pb4uski
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The last part is a popular misconception. The benefit from growth is negligible The more relevant considerations are the taxes saved when the income is deferred, which is known, and the taxes paid when the deferred income is withdrawn for spending or withdrawn as RMDs.Deferring income definitely is not going to help me avoid paying a higher tax rate when I start RMDs. I wish I had not put so much in my tax-deferred accounts. Even with Roth conversions while delaying Social Security, I'm going to be bumping up my tax bracket with RMDs. Also, for some people, if they are intending to leave money to heirs, traditional IRAs and 401(k)s may not be that tax friendly for the heirs.
I wish Roth accounts had been available to me when I was younger because it is even more beneficial then due to the time that the money has to grow tax-free. I would be doing Roths as a youngster even if I were not in a higher tax bracket.
An example. Tax rate 20% and you have.100 of tIRAs and 20 of taxable funds. 10 year time horizon and 8% annual growth.
Option 1; Convert the 100 to Roth and use the 20 of taxable to pay the tax. The 100 in the Roth grows to 216 at the end of 10 years.
Option 2. Do nothing. tIRA grows from 100 to 216. 20 taxable grows from 20 to 37. Withdraw 216 from tIRA, pay 43 in tax and have 210 for spending.
216 = 100 * (1+8%)^10
37 = 20 * (1+(8%*(1-20%)))^10
43 = 216 ° 20%
The difference between 216 and 210 of 6 or 2.9% is only due to tax savings on the taxable account over the 10 years.
So at the same tax rate the savings are negligible.
Where the tax savings come from are differences in the tax rate, in my case deferring at 28% federal and 6% state or 34% total and now withdrawing at 10-12% federal and 0% state or 10-12% total. Also paying 10-12% now is better than paying ~18% at RMD time once my SS moves is into a higher tax rate. (18% is a blend of 12% and 22%).
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