a state with a high state tax, even more benefit of tax deferred or tax free gains.

The secret, as always, is not putting all your eggs in one basket.

t
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If you are saving in your 20s, having 50-60-70 years of tax free gains for your ROTH sure can make a lot of difference. If you are in the 20-30% more tax bracket, all those gains are tax free. In a traditional account (non deferred) you are paying taxes annually on gains...interest and dividends and capital gains

T, you do realize, the main difference in return between a Roth and Traditional IRA is the difference between the tax rate at contribution vs tax rate at distribution? If the tax rates are the same, so is the return. Basically, try to project your retirement tax rate and pay when lower.

Jack
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I have 10 months to go and plan on using the rule of 55 to tide me over till I am 60 so I can collect my pension. Can't wait.

https://www.thebalance.com/what-is-the-rule-of-55-2894280

Andy
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T, you do realize, the main difference in return between a Roth and Traditional IRA is the difference between the tax rate at contribution vs tax rate at distribution?

Say you're 20, working, and can afford to have your pay check go down by $100 for retirement investing. Let's ignore any potential match in your employer's 401(k) (which only strengthens the IRA advantage) and assume a 20% tax rate.

With the Roth, you invest $100 after-tax dollars per pay check.

With the IRA, you invest $120 per pay check, but your pay still only goes down by $100.

So you invest and (hopefully) grow 20% more over 45 or 50 years. Plus there's the time value of money (would you rather pay Uncle Sam today or pay him 45 years from now?).

I think the tax rate difference is only one of several material differences.

AW
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I think the tax rate difference is only one of several material differences.

The other differences, which are individually specific, are the impact of distributions boosting income taxes to a higher bracket and Medicare premiums.

Medicare premiums increase by $3,217.20 annually for a MAGI over $160,000 single and twice both premium and income for married. The higher bracket issue is something to take into account when considering paying the taxes now or later.

Of what other material differences are you thinking of?

Jack
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So you invest and (hopefully) grow 20% more over 45 or 50 years. Plus there's the time value of money (would you rather pay Uncle Sam today or pay him 45 years from now?).

Paying with inflated dollars later on inflated income or current dollars now on current income, seems to be a wash. So the time value of money doesn't seem to apply. Paying now or later depends upon the rate of payment, pay when the tax rate is lower, now or later.

Jack
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AlphaWolf writes,

Say you're 20, working, and can afford to have your pay check go down by $100 for retirement investing. Let's ignore any potential match in your employer's 401(k) (which only strengthens the IRA advantage) and assume a 20% tax rate.

With the Roth, you invest $100 after-tax dollars per pay check.

With the IRA, you invest $120 per pay check, but your pay still only goes down by $100.

So you invest and (hopefully) grow 20% more over 45 or 50 years. Plus there's the time value of money (would you rather pay Uncle Sam today or pay him 45 years from now?).

I think the tax rate difference is only one of several material differences.


</snip>



It's just an arithmetic problem. If your tax rate remains the same, it doesn't matter if you take out the taxes at the start of the series by investing in a Roth, or at the end of the series by doing a traditional IRA. Your after-tax total is going to be the same. So the answer to the question, "Would you rather pay Uncle Sam today or pay him 45 years from now?" is, "It doesn't matter."

Those of you who remember your 3rd grade arithmetic will recognize this as the "Commutative law of multiplication."

intercst
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T, you do realize, the main difference in return between a Roth and Traditional IRA is the difference between the tax rate at contribution vs tax rate at distribution? If the tax rates are the same, so is the return.

I think there's a little more to it. I have a high income, high tax rate, and I prefer traditional (401k in my case) for the immediate tax savings. Why? I get an immediate tax break at my marginal rate, which is 24% currently - but has been as high as 28% and 33% in recent years. As it stands, my retirement is likely to be funded by withdrawals taxed as income. But I'm ok with that....because even if I look at only the years where we've had $200k+ in income, we don't pay 24-28-30% of that in federal taxes. With the blended rate of various tax brackets, our average tax paid is around 17% of gross. As a percentage of AGI, it's more like 19%. In either case, even if I have a very large draw in retirement, it's likely the tax rate will be lower than the marginal rate when I set the money aside.

In the extremely unfortunate event that accidentally I end up fabulously wealthy, with massive RMDs, and have to pay 30%+ of that in taxes every year....well, I'll just have to find a way to live with my poor life choices. ;)
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I think there's a little more to it. I have a high income, high tax rate, and I prefer traditional (401k in my case) for the immediate tax savings.

...

even if I have a very large draw in retirement, it's likely the tax rate will be lower than the marginal rate when I set the money aside.


I don't see what's in your discussion other than tax rate and personal preferences. I guess I don't understand what's the little more to it.
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If you are saving in your 20s, having 50-60-70 years of tax free gains for your ROTH sure can make a lot of difference. If you are in the 20-30% more tax bracket, all those gains are tax free. In a traditional account (non deferred) you are paying taxes annually on gains...interest and dividends and capital gains.

I have to admit that I'm looking at Roths & IRAs from the standpoint of somebody who retired before there was such a thing as 401k-Roth and when the maximum IRA+Roth contribution limit was only $2000-$3000.

My first IRA limit was $1500/yr, and at that time me & co-workers were like, "Yeah, right, like who in the world can afford to put $1500 into an IRA."

It's better now, but still only $6000. Better than a poke in the eye with a sharp stick, but....

Also, I suspect that MOST people have the same reaction that we had back then, except it's "...who can afford to put $6000..."

Times two, of course, for most people. But if you can't afford $6K you sure can't afford $12k.

I haven't run comparative lifetime cash-flow analyses recently---it doesn't apply to me so I don't much care---but the last time I did the difference in final outcome was small.

Like I said, I think that FOR MOST PEOPLE the primary advantage is the forced savings aspect, that the money you put into an IRA is in a dedicated "for retirement" account and can't easily be spent on current-day toys.
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I don't see what's in your discussion other than tax rate and personal preferences. I guess I don't understand what's the little more to it.

Ok, you're right, it's still tax rate. What I was trying to get at is that "tax rate" is used by most to refer to a number in a tax table. Which is not quite the same as the blended tax paid. The typical roth vs traditional argument usually compares only marginal rates and ignores the blended concept.
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Those of you who remember your 3rd grade arithmetic will recognize this as the "Commutative law of multiplication."

Yes. And it's a losing battle.

It's the same as the problem of trying to debate Dividend Growth Investing. It doesn't matter to them that the value of the stock goes down by the amount of the dividend. It FEELS like free money so they ignore your attempt to drag facts and math into the discussion.

The tax-free growth inside a Roth is what they focus on, and they ignore the mathematical fact that it's a higher growth applied to a smaller base and that the final result comes out the same.
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Like I said, I think that FOR MOST PEOPLE the primary advantage is the forced savings aspect,

Even that might be overstating the benefits a bit.

I think the main utility of a TIRA these days is not as a savings vehicle but as a rollover vehicle. I don't see many people making systematic contributions to their TIRA. I would guess that nationally, probably less than 5% of all adults systematically put money into a TIRA. Probably some site out there that has the data.

Roth might be different (and I see more systematics) - but I also think it caters to a slight different type of investor. My gut hypothesis is that your average Roth investor is more wealthy, has a higher income, and is more educated than your average TIRA investor - and absent any other experience, I would expect it to be the other way around (e.g. lower income use the Roth more).

I think we are currently experiencing the lowest tax rates (as a country) any of us will see if our lifetimes. This leads me to believe that, all else being equal, pay the tax now and avoid the tax later.

As such, I think Roths and especially Roth 401ks are outstanding options - especially with the ability to backdoor Roth contributions for those that can't deduct IRA contributions.
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jeffbrig writes,

Ok, you're right, it's still tax rate. What I was trying to get at is that "tax rate" is used by most to refer to a number in a tax table. Which is not quite the same as the blended tax paid. The typical roth vs traditional argument usually compares only marginal rates and ignores the blended concept.

</snip>


I agree. What I'm looking at is the annual dollars I pay in taxes this year, and in future years. My goal is to reduce the cumulative amount lost to taxes over time.

My strategy has been to minimize income pre-age-65 in order to maximize my Obamacare tax credits. Then do Roth IRA rollovers from age 65-70 to trim the size of my IRA required minimum distributions at age 70. I'm also delaying Social Security until age 70.

If I do nothing, RMDs at age 70 will likely push me into a higher tax bracket.

intercst
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"I think there's a little more to it. I have a high income, high tax rate, and I prefer traditional (401k in my case) for the immediate tax savings. Why? I get an immediate tax break at my marginal rate, which is 24% currently - but has been as high as 28% and 33% in recent years."

Same here - not all that long ago....and then add in state taxes.

The year I retired, I made $93K in salary or so. Had another $40k/yr in interest and dividends from investments. My company matched my contributions to the company 401K at 50% up to 6%. I could usually max out at about $9000/yr as a highly compensated employee. Nice to get that company match.....and save tax deferred. Oh, for 10 years I lived in VA and had to pay VA state income tax...what, 5.5%.

if you live in CA, and make $200,000 as a software engineer, but living in your van since you can't afford a $4000/month apartment, between the feds bite and the state bite, you get clobbered. Have non-deferred investments that spin off interest and dividends.....and double ouch!

Yeah, I remember IRAs when they first came out.....all of $1,500 a year and all you have in them was bank CDs.


t
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"It's just an arithmetic problem. If your tax rate remains the same, it doesn't matter if you take out the taxes at the start of the series by investing in a Roth, or at the end of the series by doing a traditional IRA. Your after-tax total is going to be the same. So the answer to the question, "Would you rather pay Uncle Sam today or pay him 45 years from now?" is, "It doesn't matter."


Well, it all depends if you think that your tax rate will be lower in retirement than it is now.

Luckily for me, I have some SS...a teeny weenie pension.......and most of my 'income' from investments is capital gains taxed at 15%. Haven't had to touch the 'capital' as it spins off more than enough.

At age 70 1/2, had to take my RMD, but only 20% of my assets are in the IRA, which was a roll over from the company 401K.

The income is enough, though, to put me in a higher medicare premium category, though......which is a pain.......

then again, if I don't spend the money, my sister, niece and nephew happily will.......



t.
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And to add to fdoubleol checklist: what kind of quality of life do you want with the years you have left?

I just left a funeral home visitation of a relative whose husband died on Saturday. She left the house at 2 pm and came home at 4 pm and he was in lazy boy, dead of a heart attack. Married 42 yrs. She was retiring in August from owning her hair salon. He had retired 10 yrs. ago when he was 53. They had bought a beach condo to enjoy vacations at.

There is no perfect age for anything....it’s an individual thing but these kinds of articles are just things to talk about and debate. If someone told me that my perfect age to retire or leave work was at 43 I would have looked at them like they were nuts, who are these people? I did retire at 43 but I decided the time was right, had the money and it was time to move on. I’m about to go on Medicare. Ack!

Lucky Dog, still holding up and managing my portfolio too
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LD:"what kind of quality of life do you want with the years you have left?"

Ah, yes. Some folks are perfectly in fine shape at age 70. Many aren't as arthritis, osteoporosis, decades of smoking, cancers, etc, catch up with them.

I read on my FB feed from tons of friends undergoing chemo, radiation, operations, and other problems .....from their 60s on to the 80s. Some, unfortunately, drop dead.

My BIL checked out at age 70. pancreatic cancer. Got him in less than 18 months. Family has a history of cancers.

- -----

LD:"I just left a funeral home visitation of a relative whose husband died on Saturday. She left the house at 2 pm and came home at 4 pm and he was in lazy boy, dead of a heart attack. Married 42 yrs. She was retiring in August from owning her hair salon. He had retired 10 yrs. ago when he was 53. They had bought a beach condo to enjoy vacations at."

Wow......

-------


LD:"There is no perfect age for anything....it’s an individual thing but these kinds of articles are just things to talk about and debate. If someone told me that my perfect age to retire or leave work was at 43 I would have looked at them like they were nuts, who are these people? I did retire at 43 but I decided the time was right, had the money and it was time to move on. I’m about to go on Medicare. Ack!"

For 'most' they aren't going to have the resources to bail out at 43 and if you've got kids, that's very unlikely unless you hit the jackpot with stock options or similar.

I made it at 52.5. Probably could have done it a few years before.

I hit Medicare 8 years ago - double ACK.... but physically am slowing down and a lot less able to do things than 20 years ago.....when I first retired.

Got in years and years of international travel and destinations from Europe to Asia to HI and AK....well, HI and AK twice...to Cocos Island ham radio DXpedition..... and had loads of fun. Still get around and travel lots domestically.

I think aiming for 50 or 55 is a doable goal for single people...... or those going to collect fat pensions they can take at 55 or 60......


t.
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Rayvt,

Early in this thread you wrote, I also think that _financially_ both IRAs and Roths are kinda stupid. Looked at it from the viewpoint of your entire life, they just shuffle the timing of WHEN you pay taxes. And for most people that is only a small advantage. Real, but small.

Seriously? You might as well be saying that expense ratios on mutual funds don't really matter.

Key real advantage to tax-advantaged accounts is that you don't pay taxes on things like interest, dividends and realized capital gains that occur as a matter of course. From what I've calculated, the savings tends to run between 1-2%/year of a typical balanced account.

Of course you can manage a taxable account so that this friction is less than 1%/year, but the best you can hope for is that the outcome for the taxable account is the same as a tax-advantaged account. But you can only achieve that by limiting your investment options, which kind of defeats the point of the analysis.

As for the *when* part of your argument, I could be wrong but I'm not sure that difference is all that small either - intuitively if only traditional pre-tax accounts were available I retirement accounts might only be of limited value since there's little point in trying to avoid taxes now to only pay into a higher bracket later... But maybe I'm wrong about that?

Then later you wrote, My first IRA limit was $1500/yr, and at that time me & co-workers were like, "Yeah, right, like who in the world can afford to put $1500 into an IRA."

It's better now, but still only $6000. Better than a poke in the eye with a sharp stick, but....


Actually since the IRA limits are indexed to inflation they should look about the same to each generation. When you're young, coming up with savings often looks tough. But once you have a decent income and have mastered the habit of saving, it's not really that much.

Also, Times two, of course, for most people. But if you can't afford $6K you sure can't afford $12k.

I don't know why you're mixing the single and married cases. These days if you're married, there's a fair chance you both have an income you can use to make the contributions.

My big complaint about IRA limits isn't that they're too big - it's that they're too small. High contribution limits are an advantage. Why should you be advantaged just because you have an employer to sponsor a retirement account? Shouldn't someone working for a employer that doesn't sponsor a plan have the same opportunities? Or someone running a small business? Yes, the sole proprietor has the solo-401(k) and other options; but small businesses often can't justify paying the expenses of a retirement plan and that cuts out the owners and their employees from that option.

- Joel
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Rayvt,

You wrote, Yes. And it's a losing battle.

It's the same as the problem of trying to debate Dividend Growth Investing. It doesn't matter to them that the value of the stock goes down by the amount of the dividend. It FEELS like free money so they ignore your attempt to drag facts and math into the discussion.

The tax-free growth inside a Roth is what they focus on, and they ignore the mathematical fact that it's a higher growth applied to a smaller base and that the final result comes out the same.


But it's not the same.

1. If you only had just pre-tax or just Roth, managing your marginal tax rate before and/or after retirement would be more difficult if not impossible, and
2. You seem to conveniently ignore that income taxes are progressive. Our incomes are not taxed solely at the marginal rate.

Point #2 is especially important since that means with pre-tax you can avoid taxes while contributing and then when you withdraw some of that money will (probably) be taxed at a much lower rate than it would have been when you were contributing. That's why I hate it when I hear people telling others they should just (blindly) prefer a Roth account for all their tax-advantaged savings...

Of course if you contribute "too much" to pre-tax in your working years, you might wind up paying more in taxes in retirement years. But that's probably a problem you aspire to have - at least if it's because your savings out-performed your plan and not just because you failed to plan.

- Joel
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telegraph,

You wrote, if you live in CA, and make $200,000 as a software engineer, but living in your van since you can't afford a $4000/month apartment, between the feds bite and the state bite ...

You're just used to what you've been paying... If you are single in CA and making $200K/yr, you are taking home $11K/month. So rent is still just about 36% of your take-home.

And yes I've looked. You're right in the ballpark for rent and incomes in Cupertino, CA ... where my nephew just took a job with Apple.

BTW, I think I paid about that (as a percentage of take-home) when I first moved into an apartment back in Dallas Texas in '83. I think I was making less than $20K/year and my rent was almost $400/m. But the thing about Cupertino is that you don't rely on central heat and air nearly as much (so a lower power bill) and entertainment opportunities are more plentiful than in Dallas - especially outdoors.

Also I've found that there can be a nice side-benefit to working in one of these high-cost areas. If you can save essentially the same percentage of your income working here as in a lower cost area, you get to save more in absolute dollars! So if you intend to retire some place cheaper you might be able to achieve that goal more quickly. The only better option would be to work for these higher wages; but do it remotely from some place that's cheaper. :-)

- Joel
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Yeah, I remember IRAs when they first came out.....all of $1,500 a year and all you have in them was bank CDs.

I had a 15.5% interest rate CD in 1982, so that restriction wasn't necessarily bad...
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I had a 15.5% interest rate CD

At one time I had one of these as well. Unfortunately the principle was only about $500 or $600.

ImAGolfer
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It's just an arithmetic problem. If your tax rate remains the same, it doesn't matter if you take out the taxes at the start of the series by investing in a Roth, or at the end of the series by doing a traditional IRA. Your after-tax total is going to be the same. So the answer to the question, "Would you rather pay Uncle Sam today or pay him 45 years from now?" is, "It doesn't matter."

Those of you who remember your 3rd grade arithmetic will recognize this as the "Commutative law of multiplication."


Intercst, I enjoy reading your posts.

I think what you are pointing out is that if both people put the same amount ($100 in a Roth and $100 in an IRA), the end up with the same amount at the end due to the cumulative law of mathematics.

However, the example I gave:

Roth IRA person gets a paycheck for $1,000. They invest $100 in a Roth IRA and have $900 in disposable income.

401(k) person used to get a $1,000 paycheck but decided to put $120 into an IRA and now gets a paycheck for $900 in disposable income. In effect, they are investing their tax savings in their IRA, not spending it.

Both start with a $1,000 paycheck and both end up with $900 disposable income.

But person A is investing $100 each paycheck in a Roth and person B is investing $120 each paycheck in an IRA.

Would the both be in the same position (net of taxes) after 45 years of investing?

AW
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Roth IRA person gets a paycheck for $1,000. They invest $100 in a Roth IRA and have $900 in disposable income.
...

But person A is investing $100 each paycheck in a Roth and person B is investing $120 each paycheck in an IRA.



I believe you are looking at the wrong thing. Instead of looking at the PAYCHECK you should be looking at the INCOME. The paycheck is the income minus taxes.

Any discussion of "disposable income" merely muddies the water. The thing that matters is the income and where it goes, not how much is spent (which is what disposable income means.)

The logic he mentioned goes like this:
For a $1000 chunk of income and current tax bracket 20% (not a current rate) and 5% annual growth for a 20 year period, and 15% (not a current rate) tax bracket at withdrawal:

IRA:
$1000 - $0 tax = $1000 invested.
$1000 grows to $2653 ($1000 * (1.05 ** 20)).
Tax upon withdrawal is $398.
Net spendable after tax = $2255

Roth:
$1000 - $200 tax = $800 invested
$800 grows to $2122 ($800 * (1.05 ** 20)).
Tax upon withdrawal is $0
Net spendable after tax = $2122

Oops!
The regular IRA ends up with more after-tax money than the Roth.

But if the tax rate at withdrawal is the same, then the IRA gives you:
Tax upon withdrawal is $531.
Net spendable after tax = $2122

Exactly the same.

"Commutative law of multiplication."
All you are doing is shifting WHEN you pay the income tax.

Of course, 401Ks are better than IRAs, because your employer gives you free money.
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"I had a 15.5% interest rate CD in 1982, so that restriction wasn't necessarily bad..."

Good for you. I finished law school in 1981 and started my career with a 16% mortgage on our first home.
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Key real advantage to tax-advantaged accounts is that you don't pay taxes on things like interest, dividends and realized capital gains that occur as a matter of course. From what I've calculated, the savings tends to run between 1-2%/year of a typical balanced account.

I'm not sure that really matters very much. That whole "multiplication is commutative" thing.
In a regular account what the ongoing taxes on dividends and realized capital gains do is to reduce your effective CAGR, so that certainly will reduce the overal growth.

But, let's see....just looking at the dividend aspect only...
Tax on qualified dividends are 15% (we are not low income, so we are out of the 0% rate). Assuming 2% dividend yield, that reduces your return by 0.3%
At 10.0% average return over 20 years, $1000 grows to:
$6727 in a tax-advantaged account. (10.0% return)
or
$6370 in a regular account. (9.7% return)

That's a difference of $357. That's 5.6% difference. Over 20 years, which is 0.28%/year.
But when you subtract 22% income tax on that $357 you have $278. That's 4.4% difference. Over 20 years, which is 0.22%/year.

All this is further complicated by the fact that future tax rates on IRA withdrawals are unknown.

Ongoing tax on dividends has a minor effect.
Ongoing capital gains tax has a larger effect, but can be mitigated by making buy & hold investments that avoid realizing capital gains.

Of course you can manage a taxable account so that this friction is less than 1%/year, but the best you can hope for is that the outcome for the taxable account is the same as a tax-advantaged account. But you can only achieve that by limiting your investment options,

Limiting your nvestment options to SPY or VTI or FZROX or some other low-cost broad market index fund is not an burdensome option.


I don't know why you're mixing the single and married cases. These days if you're married, there's a fair chance you both have an income you can use to make the contributions.

Family income is family income.


My big complaint about IRA limits isn't that they're too big - it's that they're too small. High contribution limits are an advantage. Why should you be advantaged just because you have an employer to sponsor a retirement account? Shouldn't someone working for a employer that doesn't sponsor a plan have the same opportunities?

This is a political question. And regardless of your and my opinions, trying to make an argument that "high-income people should get a deal that low-income people can't take advantage of" is a losing political argument.

FWIW, according to The EBRI IRA Database, in 2011 the average IRA contribution was $3,723 and the limit was $5000. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2271780 It's going to be a difficult argument that the limit should be higher when most people don't get even close to the limit.
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I believe you are looking at the wrong thing. Instead of looking at the PAYCHECK you should be looking at the INCOME. The paycheck is the income minus taxes.

Any discussion of "disposable income" merely muddies the water. The thing that matters is the income and where it goes, not how much is spent (which is what disposable income means.)


Rayvt, thank you for your response.

I do not understand why looking at disposable income muddies the water in this case. The only difference between the 2 examples is the type of IRA a person invests in.

The income and the net is the same in both cases, but one allows you to invest more (the deferred taxes) in your 401(k) (rather than spend it today) with no impact to your bottom line.

If you’re not maxed out in your contribution, isn’t this an advantage of the 401(k)?

AW
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Found some interesting data that might illuminate this subject and related tangents:

https://www.ici.org/pdf/per23-10a.pdf

My theory on the typical Roth investor vs TIRA investor turns out to somewhat accurate, but probably by no more than the margin of error. Better educated, but not really more income or wealth.

Also, about 27% of all households (not individuals) have an IRA and of those that have an IRA, 25% contributed in 2016 in the amount of $4000. If we assume two people per household then the contribution rate in 2016 was less than 4% so my guess of 5% is probably pretty close (need to discount quite a bit for my household assumption).

Lots more data in the link.

Two other interesting take aways:

Most Traditional IRA Withdrawals Are Made to Meet Required Minimum Distributions 71%

Reinvested or saved it in another account 39%
(page 24)

Should we take this to mean that people are saving too much in TIRA accounts? Roths have no RMD so this can only apply to traditional.
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Of course, 401Ks are better than IRAs, because your employer gives you free money.

There is another advantage of 401Ks if you are young enough that your wealth at retirement is uncertain. With 401Ks you get a bit of poverty insurance. If you end up wealthy and in a higher tax bracket, then the Roth would have been better. But if retirement is many years away, life happens. Maybe you have health issues, maybe your job situation changes, maybe the market does poorly. In that case at retirement you have less money than you hoped, you retire at a lower tax bracket, and the 401K turns out to have been better. So if choose a 401K and retire wealthy, you pay more tax but can afford it. If you choose a 401K and retire with less wealth, you pay less tax and have more money when you really need it. Viola, poverty insurance.
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That's a difference of $357. That's 5.6% difference. Over 20 years, which is 0.28%/year.
But when you subtract 22% income tax on that $357 you have $278. That's 4.4% difference. Over 20 years, which is 0.22%/year.


You forgot to account for the extra $250 that the Traditional IRA would have had to invest, or the tax-free perspective for the Roth IRA investor. And, since you are looking at the after-tax value of the Traditional IRA, you forgot to account for the taxable gains in the taxable account that still need to be paid for.

All this is further complicated by the fact that future tax rates on IRA withdrawals are unknown.

But all of your 'multiplication is commutative' analyses assume that the tax rates will be the same when making contributions and when making withdrawals. So are you changing horses in mid-stream here? Does the 'multiplication is commutative' argument not hold because 'future tax rates on IRA withdrawals are unknown'?

Here - let me do the analysis for you and look at the account value AFTER taxes (since to your earlier point, what matters is value after taxes). Assuming a marginal 25% tax rate for both the contribution and the withdrawal for the IRA and 15% capital gains rates for the taxable account:

$1,250 into the Traditional IRA @ 10% a year for 20 years is $8,409 before taxes and $6,307 after taxes

$1,000 into the Roth IRA @ 10% for 20 years is $8,409 after (no) taxes

$1,000 into the taxable account @ 9.7% for 20 years is $6,370, split as follows:
$1,000 - initial investment
$941 - reinvested dividends already taxed (so no capital gains taxes due)
$4,429 - capital gains not previously taxed

So in order to figure the value after taxes from the taxable account, there will need to be $664 in capital gains taxes paid, which drops the after tax amount in the taxable account to $5,706

Looks to me that the Traditional IRA comes out ahead $601 ahead of the taxable account after taxes. Of course, the Roth IRA beats both options hands down. But I don't think that your argument that there is no advantage to Traditional tax advantaged accounts holds.

Yes, I get that future tax rates are not necessarily going to be the same as when the contribution was made. But since you continue to stand on your 'multiplication is commutative' argument, which depends on the fact that the tax rates will be the same, then it's only fair to assume in your other analyses that the tax rates will also be the same.

AJ
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a marginal 25% tax rate for both the contribution and the withdrawal for the IRA and 15% capital gains rates for the taxable account:

$1,250 into the Traditional IRA @ 10% a year for 20 years is $8,409 before taxes and $6,307 after taxes

$1,000 into the Roth IRA @ 10% for 20 years is $8,409 after (no) taxes


I think you've got your math wrong. 25% tax on $1250 would net $937.50, not $1000.

When you use the lower amount, the growth is $6307 AT (same at TIRA), not $8409.
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But if the tax rate at withdrawal is the same, then the IRA gives you:

The point being made upthread is that you save at your marginal tax rate and pay at your effective tax rate. Upthread the person used the term "blended. Therefore for your examples to be correct, your effective rate at withdrawal would need to be equal to your marginal rate at the time you contributed.

Let's look at an example using today's tax rates. Fred, a single guy, contributes to his pre-tax 401k. All of his contributions fall in the 24% marginal rate during all his years of contributing*. He retires the last day of 2018 so there isn't any income from working in 2019. He's over 59.5 years of age and has no other sources of income for 2019.

Now let's look at several effective rates for this person.


Withdraws Marginal Rate Effective Tax Rate
$100,000 24% 15.3%
$150,000 24% 18.2%
$200,000 32% 20.7%


Fred saved 24% on this contributions during his working years. In retirement, even when his income reaches the 32% marginal rate, his effective tax rate on his withdrawals is less than 24% until he reaches a certain income that I'm not going to calculate.

Therefore, it isn't as simple as saying tax rates are the same at time of contribution and withdrawal and saying math is commutative. For that to be true, the marginal rate at time of contribution needs to equal the effective rate at withdrawal.

*I put this star up in the thread because this is a very simplistic illustration. Tax rates change over time. Someone in 2017 may have had a 33% marginal rate and in 2019 have a 24% marginal rate even if their income is the same. It assumes 100% of the contribution is in one marginal rate when it may span two tax brackets. Also even if there are not tax changes during a person's career, they likely start in the lower marginal rates, then progress to higher marginal rates as their income goes up. It would seem that a person starting out should use the Roth 401k and then progress to using the regular 401k as their income reaches higher marginal rates.

PSU
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OCD: Fred has not other sources of income other than his 401k withdrawals in 2019.

PSU
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"OCD: Fred has not other sources of income other than his 401k withdrawals in 2019."

Well there's the rub isn't it?

So no SS, no investment or interest income, no other source of money, then marginal rate at contribution vs blended rate at distribution.

BUT, most people aren't like that so it's marginal rate in both instances. Or at least a bunch of managing sources of income to keep within certain brackets.
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Well there's the rub isn't it?

So no SS, no investment or interest income, no other source of money, then marginal rate at contribution vs blended rate at distribution.

BUT, most people aren't like that so it's marginal rate in both instances. Or at least a bunch of managing sources of income to keep within certain brackets.


I didn't calculate when Fred's marginal rate would hit 24%. But at $200,000 in income, his effective rate was below 24%. If he has $25,000 in SS and $75,000 in interest and investment income, he could still withdraw $100,000 from his 401k and still not worry about having an effective rate greater than 24%. So I would say no to using marginal rates for both contributions and withdrawals. I consider contributions are made at the marginal rate and withdrawals at the effective rate.

PSU
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I think you've got your math wrong. 25% tax on $1250 would net $937.50, not $1000.

Ugh, sorry about that. I was in a hurry to get to an appointment, and multiplied instead of divided. The actual amount of money you have to make at a 25% marginal rate to make a $1,000 taxable investment would be $1,333, which is $1000/(1-25%) So $1,333 is how much you would put into the Traditional IRA to account for the initial tax advantage if you are putting $1,000 after-tax into either a taxable account or a Roth IRA.

With that, the new numbers would be:

$1,333 into Traditional IRA @ 10% a year for 20 years is $8,968 before taxes and $6,725 after 25% taxes

$1,000 into the Roth IRA @ 10% for 20 years is $8,409 after (no) taxes

$1,000 into the taxable account @ 9.7% for 20 years is $6,370, split as follows:
$1,000 - initial investment
$941 - reinvested dividends already taxed (so no capital gains taxes due)
$4,429 - capital gains not previously taxed

So in order to figure the value after taxes from the taxable account, there will need to be $664 in capital gains taxes paid, which drops the after tax amount in the taxable account to $5,706

So, again, the Roth comes out way ahead, but there is an even larger advantage for the Traditional IRA vs. the taxable account.

AJ
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The point being made upthread is that you save at your marginal tax rate and pay at your effective tax rate.

If that was the point being made then it is wrong.

You pay at the marginal rate, not the blended rate. Why is this so hard for people to see?

Withdraws Marginal Rate Effective Tax Rate
$100,000 24% 15.3%


I can see _how_ people make this mistake, but don't understand _why_ they make it.
"Effective" is the wrong word. It implies that all your income is taxed equally---but it isn't. Terminology is important.

"Blended" is the more appropriate word. Your income is NOT all taxed equally. The first $x is taxed at 0%, the next $Y is taxed at 10%, the next $Z at 12%, the next $W at 22%, and the next $V at 24%

If you withdraw $100,000, that is not the _first_ bit of income, it is the _last_ bit of income. Hence it is taxed at your marginal rate. Marginal..."at the edge".

[Why, when I google "order of taxable income" does it pull up only UK sites??]

If you withdraw $100,100 instead of $100,000, your tax goes up by $24 not $15.30. Look at any tax table or do a what-if in Turbotax.
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I've read the Financial Samurai article and this entire thread of comments.

It seems to me that when you were born and your choice of occupation might have a significant impact on when you decide to retire.

I was born in 1945. In the Sixties, I received my draft notice and served in the military during the Vietnam War and received a medical discharge. An advantage of serving in the military was the training I received as a computer programmer and led to my choice of software engineering as my occupation. There was a disadvantage: my entry into my career was delayed nearly a decade. This shifts the Financial Samurai's timeline and his purported ideal retirement age into one's fifties.

Another factor in when you retire is whether or not you got sucked into your employer's management track or were able to stay in their technical track. I got sucked into the management track during the Eighties but managed to escape back to the technical track in the Nineties. Had I stayed in the management track, I would have retired much sooner than I did. Management's questionable decisions on hardware and software provided me with more than enough technical problems to solve to delay retirement until age 68.
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With that, the new numbers would be:

$1,333 into Traditional IRA @ 10% a year for 20 years is $8,968 before taxes and $6,725 after 25% taxes

$1,000 into the Roth IRA @ 10% for 20 years is $8,409 after (no) taxes


Sorry, I think you still have the math wrong.

My calcs show $1000 into the Roth at 10% for 20 years is $6727 (same as the TIRA again).

http://www.moneychimp.com/calculator/compound_interest_calcu...

and

https://www.investor.gov/additional-resources/free-financial...
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So I would say no to using marginal rates for both contributions and withdrawals. I consider contributions are made at the marginal rate and withdrawals at the effective rate.

You repeated this statement, so I will repeat my disputation. Sorry. (::sigh::)

If your marginal rate is 24% and your effective rate is 15%, how much will your tax change if you withdraw $100 more or $100 less? Will your tax difference be $24 or $15?

Spoiler alert: $24.


----------------------------
Long time ago when I first engaged in tax rate discussions (I was in the effective rate camp), the point was driven home to me when somebody said, "All decisions are made at the margin." "The average is interesting, but what is important is what happens --what changes-- in the outcome when you do a something."
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The point being made upthread is that you save at your marginal tax rate and pay at your effective tax rate. Upthread the person used the term "blended. Therefore for your examples to be correct, your effective rate at withdrawal would need to be equal to your marginal rate at the time you contributed.

YMMV, but for me, using the overall blended rate instead of a marginal rate probably isn't correct. I have real estate rentals that produce income, and I will be collecting a pension beginning at age 62, since they won't let me wait any longer than that to start collecting, nor will they let me start any earlier than 62. Go figure... And then there's the income from my taxable accounts, which currently isn't all qualified dividends or capital gains, and if I change things so that it is, I will incur capital gains taxes. Given that I'm pretty happy with my taxable account, I'm not inclined to do that. Plus, whenever I start taking SS, up to 85% of it will also be taxable, since my other income plus half of the SS will be way over the $25k limit for tax-free SS for singles. Combine all of that with the lower inflation rate for brackets due to the chained CPI, and I anticipate that my Traditional account withdrawals are probably mostly going to be taxed at my marginal rate, with maybe 1/3 or so taxed at one bracket lower.

Given my other income, if the current tax brackets remain in place, rather than changing back to the old brackets, the blended tax rate on my Traditional withdrawals will be, at best, 18.7% if I'm in the 22% bracket, or 22.7% if I'm in the 24% bracket. If the rates go back to the old brackets, the blended rate on my Traditional withdrawals will be 22.7% (if I'm in the 25% bracket) or 27% (if I'm in the 28% bracket).

All of his contributions fall in the 24% marginal rate during all his years of contributing*.

If Fred's currently over 59.5, most of his contributions probably saved him at least 25% and probably even more.

AJ
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What I was trying to get at is that "tax rate" is used by most to refer to a number in a tax table. Which is not quite the same as the blended tax paid. The typical roth vs traditional argument usually compares only marginal rates and ignores the blended concept.

I think you've got a point here, but you need to refine how you're looking at it.

When making an IRA contribution (whether Roth or traditional), you probably do want to look at the marginal rate. By making a traditional contribution, you would be saving taxes at the marginal rate. Your taxable income without the contribution would be X, with the contribution it's X-6000 (or however much you put into the account). That make the marginal rate the most appropriate. The only time a blended rate would come into play is if that contribution causes you to cross a tax bracket. And then you'd be blending those two tax brackets, not all of your applicable brackets.

But at withdrawal time, you're talking about much larger sums of money. It's conceivable that your entire income consists of IRA withdrawals (or those plus social security). Now a blended rate is very appropriate. You're going to run through all of your applicable tax brackets. Even if your withdrawals put you into a high bracket, the lower brackets are still there and some or all of the withdrawal is taxed at those rates.

Personally, I think this is often overlooked as a reason to favor traditional over Roth accounts.

For completeness, you need to consider your specific situation. If at the time you are choosing between Roth or traditional accounts, you know you will be receiving a pension or will have significant money available from ordinary investment accounts, you will have to account for those as well. So you might already be through some of the lower tax brackets.

So there is no easy rule of thumb here. You have to run numbers and you have to make guesses - hopefully educated ones - about the future.

--Peter
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Both start with a $1,000 paycheck and both end up with $900 disposable income.

But person A is investing $100 each paycheck in a Roth and person B is investing $120 each paycheck in an IRA.

Would the both be in the same position (net of taxes) after 45 years of investing?


Yes.

You just need to follow through with the analysis.

Let's say that the investments over the years cause the invested amount to grow 10 times. So the person with the Roth will have 10,000 in their Roth and the person with the traditional will have 12,000.

To demonstrate the point, let's say the tax rate hasn't changed. It's still 20%. The person with the Roth withdraws 1000, pays no tax, and has $1000 to spend. The person with the traditional will need to withdraw 1200, pay 200 in tax and will end up with 1000 to spend. Just like the Roth.

Yes, the person with the traditional IRA looks like they have more money. But that's only because they still owe taxes on that money. Once that traditional IRA money has been taxed, they are back to being equal - assuming tax rates haven't changed since the money was contributed.

--Peter
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So no SS, no investment or interest income, no other source of money, then marginal rate at contribution vs blended rate at distribution.

BUT, most people aren't like that so it's marginal rate in both instances.


Actually, it's a blended rate in both instances - at contribution and at withdrawal. But the odds of a traditional IRA contribution crossing a tax bracket are much smaller than the odds of a significantly larger IRA withdrawal crossing a tax bracket.

--Peter
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If you withdraw $100,000, that is not the _first_ bit of income, it is the _last_ bit of income. Hence it is taxed at your marginal rate. Marginal..."at the edge".

Not really. If you are collecting SS, it would be the first bit of income. If you are withdrawing RMDs, then it would not be the last bit of income because there is no option to take it or not take it. It would then be blended with your other mandatory income.

PSU
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Regardless of what you call it, Ispouse's combined income from her pension, SS and voluntary 3% withdrawals from her 403(b) (she is 64), along with my dividend and interest income from my taxable accounts, put us in the middle of the 22% tax bracket.

So I am going to start taking enough money out of my IRA to put us at the edge of the 24% tax bracket so that we can either spend it or reinvest it in our taxable accounts whether we need it or not. If we don't, the combined income from those sources plus the RMD's and my additional SS income at 70 and 1/2 will likely be taxed at a 24% rate or higher, plus possibly add to our Medicare bill, plus, if one of us dies prematurely, the surviving spouse will likely be put into an even higher tax bracket.

So...I am looking at marginal rates for tax planning purposes.
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So I am going to start taking enough money out of my IRA to put us at the edge of the 24% tax bracket so that we can either spend it or reinvest it in our taxable accounts whether we need it or not.

Why not do conversions to a Roth account if you don't need to spend it? Investing in a taxable account means that the gains and income will be taxable. If you put it into a Roth account, the gains and income will be tax-free, assuming that the Roth account has been open for at least 5 years.

AJ
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AlphaWolf asks,

But person A is investing $100 each paycheck in a Roth and person B is investing $120 each paycheck in an IRA.

Would the both be in the same position (net of taxes) after 45 years of investing?

</snip>


Let's say their investment return is 8% per annum.

The $100 Roth Contribution grows to $3,192 after 45 years.

The $120 IRA Contribution grows to $3,830 after 45 years.

Roth isn't taxed on withdrawal. The $3,830 in the IRA is taxed at 16.67% $3,830-$638=$3192.

Note: 16.67% tax rate is $20 on $120.

intercst
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"Why not do conversions to a Roth account if you don't need to spend it"

Honest answer? We don't have a Roth account. We made too much money over the last 2 decades to put our income into a Roth account and I did not know about Roth conversions. For the next 5 years I can have negligible taxable gains by putting money into Brk-B and low cost etfs and/or index funds.
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Personally, if for planning purposes you assume the tax rate are the same when you are contributing and later when you are withdrawing, I would still go for the pre-tax contributions. I can't project future changes in tax rates. Politicians can break their promises that Roth IRAs and Roth 401ks are tax-free forever. They changed the rules on SS. What I can control right now is what tax savings I receive today. I may guess wrong and end up paying more in the future. I like certainty.

PSU
my tax rate makes it an easy decision
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Rayvt,

You wrote, Of course, 401Ks are better than IRAs, because your employer gives you free money.

In my 27 years of having access to a 401(k) from 9 separate employers that has only been true for me three times for a total of about 12 years of matching. (FWIW, I've had 10 employers over 36 years all in the tech industry ... so 9 years without access.) My current employer has been the most generous with the match, but that's partly due to an increase in the match that started almost 5 years ago. They are also one of the largest tech companies in the world and can easily afford the incentive given how profitable they are.

Also in my experience only very, very large employers (for me, just one) offer investments that are competitive with IRA options. In the past I've had to view my 401(k) contributions from the perspective of their opportunity cost under the assumption I would only be at my employer for a few years before rolling over my account. Again, my current employer is the only one I've worked for where that is no longer true. (Only one other employer's plan came close. One plan had an average annual expense of ~2%/year! Compared to using a broker where I'd spend 0.1%/year or less on my IRA.)

From what I've seen small to mid-sized tech companies have to offer 401(k) plans because some people won't take a job without it. But they often pass their costs on to their employees and do the minimum that they must to make it a safe harbor plan. (When I was working thru a contracting firm they didn't even offer a safe harbor plan, so I was capped at 4% of pay.)

- Joel
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This article references another article on The Fear of Running Out of Money in Retirement. In it, he says, "[After retirement] It felt wonderful going from a 39.6%, 35%, or 33% marginal income tax bracket (depending on my deductions and bonus) to a more reasonable 24% tax rate for a couple years. Just imagine killing yourself at work for 70 hours a week to give over 50% of some of your income to a fiscally irresponsible government. No thank you."



That statement alone (re)convinces me that this guy is a joke. Nobody is paying more than 50% in taxes. Nobody.
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I also think that _financially_ both IRAs and Roths are kinda stupid. Looked at it from the viewpoint of your entire life, they just shuffle the timing of WHEN you pay taxes. And for most people that is only a small advantage. Real, but small.

I would say that the primary benefit of IRAs and Roths (and 401k's) is that they trick people into saving part of their income for retirement instead of spending it as it comes in.





Don't forget that you can transact at will in these accounts without paying capital gains tax. This makes roll-a-bility and transfer-a-bility much easier when your investment choices change at the receiving firm.
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Nobody is paying more than 50% in taxes. Nobody.

To nitpick, that depends what you are including in "taxes". Let's say you're at the maximum federal tax rate of 37%, and you live in California and you're paying the highest State tax rate of 12.3%, and you're paying the Medicare tax rate of 1.45% (you wouldn't be paying Social Security on that level of income), and actually at that level of income you pay an additional Medicare tax of .9%, and bingo, it all adds up to more than 50%.

Not a situation that too many people are going to find themselves in, but it can happen.
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Let's say you're at the maximum federal tax rate of 37%, and you live in California and you're paying the highest State tax rate of 12.3%, and you're paying the

You are not paying 37% on your entire salary. You’re paying 37% on everything over 500k if you’re single and 600k (I rounded down) if you’re married.
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You are not paying 37% on your entire salary. You’re paying 37% on everything over 500k if you’re single and 600k (I rounded down) if you’re married.

True. I should have clarified that the actual quote from the original article was "give over 50% of some of your income" and not the "pay more than 50% in taxes" that the poster used to discredit the credibility of the article. I didn't read the article, it may indeed be a bunch of bunk, but the scenario that the author described in that quote is feasible.
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MissEdithKeeler writes,

<<Let's say you're at the maximum federal tax rate of 37%, and you live in California and you're paying the highest State tax rate of 12.3%, and you're paying the>>>

You are not paying 37% on your entire salary. You’re paying 37% on everything over 500k if you’re single and 600k (I rounded down) if you’re married.

</snip>


That's true. But maybe the guy is earning $100 million/year, so 99.5% of his income is taxed at the top rate. Then his total tax would be over 50%.

In any event, at these income levels his retirement advice is only applicable to a handful of people.

intercst
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So I am going to start taking enough money out of my IRA to put us at the edge of the 24% tax bracket so that we can either spend it or reinvest it in our taxable accounts - iampops

-------------

As long as you are paying the tax on the TIRA withdrawal anyway, why not convert it to a Roth. That way the earnings on the withdrawal will be tax free while the withdrawn amount is parked prior to spending.

As long as you are old enough for penalty free Roth withdrawals, I see little or no need for taxable accounts.
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Why not do conversions to a Roth account if you don't need to spend it? Investing in a taxable account means that the gains and income will be taxable. If you put it into a Roth account, the gains and income will be tax-free, assuming that the Roth account has been open for at least 5 years.

AJ


-------------

Oops. I had not read AJ's post when I posted this same sentiment.
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Nobody is paying more than 50% in taxes. Nobody.

I'm paying over 70% in taxes.

PSU
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That statement alone (re)convinces me that this guy is a joke. Nobody is paying more than 50% in taxes. Nobody.

Marginal rate when you include state taxes?
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Honest answer? We don't have a Roth account. We made too much money over the last 2 decades to put our income into a Roth account and I did not know about Roth conversions. For the next 5 years I can have negligible taxable gains by putting money into Brk-B and low cost etfs and/or index funds.

But when you sell, you're likely (hopefully?) going to have to pay capital gains taxes. So if it's unlikely that you will need the money for at least 4 1/2 years*, then why not set up a Roth account now? Starting Jan 1, 2024, all of that money would be available for tax-free withdrawal, since you're over 59 1/2 and the account will have been open for at least 5 tax years.

Even if you never intend to sell, it would be nice to pass a tax-free account to your heirs, rather than a taxable account, even with the step-up, unless you plan to instruct them to sell the assets immediately upon your death to avoid future capital gains taxes. Even if one of the new retirement account bills passes Congress, they will have at least 5 years to take the money out tax-free. And if neither of the bills pass, then they'll be able to take it out tax free over their expected lifetime, rather than having to pay the likely capital gains unless they sell shortly after the date of your death.

AJ

*If you have enough money that you will be converting for at least the next 5 years, if you need some money during one of the next few years, you can always skip the conversion that year, and spend the money you would have converted.
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Say you're 20, working, and can afford to have your pay check go down by $100 for retirement investing. Let's ignore any potential match in your employer's 401(k) (which only strengthens the IRA advantage) and assume a 20% tax rate...

As a first cut, you're better off paying 15% than 20% taxes. However, the actual marginal rate will be 20% now (from your assumption) vs. "who knows what" later. And the WKW rate can change between day 1 of your early retirement and later on when (if) you have RMDs.

Also, very few people I know are big enough nerds to model how much their taxable IRA income will affect the taxability of their Social Security (like me). There are situations where it's better to pay the taxes now (even at a higher rate) to convert IRA money to Roth. Later, the IRA money gets taxed *and* drives the SS from untaxed into 85% taxed, whereas the Roth scenario lets you take out money but it isn't *taxable* income so your SS remain untaxed.

Of course all the assumptions in my model will probably be upended in the eight years until I hit FRA, but I'm still going to take the best try rather than decide based on rules of thumb hope for the best.
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I am retired. Can I open a Roth IRA with no earned income?
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I am retired. Can I open a Roth IRA with no earned income?

You cannot make contributions to a Roth IRA with no earned income. However, you can do conversions from a Traditional IRA account into a new Roth IRA account, thereby 'opening a Roth IRA'.

AJ
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Would the conversion count towards our MAGI for purposes of calculating our Medicare costs? Our income is already in the $130,000 range before I even touch my IRA or take out my Social Security, both of which will be happening for me in 6 years.
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Would the conversion count towards our MAGI for purposes of calculating our Medicare costs? Our income is already in the $130,000 range before I even touch my IRA or take out my Social Security, both of which will be happening for me in 6 years.

Yes. But one of your posts upthread, you said: So I am going to start taking enough money out of my IRA to put us at the edge of the 24% tax bracket so that we can either spend it or reinvest it in our taxable accounts whether we need it or not. And that will count towards your MAGI, too.

My original point was - if you're going to take it out of your Traditional account anyway, and put it into an investment account (i.e. you don't plan on spending it), convert it to a Roth instead. That way, you will get tax-free withdrawals in the future. Plus, you have the added bonus that the tax-free withdrawals won't count as income towards higher Medicare premiums, while any capital gains from the taxable account would.

AJ
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" if you're going to take it out of your Traditional account anyway, and put it into an investment account (i.e. you don't plan on spending it), convert it to a Roth instead. "


Presumably that doesn't work for RMDs?

But if the amount of RMD is a mid-point of a tax bracket, it might make sense to convert up to the top of the bracket.
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Presumably that doesn't work for RMDs?

The RMD amount that is withdrawn cannot be converted to a Roth account. Any amount over and above the RMD amount from your own account (not an inherited account) may be converted to a Roth account.

But if the amount of RMD is a mid-point of a tax bracket, it might make sense to convert up to the top of the bracket.

Maybe. It would depend on whether you expect the RMDs plus any other expected income to move you up into the next bracket at some point. Each person would have to analyze their own circumstances, as this instance is too specific for a general rule, IMO.

AJ
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aj: "My original point was - if you're going to take it out of your Traditional account anyway, and put it into an investment account (i.e. you don't plan on spending it), convert it to a Roth instead. That way, you will get tax-free withdrawals in the future. Plus, you have the added bonus that the tax-free withdrawals won't count as income towards higher Medicare premiums, while any capital gains from the taxable account would."

Thanks. I just forwarded my questions to my cpa with your guidance in helping me ask the right questions (I hope).
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You cannot make contributions to a Roth IRA with no earned income. However, you can do conversions from a Traditional IRA account into a new Roth IRA account, thereby 'opening a Roth IRA'.

Is it possible to do something like this with a 401(k) too?

culcha
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You cannot make contributions to a Roth IRA with no earned income. However, you can do conversions from a Traditional IRA account into a new Roth IRA account, thereby 'opening a Roth IRA'.

Is it possible to do something like this with a 401(k) too?

You can roll it into an IRA, and then do the Roth conversion from there.

Or if you are still employed, you can make a non-deductible 401(k) contribution (if your plan allows it), and roll that portion into a Roth.
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Is it possible to do something like this with a 401(k) too?

Within the 401(k)? It depends on the rules for your plan. First of all, your plan must have a Roth 401(k) option. Then your plan must allow you to do in-plan conversions. So check with your plan administrator to see what the rules for your plan are.

Please be aware - unlike Roth IRAs, Roth 401(k) accounts DO have RMD requirements beginning at 70 1/2. Some 401(k) plans do allow participants who are still working for the plan sponsor after they hit 70 1/2 to delay RMDs. But after you quit working at the plan sponsor, you will need to roll your Roth 401(k) to a Roth IRA if you want to avoid RMD requirements and are over 70 1/2.

It's also possible to roll from a Traditional 401(k) directly to a Roth IRA. But whether you can do this while you are still working for the plan sponsor depends on the plan's rules.

AJ
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You can roll it into an IRA, and then do the Roth conversion from there.

If your plan administrator allows, you can actually roll directly from a Traditional 401(k) into a Roth IRA - the money doesn't have to make a stop in a Traditional IRA first. This direct rollover has been allowed since 2008, but not all plans provide the option.

AJ
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A fascinating aspect of an IRA (I can't comment on whether or not a Roth does this, too) is that, depending on how sharp or lucky you are, you can buy or sell stocks or mutuals within the IRA to your heart's content (plus fees), maybe make a lot if you're lucky, and pay no taxes until you take the money out. No capital gains taxes. I liked that years ago when I did considerable buying and selling within my IRA -- something I no longer do.

Vermonter
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...you can buy or sell stocks or mutuals within the IRA to your heart's content (plus fees), maybe make a lot if you're lucky, and pay no taxes until you take the money out...

I'd been thinking about posting this myself since, in my experience, I've increased my Roth account more than quadruple in the past 4 years as compared with my regular account, which has only doubled (more just following the market up). I don't attribute this to being particularly sharp, but in feeling more nimble, getting in and out of stocks without the tax hit. Makes me wonder: if I were willing to do the accounting and pay the taxes, I may have been able to increase my regular stock by a better margin, too...

Pete
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MataroPete:

Yup. I should have kept it up, but got lazy in recent years!

Pretty neat to do it ahead of the market, too, as I did in my Fidelity account back then! I would watch for stocks moving up, buy in, and resell -- all before the market even opened!

Vermonter
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