Author Topic: Should taxes be included when calculating one's rate of saving?  (Read 606 times)

rudged

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Should taxes be included when calculating one's rate of saving?
« on: January 25, 2020, 11:41:35 AM »
I'm pursuing the path of a SWAMI and up until now I have put my savings into pre-tax retirement accounts (403(b), 457b) provided by my employer.

Last year it became increasingly obvious that when I finally retire the required minimum distributions I receive will exceed my needs and in fact, my current income. As such, starting this year I decided to put all of my future contributions either directly or indirectly into the Roth environment (using Roth IRA/Spousal Roth IRA and Roth 403(b)/Roth 457b respectively).

My question has to do with how to continue to keep track of my rate of savings from year to year in light of this transition. Up until now I've simply compared how much I've invested in pre-tax accounts from one year to the next (apples to apples). If I directly compare the amount I saved last year in pre-tax accounts to only the amount I'm saving in post tax accounts, I'm not giving myself credit for paying the taxes in advance. Should taxes paid in advance be regarded as a type of savings?

MDM

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Re: Should taxes be included when calculating one's rate of saving?
« Reply #1 on: January 25, 2020, 03:25:51 PM »
My question has to do with how to continue to keep track of my rate of savings from year to year in light of this transition.
Might not matter.  E.g., what would you do differently depending on what numbers you get for "rate of savings?"

norajean

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Re: Should taxes be included when calculating one's rate of saving?
« Reply #2 on: January 25, 2020, 05:48:19 PM »
If you retire before you have to start making RMDs you will have the opportunity to convert some or all of the pre-tax IRA money into a Roth with no taxes due as long as you stay under required thresholds.  This can be a much better way to get into a Roth situation since it is basically tax-free.

rudged

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Re: Should taxes be included when calculating one's rate of saving?
« Reply #3 on: January 25, 2020, 08:03:00 PM »
My question has to do with how to continue to keep track of my rate of savings from year to year in light of this transition.
Might not matter.  E.g., what would you do differently depending on what numbers you get for "rate of savings?"

Thanks for your reply. I don't know that I will do anything differently, I'm just trying to plot my rate of savings over time. I find it somewhat inspirational to see it has gradually risen over the years. But I will be the first to admit that the savings habit is pretty much engrained at this point.

rudged

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Re: Should taxes be included when calculating one's rate of saving?
« Reply #4 on: January 25, 2020, 08:06:16 PM »
If you retire before you have to start making RMDs you will have the opportunity to convert some or all of the pre-tax IRA money into a Roth with no taxes due as long as you stay under required thresholds.  This can be a much better way to get into a Roth situation since it is basically tax-free.

Thanks for your reply. I actually chose my career path as an academic in part because there was no fixed retirement age and I could do it as long as I still find the work rewarding. But you are correct to point out that my circumstances may change, and in the event I retire before I have to start taking RMDs, I will certainly follow your advice.