Author Topic: #AlwaysRoth?  (Read 1981 times)

Justin1911

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#AlwaysRoth?
« on: July 20, 2016, 12:37:15 PM »
Question: Over my 20 year active duty military career should I stick with 100% Roth TSP and Roth IRA?

Assumptions:
1) I will make it to the 20 year military retirement/pension (year 2028)
2) I will FIRE in 2028
2) I will remain in the 15% tax bracket through my military career.
3) I will continue to be exempt from any state tax through my military career.
4) I will continue to max my TSP/Roth contributions each year.

I feel like the answer to my question should be a confident YES. Am I way off base here? Teach me.

seattlecyclone

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Re: #AlwaysRoth?
« Reply #1 on: July 20, 2016, 12:43:36 PM »
It's all about current tax bracket versus retirement tax bracket. Do you expect your pension to put you in the 15% bracket all on its own? If so, Roth and traditional are roughly equivalent up until the point that your traditional balance is high enough that your annual withdrawals would put you up into the 25% bracket during retirement.

In the event that you don't make it to the 20 year mark and qualify for the pension, having some source of taxable income during retirement (such as a traditional retirement account) is a good idea so that you don't let the 0% and 10% brackets go to waste during that time.

Justin1911

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Re: #AlwaysRoth?
« Reply #2 on: July 20, 2016, 01:10:46 PM »
It's all about current tax bracket versus retirement tax bracket. Do you expect your pension to put you in the 15% bracket all on its own? If so, Roth and traditional are roughly equivalent up until the point that your traditional balance is high enough that your annual withdrawals would put you up into the 25% bracket during retirement.

In the event that you don't make it to the 20 year mark and qualify for the pension, having some source of taxable income during retirement (such as a traditional retirement account) is a good idea so that you don't let the 0% and 10% brackets go to waste during that time.

Yes, my pension alone should put me square inside the 15% bracket. I'm also confident that I will naturally fall into other sources of income post FIRE.

Beach_Stache

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Re: #AlwaysRoth?
« Reply #3 on: July 20, 2016, 06:53:56 PM »
I thought I remember hearing that if you spend anytime inside a war zone that your full years wages are tax free, is that right?  I recall there being a big push for the Marines to go to the ROTH TSP when it was made available specifically because of this.  I could be mistaken but I thought there were tax free benefits when in a hostile area. 

Justin1911

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Re: #AlwaysRoth?
« Reply #4 on: July 20, 2016, 07:02:58 PM »
I thought I remember hearing that if you spend anytime inside a war zone that your full years wages are tax free, is that right?  I recall there being a big push for the Marines to go to the ROTH TSP when it was made available specifically because of this.  I could be mistaken but I thought there were tax free benefits when in a hostile area. 

That's true. I took full advantage of my tax free deployment cash. Never taxed is a nice feeling

kendallf

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Re: #AlwaysRoth?
« Reply #5 on: July 20, 2016, 09:08:24 PM »
Even with equal tax brackets before and after retireement, the Traditional account is most often the winner, as long as you do some planning and use a Roth conversion ladder, 72t or some other plan to avoid penalties.  The Mad Fientist has a post with calculations which show even taking the 10% early withdrawal penalty would be worthwhile in some cases!

http://www.madfientist.com/how-to-access-retirement-funds-early/

For another nice post showing some test cases and the outcomes, read Jeremy's "Roth Sucks" post at Go Curry Cracker:

http://www.gocurrycracker.com/roth-sucks/


mathjak107

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Re: #AlwaysRoth?
« Reply #6 on: July 21, 2016, 04:29:15 AM »
depending on your situation the roth will likely be the winner for many reasons and all have little to do with final tax brackets .

first off so much in retirement is income linked .  everything from getting ss taxed  to what you pay for medicare premiums are linked to your magi .

if you retire earlier then medicare age getting an aca subsidy is income linked .

you have no rmd's to deal with . rmd's can be a disaster when one spouse dies and the other has to file single tax wise .

once rmd's start if you reinvest that money  all gains and distributions are forever taxed .  roths are never taxed and remain tax free long after rmd's are taxed on gains .

but the biggest factor few look at are your average long term tax bracket .

most of us have careers that ramp up over decades to the higher brackets .    folks make the mistake of just looking at their final years and going in retirement we will be in a lower bracket tax wise . but that is wrong . it is your total career average that matters and roths can leave you with as much as 20%  more spendable income even if brackets stay the same .

it is only certain careers like doctors , lawyers , bankers , etc where you start out in the highest brackets that would not benefit as much from a roth .

now that i retired  i realize i made a big mistake shying away from roths  and now it t is not about whether taxes go up or not when you retire . it is all about the things linked to your income when you retire and how painful rmd's can become .

at this point conversions offer little help . . in fact convert to much and you can find your medicare premiums tripled .

se sold an asset 2 years before medicare and retiring . since medicare goes back 2 years to determine income we got a 300% increase

« Last Edit: July 21, 2016, 05:26:58 AM by mathjak107 »