PBS Frontline : The Retirement Gamble, sorta Must See (3 Viewers)

[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.

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.

Yes, as I've said all along, it's going to come down to those particulars, most of which are unknown estimations. However, even if you use a 10% rate for the taxable account in my last example, you still come out slightly ahead with the Roth.

 

[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?

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.

Not according to people in here, they said the traditional will always come out ahead if your tax rate is lower at retirement.

You may not have a horse in the race, but that didn't stop you from suggesting I didn't know what I was talking about earlier.

I didn't run the numbers because it's pointless if you don't agree with the premise. I'm sure now that people have seen them, they'll go back to bashing the premise instead of admitting that they were wrong.

 

[culdeus]

Sold out of my entire 401k balance to cash today. If Korea fires tonight I'm in a great position.

Will trade into a blackshares tactical equity portfolio tomorrow.

 

[wilked]

Sold out of my entire 401k balance to cash today. If Korea fires tonight I'm in a great position.

Will trade into a blackshares tactical equity portfolio tomorrow.

And here, I would have put you as a pork bellies sort of investor...

 

[culdeus]

Sold out of my entire 401k balance to cash today. If Korea fires tonight I'm in a great position.

Will trade into a blackshares tactical equity portfolio tomorrow.

And here, I would have put you as a pork bellies sort of investor...

 

[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.

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.

I have taxable mutual funds and while the funds sit there I never get taxed on gains except dividends. For a $3000-$8000 account that's not much at all. A hundred bucks a year? When you do withdraw, it's long term gains which is currently 15%.

Because of the above it can't be right to calculate annual compounding by decreasing the gain %

What gross income amount are you starting with in both scenarios? $14,285? (14285 * 0.7) = 10,000

1) If $14,285 gross turns into $10,000 roth, your taxes paid are $4,285

2) If $14,285 gross turns into $10,000 traditional and $3,000 taxable, your taxes paid are $1,285

In 2), the $3K difference is in your investment account gaining value instead of with the government.

It seems you are making scenario 1) come out ahead by choosing (or miscalculating) the gains/taxes in the taxable account.

 

[culdeus]

While you guys are on the subject the 3 FI funds I'm buying into are:

MAHQX

BGCIX

BHYIX

All are taxable FI type investments. Any objections for this in a 401k?

 

[NewlyRetired]

Sold out of my entire 401k balance to cash today. If Korea fires tonight I'm in a great position.

Will trade into a blackshares tactical equity portfolio tomorrow.

And here, I would have put you as a pork bellies sort of investor...

 

[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.

I have taxable mutual funds and while the funds sit there I never get taxed on gains except dividends. For a $3000-$8000 account that's not much at all. A hundred bucks a year? When you do withdraw, it's long term gains which is currently 15%.

Because of the above it can't be right to calculate annual compounding by decreasing the gain %

What gross income amount are you starting with in both scenarios? $14,285? (14285 * 0.7) = 10,000

1) If $14,285 gross turns into $10,000 roth, your taxes paid are $4,285

2) If $14,285 gross turns into $10,000 traditional and $3,000 taxable, your taxes paid are $1,285

In 2), the $3K difference is in your investment account gaining value instead of with the government.

It seems you are making scenario 1) come out ahead by choosing (or miscalculating) the gains/taxes in the taxable account.

Not sure how else to say it, but it depends on what you are invested in. If you buy a 5% corporate bond, you are paying marginal tax rates on all of your interest every year. If you buy a mutual fund, it's going to depend on the distributions- funds not only distribute dividends, they also pay out capital gains (yes, even if you don't sell- most people reinvest them back in the fund, but it's still taxable). Also, you don't pay taxes when you "withdraw" from a taxable account- you pay them when you receive dividends, interest, capital gains, etc.

As I said, even if you assume a much lower rate of 10% for the taxable account, the Roth comes out ahead in that example.

 

[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.

Yes, as I've said all along, it's going to come down to those particulars, most of which are unknown estimations. However, even if you use a 10% rate for the taxable account in my last example, you still come out slightly ahead with the Roth.

But that is only because you changed the rate of taxation in retirement from 20 to 25%. As I said, you can change anything you want to make the numbers come out how ever you like. This is really pointless right now.

 

[NewlyRetired]

you may not have a horse in the race, but that didn't stop you from suggesting I didn't know what I was talking about earlier.

I apologize for that. I did not and still do not understand the found money premise. I will admit that it could be my ignorance. Hopefully you are willing to admit that when you explained it and numerous people did not understand it, that perhaps some of the blame lays with how you approached it.

 

[Random]

I still dont think you are starting with equal amounts of money. 10K after tax = 14,285 pretax. Or 13K pre tax = 9100 after tax.

 

[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.

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.

Yes, as I've said all along, it's going to come down to those particulars, most of which are unknown estimations. However, even if you use a 10% rate for the taxable account in my last example, you still come out slightly ahead with the Roth.

But that is only because you changed the rate of taxation in retirement from 20 to 25%.As I said, you can change anything you want to make the numbers come out how ever you like. This is really pointless right now.

Wow. Isn't 25% lower than 30%?

 

[wilked]

While you guys are on the subject the 3 FI funds I'm buying into are:

MAHQX

BGCIX

BHYIX

All are taxable FI type investments. Any objections for this in a 401k?

My thoughts? Expensive.

Are you dead set on an actively managed fund?

 

[inca911]

Distilling my views on Roth IRA and 401k (without all the complicated details above):

If you run the numbers for a Roth IRA vs. a 401k, and assume the same rates of return, as well as equal tax rates at contribution and withdrawl (e.g., 25%), the two are identical in final money out at retirement for the same investment. For example, this means that at retirement withdrawl, an untaxed 401k amount of $6k invested is identical to $4.5k of taxed money (i.e., $6k - 25% to tax) invested in a Roth IRA (with same rate of return). So the primary differentiation is the tax rates at contribution and withdrawl.

If taxes are higher in retirement than at investment, the Roth IRA has greater total returns at retirement withdrawl, which is why it is an advantage to fund Roth IRA early in career when tax rates are likely lower.

If taxes are lower in retirement than at investment, 401k has greater total returns at retirement withdrawl.

One secondary difference is that in retirement, the distributions from a Roth IRA don't count as Income, and therefore keep your tax rate lower for your 401k distributions that are counted as income. This is another advantage to blending the two options, especially as your withdrawls from only a 401k could result in some of those 401k withdrawls ending up being taxed in a higher tax bracket (i.e., less $ for you). For example, withdraw for retirement from 401k at the lowest tax rate until reaching a higher tax bracket, then take out what you still need from Roth IRA (if needed).

Roth IRA's constant advantage is being able to get the principle out without penalty, if needed. 401k effectively locks up the money, or results in penalties to withdraw early. I fund Roth IRA before un-matched 401k for this reason, because dealing with issues now is more important to me than only living for retirement.

One major factor is the type of investments made in each account type. My Roth IRA investments target higher risk/reward, meaning the potentially higher gains are tax free (i.e., more $ for me). My 401k investments are more conservative than the Roth IRA ones, as the gains are taxed at withdrawl.

 

[humpback]

you may not have a horse in the race, but that didn't stop you from suggesting I didn't know what I was talking about earlier.

I apologize for that.I did not and still do not understand the found money premise. I will admit that it could be my ignorance.Hopefully you are willing to admit that when you explained it and numerous people did not understand it, that perhaps some of the blame lays with how you approached it.

Thanks.

The found money (or tax free money) premise was only to get you guys to stop thinking about if the money had been taxed before. For comparison purposes, it doesn't matter if you paid zero taxes on it or you paid a 90% tax rate on it, what matters is what you do with it right now. We're comparing putting it in a Roth vs. putting it into a taxable account. In either scenario, it doesn't matter what tax rate you paid on that $3K, it's the same for both.

I went back and looked again, maybe you can do the same, but it seems pretty clear to me. I'm sure I got a bit side-tracked from all of the attacks and talking to several posters at the same time, but I assumed people had at least a basic understanding of this stuff based on how they were telling me I didn't. Some one actually asked what about the extra $3K after I explained exactly what happened to it several times.

 

[culdeus]

While you guys are on the subject the 3 FI funds I'm buying into are:

MAHQX

BGCIX

BHYIX

All are taxable FI type investments. Any objections for this in a 401k?

My thoughts? Expensive.

Are you dead set on an actively managed fund?

Nah, not married to the idea. Even bond indexes are pretty pricey.

 

[humpback]

Distilling my views on Roth IRA and 401k (without all the complicated details above):

If you run the numbers for a Roth IRA vs. a 401k, and assume the same rates of return, as well as equal tax rates at contribution and withdrawl (e.g., 25%), the two are identical in final money out at retirement for the same investment. For example, this means that at retirement withdrawl, an untaxed 401k amount of $6k invested is identical to $4.5k of taxed money (i.e., $6k - 25% to tax) invested in a Roth IRA (with same rate of return). So the primary differentiation is the tax rates at contribution and withdrawl.

If taxes are higher in retirement than at investment, the Roth IRA has greater total returns at retirement withdrawl, which is why it is an advantage to fund Roth IRA early in career when tax rates are likely lower.

If taxes are lower in retirement than at investment, 401k has greater total returns at retirement withdrawl.

One secondary difference is that in retirement, the distributions from a Roth IRA don't count as Income, and therefore keep your tax rate lower for your 401k distributions that are counted as income. This is another advantage to blending the two options, especially as your withdrawls from only a 401k could result in some of those 401k withdrawls ending up being taxed in a higher tax bracket (i.e., less $ for you). For example, withdraw for retirement from 401k at the lowest tax rate until reaching a higher tax bracket, then take out what you still need from Roth IRA (if needed).

Roth IRA's constant advantage is being able to get the principle out without penalty, if needed. 401k effectively locks up the money, or results in penalties to withdraw early. I fund Roth IRA before un-matched 401k for this reason, because dealing with issues now is more important to me than only living for retirement.

One major factor is the type of investments made in each account type. My Roth IRA investments target higher risk/reward, meaning the potentially higher gains are tax free (i.e., more $ for me). My 401k investments are more conservative than the Roth IRA ones, as the gains are taxed at withdrawl.

, but you didn't consider the caps on contributions. If you're at or near the contribution limits, or if you're looking at a roth conversion, that's where the calculations I've been using come in . You can't always just add the difference to the traditional account, if you reach those caps you have to add it to a taxable account, and that can make a big difference.

 

[Dentist]

this thread sure took a turn for the worse in the past few pages...

 

[Random]

I still dont think you are starting with equal amounts of money. 10K after tax = 14,285 pretax. Or 13K pre tax = 9100 after tax.

Or to put it another way 10000/13000 = .77. So you are effectively using a 23% tax rate for the Roth.

 

[wilked]

this thread sure took a turn for the worse in the past few pages...

 

[moleculo]

I'm a big fan of covering college costs for my kids. My folks did it for me, my grandparents did it for them, it's a long tradition of paying it forward, so to speak. It's a tremendous advantage to enter the workforce without being burdened with all of that debt. I was able to buy a house 2 years after graduation and am now in a position to be done with mortgages by the time I'm 53 (had I not moved to SC, I would have had that house completely paid off by the age of 40). Besides that, I was able to fully fund my 401(k) and Roth IRA between the ages of 23 and 32, which is a pretty good lump of money and will make life easier for me down the road.

Of course, my degree and eventual job was in engineering - something that we all know means (relatively) stable employment. I'm obviously not ok with paying for my daughters to get degrees in womans studies or something like that.

ETA: I know that this isn't what the financial advisors would say. This is important to me though, and I am on track with being able to retire even with funding this.

you know, there's another part of this story that I should put out there. I have a brother who showed all the same signs of being college bound up until he was in HS, at which point he barely graduated. After HS, spent a couple years following around Phish and going to Rainbow Gatherings and basically being a hippie stoner. When it became obvious he was not going to be college material, my folks had a big pile of money still earmarked for his tuition, but that kind of money would not have done my brother any favors at that point in his life. They set up some sort of trust whereby he couldn't get his hands on it for non-tuition expenses until he was 35.

I believe this was all done outside the 529 plan and was thru taxable accounts.

My brothers story does have a happy ending - he worked his way around doing construction work, in upper Michigan and bought and flipped a house - even in this economy. Made a good bit of cash. He eventually cleaned himself up, (re)found religion and went to a missionary school where he learned all types of trades and useful things to know while in the bush. Right now, he is in South Sudan on a year-long stint helping to distribute aid thru Samaratans Purse. He turned 35 this March - frankly, I don't know if he is even aware that he has a lot of money coming to him soon.

As far as how my parents could afford this - frugal living while we were kids, and working jobs with nice pension bennies. My parents were both school teachers. My mom has a masters degree and 20+ years in her district - had a nice pension set up. When she was 55 or so, she took an early retirement and her pension was about 75% of what it could have been if she put in 5 more years or so. They moved to Florida and she started teaching again. After 5 years in the Florida school district, she qualified for another pension, at about 50% of the max. So, she is basically making 125% her previous salary in perpetituity.

Right now, if you were to tell me that if you play your cards right, you can retire by the age of 60 to a house on a salt-water canal in Florida with a boat kept on a lift with a nice pool, and still be able to put two kids thru college, all from a teachers salary, I'd say you were insane. Obviously, they played their cards right and managed to be pretty lucky along the way.

 

[humpback]

I still dont think you are starting with equal amounts of money. 10K after tax = 14,285 pretax. Or 13K pre tax = 9100 after tax.

Or to put it another way 10000/13000 = .77. So you are effectively using a 23% tax rate for the Roth.

Surprise, surprise- you say you are "with me", then when you see that the numbers work out the way I said they could, you are no longer "with me".

Look at post #612 (among others)- $14,285 translates to either $10K into Roth or $10K into traditional and $3K into a taxable account.

Feel free to keep saying I'm the one who doesn't know what he's talking about though.

 

[Tom Hagen]

One secondary difference is that in retirement, the distributions from a Roth IRA don't count as Income, and therefore keep your tax rate lower for your 401k distributions that are counted as income. This is another advantage to blending the two options, especially as your withdrawls from only a 401k could result in some of those 401k withdrawls ending up being taxed in a higher tax bracket (i.e., less $ for you). For example, withdraw for retirement from 401k at the lowest tax rate until reaching a higher tax bracket, then take out what you still need from Roth IRA (if needed).

Roth IRA's constant advantage is being able to get the principle out without penalty, if needed. 401k effectively locks up the money, or results in penalties to withdraw early. I fund Roth IRA before un-matched 401k for this reason, because dealing with issues now is more important to me than only living for retirement.

One major factor is the type of investments made in each account type. My Roth IRA investments target higher risk/reward, meaning the potentially higher gains are tax free (i.e., more $ for me). My 401k investments are more conservative than the Roth IRA ones, as the gains are taxed at withdrawl.

From a tax perspective there is one other potential benefit to the Roth. Let's assume Social Security will be in around in some form for the sake of this discussion. Under current rules up to 85% of Social Security benefits are taxable for a married couple whose qualifying income (50% of SS plus other income) is over $32,000. Roth distribtuions are not included in this calculation.

Let's say a retired couple are drawing $50,000/year from retirement accounts and collecting $30,000 in SS. If the $50,000 was from a traditional IRA or 401(k) your adjusted gross income is $73,850. If the $50,000 was from a Roth IRA or 401(k) your AGI would be zero. There can be a multiplier effect on adding income to a return with SS benefits.

 

[Random]

I still dont think you are starting with equal amounts of money. 10K after tax = 14,285 pretax. Or 13K pre tax = 9100 after tax.

Or to put it another way 10000/13000 = .77. So you are effectively using a 23% tax rate for the Roth.

Surprise, surprise- you say you are "with me", then when you see that the numbers work out the way I said they could, you are no longer "with me". Look at post #612 (among others)- $14,285 translates to either $10K into Roth or $10K into traditional and $3K into a taxable account. Feel free to keep saying I'm the one who doesn't know what he's talking about though.

Ok my bad. Maybe you missed this part from post #612:

It seems you are making scenario 1) come out ahead by choosing (or miscalculating) the gains/taxes in the taxable account.

I was really trying to follow you for a while, but its obvious you are just or not all there now. Carry on with your free money for retirement analysis.

 

[lumpy19]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket

Would it be smart to dump that rollover IRA into a Roth and take the heat now?

 

[wilked]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket

Would it be smart to dump that rollover IRA into a Roth and take the heat now?

I personally would do it...

Is the rollover from a single job? Be clear you understand the rules, it can get a little tricky.

But if your tax levels are assured to rise in the near future, I would do it.

 

[guru_007]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket Would it be smart to dump that rollover IRA into a Roth and take the heat now?

YesI believe you may be even able to roll the heat out over a two-year period (not positive if that is still an option but was a few years ago when I converted).

 

[humpback]

I still dont think you are starting with equal amounts of money. 10K after tax = 14,285 pretax. Or 13K pre tax = 9100 after tax.

Or to put it another way 10000/13000 = .77. So you are effectively using a 23% tax rate for the Roth.

Surprise, surprise- you say you are "with me", then when you see that the numbers work out the way I said they could, you are no longer "with me". Look at post #612 (among others)- $14,285 translates to either $10K into Roth or $10K into traditional and $3K into a taxable account. Feel free to keep saying I'm the one who doesn't know what he's talking about though.

Ok my bad. Maybe you missed this part from post #612:

>It seems you are making scenario 1) come out ahead by choosing (or miscalculating) the gains/taxes in the taxable account.

I was really trying to follow you for a while, but its obvious you are just or not all there now. Carry on with your free money for retirement analysis.

The taxes estimated on the growth in the taxable account is an entirely separate issue, but I've already explained that a few times as well. Sorry that you don't understand how this stuff works, but you should probably stop acting as if you do.

I'd apologize for being a jackass, but when in Rome...

 

[lumpy19]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket Would it be smart to dump that rollover IRA into a Roth and take the heat now?

YesI believe you may be even able to roll the heat out over a two-year period (not positive if that is still an option but was a few years ago when I converted).

Thanks guys. I guess I have a few phone calls to make. And to answer wilked yes it's all from a single job.

 

[humpback]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket Would it be smart to dump that rollover IRA into a Roth and take the heat now?

YesI believe you may be even able to roll the heat out over a two-year period (not positive if that is still an option but was a few years ago when I converted).

Thanks guys. I guess I have a few phone calls to make. And to answer wilked yes it's all from a single job.

Definitely make those phone calls, because people really shouldn't be saying yes or no without having a lot more information. One of the most important factors in this decision is going to be if you have the funds to pay the tax bill from outside of the IRA, which is pretty apropos given the recent "discussions" in here.

 

[lumpy19]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket Would it be smart to dump that rollover IRA into a Roth and take the heat now?

YesI believe you may be even able to roll the heat out over a two-year period (not positive if that is still an option but was a few years ago when I converted).

Thanks guys. I guess I have a few phone calls to make. And to answer wilked yes it's all from a single job.

Definitely make those phone calls, because people really shouldn't be saying yes or no without having a lot more information. One of the most important factors in this decision is going to be if you have the funds to pay the tax bill from outside of the IRA, which is pretty apropos given the recent "discussions" in here.

I do not have the funds to cover the tax bill. I get a free advisor with my retirement account so i'll be sitting down with them to work this all out.

 

[humpback]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket Would it be smart to dump that rollover IRA into a Roth and take the heat now?

YesI believe you may be even able to roll the heat out over a two-year period (not positive if that is still an option but was a few years ago when I converted).

Thanks guys. I guess I have a few phone calls to make. And to answer wilked yes it's all from a single job.

Definitely make those phone calls, because people really shouldn't be saying yes or no without having a lot more information. One of the most important factors in this decision is going to be if you have the funds to pay the tax bill from outside of the IRA, which is pretty apropos given the recent "discussions" in here.

I do not have the funds to cover the tax bill. I get a free advisor with my retirement account so i'll be sitting down with them to work this all out.

Okay, that's going to make a huge difference and could change the decision completely. The free advisor is a good start, but to more accurately see the implications you should work it out with your accountant (if you have one).

If you're comfortable giving specifics I can run the numbers for you pretty quickly to see if the decision is an obvious one either way, or you could post back on here after you talk to the advisors for feedback. Contrary to popular opinion, I actually know what I'm talking about.

 

[culdeus]

i think I broke a sweat putting all this in. This is about 120k worth of transactions. I have some core bond holdings in my SP account to balance the asset classes that I can't trade out of. Commission on all this 0. Well except for the Berkshire. Wanted to get 20k in there.

If this gets to be too much of a beating I'm going to consolidate down the sectors into a global index.

Spoiler

Order Status Buy 393 Shares of EUSA Order Number:E10BLTSW Filled at $35.12 Buy 47 Shares of EWC Order Number:E10BLWBX Filled at $28.23 Buy 705 Shares of EWJ Order Number:E10BLXFJ Filled at $11.735 Buy 137 Shares of EWH Order Number:E10BLZSD Filled at $20.7686 Buy 150 Shares of EWS Order Number:E10BMBPW Filled at $14.6205 Buy 297 Shares of EWU Order Number:E10BMCRH Filled at $19.1592 Buy 26 Shares of EWQ Order Number:E10BMDTC Filled at $24.9485 Buy 75 Shares of ECNS Order Number:E10BMPHP Filled at $44.7999 Buy 207 Shares of EWT Order Number:E10BMQGQ Filled at $14.2056 Buy 66 Shares of EWM Order Number:E10BMRBD Filled at $16.5199 Buy 10 Shares of EWZ Order Number:E10BMRRG Filled at $54.83 Buy 105 Shares of IDV Order Number:E10BMSVM Filled at $35.7239 Buy 23 Shares of OEF Order Number:E10BMTNR Filled at $73.3085 Buy 35 Shares of AGG Order Number:E10BMVRF Filled at $110.57 Buy 40 Shares of HYG Order Number:E10BMWLD Filled at $95.7985 Buy 40 Shares of IGOV Order Number:E10BMXFM Filled at $99.36 Buy 180 Shares of IWV Order Number:E10BMXRL Filled at $96.819 Buy 72 Shares of EEM Order Number:E10BMZPK Filled at $43.40 Buy 163 Shares of EFA Order Number:E10BNBHK Filled at $62.371 Buy 100 Shares of IAU Order Number:E10BNCKV Filled at $13.821 Buy 200 Shares of BRKB Order Number:E10BNGMP Filled at $111.2525

 

[humpback]

http://calcxml.com/calculators/roth-ira-conversion-calculator]Here is a handy Roth IRA conversion calculator you can use to run some numbers. Note that the "side account" money is taxed at marginal rates,they don't allow you to change that variable. You can always just compute that part in excel using a different rate if you'd prefer. Also, the number of years to receive income has a minimum of 1, so use a 29 year age difference if you want to see the values after 30, etc.

 

[humpback]

From http://www.bogleheads.org/wiki/Tax-Adjusted_Asset_Allocation]this link:

Roth ConversionsYou can evaluate a conversion of a traditional IRA to a Roth by its effect on your after-tax asset allocation. If you are in the same tax bracket now that you expect to be in at retirement, and you pay taxes on the conversion with IRA money, the conversion is break-even. For example, if you are in a 25% tax bracket and convert a $40,000 IRA, you will have $30,000 in the Roth after paying taxes. Previously, you owned $30,000 of the IRA and the IRS owned the other $10,000; after conversion, you own the entire $30,000 in the Roth.

In contrast, if you pay the taxes with taxable money, you have a net gain, and it may even be worth making the conversion if you are going to be in a slightly lower tax bracket at retirement. If you are in a 28% tax bracket but expect to retire in a 25% tax bracket, and have $11,200 in a taxable account and $40,000 in an IRA, you own 75% of the IRA and probably about 75% of the taxable account, a total of $38,400. If you convert to a Roth, paying the taxes with the taxable $11,200, you will have a Roth worth $40,000.

The Advantage of a RothIf you can max out either a traditional or a Roth IRA or 401(k), you are likely to be better off with the Roth, because you effectively tax-defer more money. You can contribute the same number of dollars either way, but you own all of the Roth and not all of the traditional account.

Investing in the Roth in this situation is equivalent to investing in a traditional IRA and immediately converting it to a Roth, paying the tax with after-tax dollars. Therefore, if you are in a much higher tax bracket now than you will be in at retirement, the traditional account may still be better, but if the brackets will be equal or close, you should prefer the Roth.

 

[wilked]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket Would it be smart to dump that rollover IRA into a Roth and take the heat now?

YesI believe you may be even able to roll the heat out over a two-year period (not positive if that is still an option but was a few years ago when I converted).

Thanks guys. I guess I have a few phone calls to make. And to answer wilked yes it's all from a single job.

Definitely make those phone calls, because people really shouldn't be saying yes or no without having a lot more information. One of the most important factors in this decision is going to be if you have the funds to pay the tax bill from outside of the IRA, which is pretty apropos given the recent "discussions" in here.

I do not have the funds to cover the tax bill. I get a free advisor with my retirement account so i'll be sitting down with them to work this all out.

OK, that changes things. You will need to pay those taxes out of pocket. I assumed from your 'take the heat' comment that you recognized the heat as the tax bill due immediately - my B. If you can't pay the taxes from savings it won't make sense to convert...

 

[humpback]

I've got a rollover IRA from a previous job, right now it's about 45% of my retirement savings, the other 55% is all in a traditional 401k. Sometime in the next few years my wife(teacher) and I will be moving into the next tax bracket

Would it be smart to dump that rollover IRA into a Roth and take the heat now?

YesI believe you may be even able to roll the heat out over a two-year period (not positive if that is still an option but was a few years ago when I converted).

Thanks guys. I guess I have a few phone calls to make. And to answer wilked yes it's all from a single job.

Definitely make those phone calls, because people really shouldn't be saying yes or no without having a lot more information. One of the most important factors in this decision is going to be if you have the funds to pay the tax bill from outside of the IRA, which is pretty apropos given the recent "discussions" in here.

I do not have the funds to cover the tax bill. I get a free advisor with my retirement account so i'll be sitting down with them to work this all out.

OK, that changes things. You will need to pay those taxes out of pocket. I assumed from your 'take the heat' comment that you recognized the heat as the tax bill due immediately - my B. If you can't pay the taxes from savings it won't make sense to convert...

I still can't believe that you said I was giving bad advice in here, but at least others see that and are not acting on it. I truly hope no one is acting on yours.

We still don't have nearly enough information (although that hasn't stopped you from giving one recommendation and then the opposite one), but it absolutely can still make sense to convert even if you can't pay the taxes from savings, not to mention you've been fighting against that premise the entire time.

 

[Ministry of Pain]

this thread sure took a turn for the worse in the past few pages...

That's an understatement

 

[wilked]

Hump has singlehandedly torpedoed this thread. Sometimes you have to just tip your cap...

 

[mquinnjr]

Hump has singlehandedly torpedoed this thread. Sometimes you have to just tip your cap...

 

[Random]

Hump has singlehandedly torpedoed this thread. Sometimes you have to just tip your cap...

And he is still giving advice. Sad thing is, I am guessing based on all of his "trust me's" that he is some sort of adviser. Scary.

 

[humpback]

Hump has singlehandedly torpedoed this thread. Sometimes you have to just tip your cap...

And he is still giving advice. Sad thing is, I am guessing based on all of his "trust me's" that he is some sort of adviser. Scary.

This thread is such a trip. The tangent began back when Doctor Detroit mentioned he has a Roth 401K option at work and asked whether he should start contributing to it (check out post #486 for our first few posts about it). Wilked responded by saying that he would diversify with both pretax and posttax accounts (traditional 401K and Roth IRA), but he would only do the Roth 401K if he was confident that his tax bracket would climb at retirement. I asked "why", because the Roth 401K is also a posttax account just like the Roth IRA. His response was "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)". Putting aside the fact that his reply contradicts his advice to fund the Roth IRA, the tax treatment for the Roth 401K is exactly the same as the Roth IRA. I just pointed out that his first statement wasn't necessarily true, but my question was, why the Roth IRA but not the Roth 401K when they are identical for tax purposes?

I asked that question quite a few times, he kept insisting he was correct about the traditional vs. Roth calculation, but I still don't think he has even addressed the question. I've explained why he is wrong on the traditional vs. roth, I've run the numbers showing how he is wrong, I've provided a link to a calculator where you guys can run the numbers yourselves to see that he is wrong, and I provided a link from bogleheads (which I got through the very link he provided) saying that he is wrong. You absolutely can be better off with a Roth even if your tax rate is lower in retirement than it is now.

There has been quite a bit of misinformation in this thread (not to mention some pretty awful advice), but if you want to criticize and attack me for pointing it out or correcting it, knock yourself out. I'll refrain from providing further advice, continue to listen to someone who may have stayed at a Holiday Inn Express last night if you'd prefer- it's not my money you're throwing away. It's no wonder why so many people are in terrible financial shape.

Good luck, you're going to need it.

 

[moleculo]

ok, here's my related situation: I'm married, home-owner, 2 kids, wife doesn't work. Right now, I'm barely in the 15% tax bracket once all deductions are applied. I have a good emergency savings fund - about 6 months worth in the bank that I can play with. I'm presently funding my 401(k) at the rate of about $6k/year - enough to reap all company matches.

I got a rather substantial bonus this year. The amount of the bonus will push me well into the 25% tax bracket. I don't have the bonus ear-marked for anything - for all considerations, consider it found money that taxes have already been paid on. I would like to use the bonus to help the retirement nest egg along - my ultimate goal is early retirement. The faster all of my retirement accounts grow, the sooner I don't have to work.

Let's say the bonus is $10k after taxes. It's already been paid to me, I simply have it sitting in savings with my emergency fund because I don't really know what else to do with it.

Here are a couple of options:

1. split it between my wife's and my IRA accounts - entire $10k goes in as Roth contributions. My overall compensation at the end of year records as salary + bonus.

2. Drastically increase my 401(k) contributions (max out) and use the bonus to supplement the lost income. To do this, I would set up and automatic transfer from my savings account every pay day equal to the contribution. This would have the effect of pushing the $10k into my 401(k). The kicker here is that my overall compensation would now be salary + bonus - extra 401(k), which should bring me back to the 15% tax rate, and set me up for a nice refund next April.

Thoughts?

 

[Politician Spock]

ok, here's my related situation: I'm married, home-owner, 2 kids, wife doesn't work. Right now, I'm barely in the 15% tax bracket once all deductions are applied. I have a good emergency savings fund - about 6 months worth in the bank that I can play with. I'm presently funding my 401(k) at the rate of about $6k/year - enough to reap all company matches.

I got a rather substantial bonus this year. The amount of the bonus will push me well into the 25% tax bracket. I don't have the bonus ear-marked for anything - for all considerations, consider it found money that taxes have already been paid on. I would like to use the bonus to help the retirement nest egg along - my ultimate goal is early retirement. The faster all of my retirement accounts grow, the sooner I don't have to work.

Let's say the bonus is $10k after taxes. It's already been paid to me, I simply have it sitting in savings with my emergency fund because I don't really know what else to do with it.

Here are a couple of options:

1. split it between my wife's and my IRA accounts - entire $10k goes in as Roth contributions. My overall compensation at the end of year records as salary + bonus.

2. Drastically increase my 401(k) contributions (max out) and use the bonus to supplement the lost income. To do this, I would set up and automatic transfer from my savings account every pay day equal to the contribution. This would have the effect of pushing the $10k into my 401(k). The kicker here is that my overall compensation would now be salary + bonus - extra 401(k), which should bring me back to the 15% tax rate, and set me up for a nice refund next April.

Thoughts?

If the goal is to reduce the tax you pay on that bonus this year, open two traditional IRAs for you and your wife and put the bonus in them. The purpose being your IRA should have far better options than your 401K. (note: if you love the options in your 401K, then just stick the money in there. Or if your company will match some of that bonus if you stick it in their 401K, then grab the matching.)

Personally I prefer the Roth option, even though you will get no tax credit this year on the bonus. The ability to withdrawal what you've deposited when you need to is a big plus over any other retirement tax benefit instrument. Even with a healthy "emergency fund", I don't like instruments that penalize you when you decide in the future you need to go in a different direction, as slight as it may be.

 

[wilked]

Tough question here. As you know the brackets jump from 15% to 25%, which is the biggest jump in the tax tables.

If this $10K puts you $10k into the next tax bracket, you immediately earn 10% on that money by going the 401K route (as opposed to an IRA). However, if that $10K puts you $5K into the next tax bracket, it is not as juicy.

My point is, pull out the calculator... I would fund 401K until you are exactly at that $72.5k mark (15% on taxable income over $17,850 to $72,500), and put whatever is left into a Roth.

Last point... I think you should be doing both if at all possible. In such a low tax bracket Roth space is very valuable. I would challenge yourself to see if you can fund the $11K annual into Roth, and still contribute to 401K in addition, in an effort to stay in the 15% tax space. You might consider using some of that E-fund (Roth can be treated as an e-fund, see here http://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund ). I would not go below 3 months e-fund in a liquid account.

Regarding that tax check next March/April next year, remember that you can also use that to contribute to your 2013 Roth so long as it is before April 15.

 

[Britney Spears]

GB you Wilked.

 

[Doctor Detroit]

GB you Wilked.

Some very good info in this thread via Wilked.

 

[Dentist]

i think I broke a sweat putting all this in. This is about 120k worth of transactions. I have some core bond holdings in my SP account to balance the asset classes that I can't trade out of. Commission on all this 0. Well except for the Berkshire. Wanted to get 20k in there. If this gets to be too much of a beating I'm going to consolidate down the sectors into a global index.

Spoiler

Order Status Buy 393 Shares of EUSA Order Number:E10BLTSW Filled at $35.12 Buy 47 Shares of EWC Order Number:E10BLWBX Filled at $28.23 Buy 705 Shares of EWJ Order Number:E10BLXFJ Filled at $11.735 Buy 137 Shares of EWH Order Number:E10BLZSD Filled at $20.7686 Buy 150 Shares of EWS Order Number:E10BMBPW Filled at $14.6205 Buy 297 Shares of EWU Order Number:E10BMCRH Filled at $19.1592 Buy 26 Shares of EWQ Order Number:E10BMDTC Filled at $24.9485 Buy 75 Shares of ECNS Order Number:E10BMPHP Filled at $44.7999 Buy 207 Shares of EWT Order Number:E10BMQGQ Filled at $14.2056 Buy 66 Shares of EWM Order Number:E10BMRBD Filled at $16.5199 Buy 10 Shares of EWZ Order Number:E10BMRRG Filled at $54.83 Buy 105 Shares of IDV Order Number:E10BMSVM Filled at $35.7239 Buy 23 Shares of OEF Order Number:E10BMTNR Filled at $73.3085 Buy 35 Shares of AGG Order Number:E10BMVRF Filled at $110.57 Buy 40 Shares of HYG Order Number:E10BMWLD Filled at $95.7985 Buy 40 Shares of IGOV Order Number:E10BMXFM Filled at $99.36 Buy 180 Shares of IWV Order Number:E10BMXRL Filled at $96.819 Buy 72 Shares of EEM Order Number:E10BMZPK Filled at $43.40 Buy 163 Shares of EFA Order Number:E10BNBHK Filled at $62.371 Buy 100 Shares of IAU Order Number:E10BNCKV Filled at $13.821 Buy 200 Shares of BRKB Order Number:E10BNGMP Filled at $111.2525

im still working on this. its sick i know so many of those etf ticker symbols by heart though

 

[Doctor Detroit]

So my 401k plan (TSP) has a bunch of calculators and I messed around with them tonight. They have a Roth v Traditional calculator but it isn't all that inclusive and seems to be missing a variable or two. What I figured though is in retirement, based on all the things I know now and guessing on my return of investment, I'll have between 65% and 75% of my current earnings in combined pension and 401k annuity.

My other money would come from my Roth IRA and I'd have savings based on selling my primary residence (would sell at retirement or possibly before based on career/geographical move in which case I would not buy another primary residence because home ownership is generally a PITA). I would have to sink money into my retirement home (either the one in Italy, the one in Michigan, or both) but still should have a substantial amount leftover, especially if I ever were to sell the house in Italy which is worth double what my primary residence and vacation residence (Michigan house) are combined right now (but the property taxes are really high). I would likely split time between Italy and Michigan until I was unable to travel so easily, then I would live in Italy only or possibly find a place in a dry climate like west Texas for the winters.

I'm in good shape I think. Or am I not accounting for something?