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Old 09-25-2012, 10:41 AM   #21
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boy if roths were around when i started work back in the 1970's i would have gotten screwed big time since taxes came down so much.
I don't see how. Your earnings on the Roth still would've been tax free. It's just less of a savings.

Had you done a Roth INSTEAD of a 401K (which didn't exist then either), you would've made the worse choice, but for many people it's not an either/or, it's an "and".
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its really a case by case issue rather then just general advice for everyone to do a roth.
True enough, though huge tax drops and other big tax law changes aren't so much case-by-case as they are things that affect many people that weren't easily predicted.
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Old 09-25-2012, 11:20 AM   #22
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Looks like we have a doubter. Convert to Roth now or keep as tIRA? Let's go to the math to see what the numbers say. Scenario: 9900% (100x) hyperinflation and 15% tax rate now and later. $1000 in tIRA, $150 in non-retirement bank account.

1) Convert to Roth now, pay $150 in taxes from bank funds. After 100x hyperinflation, Roth value $100000, bank $0. Total after-tax net worth: $100000.

2) Keep as tIRA. After 100x hyperinflation, tIRA value $100000, bank $15000, totals $115000, which has pending taxes of $17250. Total after-tax net worth: $97480.

So, for each $1000 of initial tIRA, converting to Roth now makes you $2520 richer.
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Old 09-25-2012, 11:54 AM   #23
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I don't see how. Your earnings on the Roth still would've been tax free. It's just less of a savings.

Had you done a Roth INSTEAD of a 401K (which didn't exist then either), you would've made the worse choice, but for many people it's not an either/or, it's an "and".

True enough, though huge tax drops and other big tax law changes aren't so much case-by-case as they are things that affect many people that weren't easily predicted.
the tax free part may not mean anything if rates are the same.

given the same tax rates and gains the roth and the traditional both would equal the same amount assuming you equal the amounts up .

as an example in the 25% bracket 5000.00 in a roth ,plus the taxes you have to prepay is the same as 6650 pretax in your 401k

if both doubled over time they both yield the exact same bottom line after the taxes on the 401k are paid.

folks always figure this wrong because they prepay the taxes upfront on the roth with money outside the roth . they then try to compare by paying the taxes out of the traditional..

they really end up equalling the same thing at the end of the day.
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Old 09-25-2012, 12:31 PM   #24
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Looks like we have a doubter. Convert to Roth now or keep as tIRA? Let's go to the math to see what the numbers say. Scenario: 9900% (100x) hyperinflation and 15% tax rate now and later. $1000 in tIRA, $150 in non-retirement bank account.

1) Convert to Roth now, pay $150 in taxes from bank funds. After 100x hyperinflation, Roth value $100000, bank $0. Total after-tax net worth: $100000.

2) Keep as tIRA. After 100x hyperinflation, tIRA value $100000, bank $15000, totals $115000, which has pending taxes of $17250. Total after-tax net worth: $97480.

So, for each $1000 of initial tIRA, converting to Roth now makes you $2520 richer.
What you fail to consider is purchasing power of your dollars today vs. purchasing power of those dollars at some future date after the inflation effect. After all, it not about the number of digits in the bank but what can actually be consumed with those dollars when you go to spend it.

You left out a time preference, so lets assume 10 years. If we just consider today's conservative estimate of 9% real inflation and not a hyper-inflation scenario, the actual lost buying power of the $17,250 tax bill in the future is equivalent to $7,287 today, since you will be paying the tax bill with dollars that are worth less in the future.

This situation only gets worse for Roth as you extend the time preference and increase the real inflation rate, which is already baked in the cake.
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Old 09-25-2012, 01:02 PM   #25
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the tax free part may not mean anything if rates are the same.

given the same tax rates and gains the roth and the traditional both would equal the same amount assuming you equal the amounts up .

as an example in the 25% bracket 5000.00 in a roth ,plus the taxes you have to prepay is the same as 6650 pretax in your 401k

if both doubled over time they both yield the exact same bottom line after the taxes on the 401k are paid.

folks always figure this wrong because they prepay the taxes upfront on the roth with money outside the roth . they then try to compare by paying the taxes out of the traditional..

they really end up equalling the same thing at the end of the day.
True, but if you have an option for a Roth 401k or traditional 401k, or a Roth IRA or traditional IRA, you are limited to equal contributions amounts for either. That $5k in a Roth IRA is worth $6650 in a traditional IRA, but you can only put $5k into the traditional IRA. So even with equal tax rates, the Roth can be better if you are maxing out your contributions.
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Old 09-25-2012, 01:05 PM   #26
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Corrrect ,if your comparing a traditional to a roth you can squeeze more into the roth because your pre-paying the tax outside it.

but comparing a 401k where you can even up the amounts they work out the same at the end.

by the same token you could pay the tax with money on the traditional from outside the ira and get similiar results.

typically everyone compares by paying the taxes on the roth up front with money outside of it but they always subtract the taxes off the bottom line of the traditional rather then figure those too from outside it.
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Old 09-25-2012, 03:05 PM   #27
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My partner has about $250,000 in her rollover IRA (all wih Vanguard). Should she rconvertl to a Roth? She is 67 on SS & pension, has no debts and her house is aid for.
Blue, this is where some time with a pro who can look at her specific situation might really come in handy, like someone you can get on an hourly basis. Either a CPA with a financial planning bent (look for the PFS designation) or maybe an NAPFA member CFP.

I like the idea that others have suggested of converting some each year, bumping up to the bottom of a bracket, but I guess I'm of the school that would rather see more of her money stay in traditional than in Roth at this age, barring anything really unusual in y'all's financial structure.

I've counseled my own parents through their 60s not to convert, but your situation might be different.
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Old 09-25-2012, 03:19 PM   #28
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What you fail to consider is purchasing power of your dollars today vs. purchasing power of those dollars at some future date after the inflation effect.
I left duration out of the example since it makes no difference. The example *does* take purchasing power into account since it inflates all amounts equally. The $2520 higher net worth with Roth is expressed in inflated dollars; you can remove the inflation if you want (divide by 100), but even then the Roth still gives you more net worth than the tIRA.
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Old 09-25-2012, 03:41 PM   #29
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the tax free part may not mean anything if rates are the same.

given the same tax rates and gains the roth and the traditional both would equal the same amount assuming you equal the amounts up .

as an example in the 25% bracket 5000.00 in a roth ,plus the taxes you have to prepay is the same as 6650 pretax in your 401k

if both doubled over time they both yield the exact same bottom line after the taxes on the 401k are paid.

folks always figure this wrong because they prepay the taxes upfront on the roth with money outside the roth . they then try to compare by paying the taxes out of the traditional..

they really end up equalling the same thing at the end of the day.
This is true IF the tax rate during the accumulation phase and the tax rate during the withdrawal phase are the same. However, for many people their tax rate in accumulation will be higher than their tax rate during withdrawal, so for these people tax-deferred or tax-free is preferable.
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Old 09-25-2012, 04:16 PM   #30
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I left duration out of the example since it makes no difference. The example *does* take purchasing power into account since it inflates all amounts equally. The $2520 higher net worth with Roth is expressed in inflated dollars; you can remove the inflation if you want (divide by 100), but even then the Roth still gives you more net worth than the tIRA.
You only address the asset inflation, while completely ignoring consumer inflation and present day buying power vs. future buying power.

As the inflation ratchets up, the decision to forgo the greater real purchasing power today by tax deferment for the ever diminishing purchasing power later, becomes more prevalent over time.

Put another way, that $2,520 you gain at the end may not buy a stick of gum and will ultimately be far less valuable than the value of the money you use today that is not paid to the tax man today.

To neglect the effect of consumer inflation over time due to currency debasement is missing a big piece of the equation in the decision to go Roth or not.
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Old 09-25-2012, 04:51 PM   #31
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There actually are 2 cases to consider in comparing Roth vs Traditional

I. Funds are limited to income only ....cash poor..only have 5K income
I.A. TIRA....contribute 5K; TIRA doubles to 10K; cashout and pay 25% tax
of 2.5K leaving you with 7.5K
I.B. Roth....contribute 3.75K; pay 25% tax of 1.25K; Roth doubles to 7.5K
I.Results TIRA = Roth

II. Funds are unlimited...have savings in addition to 5K income
II.B. Roth.....contribute 5K; pay 25% tax of 1.25K on income depleting outside funds by that amount; Roth doubles to 10K
II.A. TIRA....contribute 5K; also have extra 1.25K in outside funds compared to case II.B
TIRA doubles to 10K; extra 1.25K doubles to 2.5K
Cashout TIRA and pay 25% tax of 2.5K; cashout side fund and pay Tax on
appreciation of 1.25K
After tax result is 10K TIRA - 2.5K tax + 2.5K side fund - tax on 1.25K =
10K - tax on 1.25K
II. Results: Roth beats TIRA by amount of tax on 1.25K

........so depending on which assumption you make (I...limited funds)
vs II (unlimited funds), the Roth is either equal to or better than TIRA
if tax rates are the same

Exactly the same math holds for Roth conversions depending if you are paying conversion tax from the TIRA or from outside funds.
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Old 09-25-2012, 05:08 PM   #32
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they really end up equalling the same thing at the end of the day.
Mathjak, always certain, sometimes right.

The guy who did a balance sheet example above showed that it is foolish to pay the tax with the converted money, but he did account for the tax.

Ha
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Old 09-25-2012, 05:27 PM   #33
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I could understand a big argument about whether to save or spend during a period of high inflation. I don't see what role inflation plays when you are comparing TIRA vs Roth. It's not like you're going to be spending out of either in the interim and even if you were, you would spend equal amounts (adjusted for taxes) out of both.
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Old 09-25-2012, 05:28 PM   #34
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This is true IF the tax rate during the accumulation phase and the tax rate during the withdrawal phase are the same. However, for many people their tax rate in accumulation will be higher than their tax rate during withdrawal, so for these people tax-deferred or tax-free is preferable.

yep we agree there, thats why im not in favor of anyone shooting recommendations from the hip out to folks to just do a roth.

not a heck of alot of americans are going to be in a higher bracket when not only one but 2 paychecks stop.

even if rates are the same the fact that more income passes through at lower tax rates each year still puts the traditional ahead.

i said it right that time lol....
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Old 09-25-2012, 05:43 PM   #35
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Mathjak, always certain, sometimes right.

The guy who did a balance sheet example above showed that it is foolish to pay the tax with the converted money, but he did account for the tax.

Ha

well heres my numbers

putting 6675 pretax in a 401k is the same as 5k in a roth with 1675 going for taxes upfront, in the 25% bracket.

if things double the roth has 10k , the 401k has 13,350

13350 less 25% for taxes is 10k after tax.


if taxes stayed the same the 401k would be ahead since more of it over the years would go through at lower tax rates.


if you compare putting 5k in a traditional vs 5k in a roth then you would have to take the extra 1675 used for prepayment of taxes

in the roth and invest it outside the traditional. you would need to find something tax advantaged but even so there will be some taxes so that case would favor the roth but 401k vs roth doesnt have that problem
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Old 09-25-2012, 06:12 PM   #36
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I could understand a big argument about whether to save or spend during a period of high inflation. I don't see what role inflation plays when you are comparing TIRA vs Roth. It's not like you're going to be spending out of either in the interim and even if you were, you would spend equal amounts (adjusted for taxes) out of both.
Congress-critters can effectively raise the tax rate by not adjusting the tax brackets for inflation. This way they can say they are not raising taxes, but people will gradually (or not so gradually) will be moved into a higher tax bracket.

Not adjusting for inflation the income level when SS benefits become 50% or 85% taxable is an example how inflation can lead to higher taxes.
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Old 09-25-2012, 06:19 PM   #37
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they could do alot of things but if i had to guess ,with 80 million of us any political party would have to be nuts .

dont forget we arent just 80 million people ,we are 80 million old crotchety people.
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Old 09-25-2012, 06:36 PM   #38
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they could do alot of things but if i had to guess ,with 80 million of us any political party would have to be nuts .

dont forget we arent just 80 million people ,we are 80 million old crotchety people.
They have not adjusted the brackets for inflation for when SS benefits become taxed. Therefore, they must figure those 80 million are asleep at the wheel or too stupid to realize what is taking place. ATM also comes to mind when thinking what damages can be caused by inflation.
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Old 09-25-2012, 06:43 PM   #39
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No doubt we can both do arithmetic, but for someone with more than hand to mouth means, he would put $5000 in either the Roth or a 401K or TIRA, and pay the tax on that $5000 from his taxable accounts. The same arithmentic holds for a conversion which is what was being discussed. Then to make the comparison we must go down the road a bit, and look at what remains of that money in each case. In the Roth case, we start with $5000 in the Roth, and nothing in our bank account. In the TIRA, we start with $5000 in the TIRA, and $1250 in our bank account. Assume a return, which of course will be higher in both the Roth and the TIRA than it is on the bank account because we won't have the drag of taxes each quarter, then go out a few years, tax what is in the TIRA and compare the balances of each strategy.

You do it if you are interested. I usually do these things once, and then go on to to other things. If I am right or wrong, this issue is settled for me, barring law changes.

Ha
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Old 09-25-2012, 07:12 PM   #40
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My employer (academic) first offered Roth 403(b) accounts in 2008. Since 1994, I had contributed the maximum to a traditional (tax-deferred) 403(b) plan. When the Roth became available, I jumped immediately and went all-in with the Roth from then until I left work in 2011. The split between the two accounts presently is about 2:1 (trad/Roth).

I'm ambivalent about embarking on any conversions between the two, and I think it is relevant that I do not have any kids - it's quite possible whatever happens to be left ends up going to charity. I can see the points being made here and in many other similar threads about conversion strategies, so no problems there. But I think for me, I'll just sit pat and use the resources (when they are available, which is a few years away) to retain some flexibility with taxes.
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