100% of retirement accounts in Roth- is tax bracket 0%?

[jIM]

If a person could save 25X annual spending entirely in Roth accounts,
would there effective tax bracket be 0% (outside of paying property
taxes and sales taxes)?

Three related questions:

Some (Most) of the 25X would come from a "Roth 401k"- the match on
this would be in a regular 401k. This would get taxed, but might be
low enough in a given year to be under standard deductions? How would
one consider this for tax planning (value of a match vs match
increasing tax during retirement)?

If there are dividends being paid from taxable investment accounts, do
the dividends count as ordinary income, or because of current tax
favorable treatment, do dividends get considered into this
differently?

It makes sense to me to maximise Roth accounts (to try to keep no
money from getting taxed), but if a person "misses" the goal, did they
pay more in taxes (while working) than they needed to? Meaning does
it make sense to sell out, use Roth IRA and Roth 401k in hopes of
paying no taxes in retirement... at risk of paying too much taxes
while working?

[joetaxpayer]

jIM wrote:

> If there are dividends being paid from taxable investment accounts, do
> the dividends count as ordinary income, or because of current tax
> favorable treatment, do dividends get considered into this
> differently?

If one is in the 'zero' bracket, 2007, single = $5350 + $3400 = $8750
It doesn't matter where the income comes from. i.e. the STD deduction
and exemption can wipe out dividends if you wish.


> It makes sense to me to maximise Roth accounts (to try to keep no
> money from getting taxed), but if a person "misses" the goal, did they
> pay more in taxes (while working) than they needed to? Meaning does
> it make sense to sell out, use Roth IRA and Roth 401k in hopes of
> paying no taxes in retirement... at risk of paying too much taxes
> while working?

I think that as much as we talk about 'saving your way to the next
bracket' at retirement, you can certainly do the opposite, live in the
28% bracket, and retire at zero. We've discussed the point of
diversifying across tax status to maximize wealth and minimize taxes. As
you suggest, even a Roth 401(k) isn't purely post tax if the company
matches. A $100K earner, 5% match, will have $15500 pre tax, $5000 post.
I think that over weighting in post tax (Roth) retirement accounts is a
missed opportunity, the $8750 above, plus the 10% rate up to $7825. So
for a single person, $16575 has a total tax of $782.

Yes, rates change, past performance, yada, yada. Either extreme on the
tax continuum is lost opportunity.

JOE

[Thumper]

On Fri, 1 Jun 2007 13:31:58 -0500, jIM >
wrote:

>It makes sense to me to maximise Roth accounts (to try to keep no
>money from getting taxed), but if a person "misses" the goal, did they
>pay more in taxes (while working) than they needed to? Meaning does
>it make sense to sell out, use Roth IRA and Roth 401k in hopes of
>paying no taxes in retirement... at risk of paying too much taxes
>while working?


This is a very individual thing. My advise is to not live your life
merely with taxes in mind.
Thumper

[joetaxpayer]

Thumper wrote:

> This is a very individual thing. My advice is to not live your life
> merely with taxes in mind.
> Thumper

But, with a bit of research and education, one can make some better,
informed choices. In the end, there's more to gain by saving the right
percentage and investing with an eye toward diversification, I'd agree.
Proper tax structuring can add a 5-15% boost that's not trivial. Why
would you be so quick to dismiss that, when, as a group, we analyze
everything else to death?

JOE

[zxcvbob]

jIM wrote:
> If a person could save 25X annual spending entirely in Roth accounts,
> would there effective tax bracket be 0% (outside of paying property
> taxes and sales taxes)?
>

> It makes sense to me to maximise Roth accounts (to try to keep no
> money from getting taxed), but if a person "misses" the goal, did they
> pay more in taxes (while working) than they needed to? Meaning does
> it make sense to sell out, use Roth IRA and Roth 401k in hopes of
> paying no taxes in retirement... at risk of paying too much taxes
> while working?
>


Just remember that if you plan everything using the current tax laws,
the government can come along and retroactively change the rules on you
15 years from now. That's exactly what happened with the UTMA account
that I set up for DD's college savings. The saving grace is that the
account had very poor returns (therefore little income to be taxed at
high rate) and other accounts have had very good returns. DD can leave
most of that money alone until she's 24, meanwhile I'll pay for much of
her college using other funds as tax efficiently as I can. She can
eventually use the UTMA to pay off her student loans when she gets out
of college and doesn't have much income yet.

Unless they change the rules again.

I fully expect a "flat tax", under the ruse of "fairness", to be
implemented in such a way and just in time to tax my (and other baby
boomers') Roth account withdrawals.

Bob

[Elizabeth Richardson]

"joetaxpayer" > wrote in message
...
>
> Proper tax structuring can add a 5-15% boost that's not trivial. Why
> would you be so quick to dismiss that, when, as a group, we analyze
> everything else to death?
>

I'm surprised at you, Joe. There are many of us here who advocate not
letting the tax tail wag the dog. jIM may or may not be doing this (we don't
have enough information), but Thumper's response is right on.

Elizabeth Richardson

[joetaxpayer]

Elizabeth Richardson wrote:

> I'm surprised at you, Joe. There are many of us here who advocate not
> letting the tax tail wag the dog. jIM may or may not be doing this (we don't
> have enough information), but Thumper's response is right on.
>
> Elizabeth Richardson

I'm surprised at you, too. Thumper says "not live your life
merely with taxes in mind." I don't suggest it's the top priority, just
that's it's worth a look. We agree that we don't know what the tax
structure will be in 5 years, let alone 10 or 20. To that, I suggest
that choosing to go to either extreme, all pre-tax 401(k) or all post
tax Roth type accounts, is putting all your eggs in one tax basket. My
initial rambling about the numbers was just pointing out to jIM that a
certain amount of income is nearly free, and likely to continue to be
free (or nearly so) moving forward. This is all after choosing the right
amount to save and diversifying. Are you suggesting it just be ignored?

I don't mean to pick anyone's words apart, but I thought the expression
"tax tail waging the dog" implied choosing wrong investments and
ultimately getting a lower total return, while paying too much attention
to the tax aspect and not enough to the big picture. I treated jIM's
question as first assuming everything else is in order, and jumping
right to the tax status question. Sorry if I misunderstood his intent there.

JOE

[Elizabeth Richardson]

"joetaxpayer" > wrote in message
. ..
>
>
> I don't mean to pick anyone's words apart, but I thought the expression
> "tax tail waging the dog" implied choosing wrong investments and
> ultimately getting a lower total return, while paying too much attention
> to the tax aspect and not enough to the big picture.

I always thought it meant deciding upon a course of action based on tax
implications regardless of consequences. You might be either lucky or
unlucky in your results. I think we agree that a better approach is that
your first line of decision-making should be choosing the investment,
regardless of tax implications, but not ignoring tax implications either.
You seemed to take an adversarial position (at least it looked that way to
me) to Thumper's statement "to not live your life merely with taxes in
mind." Perhaps I jumped to conclusions (yet again).

Elizabeth Richardson

[Thumper]

On Fri, 1 Jun 2007 16:41:43 -0500, joetaxpayer
> wrote:

>
>
>Thumper wrote:
>
>> This is a very individual thing. My advice is to not live your life
>> merely with taxes in mind.
>> Thumper
>
>But, with a bit of research and education, one can make some better,
>informed choices. In the end, there's more to gain by saving the right
>percentage and investing with an eye toward diversification, I'd agree.
>Proper tax structuring can add a 5-15% boost that's not trivial. Why
>would you be so quick to dismiss that, when, as a group, we analyze
>everything else to death?
>
>JOE

Because I believe that living a happy and productive life can be worth
far more than that 5-15%.. For instance, I can probably save a good
chunk of change burning wood, especially if I do the cutting, but all
that work isn't worth the saving to me.
Thumper

[Thumper]

On Fri, 1 Jun 2007 18:06:41 -0500, "Elizabeth Richardson"
> wrote:

>
>"joetaxpayer" > wrote in message
...
>>
>> Proper tax structuring can add a 5-15% boost that's not trivial. Why
>> would you be so quick to dismiss that, when, as a group, we analyze
>> everything else to death?
>>
>
>I'm surprised at you, Joe. There are many of us here who advocate not
>letting the tax tail wag the dog. jIM may or may not be doing this (we don't
>have enough information), but Thumper's response is right on.
>
>Elizabeth Richardson


Thank you. I've paid so many different rates of income tax over my
lifetime I have lost track. They have been as high as 46% marginal to
only 15% and I haven't been able to see any difference in my happiness
that correlates to tax rates.
Thumper

[joetaxpayer]

Elizabeth Richardson wrote:

> I always thought it meant deciding upon a course of action based on tax
> implications regardless of consequences. You might be either lucky or
> unlucky in your results. I think we agree that a better approach is that
> your first line of decision-making should be choosing the investment,
> regardless of tax implications, but not ignoring tax implications either.
> You seemed to take an adversarial position (at least it looked that way to
> me) to Thumper's statement "to not live your life merely with taxes in
> mind." Perhaps I jumped to conclusions (yet again).
>
> Elizabeth Richardson

I appreciate your reply, Elizabeth. I did jump into 'defensive' mode
seeing Thumper's first comments, and I'll stay there after seeing his
posts this morning.
You agree not to ignore tax implications. I agree with you that one has
some other decisions that take priority. I think we agree here.

I continue to read Thumpers' posts to mean that the tax discussion
should simply be ignored. But since jIM's question was ONLY about tax
implications, it seemed that going backward to point out that the larger
impacts to retiree wealth first come from savings rate and then asset
allocation, etc.

Thumper then states,"[tax rates] have been as high as 46% marginal to
only 15% and I haven't been able to see any difference in my happiness
that correlates to tax rates."

To that, I respond, That's my point exactly! Blinding thinking that
pre-tax accounts are sacred, or that a Roth is best for 100%, will lead
to lower returns. If Thumper had the opportunity to go pretax 401(k) in
the 46% years, and convert to Roth in 15% years, that looks like a 31%
delta to me. When I sit with a client discussing year end strategies,
for some, the Roth/401(k)/tax discussion takes about 5 minutes. Far less
time than the discussion of asset allocation, or the other things you
and I know take priority. That 5 minutes isn't 'living with taxes as
priority'. (didn't we agree long ago 'tax diversification is good'? I'm
saying no different now)
JOE

[Elizabeth Richardson]

"joetaxpayer" > wrote in message
. ..
>
>
> Thumper then states,"[tax rates] have been as high as 46% marginal to
> only 15% and I haven't been able to see any difference in my happiness
> that correlates to tax rates."
>
> To that, I respond, That's my point exactly! Blinding thinking that
> pre-tax accounts are sacred, or that a Roth is best for 100%, will lead
> to lower returns.

I'm not sure I can fully agree that blind thinking will always lead to lower
returns. There are many (most?) households in the US where no savings would
take place if it were not for the automaticity of pay-related pre-tax
contributions to a 401k. You may be correct that these contributions have
lower returns than might be, but I'll say the returns are higher because the
savings exist at all.

As to jLM's initial question: Part of the beauty of these accounts is the
absence of RMDs, not just the absence of taxes on withdrawal. Others have
noted that the rules regarding inheritance are different, too. While I hold
the optimistic view that Uncle Sam will not mess with the current status of
a Roth, others believe there are ways to affect its tax status obliquely if
not directly. Pay attention to Joe and his recommendations for
diversification if you have more than just this vehicle available to you.

Elizabeth Richardson

[jIM]

On Jun 1, 2:31 pm, jIM > wrote:
> If a person could save 25X annual spending entirely in Roth accounts,
> would there effective tax bracket be 0% (outside of paying property
> taxes and sales taxes)?
>

Here's the line of thinking.

The assumption with a Roth, is that it makes sense if tax rates in
retirement are higher (than when contributions were made).

If you "know" this to be true, then all assets are in a Roth account,
isn't the tax rate now zero in retirement (because of tax advantaged
withdraw status).

[joetaxpayer]

jIM wrote:
> The assumption with a Roth, is that it makes sense if tax rates in
> retirement are higher (than when contributions were made).
>
> If you "know" this to be true, then all assets are in a Roth account,
> isn't the tax rate now zero in retirement (because of tax advantaged
> withdraw status).

Ok. Let's hold all other variables constant. i.e. no change to tax
structure, no congress finding a way to bone us on the favored status of
Roth accounts, etc.

Today, you have a (single person) zero rate to $8750. 25X that is
$218750. Even if you are in a 15% bracket today, saving pretax will
allow you to put $10,000 in a 401(k) for every $8500 you are out of
pocket. At the other end, you get it back tax free.

But, jIM, even the initial premise is too shakey, and I'd dig my heals
in to suggest that 100% of one's wealth in Roth accounts or 100% in
pre-tax 401(k) accounts are the two points on the curve with the highest
overall tax bite. The curve in between may not be smooth, it may not
even be knowable, but as I offer above, there is a number that can go in
pre tax and come out tax free.

Side note - the 48 year old whose money I manage, pushed her to deposit
to her 401(k), became disabled, have been using Roth conversion since it
was available. She now has $90K converted. Money that went into the
401(k) pretax, and is getting converted, each year, at her zero rate,
now continuing to grow tax free. I'd say the planning we've done each
year to avoid taking this money out at 10% was well worth the effort,
and since she was in the 28% bracket while working, the tax savings
added up.

JOE

[jIM]

> I'd dig my heals
> in to suggest that 100% of one's wealth in Roth accounts or 100% in
> pre-tax 401(k) accounts are the two points on the curve with the highest
> overall tax bite. The curve in between may not be smooth, it may not
> even be knowable, but as I offer above, there is a number that can go in
> pre tax and come out tax free.
>

This is my premise I started thinking about...

Consider- married filing jointly, currently in 25% tax bracket
(combined Gross Income close to 110k). Have around 125k in 401ks and
another 35k in Roth, plus two smaller rollover IRAs.

My thought was if I used the Roth 401k now, there is a situation where
the "traditional" 401k/Rollover money is "tax free" (RMD's taken as
72T and/or at 0% tax rate because of exemptions).

Then use Roths for rest of money to be tax free during retirement.

If working life was age 25- age 45, with early retirement at 45...
there might be some logic to suggesting that paying high taxes for 20
years and none for next 40-50 is better than some taxes at ages 25-95.

[joetaxpayer]

jIM wrote:

> Consider- married filing jointly, currently in 25% tax bracket
> (combined Gross Income close to 110k). Have around 125k in 401ks and
> another 35k in Roth, plus two smaller rollover IRAs.
>
> My thought was if I used the Roth 401k now, there is a situation where
> the "traditional" 401k/Rollover money is "tax free" (RMD's taken as
> 72T and/or at 0% tax rate because of exemptions).

I mostly agree with your approach. I'd just suggest that the goal of
'zero bracket' in retirement ignores any use of whatever the first
bracket is, currently 10% for that first $7825.
I'm not saying to change your path, just be aware that any opportunity
to put money away in one bracket, and take it out in a lower bracket, is
money in your pocket.
JOE

[rick++]

> I think that as much as we talk about 'saving your way to the next
> bracket' at retirement, you can certainly do the opposite, live in the
> 28% bracket, and retire at zero.

An overlooked factor is "means testing of medicare premiums"
which suggests reducing taxable retirement accounts too.
Though this factor is minimal in the inaugral 2007 year,
there are escaltors in the tax formulas which suggest very
high medicare premiums for the median retiree by the 2020s.
I'm talking about over $1000 a month medicare premium for
those with poor tax planning.

[jIM]

> > I think that as much as we talk about 'saving your way to the next
> > bracket' at retirement, you can certainly do the opposite, live in the
> > 28% bracket, and retire at zero.
>
> An overlooked factor is "means testing of medicare premiums"
> which suggests reducing taxable retirement accounts too.
>
> I'm talking about over $1000 a month medicare premium for
> those with poor tax planning.

can you explain this with slightly more detail, please?

[rick++]

> > I'm talking about over $1000 a month medicare premium for
> > those with poor tax planning.
>
> can you explain this with slightly more detail, please?

Currently retirees making less than $80,000 a year
pay $0 for medicare part A and $93.50 per month
for medicare part B. Each part has the nominal insurance
full price of $374 a month, 7/8ths which is paid for by
medicare. The Medicare Drug Act of 2003 makes
high-AGI taxpayers pay all of the part B premium.
This phases in over eight years. 8% of retirees have to pay
more the $93.50 in 2007.

Now comes the interesting parts.
First, medicare premiums are inflating rapidly. In 2002 they
were $53 a month, or an increase averaging 13% a year.
Should this continue, the monthly subsized medicare premium
will be $400 by 2020. $1600 a month if not subdized.

Second, the $80K number was intentionally not COLA indexed.
So while only 8% are above this in 2007, its estimate over
half will be so in the 2020s, just from basic inflation.

Now the "means-testing" genie has let out of the bottle,
nothing stops means-testing of part A and the social security pension.
A bill to extend means testing to part D failed last year,
probably due to the new democratic majority.

Currently the law says a social security check can never go down.
So the medicare increases would mainly end COLA increased in
current retiree's checks and decrease starting checks of new retirees.

Now the rub may be to make your income appear below $80K
by careful tax planning. I havent seen this kind of tax planning
widely discussed yet. But health insurance costs for retirees in
the next decade or two look like they are going to be gigantic
even for those covered by medicare.

[joetaxpayer]

rick++ wrote:
>>>I'm talking about over $1000 a month medicare premium for
>>>those with poor tax planning.
>>
>>can you explain this with slightly more detail, please?
>
> Now the rub may be to make your income appear below $80K
> by careful tax planning. I havent seen this kind of tax planning
> widely discussed yet. But health insurance costs for retirees in
> the next decade or two look like they are going to be gigantic
> even for those covered by medicare.
>

Wouldn't this issue become 'low hanging fruit' for congress? They can
easily decide that this avoidance of medicare premiums wasn't their
intent with Roth, and they act by including Roth income for this, and
perhaps for social security purposes as well. Perhaps Sandra's cynicism
has rubbed off on me.

JOE

[Elizabeth Richardson]

"rick++" > wrote in message
oups.com...
>
>
8% of retirees have to pay
> more the $93.50 in 2007.

[snip]

>
> Now comes the interesting parts.
> First, medicare premiums are inflating rapidly. In 2002 they
> were $53 a month, or an increase averaging 13% a year.

I found a site which gives different statistics than those which you have
posted. http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=1958

"The standard Medicare Part B monthly premium will be $93.50 in 2007, an
increase of $5.00 or 5.6 percent from the current $88.50 Part B premium,
considerably lower than was earlier projected. This premium is the smallest
percent increase in the Part B premium since 2001 and less than half of the
dollar increase in the premium for 2006. "

and

"In 2007, approximately 4 percent of Medicare Part B enrollees with higher
incomes will pay a higher Part B premium based on their income. The
income-related Part B premiums for 2007 will be $105.80, $124.40, $142.90,
or $161.40, depending on the extent to which an individual beneficiary's
income exceeds $80,000 (or a married couple's income exceeds $160,000), with
the highest premium rates only paid by less than 1 percent of beneficiaries
whose incomes are over $200,000 (or $400,000 for a married couple). "

Perhaps a greater percentage of MIFP readers/posters will be subject to the
higher Medicare premiums than in the general retirement population. Still,
this seems like a non-issue for most folks.

Elizabeth Richardson

[Sgt.Sausage]

"joetaxpayer" > wrote in message
...

> Ok. Let's hold all other variables constant. i.e. no change to tax
> structure, no congress finding a way to bone us on the favored status of
> Roth accounts, etc.

Well ... strictly speaking -- that's exactly where you've
gone wrong in your analysis. Our nice representatives out
there in D.C. *will* find a way to bone us, and bone us
hard.

<grin>