Just realized I'm barely paying any fed taxes this year

[retired?]

Who is to decide what behavior is preferred?  Why is owning a home to be preferred to not owning?

And, I certainly do prefer paying less to more (not only because I like to keep my $$, but also I don't think the fed govt is efficient at using what they do collect), but I stand by my assertion that the govt shouldn't use taxes to steer behavior.

The tax code is ridiculous.  I'd be happy paying the same amount w/o all the "rigamarole and shenanigans" one goes through to file taxes and optimize.

[beltim]

And, I certainly do prefer paying less to more (not only because I like to keep my $$, but also I don't think the fed govt is efficient at using what they do collect), but I stand by my assertion that the govt shouldn't use taxes to steer behavior.

Do you think your taxes should be less because you contribute to retirement accounts?

[Elisabeth]

Just curious why you and non-working spouse choose traditional IRAs instead of Roth. Obviously the tax benefit exists with your current choice, but at your income level you could still get the Roth benefit...?

Roth IRA would require me to pay taxes now, but the traditional requires me to pay taxes later.  If I invest in the Roth instead, the income I would use to fund it will be at taxed 15%.  If I am creative enough during retirement, the taxes that I pay on the traditional IRA withdrawals will only be 10%.  Obviously, much of this is influenced by future tax policy.

Ah so you are counting on lower taxes later. Gotcha. Curious - Are you planning a Mustachian retirement?

[Beric01]

Other point - seems most agree, but why would anyone want the government to steer individual behavior when it comes to personal choices?  In particular, having children or not, married or not, homeowner or not (we saw how the Fed Govt's goal of increasing homeownership worked....via HUD setting criteria for Fannie and Freddie).  Really, we don't need or want them to encourage any behavior other than discouraging criminal behavior. 

A society where work, increasing one's skills, and generally being successful is rewarded does enough to incentivize the population.

Taxes should not be used as a vehicle for public policy.  But, to use a phrase from above, the boat has already sailed on that one.  Too many people/firms benefit from having a complex code....and they will protect their interests.  Tax reform is low on the radar.

I fully support using tax policy to encourage behavior.  And I suspect you do, too, on some level: how do you feel about getting tax benefits for retirement savings?

I think it's pretty messed up that the only way we can many get people to save for retirement is to give them tax benefits for doing so.

[VirginiaBob]

Just curious why you and non-working spouse choose traditional IRAs instead of Roth. Obviously the tax benefit exists with your current choice, but at your income level you could still get the Roth benefit...?

Roth IRA would require me to pay taxes now, but the traditional requires me to pay taxes later.  If I invest in the Roth instead, the income I would use to fund it will be at taxed 15%.  If I am creative enough during retirement, the taxes that I pay on the traditional IRA withdrawals will only be 10%.  Obviously, much of this is influenced by future tax policy.

Ah so you are counting on lower taxes later. Gotcha. Curious - Are you planning a Mustachian retirement?

Not as early as my 30's, but hopefully in my mid to late 40's.

[Undecided]

Taxes should not be used as a vehicle for public policy.  But, to use a phrase from above, the boat has already sailed on that one.  Too many people/firms benefit from having a complex code....and they will protect their interests.  Tax reform is low on the radar.

While current application might be one thing, if you have not considered the concept of "externalities" as discussed in a basic microeconomics economics text, I suggest you do.

[retired?]

And, I certainly do prefer paying less to more (not only because I like to keep my $$, but also I don't think the fed govt is efficient at using what they do collect), but I stand by my assertion that the govt shouldn't use taxes to steer behavior.

Do you think your taxes should be less because you contribute to retirement accounts?

No, I don't. 

I can decide whether something is good or makes sense regardless of whether it helps me individually.  It reminds me of a conversation five years ago with a couple friends regarding the Obama arbitrary 250k income cut-off for those who should pay more in taxes.  I objected to it for various reasons, but one friend said "ah, so you must make more than 250k".  I was a little offended, the implication being I think something is good only if it directly benefits me financially. 

No one would agree to pay any taxes if that was their criteria.  And, while people prefer to pay less (esp. since the govt is involved in more activities than needed and it is not efficient at what it does do) I think most would agree to pay a reasonable amount......understanding that the fed govt does have a purpose.

And, I don't think my taxes should be less b/c I pay mortgage interest.  I don't think they should be less b/c I have kids.....in fact, since I have kids my family is presumably using more resources.  etc. etc.  I'd be fine with some sort of consumption based tax.

The married couple paying the equivalent of three single people is a perfect example of the nonsense.

[beltim]

Do you think your taxes should be less because you contribute to retirement accounts?

No, I don't. 

I can decide whether something is good or makes sense regardless of whether it helps me individually.  It reminds me of a conversation five years ago with a couple friends regarding the Obama arbitrary 250k income cut-off for those who should pay more in taxes.  I objected to it for various reasons, but one friend said "ah, so you must make more than 250k".  I was a little offended, the implication being I think something is good only if it directly benefits me financially. 

That's fine, but I would like to note that I'm not saying you can't.  I'm just saying that most people support using tax policies to encourage some behaviors and discourage others.  Again, I fully support using the tax policy this way (although I don't support all current uses).

For example, I think granting R&D tax credits is a good thing -- it encourages R&D.  I support the tax advantages of retirement accounts, because it results in more people saving for retirement, which is a good thing (and to respond to Beric's point, I agree that it would be better if we didn't have to incentivize people to save for retirement -- but, unfortunately, we do).  I support higher taxes on goods and services with high negative externalities (Undecided is right on), like alcohol, cigarettes, and gasoline.

[retired?]

Taxes should not be used as a vehicle for public policy.  But, to use a phrase from above, the boat has already sailed on that one.  Too many people/firms benefit from having a complex code....and they will protect their interests.  Tax reform is low on the radar.

While current application might be one thing, if you have not considered the concept of "externalities" as discussed in a basic microeconomics economics text, I suggest you do.

I understand and am well aware of the concept of externalities.  But, you don't really make an argument.  Beltim points to a few.....but, why does society as a whole have to pay for the negative impacts of alchohol and cigarettes?  You make poor choices, you accept the consequences.  It is society's choice to pay for people's poor choices that causes society to impose a tax.

But, we are somewhat off topic.  We were talking about federal income taxes.

Even if you give me a reason for taxing gasoline consumption (is it truly to deter consumption or simply a cash generator for the government?  In the U.S. it does not deter consumption, I'd argue), that is different, in my view, that trying to incentivize people to be married, have children, or own a house.  Undecided - what are the externalities to these choices?  I don't incur a cost or benefit by someone else's choice to marry, buy a house, have children.

Thanks for the "econ lesson", but you are mixing apples and oranges.

[Undecided]

Taxes should not be used as a vehicle for public policy.  But, to use a phrase from above, the boat has already sailed on that one.  Too many people/firms benefit from having a complex code....and they will protect their interests.  Tax reform is low on the radar.

While current application might be one thing, if you have not considered the concept of "externalities" as discussed in a basic microeconomics economics text, I suggest you do.

I understand and am well aware of the concept of externalities.  But, you don't really make an argument.  Beltim points to a few.....but, why does society as a whole have to pay for the negative impacts of alchohol and cigarettes?  You make poor choices, you accept the consequences.  It is society's choice to pay for people's poor choices that causes society to impose a tax.

But, we are somewhat off topic.  We were talking about federal income taxes.

Even if you give me a reason for taxing gasoline consumption (is it truly to deter consumption or simply a cash generator for the government?  In the U.S. it does not deter consumption, I'd argue), that is different, in my view, that trying to incentivize people to be married, have children, or own a house.  Undecided - what are the externalities to these choices?  I don't incur a cost or benefit by someone else's choice to marry, buy a house, have children.

Thanks for the "econ lesson", but you are mixing apples and oranges.

I'm sorry if I somehow offended you, as your "tone" suggests.

But suggesting that income taxes shouldn't be used as a vehicle for public policy regarding spending decisions would rob a society and government of an effective tool. Beneficial income tax treatment is just as valid a way to encourage a behavior that offers positive externalities as a "sin tax" is to discourage some other behavior that creates negative externalities, so I don't think I'm mixing apples and oranges at all. If policy makers believe that higher rates of home ownership create positive externalities (perhaps reducing crime or blight for the benefit of everyone, for example), or that greater relative use of electric vehicles will produce positive environmental externalities, why shouldn't they consider those externalities in the tax code, by offering a mortgage interest deduction or an electric car credit?   

[Elisabeth]

Just curious why you and non-working spouse choose traditional IRAs instead of Roth. Obviously the tax benefit exists with your current choice, but at your income level you could still get the Roth benefit...?

Roth IRA would require me to pay taxes now, but the traditional requires me to pay taxes later.  If I invest in the Roth instead, the income I would use to fund it will be at taxed 15%.  If I am creative enough during retirement, the taxes that I pay on the traditional IRA withdrawals will only be 10%.  Obviously, much of this is influenced by future tax policy.

Ah so you are counting on lower taxes later. Gotcha. Curious - Are you planning a Mustachian retirement?

Not as early as my 30's, but hopefully in my mid to late 40's.

But, lower taxes in retirement, so long as the tax code stays the same.

[VirginiaBob]

Just curious why you and non-working spouse choose traditional IRAs instead of Roth. Obviously the tax benefit exists with your current choice, but at your income level you could still get the Roth benefit...?

Roth IRA would require me to pay taxes now, but the traditional requires me to pay taxes later.  If I invest in the Roth instead, the income I would use to fund it will be at taxed 15%.  If I am creative enough during retirement, the taxes that I pay on the traditional IRA withdrawals will only be 10%.  Obviously, much of this is influenced by future tax policy.

Ah so you are counting on lower taxes later. Gotcha. Curious - Are you planning a Mustachian retirement?

Not as early as my 30's, but hopefully in my mid to late 40's.

But, lower taxes in retirement, so long as the tax code stays the same.

Yes, I'm thinking at worst, I'll be in the 15% bracket ( just like now).  At best, I'll be in the 10% bracket.  All assuming tax policy does not change - the political winds indicate that if tax rates do go up, it will be for those with higher taxable incomes.  But this is hard to predict.

[fartface]

Just curious why you and non-working spouse choose traditional IRAs instead of Roth. Obviously the tax benefit exists with your current choice, but at your income level you could still get the Roth benefit...?

Roth IRA would require me to pay taxes now, but the traditional requires me to pay taxes later.  If I invest in the Roth instead, the income I would use to fund it will be at taxed 15%.  If I am creative enough during retirement, the taxes that I pay on the traditional IRA withdrawals will only be 10%.  Obviously, much of this is influenced by future tax policy.

Yes, but you're neglecting to take into account the gains your Roth will make over the next 10 or 20 years (don't know your age).

I have $50,000 in my Roth. If I never contribute another dime...it should be worth about $200,000 in 20 years.

You have $50,000 in your IRA. If you never contribute another dime...it should be worth about $200,000 in 20 years.

Even at an effective tax rate of 10% you're going to owe more on the gains (later) than just paying the tax upfront (now) in the 15% bracket.

[beltim]

Just curious why you and non-working spouse choose traditional IRAs instead of Roth. Obviously the tax benefit exists with your current choice, but at your income level you could still get the Roth benefit...?

Roth IRA would require me to pay taxes now, but the traditional requires me to pay taxes later.  If I invest in the Roth instead, the income I would use to fund it will be at taxed 15%.  If I am creative enough during retirement, the taxes that I pay on the traditional IRA withdrawals will only be 10%.  Obviously, much of this is influenced by future tax policy.

Yes, but you're neglecting to take into account the gains your Roth will make over the next 10 or 20 years (don't know your age).

I have $50,000 in my Roth. If I never contribute another dime...it should be worth about $200,000 in 20 years.

You have $50,000 in your IRA. If you never contribute another dime...it should be worth about $200,000 in 20 years.

Even at an effective tax rate of 10% you're going to owe more on the gains (later) than just paying the tax upfront (now) in the 15% bracket.

I suggest reviewing the commutative property of numbers.  It doesn't matter whether taxes are taken out at the beginning at the end, in the case of equal tax rates and equal contributions.  Your example doesn't work because you're not using equal contributions ($50000 in a Roth is after tax, but $50000 in a traditional IRA is pre-tax -- you need to compare both on the same tax basis).

[MDM]

beltim is correct.

See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 for (perhaps) more (than you want to see) on the subject....

[retired?]

 If policy makers believe that higher rates of home ownership create positive externalities (perhaps reducing crime or blight for the benefit of everyone, for example), or that greater relative use of electric vehicles will produce positive environmental externalities, why shouldn't they consider those externalities in the tax code, by offering a mortgage interest deduction or an electric car credit?   

I suppose I simply put very little faith in the wisdom of our policy makers.  Yes it is a tool, so is a gun.  Put in the wrong hands means....'

The 11% approval rate of Congress indicates most people feel the same.

As a side note, the way the govt chose to increase home ownership was not just the tax and interest deductions, but also through HUD setting aggressive targets for Fannie and Freddie, which resulted in the good ol' 3% down and no-doc loans.  We see where that wisdom led.

The average politician seems to know very, very little about basic economics and looking beyond single time-step ceteris paribus arguments and conclusions.

[Undecided]

 If policy makers believe that higher rates of home ownership create positive externalities (perhaps reducing crime or blight for the benefit of everyone, for example), or that greater relative use of electric vehicles will produce positive environmental externalities, why shouldn't they consider those externalities in the tax code, by offering a mortgage interest deduction or an electric car credit?   

I suppose I simply put very little faith in the wisdom of our policy makers.  Yes it is a tool, so is a gun.  Put in the wrong hands means....'

The 11% approval rate of Congress indicates most people feel the same.

As a side note, the way the govt chose to increase home ownership was not just the tax and interest deductions, but also through HUD setting aggressive targets for Fannie and Freddie, which resulted in the good ol' 3% down and no-doc loans.  We see where that wisdom led.

The average politician seems to know very, very little about basic economics and looking beyond single time-step ceteris paribus arguments and conclusions.

But there's a difference between the "wrong hands" argument and the broader claim that the tool just shouldn't be used (unless, as I suspect may be the case here, you mean that nobody who wants to use that tool will ever be the sort of person to use it "well"). I already conceded that many people aren't going to agree with any given application of tax-based implementations of policy.

[retired?]

I agree that a useful tool should be used.  The problems here are two-fold, one philosophical and the second empirical:

1)  who is to decide what is "good"?  We've covered aspects that are purely subjective, but which are included in the tax code (e.g. home ownership, marriage, etc.).  The view is clearly evolving.  It is not as objective as education.  But, even education is subjective.  Beyond basic education, I would argue that society does not need/benefit from having any person that desires to go to college to actually do so.

2)  the government, i.e. politicians, are poor at implementing policies to reach an end result.  There is a disconnect b/n the intended goal and what actually happens.

An example that comes to mind is "executive order".  Useful in some cases, but lately appears to be a tactic for "getting stuff done" without the approval of Congress. 

You likely have a much less skeptical view of politicians than I do.  I think of politicians like doctors and lawyers.  Many politicians steer towards politics with the intention of doing "good".  Likewise for lawyers and doctors.  But, what keeps them going is power for politicians and $$ for lawyers and doctors.  I don't want to offend any lawyers and doctors, but the cost of training and hours worked is too high to not be guided by $$.  For career politicians it is pure power.  Look at Joe Biden.....a mediocre law student and lawyer.  Claim to fame used to be Senator with the lowest net worth.  Yet, he now has a lot of power.  And, well, Obama......

[Bob W]

Deduct the 20 k. Miles per year you drive for your real estate investment business.   That should shave 2 k off your taxes.            Also,  you completely overlooked the inflation tax you're paying.    To calculate inflation tax multiply the value of all your assets by 4%.   I think you'll find that uncle Sam is getting plenty of taxes from you.

[Undecided]

I agree that a useful tool should be used.  The problems here are two-fold, one philosophical and the second empirical:

1)  who is to decide what is "good"?  We've covered aspects that are purely subjective, but which are included in the tax code (e.g. home ownership, marriage, etc.).  The view is clearly evolving.  It is not as objective as education.  But, even education is subjective.  Beyond basic education, I would argue that society does not need/benefit from having any person that desires to go to college to actually do so.

2)  the government, i.e. politicians, are poor at implementing policies to reach an end result.  There is a disconnect b/n the intended goal and what actually happens.

An example that comes to mind is "executive order".  Useful in some cases, but lately appears to be a tactic for "getting stuff done" without the approval of Congress. 

You likely have a much less skeptical view of politicians than I do.  I think of politicians like doctors and lawyers.  Many politicians steer towards politics with the intention of doing "good".  Likewise for lawyers and doctors.  But, what keeps them going is power for politicians and $$ for lawyers and doctors.  I don't want to offend any lawyers and doctors, but the cost of training and hours worked is too high to not be guided by $$.  For career politicians it is pure power.  Look at Joe Biden.....a mediocre law student and lawyer.  Claim to fame used to be Senator with the lowest net worth.  Yet, he now has a lot of power.  And, well, Obama......

Well, generally the US has a democratic republic and it seems pretty clear who decides what good is, notwithstanding that it's a multi-layered process and those decisions aren't permanent or static. What you would decide is pretty much irrelevant except in the case where you're the median voter. I think you've moved pretty far from what drew my initial response. It turns out you don't trust politicians and you're particularly dismissive of Obama and Biden. Fair enough, there's a whole party for that stuff, but it's got nothing to do with structural elements of governing.

[retired?]

You got me.  I cannot stand Obama's arrogant politics.

But, to the main point, I do not think government, whoever is in power, right, left, independent, should use the tax code to steer behavior.  Do you like having others choose what behavior is good (aside from that which encroaches upon other people's right to live a free life)?  Suppose, for example, that those in power decided that single parenthood was good, low education was good, a lot of government support allowing people to choose to not work was good.  Would you support tax incentives towards those goals?  You are implicitly assuming, in my view, that politicians work towards goals that are objectively sound.  I trust them as far as I can throw them.  You should, too.

I've been on the defensive in this argument.  You tell me why the government should encourage home ownership, marriage, having children.  Why are these, objectively, "good" goals (the answer is they are not......not poor goals either).

And, don't be fooled by the idea of a democratic republic.  Politicians often vote/do how they choose after they are elected and look towards being re-elected (i.e. local concerns) regardless of what makes sense for the country.  Look at Harry Reid.  We have someone from Nevada, a not too populous state, steering a lot of policy.  Senators - 6 years!  Do you really feel that your view is represented?  Take away what they can decide and the limits do not matter nearly as much.  But, the federal govt has become too big.  Not just Uncle Sam, but Mommy and Daddy Sam.

The difference b/n our two viewpoints is simply that you are fairly willing to let others decide what is right.  For the most part, I'd expect Mustachians to be for small government. 

[Undecided]

You got me.  I cannot stand Obama's arrogant politics.

But, to the main point, I do not think government, whoever is in power, right, left, independent, should use the tax code to steer behavior.  Do you like having others choose what behavior is good (aside from that which encroaches upon other people's right to live a free life)?  Suppose, for example, that those in power decided that single parenthood was good, low education was good, a lot of government support allowing people to choose to not work was good.  Would you support tax incentives towards those goals?  You are implicitly assuming, in my view, that politicians work towards goals that are objectively sound.  I trust them as far as I can throw them.  You should, too.

I've been on the defensive in this argument.  You tell me why the government should encourage home ownership, marriage, having children.  Why are these, objectively, "good" goals (the answer is they are not......not poor goals either).

And, don't be fooled by the idea of a democratic republic.  Politicians often vote/do how they choose after they are elected and look towards being re-elected (i.e. local concerns) regardless of what makes sense for the country.  Look at Harry Reid.  We have someone from Nevada, a not too populous state, steering a lot of policy.  Senators - 6 years!  Do you really feel that your view is represented?  Take away what they can decide and the limits do not matter nearly as much.  But, the federal govt has become too big.  Not just Uncle Sam, but Mommy and Daddy Sam.

The difference b/n our two viewpoints is simply that you are fairly willing to let others decide what is right.  For the most part, I'd expect Mustachians to be for small government.

I'm not interested in debating politics here. I do stand by the view that when externalities exist, a good use of government is to connect those externalities to individual decisions. Your claims, or even equating what I've said with some willingness to let others decide what is "good" and "right," are non sequitors.

I don't know what "small government" means to you, but I'm curious as to why you think that. I see a lot of talk here about the value of state colleges and universities, public transit, people talking about the degree to which the ACA is helpful to them after retirement, and other things that aren't obviously "small government" (but maybe they are within the scope of that terms as you mean it?).

[fartface]

Ok, can we get back to my point about Roth vs Traditional IRA?

If I have contributed a TOTAL of $50,000 to my Roth over ten years - that equates to $7500 paid up front in federal tax at my 15% bracket.

Now, I contribute no more. That $50,000 grows to $200,000 which I'm allowed to w/draw at 59 1/2 TAX FREE.

How is that the SAME as contributing $50,000 to a traditional IRA which also grows 'tax deferred' to $200,000. If and when I w/draw my $200,000....I'm paying tax on ALL OF IT. 100% of the total amount: gains + dividends + the original contribution amount.

Someone please help me here. If I w/draw say $50,000 per year from my Traditional IRA @ 10% income bracket, I'm still paying $5000/year taxes x 4 years = $20,000 tax consequence.

What am I missing here?

[Emilyngh]

Ok, can we get back to my point about Roth vs Traditional IRA?

If I have contributed a TOTAL of $50,000 to my Roth over ten years - that equates to $7500 paid up front in federal tax at my 15% bracket.

Now, I contribute no more. That $50,000 grows to $200,000 which I'm allowed to w/draw at 59 1/2 TAX FREE.

How is that the SAME as contributing $50,000 to a traditional IRA which also grows 'tax deferred' to $200,000. If and when I w/draw my $200,000....I'm paying tax on ALL OF IT. 100% of the total amount: gains + dividends + the original contribution amount.

Someone please help me here. If I w/draw say $50,000 per year from my Traditional IRA @ 10% income bracket, I'm still paying $5000/year taxes x 4 years = $20,000 tax consequence.

What am I missing here?

I've found this blog post very helpful in comparing a traditional and Roth.  http://www.madfientist.com/traditional-ira-vs-roth-ira/

[Undecided]

Ok, can we get back to my point about Roth vs Traditional IRA?

If I have contributed a TOTAL of $50,000 to my Roth over ten years - that equates to $7500 paid up front in federal tax at my 15% bracket.

Now, I contribute no more. That $50,000 grows to $200,000 which I'm allowed to w/draw at 59 1/2 TAX FREE.

How is that the SAME as contributing $50,000 to a traditional IRA which also grows 'tax deferred' to $200,000. If and when I w/draw my $200,000....I'm paying tax on ALL OF IT. 100% of the total amount: gains + dividends + the original contribution amount.

Someone please help me here. If I w/draw say $50,000 per year from my Traditional IRA @ 10% income bracket, I'm still paying $5000/year taxes x 4 years = $20,000 tax consequence.

What am I missing here?

It's not the same. But contributing $50,000 to a tIRA isn't the same as contributing $50,000 to a Roth IRA, either. On your assumptions, the Roth IRA cost you more than the tIRA to make the contributions. If you subtract the $7,500 taxes out from the $50,000 such that you only have $42,500 to contribute to the Roth IRA, and then you quadruple that money to $170,000, how does that compare to the $200,000 in the hypothetical tIRA that's subject to the 10% tax?

[MDM]

Ok, can we get back to my point about Roth vs Traditional IRA?

If I have contributed a TOTAL of $50,000 to my Roth over ten years - that equates to $7500 paid up front in federal tax at my 15% bracket.

Now, I contribute no more. That $50,000 grows to $200,000 which I'm allowed to w/draw at 59 1/2 TAX FREE.

How is that the SAME as contributing $50,000 to a traditional IRA which also grows 'tax deferred' to $200,000. If and when I w/draw my $200,000....I'm paying tax on ALL OF IT. 100% of the total amount: gains + dividends + the original contribution amount.

Someone please help me here. If I w/draw say $50,000 per year from my Traditional IRA @ 10% income bracket, I'm still paying $5000/year taxes x 4 years = $20,000 tax consequence.

What am I missing here?

From the Boglehead's thread referenced in reply #64:
"...either invest it all in a tIRA and pay tax later, or pay taxes now and invest the remainder in a Roth tax free. Then, if the marginal tax rate doesn't change

G = Gross starting amount, $
i = Annual investment return, fraction
n = Number of years
T = Marginal tax rate, fraction
Roth = G * (1 - T) * (1 + i)^n
tIRA = G * (1 + i)^n * (1 - T)
...and the results are identical."

Does that make sense?

[Pooperman]

The reason the RE community prefers to traditional to Roth is that traditional reduces your income now and since RE tends to be on a fairly low budget, the tax free amount of conversion is nearly all of the amount i.e pay only $500 tax on $40k). Because of the standard deduction plus exemption(s), the traditional comes out ahead of the Roth because of time. Given time, you will pay no tax on the money (or very little). So while rates don't change it seems equal (save 50k traditional vs 45k Roth @ 10% tax rate) the reality is that some tax hacking can get that traditional out with much less or no tax. Did I mention that it reduces your tax bill now so you can save even more in the long run from tax hacking?

[VirginiaBob]

I think the only time the Roth may work better (or at least break even) is if your future retirement income includes a large pension + SS, which could put you in the higher tax brackets later.

[fuzzhead1506]

on a related but slightly different note, in 2015 i am anticipating to be in the unusual position of having a $0 tax liability and refundable credits leftover.  that is to say that my wife and i will be paid by the US government to work in this great nation. 

I think the only time the Roth may work better (or at least break even) is if your future retirement income includes a large pension + SS, which could put you in the higher tax brackets later.

in this case, it would be stupid to utilize the leftover ceiling amount for a Traditional contribution!

so, on top of our 401(k) deductions, we will be able to have put even a little money into one of our IRA's as a ROTH contribution that will never ever be taxed.... i can't be the only Mustachian with this unlikely gift from the government - can anyone else make their retirement money work this well? =)

[Sblak]

@ Fuzzhead.  I put the system to work in a similar way.  I make about $70,000 a year.  I am married to a SAHW and we have 4 kids.  I contribute about 12% pretax to a pension ($8,000), and max a 457(b) deferred account ($17,500).  That plus the insurance and other pretax deductions ($8,000) put my income at the near poverty level for a family of four ($36,500). 

That "income" makes all the refundable credits (EITC, additional child credits) available and with my exemptions I have no taxable income.  So I pay zero in federal taxes and still get a large refund ($7,500) which makes my overall effective tax rate negative.  Accounting for social security and medicare taxes ($5,000), the refund this year should still net me $2,500.  That rounds up to a -4% effective tax rate.

It seems to me that it makes perfect sense for me to contribute to a Roth now because my tax rate in retirement must increase.  There is no way I can keep this tax rate in retirement.  It will go to at least 10% and hopefully higher since I will have a pension and my retirement accounts and income from social security. 

The tax system encourages me to do this, and I take advantage of taxes because I am self interested.  Still I agree with those about that I don't know that the system should subsidize low income married people as highly as it does.

[VirginiaBob]

@ Fuzzhead.  I put the system to work in a similar way.  I make about $70,000 a year.  I am married to a SAHW and we have 4 kids.  I contribute about 12% pretax to a pension ($8,000), and max a 457(b) deferred account ($17,500).  That plus the insurance and other pretax deductions ($8,000) put my income at the near poverty level for a family of four ($36,500). 

That "income" makes all the refundable credits (EITC, additional child credits) available and with my exemptions I have no taxable income.  So I pay zero in federal taxes and still get a large refund ($7,500) which makes my overall effective tax rate negative.  Accounting for social security and medicare taxes ($5,000), the refund this year should still net me $2,500.  That rounds up to a -4% effective tax rate.

It seems to me that it makes perfect sense for me to contribute to a Roth now because my tax rate in retirement must increase.  There is no way I can keep this tax rate in retirement.  It will go to at least 10% and hopefully higher since I will have a pension and my retirement accounts and income from social security. 

The tax system encourages me to do this, and I take advantage of taxes because I am self interested.  Still I agree with those about that I don't know that the system should subsidize low income married people as highly as it does.

Actually, in your case, since it appears you qualify for EITC, you may be better served by using a Traditional IRA, since it will increase your EIC by over $1,000. 

Edit - it is even better than I thought in your case.  Your EITC will go from $3,168 to $5,489 based on the 2013 tables (probably even better for 2014).  That is a $2,321 difference.  I'd jump on that if I were you.

Your welcome.

[sol]

I were you.
Your welcome.

His welcome what?

[Sblak]

Thanks, VirginiaBob, for the tip about using an traditional IRA versus a Roth.  I understand that you are suggesting maxing two IRAs at $5,500 in your recalculation of the EITC?  One for me and one for my wife?  That reduces our "income" from $36,500 to $25,500.  It then increases by about $9,500 from the tax refund.  So we would have to live on $35,000 a year.

While that math makes sense, I may fail to convince my wife to cut more from the now to put even more into retirement.  Currently, I am not contributing to the Roth but was being tempted by it.  We currently live off $42,500 per year ($36,500 "income" plus $7,000 refund).  That is not huge with a mortgage and four kids.  I don't know that we want to tighten the screws any tighter.  But you are right that it would be encouraged/rewarded by the tax system.

I think this plan will work though as I increase my income with time.  Just put increases away into an IRA and keep the benefit of free government money.

[VirginiaBob]

I were you.
Your welcome.

His welcome what?

For the thanks that will likely be recieved. 

[Sblak]

@Sol.  You're welcome too.

[sol]

For the thanks that will likely be recieved.

"You're welcome" would be an appropriate response for thanks received.  I love the internet.

You know, web browsers have spellcheck built right in these days.  Good ones can even tell when you're spling and grammer go sourth.

[VirginiaBob]

For the thanks that will likely be recieved.

"You're welcome" would be an appropriate response for thanks received.  I love the internet.

You know, web browsers have spellcheck built right in these days.  Good ones can even tell when you're spling and grammer go sourth.

Rearly?  Danks alot fer dee teeps.

[teen persuasion]

@ Fuzzhead.  I put the system to work in a similar way.  I make about $70,000 a year.  I am married to a SAHW and we have 4 kids.  I contribute about 12% pretax to a pension ($8,000), and max a 457(b) deferred account ($17,500).  That plus the insurance and other pretax deductions ($8,000) put my income at the near poverty level for a family of four ($36,500). 

That "income" makes all the refundable credits (EITC, additional child credits) available and with my exemptions I have no taxable income.  So I pay zero in federal taxes and still get a large refund ($7,500) which makes my overall effective tax rate negative.  Accounting for social security and medicare taxes ($5,000), the refund this year should still net me $2,500.  That rounds up to a -4% effective tax rate.

It seems to me that it makes perfect sense for me to contribute to a Roth now because my tax rate in retirement must increase.  There is no way I can keep this tax rate in retirement.  It will go to at least 10% and hopefully higher since I will have a pension and my retirement accounts and income from social security. 

The tax system encourages me to do this, and I take advantage of taxes because I am self interested.  Still I agree with those about that I don't know that the system should subsidize low income married people as highly as it does.

Actually, in your case, since it appears you qualify for EITC, you may be better served by using a Traditional IRA, since it will increase your EIC by over $1,000. 

Edit - it is even better than I thought in your case.  Your EITC will go from $3,168 to $5,489 based on the 2013 tables (probably even better for 2014).  That is a $2,321 difference.  I'd jump on that if I were you.

Your welcome.

The EITC rules test both your line 7 wages, and your AGI.  You lookup the EITC amounts on each, compare, and receive the LOWER  EITC credit.  Contributions to your 401k lower both wages and AGI, but tIRA contributions only lower AGI.  If all or nearly all your income is W2 wages, contributing to a tIRA, IME, will not increase your EITC.  Also, if you have investment income over ~$3300 (not sure of the exact current amount), you are no longer eligible for the EITC, so sizable taxable accounts can disqualify you.

That said, we put as much as possible in DH's 401k, to maximize our refunds as much as possible.  Then we use those refunds to fund our Roths.  Our state matches EITC at 30%, and CTC at 33%.  If the EITC phaseout rate is 21%, each $1.00 added to his 401k increases our refund $0.413: .21 + .063 + .10 + .04  ( EITC phaseout + state match + fed tax + state tax).  At least until we hit the zero fed level.  We have a bit to go before we can get down to the max EITC point, which happens to correspond well to the FAFSA auto EFC = 0.

[Blindsquirrel]

 Not sure if this was covered above but passive losses for real estate phase out at about 165k, Roth contributions are also gone about the same level, We payed a boat load in taxes all together and it is hideous if you add it all up which I highly recommend that you do. Do not forget SS, medicare, sales tax, prop tax, licenses fees etc, permits and traffic tickets.