Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Who pays more income taxes in retirement?
Old 12-16-2006, 08:22 AM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,615
Who pays more income taxes in retirement?

OK, except for mathjak, who pays more income taxes in retirement than they did while they were working?

The reason I ask, is that "they" are writing and saying all the time that a Roth IRA is a great thing because you might end up in a higher tax bracket in retirement and your retirement plan contributions may be taxed at a higher rate than they could be now. I don't see how that can possibly be the case.

The way I see it, is that during the accumulation phase my Roth contributions are taxed at 25% or 28% or 33%, while my 401(k) contributions are not taxed.

In retirement, my Roth withdrawals are tax-free. My 401(k) withdrawals get taxed, but the first tax bracket is 0% ($16,400 in 2005 was tax-free) and right now some dividends are taxed at 15%.

A little TurboTax2005 run shows that if I have $20,000 in taxable IRA withdrawals and $20,000 in qualified dividends that my income tax is $1418 for a 55 year old married filing jointly for about a 3.5% tax rate.

With $20K dividends and $60K taxable IRA withdrawal, the income tax is $7524 or 9.4% rate.

Anyways, I just can't see where contributing to a Roth IRA makes sense for that tax-free withdrawal future.

So if you know of anyone paying more taxes in retirement than while working, can you please share with us some real examples?
__________________

__________________
LOL! 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!

Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:31 AM   #2
 
Posts: n/a
Re: Who pays more income taxes in retirement?

YUp, I'd always go with the Tax deductable IRA or 401K before a Roth.
__________________
  Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:41 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Re: Who pays more income taxes in retirement?

Quote:
Originally Posted by LOL!
OK, except for mathjak, who pays more income taxes in retirement than they did while they were working?

The reason I ask, is that "they" are writing and saying all the time that a Roth IRA is a great thing because you might end up in a higher tax bracket in retirement and your retirement plan contributions may be taxed at a higher rate than they could be now. I don't see how that can possibly be the case.

The way I see it, is that during the accumulation phase my Roth contributions are taxed at 25% or 28% or 33%, while my 401(k) contributions are not taxed.

In retirement, my Roth withdrawals are tax-free. My 401(k) withdrawals get taxed, but the first tax bracket is 0% ($16,400 in 2005 was tax-free) and right now some dividends are taxed at 15%.

A little TurboTax2005 run shows that if I have $20,000 in taxable IRA withdrawals and $20,000 in qualified dividends that my income tax is $1418 for a 55 year old married filing jointly for about a 3.5% tax rate.

With $20K dividends and $60K taxable IRA withdrawal, the income tax is $7524 or 9.4% rate.

Anyways, I just can't see where contributing to a Roth IRA makes sense for that tax-free withdrawal future.

So if you know of anyone paying more taxes in retirement than while working, can you please share with us some real examples?

we are both still working. a few more years left. boo hoo
__________________
mathjak107 is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:43 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Sep 2006
Posts: 1,316
Re: Who pays more income taxes in retirement?

I too max out on my 401K and Deductible IRAs before contributing to a Roth. The roth still have some advantages like no RMD at 70 1/2 and you can pass it to your heir etc.. but I expect my income to be drastically lower in retirement.
__________________
Corporateburnout is online now   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:44 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Re: Who pays more income taxes in retirement?

Quote:
Originally Posted by LOL!
OK, except for mathjak, who pays more income taxes in retirement than they did while they were working?

The reason I ask, is that "they" are writing and saying all the time that a Roth IRA is a great thing because you might end up in a higher tax bracket in retirement and your retirement plan contributions may be taxed at a higher rate than they could be now. I don't see how that can possibly be the case.

The way I see it, is that during the accumulation phase my Roth contributions are taxed at 25% or 28% or 33%, while my 401(k) contributions are not taxed.

In retirement, my Roth withdrawals are tax-free. My 401(k) withdrawals get taxed, but the first tax bracket is 0% ($16,400 in 2005 was tax-free) and right now some dividends are taxed at 15%.

A little TurboTax2005 run shows that if I have $20,000 in taxable IRA withdrawals and $20,000 in qualified dividends that my income tax is $1418 for a 55 year old married filing jointly for about a 3.5% tax rate.

With $20K dividends and $60K taxable IRA withdrawal, the income tax is $7524 or 9.4% rate.

Anyways, I just can't see where contributing to a Roth IRA makes sense for that tax-free withdrawal future.

So if you know of anyone paying more taxes in retirement than while working, can you please share with us some real examples?


i think you got that backwards. im the one who always says becareful of a roth, the odds of being in a higher bracket for most of us are slim.

i always point out that you take almost 35,000 out of your un-taxed retirement funds and only pay 1500 bucks on it when you retire

as well as the tax brackets keep expanding upward every year allowing more income and a lower bracket
__________________
mathjak107 is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:46 AM   #6
Thinks s/he gets paid by the post
maddythebeagle's Avatar
 
Join Date: Jun 2005
Posts: 2,450
Re: Who pays more income taxes in retirement?

I hear you LOL, I would certainly bet on lowering your taxes NOW.....but there are income phaseouts for the deductibility of an ira...

http://www.bankrate.com/BOS/itax/tax...nal_IRA_a1.asp

the phase out for the roth is higher...
__________________
- Hurry! to the cliffs of insanity!
maddythebeagle is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:47 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,615
Re: Who pays more income taxes in retirement?

Quote:
Originally Posted by mathjak107
i think you got that backwards. im the one who always says becareful of a roth, the odds of being in a higher bracket for most of us are slim.
My reference to you was not about a Roth, but was about your capital gains and AMT taxes.
__________________
LOL! is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:52 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Re: Who pays more income taxes in retirement?

ooooh okay.. yeah that was the sale of some property..... that should only happen again in my lifetime ha ha ha
__________________
mathjak107 is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 08:57 AM   #9
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,071
Re: Who pays more income taxes in retirement?

Quote:
Originally Posted by LOL!
Anyways, I just can't see where contributing to a Roth IRA makes sense for that tax-free withdrawal future.

So if you know of anyone paying more taxes in retirement than while working, can you please share with us some real examples?
I don't think it is necessarily a case of paying more taxes in retirement than while working (not for me, anyway) but it is a case of minimizing the taxes I pay while retired.

Contributing to a Roth while I was working did not make financial sense. But now that I'm retired, not yet getting SS and in the 15% bracket, I'm converting some traditional IRA money to Roth IRA's due to what I see on the horizon: RMD's and the SS "tax torpedo", which could force me into the 25% bracket.

Changes to the tax law may make this a bad strategy, but I'm betting it will pay off.

__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 09:04 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,453
Re: Who pays more income taxes in retirement?

My experience was that I was in a higher TAX BRACKET while working. But I actually pay more in taxes now - it's just that I pay long-term cap gains taxes mostly, and some qualified dividend taxes - 15%.

Of course I often get hit with the AMT (26%), but that is still a lower TAX BRACKET type percent than I was paying while working.

Of course tax brackets were also higher in the 80s and 90s than they are now!

Most of my investments are not in tax-deferred accounts, that's why long-term cap gains rate dominates as my tax rate.

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 09:29 AM   #11
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: Who pays more income taxes in retirement?

Tax management will be a driving factor in my early retirement phase. Taxed assets represent less than 25% of my net worth. I'll be into my tax deferred IRA pretty quickly. I'm hoping to move a good bit of it to a Roth prior to SS kicking in but I'll have to watch the marginal tax rate.

I've seen several articles where the advice is to deplete your already taxed assets first before going into your tax deferred accounts. It seems so obvious to balance your tax rates by doing conversions.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 09:30 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Re: Who pays more income taxes in retirement?

Hmmm

I play what if's with the ORP Calculator - looks like under some circumstances as early as 67 or as late as the std. 70 1/2 RMD I 'll be paying more taxes than back working at age 49 in 1992.

All in in all - not a bad run. BTW - 80 plus percent in trad 401k/IRA rollover. 7% Roth.

heh heh heh heh - need to get my individual stocks back up to 15%
__________________
unclemick is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 09:41 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,615
Re: Who pays more income taxes in retirement?

Well, I can see a little flaw in my TurboTax scenarios. Take that scenario where I withdrew $20,000 from the IRA and paid $1418 in taxes. Suppose I had paid $1418 in taxes on $6418 in order to invest $5000 in a Roth IRA that grew to $20,000?

I say dollars in the future are cheaper than dollars now.
__________________
LOL! is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 10:42 AM   #14
Full time employment: Posting here.
bosco's Avatar
 
Join Date: Jul 2005
Posts: 987
Re: Who pays more income taxes in retirement?

Quote:
Originally Posted by LOL!
Well, I can see a little flaw in my TurboTax scenarios. Take that scenario where I withdrew $20,000 from the IRA and paid $1418 in taxes. Suppose I had paid $1418 in taxes on $6418 in order to invest $5000 in a Roth IRA that grew to $20,000?

I say dollars in the future are cheaper than dollars now.
but if you are going to play that game, you also need to assume that the tax brackets themselves are indexed to inflation.
__________________
I have an inferiority complex, but it's not a very good one.
bosco is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 11:37 AM   #15
Recycles dryer sheets
 
Join Date: Aug 2003
Posts: 474
Re: Who pays more income taxes in retirement?

LOL, I think you are looking at the total ground up tax rate, not the marginal rate. That 20 to 60 example you are paying 6106 on the extra $40k or 15%. Still lower than your marginal rate today, but closer.

Many people who think about this stuff are in a situation where they have $25k in SS, $40k in pension, and a $100k RMD, so they are being pushed into fairly high brackets.

One theory is that today's higher rates of 33-35% are historically low, so you should take advantage of them before they get raised.

Another issue is that if you add $20-$30k of SS income, then the phased in taxation of SS might push your rate up to ~28% after something like $35k of AGI. I've read that the phase in of SS can cause marginal tax rates over 50% in some situations.

I definitely wouldn't put all your eggs in the Roth basket (and you probably can't do that anyway), but it may pay off to have some extra flexibility later in life.

Speaking of this, if you're not maxing out both your 401k and Roth options (assuming you are under the Roth limits), don't we revoke your membership in the forum? I'll have to check the bylaws.
__________________
bongo2 is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 11:56 AM   #16
Recycles dryer sheets
 
Join Date: Jun 2005
Posts: 56
Re: Who pays more income taxes in retirement?


Especially for younger folks like myself, I look at the Roth has hedging my bets. If I live to be 100, that's 65 years of possible tax code / rate changes. The last 65 have seen 90% marginal rates, the end of the gold standard, etc. etc. Tax rates today are the lowest they are going to be and have nowhere to go but up, and who knows what will be taxed to help close the SS/Medicare gap. ("excess withdrawal 401k tax" anyone?)

__________________
work4beer is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 12:02 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Re: Who pays more income taxes in retirement?

see thats where i disagree. i can see tax rates coming down with the inflation adjusted tax bracketing moving higher and higher income into lower tax brackets.

why do i see this?

80 million voting retired or will be retired baby boomers. i cant see any political party telling that group we are raising your taxes.

i do see huge increases in ss tax and medicare taxes for the working stiffs though .
__________________
mathjak107 is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-16-2006, 12:12 PM   #18
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Re: Who pays more income taxes in retirement?

Quote:
Originally Posted by LOL!
OK, except for mathjak, who pays more income taxes in retirement than they did while they were working?
Anyways, I just can't see where contributing to a Roth IRA makes sense for that tax-free withdrawal future.
So if you know of anyone paying more taxes in retirement than while working, can you please share with us some real examples?
Hey, no one is advocating Roth uber alles. 401(k)s & deductible IRA contributions are always a better deal. However if the choice is putting the leftover savings in a taxable fund or in real estate or in a Roth, then a Roth might be a better deal. But in some markets the real estate might work out better too. The reason the Roth conversion discussion is so controversial is because it incorporates a lot of different factors that are different for just about every situation and subject to wildly different evaluations of their likelihood.

When spouse and I were both working our only tax-deferred savings options were the military's TSP (which didn't exist for the first 20 years of our careers and then used to limit contributions to 6% of base pay) and non-deductible IRAs. Then she left active duty and we had the additional option of contributing to a Roth (plus the non-deductible IRA). Now the TSP has become a much better deal and the other options are still open.

Now I'm drawing a military pension with a COLA and at the low end of the 15% tax bracket. But we can look ahead to her military COLA pension (in 2022) and see that it'll bounce us right out of the 15% tax bracket. Social Security (in 2024 or, if we use the Cut-Throat approach, in 2032) will only raise the tax burden. And by 2022 our mortgage-interest deduction will probably be a lot less than the standard deduction.

Meanwhile we have all of this time before 2022 where our only "earned" income is my pension and her occasional Reserve paycheck. We can max out paying taxes in the 15% bracket and also boost our tax-sheltered assets by paying the conversion taxes out of our taxable funds. The tax impact of cashing in our long-term cap gains today (for living expenses and to pay conversion taxes) is as negligible as it's ever likely to be, and we're swapping it for never having to deal with RMDs and reducing SS taxes. Seems like a good deal to me.

I'd say that anyone with a COLA pension should take a serious look at what tax bracket they'll be in during RMDs and Social Security. A Roth conversion, especially when the taxes are paid out of taxable funds, can save a good bit of taxes later by paying them now.

Unless, of course, future taxes are lower or somehow different than today's. Good luck with that. An asset tax would truly suck, as would a flat tax. I could live with a consumption tax because we're not big consumers. But any attempt to tax my Roth IRA will be subject to 78 million Boomers lobbying to grandfather those of us who converted years before Congress got desperate.

If you're not taking RMDs yet then it might be worth talking to people who are. My FIL's IRA accounts are a mishmash of rolled-over 401(k) contributions, employer matches, employee after-tax extra contributions, deductible contributions, and a lump-sum retirement. His son, my BIL the CPA, does his calculations & taxes for free yet it's still a two-week e-mail tornado of spreadsheets, "buts", and phone calls laced with phrases like "those $%^&ing IRS bahstahds". Determining his RMD and selecting the accounts/funds for the withdrawal cause him slightly more pain & anguish than what I experienced during my casualties with nuclear reactors, but at least I knew that mine wouldn't last for the rest of my life. So for many people, just doing a Roth conversion now to avoid RMDs later may be worth the effort... especially while we still have the temperament (and the brain cells) to accomplish the task.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-17-2006, 03:42 PM   #19
Recycles dryer sheets
 
Join Date: Oct 2005
Posts: 150
Re: Who pays more income taxes in retirement?

The marginal tax rate for many of us will be over 50% on our IRA withdrawals under current laws do to the SS Tax Torpedo. With Roth income you lose the tax on both of these (IRA and up to 85% of SS) during retirement. Because the SS tax thresholds are not indexed for inflation, many more of us will see these high marginal rates even if tax rates are not increased. (And I think that they will be). The "tax savings" of a Roth also comes into play when one spouse dies. As the threshold of SS taxation is "lowered to $25,000" at my death, my widowed wife pays a high marginal rate on much of her income. And the tax brackets are also lower for her as a single.

If you don't need the Roth income, you don't have to take it and you can "stretch" it to the next generation. Your kids can then take the income over their lifetimes and essentially "re-fund" this income into their own Roth IRAs or Roth 401(k)s.

I think the Roth has a huge advantage for many.
__________________
New Thinking is offline   Reply With Quote
Re: Who pays more income taxes in retirement?
Old 12-17-2006, 04:16 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Re: Who pays more income taxes in retirement?

I converted all our IRAs into Roth IRAs in 1998 (spread the pain over 4 years). I'm still wondering if that was the right thing to do--we paid tax at the 28% rate on it, and I proably could have done t piecemeal later and saved money. OTOH, I wasn't sure at the time that I'd be ERing and in a lower bracket.

Since that time, we've put self-employed income into a Self Employed 401K and some into a (deductable) spousal IRA. And, we still have some $$ in taxable accounts.

I'm sure that, theoretically, having a diversity of account types is good, since it will give us some flexibility to adjust withdrawals/shift $$ to minimize taxes. The rub is in doing the"what-if" drill each year to match the current and anticipated changes. Stability would sure be nice.

One other nice thing about a National Retail Sales Tax (if it ever came to be): By dismantling the system of bank reporting on customer accounts and the system of taxpayer-supplied data forms (1040 et al), it would take us a step back from a major ER nightmare: A tax on assets. I'd like to see that become more difficult to implement.
__________________

__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem 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


Similar Threads
Thread Thread Starter Forum Replies Last Post
Roth Conversion Tax halo FIRE and Money 35 11-28-2006 01:00 PM
Taxes on income. Can. Q My Dream FIRE and Money 22 11-01-2006 09:54 AM
Retirement income question azanon Young Dreamers 4 11-04-2004 12:13 PM

 

 
All times are GMT -6. The time now is 01:41 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.