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Old 01-13-2017, 03:20 PM
willthrill81 willthrill81 is online now
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Originally Posted by Pondjumpr View Post
The only thing that you left out of the equation is growth. Your "effective" tax rate in retirement may very well end up being 100% of your initial contribution. In other words, if you initially deposit $100, it grows to $400 and you withdraw $400, a 25% tax rate would mean you pay $100. You would get $300 from your initial investment. That is the entire amount of your initial investment. At the same tax rate initially (assuming like this entire topic) you saved $25 in taxes initially.
That same $100, invested in a ROTH, if grown to $400 will allow you to withdraw the entire $400, use the entire $400 and pay no taxes. Or, if you like the math this way, take out $300, your entire gain, and use it all, pay no taxes and you still have your ENTIRE initial investment.

Another thing I like about having some money in ROTH is that you are not required to start taking distributions at age 70 1/2. With a traditional IRA, you are required to take money and pay taxes, as soon as you turn 70 1/2.
Yes, there are many factors that can impact your effective tax rate in retirement. But the facts are that very few retirees have an higher effective tax rate in retirement than when they were working. The lion's share take a pay cut.

No matter how you slice it, the math is very clear that the traditional IRA is preferable unless your effective tax rate is higher in retirement than in your working years.

And your $100 comparison is not really apples to apples. $100 invested in a traditional IRA will be less if invested in a Roth IRA due to taxes. Even if you could max out a Roth IRA, you could due the same with a traditional IRA and invest the taxes saved in any number of tax efficient vehicles (i.e. index funds, municipal bonds, real estate).

Required minimum distributions do not become a major tax concern unless you have well over $1 million in a traditional IRA (or 401k). But there are several strategies for dealing with that, including rollovers into Roth IRAs when your marginal tax rate favors it and single premium immediate annuities (that money is not subject to RMDs).

I expect to have quite a lot between my 401k and our IRAs, and I'm already anticipating both of the above strategies to minimize the tax impact of RMDs. But considering that RMDs will not hit me for several decades, there's little use for me personally in planning much because the tax law is likely to change between now and then.
Old 01-13-2017, 06:47 PM
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Originally Posted by Pondjumpr View Post
The only thing that you left out of the equation is growth. Your "effective" tax rate in retirement may very well end up being 100% of your initial contribution. In other words, if you initially deposit $100, it grows to $400 and you withdraw $400, a 25% tax rate would mean you pay $100.
Another thing I like about having some money in ROTH is that you are not required to start taking distributions at age 70 1/2. With a traditional IRA, you are required to take money and pay taxes, as soon as you turn 70 1/2.
Still another thing: When your stock prices goes up, normally you pay tax on the profit, aka capital gains. This rate is only 15%. But that same profit, held inside a traditional IRA would be taxed just like income, at your highest tax rate. (Of course in a Roth it is not taxed at all.)

In 20 years it you could easily have a 500% profit (stocks have increased almost 100% in just the last five years)... oops, all profit fully taxed at your maximum bracket if held in a traditional IRA - most likely 28%. Why pay 28% instead of 15% or zero? Why indeed.
Old 01-13-2017, 08:18 PM
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Still another thing: When your stock prices goes up, normally you pay tax on the profit, aka capital gains. This rate is only 15%.
A 15% tax rate only applies in one instance of capital gains tax. If the capital gains are short-term (held under a year before sold), then earned income tax rates apply. If the capital gains are long-term, then the tax is 0% if your income is $75,900 or below for a married couple filing jointly. 15% would apply above that income level up to $470,700, when it becomes 20%.

http://www.schwab.com/public/schwab/...axes-Whats-New

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Originally Posted by puttster View Post
But that same profit, held inside a traditional IRA would be taxed just like income, at your highest tax rate. (Of course in a Roth it is not taxed at all.)

In 20 years it you could easily have a 500% profit (stocks have increased almost 100% in just the last five years)... oops, all profit fully taxed at your maximum bracket if held in a traditional IRA - most likely 28%. Why pay 28% instead of 15% or zero? Why indeed.
With your other posts, it's clear that you don't understand how a progressive tax system such as ours works. Even if you were in the 28% bracket (and very few are since you need income of more than $151,900 for a married couple filing jointly to get there, which is roughly triple that of the median household income, and most retirees will not be even close to that), only the money above $151,900 would be taxed at 28%. The rest would be taxed at lower rates (10%, 15%, and 25%).

And beyond that, you're ignoring the fact that the money going into your Roth has already been taxed completely at your marginal (highest) tax rate. Using your 28%, this means that you will only have 72% as much money as if a traditional IRA was used instead. So even though your proceeds will be tax free, you will only have 72% as much as if you had used the traditional IRA instead. That is a very important point that the 'Roth all the time' crowd misses. See the OP for an explanation as to why.
Old 01-13-2017, 08:39 PM
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Originally Posted by willthrill81 View Post
If the capital gains are long-term, then the tax is 0% if your income is $75,900 or below for a married couple filing jointly. .
Fine, have it your way.
0% capital gains tax for a regular investment account.
0% capital gains tax for a Roth.
15% to 33% capital gains tax for a traditional IRA.

If you plan on making some capital gains, who you gonna call?
Old 01-13-2017, 10:53 PM
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Originally Posted by puttster View Post
Fine, have it your way.
0% capital gains tax for a regular investment account.
0% capital gains tax for a Roth.
15% to 33% capital gains tax for a traditional IRA.

If you plan on making some capital gains, who you gonna call?
Funds initially placed into a regular investment account: taxed at highest earned income rates.

Funds initially placed into a Roth: taxed at highest earned income rates.

Funds initially placed into a traditional IRA: 0% tax.

You start off with less money by using Roth IRAs and taxable accounts. That is more than enough in many cases to leave someone with less money than if they had gone with a 401k or a traditional IRA.
Old 01-17-2017, 06:35 PM
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puttster, a wise man once said, "It is better to keep your mouth shut and appear an idiot, than open it an remove all doubt."

You should really consider that advice and stop posting on this thread, because you are completely misinformed and have absolutely no idea what you're talking about.
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Old 01-17-2017, 06:46 PM
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Originally Posted by Pondjumpr View Post
The only thing that you left out of the equation is growth. Your "effective" tax rate in retirement may very well end up being 100% of your initial contribution. In other words, if you initially deposit $100, it grows to $400 and you withdraw $400, a 25% tax rate would mean you pay $100. You would get $300 from your initial investment. That is the entire amount of your initial investment. At the same tax rate initially (assuming like this entire topic) you saved $25 in taxes initially.
That same $100, invested in a ROTH, if grown to $400 will allow you to withdraw the entire $400, use the entire $400 and pay no taxes. Or, if you like the math this way, take out $300, your entire gain, and use it all, pay no taxes and you still have your ENTIRE initial investment.

Another thing I like about having some money in ROTH is that you are not required to start taking distributions at age 70 1/2. With a traditional IRA, you are required to take money and pay taxes, as soon as you turn 70 1/2.
No, that's not the way it works. First of all (as has been pointed out), your math is bad, you didn't take into consideration initial taxes on the ROTH.

But more to the point, you can't do tax planning in a bubble and say that your entire ROTH distribution is going to be taxed at a marginal rate. You have to calculate it at an effective rate, which, as willthrill81 pointed out, is a product of all sources of income.

But in virtually all cases, your effective rate is going to be lower than your marginal rate - that's just a product of the progressive tax system. So to reiterate what was said earlier, tax deferred contributions reduce taxes at a marginal rate, tax deferred withdrawals are taxed at an effective rate.
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Old 01-18-2017, 02:10 AM
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Since you don't know what your average tax rate is until you add up ALL your income, your claim that IRA is taxed at your average rate is impossible. The IRA income is not taxed after your other income is taxed.

If half your income is taxed at 0% and half at 15% your average/effective rate is 7.5%. We can agree on that. Now if you withdraw from an IRA, you say it will be taxed at 7.5%, your "effective" rate. Whether the IRA is $10 or $10,000, it is taxed at 7.5%.... Do you see how idiotic that is?

Guys. Get a job. Get a form 1090. Pay some taxes. Then come back and discuss what you have learned.
Old 01-18-2017, 12:23 PM
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Since you don't know what your average tax rate is until you add up ALL your income, your claim that IRA is taxed at your average rate is impossible. The IRA income is not taxed after your other income is taxed.
Yes it is. If you were to make a contribution to a traditional IRA, the tax reduction would be at your marginal (highest) rate. So in a very real way, that's the tax rate on your Roth contributions.

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Originally Posted by puttster View Post
If half your income is taxed at 0% and half at 15% your average/effective rate is 7.5%. We can agree on that. Now if you withdraw from an IRA, you say it will be taxed at 7.5%, your "effective" rate. Whether the IRA is $10 or $10,000, it is taxed at 7.5%.... Do you see how idiotic that is?
There's nothing idiotic about it at all. The entire context of this thread has been comparing taxes on contribution in your career and taxes on withdrawals in retirement. In your example with 0% and 15% tax rates, if your income was the same in retirement as in your career, then yes, your withdrawals in total for a given year would be taxed at 7.5%. However, your Roth contributions would have been taxed earlier at 15%, so you would clearly be better off with the traditional IRA.

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Originally Posted by puttster View Post
Guys. Get a job. Get a form 1090. Pay some taxes. Then come back and discuss what you have learned.
Your attempt at condescension only makes you sound like an idiot. You're doubling-down on the belief that you're correct despite multiple people demonstrating with simple math that you are wrong.

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Originally Posted by TonyDedo View Post
puttster, a wise man once said, "It is better to keep your mouth shut and appear an idiot, than open it an remove all doubt."

You should really consider that advice and stop posting on this thread, because you are completely misinformed and have absolutely no idea what you're talking about.
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Old 01-18-2017, 01:54 PM
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In your example with 0% and 15% tax rates, if your income was the same in retirement as in your career, then yes, your withdrawals in total for a given year would be taxed at 7.5%.
LOL, well why don't you recommend withdrawing the whole million dollars of IRA that year, if it is only going to be taxed at your "effective rate" of 7.5%?
Old 01-18-2017, 03:15 PM
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LOL, well why don't you recommend withdrawing the whole million dollars of IRA that year, if it is only going to be taxed at your "effective rate" of 7.5%?
Simple. If you withdrew the whole million dollars in one year, most of it would be taxed at 39.6%.

But why on earth would you want to do that? The overwhelming majority of people in retirement just need an income, not a huge lump sum. And the income they need is usually less than they needed while working. And withdrawing more reasonable amounts of money will result in far fewer taxes paid overall.
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Old 01-18-2017, 05:58 PM
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... tax deferred contributions reduce taxes at a marginal rate, tax deferred withdrawals are taxed at an effective rate.
WillT, you originally said withdrawals would be taxed at your "effective" rate, 7.5%. That was the alleged Big Advantage. Your sock puppet agrees, withdrawals would be taxed at your "effective" rate.

Now you say it would be taxed at 39.6%, the marginal rate? Whoa, what happened to that effective rate you promised?
Old 01-18-2017, 06:22 PM
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WillT, you originally said withdrawals would be taxed at your "effective" rate, 7.5%. That was the alleged Big Advantage. Your sock puppet agrees, withdrawals would be taxed at your "effective" rate.

Now you say it would be taxed at 39.6%, the marginal rate? Whoa, what happened to that effective rate you promised?
Okay, you're officially a moron.

I said that MOST of it would be taxed at 39.6% because you would be taking out a huge lump sum in one year.

Under normal circumstances where you're just drawing an INCOME from your IRA, your effective rate in retirement is lower than your marginal (highest) rate in your working career.

Only an IDIOT would empty their traditional IRA of $1 million in one year.
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Old 01-18-2017, 07:03 PM
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Roth contributions are taxed at your marginal rate (the highest bracket you pay at). Traditional withdrawals are taxed at your effective rate (the percentage of your overall income paid in taxes).
Let's have you repeat yourself ^^^ so the world can know never to listen to you again.
And let's have another look at that 1040 so we can see that IRA withdrawals are taxed EXACTLY like ordinary income, not at some special "effective" rate.
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Old 01-18-2017, 07:34 PM
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Let's have you repeat yourself ^^^ so the world can know never to listen to you again.
And let's have another look at that 1040 so we can see that IRA withdrawals are taxed EXACTLY like ordinary income, not at some special "effective" rate.
Anyone with ANY tax knowledge knows that your effective tax rate depends on your income. Your effective tax rate would of course be far higher with a million dollar annual income than $100,000.

And that statement of mine that you quoted is still 100% accurate. I have said REPEATEDLY that if your income is the same or lower in retirement than in your working career, which is true for 95% of retirees, the traditional IRA wins. Otherwise, the Roth IRA is a better choice. If you plan on needing a million dollars in one year, then by all means go with the Roth, though I doubt that you will since you clearly have no knowledge of how income taxes work.

Form 1040 does not discuss effective tax rates, but that does not mean they don't exist.

You can't cure stupid.
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Old 01-19-2017, 10:19 AM
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You can't cure stupid.
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