ROTH tax myth
Moderator: Aitrus
ROTH tax myth
Let's settle this once & for all. ROTH contribution (fro IRA/TSP/401K) WILL NOT be taxed at future withdraws of principle contribution AND growth earnings. Please help confirm this.
If so, why would anyone do a big Traditional beside helping to reduce the their yearly tax liabilities?
If so, why would anyone do a big Traditional beside helping to reduce the their yearly tax liabilities?
Re: ROTH tax myth
There are several different retirement accounts that one can have, and they are taxed differently. The ROTH account is taxed when the money is earned, before it is invested and not when it is used in retirement. A traditional IRA is taxed only in retirement, not when the money is earned. The TSP can have both traditional and ROTH parts. Its not a myth; just a misunderstanding.
Re: ROTH tax myth
Some people earn too much and don't qualify for a Roth IRA. (see rules at www.rothira.com) Instead they contribute to a regular IRA that reduces their taxable income. This way they will pay taxes in retirement when their income is smaller, and their tax liability is reduced.
Re: ROTH tax myth
besides the lower present year tax savings, the number one reason i do traditional is my belief that since my retirement income WILL LIKELY be less than my present working income, my tax rates and liability WILL beless during retirement.ndy856 wrote:Let's settle this once & for all. ROTH contribution (fro IRA/TSP/401K) WILL NOT be taxed at future withdraws of principle contribution AND growth earnings. Please help confirm this.
If so, why would anyone do a big Traditional beside helping to reduce the their yearly tax liabilities?
Anger and intolerance are the enemies of correct understanding.
― Mahatma Gandhi
If it's a choice between a difficult truth and a simple lie, people will take the lie every time. Even if it kills them.
― Paul Murray
― Mahatma Gandhi
If it's a choice between a difficult truth and a simple lie, people will take the lie every time. Even if it kills them.
― Paul Murray
Re: ROTH tax myth
https://www.tsp.gov/PlanParticipation/E ... index.html
And https://www.tsp.gov/PlanParticipation/E ... atrix.html
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Re: ROTH tax myth
If tspcalc keeps pumping out 20%+ returns annually, nobody should be retiring with less income than during their working days. Millionaires all of us!
"Get your money for nothin', and your chicks for free."
Following TSPCalc strategy #64902.
Following TSPCalc strategy #64902.
Re: ROTH tax myth
It's been settled since the start of ROTH accounts...ndy856 wrote:Let's settle this once & for all.
No clue what I'm doing, but willing to learn.
Re: ROTH tax myth
Unless the Government changes it's mind. At least that is what the groundhog in my yard thinks.
Re: ROTH tax myth
STATE TAXES....
I live in MD and pay 8.95% marginal income tax. Now when I retire I will live in a state that has a 0% income tax rate, so using the traditional saves me 8.95%. Now if I was in the first 10 years of my career then I would go 100% ROTH just because I would rather pay the tax rate then when you make it to the top of the GS band and retire making the same or more then you did working.
I live in MD and pay 8.95% marginal income tax. Now when I retire I will live in a state that has a 0% income tax rate, so using the traditional saves me 8.95%. Now if I was in the first 10 years of my career then I would go 100% ROTH just because I would rather pay the tax rate then when you make it to the top of the GS band and retire making the same or more then you did working.
Re: ROTH tax myth
executive summary:
Roth: wont be taxed (unless you did something really nontraditional or crazy) when you're 70
Traditional: Definitely will be taxed AND have mandatory distributions.
Below is along winded example.
Okay so here is how I understand it (I am almost done with my masters of science in Finance and Economics)
Traditional: you don't have to pay taxes on money put into an IRA.. Hence why people can deduct traditional IRA contributions (and this is the same for traditional TSP as well) from their income before calculating Adjusted Gross Income (AGI). However, when you withdraw, you pay taxes because this is considered INCOME.
Roth: You pay taxes on it now, but when it comes time to withdraw, you don't pay any taxes. Roth distributions are NOT considered INCOME
so lets say two people.. Mr. T (for traditional) and Ms. R (for Roth), both unmarried, and living in Texas (no state taxes).
Ignoring all the events leading up to it, lets say both Mr. T and Ms. R end up with 1,000,000 dollars in their ending Traditional/Roth IRAs. Lets also assume that neither Mr. T nor Ms. R get any retirement benefits (no military retirement, no pensions, no social security income, nothing)
Mr. T does a sneaky move and quits his full time job 1 year before he starts to take DISTRIBUTIONs (remember that word) from his traditional account. He does this at 69.5 years old (69 and a half). Mr. T thinks that since his income is ZERO, he will have to be minimal taxes... which.. is true... However, the government is one step ahead of him. According to the IRS (source below), Mr. T MUST take Required Mandatory Distributions (RMDs).. Essentially, the government wants Mr. T to liquidate (ie, force all money from IRA to a standard bank account) his Traditional IRA. How do they do this? Look at the IRA chart (source below)
"Figure your required minimum distribution for each year by dividing the IRA account balance (defined next) as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy." (1)
Accordin appendix B, table III for unmarried, Mr. T, a SINGLE 70 year old male (round up), is expected to live to 97.4 years (27.4 more years). So, his RMD is:
(IRA account balancer) / (distribution period) = $1,000,000/27.4 = $36,496.35
Of that money
0-12,000 is taxed at 0% ($0)
12,001- 21,525 is taxed at 10% ($952)
21,526 - 36,496.35 is taxed at 12% ($1,796.56)
For a total tax burden of $2,748.56
Now, lets look at Ms. Roth
Ms. Roth decides to quit her job as well at 70. However, the IRA does not require Ms. Roth to take RMDs. She can continue to allow the Roth IRA to grow, take some (even just $1!), take it all, or do nothing. If Ms. R took out all the money (yes EVERY PENNY) it would not be taxed. Could you imagine Ms. R waking up and her bank account is now a MILLION dollars larger? She could pay for expensive medical care, or fancy vacations to the moon, etc.
Now, if Mr. T decided to take the entire traditional out, he would need to continue to pay taxes at the marginal tax brackets. So, we already did the first three rows but I don't want to manually do the rest, so I cheated (2). If he took out all 1 million dollars, he would pay $331,250 in taxes! which leaves him with a paltry $668,750!
Now, lets say Ms. R and Ms. T had both retired from the government and had an extra $50,000 annually (this money IS income and IS taxed)
Ms. R's annual tax burden is $50,000, or $4,370
Mr. T's annual tax burden (retirement + RMD) = $86,497 * (marginal tax brackets) =$12,329
Now, remember, Ms. R can take as much out as she wants, tax free.
IRA Source:
(1) https://www.irs.gov/publications/p590b# ... 1000231236
(2) https://smartasset.com/taxes/income-taxes#GxGcLxRACu
note* ignore FICA taxes for now
Roth: wont be taxed (unless you did something really nontraditional or crazy) when you're 70
Traditional: Definitely will be taxed AND have mandatory distributions.
Below is along winded example.
Okay so here is how I understand it (I am almost done with my masters of science in Finance and Economics)
Traditional: you don't have to pay taxes on money put into an IRA.. Hence why people can deduct traditional IRA contributions (and this is the same for traditional TSP as well) from their income before calculating Adjusted Gross Income (AGI). However, when you withdraw, you pay taxes because this is considered INCOME.
Roth: You pay taxes on it now, but when it comes time to withdraw, you don't pay any taxes. Roth distributions are NOT considered INCOME
so lets say two people.. Mr. T (for traditional) and Ms. R (for Roth), both unmarried, and living in Texas (no state taxes).
Ignoring all the events leading up to it, lets say both Mr. T and Ms. R end up with 1,000,000 dollars in their ending Traditional/Roth IRAs. Lets also assume that neither Mr. T nor Ms. R get any retirement benefits (no military retirement, no pensions, no social security income, nothing)
Mr. T does a sneaky move and quits his full time job 1 year before he starts to take DISTRIBUTIONs (remember that word) from his traditional account. He does this at 69.5 years old (69 and a half). Mr. T thinks that since his income is ZERO, he will have to be minimal taxes... which.. is true... However, the government is one step ahead of him. According to the IRS (source below), Mr. T MUST take Required Mandatory Distributions (RMDs).. Essentially, the government wants Mr. T to liquidate (ie, force all money from IRA to a standard bank account) his Traditional IRA. How do they do this? Look at the IRA chart (source below)
"Figure your required minimum distribution for each year by dividing the IRA account balance (defined next) as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy." (1)
Accordin appendix B, table III for unmarried, Mr. T, a SINGLE 70 year old male (round up), is expected to live to 97.4 years (27.4 more years). So, his RMD is:
(IRA account balancer) / (distribution period) = $1,000,000/27.4 = $36,496.35
Of that money
0-12,000 is taxed at 0% ($0)
12,001- 21,525 is taxed at 10% ($952)
21,526 - 36,496.35 is taxed at 12% ($1,796.56)
For a total tax burden of $2,748.56
Now, lets look at Ms. Roth
Ms. Roth decides to quit her job as well at 70. However, the IRA does not require Ms. Roth to take RMDs. She can continue to allow the Roth IRA to grow, take some (even just $1!), take it all, or do nothing. If Ms. R took out all the money (yes EVERY PENNY) it would not be taxed. Could you imagine Ms. R waking up and her bank account is now a MILLION dollars larger? She could pay for expensive medical care, or fancy vacations to the moon, etc.
Now, if Mr. T decided to take the entire traditional out, he would need to continue to pay taxes at the marginal tax brackets. So, we already did the first three rows but I don't want to manually do the rest, so I cheated (2). If he took out all 1 million dollars, he would pay $331,250 in taxes! which leaves him with a paltry $668,750!
Now, lets say Ms. R and Ms. T had both retired from the government and had an extra $50,000 annually (this money IS income and IS taxed)
Ms. R's annual tax burden is $50,000, or $4,370
Mr. T's annual tax burden (retirement + RMD) = $86,497 * (marginal tax brackets) =$12,329
Now, remember, Ms. R can take as much out as she wants, tax free.
IRA Source:
(1) https://www.irs.gov/publications/p590b# ... 1000231236
(2) https://smartasset.com/taxes/income-taxes#GxGcLxRACu
note* ignore FICA taxes for now
Re: ROTH tax myth
Don’t remember the OP asking for a long winded explanation of the difference between Roth and Traditional, but hey, everyone has to flex on the interwebs, right?
"Get your money for nothin', and your chicks for free."
Following TSPCalc strategy #64902.
Following TSPCalc strategy #64902.
Re: ROTH tax myth
You left out a very important piece. How much in taxes did Mr T save and Ms R pay over the 30 or so year period they funded their accounts?
Re: ROTH tax myth
LOLSnareMV17 wrote:Don’t remember the OP asking for a long winded explanation of the difference between Roth and Traditional, but hey, everyone has to flex on the interwebs, right?
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Re: ROTH tax myth
Thank you seeker407.
This is true. In my case being the head of household earning over $140k with two dependants and a mortgage my taxes are, presumably, lower today than when I am retired and it is just my wife and I without a mortgage therefore I am taking full advantage of the Roth option.Jmk wrote:You left out a very important piece. How much in taxes did Mr T save and Ms R pay over the 30 or so year period they funded their accounts?
> $50k on 7 April 2017
>$100k on 8 Jan 2019
>$250k 02 Jun 2023
>$100k on 8 Jan 2019
>$250k 02 Jun 2023
Re: ROTH tax myth
So having all those dependent and deductibles, there's no point of trying to save more with Traditionals. Best to do more Roth than Trad each pay period
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