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Financial Planning Retirement Planning

Retirement Planning Strategies Following the 2017 Tax Act

The lower tax rates and higher standard deductions make taking advantage of Roth IRAs more attractive now.

by William Reichenstein, William Meyer | March 2018

Article Highlights:

  • The key comparison for determining whether to save in a tax-deferred account or a Roth account is between the relative sizes of the current marginal tax rate and the expected marginal tax rate in retirement.
  • Expected higher marginal tax rates in retirement favor saving in a Roth type of account; expected lower tax rates favor saving in tax-deferred accounts.
  • Saving in or converting to a Roth account now reduces the risk of higher future tax rates. For singles and married couples, the lower tax rates and higher standard deduction makes Roth conversions more attractive.

The Tax Cuts and Jobs Act (TCJA) of 2017 calls for generally lower tax rates from 2018 through 2025 before reverting back to 2017’s higher tax rates (after inflation adjustments) in 2026.

Moreover, there is a possibility that Congress may raise tax rates before 2026. The TCJA affects several tax-based strategies related to retirement planning. This article addresses two strategies for those who believe, as we do, that tax rates in 2018 and the next few years will be lower than tax rates in later years.

We begin by discussing the implications of the TCJA for the choice between saving pretax funds in, say, a 401(k) or aftertax funds in, say, a Roth 401(k). We then explain how singles and married couples might use Roth conversions to reduce the effective tax rate they will eventually pay on pretax funds in 401(k) and similar tax-deferred accounts. In short, we consider what many taxpayers can do this year and beyond to take advantage of what we expect to be temporarily lower tax rates.

Choosing Between a 401(k) and a Roth 401(k), and Similar Accounts

In 2018, employees often have the choice of saving up to $18,500 (or $24,500 if age 50 to 70) of pretax funds in a 401(k) account, or saving the same amount of aftertax funds in a Roth 401(k) account. The same rules apply to similar types of employer-sponsor plans such as 403(b) or Roth 403(b) plans. Separately, most individuals under age 70 can contribute pretax funds to a traditional (deductible) individual retirement account (IRA) or aftertax funds to a non-deductible Roth IRA.

The key comparison that determines whether someone should save pretax funds this year in a tax-deferred

account—such as a 401(k), 403(b), or traditional IRA—or an equivalent aftertax amount in a Roth 401(k), Roth 403(b), or Roth IRA is the relative sizes of the marginal tax rate this year and the expected marginal tax rate in retirement. If this year’s marginal tax rate is greater than the expected marginal tax rate in retirement, then save pretax funds in a tax-deferred account, and vice versa.

The marginal tax rate is the tax rate paid on your next dollar of income. For almost everyone younger than retirement age, the year’s marginal tax rate is the highest tax bracket you fall into.

For simplicity, but without loss of generality, Table 1 assumes Betty is deciding whether to save $10,000 of pretax funds this year in a 401(k) or an equivalent aftertax amount in a Roth 401(k). [The same logic would apply to choosing between a 403(b) and a Roth 403(b) or a traditional IRA and a Roth IRA] Betty’s marginal tax rate is currently 24%.

She can save either $10,000 of pretax funds in a 401(k) or $7,600 of aftertax funds in a Roth 401(k). The $10,000 contribution of pretax funds to a 401(k) is equivalent to a $7,600 contribution to a Roth 401(k) because they each reduce the amount that she can spend this year by $7,600. If she contributes $10,000 of pretax funds to a 401(k) it will reduce her taxable income by $10,000 and her tax bill by $2,400 [$10,000 × 24% tax rate = $2,400]. If she opts for the Roth 401(k) instead, she is contributing aftertax dollars, which equate to $7,600 ($10,000 less $2,400 paid in taxes).

To hold everything else constant, we assume the underlying investments in the 401(k) and the Roth 401(k) are the same. Table 1 assumes that the underlying investments’ cumulative pretax return is 100% between now and when Betty withdraws the funds to spend in retirement. If she contributes $7,600 of aftertax funds to the Roth 401(k), the amount would be worth $15,200 on an aftertax basis when she withdraws the funds in retirement. Returns in a Roth account grow tax free if the account has been in existence for at least five years and the account owner is at least age 59½ at the time of withdrawal. So, she could buy $15,200 of goods and services using aftertax dollars. The effective tax rate on funds held in a Roth account is 0%.

Table 1. Difference Between Saving in 401(k) and Saving in Roth 401(k)

 

For comparison, the $10,000 in the 401(k) will double and be worth $20,000 before taxes when Betty withdraws and spends the funds in retirement. This $20,000 of pretax funds will be reduced then by the prevailing marginal tax rate [$20,000 × (1 – marginal tax rate)] when the funds are withdrawn in retirement.

The top third of Table 1 assumes her marginal tax rate in retirement will be 24%. In this case, this $20,000 withdrawal from her 401(k) will allow her to buy $15,200 of goods and services [$20,000 × (1 – 24%) = $15,200]. Conceptually, this year’s $2,400 of tax savings in the 401(k) grows to $4,800, and this pays the full taxes on the $20,000 withdrawal [24% of $20,000 = $4,800.]Since the marginal tax rates this year and in retirement are the same, Betty should be indifferent between saving $10,000 in a 401(k) and $7,600 in a Roth 401(k), all else being equal.

The middle third of Table 1 demonstrates that if Betty expects to have a higher marginal tax rate in retirement, then she should save in the Roth 401(k). For example, if she will have a marginal tax rate of 28% in retirement, then her 401(k) would be worth $14,400, [$20,000 x (1 – 28%)] on an aftertax basis in retirement. This would be less than the $15,200 aftertax amount available with the Roth 401(k). Conceptually, the $2,400 of tax savings this year from the 401(k) contribution grows to $4,800 in retirement, but the tax bill on the $20,000 withdrawal from the 401(k) would be $800 more at $5,600 [$20,000 × 28% = $5,600]. So, the 401(k) is worth $800 less after taxes in retirement than the Roth 401(k) due to her higher tax rate.

The lower third of Table 1 shows that if Betty expects to have a lower marginal tax rate in retirement, then she should save pretax funds in the 401(k). For example, if she will have a marginal tax rate of 15% in retirement, then the 401(k) would be worth $17,000 [$20,000 × (1 – 15%)] on an aftertax basis. This would be more than the $15,200 aftertax amount available with the Roth 401(k). Conceptually, the $2,400 of tax savings in 2018 grows to $4,800 in retirement, but only $3,000 will be needed to pay the tax bill. So, she keeps the additional $1,800. That explains why the $17,000 aftertax amount from the 401(k) is $1,800 higher than the $15,200 aftertax amount that would be available from the Roth 401(k). The effective tax rate on this 401(k) is negative.

Before leaving this section, we want to add two points. First, returns in a Roth account (held for at least five years and withdrawn after age 59½) grow tax free. The effective tax rate is 0%. The effective tax rate is negative on returns in a tax-deferred account when the marginal tax rate in retirement is less than this year’s marginal tax rate. By making the better choice between saving in a Roth account or a tax-deductible account, your effective tax rate is 0% or less! These are attractive tax rates. Therefore, when saving for retirement, you should save all you can afford to save in these tax-advantaged savings vehicles.

Second, suppose your marginal tax rate this year, which is probably your tax bracket, is the same as your expected tax bracket in retirement. In this case, we encourage you to save in the Roth account for two reasons. First, as the example in the top third of Table 1 shows, for a taxpayer with a 24% marginal tax rate this year, saving $7,600 of aftertax funds in a Roth 401(k) is equivalent to savings $10,000 of pretax funds in a 401(k). Thus, saving $18,500 of aftertax funds in a Roth 401(k) is effectively a larger savings amount than saving $18,500 of pretax funds in a 401(k). Since the effective tax rate on savings in a Roth is 0%, you should save in the Roth account if you can save the maximum amount.

Second, as we will explain in a later article, the marginal tax rate for many retirees will be higher than their tax bracket. As a preview, due to the taxation of Social Security benefits, many lower- and middle-income taxpayers will pay a marginal tax rate that is either 150% or 185% of their tax bracket. For example, a single retiree receiving Social Security benefits may be in the 22% tax bracket, but will have to pay a federal marginal tax rate of 40.7%, [22% × 1.85], on distributions from their 401(k) or other tax-deferred accounts. A forthcoming AAII Journal article will also explain why income-based increases in Medicare premiums will cause some high-income taxpayers to pay extremely high marginal tax rates on their tax-deferred account distributions. In short, many low-income through high-income taxpayers will have much higher marginal tax rates in retirement than their tax brackets. So, if your marginal tax rate this year is the same as your expected tax bracket in retirement, you should save in the Roth account.

Roth Conversions Strategy

In this section, we present several examples where it would be better for a taxpayer to convert funds to a Roth account, while tax rates are temporarily lower, than to not make Roth conversions and have these pretax funds taxed at a higher marginal tax rate when withdrawn in retirement. As before, the key to whether a Roth conversion makes sense this year is the comparison of this year’s marginal tax rates to the marginal tax rate if the funds are retained in the tax-deferred account and withdrawn in retirement.

For the first example consider Mary, who is 60 years old and single. Her projected taxable income this year will be about $108,000. Her marginal tax rate (and tax bracket) this year will be 24%, but she expects her marginal tax rate in retirement to be higher than 24%. At the end of this year, Mary should estimate her calendar-year income, including such things as interest, dividends and capital gains on assets held in taxable accounts. She should then convert sufficient pretax funds from a traditional IRA, rollover IRA or 401(k) to a Roth account to take her taxable income to the top of the 24% tax bracket. To be conservative, she may convert an amount to take her income slightly below the limit. After all, even at the end of the year, Mary may not know her precise income level before the Roth conversion. As demonstrated in Table 1, it is better to give the government 24% of the conversion amount now than to give the government a higher percentage of the pretax withdrawal amount in retirement.

For the second example, consider a widow, age 67, whom we are working with at our firm www.income

strategy.com. She should aggressively pursue Roth conversions from her rollover IRA before she turns 70½. If she does not, her required minimum distributions (RMDs) when she turns 70½ will place her in the 22% tax bracket based on the TCJA’s 2018–2025 tax rates or place her in the 25% tax bracket beginning in 2026 (if the TCJA’s lower tax rates expire). Due to the rules affecting the taxation of Social Security benefits, she will pay a marginal tax rate of more than 40% on much of her IRA distributions. (For a wide range of tax-deferred account withdrawals, each $100 withdrawn will cause another $85 of Social Security benefits to be taxed. So, her taxable income increases by $185, and 22% of $185 is $40.70. Thus, her marginal tax rate is 40.7%.) By aggressively converting funds to a Roth account to take her to the top of the 24% tax bracket in each year before turning 70½, she will be able to reduce funds in her tax-deferred IRA and thus reduce, if not eliminate, the size of her required minimum distributions (RMDs) subject to the 40.7% or higher marginal tax rates. (By reducing her RMDs, Mary lowers the amount of taxable income used to determine how much of her Social Security benefits will be taxed.) It would be better for her to pay 22% or 24% on Roth conversions each of the next few years than to retain these funds in her tax-deferred IRA and have these funds taxed at over 40% a few years later.

For the third example, let’s consider a higher-income single female who is age 55. Her income, once RMDs begin after age 70½, will be so high that she cannot avoid paying taxes on 85% of her Social Security benefits, which is the maximum taxable amount. She should consider converting pretax funds from her tax-deferred accounts such as a 401(k) to a Roth account from, say, ages 55 to 62. Since she will begin Medicare at age 65, these conversion amounts through age 62 will not affect the size of her Medicare premiums at age 65 or later. The reason is that Medicare premium levels at age 65 will be based on her income level two years earlier, or age 63. By converting funds to Roth accounts from, say, age 55 to 62, she may reduce the size of her RMDs and thus the size of her future Medicare premiums.

The fourth example is similar to the prior example, except that the single taxpayer or married couple filing jointly may be decades from retirement. Consider a married couple in their late 30s. They have been saving aggressively in their firms’ 401(k) plans. They could convert funds to the top of the 22% or 24% tax bracket in 2018 and each year thereafter that these lower tax rates apply. As explained in Table 1, these Roth conversions will enhance their aftertax wealth in retirement if their marginal tax rate in retirement will be higher. By converting pretax funds to aftertax funds and paying say 24% on the converted amounts, these young taxpayers do not have to worry about the impacts of taxation of Social Security benefits and income-based Medicare premiums on their marginal tax rate in retirement. This example demonstrates that the new tax code has retirement-planning implications for people decades from retirement.

Furthermore, by converting some of their pretax funds in a 401(k) or other tax-deferred accounts to a Roth account in the next few years, these young workers are practicing a form of tax diversification. That is, by converting some of their tax-deferred funds to a Roth in the next few years, they are reducing the risk that Congress may substantially raise future tax rates, which would affect the marginal tax rate on all funds withdrawn from their tax-deferred accounts in retirement.

Let’s consider a fifth example. An older same-age married couple will have an adjusted gross income of $90,000 in 2018. After deducting their $26,600 standard deduction, which includes $2,600 for both spouses being over 65, their taxable income will be $63,400. Furthermore, most of this income comes from RMDs. Beginning one year after the death of the first spouse, the survivor will likely have a similar level of adjusted gross income, but due to the lower standard deduction for a single household, the survivor’s taxable income may be about $76,400, [$90,000 – $13,600 standard deduction]. Based on the TCJA tax structure, as a married couple they will be in the 12% tax bracket. After the death of the first spouse, the survivor may either be in the 22% tax bracket based on the TCJA’s 2018–2025 tax rates or in the 25% tax bracket beginning 2026 (if the TCJA’s brackets expire). In short, after the death of the first spouse, the survivor will usually be subject to a higher tax bracket. Such couples should consider converting funds to a Roth while both partners are alive to fill their relatively low tax bracket. It may be better for them to convert funds to a Roth account when they can file as a married couple filing jointly and the TCJA’s temporarily lower 2018–2025 tax rates apply than to not make such conversions and force the surviving spouse to pay a substantially higher tax rate on the distribution of these pretax funds later in retirement.

Summary

The TCJA established lower tax rates for 2018–2025 than 2026 and beyond. And there is no guarantee that Congress may not raise tax rates before 2026. In this article, we discuss two retirement-related strategies that should help many taxpayers take advantage of these temporarily lower tax rates. These strategies apply to taxpayers who have a lower marginal tax rate this year than they expect to have in retirement.

The first strategy is for these taxpayers to make contributions this year to tax-exempt Roth accounts instead of making tax-deductible contributions to tax-deferred accounts such as a 401(k) or traditional IRA. The second strategy is for these taxpayers to make Roth conversions if their marginal tax rate this year, which is probably their tax bracket, is below their expected marginal tax rate in retirement.

Discussion

Dave Gilmer from WA posted over 8 years ago:

There is some good information here, but I caution against making investment decisions based on what you think future tax rates may be. Advisors have in some cases led investors down the Roth conversion path telling them over the last 15 years that: "One, the Bush tax cuts would not be extended, thus your taxes would increase." "Two, tax rates obviously have to go up in the future." Nether of these two things happened and those that converted huge sums of their IRA, now have essentially wasted in most cases many thousands of dollars they can never get back. Multiply that by all the people using this tactic to drain their IRA and you begin to see the problem. Don't get me wrong there are many reasons to like the Roth for tax diversification and other reasons, but having more spendable income in retirement is usually not one of them. There are very few people when in retirement cannot spend the bulk of their assets in a tax bracket that is lower than when they were working, RMDs or no RMDs. Here are some numbers of the "Risk of the Roth IRA Revolution": https://seekingalpha.com/article/4140837-risk-roth-ira-revolution


Dave Gilmer from WA posted over 8 years ago:

"Second, as we will explain in a later article, the marginal tax rate for many retirees will be higher than their tax bracket. As a preview, due to the taxation of Social Security benefits, many lower- and middle-income taxpayers will pay a marginal tax rate that is either 150% or 185% of their tax bracket." First, this only applies if you consider your SS is due you in an untaxed state. For most people 85% of SS is going to be taxable, so whether you blame it on the IRA, or the taxable account, or your dividends makes little difference to me, it will be taxable income. Whether you consider it taxed in the zero marginal bracket, or higher is really just a matter or ordering. Now you say not if I spend my Roth funds. To that I say, spending your Roth funds in the ZERO tax bracket, or other low tax brackets violates the principals of THIS article. You WILL have less spendable income in retirement IF you do this! It is important to note that in retirement your EFFECTIVE tax rate on all the funds you spend is important and SS is usually a very narrow window in the spending equation. When you are earning money your effective tax rate is not what is important because this money goes into your tax-deferred savings at the marginal rate. When you spend it, it also comes out at your marginal rate(s), but usually over a lot more of your tax brackets. In MOST cases for a married couple the SS even in its 85% taxed state will not be enough to fill up your standard deduction so it will NOT be taxed at all, so the assumption that your IRA money will cause SS to be taxed is completely false! The IRA money that is causing the SS to be taxed will fall under the standard deduction and not be taxed either. Of course you can throw in a pension, which most don't have, and this will make the math look a little different, at least to the casual observer, who doesn't understand that now her pension will be in the zero tax bracket along with SS. It is of course an arguable point that there is some "order" to your retirement budget in which you are going to make decisions based on the true marginal rate of each dollar spent. I contend you merely need to look at your effective tax rate on all money spent and see if the same amount can be spent more efficiently. By efficiently I do not mean paying less tax. What I mean is having more retirement spending dollars based on the earnings you made to fund the retirement. This is a subtle point that considers whether you spend your Roth and IRA funds efficiently and this point is missed on many.


Dave Gilmer from WA posted over 8 years ago:

Finally, One question for the authors: When you use the term " tax bracket based on the TCJA’s 2018–2025 tax rates" and you do future year calculations what do you use for the upper end of each tax bracket? Does the TCJA suggest an inflation factor? Thanks, Dave


Adreand Bya from NC posted over 8 years ago:

Byagmail.com


Richard Oehlberg from CA posted over 8 years ago:

Dave: Thank you for the insightful comments. My take-away was: interesting article but in a practical sense useless. Why useless? Because as Dave points out, guesses about the future will likely be wrong! (Just like economists and "expert" guesses on what the market will do in any year that I can remember. A humorist once quipped that the definition of inexpert is a drip under pressure.) Knowing or guessing the future is not within the human skillset. So what do we do? How about converting a bit to a ROTH to hedge our bets on the future. The amount we convert will depend on our income level and how close we are to various tax thresholds that await our individual case.


Linda from CA posted over 8 years ago:

Dave Gilmer, Thank you sooooo much! Great points.


Steven Duncan from NY posted over 8 years ago:

To Dave Gilmer, Thank you for your insights. The take-away for me is that this subject is too complicated, unpredictable, and above my ability to fully grasp. I will just keep some of my money in a regular IRA and some in a Roth IRA and move on to just enjoying my life.


Randall Knowles from MT posted over 8 years ago:

I always opt for the compounding of Uncle Sam's money and I will worry about taxes later. The new option for Heavy Retirement Accounts is a CRUT or CRAT [especially for heirs] and don't forget that you can make all of your donations "before tax" by shifting directly from the Retirement Acct to the Charity. In my experience you can save a LOT of money if you take the time to plan. I earn about $100 per hour spending the time to do a good job of tax preparation and keeping current on the tax laws. THE problem is: I don't like to cook, everyone has to eat but everyone does NOT have to cook. Your meals are healthier if you cook JUST like your planning is better if you take the time to learn and prepare.


D Barry from FL posted over 8 years ago:

I thought the article made some good points. If you do not need 401k money for current income it would be well to convert 401K money to a Roth IRA so long as you pay attention to how much you can transfer until you hit the next tax bracket. If you maintain your current investments, percentage wise, in a Roth account and if taxes go up in the future you will be ahead. if taxes remain the same you will come out even. If taxes go down you will be worse off. All who believe taxes will go down in the future please raise your hand. I do not see this as an investment decision such as such but changing where the investment is held. Bottom line, it isn't really your money until you pay your taxes.


James Weiner from PA posted over 8 years ago:

Thank You William and Dave for your perspectives. One question that I have concerns Social Security and Medicare taxes. If I contribute to a ROTH, I pay SS and Medicare Taxes. When I withdraw, I do not pay those taxes, only Fed, State and Local. If I contribute to a IRA, I do not pay Medicare Taxes.When I withdraw, I do not pay those taxes, only Fed, State and Local. For both Scenarios, if I live in a tax free state for retirees, I only pay FED tax on withdrawals. Is my basic thoughts correct here? Thanks, Jim


Scott Sarratt from VA posted over 8 years ago:

James, It is pretty simple. The IRS generally lets you delay but not avoid taxes. With a regular IRA/401K, you avoid Federal and state taxes on your contribution. However you do pay SS/Medicare taxes. So when you pull out the money, you pay the Federal/state income taxes since you never paid them in the first place. However since you already paid SS/Medicare, you don't have to pay them again. The same principal works with a Roth. You pay Federal/state/SS before you contribute money to the account. Thus you don't pay any of these taxes when you take the money out.


Scott Sarratt from VA posted over 8 years ago:

There are several issues concerning Roth contributions that are never touched on. As Dave Gilmer indicated, avoiding tax on SS is not really an option for most people with a decent sized 401K/IRA. It doesn't much income to have to start paying tax on SS. Anyone who built up a sizeable retirement portfolio probably made a decent salary -- 100K. That type of person is going to need/want a decent income stream in retirement. Consequently the idea of paying income taxes now for a Roth conversion hoping to avoid taxes in the future is probably false. In other words, there will not be a added tax on SS, because that person will probably be paying taxes on their SS regardless of any IRA/401K withdrawal.


Scott Sarratt from VA posted over 8 years ago:

There is another issue concerning Roth conversions that is NEVER mentioned and that has to do with the Government changing the rules. With massive federal deficits as far as the eye can see, the Government is going to start looking hard at large pots of untaxed money. There is no reason to assume a Roth account will remain tax free in the future. Yes the Government might not directly tax the money, but there are ways to indirectly tax it. For instance adding a Roth withdrawal to adjusted income for deduction limits. This money could also be subject to the AMT or subject to the 3.8 percent Medicare tax -- or even subject to SS/Medicare tax. Think this can't happen? The Government has done something like this before -- taxing SS benefits for one. Personally I feel any advice to convert a traditional IRA/401K is bad advice. For us older folks -- 60 plus, there is not a lot of time to grow money in a Roth to make up for the taxes paid prematurely. For younger people such as the couple in their thirties in the article, they should simply contribute to a Roth going forward if they are so afraid of future taxes. Conversion advice sounds like a great way for a financial planner to generate some extra fees.


Kevin V from CA posted over 8 years ago:

This is a useful discussion (Dave's points, too). There are a couple of points that are seldom mentioned, however. As a current CA resident, the marginal rate is very high. I will be relocating before or at retirement to a state with rates that are half (or lower) than CA rates. It makes little sense for me to convert early or to not make use of the current tax deferral of a regular 401k. Potential fed rate hikes will likely dwarf the state tax difference. A reason I would consider conversion is for avoiding tax liability for my kids. The 401k is a huge tax bomb - I'd hate for them to have to defuse it.


Ken Langtry from TX posted over 8 years ago:

A number of years ago we converted 1/2 of our portfolio to a Roth and paid excessive taxes for the conversion during the following four years. Since retiring in 1996 we've used only funds from the taxable IRA and left the Roth to increase, which it did substantially. In 2017 we spent the last $5,103.83 left in the taxable IRA, and for other living expenses, we used non-taxable funds from the Roth. Since our only taxable income was $5,103.83, we owed no taxes on what we receive in Social Security and owe zero taxes for 2017. My wife and I look forward to a long life and the prospect of never having to pay taxes during our remaining years.


Ken B from Idaho posted over 8 years ago:

Great article! Thanks. The impact that RMDs have on AMT and benefit phase-outs can also be big factors that affect the decision both in the conversion period and in the RMD period. Optimizing Roth conversions can reduce these impacts. I would like to see these topics addressed. If one can do so, delaying SS benefits and performing Roth conversions during that period before drawing SS can be a double benefit: minimized taxes for the Roth conversions plus maximized SS benefits.


Dave Gilmer from WA posted over 8 years ago:

@ Kevin V, Yes, I agree I seldom mention state taxes because I live in a state without them, but as you point out they have to be "implied." Everyones tax situation is different, but when I say compare tax rates in to tax rates out you have to look at the big picture. Certainly moving to a state that gives you lower taxes in retirement, is one way that the IRA money will become more valuable. As I said however, once you move to that lower tax state, and are in retirement, doing conversions is of limited value because the only way the Roth wins mathmatically is if you use it to avoid higher taxes, which you already avoided by moving. While it is admirable to not add additional taxes to your kids income, it is somewhat of a mis-guided venture as they will likely have less after-tax inheritance to spend - unless of course they are expected to be in a higher tax bracket than you are at the time you do the conversion.


Dave Gilmer from WA posted over 8 years ago:

Scott, By the way I try not to base too much of my "future risk" on what the government "might do." This is what has got a lot of people in trouble so far thinking they should put all their money into a Roth, because tax rates are going up. It's not a problem to do a little "planning around the edges" just don't bet the farm on it so to speak.


Dave Gilmer from WA posted over 8 years ago:

@Ken Langtry, I like your story because it is a perfect example of how people make poor choices, when they aren't fully informed of the consequences. My comments are not meant to say it was wrong for you but only to point out the math. The consequences of your actions, are less spendable money in retirement had you not converted such a large sum of your IRA in much larger tax brackets than you are in now. This is the "simple" math that I talk about again and again for Roth / IRA comparisons: https://seekingalpha.com/author/financialdave/articles#regular_articles Think of the fact that going forward, if you are both over 65, you have a zero tax bracket of $26,600, for which you could have been pulling money out of your IRA tax free. Add on to that another $74,700 up to the top of the 12% bracket. Of course some of that will be taken up by SS within that second $74,700 window, but not all. It is quite easy to see you could have been pulling $50k or more out of your IRA every year, paying the tax and still having more than what you have in the Roth. However, it is a personal choice as to what is going to make us sleep well at night and my only point is to show others what can happen if you have a mindset that is afraid of taxes rather than "what gives me the best chance to have more money in retirement." Whether someone "needs" more money in retirement is strictly something they have to figure out.


Dave Gilmer from WA posted over 8 years ago:

@ Ken B, " delaying SS benefits and performing Roth conversions during that period before drawing SS can be a double benefit: minimized taxes for the Roth conversions plus maximized SS benefits." Doing some of what you suggest, especially if you have no Roth accounts "may" turn out to have some benefit later on. In most cases however you can not do these conversions in a tax-rate prior to SS that is LOWER than your tax rate later, for the simple reason that 15% of your SS is not taxable and for the secondary reason that early in retirement you may want to be spending more money, thus creating a higher tax bracket if you add conversion taxes on top of it. The math at best supports the SAME tax bracket which gives no advantage to the Roth.


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