<p>
I used a 100% withdrawal to prove a point in a more obvious way. It would be pretty unusual you drain your retirement accounts in one year.</p>
<p>If the tax rate and rate of return are the same when the conversion is done and when withdrawals start, it doesn’t matter how much or how little you take out, or when, the results are the same. Multiplication is commutative.</p>
<p>So the people that inherit the iras still withdraw money over many years And they pay taxes on these withdrawals as they occur.</p>
<p>Ok…</p>
<p>Notrichenough…</p>
<p>I like that answer…</p>
<p>I am going to think about this now. </p>
<p>Thanks…</p>
<p>Notrichenough, I give you a bad time sometimes. You are right. Your example was therefore better than what I wanted to see.</p>
<p>You are right.</p>
<p>It is definitely not always the best idea to convert to a Roth. If your tax rates will be lower at retirement, as mentioned, and if you have to use money from that IRA to pay the taxes for the conversion. It would be crazy to withdraw that money from your IRA to convert, you have lost some of your principle to pay taxes now. We even told our advisor not to take his fee out of the Roth, we’ll pay him out of pocket.</p>
<p>I think our rate will go up because we have a pension, and that taxes will be going up most people in the future. Our friend gets a much higher return on our Roth than I do with our 401K funds. So that is another thing to consider, as you don’t always have options about where the money is. You want that Roth to be where you get the highest return…and since you are forced to make withdrawals from your 401K, the Roth should be the very last thing you withdraw from.</p>
<p>“What’s really interesting is that they got set up to fund every other week, and they got on alternate weeks. Same fund, same amount of money, one has consistently outearned the other”</p>
<p>That’s awesome that you’ve done this for your kids. And very bizarre that the funds are now unequal!</p>
<p>
</p>
<p>This made my day. I dragged my husband to a financial planner because I was worried what he would do if something happened to me. It was a good exercise, but in the end she didn’t tell us anything we didn’t already know. My husband feels vindicated, he always said if the advisors were so good at managing money they wouldn’t be working as advisors, hmmm. And it really galls me that the local Schwab office addresses correspondence to my husband, even though I opened the account 30 years ago and added him to it later. </p>
<p>I know retirees who are being taxed at higher rates than during their working career because of mandatory withdrawals from IRA’s and 401Ks. The IRS wants you to deplete your account by the time you die, so if you have saved diligently and gotten good returns you can end up with a healthy income just at the time of life you are beginning to scale back on travel etc.</p>
<p>Ok…this is my problem notrichenough…</p>
<p>In any case, if you are paying the same tax rates now as in the future, it’s a wash.</p>
<p>Example: $100K in an IRA, 5% return for 20 years, 40% combined tax rate.</p>
<p>IRA: in 20 years you have $265,000 - take it out in one year, you get $159K after taxes.</p>
<p>Roth: after the conversion you have $60K. Twenty years later, you have $159K on which you own no tax. "</p>
<p>The returns on income after you have to withdraw from the ira are no longer the
same as the roth…</p>
<p>So…after 20 years…the after tax balances are the same…</p>
<p>Going forward…whatever you make in the ira will eventually be taxed and whatever you make outside the ira will be taxed…</p>
<p>The roth 's income will not be taxed…</p>
<p>So let’s say for example sake…</p>
<p>I have both an ira and a roth worth 159,000 each.
I have to withdraw from the ira.
I make 5 percent a year in both accounts.
I am in a 40 percent bracket and have been since I started these
retirement programs.
I start withdrawing. Future income’s after tax return in the ira is 3 percent after paying the 40 percent tax…
Future income’s after tax return in the roth is 5 percent…</p>
<p>The roth is better…under the above scenario…isn’t that correct?</p>
<p>"Example: $100K in an IRA, 5% return for 20 years, 40% combined tax rate.</p>
<p>IRA: in 20 years you have $265,000 - take it out in one year, you get $159K after taxes.</p>
<p>Roth: after the conversion you have $60K. Twenty years later, you have $159K on which you own no tax."</p>
<p>I don’t understand this example. After the conversion, you would still have 100K, growing tax free and never taxed again. Unless you were paying the conversion tax out of the Roth, which would be unwise. Twenty years later, you would still have the $265K, that you would never be taxed again. The negative on this would be, what would you have otherwise done with the 40K that you had to pay in taxes to convert?</p>
<p>I want to write post 128 in a simpler way…</p>
<p>Once a person reaches mandatory withdrawal age 70 1/2…
All income in a pre tax funded ira is subject to tax eventually…
While All income in a roth is not subject to tax…</p>
<p>So if the value of both funds is the same at the withdrawal date…
And the before tax returns are the same…</p>
<p>The roth is better…</p>
<p>Right?</p>
<p>I agree. Except you have to factor in that you were able to deduct the value of your contributions from your pre tax IRA from your taxes (but not from your Roth), and how much is that worth? Certainly if you are in a very low or zero tax bracket, it is obvious that the Roth will always be better.</p>
<p>One advantage of the ROTH that everyone is missing is the ability to stretch out the RMDs until your children reach age 70 1/2. Take the example already given: </p>
<p>$100K in an IRA, 5% return for 20 years, 40% combined tax rate.</p>
<p>IRA: in 20 years you have $265,000 - take it out in one year, you get $159K after taxes.</p>
<p>Roth: after the conversion you have $60K. Twenty years later, you have $159K on which you own no tax."</p>
<p>If the account holder dies the Roth can then be left to the spouse. Lets say the spouse lives another 20 years at 5% interest the account is worth $422K. The spouse dies and leaves it to a child. The child does not need to take RMDs until they are 70 1/2 and even then they are tax free. The Roth is a great way to pass tax free inheritance to children.</p>
<p>“The child does not need to take RMDs until they are 70 1/2 and even then they are tax free. The Roth is a great way to pass tax free inheritance to children.”</p>
<p>Definitely, they can hold onto that until their own retirement (theoretically).</p>
<p>“Roth: after the conversion you have $60K. Twenty years later, you have $159K on which you own no tax.”</p>
<p>I don’t think it is accurate to use that example, because after the conversion you still have 100K. You just have a big tax bill. I realize it’s easier to figure it out this way, but a bad way to convert.</p>
<p>Holy cow guys, if you would wrap a [noparse]
[/noparse] block around what you include from another post it would make things a lot easier to read.
But you are withdrawing 40% more because there is 40% more money in there.</p>
<p>IRA has 100K, grows for 20 years at 5% to 265K, 7% withdrawal = 18.55K, after 40% tax = 11.1K.
Roth starts at 60K, grows for 20years at 5% to 159K, 7% withdrawal = 11.1K.</p>
<p>It’s the same.</p>
<p>
This assumes you have $40K laying around not doing anything.</p>
<p>The opportunity cost of that $40k more or less balances out the extra money in the Roth.</p>
<p>
It’s not a fair comparison in that case. You’ve essentially injected $40K of money into your Roth.</p>
<p>
I don’t believe this to be the case. A non-spouse beneficiary has to start taking RMDs the year after the death of the owner. They can spread it over their life expectancy, which can be a very long time, allowing the maximum tax-free growth.</p>
<p>If I follow your earlier example, and just pay the tax of the ira at age 70 1/2, I have the same amount of money …in both accounts at age 70 1/2, correct? 159,000.</p>
<p>So I don’t have 40 percent more in the Ira.
And your mathematical principal is correct. </p>
<p>It doesn’t matter when I take out the money after age. 70 1/2.
The accounts are equivalent. </p>
<p>Except the Roth continues to grow tax free while the Ira doesn’t. Right?</p>
<p>If you take the money out of the IRA, it is obviously no longer in an IRA, so of course it cannot grow tax-free.</p>
<p>But why would you take it all out though? Either leave it in the IRA to grow tax-free, or convert the IRA to a Roth and use 40% of the money to pay the taxes.</p>
<p>It was just a thought experiment, not a recommendation. The assumption was you took all the money out of the Roth as well.</p>
<p>I am not arguing with you…I am thinking. You are helping me…frankly I thought roths were going to suck when I first started in this thread. :)</p>
<p>If you keep the ira your final withdrawal and continue living, you are definitely a loser compared to the roth…</p>
<p>I am assuming you are not spending the withdrawals…</p>
<p>So…</p>
<p>If your tax rates are going to be as high or higher in retirement, you should convert…</p>
<p>If you rax rates are going to be the same in retirement, there is no rush in converting…</p>
<p>Your formula is great…it is what I wanted…</p>
<p>So what is the latest you can convert?</p>
<p>I guess I should look that up.</p>
<p>There are ideas out there that because of lower cap gains taxes people shouod not even use roths or iras…</p>
<p>I am going to rethink that now…</p>
<p>Just curious, what is the wisdom in thinking that tax rate will be much higher in the future when one is retired?</p>
<p>First for many retirees, their needed income should be much lower given the same or similar life style because first, you no longer need to save whatever percentage amount for retirement. Second, for most people, I would think the home will be paid off, and/or the size of the home would be much smaller needing a lot less expense. Smaller proportional expense should mean potentially smaller needed withdrawal rate of retirement income and smaller tax rate for being in the lower bracket than where you are now in the years before retirement (assuming that the progressive nature of the tax system is here to stay).</p>
<p>Third, if the tax reform is ever undertaken by our law makers, it could easily be that the tax rate will be coming down and the deductions for several things such as home mortgage deductions, educational expenses, retirement savings etc…, items which seniors and retirees generally may not have a lot of when they retire.</p>
<p>You still want to have some Roth to escape the minimum withdrawal requirement if you have a lot of or more than adequate retirement savings, but things are so uncertain that I am not sure that the proposition to convert all/most or forgo 401k contribution now in favor of Roth is that good of a thing.</p>
<p>“Just curious, what is the wisdom in thinking that tax rate will be much higher in the future when one is retired?”</p>
<p>Everyone’s situation is going to be different. For most people, their tax rate generally will go down. For us, we have a very high pension (unless our pension fund goes bankrupt–always a possibility). Add that on to required distributions for 401K, and the fact that we think there will be very few tax breaks that we’re eligible for in retirement, and the fact that we’re going to have to start paying down the countries debt, and I plan on the same or greater tax rate as an assumption.</p>