Boston College says TIRA over Roth ???

[Time2]

How about 1.666666666666666666666666666666666666666666666666666666666666666666666........ to infinity and beyond bank?

Or somebody, please just give them the missing third and they can call themselves Second National Bank.

Second to no one, we are 2/3 above One!

 

[mystang52]

I never crunched the "what-if" numbers. But DW and I took advantage of our respective 403B and 401K options. Between the upfront tax deferral and employer match, we did quite well. When we start our RMD's we'll have to pay income taxes on them. I don't see a problem with that.

 

[Lawrencewendall]

+1.

I was maxxing out 401k and spousal IRA during peak salary work years at a 22% marginal tax bracket.

Now in early retirement years I can ROTH convert at a 12% tax rate.

+1

 

[jazz4cash]

You can read the original brief here: https://crr.bc.edu/wp-content/uploads/2020/12/IB_20-16_.pdf

They essentially conclude that 4/5 of retirees will pay negligible taxes in retirement.

As for what wealth that corresponds to, the average retirement wealth of those in the 4th quintile is about $350k (exclusive of pensions and SS). The average for the 5th quintile is about $770k. The average for the top 5% is about $950k. (They note that the data don't capture the truly wealthy very well, depressing the average.)

If you’re in the 4th quintile with 350k and a good pension plus SS, your taxes may not be negligible. It makes no sense to exclude pensions and SS since they are taxable and “retirement wealth” is not.

 

[Out-to-Lunch]

If you’re in the 4th quintile with 350k and a good pension plus SS, your taxes may not be negligible. It makes no sense to exclude pensions and SS since they are taxable and “retirement wealth” is not.

They fully took those things into account in determining the relevant tax situation. You should just read the brief yourself. (It is, uhhh, brief.) See Table 2.

But the question was raised earlier in the thread about how much "retirement wealth" was acquired by the various quintiles. That is the question I was answering.

 

[pjigar]

Just read piece about a Boston College study Saying the general public might just be better with a traditional IRA and the tax deduction at your current rate.

https://www.marketwatch.com/story/d...until-you-read-this-11608051128?siteid=yhoof2



I'm still telling the kids to put the money into Roth and converting the remaining TIRA to Roth this year and next. YMMV IMHO BYOB

This is only true for people who DO NOT max out the pre-tax vehicles, e.g. 401K, HSA. i.e. if you have to choose BETWEEN Traditional IRA and Roth IRA AFTER you exhausted other pre-tax vehicles then choose Traditional IRA. But a lot of us on this forum CAN'T contribute to Traditional IRA due to income caps and hence they use backdoor IRA and, mega-backdoor IRA (aka after-tax 401K contributions). The logic is very simple for these high earners: Save/defer tax on the gains.

PS: Like as CardsFan mentioned earlier, Roth IRA are equally (if not more) important for young people in zero or low tax bracket.

 

[pjigar]

My recommendation to young workers would be to use Roth early on while you are lower income, and tIRA when you have higher income.

+1

 

[Dtail]

There is no "one size fits all", and I don't think the article is saying that either. For at least some of us here, deferring income (tIRA or 401K) was the right move because of high enough earnings putting us in a higher tax bracket than we'd be in during retirement, especially ER. I have no regrets.

Yup that was me and now managing MAGI for ACA over Roth conversions until 65.
No regrets.

 

[RetireBy90]

This is only true for people who DO NOT max out the pre-tax vehicles, e.g. 401K, HSA. i.e. if you have to choose BETWEEN Traditional IRA and Roth IRA AFTER you exhausted other pre-tax vehicles then choose Traditional IRA. But a lot of us on this forum CAN'T contribute to Traditional IRA due to income caps and hence they use backdoor IRA and, mega-backdoor IRA (aka after-tax 401K contributions). The logic is very simple for these high earners: Save/defer tax on the gains.

PS: Like as CardsFan mentioned earlier, Roth IRA are equally (if not more) important for young people in zero or low tax bracket.

Many of those with a 401K also have option for Roth 401K. I contributed the max allowed to the Roth and company match went to traditional, tax deferred.

Each case if different of course, but I never thought I would be in a position where I'm in 22% or higher from here on out without any IRA funds. We spent many years barely scrapping by with much lower income than we have today but Roth wasn't an option early on. Turns out we have 3 small pensions and a rental property along with 1 SS and waiting on 2nd till 70. These all add up and put us in our current tax bracket before any IRA considerations. So I'm converting what i can before 2025 and will continue till my SS at 70. All that to say I wish we could have contributed to Roth at the start of our savings.

 

[pacergal]

There was no Roth offered where we worked, so pension and def comp was it.
A Roth version was finally available a few years before retirement, but I never chose to use it.

 

[tenant13]

Saving for retirement makes certain assumptions about the future and if I learned anything in my past it was that assumptions are not worth much.

I was funding both accounts equally but while the Apple stock I bought in TIRA made my retirement possible and put me in the higher tax bracket, my ROTH investments were consistently losing money. So I have enormous TIRA and tiny ROTH.

Also my life expectancy just dropped significantly since I had a heart attack so I’m not very concerned about my tax bills at 85 - I very likely won’t have any.

 

[Montecfo]

I kinda figured that, but couldn't resist

On topic: While I wish I had more in Roth, the reality is that most of it went into the tIRA at 28+% marginal rate, so the deduction was worthwhile and, even with a rather large tIRA, odds are I will get most of it out, on average, at that rate or lower. So, no harm, no foul.

My recommendation to young workers would be to use Roth early on while you are lower income, and tIRA when you have higher income.

Yeah but these young singles can get into pretty healthy tax brackets rather quickly. I think taking the deduction is wisest for most people, and do Roth after you max out.

But it all depends on something not really knowable with certainty: your future tax rates.

The reason Roth conversions are attractive to early retirees is because at that point your INCOME is rather knowable and conversion horizon usually time limited, which takes a bit or the guess work out.

 

[Time2]

Saving for retirement makes certain assumptions about the future and if I learned anything in my past it was that assumptions are not worth much.

I was funding both accounts equally but while the Apple stock I bought in TIRA made my retirement possible and put me in the higher tax bracket, my ROTH investments were consistently losing money. So I have enormous TIRA and tiny ROTH.

Also my life expectancy just dropped significantly since I had a heart attack so I’m not very concerned about my tax bills at 85 - I very likely won’t have any.

I have no info about your specific heart attack, but I have buddy that had a heart attack and a stint installed many years ago and he is a healthy 80 year old still climbing on the roof* and mowing his lawn. Take care and think positive.


* sure makes his wife mad!

 

[Skitso999]

I never thought that a Roth was worthwhile to me since I always thought that a 401K investment was, for example, $100 for $100 earned. A Roth would be more like $78 invested (after taxes) for $100 earned. Why would I want to do that?

Go check out how $100 appreciates, after 30 years, compared to $78 at the same rate of appreciation. Totally different. The $100 appreciates to $661, and the $78 appreciates to only $516 after 30 years at 6.5%.

I'd rather have the $661 and have the "problem" of all those extra earnings causing more taxes.

 

[RunningBum]

I never thought that a Roth was worthwhile to me since I always thought that a 401K investment was, for example, $100 for $100 earned. A Roth would be more like $78 invested (after taxes) for $100 earned. Why would I want to do that?

Go check out how $100 appreciates, after 30 years, compared to $78 at the same rate of appreciation. Totally different. The $100 appreciates to $661, and the $78 appreciates to only $516 after 30 years at 6.5%.

I'd rather have the $661 and have the "problem" of all those extra earnings causing more taxes.

Guess what that 401K or tIRA is worth if you have the same 22% tax on withdrawal? $516.

The message is, or at least should be, consistent on this board. If you think your tax rate now is higher than it will be when you start withdrawing, then go with the tax deferred 401K or tIRA contribution. If you think your tax rate is lower now, invest in a Roth, or convert from a tIRA to a Roth.

You can't be certain of the future tax rate. Make an educated guess. Include your SS income and any pension with your RMD. For some extra income later from tIRA withdrawals also push more SS into being taxed.

The tougher it is to tell if your future rate will be higher or lower, most likely the less difference it will make if it's that close.

Get over the reluctance to pay taxes now if the numbers tell you to contribute or convert to a Roth. That tax deferred money is unavailable for you to spend until you pay the taxes, unless you plan to give it away to charity later.

 

[Dash man]

I have no info about your specific heart attack, but I have buddy that had a heart attack and a stint installed many years ago and he is a healthy 80 year old still climbing on the roof* and mowing his lawn. Take care and think positive.


* sure makes his wife mad!

I had an uncle pass away a couple of years ago at 93. He had a heart attack at 46.

 

[Skitso999]

Guess what that 401K or tIRA is worth if you have the same 22% tax on withdrawal? $516.

The message is, or at least should be, consistent on this board. If you think your tax rate now is higher than it will be when you start withdrawing, then go with the tax deferred 401K or tIRA contribution. If you think your tax rate is lower now, invest in a Roth, or convert from a tIRA to a Roth.

You can't be certain of the future tax rate. Make an educated guess. Include your SS income and any pension with your RMD. For some extra income later from tIRA withdrawals also push more SS into being taxed.

The tougher it is to tell if your future rate will be higher or lower, most likely the less difference it will make if it's that close.

Get over the reluctance to pay taxes now if the numbers tell you to contribute or convert to a Roth. That tax deferred money is unavailable for you to spend until you pay the taxes, unless you plan to give it away to charity later.

I would still rather have the $661 rather than the $516. You can do more with $661 than $516 even if you do end up paying the same amount of taxes.

Also, most people's taxation rate at retirement will be a lot lower than before retirement, therefore the $661 would be taxed at a lower rate. Therefore the $661 ends up giving me more money in the end.

 

[RunningBum]

Saving for retirement makes certain assumptions about the future and if I learned anything in my past it was that assumptions are not worth much.

...

Also my life expectancy just dropped significantly since I had a heart attack so I’m not very concerned about my tax bills at 85 - I very likely won’t have any.

That may be one of those assumptions that's not worth much. My dad is 86 now, more than 30 years since a major heart attack, and it's likely that cancer will get him in the next couple of years. He took a lot of steps to improve his health though.

 

[Gumby]

I would still rather have the $661 rather than the $516. You can do more with $661 than $516 even if you do end up paying the same amount of taxes.

Also, most people's taxation rate at retirement will be a lot lower than before retirement, therefore the $661 would be taxed at a lower rate. Therefore the $661 ends up giving me more money in the end.

I don't understand what you mean by your second sentence. You have to pay the taxes to withdraw that money from your IRA to do anything with it, so how can you do more with it than you could do with the equivalent after tax money you've saved outside the IRA?

Moreover, it doesn't matter what most people's marginal tax rate will be in retirement. It matters what yours will be. If it is the same as when you put the money in, then it is a wash. If it is less in retirement, then congratulations, you've won the tax arbitrage. If it is higher (which may occur when you have large RMDs or tax rates rise in the future), then too bad, so sad for you.

Actually, given that long term capital gains in an IRA are treated as ordinary income when you withdraw them from the IRA, you could end up worse off even if your marginal tax bracket remains the same as when you put the money in the IRA.

 

[DayVee B]

Disclaimer here first: I'm just a regular working guy not too into all the nuances or little rules about all this. Seems most of y'all on here are financially waaaaaay better off than I am so you probably have to worry about income limits and super high tax brackets and all that stuff. But I'll retire comfortable enough to be content and worry free which is the point.

Not big at trusting the government at keeping their word, for years I contributed to my 401k. My thought was I might as well take the break on my taxes now because even though they say the Roths won't be taxed, they can always come up with a scheme to force me to hand over some of that $$ to them. (Can't you just see all the cry babies who contributed to tax deferred retirement screaming to Congress that it isn't fair that those Roth folks aren't paying their "fair share" in taxes) I also figured my income would be much lower in retirement putting me in a lower to zero tax bracket.

Though I still don't trust the government, I recently switched and started putting my contributions into a Roth 401K. Looking at the tremendous, unsustainable growth in spending by Washington, even if my income is lower when I retire, the rates are going to have to climb even on lower incomes. Also the Trump cuts aren't perminant so I should take advantage of the lower rate now for my post tax contributions.

Not sure if I'll do any conversions to Roth out of the regular 401K. Have to wait and see. But I figure having some in both kinds of lets me hedge my bets. When I retire I could withdraw from the tax deferred up to a certain tax level and if I need more income, take some tax free from the Roth.

 

[RunningBum]

I would still rather have the $661 rather than the $516. You can do more with $661 than $516 even if you do end up paying the same amount of taxes.

No, you can't. With the same tax rate, it's a wash. I've already shown the math on that.

Also, most people's taxation rate at retirement will be a lot lower than before retirement, therefore the $661 would be taxed at a lower rate. Therefore the $661 ends up giving me more money in the end.

I covered that in the rest of my post.

 

[pb4uski]

RunningBum, as usual, is spot on.

There are many people on this forum who saved tax-deferred money expecting to have a lower tax rate in retirement and it didn't work out that way... their tax rate in retirement is actually higher.... search threads here for "tax torpedo".

In addition, for some they get hit with IRMAA, increased premiums for Medicare Part B and Part D because their income is high. While this technically isn't a tax, it is a marginal economic cost that is similar to a tax.

 

[CaptTom]

There are many people on this forum who saved tax-deferred money expecting to have a lower tax rate in retirement and it didn't work out that way... their tax rate in retirement is actually higher.... search threads here for "tax torpedo".

I would be thrilled to have that problem. If I suddenly got some massive windfall income which put me in a higher tax bracket, I'd be OK paying my share of it in taxes.

It's far more likely that future increases in my income will be offset by an equal increase in the various tax bracket thresholds due to routine inflation, leaving me in about the same tax bracket as now. Unfortunately, I'm neither rich enough, nor poor enough, to pay no taxes.

 

[CRLLS]

Often forgotten or at least ignored, is "most" married couples will, at some time or another become widows or widowers. Then their tax will be based on single in a higher tax bracket than it they were still married.

Another big benefit in the "wash" situation is, when you withdraw from the tIRA it is considered income and other financial situations apply such as taxation of SS benefits, or IRMAA, ACA subsidies, etc. When withdrawn from a Roth, the spendable income is the same, but it is free money. It is not counted as income. No impact on any of those.

In a wash situation, I always suggest going the Roth path. In addition, considering today's low tax rates, I would not bet on them being at, or lower than today's rates.

 

[harley]

I would still rather have the $661 rather than the $516. You can do more with $661 than $516 even if you do end up paying the same amount of taxes.

Also, most people's taxation rate at retirement will be a lot lower than before retirement, therefore the $661 would be taxed at a lower rate. Therefore the $661 ends up giving me more money in the end.

That's pretty simplistic thinking. There's a lot you are missing, and it all depends on your personal situation. There's a ton of good and useful information on this site, that will answer questions you never even thought to ask. And I agree with Gumby, that second sentence doesn't make any sense.

As an aside, and back to 5/3 Bank, I just closed our account with them. I had opened it last spring to get the $250 bonus, and was planning to leave it open to use as an automatic withdrawal account for our mortgage. But their customer service was so incredibly bad I couldn't take it. I've banked with a dozen banks in my life, and they were definitely 5/3 worse than any of the others. I did like the explanation on their web page about their name. After a merger they thought 5/3 sounded more mature and less party-like than 3rd fifth.