PBS Frontline : The Retirement Gamble, sorta Must See (5 Viewers)

[NewlyRetired]

What I mean is throw out an example. At this point I really dont even know what you are trying to say. An example might clear it up.

Using the hypothetical we've been discussing with one adjustment- assume you have $13K to invest with a $10K cap on the retirement contribution. Your choices are (same investments in all accounts): 1- put $10K into a Roth account and send $3K to the IRS or 2- put $10K into a traditional retirement account and $3K into a taxable account. If it helps, think of it as a "do I convert my $10K traditional IRA to a Roth" decision.

In both cases you are assuming a $13K gross (I think). In 2), you only put $10K of gross into a retirement account. How were you able to get that $3K of gross into a non-retirement account without being taxed?

17secs, check post 553 and see if that makes better sense. I think it is correct but want someone to look it over since I could not understand Humpbacks scenario.

 

[humpback]

I really have no clue what you are trying to prove or disprove here, but at some point the 3,000 you are pulling from your savings was earned and taxed.

Not sure why you are hung up on this, but it isn't even necessarily true. Again, if it makes you feel better, assume you found the $3K, or it's interest payments from muni-bonds, or some other tax free source.

 

[Random]

I really have no clue what you are trying to prove or disprove here, but at some point the 3,000 you are pulling from your savings was earned and taxed.

Not sure why you are hung up on this, but it isn't even necessarily true. Again, if it makes you feel better, assume you found the $3K, or it's interest payments from muni-bonds, or some other tax free source.

Ok, I'm with you now. Please run some numbers for us like andy did above to show us whatever it is you are trying to show us. Thanks.

 

[MechEng]

Assuming the 30% tax rate that was listed earlier in the thread

13,000 * .3 = $3,900

If that 30% variable has been changed and I missed it, please ignore.

The $3K isn't taxed here.

>The $3,000 into a taxable account is going to be taxed before it goes in. Hence the $2,100.

No, it isn't- you don't pay a tax to put money into a normal brokerage account.

If you earned it you paid tax on it sometime.

 

[NewlyRetired]

I really have no clue what you are trying to prove or disprove here, but at some point the 3,000 you are pulling from your savings was earned and taxed.

Not sure why you are hung up on this, but it isn't even necessarily true. Again, if it makes you feel better, assume you found the $3K, or it's interest payments from muni-bonds, or some other tax free source.

Ok, I'm with you now. Please run some numbers for us like andy did above to show us whatever it is you are trying to show us. Thanks.

Is this really a real life scenario in terms of finding non taxable money? Even the muni bonds had to be purchased with money that was presumably taxed so you can't just take the gains from those with out considering taxes, imo. The key for this scenario that Wilked suggested yesterday is to have both sides start with the same amount of before tax money so that it could represent a more real life scenario that an investor would face.

 

[stbugs]

I really have no clue what you are trying to prove or disprove here, but at some point the 3,000 you are pulling from your savings was earned and taxed.

Not sure why you are hung up on this, but it isn't even necessarily true. Again, if it makes you feel better, assume you found the $3K, or it's interest payments from muni-bonds, or some other tax free source.

Ok, I'm with you now. Please run some numbers for us like andy did above to show us whatever it is you are trying to show us. Thanks.

Is this really a real life scenario in terms of finding non taxable money? Even the muni bonds had to be purchased with money that was presumably taxed so you can't just take the gains from those with out considering taxes, imo.The key for this scenario that Wilked suggested yesterday is to have both sides start with the same amount of before tax money so that it could represent a more real life scenario that an investor would face.

Agreed. This is one of the oddest scenarios I have ever seen. I don't get how a found $3K somehow makes it into one side and not the other. Doesn't matter if you paid taxes on it already, you can't do a real future comparison. You can add the found 3K to the Roth to make it 10k after losing 3k to taxes, but then you have to have that same 3K taxable account sitting next to the 10k traditional IRA. No matter how you slice it, you have an extra 3K invested in the traditional IRA side, which will get taxed at the "end", but comparing 10k Roth to 10k traditional is silly and not a real scenario.

By the way, there is a lot of love for Roth IRAs, but in my situation, I take the traditional side all the time. First of all, my wife and I both work, so our taxes are on the high side for the last $$$ in income that gets shaved off pre-tax into the 401ks. Second of all, while we have no idea on tax rates, if taxes start going up, don't expect the Roth distributions to stay tax free forever as well. I don't put it past our government in dire need of taxes (to raise them on income) to decide to attach a small tax on Roth distributions. Third of all, the Roth side is much smaller than the 401k amount (have some good low cost options). I could be wrong in the end, but I like not paying the high taxes now and rolling the dice/finding loopholes later. Funny thing is that either way, the numbers are usually just about the same, not drastically different.

 

[17seconds]

Side comment... One of the reasons I never did anything outside of 401K is because the IRA limits were so small. I know that's not a logical way to look at it - savings is savings - but now that it is up to $5,500 it is significant. Forever it was $2K or $3K and I've always been at or above the phase out level. Just never seemed worth doing.

 

[culdeus]

Lets go back to MLPs for a moment.

Real world example.

I want to sink 20k in my 401k in AMJ. What am I looking at if in a year I sell it?

Are you asking people to predict your exact rate of return? No one can do that with any level of certainty.

no, what tax consequences I would have vs. holding in an outside account

ok gotcha.

Assuming you don't get covered under one of these to avoid the penalty

• If you are totally and permanently disabled, and are receiving disability payments from your insurance company or Social Security.
• If you just need enough to pay unreimbursed medical bills that amount to at least 7.5% of your adjusted gross income.
• If you die and your 401k funds are dispersed to your next of kin, though this isn’t true in all cases.
• You are forced to pay up in the event of a divorce and you need to tap your 401k to do so.

You will have to do the following

1) Pay a 10% penalty on the exact amount you withdraw

2) Pay taxes on the amount you withdraw (in most cases this will be considered ordinary income).

what penalty? I'm not withdrawing anything.

Wait, what are you asking? Are you just wondering what tax consequences there are when buying and selling in your 401k?

There are none. When you retire and withdraw the money you will be taxed at an income rate. The idea of capital gains taxes does not really exist in a 401k shelter.

Awhile back someone said MLP could trigger a taxable event inside a 401k.

 

[culdeus]

Side comment... One of the reasons I never did anything outside of 401K is because the IRA limits were so small. I know that's not a logical way to look at it - savings is savings - but now that it is up to $5,500 it is significant. Forever it was $2K or $3K and I've always been at or above the phase out level. Just never seemed worth doing.

same here.

roth limits are the suck.

 

[wilked]

Dr D, I would diversify with both pretax and posttax accounts (traditional 401K and Roth IRA). I personally would only do Roth 401K if I was confident that my tax bracket would climb at retirement. Given you are not, I would stick with what you have.

Why?

If your tax rate is lower upon retirement, you should pay the taxes then, not now (do the math yourself if you are not convinced)

This discussion is going no where fast. Lets go back to what kicked it all off and start over again.

Wilked, is there a minimum % difference needed between before and after retirement to make the math work (like does there need to be at least a 5% lowering of tax rate in retirement)?

There is no minimum. Break-even is the same tax rate, higher tax rate (any amount higher) at retirement favors Roth, and vice versa

 

[wilked]

Side comment... One of the reasons I never did anything outside of 401K is because the IRA limits were so small. I know that's not a logical way to look at it - savings is savings - but now that it is up to $5,500 it is significant. Forever it was $2K or $3K and I've always been at or above the phase out level. Just never seemed worth doing.

same here.

roth limits are the suck.

You can always roll your 401K into an IRA, then roll that over to a Roth... It can get complicated though, be sure to read up on it beforehand, and don't forget that you will owe taxes immediately. Still, if you want more Roth space, it is an option

 

[humpback]

>The $3,000 into a taxable account is going to be taxed before it goes in. Hence the $2,100.

No, it isn't- you don't pay a tax to put money into a normal brokerage account.

If you earned it you paid tax on it sometime.

Again, irrelevant, but what if you didn't earn it? What if you earned it while in a lower bracket, via capital gains, or even a zero bracket because of deductions?

Is this really a real life scenario in terms of finding non taxable money? Even the muni bonds had to be purchased with money that was presumably taxed so you can't just take the gains from those with out considering taxes, imo.The key for this scenario that Wilked suggested yesterday is to have both sides start with the same amount of before tax money so that it could represent a more real life scenario that an investor would face.

I figured someone would say this. I hesitated posting it because it doesn't matter if the money was taxed or not, what matters is what you do with it from here on out, I just wanted him to stop being hung up on that.

Agreed. This is one of the oddest scenarios I have ever seen. I don't get how a found $3K somehow makes it into one side and not the other. Doesn't matter if you paid taxes on it already, you can't do a real future comparison. You can add the found 3K to the Roth to make it 10k after losing 3k to taxes, but then you have to have that same 3K taxable account sitting next to the 10k traditional IRA. No matter how you slice it, you have an extra 3K invested in the traditional IRA side, which will get taxed at the "end", but comparing 10k Roth to 10k traditional is silly and not a real scenario.

By the way, there is a lot of love for Roth IRAs, but in my situation, I take the traditional side all the time. First of all, my wife and I both work, so our taxes are on the high side for the last $$$ in income that gets shaved off pre-tax into the 401ks. Second of all, while we have no idea on tax rates, if taxes start going up, don't expect the Roth distributions to stay tax free forever as well. I don't put it past our government in dire need of taxes (to raise them on income) to decide to attach a small tax on Roth distributions. Third of all, the Roth side is much smaller than the 401k amount (have some good low cost options). I could be wrong in the end, but I like not paying the high taxes now and rolling the dice/finding loopholes later. Funny thing is that either way, the numbers are usually just about the same, not drastically different.

The "found" $3K does make it onto both sides- $10K into the Roth and $3K to the IRS or $10K into the traditional and $3K in a taxable account. I've been comparing $10K in a Roth to $10K in traditional and $3K in a taxable account all along. How is that not clear?

 

[NewlyRetired]

[ Awhile back someone said MLP could trigger a taxable event inside a 401k.

This is probably my ignorance then. I had never heard of anything triggering a taxable event in a 401k before you withdrew it. Do you have a link which explains in detail MLP so I can educate myself?

 

[Random]

Seriously Hump, what are you trying to prove?

 

[NewlyRetired]

Seriously Hump, what are you trying to prove?

I am still not sure but since he has not taken the time to to run the numbers, I ran them myself using his scenario (which I still don't understand how it is real life, but so be it).

If I represented his stipulations of found money correctly, scenario 2 is still better I think.

Humps, if I misrepresented this, please let me know and I will adjust.

Humps scenario

" I've been comparing $10K in a Roth to $10K in traditional and $3K in a taxable account all along. How is that not clear?"

Scenario #1: $10,000 to Roth

Scenario #2: $10,000 to 401k, $3000 to taxable account

Assumptions

Tax Rate Before Retirement: 30%

Tax Rate After Retirement: 20%

Capital Gain Tax rate: 15%

Growth in every account: 5%

Time period: 30 years

No dividend assumed in taxable account

After 30 years:

Roth grows to: $41,161

401K grows to: $41,161

Taxable Account Grows to: $12,348

After Taxes:

Final Roth: $41,161 (no tax implications)

Final 401k After Withdrawal: $32,929 = 41,161 * .8

Final Taxable Account after selling: $10,945 = (($12,348-3000) * .85) + $3000

Final Count

Scenario 1: $41,161

Scenario 2: $43,874

edit to account for original $3000 in taxable account not needing to be taxed at withdrawal.

 

[stbugs]

Seriously Hump, what are you trying to prove?

I am still not sure but since he has not taken the time to to run the numbers, I ran them myself using his scenario (which I still don't understand how it is real life, but so be it). If I represented his stipulations of found money correctly, scenario 2 is still better I think.Humps, if I misrepresented this, please let me know and I will adjust. Humps scenario" I've been comparing $10K in a Roth to $10K in traditional and $3K in a taxable account all along. How is that not clear?" Scenario #1: $10,000 to RothScenario #2: $10,000 to 401k, $3000 to taxable account AssumptionsTax Rate Before Retirement: 30%Tax Rate After Retirement: 20%Capital Gain Tax rate: 15%Growth in every account: 5%Time period: 30 yearsNo dividend assumed in taxable account After 30 years: Roth grows to: $41,161401K grows to: $41,161Taxable Account Grows to: $12,348 Final Roth: $41,161 (no tax implications)Final 401k After Withdrawal: $32,929 = 41,161 * .8Final Taxable Account after selling: $10,495 = 12,348 * .85 Scenario 1: $41,161Scenario 2: $43,425

Not sure where he is going with this at all. I think someone told him a Roth is better no matter what and it isn't. As Wilked said above, it is a pretty simple assumption/rule that a Roth ends up better (assuming same investments) if tax rates in the future are higher and traditional is better if tax rates go down. Not sure where he is going and not sure if anyone can convince him he is wrong.

 

[NewlyRetired]

Not sure where he is going with this at all. I think someone told him a Roth is better no matter what and it isn't. As Wilked said above, it is a pretty simple assumption/rule that a Roth ends up better (assuming same investments) if tax rates in the future are higher and traditional is better if tax rates go down. Not sure where he is going and not sure if anyone can convince him he is wrong.

I don't really have a horse in this race. I have only been posting trying to understand what he was representing as a scenario since I had never encountered it before in all my years of planning.

I just ran the numbers since he was not providing them for what ever reason in hopes that they could further the discussion.

 

[Tom Hagen]

[

Awhile back someone said MLP could trigger a taxable event inside a 401k.

This is probably my ignorance then. I had never heard of anything triggering a taxable event in a 401k before you withdrew it.Do you have a link which explains in detail MLP so I can educate myself?

Pub 598

We touched on this earlier in this thread relating to IRA's but I believe it also holds true for 401(k) plans. If the Unrelated business taxable income passed through from all MLP's the plan owns exceeds $1,000 in a year, the plan is required to file a 990-T and pay tax at trust rates.

 

[NewlyRetired]

[

Awhile back someone said MLP could trigger a taxable event inside a 401k.

This is probably my ignorance then. I had never heard of anything triggering a taxable event in a 401k before you withdrew it.Do you have a link which explains in detail MLP so I can educate myself?

http://www.irs.gov/pub/irs-pdf/p598.pdf We touched on this earlier in this thread relating to IRA's but I believe it also holds true for 401(k) plans. If the Unrelated business taxable income passed through from all MLP's the plan owns exceeds $1,000 in a year, the plan is required to file a 990-T and pay tax at trust rates.

Thank you! I will read up on that. Culdeus was asking earlier how that affects the individual investor for taxes. Does it trigger a taxable event that he would have to handle or does the plan itself handle it?

 

[Tom Hagen]

This is probably my ignorance then. I had never heard of anything triggering a taxable event in a 401k before you withdrew it.Do you have a link which explains in detail MLP so I can educate myself?

http://www.irs.gov/pub/irs-pdf/p598.pdf We touched on this earlier in this thread relating to IRA's but I believe it also holds true for 401(k) plans. If the Unrelated business taxable income passed through from all MLP's the plan owns exceeds $1,000 in a year, the plan is required to file a 990-T and pay tax at trust rates.

Thank you! I will read up on that.Culdeus was asking earlier how that affects the individual investor for taxes. Does it trigger a taxable event that he would have to handle or does the plan itself handle it?

That is a good question. In theory, I believe the custodian is responsible for filing the return but I'm not sure how many of them pay attention to this rule or take responsibility for preparing the returns, especially if your IRA or 401(k) is held with a discount brokerage. The custodian may interpret their responsibilty as notifying you of the need to prepare the 990-T and return to them for filing and payment.

 

[acarey50]

The key for this scenario that Wilked suggested yesterday is to have both sides start with the same amount of before tax money so that it could represent a more real life scenario that an investor would face.

I figured someone would say this. I hesitated posting it because it doesn't matter if the money was taxed or not, what matters is what you do with it from here on out, I just wanted him to stop being hung up on that.

Care to address the bolded? The key for any logical comparison between traditional vs. Roth is the same starting point. Your scenarios are not doing that, thus they are not really valid comparisons.

 

[humpback]

Newly, a couple of things:

1- Looks like you only ran 29 years, not 30

2- For the taxable account, you calculated it assuming no dividends, no interest, no capital gains distributions, and no transactions the entire time and only paid taxes at the end (you also calculated the taxes on the entire amount, but it would only be on the gain). It all depends on your investment choices obviously, but it's more likely you will be paying taxes as you go, with your marginal rate a better approximation. If you buy a 30 year 5% bond for instance, you're paying marginal rates every year.

 

[NewlyRetired]

Newly, a couple of things:

1- Looks like you only ran 29 years, not 30

2- For the taxable account, you calculated it assuming no dividends, no interest, no capital gains distributions, and no transactions the entire time and only paid taxes at the end. It all depends on your investment choices obviously, but it's more likely you will be paying taxes as you go, with your marginal rate a better approximation. If you buy a 30 year 5% bond for instance, you're paying marginal rates every year.

1) I put in the 10k in year 1 and then let it go for another 29 years for a total of 30 years, which is what I defined the time period as. I don't think it would make any difference though if it grew another year or not. YMMV.

2) agreed, which is why I listed that in my assumptions. Please feel free to run a more complicated set of numbers factoring in dividends, capital gains etc. I was just doing it very quickly just to give some added depth to the discussion.

 

[wilked]

First you need to be dragged into the front yard and beaten for using your taxable space to invest in bonds ;-)

 

[NewlyRetired]

First you need to be dragged into the front yard and beaten for using your taxable space to invest in bonds ;-)

sadly this is what I do. I don't have much choice though as the bonds provide me with my living income as I can't touch my retirement money yet.

 

[17seconds]

found money?

 

[NewlyRetired]

found money?

if it were only so easy

 

[humpback]

First you need to be dragged into the front yard and beaten for using your taxable space to invest in bonds ;-)

Says the guy who recommended someone should put their Roth all in bonds ;-)

 

[17seconds]

found money?

if it were only so easy

You don't need to show any calculations to convince me that $3000 on a W-2 is not as good as $3000 found in a shoebox.

 

[wilked]

First you need to be dragged into the front yard and beaten for using your taxable space to invest in bonds ;-)

Says the guy who recommended someone should put their Roth all in bonds ;-)

uhh, Roth is tax-advantaged (or tax-deferred, if you prefer) space, not taxable space. Big difference. That recommendation was spot-on.

 

[humpback]

found money?

It's to get you guys who don't understand that it doesn't matter if you paid taxes on that "extra" money to move on. Since you can't see that it's irrelevant for the comparison, just pretend you didn't pay taxes on it.

When you guys purchase things, do you think they really cost 30-40% more because you're using money that was already taxed to buy them? Woah, you had to pay taxes on the money you used to pay taxes too!

 

[Sand]

[

Awhile back someone said MLP could trigger a taxable event inside a 401k.

This is probably my ignorance then. I had never heard of anything triggering a taxable event in a 401k before you withdrew it.Do you have a link which explains in detail MLP so I can educate myself?

To add another - here. Has a bit more on strategy to get around the issue.

I do have MLPs in my IRA, but am well below the $1000 (which is actually a decent sized holding when you calculate it out). My IRA is small, so no worries for me there.

 

[humpback]

First you need to be dragged into the front yard and beaten for using your taxable space to invest in bonds ;-)

Says the guy who recommended someone should put their Roth all in bonds ;-)

uhh, Roth is tax-advantaged (or tax-deferred, if you prefer) space, not taxable space. Big difference. That recommendation was spot-on.

uhh, I know that- his choice was between a traditional and a Roth. Big difference. Recommending that someone put the lower expected performing asset class in the account with the biggest tax advantage is the opposite of spot-on.

 

[wilked]

hump, the best I can tell you is that you are on an island here, despite your numerous posts no one seems to agree with you. You are frankly giving bad advice in here, but at least others see that and are not acting on it.

For anyone looking for a good primer on fund placement, this is a good write-up

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

As you can see from the article, your bond funds should be in tax-advantaged accounts (such as a 401K or Roth), to minimize taxes.

 

[humpback]

hump, the best I can tell you is that you are on an island here, despite your numerous posts no one seems to agree with you. You are frankly giving bad advice in here, but at least others see that and are not acting on it.

For anyone looking for a good primer on fund placement, this is a good write-up

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

As you can see from the article, your bond funds should be in tax-advantaged accounts (such as a 401K or Roth), to minimize taxes.

As I already pointed out, both of his options were tax advantaged. Not sure if you actually read your link, but it pretty clearly shows the first choice for bond funds is tax deferred accounts, while the first choice for high growth stock funds is the tax-free accounts. Also from your link:

For simplicity, many people manage their asset allocation without regard to taxes. When Roth IRA accounts are much smaller than tax-deferred accounts this approximation works well. But it can be noted that moving the asset with the greatest expected future value from tax-deferred to a tax-free account does increase the risk/return of the investor. A simple way to view this tax-adjusted allocation for an investor in the 25% tax bracket is that the government is a 25% owner of the tax-deferred account. When moving an asset increases the investor's ownership of a high risk/return asset from 75% to 100% (in a Roth IRA), the overall portfolio risk-return increases as well.

 

[wilked]

maybe we all agree then on that point.

When I recommended someone put their bonds in their Roth, it was because they had terrible bond choices in their 401K. If your bond choices are equal between 401K and Roth, then sure, it helps to put them in the 401K since their gains are capped. But I would never choose a bad (read: expensive) bond fund in my 401K just to keep it out of the Roth, that is cutting off the nose to spite the face.

 

[humpback]

[SIZE=9pt]Scenario #1: $10,000 to Roth
Scenario #2: $10,000 to 401k, $3000 to taxable account

Assumptions[/SIZE]
Tax Rate Before Retirement: 30%
Tax Rate After Retirement: 20%
Growth: 5%
Time period: 30 years
Taxable account growth: 3.5% (.05*.7)


After 30 years:
Roth grows to: $43,219
401K grows to: $43,219
Taxable Account Grows to: $8,420


[SIZE=9pt]After Taxes[/SIZE][SIZE=9pt]:
Final Roth: $43,219 (no tax implications)
Final 401k After Withdrawal: $34,575 = $43,219 * .8
Final Taxable Account: $8,420

Final Count[/SIZE]
Scenario 1: $43,219
Scenario 2: $42,995

 

[NewlyRetired]

[

Awhile back someone said MLP could trigger a taxable event inside a 401k.

This is probably my ignorance then. I had never heard of anything triggering a taxable event in a 401k before you withdrew it.Do you have a link which explains in detail MLP so I can educate myself?

To add another - here. Has a bit more on strategy to get around the issue. I do have MLPs in my IRA, but am well below the $1000 (which is actually a decent sized holding when you calculate it out). My IRA is small, so no worries for me there.

Thanks Sand. This is a fairly complicated tax topic.

 

[17seconds]

[SIZE=9pt]Taxable account growth: 3.5% (.05*.7)[/SIZE]

Why did you calculate it that way? You aren't taxed until you withdraw.

You lost about $2,000 over 30 years in scenario 2 by doing that instead of calculating the tax on withdrawal.

 

[NewlyRetired]

Taxable account growth: 3.5% (.05*.7)

Why did you calculate it that way? You aren't taxed until you withdraw.

You lost about $2,000 over 30 years in scenario 2 by doing that instead of calculating the tax on withdrawal.

I think he was trying to represent a constant taxation of capital gains and dividends (although the rate looks higher than what I would have guessed so he might be representing another type of taxation. ). I am unsure how the formula accounts for the fact that the original 3k should not be taxed in this scenario, only the growth should be taxed.

 

[humpback]

[SIZE=9pt]Taxable account growth: 3.5% (.05*.7)[/SIZE]

Why did you calculate it that way? You aren't taxed until you withdraw.

You lost about $2,000 over 30 years in scenario 2 by doing that instead of calculating the tax on withdrawal.

It's a taxable account, so it's taxed as it's realized, not when you withdraw. It's going to depend on what it's invested in, but if it were a 5% bond or CD, you're paying marginal tax rates on that interest every year.

 

[humpback]

Scenario #1: $10,000 to Roth
Scenario #2: $10,000 to 401k, $3000 to taxable account

Assumptions
Tax Rate Before Retirement: 30%
Tax Rate After Retirement: 25%
Growth: 7%
Time period: 30 years
Taxable account growth: 4.9% (.07*.7)


After 30 years:
Roth grows to: $76,123
401K grows to: $76,123
Taxable Account Grows to: $12,600

After Taxes:
Final Roth: $76,123 (no tax implications)
Final 401k After Withdrawal: $57091.91 = $76,123 * .75
Final Taxable Account: $12,600

Final Count
Scenario 1: $76,123
Scenario 2: $69,692

 

[NewlyRetired]

Taxable account growth: 3.5% (.05*.7)

Why did you calculate it that way? You aren't taxed until you withdraw.

You lost about $2,000 over 30 years in scenario 2 by doing that instead of calculating the tax on withdrawal.

It's a taxable account, so it's taxed as it's realized, not when you withdraw. It's going to depend on what it's invested in, but if it were a 5% bond or CD, you're paying marginal tax rates on that interest every year.

Not on all bonds. There are bonds that are tax free. As you said, this part of the equation all depends on what you invest in over the 30 year period and how active you are in the account. We can come up with a million different options, some of which make scenario 1 better and some of which make scenario 2 better.

 

[NewlyRetired]

Hump, how is your formula accounting for not taxing the first $3k invested in the taxable account?

 

[humpback]

Taxable account growth: 3.5% (.05*.7)

Why did you calculate it that way? You aren't taxed until you withdraw.

You lost about $2,000 over 30 years in scenario 2 by doing that instead of calculating the tax on withdrawal.

It's a taxable account, so it's taxed as it's realized, not when you withdraw. It's going to depend on what it's invested in, but if it were a 5% bond or CD, you're paying marginal tax rates on that interest every year.

Not on all bonds. There are bonds that are tax free.As you said, this part of the equation all depends on what you invest in over the 30 year period and how active you are in the account. We can come up with a million different options, some of which make scenario 1 better and some of which make scenario 2 better.

If you're investing in a tax free bond in the taxable account, then surely you'll get a higher return on a taxable equivalent in your retirement accounts. We're assuming the same investments, you'd never invest in a tax free bond in your retirement accounts.

That's been my point from the very beginning- depending on the projections, you can come out ahead with the Roth even if your tax rate is lower in retirement. Pretty much every one else has claimed it's impossible.

 

[humpback]

Hump, how is your formula accounting for not taxing the first $3k invested in the taxable account?

I'm simply starting with $3K and compounding by the after tax rate of return.

 

[NewlyRetired]

[That's been my point from the very beginning- depending on the projections, you can come out ahead with the Roth even if your tax rate is lower in retirement..

Well of course. Anyone can manipulate the numbers however they want for a desired result, kind of like this "found money" stipulation. However that does not make it a real life scenario.

 

[NewlyRetired]

Hump, how is your formula accounting for not taxing the first $3k invested in the taxable account?

I'm simply starting with $3K and compounding by the after tax rate of return.

Ok cool, I see that. I guess it still comes down to what type of investment you have but if you figure a generic mutual fund that kicks off distributions, 30% seems very high to me.

 

[humpback]

[That's been my point from the very beginning- depending on the projections, you can come out ahead with the Roth even if your tax rate is lower in retirement..

Well of course. Anyone can manipulate the numbers however they want for a desired result, kind of like this "found money" stipulation. However that does not make it a real life scenario.

Are you suggesting that I'm manipulating the numbers, or that they don't represent a real life scenario? You calculated the taxable account assuming zero taxable events for 30 years- do you consider that a likely real life scenario?

 

[NewlyRetired]

[That's been my point from the very beginning- depending on the projections, you can come out ahead with the Roth even if your tax rate is lower in retirement..

Well of course. Anyone can manipulate the numbers however they want for a desired result, kind of like this "found money" stipulation. However that does not make it a real life scenario.

Are you suggesting that I'm manipulating the numbers, or that they don't represent a real life scenario? You calculated the taxable account assuming zero taxable events for 30 years- do you consider that a likely real life scenario?

I am saying that anyone, not you specifically, can change any parameter they want, to make the numbers work in their favor. I again have to remind you I have no horse in this race. I am already retired. I have also never owned a Roth IRA (was never eligible). I only ran the numbers to begin with because for what ever reason you refused to.