Roth IRA vs Traditional

[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.

[an]

joec, did I make a mistake in my calculation? Based on my calculation, for that scenario, it’s much cheaper to go w/ Roth. I didn’t say you take out the $1.8M all in one year. I assume this person would take the $1.8M out over 20 years, starting at age 70.5. Which equate to $90k/yr on top of SS, etc. I’m sure you’re aware, that’s why you picked the 70.5 age, but traditional has minimum distribution while Roth doesn’t.

Job change won’t affect your calculation that much unless you’re out of a job for a whole year or more.

Yes, I agree that everyone’s case is different. No investment vehicle is a no brainer for everyone. I’m just trying to say that the longer you are away from retirement, the better Roth becomes. Assuming you don’t have too many gaps in employment. I also noticed that you mentioned that you won’t have any income during retirement. In my calculation, if someone start saving $1k/month, they’d have $1.5M in 30 years w/ 8% yearly return. The interest you get from $1.5M would be considered income. Wouldn’t SS also considered income?

[an]

joec, did I make a mistake in my calculation? Based on my calculation, for that scenario, it’s much cheaper to go w/ Roth. I didn’t say you take out the $1.8M all in one year. I assume this person would take the $1.8M out over 20 years, starting at age 70.5. Which equate to $90k/yr on top of SS, etc. I’m sure you’re aware, that’s why you picked the 70.5 age, but traditional has minimum distribution while Roth doesn’t.

Job change won’t affect your calculation that much unless you’re out of a job for a whole year or more.

Yes, I agree that everyone’s case is different. No investment vehicle is a no brainer for everyone. I’m just trying to say that the longer you are away from retirement, the better Roth becomes. Assuming you don’t have too many gaps in employment. I also noticed that you mentioned that you won’t have any income during retirement. In my calculation, if someone start saving $1k/month, they’d have $1.5M in 30 years w/ 8% yearly return. The interest you get from $1.5M would be considered income. Wouldn’t SS also considered income?

[an]

joec, did I make a mistake in my calculation? Based on my calculation, for that scenario, it’s much cheaper to go w/ Roth. I didn’t say you take out the $1.8M all in one year. I assume this person would take the $1.8M out over 20 years, starting at age 70.5. Which equate to $90k/yr on top of SS, etc. I’m sure you’re aware, that’s why you picked the 70.5 age, but traditional has minimum distribution while Roth doesn’t.

Job change won’t affect your calculation that much unless you’re out of a job for a whole year or more.

Yes, I agree that everyone’s case is different. No investment vehicle is a no brainer for everyone. I’m just trying to say that the longer you are away from retirement, the better Roth becomes. Assuming you don’t have too many gaps in employment. I also noticed that you mentioned that you won’t have any income during retirement. In my calculation, if someone start saving $1k/month, they’d have $1.5M in 30 years w/ 8% yearly return. The interest you get from $1.5M would be considered income. Wouldn’t SS also considered income?

[an]

joec, did I make a mistake in my calculation? Based on my calculation, for that scenario, it’s much cheaper to go w/ Roth. I didn’t say you take out the $1.8M all in one year. I assume this person would take the $1.8M out over 20 years, starting at age 70.5. Which equate to $90k/yr on top of SS, etc. I’m sure you’re aware, that’s why you picked the 70.5 age, but traditional has minimum distribution while Roth doesn’t.

Job change won’t affect your calculation that much unless you’re out of a job for a whole year or more.

Yes, I agree that everyone’s case is different. No investment vehicle is a no brainer for everyone. I’m just trying to say that the longer you are away from retirement, the better Roth becomes. Assuming you don’t have too many gaps in employment. I also noticed that you mentioned that you won’t have any income during retirement. In my calculation, if someone start saving $1k/month, they’d have $1.5M in 30 years w/ 8% yearly return. The interest you get from $1.5M would be considered income. Wouldn’t SS also considered income?

[an]

joec, did I make a mistake in my calculation? Based on my calculation, for that scenario, it’s much cheaper to go w/ Roth. I didn’t say you take out the $1.8M all in one year. I assume this person would take the $1.8M out over 20 years, starting at age 70.5. Which equate to $90k/yr on top of SS, etc. I’m sure you’re aware, that’s why you picked the 70.5 age, but traditional has minimum distribution while Roth doesn’t.

Job change won’t affect your calculation that much unless you’re out of a job for a whole year or more.

Yes, I agree that everyone’s case is different. No investment vehicle is a no brainer for everyone. I’m just trying to say that the longer you are away from retirement, the better Roth becomes. Assuming you don’t have too many gaps in employment. I also noticed that you mentioned that you won’t have any income during retirement. In my calculation, if someone start saving $1k/month, they’d have $1.5M in 30 years w/ 8% yearly return. The interest you get from $1.5M would be considered income. Wouldn’t SS also considered income?

[an]

[quote=carlsbadworker]
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).
[/quote]
If you see higher taxes in the future, then that 15% I used in my calculation would be too low. Also, I didn’t count in SS, income from taxable accounts, deduction you get today that you won’t be getting when you retire. I was trying to build the best case scenario and it doesn’t add up for me.

[an]

[quote=carlsbadworker]
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).
[/quote]
If you see higher taxes in the future, then that 15% I used in my calculation would be too low. Also, I didn’t count in SS, income from taxable accounts, deduction you get today that you won’t be getting when you retire. I was trying to build the best case scenario and it doesn’t add up for me.

[an]

[quote=carlsbadworker]
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).
[/quote]
If you see higher taxes in the future, then that 15% I used in my calculation would be too low. Also, I didn’t count in SS, income from taxable accounts, deduction you get today that you won’t be getting when you retire. I was trying to build the best case scenario and it doesn’t add up for me.

[an]

[quote=carlsbadworker]
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).
[/quote]
If you see higher taxes in the future, then that 15% I used in my calculation would be too low. Also, I didn’t count in SS, income from taxable accounts, deduction you get today that you won’t be getting when you retire. I was trying to build the best case scenario and it doesn’t add up for me.

[an]

[quote=carlsbadworker]
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).
[/quote]
If you see higher taxes in the future, then that 15% I used in my calculation would be too low. Also, I didn’t count in SS, income from taxable accounts, deduction you get today that you won’t be getting when you retire. I was trying to build the best case scenario and it doesn’t add up for me.

[joec]

AN, I’m sure your calcs are correct. Social security is a major factor as well and if you have 50k in SS income, then a Roth ira/401k may make more sense as well.

In summary, it really depends on your situation. The main thought I hope to present is that don’t go blindly into Roth IRA or Roth 401k (I was very biased myself). Another thing to consider is that the government probably loves the Roth 401k and the Roth conversions since they get their tax dollars now (the future is someone else’s problem).

For myself, working non-stop for about 13 years, and recently having job changes, new businesses, it just seems more likely most folks will have at least some breaks in employment due to layoffs, disability, new babies, starting a new business, etc…

It makes sense to convert your IRA to a Roth anytime you have low income of if you are lucky enough to retire at 59.5, do it every year starting then.

I have a friend who worked for about 13 years in tech straight and is now taking time off and it would be a perfect time to do some conversions.

[joec]

AN, I’m sure your calcs are correct. Social security is a major factor as well and if you have 50k in SS income, then a Roth ira/401k may make more sense as well.

In summary, it really depends on your situation. The main thought I hope to present is that don’t go blindly into Roth IRA or Roth 401k (I was very biased myself). Another thing to consider is that the government probably loves the Roth 401k and the Roth conversions since they get their tax dollars now (the future is someone else’s problem).

For myself, working non-stop for about 13 years, and recently having job changes, new businesses, it just seems more likely most folks will have at least some breaks in employment due to layoffs, disability, new babies, starting a new business, etc…

It makes sense to convert your IRA to a Roth anytime you have low income of if you are lucky enough to retire at 59.5, do it every year starting then.

I have a friend who worked for about 13 years in tech straight and is now taking time off and it would be a perfect time to do some conversions.

[joec]

AN, I’m sure your calcs are correct. Social security is a major factor as well and if you have 50k in SS income, then a Roth ira/401k may make more sense as well.

In summary, it really depends on your situation. The main thought I hope to present is that don’t go blindly into Roth IRA or Roth 401k (I was very biased myself). Another thing to consider is that the government probably loves the Roth 401k and the Roth conversions since they get their tax dollars now (the future is someone else’s problem).

For myself, working non-stop for about 13 years, and recently having job changes, new businesses, it just seems more likely most folks will have at least some breaks in employment due to layoffs, disability, new babies, starting a new business, etc…

It makes sense to convert your IRA to a Roth anytime you have low income of if you are lucky enough to retire at 59.5, do it every year starting then.

I have a friend who worked for about 13 years in tech straight and is now taking time off and it would be a perfect time to do some conversions.

[joec]

AN, I’m sure your calcs are correct. Social security is a major factor as well and if you have 50k in SS income, then a Roth ira/401k may make more sense as well.

In summary, it really depends on your situation. The main thought I hope to present is that don’t go blindly into Roth IRA or Roth 401k (I was very biased myself). Another thing to consider is that the government probably loves the Roth 401k and the Roth conversions since they get their tax dollars now (the future is someone else’s problem).

For myself, working non-stop for about 13 years, and recently having job changes, new businesses, it just seems more likely most folks will have at least some breaks in employment due to layoffs, disability, new babies, starting a new business, etc…

It makes sense to convert your IRA to a Roth anytime you have low income of if you are lucky enough to retire at 59.5, do it every year starting then.

I have a friend who worked for about 13 years in tech straight and is now taking time off and it would be a perfect time to do some conversions.

[Author]

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