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Retirement Tax Brackets & IRA Choice

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brianosauras
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Retirement Tax Brackets & IRA Choice  Reply with quote  

With all the Roth pushing out there I have been considering one aspect that I don�t seem to quite understand. Maybe you guys can help me figure something out.

If ones tax bracket is going to be lower during retirement then it is at the time of the contributions, one should choose a traditional ira, right?

I am wondering how someone would generate a larger income, and thus be in a higher tax bracket, AFTER they retire?

Since you have stopped earning wages - wouldn't your bracket naturally be lower?

Unless your interest income of all investments during retirement is larger then their income while they were working, again, wouldn�t you always be in a lower tax bracket?

Why then Roth?
Post Tue Feb 06, 2007 2:06 am
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BlankenshipFP
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Ditto what muneepenee said, whatever that was... Shocked

Without looking at the tax benefit of long-term growth WITH NO TAX EVER, there are several benefits to consider with the Roth IRA:

1) No RMD - Required Minimum Distributions - meaning, if you don't need to withdraw the money in your lifetime, you don't have to, you can just let it ride and pass it on to your heirs.
2) Flexibility - you can withdraw the contributions from a Roth IRA for any purpose at any time, with no penalty.
3) More Flexibility - for qualified purposes, including education expenses, you can use the entire balance of the Roth IRA without penalty, subject to qualification.
4) Even More Flexibility - if you desparately need the money, you can withdraw the entire balance at any time (with penalties), versus a 401(k)/403(b)/CODA plan where you are limited to a loan of $50k.

These are just the first ones that pop into my brain. Hope this helps -

Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
Post Tue Feb 06, 2007 3:09 pm
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brianosauras
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quote:
Originally posted by BlankenshipFP
Ditto what muneepenee said, whatever that was... Shocked
1) No RMD - Required Minimum Distributions - meaning, if you don't need to withdraw the money in your lifetime, you don't have to, you can just let it ride and pass it on to your heirs.
2) Flexibility - you can withdraw the contributions from a Roth IRA for any purpose at any time, with no penalty.
3) More Flexibility - for qualified purposes, including education expenses, you can use the entire balance of the Roth IRA without penalty, subject to qualification.
4) Even More Flexibility - if you desparately need the money, you can withdraw the entire balance at any time (with penalties), versus a 401(k)/403(b)/CODA plan where you are limited to a loan of $50k.



OK but lets suppose all of these are unimportant to me.

I own a small business that has been passed down via family, and has been in operation for almost 50 years. I feel comfortable that it is well established and isn't going anywhere. Because of this I would tend to think - as stated in my first post- that I will be at a higher tax bracket before I retire then during retirement.

Discounting the reasons you stated (which all make plain sense btw) - and without these 'extras' involved -

...what about my original question?

Thanks


<edited for font size>
Post Wed Feb 07, 2007 12:37 am
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oldguy
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quote:
I am wondering how someone would generate a larger income, and thus be in a higher tax bracket, AFTER they retire?


I tink you are looking at it correctly, most of us make less in retirement than during our peak earning years. So the Trad IRA would theoretically be better. The wild card is 'will the govt increase the tax rates in 30 years?' Or, what if they change the system entirely - flat tax? So a prudent paln is to own some of both, that way you won't kick yourself for being 100% wrong - ie, diversify the taxability of your holdings as well as the actual holdings.
Post Wed Feb 07, 2007 4:18 am
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BlankenshipFP
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Okay, with your original question
quote:
I am wondering how someone would generate a larger income, and thus be in a higher tax bracket, AFTER they retire?


As an example: let's say you make contributions over your lifetime to an account, either a Roth or a Trad IRA, that has grown to $3,000,000. This is feasible given a possible 40-year timespan involved... let's say further that you, as the business owner, have always played the tax system to your advantage and only take a small income (in w2 wages) each year - say, $50,000. When you reach age 70.5, if you've put this money into a Trad IRA, you'll be required to take out RMD, at a rate (for the first year) of 1/27th of the value of the account. This would amount to $109,489. Since distributions from Traditional IRAs are taxed as ordinary income, you would definitely be paying more tax in retirement than before retirement.

Hope this helps.

Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
Post Wed Feb 07, 2007 3:21 pm
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brianosauras
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Re: Retirement Tax Brackets & IRA Choice  Reply with quote  

I had it pointed out to me as well that, "you are only in the higher tax bracket for the extra dollars over the previous bracket". I realized this for my regular income now; however, silly me didn't think about this for the retirement years. With out giving it too much thought, I kinda had it in my head as an 'all or nothing' idea.

Should this alone would lean me toward a Roth?

Now here's my situation: Im 39 & married. We have $45k in Roth's already and $22k in Traditionals.

Not sure if I should roll the Trads. over to Roths before they get bigger.

With the Traditonals, think I should:
    1. Roll all?
    2. Roll some?
    3. Keep & Not Add?
    4. Keep & Add?



I like what OldGuy said about having both to be safe, so I'm leaning toward #3 but I know it wouldnt amout to too much in the end. (110k @8%/20ys)


Last edited by brianosauras on Wed Feb 07, 2007 10:45 pm; edited 1 time in total
Post Wed Feb 07, 2007 9:46 pm
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