Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 01-14-2012, 10:35 AM   #21
Full time employment: Posting here.
 
Join Date: Mar 2010
Location: Chicago
Posts: 868
Quote:
Originally Posted by LOL! View Post
Folks who are close to retirement can easily know for sure what taxes they will pay in the next 3 to 5 years.

And some folks do not realize that in retirement they will
Not be paying FICA, medicare taxes
Not be contributing to IRAs and 401(k)s
and thus will have an immediate lower set of expenses that will require lower withdrawals and thus lower taxes.

And some folks still have figured out that some of their income is tax-free (think exemptions and Schedule A or standard deduction), the next bit of income is taxed at a low rate like 10%, and only the last bit of their income is taxed at their marginal income tax rate. That is, not everything is taxed at 30%. It ain't all about tax bracket.

Yes, some folks maybe should not do conversions, but they should be able to figure this out. I argued elsewhere for not doing a conversion now when the converters were in the 37% or higher tax bracket. However, if one is in the 0% tax bracket, it surely is a no-brainer to do a conversion.
Well, I agree with your last point anyway.
__________________

__________________
ripper1 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-14-2012, 10:36 AM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,337
Like many other investment decisions, we make an lightened guess as what the future will be, and act on it. Since, the future is always unknown, the best thing may be to use that old tool diversification and have money in personal, tIRA and Roth IRA accounts. That is what I have done. For many years all my new IRA contributions have gone into beefing up my Roth. I like the flexibility.
__________________

__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 01-14-2012, 10:50 AM   #23
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,699
A tool I used recently (it seems to have been improved) is: Optimal Retirement Calculator and Retirement Decision Support System I'm sure it's been mentioned here before.

It shows how one might take distributions in retirement i.e. from which accounts. It is a useful way of thinking through your situation.

For me personally, I do not plan on using its output exactly but it gave me some hints on how to proceed. I ran it without the Monte Carlo and specifically looked at the Withdrawal Report. A good post-FIRECalc tool.
__________________
Lsbcal is online now   Reply With Quote
Old 01-14-2012, 12:16 PM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
Quote:
Originally Posted by Lsbcal View Post
A tool I used recently (it seems to have been improved) is: Optimal Retirement Calculator and Retirement Decision Support System I'm sure it's been mentioned here before.

It shows how one might take distributions in retirement i.e. from which accounts. It is a useful way of thinking through your situation.

For me personally, I do not plan on using its output exactly but it gave me some hints on how to proceed. I ran it without the Monte Carlo and specifically looked at the Withdrawal Report. A good post-FIRECalc tool.
i-orp is a good tool, but since everyone's tax situation is different, it behooves one to use TurboTax or other tax software to confirm some of the assumptions and results. For example, we found that we could convert twice as much 401(k) money to a Roth without paying any taxes than ORP suggested. If we had only done what ORP suggested, we would've left quite a lot of free money on the table.

It is sad to think that many folks are totally clueless about the possibilities because they do not use the tools available and believe the conventional wisdom found in the financial media and on internet forums.

PS: Don't believe anything I write here. You must go and run the numbers yourself.
__________________
LOL! is offline   Reply With Quote
Old 01-14-2012, 01:04 PM   #25
Recycles dryer sheets
 
Join Date: Feb 2009
Location: Cville
Posts: 399
Back to the original note about to Roth or not to Roth, just wanted to point out that there are bennies to the Roth other than taxes, no RMD. Maybe this isn't more important than taxes in normal situation but the ones I know that have been retired a while spend less now than early in rettirement and don't need RMD today.
__________________
RetireBy90 is offline   Reply With Quote
Old 01-14-2012, 01:52 PM   #26
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,936
Quote:
Originally Posted by ripper1 View Post
I'm going to be the contrarian here. I think Roth accounts do not create wealth. It is pay me now (US) or pay me later. Say you're in 30% tax bracket state and federal. You have 100,000 and convert. Now you have 70,000. Now in 5 years for example this money doubles to 140,000. Great, all tax free. Now if that same person decides to convert after 5 years he has doubled his money to 200,000 but after tax at 30% he is back to 140,000. So really the government is just getting their money upfront. Now you say, Yeah, but won't you be in a higher tax bracket then. Well, how would anyone no for sure. Also who says that Congress won't change their minds about this Roth deal and make it taxable?
One factor you might want to consider: the "Roth is bigger" effect if you pay the conversion from other funds:
1) Convert 100K to Roth. Pay 30K tax from other funds. In N yrs, Roth doubles to 200Kvs.
2) Leave 100K in TIRA and have 30K more in a side fund (since the Roth conversion guy spent it on taxes). In N yrs, TIRA doubles to 200K and side fund doubles to 60K . After tax, TIRA is worth 140K and side fund is worth 60K so 1) is worth more.

Then you have LOL's larger std deduction/exemption idea and who knows what tax rate changes so ...........
__________________
kaneohe is offline   Reply With Quote
Old 01-14-2012, 05:01 PM   #27
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,863
Quote:
Originally Posted by kaneohe View Post
One factor you might want to consider: the "Roth is bigger" effect if you pay the conversion from other funds:
1) Convert 100K to Roth. Pay 30K tax from other funds. In N yrs, Roth doubles to 200Kvs.
2) Leave 100K in TIRA and have 30K more in a side fund (since the Roth conversion guy spent it on taxes). In N yrs, TIRA doubles to 200K and side fund doubles to 60K . After tax, TIRA is worth 140K and side fund is worth 60K so 1) is worth more.

Then you have LOL's larger std deduction/exemption idea and who knows what tax rate changes so ...........
You meant to say the side fund has to pay cap gains taxes of 15%-20% for (2), so it is worth less than $60k and (1) is worth more.

The Roth conversion allows you to essentially move some of your taxable funds into the Roth and grow them tax free. That's what makes it better even if tax rates are the same for input and output.
__________________
Animorph is offline   Reply With Quote
Old 01-14-2012, 05:27 PM   #28
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,936
Quote:
Originally Posted by Animorph View Post
You meant to say the side fund has to pay cap gains taxes of 15%-20% for (2), so it is worth less than $60k and (1) is worth more.

The Roth conversion allows you to essentially move some of your taxable funds into the Roth and grow them tax free. That's what makes it better even if tax rates are the same for input and output.
animorph........yes, thanks for filling in the blanks. Must have been spaced out toward the end there.
__________________
kaneohe is offline   Reply With Quote
Old 01-14-2012, 05:31 PM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
The side fund may not have to pay taxes on cap gains because you may die or you may offset gains with carryover losses or you may not even have gains or may be in such a low tax bracket that you will not have to pay taxes on those gains anyways or you may give shares away to charity and avoid those taxes.
__________________
LOL! is offline   Reply With Quote
Old 01-14-2012, 06:15 PM   #30
Thinks s/he gets paid by the post
Koolau's Avatar
 
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 3,244
Quote:
Originally Posted by LOL! View Post

PS: Don't believe anything I write here. You must go and run the numbers yourself.
Not to worry, heh, heh.
__________________
Ko'olau's Law -

Anything which can be used can be misused. Anything which can be misused will be.
Koolau is offline   Reply With Quote
Old 01-14-2012, 10:59 PM   #31
Full time employment: Posting here.
 
Join Date: Mar 2010
Location: Chicago
Posts: 868
Quote:
Originally Posted by RetireBy90 View Post
Back to the original note about to Roth or not to Roth, just wanted to point out that there are bennies to the Roth other than taxes, no RMD. Maybe this isn't more important than taxes in normal situation but the ones I know that have been retired a while spend less now than early in rettirement and don't need RMD today.
I guess some of us will be lucky enough to leave a legacy.
__________________
ripper1 is offline   Reply With Quote
Old 01-15-2012, 09:21 AM   #32
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,936
Quote:
Originally Posted by LOL! View Post
The side fund may not have to pay taxes on cap gains because you may die or you may offset gains with carryover losses or you may not even have gains or may be in such a low tax bracket that you will not have to pay taxes on those gains anyways or you may give shares away to charity and avoid those taxes.
also possible, you may go before the TIRA is depleted and the inheritance may go to your high bracket offspring, who despite the stretch possible, may end up paying more in taxes...............
__________________
kaneohe is offline   Reply With Quote
Old 01-15-2012, 11:22 AM   #33
gone traveling
 
Join Date: Jul 2007
Posts: 8
Quote:
Originally Posted by LOL! View Post
i-orp is a good tool, but since everyone's tax situation is different, it behooves one to use TurboTax or other tax software to confirm some of the assumptions and results. For example, we found that we could convert twice as much 401(k) money to a Roth without paying any taxes than ORP suggested. If we had only done what ORP suggested, we would've left quite a lot of free money on the table.
The operative word here is suggested. I don't think that ORP's vendor characterizes ORP as an accounting tool. Switching from guidelines fo accounting is something that has to be done annually, at least.
__________________
gneeby is offline   Reply With Quote
Old 01-15-2012, 01:14 PM   #34
Recycles dryer sheets
Nova's Avatar
 
Join Date: Apr 2010
Posts: 270
Quote:
Originally Posted by Koolau View Post
Not to speak for LOL, but in my case, early in retirement, I was sitting on a pile of cash (or equivalent investments with not much unrealized appreciation). Had I not had a pension (oh, darn!) I would have been in a position to have essentially 0% taxes. That would have been an excellent situation in which to do Roth conversions. As it was, the first couple of years of ER, my taxes were quite low, though never 0% - again, that pesky pension. YMMV.

+1, but no pension.
__________________
Nova is offline   Reply With Quote
Old 01-18-2012, 10:44 PM   #35
Full time employment: Posting here.
 
Join Date: Jan 2007
Posts: 855
So - I'm trying to decide what to do here... and would appreciate your input.

A new employer has a Roth 401K option and I could contribute $22,500 including catch-up in 2012. There is no income restriction on this type of Roth.

No mortgage. Starting to catch on to that concept of bunching philanthropic contributions into even years, so this year will contain the contributions. Even after the contributions and deductions, I think we're in a 25% tax bracket.

Don't have much in Roth accounts up to now. Around $6,000 times two accounts. All other retirement savings in pre-tax accounts with employer plans.

So at first I thought I should put $22,500 into the Roth 401K just to have some variety. But I would think we'd be in the 15% tax bracket in early retirement (no pensions).

So it does not seem that "no RMD" is a good enough reason to pay the 25% tax to put the amount in the Roth 401K.

What say ye?
__________________
spncity is offline   Reply With Quote
Old 01-19-2012, 05:15 AM   #36
Recycles dryer sheets
 
Join Date: Feb 2009
Location: Cville
Posts: 399
Quote:
Originally Posted by spncity View Post
So - I'm trying to decide what to do here... and would appreciate your input.

A new employer has a Roth 401K option and I could contribute $22,500 including catch-up in 2012. There is no income restriction on this type of Roth.

No mortgage. Starting to catch on to that concept of bunching philanthropic contributions into even years, so this year will contain the contributions. Even after the contributions and deductions, I think we're in a 25% tax bracket.

Don't have much in Roth accounts up to now. Around $6,000 times two accounts. All other retirement savings in pre-tax accounts with employer plans.

So at first I thought I should put $22,500 into the Roth 401K just to have some variety. But I would think we'd be in the 15% tax bracket in early retirement (no pensions).

So it does not seem that "no RMD" is a good enough reason to pay the 25% tax to put the amount in the Roth 401K.

What say ye?
spncty - For my personal situation, I plan to be in slightly lower tax bracket once I retire. 28% now vs 25% then. I have gone back and forth for about the last 3 years. First moving to Roth, then back to traditional then split of Roth and traditional. Currently I'm 52% trad and 48% Roth in my 401K contributions.
For my situation and thinking, there are 4 reasons to fund some in a Roth:
1) A Roth doesn't have the RMD
2) Planning on spending 30 years in retirement, I don't know what will happen tax wise so this gives me some flexibility. However, I'm sure to be part right and part wrong here
3) I can afford to pay the taxes on the Roth contributions now and the tax rate difference is not great, so I consider it paying ahead.
4) SS and Medicare - Some SS will be taxable if you make enough other income and Medicare gets more expensive if you make enough. Don't know what that will be in 12 years, but that could offset the tax difference.

Reasons not to fund Roth:
1) I'm not going to be in a position to make the same check in retirement that I do now, so chances are less taxes if I defer to paying taxes then.

Hrmmm - IMHO for me, the to Roth or not is close call. Just my thoughts.
__________________
RetireBy90 is offline   Reply With Quote
Old 01-19-2012, 05:54 AM   #37
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
The decision is not
(a) pay taxes now and put in Roth 401(k), but pay no taxes later
versus
(b) pay no taxes now and put in traditional 401(k), but pay taxes later.

Instead the decision is
(a) pay taxes now and put in Roth 401(k), but pay no taxes later
versus
(b) pay no taxes now and put in traditional 401(k), but convert to Roth IRA later and pay taxes later.

That convert to Roth IRA later is important since it avoids some of RMDs (which are not to be feared by-the-way) and the conversion may take place at a lower tax than decision (a). Furthermore, the money that you save by not paying taxes now can be invested tax-efficiently at a lower tax rate than the taxes you pay now.

I think it is rare for a Roth 401(k) to be better. That situation arises when
(1) one works until age 70 with a
(2) very high income or
(3) has a very nice pension.

For early retiree wannabees with a minimal chance of a pension, a Roth 401(k) just costs too much and locks you into paying taxes that you have a good chance of avoiding.

If you are projecting your taxes in the future, please do not forget that both exemptions and the standard deduction are indexed to the COLA/inflation. So even though that RMD might be $100,000 when you have to take it, the standard deduction might be $80,000 and your exemption might be $20,000.
__________________
LOL! is offline   Reply With Quote
Old 01-19-2012, 06:09 AM   #38
Recycles dryer sheets
 
Join Date: Feb 2009
Location: Cville
Posts: 399
Quote:
Originally Posted by LOL! View Post
The decision is not
(a) pay taxes now and put in Roth 401(k), but pay no taxes later
versus
(b) pay no taxes now and put in traditional 401(k), but pay taxes later.

Instead the decision is
(a) pay taxes now and put in Roth 401(k), but pay no taxes later
versus
(b) pay no taxes now and put in traditional 401(k), but convert to Roth IRA later and pay taxes later.

That convert to Roth IRA later is important since it avoids some of RMDs (which are not to be feared by-the-way) and the conversion may take place at a lower tax than decision (a). Furthermore, the money that you save by not paying taxes now can be invested tax-efficiently at a lower tax rate than the taxes you pay now.

I think it is rare for a Roth 401(k) to be better. That situation arises when
(1) one works until age 70 with a
(2) very high income or
(3) has a very nice pension.

For early retiree wannabees with a minimal chance of a pension, a Roth 401(k) just costs too much and locks you into paying taxes that you have a good chance of avoiding.

If you are projecting your taxes in the future, please do not forget that both exemptions and the standard deduction are indexed to the COLA/inflation. So even though that RMD might be $100,000 when you have to take it, the standard deduction might be $80,000 and your exemption might be $20,000.
But if I understand your point, the decision is still pay taxes now or later.
This still leaves me with my problem that you don't know what will happen to taxes in the future, an unknown risk. I think that taxes will need to rise as govt spending will increase to support all the baby boomers (including me). With risk should come an increase in return. If an investment doesn't pay more for the increase in risk why take the risk?
In my situation, I have a pension now and plan on something from SS at 67 for both me and DW. By the time I am 70, pension and SS should more than cover my living expenses so I'm left with funding my needs beyond pension till we start SS. I'll try to move as much from trad to Roth in the years between retirement and SS, when my tax rate should be the lowest. However, I'm still left with a pile of $$ that I have to pay taxes on at some point.
__________________

__________________
RetireBy90 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 09:21 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.