One concept that I am not getting across and that is NOT realistic is for folks to liquidate a traditional IRA in 1 fell swoop / in 1 year. Here’s another article on how much assets it would take before you even get to the 15% tax bracket. These numbers are old so you can even withdraw more now before getting taxed.
”
…2008. For this couple, their standard deduction is $10,900, and two exemptions ($3500 each) all total $17900. It would take an account balance of $447,500 to support this level of withdrawal.
So, a couple can accumulate $447.5K and the withdrawals (at 4%/yr) will be at a zero tax rate…
”
”
…From this chart, we see the next $16,050 is taxed at 10%. It would take another $401,250 to support this additional annual withdrawal. We now total $848,750 in pre-tax savings, an annual withdrawal totaling $33,950 and still remain in the 10% bracket. The 15% bracket covers the next $49050 which is the annual withdrawal supported by an additional $1,226,250 worth of assets. I’ll stop at this point, having shown that $2M in pretax savings is not a large enough sum to put you over the 15% bracket…”
What this means to me is that unless you have a pension or other income sources in retirement (I don’t), paying taxes now is very expensive since it’s at your highest tax rate. Also, you may not NEED the money at 59 1/2 or even 70 1/2, but unless your balance is really large, it’s still cheaper to pay tax later and just get hit with RMDs at 15% tops (unless your IRA is well over 2 mil+).
Not to mention, you lose all the nice credits available now like new home credit, new auto sales tax deduction, retirement savings credit, etc…due to high income that comes with a Roth 401k.
How many people here have 2 mil+ IRA/401k balances? Tie it in to standard deduction being raised each year and it sounds to me to be more effective to defer (inflation too so say 3k in taxes is more now than 30 years from now in terms of purchasing power).
Again, I’m sure everyone’s case is different and that’s why you have to look at your individual circumstance, but I stress again that I was heavily in the Roth camp in the past, but unless you have a pension paying you 50-80% of your income (I don’t), it would take a massive IRA balance to withdraw it to put you in the larger tax rate than you pay now.
Mix that in with job changes / layoffs (personal experience) and the Roth 401(k) is not as big of a no brainer than I thought it was.
Not to mention, you get tax deductions for traditional IRAs (low income levels). If you don’t, Roth is better for new contributions. Just hold off on the conversions till you have a low income year (go back to school, new business, etc…)
