Retirement Planning
At what point on the tax bracket does it make sense to contribute to a traditional instead of a Roth? To me, the 32% bracket makes sense, but before that, I am not sure, assuming you would retire early enough to make some conversions.
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I'm with Roberto on this one. Remember that when retired, you fill up your tax brackets from the bottom up. When you make the deductions to fill up traditional accounts, it comes from the top.
I'm planning to live on about $50k/year in retirement (with a paid-off house), so then obviously my tax rate in retirement probably won't be very high.
The new book Tax planning to and through early retirement is very helpful explaining why traditional contributions often make more sense than Roth
You probably know that the only thing that matters is marginal taxes on the dollar today vs. later. All things being the same (growth and tax rate), traditional vs. Roth is a wash. For most with higher savings rates, I think, the applicable tax rate for future withdrawals will be lower than for earned income today. In that case I would max out tax deferred options, then HSA, then Roth (backdoor Roth), then brokerage. Key is to have an idea what your projected MAGI will be considering factors like expenses, ACA subsidies, Medicare / IRMAA, need for Roth conversions, ...
Unless you plan to make extremely large withdrawals from your traditional accounts (i.e., >= $130k each year), then odds are you are better off making traditional contributions once you are above the 12% tax bracket.
My plan is to live on 120k per year in retirement
OK, so using that number, let's make up a totally hypothetical scenario. Suppose you will draw $60k from traditional accounts, $30k from Roth accounts, and $30k from after tax (brokerage, savings, etc).
$30k Roth -> $0 taxes (it has already been taxed)
$60k Traditional -> ~$3k taxes*
$30k brokerage (let's assume only part of this is capital gains) -> $0** taxes
In this scenario, your effective tax rate is 2.5% ($3k/$120k). So, yeah, making traditional contributions is definitely the way to go for a scenario like this. You can play with the numbers based on your own knowledge of your situation, i.e., to project more accurately where you intend to draw funds from, accounting for things like rental income, part time work, etc.
\* I arrived at a number of around $3000 in taxes by taking $60,000 - $31,500 (this year's MFJ standard deduction) = $28,500, which (with no other deductions or considerations) is taxed as (again, MFJ) $23,850 @ 10% and $4,650 @ 12%, which is $2,385 + $558 = $2,943. BTW, even if your $120k withdrawal came entirely from a traditional retirement account, you'd still solidly be in the 12% marginal tax bracket ($120k - $31,500 = $88,500).
\*\* In 2025, you can go up to $96,700 for the 0% capital gains tax rate. This works by first counting your earned income (i.e., wages, traditional retirement account withdrawals, taxable dividends, taxable interest, etc.) and then adding the capital gain to it. In this notional scenario, even if your $30k brokerage withdrawal was 100% capital gains (hint: that is a literal impossibility, more likely even if you've held the securities for a very long time it's going to be at most 70% or 80% capital gains and the rest basis) when added to your $60k traditional withdrawal, still falls under the $96,700 limit for 0% capital gains treatment.
Thanks this breaks it down a lot better