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He was especially surprised at the large percentage of people who think their tax rate will decline when they retire.
Um, probably because they no longer have a job bringing in steady income? Hello? Anyone in there?
Many investment sites have Roth conversion calculators. The results are only as good as the assumptions you use. I ran some scenarios on this Morningstar calculator, using conservative assumptions. I used a $100,000 IRA balance for conversion and assumed that none of this balance had been funded with post-tax money. I also assumed annual returns of 5 percent now and in retirement (many calculators use higher returns as a default),and said that I would retire at the age of 70 and that my retirement would last 20 years. Tax rates are important, too. I used a current income tax rate of 28 percent and a 15 percent rate for long-term capital gains. Again, to be conservative, I said my tax rate at retirement would rise to 33 percent.
Using these assumptions, I entered various ages as of the end of 2010 and produced these comparisons:
At age 60 in 2010, converting to a Roth would cost $28,000 in 2010 taxes and provide post-tax income of $13,070 a year in retirement, compared with $11,681 for a traditional IRA.
A 33% tax rate at retirement with a post-tax income of just $13,070 a year? You have got to be joking!
To put this in perspective, I earned $33,915 in 2009 (deflation hit my inflation protected treasuries). I owed $1,994 in taxes. My post-tax income was therefore $31,921 and my retirement tax rate was therefore 6%. That is a far lower tax rate than when I was working. So why would I have wanted to prepay taxes at 28% when I was ultimately taxed at just 6%?
Now try to imagine what my tax rate at retirement would be if I had a post-tax income of just $13,070 instead of $31,921. Hint: The 2009 Federal Poverty level is $10,830.
In his defense, he did say that "the results are only as good as the assumptions you use" though. Unfortunately, if you start off ASSUMING that your tax rate will be higher in retirement than it was when you were being paid to work then it isn't all that hard to show that a Roth IRA is good for you. Garbage in, garbage out!
Update:
Gravestone Generator
9 comments:
.gov did something similar during the recession after the dotcom bust.
Mr. Moeller used the example of "boomers" as if they are simply cruising towards retirement.
I read the entire article but I still missed the part about zero-income out of work folks who can convert with zero tax involved.
Isn't that what this whole thing is really all about anyway?
At least it was during the dot.com recession.
"To ease the tax bite of a conversion, people can either take the entire hit on their 2010 returns, or they can defer it and split it equally between their 2011 and 2012 returns."
Better yet, they can simply be OUT OF A JOB, like so freaking many people are, and not pay a penny on that conversion!
G.H.,
Better yet, they can simply be OUT OF A JOB, like so freaking many people are, and not pay a penny on that conversion!
No joke!
Barring that, it makes little sense to push the taxes of 20 years of theoretical retirement into just one or two years while you are still working, unless you are simply shooting for The Highest Tax Bracket of the Year Award.
The following two situations are absolutely identical.
1. Start with $100,000. Let it grow. Get taxed at 28% as you withdraw.
2. Start with $100,000. Get taxed at 28%. Let it grow. Withdraw it tax free.
In order to justify doing the conversion, you better believe your future tax rate will be higher. However, once you retire you should have less income. Even if tax rates rise in general, you will still more than likely be paying less taxes.
The longer I live the lower my tax rate should go. If I live to age 100 then just sit me out on the steet corner with a cardboard sign. There will be very little, if any, nest egg left to tax!
Mark,
that gravetsone site is a gem, good find.
I think it is a virtual certainty that taxes of all kinds are going up and new ones will be invented. In the words of Carlito Brigante:
"Here comes the PAIN!!!"
GYSC,
The strategy of converting to the Roth to avoid rising taxes won't help all that much when states raise their sales taxes, property taxes, and soda is considered a sin!
Tax soda since it offers no redeeming health benefits
Wake up, people; money trees don’t exist. The state and counties need extra money.
The Claim
1. Money trees don't exist.
2. Consumers are money trees.
Hmmm.
I think it is a virtual certainty that taxes of all kinds are going up and new ones will be invented.
Stag, GYSC,
Certainty? Taxes? Death? Yep, the only things that ARE certain are death and taxes.
Oh, and Wall St. bonuses - those are guaranteed too.
Well,
some thing I heard is that you can separate some folks from their gold/silver bullion on craigslist cus they have no idea what they have. No paper trail as well. Just a rumor by the way!
mab & GYSC,
Our chief weapon is tax...tax and death...death and tax.... Our two weapons are death and tax...and ruthless bonuses.... Our *three* weapons are death, tax, and ruthless bonuses...and an almost fanatical devotion to expanding credit.... Our *four*...no... *Amongst* our weapons.... Amongst our weaponry...are such elements as tax, death.... I'll come in again.
Month Python: The Spanish Inquisition
Ximinez: NOBODY expects the Spanish Inquisition! Amongst our weaponry are such diverse elements as: fear, surprise, ruthless efficiency, an almost fanatical devotion to the Pope, and nice red uniforms - Oh damn!
US top marginal tax rates have topped 90% several times.
Under Obama and the Democratic congress deficit spending is higher than any time in US history as a percent of GDP. And our national debt (even without unfunded liabilities for entitlement programs) is growing exponentially.
Those of you who think you're going to pay 6%, or 28% at retirement - you're fools. Even if you're some lame blog author or coffee barista you can plan on a minimum 50% federal tax plus state taxes, an Obamacare surtax, and a nice 17% VAT on the little that's left over.
The good news is that it doesn't matter: Obama's plan is to spend like a big-eared drunken monkey and then boost inflation. That's how you really get down to redistributatin' wealth while making our national debt disappear at the same time. Don't you remember Carter?
So you can stop worrying about your projected tax rates: you won't have any savings at all after 5 years of 15% inflation.
Anonymous,
US top marginal tax rates have topped 90% several times.
That is not even remotely relevant to my personal situation, nor is it relevant to the vast majority of Americans. I will not be in a top marginal tax rate in 30 years, especially if the rest of what you say is true. I will be even more broke then than I am planning to be.
Those of you who think you're going to pay 6%, or 28% at retirement - you're fools. Even if you're some lame blog author...
Since you feel the need to label me a "fool" and a "lame blog author" too, I shall label you.
You attacked me for no good reason. Therefore you are a jerk, and an arrogant one at that.
Don't you remember Carter?
Yes I do.
So you can stop worrying about your projected tax rates: you won't have any savings at all after 5 years of 15% inflation.
Yes I will. The bulk of my savings sits in inflation protected treasuries and inflation protected I-Bonds. A decent chunk of that is even tax deferred.
And lastly, your commentary does nothing to dispute that the Roth IRA is a bad plan for most people. You claim that it doesn't matter. All savings will be gone anyway. So why attack me?
What part of the "Illusion of Prosperity" implies that I am not sympathetic to your views or would have been had you not felt the need to be an @$$hole?
Please don't return to my blog. I don't appreciate being attacked personally by anonymous posters. Most people who disagree with what I have to say can at least be civil about it.
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