Author Topic: Roth v. Trad with pension(s)  (Read 1533 times)

Connemara

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Roth v. Trad with pension(s)
« on: March 24, 2017, 01:37:42 PM »
I'm trying to think through the optimal choice for my 457(b) knowing that I am almost certain to receive a pension (possibly two) when I retire. My most conservative estimate is $60K/year, though it could end up being as much as $80K+. My basic assumption is 30 years in the pension system which would allow me to FIRE at around 52 and begin drawing the pension at 62. I may try to retire at an earlier age.

There's a chance that a second pension could enter the picture if I wind up marrying my long-term girlfriend. If she also remains in the system for ~30 years, it would be reasonable to assume a pension of more than $80K due to her earning potential (attorney).

In this scenario wouldn't it make more sense to contribute to a Roth 457(b)? Pensions and SS alone would push us into the 25% or 28% brackets which would limit our ability to control our tax situation.

FYI, I'm also opening a Roth IRA this year. I am in the 25% tax bracket which I understand to be sort of a wash for Trad vs. Roth IRA. If I wind up marrying my girlfriend we would be over the deduction limit for a Trad.

Thanks for your advice!

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1503
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Roth v. Trad with pension(s)
« Reply #1 on: March 24, 2017, 01:55:31 PM »
It sure seems to me as if you're overestimating your retirement year's marginal tax rate.

It's pretty to get into the 28% bracket. And you've been very successful if you get into the 25% bracket.

Are you pretty comfortable with the math of how tax brackets work?

http://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/


Connemara

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Roth v. Trad with pension(s)
« Reply #2 on: March 24, 2017, 02:44:11 PM »
It sure seems to me as if you're overestimating your retirement year's marginal tax rate.

It's pretty to get into the 28% bracket. And you've been very successful if you get into the 25% bracket.

Are you pretty comfortable with the math of how tax brackets work?

http://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/

Thanks for the link. I believe I understand how the brackets work. The examples cited on the blog seem to apply to people who are using up the lower brackets with dividend and other non-taxable income. In that scenario, I can certainly see how a couple with $100K in retirement income could pay very little to no income tax. But how is that possible if you have $100K+ in pension income? Doesn't that automatically fill up the lower brackets? And wouldn't that make Roth IRA/457b a better choice as no tax is due on those distributions?

I could be approaching this incorrectly as I am by no means a tax expert.

MDM

  • Walrus Stache
  • *******
  • Posts: 9713
Re: Roth v. Trad with pension(s)
« Reply #3 on: March 24, 2017, 05:12:38 PM »
I can certainly see how a couple with $100K in retirement income could pay very little to no income tax. But how is that possible if you have $100K+ in pension income?
It isn't.

Quote
Doesn't that automatically fill up the lower brackets?
It does.

Quote
And wouldn't that make Roth IRA/457b a better choice as no tax is due on those distributions?
Depends on your exact marginal saving rate vs. your marginal withdrawal rate.

Beware the possibility of self-defeating predictions: predict high taxable retirement income > contribute to Roth > get low taxable retirement income; predict low taxable retirement income > contribute to traditional > get high taxable retirement income.

If in doubt, it's better to have the problem of "paying too much tax" rather than "not having enough income" - in other words, when in doubt use traditional.

beltim

  • Magnum Stache
  • ******
  • Posts: 2848
Re: Roth v. Trad with pension(s)
« Reply #4 on: March 25, 2017, 03:06:20 AM »
It sure seems to me as if you're overestimating your retirement year's marginal tax rate.

It's pretty to get into the 28% bracket. And you've been very successful if you get into the 25% bracket.

Are you pretty comfortable with the math of how tax brackets work?

http://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/

Are you comfortable with the math of how tax brackets work?  The OP gave all the data you need to see that the most conservative pension assumed would place him in the 25% tax bracket.

beltim

  • Magnum Stache
  • ******
  • Posts: 2848
Re: Roth v. Trad with pension(s)
« Reply #5 on: March 25, 2017, 03:12:24 AM »
In this scenario wouldn't it make more sense to contribute to a Roth 457(b)? Pensions and SS alone would push us into the 25% or 28% brackets which would limit our ability to control our tax situation.

In this situation, yes.  Contribute to the Roth while you're in the 25% bracket to lock in your lower rate, and save the space for if you get married and if you get in the 33% bracket, at which point returning to a traditional would be better.

In my mind the only questions are behavior, not mathematical.  For example, the relative safety of your job and pension, the likelihood of you working as long as you intend, etc.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1804
Re: Roth v. Trad with pension(s)
« Reply #6 on: March 25, 2017, 07:58:12 AM »
The "tax bucket" examples from that  link are simpler than reality.  In reality, people don't have W-2 income exactly matching their standard deduction, or a second job exactly matching their personal exemption.

I prefer "about $10k / person" in deductions, and then figure income from there.  Taking OP's example, that's $50k-$70k taxable pension - solidly in the 25% tax bracket.

Couple of qualitative differences between Roth and Traditional if the tax situation is a tie:  we're at historically low tax rates.  If they go up, Roth will have locked in lower tax rates.  In Roth, what you see is what you get - the withdrawal is not taxed.  If you are a saver, both IRAs have the same contribution limit ($5,500/yr).  But the Roth contributions are after-tax where Traditional is pre-tax, so you're saving more in the Roth.

Connemara

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Roth v. Trad with pension(s)
« Reply #7 on: March 27, 2017, 11:28:36 AM »
Thanks for the advice folks. I'll stick with Roth for now and will reassess when my income increases.