YesterdayQuote:
But many other factors are much more important to at least consider. Most people have a lower income in retirement than they do when working. Super savers like you and I might be the exception, but it's true most of the time. Since taxes are paid on marginal income, most already fall into a lower tax bracket (lower effective tax rate) in retirement than they do working. Because taxes are paid on marginal income, the money you convert today from traditional to Roth is by definition taxed at your highest marginal income rate. It's income placed on top of all your W2 income from airlinering and whatever else. So you are paying taxes on that money today, at your highest rate. On the other hand, when you start withdrawing traditional funds in the future during retirement, each year you start withdrawing at the lowest marginal rate and your effective tax rate only goes as high as the level of money you pull out each year.
And of course there is a risk that Congress someday adds a tax penalty/requirement to Roth accounts, or Roth accounts of a certain size to pay down the national debt, or fund social security/Medicare. We just don't know. You could pay all these top rate taxes now, only to have to pay Roth taxes of some kind in the future.
I don't know the answer, or best strategy. I like the idea of having some in both types of accounts. In a given retirement year, I can start withdrawing from traditional accounts at the lowest marginal tax rate, and when those withdrawals start to push into higher tax brackets (higher effective tax rate) I can start pulling more from the Roth funds that hopefully won't have taxes due and won't raise my effective tax rate further.
Still curious to hear other perspectives and ideas though. These are just my thoughts.
Depending on time frame, probably high likelihood of congress "means testing" SSA and Roth Accounts (or all 401K) for that matter. Originally Posted by Bluedriver
That's not a terrible argument, but possibly too simplistic. For one thing taxes have been much higher in the past, with the US at one time having a top income rate of 70%, so taxes don't necessarily only go up over time.But many other factors are much more important to at least consider. Most people have a lower income in retirement than they do when working. Super savers like you and I might be the exception, but it's true most of the time. Since taxes are paid on marginal income, most already fall into a lower tax bracket (lower effective tax rate) in retirement than they do working. Because taxes are paid on marginal income, the money you convert today from traditional to Roth is by definition taxed at your highest marginal income rate. It's income placed on top of all your W2 income from airlinering and whatever else. So you are paying taxes on that money today, at your highest rate. On the other hand, when you start withdrawing traditional funds in the future during retirement, each year you start withdrawing at the lowest marginal rate and your effective tax rate only goes as high as the level of money you pull out each year.
And of course there is a risk that Congress someday adds a tax penalty/requirement to Roth accounts, or Roth accounts of a certain size to pay down the national debt, or fund social security/Medicare. We just don't know. You could pay all these top rate taxes now, only to have to pay Roth taxes of some kind in the future.
I don't know the answer, or best strategy. I like the idea of having some in both types of accounts. In a given retirement year, I can start withdrawing from traditional accounts at the lowest marginal tax rate, and when those withdrawals start to push into higher tax brackets (higher effective tax rate) I can start pulling more from the Roth funds that hopefully won't have taxes due and won't raise my effective tax rate further.
Still curious to hear other perspectives and ideas though. These are just my thoughts.
They make the rules, they can change them. When they (congress) decides they need money to pay for something instead of just borrowing it, biggest source of funds would be those "privileged" people who were able to save in a ROTH/401K.
In the interest of equity and fairness, it would be easier for the government just to seize all retirement funds and "provide" you with the healthcare/housing/and lifestyle that can be more equal across the masses. That's been the way of several faltering countries in the past.
Many of investor advisors have had the axiom of never paying a tax before it's actually due.
