The Great Roth Controversy

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ArrieS
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Re: The Great Roth Controversy

Post by ArrieS »

Part of your withdrawal will be taxed no matter what. The government contributions are tax deferred so whatever percentage that is of your account will be subject to taxes.
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mindofmush
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Re: The Great Roth Controversy

Post by mindofmush »

For Go Curry Cracker's investment style and retirement income plan, using the Roth during working years cost him more in taxes. His plan for paying no taxes on a Roth conversion ladder in retirement is interesting but only works if you can maintain a 15% tax bracket (something that a CSRS or FERS retiree would find difficult to achieve).

GCC assumes only 5% real long term growth on his investment but achieving 10%, 15% or better returns will produce many times more earnings than contributions which makes the Roth more attractive.

An IRA is better than a regular brokerage account if you plan to use any strategy that produces short term gains (options, like covered calls or put spreads, or frequent stock/ETF sales) which are not taxed in an IRA.

While many people wear the same size shoe, one shoe size doesn't fit everybody. Create the investment/retirement/tax reduction plan that fits you.
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mmmmmbeer
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Re: The Great Roth Controversy

Post by mmmmmbeer »

But just to clarify in your scenario, would the percentage you get taxed on $1400 vs $10k be the same?
I'd say yes or higher. The $10k a month (tsp) + $5300 (pension) = $15.3k a month x 12 = $183k

Quite a bite more than my gross now, so yeah, probably equal or higher.
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Ofsthun01
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Re: The Great Roth Controversy

Post by Ofsthun01 »

I'm really invested in figuring out what the best strategy here may be.

My wife just started federal service Monday (yay) at 27yrs of age. So she's got, let’s say 30 to go. We have no kids and intend on keeping it that way. I've been federal for 13 yrs and have made traditional contributions the whole time.

There is such a debate on which is best, is there really any way to determine which is best? Everyone's decision on which route to take seems to depend heavily on everyone being exactly where they plan to be in retirement, with everything going exactly according to plan. This rarely happens in my case, kudos to you if it does. With changes to tax laws, having kids or not having kids, potential job changes, other extenuating circumstances etc, how sure can we really be that we're making the right choice? And maybe most importantly, how much are we missing out on if we take the "wrong" route?

Mindofmush is correct in saying one size does not fit all (paraphrasing) when it comes to retirement. Everyone's opinion is very much appreciated on this subject. Trying to learn as much as I can.

Who knows, maybe the best plan is for me to keep making traditional contributions and for my wife to contribute to Roth. :?:
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PoorFed
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Re: The Great Roth Controversy

Post by PoorFed »

Although no one knows what the tax rate will be in the future, I believe it is safe to say that it will be higher. However, I believe that standard deductions, exemptions, and the income brackets for those tax rates will also be higher which will negate some of the additional taxes from the higher tax rate. To Roth or not to Roth depends on ones personal situation and is definitely not a one size fits all. All else being the same, if I lived in Nevada with no state including me tax, I would probably lean towards Roth. Living in Hawaii where they tax you on everything (Hawaii taxes Federal COLA) I would never choose Roth because of the progressive nature of tax rates.

Capitalism
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Joined: Fri Jul 07, 2017 6:45 pm

Re: The Great Roth Controversy

Post by Capitalism »

That's my situation too. I don't do Roth because my current state has an income tax and my retirement state does not. I know that's not a guarantee that it won't change but I can not predict the future.

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evilanne
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Re: The Great Roth Controversy

Post by evilanne »

Ofsthun01,

A lot depends on your current earnings & marginal tax rate as well as your promotion potential in your careers, under current system if you file married filing jointly, you can have earnings up to ~96K in the 15% bracket. Under the proposed new tax law, you would be at 12% bracket up to $114K (12% Tax Bracket Top + Std Deduction) of taxable income (see atch). Remember that FEHB is pretax also (your premiums are excluded from income); FSA & HSA contributions are also pretax.

If you are already in 25% or higher bracket, you may want to stick with Traditional or figure out the amount that will keep you in the lower tax bracket and contribute the rest to Roth. It takes a little planning but it is easy enough to change your allocation/contribution amounts throughout the year if things change.

Another factor is how much you can grow your accounts. Take a look at some of the TSP calculators and see how much your account will grow at 5-6% vs 10, 15 or 20% over your time horizon. Then look at what your retirement income would be based on various assumptions. What is really interesting is when MRDs kick in at 70.5 when you use a higher RoR.

Ref: http://www.businessinsider.com/trump-go ... te-2017-10
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Ofsthun01
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Re: The Great Roth Controversy

Post by Ofsthun01 »

Thanks for the information Evil.
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cashworth
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Re: The Great Roth Controversy

Post by cashworth »

Ofsthun01 wrote:I'm really invested in figuring out what the best strategy here may be.

My wife just started federal service Monday (yay) at 27yrs of age. So she's got, let’s say 30 to go. We have no kids and intend on keeping it that way. I've been federal for 13 yrs and have made traditional contributions the whole time.

There is such a debate on which is best, is there really any way to determine which is best? Everyone's decision on which route to take seems to depend heavily on everyone being exactly where they plan to be in retirement, with everything going exactly according to plan. This rarely happens in my case, kudos to you if it does. With changes to tax laws, having kids or not having kids, potential job changes, other extenuating circumstances etc, how sure can we really be that we're making the right choice? And maybe most importantly, how much are we missing out on if we take the "wrong" route?

Mindofmush is correct in saying one size does not fit all (paraphrasing) when it comes to retirement. Everyone's opinion is very much appreciated on this subject. Trying to learn as much as I can.

Who knows, maybe the best plan is for me to keep making traditional contributions and for my wife to contribute to Roth. :?:
I also couldn't come up with a 100% win. I run 1/2 traditional 1/2 Roth. KISS.

cb14
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Re: The Great Roth Controversy

Post by cb14 »

I also couldn't come up with a 100% win. I run 1/2 traditional 1/2 Roth. KISS.
I'm thinking this same thing. I'm about to change from 100% Roth to half-and-half.
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mmmmmbeer
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Re: The Great Roth Controversy

Post by mmmmmbeer »

Well being as I already have 280k in traditional.. it's got a good headstart. If I put the rest into 100% Roth for the next 7 years I have left, I should have somewhere around a 70%/30% tradish/roth split by the time I start drawing. So that's not to shabby I think.
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Ofsthun01
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Re: The Great Roth Controversy

Post by Ofsthun01 »

cb14 wrote:
I also couldn't come up with a 100% win. I run 1/2 traditional 1/2 Roth. KISS.
I'm thinking this same thing. I'm about to change from 100% Roth to half-and-half.
So maybe I should just keep doing traditional for the next 20 something years and have my wife contribute Roth for 30 years. Or maybe we both do splits. I don't know. My head hurts.
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Timber82
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Re: The Great Roth Controversy

Post by Timber82 »

Am i the only one that feels like they will be making less money when they retire? I see myself sitting at the bottom of the chain when that day comes.

I havent seen anyone mention it yet so maybey i am stating a negative fact here but being this money in tradition is pretax, doesnt this also bring down my tax bracket i am paying now. Like say I make 98K and I contributed the max 18k, doesnt the IRs basically look at me as though I made 80K? Then I did the 5.5k into a tradition IRA, now doesnt the GOVT look at me as though I make 74.5K? I hope my logic is right here otherwise I have been doing it all wrong lol.

Carmen909
Posts: 109
Joined: Sun Dec 04, 2016 12:16 am

Re: The Great Roth Controversy

Post by Carmen909 »

Timber82 wrote:Am i the only one that feels like they will be making less money when they retire? I see myself sitting at the bottom of the chain when that day comes.

I havent seen anyone mention it yet so maybey i am stating a negative fact here but being this money in tradition is pretax, doesnt this also bring down my tax bracket i am paying now. Like say I make 98K and I contributed the max 18k, doesnt the IRs basically look at me as though I made 80K? Then I did the 5.5k into a tradition IRA, now doesnt the GOVT look at me as though I make 74.5K? I hope my logic is right here otherwise I have been doing it all wrong lol.
Yes, if you make 98k now, you subtract the 18k and the 5.5k to make your adjusted gross income 74.5k. So when you pay federal taxes, the IRS is taxing your $74.5.

I imagine I'll have less income when I retire as well. But hopefully my expenses will be less, too.

mindofmush
Posts: 353
Joined: Mon Jul 02, 2012 1:38 pm

Re: The Great Roth Controversy

Post by mindofmush »

PoorFed wrote:Although no one knows what the tax rate will be in the future, I believe it is safe to say that it will be higher. However, I believe that standard deductions, exemptions, and the income brackets for those tax rates will also be higher which will negate some of the additional taxes from the higher tax rate. To Roth or not to Roth depends on ones personal situation and is definitely not a one size fits all. All else being the same, if I lived in Nevada with no state including me tax, I would probably lean towards Roth. Living in Hawaii where they tax you on everything (Hawaii taxes Federal COLA) I would never choose Roth because of the progressive nature of tax rates.
Hawaii does not tax Roth IRA withdrawals (nor SS benefits) so how does a progressive tax structure affect your Roth decision?

I would have have thought withdrawals from a Roth IRA over a Traditional IRA would be more beneficial in states that have income tax. Am I thinking this from the wrong end?
mo meng, mo ching (which loosely means: no money, no life)

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