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Should I keep contributing to my RothIRA
Posted on 1/29/18 at 10:05 pm
Posted on 1/29/18 at 10:05 pm
Was recently informed that with my marginal tax rate (25%) that I shouldn’t be contributing to a RothIRA and instead should use a traditional IRA instead. Little background: I have to contribute 9% of my gross into a PERS state retirement system. I have no choice in this. I am looking at opening a 457 DC to contribute the remaining 6%. I have also been fully finding my Roth the last couple of years. Should I just continue or redirect the money and open a traditional IRA instead?
This post was edited on 1/30/18 at 12:53 pm
3
Posted on 1/29/18 at 10:14 pm to corndawg85
From my limited understanding, if you think your tax rate in retirement will be higher than now, you put it in a Roth. If the opposite, then traditional.
Posted on 1/29/18 at 10:22 pm to Weagle25
quote:
From my limited understanding, if you think your tax rate in retirement will be higher than now, you put it in a Roth. If the opposite, then traditional.
My tax rate in retirement is the same as it was when I was working, I wish I had used Roth IRAS. My withdrawals being now taxed as regular income is pretty painful.
Posted on 1/30/18 at 8:10 am to corndawg85
quote:
if you think your tax rate in retirement will be higher than now, you put it in a Roth. If the opposite, then traditional.
Now, think through the debt issues in this country and when they will come to roost. It amazes me that people will invest in cryptos because it's the future, but can't seem to think logically about tax code.
Taxes will be higher. Invest in the Roth, if for nothing less than tax diversification when the wrong party gets in power during your retirement.
#taxationistheft
Posted on 1/30/18 at 8:46 am to EA6B
quote:
My tax rate in retirement is the same as it was when I was working, I wish I had used Roth IRAS. My withdrawals being now taxed as regular income is pretty painful.
Yes but we aren't talking dollars to dollars same amount.
If you are 25% tax bracket, then you could put $5,000 into a 401k/ pre tax or $4,000 into a Roth and give the gov $1000.
If you have any self employment income you add an additional 12.3%+ in tax savings. So it's not like you will retire with say $2 mil in a Roth or 2 mil in a 401k. Its more like would you take either $2 mil in a Roth or $3 mil taxed in a 401k? Remember the only thing taxed is your withdrawal.
Now let's say your money doubles every ten years with 7% growth, you could have $6 mil at 75 in a 401k or have $4mil in a Roth. I'd take the $6 mil taxed personally.
This post was edited on 1/30/18 at 8:47 am
Posted on 1/30/18 at 8:49 am to corndawg85
This is why I'm asking the question:
It depends on a lot of factors, but the calculation is somewhat straight forward:
Traditional IRA: Investing $5k/year Roth investing not 5k, but 5(1-marginal tax rate) *this is the part that most people leave out, so at 25% marginal (including state) we'll put that at 3750. This is the only way to equitably compare unless you are saturating all pre-tax contribution avenues.
For 5k with 6% return on a 30 year investment, you'd have 447,725. For 3750 at 6% return on a 30 year investment, you'd have 335,794, tax free. The effective tax rate in retirement is a bit complicated (and uncertain), but you should pay about 12-17% effective tax on your withdrawals. The reason it's effective and not marginal is because all of your income will be from retirement and SS, not from earned income. At 15%, that makes the 447k become 380k, and 380k > 335k. To get back to 335k from the Traditional IRA you'd need to be taxed at 25% on the withdrawals.
What you don't want in retirement is a tax bill so small that you're not taking advantage of deductions and low-tax brackets because then you're essentially pre-paying taxes for nothing. One strategy is to use Roth only in the highest marginal tax rates, e.g., those over 25%, which would be useful if you're pulling down more than 250-300k in 30 years as a single.
It depends on a lot of factors, but the calculation is somewhat straight forward:
Traditional IRA: Investing $5k/year Roth investing not 5k, but 5(1-marginal tax rate) *this is the part that most people leave out, so at 25% marginal (including state) we'll put that at 3750. This is the only way to equitably compare unless you are saturating all pre-tax contribution avenues.
For 5k with 6% return on a 30 year investment, you'd have 447,725. For 3750 at 6% return on a 30 year investment, you'd have 335,794, tax free. The effective tax rate in retirement is a bit complicated (and uncertain), but you should pay about 12-17% effective tax on your withdrawals. The reason it's effective and not marginal is because all of your income will be from retirement and SS, not from earned income. At 15%, that makes the 447k become 380k, and 380k > 335k. To get back to 335k from the Traditional IRA you'd need to be taxed at 25% on the withdrawals.
What you don't want in retirement is a tax bill so small that you're not taking advantage of deductions and low-tax brackets because then you're essentially pre-paying taxes for nothing. One strategy is to use Roth only in the highest marginal tax rates, e.g., those over 25%, which would be useful if you're pulling down more than 250-300k in 30 years as a single.
Posted on 1/30/18 at 8:55 am to baldona
Since we like psychological advice here: Roth has the benefit of being your honest retirement nest egg balance. That balance can wholly be used against expenses.
I’m a big proponent to keep it slanted 60/40% slanted towards Roth in most cases. Playing the odds while attaining tax diversification.
Don’t forget that all employer contributions are traditional regardless of your settings. As a result, your part may 100% be Roth
I’m a big proponent to keep it slanted 60/40% slanted towards Roth in most cases. Playing the odds while attaining tax diversification.
Don’t forget that all employer contributions are traditional regardless of your settings. As a result, your part may 100% be Roth
This post was edited on 1/30/18 at 8:56 am
Posted on 1/30/18 at 9:13 am to Volvagia
It's mainly pay the tax now or pay the tax later. But realize your spending matters too. You only pay 24% (or whatever) on the HIGHER portion of your income. If you know your withdrawals/income will be low in retirement, why not pay the 12% (assuming taxes don't change, yeah right but who knows) later?
I'm having a hard time putting into words what I mean. If you're not going to "fill up" the lower tax bracket in retirement (with your withdrawals), why not save on taxes (maybe 22% now) pay the lower taxes (12%) in retirement?
I'm having a hard time putting into words what I mean. If you're not going to "fill up" the lower tax bracket in retirement (with your withdrawals), why not save on taxes (maybe 22% now) pay the lower taxes (12%) in retirement?
This post was edited on 1/30/18 at 9:14 am
Posted on 1/30/18 at 9:33 am to jimbeam
quote:
If you're not going to "fill up" the lower tax bracket in retirement (with your withdrawals), why not save on taxes (maybe 22% now) pay the lower taxes (12%) in retirement?
Correct, advice is different for anyone that earns $150k or so plus most of their life and will need that much in retirement.
But for the average person that earns $80-120k ish or a little more you will likely pay very close to the same amount in taxes now or the future. I've heard taxes are 'going up' for 25 years yet they've not really changed.
Most of the people that talk about taxes going up are frankly not very good at business or finances, because most people that are delay taxes as much as possible. If you can delay paying 25% now for another 40 years there's basically no situation where that doesn't make sense.
Most people need less money in retirement too. No house payment, no retirement savings, etc. Removing just those 2 is generally 25-40% of someone's gross pay. That's a lot less money, and can easily drop your tax bracket considerably.
Posted on 1/30/18 at 10:02 am to baldona
Exactly 
Posted on 1/30/18 at 12:37 pm to baldona
quote:
But for the average person that earns $80-120k ish or a little more you will likely pay very close to the same amount in taxes now or the future. I've heard taxes are 'going up' for 25 years yet they've not really changed.
You see, comments like this are why I think some people were a little quick off the gun to get excited about the tax cuts. The Senate version leaves a lot to be desired.
It’s not theoretical anymore, bracket creep is back. Unless you are planning to retire in the next decade or so, its best to put heavier in a Roth now for the next few years than you would otherwise do.
Even if rates stay the same, it now trails inflation. In the long term, it is going to be a significant difference. Something to consider for those with ~30 year retirement horizons.
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