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joec
ParticipantAN, 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.
ParticipantAN, 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.
ParticipantOne 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…)
ParticipantOne 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…)
ParticipantOne 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…)
ParticipantOne 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…)
ParticipantOne 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…)
ParticipantActually, I think the main point of the article and what I got out of it is that a traditional ira gives you flexibility on when to pay the tax.
Also, when you did the calculation for the conversion, you didn’t incorporate that we have a progressive tax system in the US (THIS IS CRITICAL). That first 17k in conversion is not taxed at all. The next 16k is at 10%, the next 49k is at 15% according to the article and rest is 25% about 10k. Rough estimates bring that out to around 20k in tax. However, this is also critical, is that you don’t HAVE to do a full 100% conversion in any given year. You can do any amount based on your circumstance that year.
A lot of people look at 2010 and look at how anyone can convert to a Roth, but people were able to do IRA conversions for a while. In my own case, I have converted during a job transition year and paid about 6% tax that whole year. Assuming most readers here are aged 30-40, you have a good 30-40 years before mandatory required minimum distributions.
Also, a lot of financial professionals will probably tell you to NOT do a 100% conversion. The whole goal is to keep the conversion amount in a lower tax bracket so say, if you’re lucky enough to retire at 59 1/2, you can convert every year with no other income (delay social security) till 70 1/2 and in short order (say 10 years till 70 1/2, convert 800k (80k per year) paying 15% tax only). Move to an income tax free state first of course. 🙂
You can convert a bit every single year and that’s the power of the traditional ira vs. the roth 401k where you already paid the highest income tax bracket of your income. The key is that the roth 401k tax is paid at your highest tax bracket while unless you have a pension, the income you take from a traditional ira is at the lowest bracket…
Hope that makes sense. 🙂
Again, I’ve been in the Roth camp for a while, but unless you have really high retirement income from social security or pensions, there really is no other income source to fill your exemptions, deductions, etc…
ParticipantActually, I think the main point of the article and what I got out of it is that a traditional ira gives you flexibility on when to pay the tax.
Also, when you did the calculation for the conversion, you didn’t incorporate that we have a progressive tax system in the US (THIS IS CRITICAL). That first 17k in conversion is not taxed at all. The next 16k is at 10%, the next 49k is at 15% according to the article and rest is 25% about 10k. Rough estimates bring that out to around 20k in tax. However, this is also critical, is that you don’t HAVE to do a full 100% conversion in any given year. You can do any amount based on your circumstance that year.
A lot of people look at 2010 and look at how anyone can convert to a Roth, but people were able to do IRA conversions for a while. In my own case, I have converted during a job transition year and paid about 6% tax that whole year. Assuming most readers here are aged 30-40, you have a good 30-40 years before mandatory required minimum distributions.
Also, a lot of financial professionals will probably tell you to NOT do a 100% conversion. The whole goal is to keep the conversion amount in a lower tax bracket so say, if you’re lucky enough to retire at 59 1/2, you can convert every year with no other income (delay social security) till 70 1/2 and in short order (say 10 years till 70 1/2, convert 800k (80k per year) paying 15% tax only). Move to an income tax free state first of course. 🙂
You can convert a bit every single year and that’s the power of the traditional ira vs. the roth 401k where you already paid the highest income tax bracket of your income. The key is that the roth 401k tax is paid at your highest tax bracket while unless you have a pension, the income you take from a traditional ira is at the lowest bracket…
Hope that makes sense. 🙂
Again, I’ve been in the Roth camp for a while, but unless you have really high retirement income from social security or pensions, there really is no other income source to fill your exemptions, deductions, etc…
ParticipantActually, I think the main point of the article and what I got out of it is that a traditional ira gives you flexibility on when to pay the tax.
Also, when you did the calculation for the conversion, you didn’t incorporate that we have a progressive tax system in the US (THIS IS CRITICAL). That first 17k in conversion is not taxed at all. The next 16k is at 10%, the next 49k is at 15% according to the article and rest is 25% about 10k. Rough estimates bring that out to around 20k in tax. However, this is also critical, is that you don’t HAVE to do a full 100% conversion in any given year. You can do any amount based on your circumstance that year.
A lot of people look at 2010 and look at how anyone can convert to a Roth, but people were able to do IRA conversions for a while. In my own case, I have converted during a job transition year and paid about 6% tax that whole year. Assuming most readers here are aged 30-40, you have a good 30-40 years before mandatory required minimum distributions.
Also, a lot of financial professionals will probably tell you to NOT do a 100% conversion. The whole goal is to keep the conversion amount in a lower tax bracket so say, if you’re lucky enough to retire at 59 1/2, you can convert every year with no other income (delay social security) till 70 1/2 and in short order (say 10 years till 70 1/2, convert 800k (80k per year) paying 15% tax only). Move to an income tax free state first of course. 🙂
You can convert a bit every single year and that’s the power of the traditional ira vs. the roth 401k where you already paid the highest income tax bracket of your income. The key is that the roth 401k tax is paid at your highest tax bracket while unless you have a pension, the income you take from a traditional ira is at the lowest bracket…
Hope that makes sense. 🙂
Again, I’ve been in the Roth camp for a while, but unless you have really high retirement income from social security or pensions, there really is no other income source to fill your exemptions, deductions, etc…
ParticipantActually, I think the main point of the article and what I got out of it is that a traditional ira gives you flexibility on when to pay the tax.
Also, when you did the calculation for the conversion, you didn’t incorporate that we have a progressive tax system in the US (THIS IS CRITICAL). That first 17k in conversion is not taxed at all. The next 16k is at 10%, the next 49k is at 15% according to the article and rest is 25% about 10k. Rough estimates bring that out to around 20k in tax. However, this is also critical, is that you don’t HAVE to do a full 100% conversion in any given year. You can do any amount based on your circumstance that year.
A lot of people look at 2010 and look at how anyone can convert to a Roth, but people were able to do IRA conversions for a while. In my own case, I have converted during a job transition year and paid about 6% tax that whole year. Assuming most readers here are aged 30-40, you have a good 30-40 years before mandatory required minimum distributions.
Also, a lot of financial professionals will probably tell you to NOT do a 100% conversion. The whole goal is to keep the conversion amount in a lower tax bracket so say, if you’re lucky enough to retire at 59 1/2, you can convert every year with no other income (delay social security) till 70 1/2 and in short order (say 10 years till 70 1/2, convert 800k (80k per year) paying 15% tax only). Move to an income tax free state first of course. 🙂
You can convert a bit every single year and that’s the power of the traditional ira vs. the roth 401k where you already paid the highest income tax bracket of your income. The key is that the roth 401k tax is paid at your highest tax bracket while unless you have a pension, the income you take from a traditional ira is at the lowest bracket…
Hope that makes sense. 🙂
Again, I’ve been in the Roth camp for a while, but unless you have really high retirement income from social security or pensions, there really is no other income source to fill your exemptions, deductions, etc…
ParticipantActually, I think the main point of the article and what I got out of it is that a traditional ira gives you flexibility on when to pay the tax.
Also, when you did the calculation for the conversion, you didn’t incorporate that we have a progressive tax system in the US (THIS IS CRITICAL). That first 17k in conversion is not taxed at all. The next 16k is at 10%, the next 49k is at 15% according to the article and rest is 25% about 10k. Rough estimates bring that out to around 20k in tax. However, this is also critical, is that you don’t HAVE to do a full 100% conversion in any given year. You can do any amount based on your circumstance that year.
A lot of people look at 2010 and look at how anyone can convert to a Roth, but people were able to do IRA conversions for a while. In my own case, I have converted during a job transition year and paid about 6% tax that whole year. Assuming most readers here are aged 30-40, you have a good 30-40 years before mandatory required minimum distributions.
Also, a lot of financial professionals will probably tell you to NOT do a 100% conversion. The whole goal is to keep the conversion amount in a lower tax bracket so say, if you’re lucky enough to retire at 59 1/2, you can convert every year with no other income (delay social security) till 70 1/2 and in short order (say 10 years till 70 1/2, convert 800k (80k per year) paying 15% tax only). Move to an income tax free state first of course. 🙂
You can convert a bit every single year and that’s the power of the traditional ira vs. the roth 401k where you already paid the highest income tax bracket of your income. The key is that the roth 401k tax is paid at your highest tax bracket while unless you have a pension, the income you take from a traditional ira is at the lowest bracket…
Hope that makes sense. 🙂
Again, I’ve been in the Roth camp for a while, but unless you have really high retirement income from social security or pensions, there really is no other income source to fill your exemptions, deductions, etc…
ParticipantI’ve reviewed this question many times myself in the past and have changed my view on this a while back. I used to be in the camp of 100% Roth because the goverment can only raise your taxes, but take a look at this article and some the other links in the article and you might rethink your view. I know I have. Also, a key point which is very true is job changes / layoffs, etc where you can choose at anytime when you want to do an IRA conversion to a Roth and pay low or no tax. Another good point is all the tax credits for lower income folks or middle income folks. Like the new home buyer credit, you can’t get if your income is too high.
Also, if you ever start a business, you can be looking at low taxes for a few years and do conversions every year to use up your business losses, exemptions, deductions, etc…
Unlike our parents, 30 years at the same company with a pension is very unlikely and for the overall flexibility and not being “forced” to pay taxes now, I think a regular 401k or traditional makes a lot of sense.
For people without a stable pension paying you 50 or 100k, your IRAs/401ks will probably be your only income next to social security so (check the links), you would need a pretty massive IRA before you will be in a higher tax bracket than the minimum tax rates.
http://thefinancebuff.com/2008/03/case-against-roth-401k.html
ParticipantI’ve reviewed this question many times myself in the past and have changed my view on this a while back. I used to be in the camp of 100% Roth because the goverment can only raise your taxes, but take a look at this article and some the other links in the article and you might rethink your view. I know I have. Also, a key point which is very true is job changes / layoffs, etc where you can choose at anytime when you want to do an IRA conversion to a Roth and pay low or no tax. Another good point is all the tax credits for lower income folks or middle income folks. Like the new home buyer credit, you can’t get if your income is too high.
Also, if you ever start a business, you can be looking at low taxes for a few years and do conversions every year to use up your business losses, exemptions, deductions, etc…
Unlike our parents, 30 years at the same company with a pension is very unlikely and for the overall flexibility and not being “forced” to pay taxes now, I think a regular 401k or traditional makes a lot of sense.
For people without a stable pension paying you 50 or 100k, your IRAs/401ks will probably be your only income next to social security so (check the links), you would need a pretty massive IRA before you will be in a higher tax bracket than the minimum tax rates.
http://thefinancebuff.com/2008/03/case-against-roth-401k.html
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