This is a common misunderstanding about Roth vs traditional accounts. The commutative property of multiplication means that the only thing that matters is the tax rate you'd pay up front (with Roth) or on the back end (with traditional). The time in between could be 1 year or 100 and it wouldn't make a difference.I`m a good-natured person and immediately willing to believe that, but... can you substantiate this? To me it seems so logical that doing a Roth converseion in the 22% bracket at say... 20 years old will be a great deal while doing it at say 63 this might be much less of a good idea. Out of a gut feeling that I havent modelled out in Excel I´d even guess it probably doesnt matter if you´re in a crazy high bracket when you´re young as you have so many years to rake in free growth.No. That isn't how math works. The relative.tax rates are the key factor, rather than time.Given you are 58 I am not sure if a Roth conversion is still a great idea. As a rule of thumb, the Roth makes more sense the younger you are, because you pay taxes on it once and then grow it into perpetuity.In 2024 I plan on doing Roth conversions to the top of the 22% tax bracket. My question is should I go ahead and pay 2% more and convert in the 24% bracket as I have about 120,000 in cash I could use to pay the taxes. My understanding is that the tax bracket will be reverting back in 2026 from 22% to 25% and 24% to 28%. Is this a good idea or not?
Let's say you're considering what to do with $10K of gross income, you're in the 22% bracket now and in retirement the chunk of money would also be taxed at 22%. Assume 8% nominal annual growth.
With Roth, you make a $7800 contribution. After 40 years, you have $169,451, tax-free. Had you instead deferred taxes and contributed the full $10K, you'd have $217,245 pre-tax, after paying 22% tax you'd have the same as with Roth - $169,451. If the retirement tax rate is higher, you're better off with Roth; if the retreiement tax rate is lower (which is true for the vast majority of people), you're better off with traditional.
The math is EXACTLY the same even if the time period is just 1 year: With Roth, you have $8,424 after tax, or with tradtiional you have $10,800 pre-tax, after paying 22% tax you'd have the same as with Roth - $8,424.
The only thing that matters in the Roth vs traditional question is the tax rate, not length of time the money is in the account.
The reason Roth makes sense for many younger people is that their income is lower in their younger years and therefore their tax rate tends to be lower (but this isn't always the case, e.g., a single high earner will face lower tax rates if they marry a lower earner and/or the spouse becomes a stay at home parent). It has nothing to do with how long the money will sit in the account.
Statistics: Posted by 02nz — Wed Jan 31, 2024 10:33 am — Replies 136 — Views 11184