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-   -   Pre tax vs. Post tax (http://www.early-retirement.org/forums/f28/pre-tax-vs-post-tax-66257.html)

Dwhit 04-17-2013 04:31 PM

Pre tax vs. Post tax
 
I was just wondering how most would view this situation....

Retiring with almost all of your money in an IRA or 401k... After you retire, would you only take out enough to cover your expenses to minimize taxes, or would you take out extra to build up some cash that has already been taxed? Assuming several years before required distributions.

I was thinking the latter, because of better liquidity, but I am not sure. ???

Turn_the_Page 04-17-2013 04:36 PM

Good question. I think if you're going to do the latter you should maybe convert this to a Roth instead. This would give you tax advantages.

samclem 04-17-2013 05:19 PM

Quote:

Originally Posted by Dwhit (Post 1310276)
I was just wondering how most would view this situation....

Retiring with almost all of your money in an IRA or 401k... After you retire, would you only take out enough to cover your expenses to minimize taxes, or would you take out extra to build up some cash that has already been taxed? Assuming several years before required distributions.

I was thinking the latter, because of better liquidity, but I am not sure. ???

It's a very complicated issue. The main factor is your present tax rate in comparison to the rate you think you'll pay later on. The rate you pay later depends on the amount you'd voluntarily withdraw from your IRAs/401K later or the Required Minimum Distribution (which see), whichever is higher. When you do your "what if" calculations, much will depend on the rate of growth you assume your investments in the IRA/401K will achieve, so leave yourself room in case you are wrong. You might also factor in any guesses about what the government will do with tax rates over time (up? down?) and maybe even your ability to qualify for subsidies for your health insurance if you keep your income low.
Many folks here find it useful, after retiring from their j*bs, to do "Roth Conversions" up to the top of the income bracket >below that< which they think they'd be subject to later on in retirement. But every case needs to be looked at individually, using a rule-of-thumb can prove very expensive. Search around on the board and the FAQs for info on "Roth Conversions" and health insurance subsidies (search terms "exchanges", "subsidies" "ACA" "Obabamcare")

panacea 04-17-2013 05:25 PM

Generally, I'd say only take what you need to cover expenses. Why pay taxes if you don't have to? Having said that, I think it also depends on the tax bracket you fall into when you draw what you need. For example, if you're more than half way through the 25% tax bracket now but expect that you'll be in the 28% bracket later (because of RMDs or starting Social Security or both), you'll probably want to take more to fill up the 25% bracket so you can get tax deductions at the 28% rate and also level out your tax rate over retirement. Although TTP's thought of converting some to a Roth also works to generate this additional income.

panacea 04-17-2013 05:26 PM

Quote:

Originally Posted by samclem (Post 1310299)
It's a very complicated issue. The main factor is your present tax rate in comparison to the rate you think you'll pay later on. The rate you pay later depends on the amount you'd voluntarily withdraw from your IRAs/401K later or the Required Minimum Distribution (which see), whichever is higher. When you do your "what if" calculations, much will depend on the rate of growth you assume your investments in the IRA/401K will achieve, so leave yourself room in case you are wrong. You might also factor in any guesses about what the government will do with tax rates over time (up? down?) and maybe even your ability to qualify for subsidies for your health insurance if you keep your income low.
Many folks here find it useful, after retiring from their j*bs, to do "Roth Conversions" up to the top of the income bracket >below that< which they think they'd be subject to later on in retirement. But every case needs to be looked at individually, using a rule-of-thumb can prove very expensive. Search around on the board and the FAQs for info on "Roth Conversions" and health insurance subsidies (search terms "exchanges", "subsidies" "ACA" "Obabamcare")

+1 I should have just waited a few more minutes before posting! :)

HighRoller 04-18-2013 08:17 AM

Quote:

Originally Posted by samclem (Post 1310299)
It's a very complicated issue. The main factor is your present tax rate in comparison to the rate you think you'll pay later on.

Many folks here find it useful, after retiring from their j*bs, to do "Roth Conversions" up to the top of the income bracket >below that< which they think they'd be subject to later on in retirement

+1 I've been working these calculations for my specific situation recently since I just retired last year and have about 8 more years before RMD's and much higher tax brackets again.

W2R 04-18-2013 10:25 AM

Quote:

Originally Posted by samclem (Post 1310299)
It's a very complicated issue. The main factor is your present tax rate in comparison to the rate you think you'll pay later on. The rate you pay later depends on the amount you'd voluntarily withdraw from your IRAs/401K later or the Required Minimum Distribution (which see), whichever is higher. When you do your "what if" calculations, much will depend on the rate of growth you assume your investments in the IRA/401K will achieve, so leave yourself room in case you are wrong. You might also factor in any guesses about what the government will do with tax rates over time (up? down?) and maybe even your ability to qualify for subsidies for your health insurance if you keep your income low.
Many folks here find it useful, after retiring from their j*bs, to do "Roth Conversions" up to the top of the income bracket >below that< which they think they'd be subject to later on in retirement. But every case needs to be looked at individually, using a rule-of-thumb can prove very expensive. Search around on the board and the FAQs for info on "Roth Conversions" and health insurance subsidies (search terms "exchanges", "subsidies" "ACA" "Obabamcare")

+1, and if you aren't taking SS yet, that could be a change in taxable income to consider too, as you look at your tax situation now and at age 70+.


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