Roth IRA vs Traditional

[an]

You’re right about that main point, and I definitely agree with that point. I think the main advantage of Roth is the tax free growth. In your calculation, you only consider federal income tax. If you plan to retire in a no income tax state, then great, but I plan to retire right here in SD, so I’d have to add about 10% on top of that.

You’re right regarding the progressive tax code. I totally forgot about that. It does bring the federal tax rate down from the 25% I was using to calculate. So, let me try this again. Assuming someone is 30, and start saving for retirement now and put $15k/yr away. Lets assume this individual stay w/in the 25% fed tax rate (to make things simpler). This person will retire at age 60. Over 30 years, this person put away $450k into their 401k. Lets assume there’s no major gap in employment and the investment grow at 8% over 30 years. With Roth, you’re paying $112k in federal tax. With traditional, that $450k should grow to $1,879,213.91. Lets assume you’re splitting that $1.8M up over time so you’ll stay w/in the 25% tax bracket, so the effective tax rate due to the progressive tax code will be 15% as you mentioned. 15% of the $1.8M is $281882. So, you’re still going to pay roughly $170k more in taxes.

The other big advantage of Roth vs traditional is required minimum distributions. Roth does not have that until you die, while traditional require you to take $ out at age 70.5. It really depends on how big is your nest egg outside of your retirement account. If you did a good job in saving for retirement beyond your 401k/IRA, having a Roth means you don’t have to take $ out and raise your tax bracket when you don’t really need to. People in the middle of the 25% tax bracket, should be able to save about $1k-3k/month beyond maxing 401k/IRA. If that person invest and get 8% return over 30 years, they should have a nest egg of $1.5M-$4.5M in taxable account.

The big unknown is inflation. If inflation go wild or just run faster than it has been for the next 30 years, 8% return would be too small. If we have average deflation over the next 30 years, 8% would be too large. If one bet on inflation, Roth seems even more lucrative while if one bet on deflation between now and retirement, traditional would be a better vehicle. Assuming the deflation will cause your average return to be less than 1.7% over 30 years vs 8%.

[Raybyrnes]

First Principal is to Maximize wealth. This can be accomplished by minimizing taxes burden. Second principal max liquiidity. If money needs to be pulled out from Roth for house, college costs, etc it is far easier then doing so from a traditional.

For all of you who have made arguments for the Traditional, I want to let you know that is exactly the logical argument that I find acceptable. Saying that a person is saving money with the traditonal by not paying taxes n ow. Not acceptable.

[Raybyrnes]

First Principal is to Maximize wealth. This can be accomplished by minimizing taxes burden. Second principal max liquiidity. If money needs to be pulled out from Roth for house, college costs, etc it is far easier then doing so from a traditional.

For all of you who have made arguments for the Traditional, I want to let you know that is exactly the logical argument that I find acceptable. Saying that a person is saving money with the traditonal by not paying taxes n ow. Not acceptable.

[Raybyrnes]

First Principal is to Maximize wealth. This can be accomplished by minimizing taxes burden. Second principal max liquiidity. If money needs to be pulled out from Roth for house, college costs, etc it is far easier then doing so from a traditional.

For all of you who have made arguments for the Traditional, I want to let you know that is exactly the logical argument that I find acceptable. Saying that a person is saving money with the traditonal by not paying taxes n ow. Not acceptable.

[Raybyrnes]

First Principal is to Maximize wealth. This can be accomplished by minimizing taxes burden. Second principal max liquiidity. If money needs to be pulled out from Roth for house, college costs, etc it is far easier then doing so from a traditional.

For all of you who have made arguments for the Traditional, I want to let you know that is exactly the logical argument that I find acceptable. Saying that a person is saving money with the traditonal by not paying taxes n ow. Not acceptable.

[Raybyrnes]

First Principal is to Maximize wealth. This can be accomplished by minimizing taxes burden. Second principal max liquiidity. If money needs to be pulled out from Roth for house, college costs, etc it is far easier then doing so from a traditional.

For all of you who have made arguments for the Traditional, I want to let you know that is exactly the logical argument that I find acceptable. Saying that a person is saving money with the traditonal by not paying taxes n ow. Not acceptable.

[joec]

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.

http://www.joetaxpayer.com/toomuch.html

”
…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…)

[joec]

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.

http://www.joetaxpayer.com/toomuch.html

”
…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…)

[joec]

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.

http://www.joetaxpayer.com/toomuch.html

”
…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…)

[joec]

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.

http://www.joetaxpayer.com/toomuch.html

”
…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…)

[joec]

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.

http://www.joetaxpayer.com/toomuch.html

”
…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…)

[carlsbadworker]

I do see higher tax in the future as well. It is a near-certainty event with the aging population and increasing deficit. Also, politically, there’re many young workers who can not find jobs right now and research indicated that recessions in early adulthood can shape people’s support of government intervention.

But as I have been arguing ealier, even if we see the start of the shift towards a pattern more familiar to Europeans (big government, higher taxes). It does not translate into higher income tax for all group of the people. The people will call forth demands for a more generous social-safety net, which in turn makes a steep tax structural, just like what it is in Europe.

So take France as an example, their tax table works out as following:
Up to €5,875 0%
Between €5,876 – €11,720 5.5%
Between €11,721 – €26,030 14%
Between €26,031 – €69,783 30%
Above €69,783 40%

On top of that, there is 19.6% VAT (2.1% drugs, newspapers, theatres and 5.5% raw food, books).

The overall burden of the tax will be higher. But as joec has pointed out, that doesn’t mean Roth will certainly beat IRA, unless you have a really high IRA-distribution each year.

Lastly, just to point out, when AN said “15% of the $1.8M is $281882. So, you’re still going to pay roughly $170k more in taxes.” That is $280K tax starting from 30 years from now, rather than $112K taxes starting from today. All things being equal. I would rather pay $3 taxes 30 years from now rather than $1 tax today, as I am sure inflation will eat up most of its purchasing power (just assume a moderate 4% inflation rate each year).

The only way the governments can get out of this mess is a combination of tax and printing money. Of course, they could hope to borrow more, but foreigners may not want to lend them anymore, as Greece is teaching all of us recently.

[carlsbadworker]

I do see higher tax in the future as well. It is a near-certainty event with the aging population and increasing deficit. Also, politically, there’re many young workers who can not find jobs right now and research indicated that recessions in early adulthood can shape people’s support of government intervention.

But as I have been arguing ealier, even if we see the start of the shift towards a pattern more familiar to Europeans (big government, higher taxes). It does not translate into higher income tax for all group of the people. The people will call forth demands for a more generous social-safety net, which in turn makes a steep tax structural, just like what it is in Europe.

So take France as an example, their tax table works out as following:
Up to €5,875 0%
Between €5,876 – €11,720 5.5%
Between €11,721 – €26,030 14%
Between €26,031 – €69,783 30%
Above €69,783 40%

On top of that, there is 19.6% VAT (2.1% drugs, newspapers, theatres and 5.5% raw food, books).

The overall burden of the tax will be higher. But as joec has pointed out, that doesn’t mean Roth will certainly beat IRA, unless you have a really high IRA-distribution each year.

Lastly, just to point out, when AN said “15% of the $1.8M is $281882. So, you’re still going to pay roughly $170k more in taxes.” That is $280K tax starting from 30 years from now, rather than $112K taxes starting from today. All things being equal. I would rather pay $3 taxes 30 years from now rather than $1 tax today, as I am sure inflation will eat up most of its purchasing power (just assume a moderate 4% inflation rate each year).

The only way the governments can get out of this mess is a combination of tax and printing money. Of course, they could hope to borrow more, but foreigners may not want to lend them anymore, as Greece is teaching all of us recently.

[carlsbadworker]

I do see higher tax in the future as well. It is a near-certainty event with the aging population and increasing deficit. Also, politically, there’re many young workers who can not find jobs right now and research indicated that recessions in early adulthood can shape people’s support of government intervention.

But as I have been arguing ealier, even if we see the start of the shift towards a pattern more familiar to Europeans (big government, higher taxes). It does not translate into higher income tax for all group of the people. The people will call forth demands for a more generous social-safety net, which in turn makes a steep tax structural, just like what it is in Europe.

So take France as an example, their tax table works out as following:
Up to €5,875 0%
Between €5,876 – €11,720 5.5%
Between €11,721 – €26,030 14%
Between €26,031 – €69,783 30%
Above €69,783 40%

On top of that, there is 19.6% VAT (2.1% drugs, newspapers, theatres and 5.5% raw food, books).

The overall burden of the tax will be higher. But as joec has pointed out, that doesn’t mean Roth will certainly beat IRA, unless you have a really high IRA-distribution each year.

Lastly, just to point out, when AN said “15% of the $1.8M is $281882. So, you’re still going to pay roughly $170k more in taxes.” That is $280K tax starting from 30 years from now, rather than $112K taxes starting from today. All things being equal. I would rather pay $3 taxes 30 years from now rather than $1 tax today, as I am sure inflation will eat up most of its purchasing power (just assume a moderate 4% inflation rate each year).

The only way the governments can get out of this mess is a combination of tax and printing money. Of course, they could hope to borrow more, but foreigners may not want to lend them anymore, as Greece is teaching all of us recently.

[carlsbadworker]

I do see higher tax in the future as well. It is a near-certainty event with the aging population and increasing deficit. Also, politically, there’re many young workers who can not find jobs right now and research indicated that recessions in early adulthood can shape people’s support of government intervention.

But as I have been arguing ealier, even if we see the start of the shift towards a pattern more familiar to Europeans (big government, higher taxes). It does not translate into higher income tax for all group of the people. The people will call forth demands for a more generous social-safety net, which in turn makes a steep tax structural, just like what it is in Europe.

So take France as an example, their tax table works out as following:
Up to €5,875 0%
Between €5,876 – €11,720 5.5%
Between €11,721 – €26,030 14%
Between €26,031 – €69,783 30%
Above €69,783 40%

On top of that, there is 19.6% VAT (2.1% drugs, newspapers, theatres and 5.5% raw food, books).

The overall burden of the tax will be higher. But as joec has pointed out, that doesn’t mean Roth will certainly beat IRA, unless you have a really high IRA-distribution each year.

Lastly, just to point out, when AN said “15% of the $1.8M is $281882. So, you’re still going to pay roughly $170k more in taxes.” That is $280K tax starting from 30 years from now, rather than $112K taxes starting from today. All things being equal. I would rather pay $3 taxes 30 years from now rather than $1 tax today, as I am sure inflation will eat up most of its purchasing power (just assume a moderate 4% inflation rate each year).

The only way the governments can get out of this mess is a combination of tax and printing money. Of course, they could hope to borrow more, but foreigners may not want to lend them anymore, as Greece is teaching all of us recently.

[Author]

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