Some young people start out in the 0% tax bracket. Or 10%.
And all those arguments can be made for not wanting to tax those funds at retirement age: losing credits and a higher tax bracket. The difference being that we do know the situation now and we don’t know what will happen when we’re 70.5. I agree that with perfect 20/20 hindsight this would be a far easier conversation.
your biggest assumption here is that you will be in the same tax bracket at retirement. Also, who is going to take these out after 10 years? If you left those funds grow for another 30, one will have grown tax free and the other would be taxable.
Yes. And the conventional wisdom regarding Roth versus traditional makes the opposite assumption (i.e. that you will be in a lower tax bracket when you retire). That won’t be the case for my wife and I, and it won’t be the case for a good many couples we know. The point of my example was not that people shouldn’t blindly assume Roth will be the better choice for them without first running the numbers based on their own finances and projected income at retirement.
Projecting income at retirement is definitely a crapshoot. We thought we had things well pegged and predicted our retirement income. We were WAY off and predicted much less than we are actually reporting. Still, we have no regrets about having Roth IRAs, just not sure about whether we will be converting the money that we have in tIRAs into Roth IRAs.
Thanks all… have passed on info to young adult… importance of evaluating tax bracket when deciding where to put retirement savings
Also, realized importance of re-looking at Traditional IRA closer to retirement… evaluate whether to save on taxes in “the moment” with IRA when at a higher tax bracket, then pay taxes on distribution if retirement bracket is lower.
I had a client today who is 54 years old. Approaching the income level where he and his wife cannot contribute to a Roth IRA so he asked me if there is anything else they could do. They already max out their 401-K contributions. They each put $23,000 so that reduced their taxable income by $46,000 which is the only thing keeping them able to contribute to the Roth. I discussed the back door method with him and he was very happy and said his wife would definitely do it.
He, however, has about $300,000 in a traditional IRA which was a rollover from another job he left. So he cannot use the back door method without paying some tax so again, he wanted some options,
I explained that if he put $6,500 into a traditional he would have to pay tax on most of it if he converted. His marginal tax rate right now is 25%. He plans to work for maybe another 15 years at which time he’ll collect a generous pension and social security and they have large investments, so his tax bracket will not go down. We figured that he could convert about $30,000 a year from his IRA to a Roth and pay tax at his present rate. That money will then continue to grow tax free.
But to him, the biggest benefit was that there would be no RMD at 70.5 which would keep his income low.
I still don’t understand Alexander’s examples that claim the tax would be the same. Even if this guy only has another 15 years, the numbers work out. If he were in his 30’s, it would be much, much better to use the Roth.
Your client may be able to roll the rollover IRA into his current employer’s 401k. Then, the back door Roth isn’t a problem if there is no other IRA money.
Besides, he would prefer to take what IRA money he has now and convert to a Roth little by little until it’s all a Roth before he retires. He is trying to avoid the RMD.