Like other stated this video is based on you staying at the same income level at retirement. That accomplishment is rare thus most will be in a lower tax bracket. I will be in the 12% when i retire while now in the 22%
Adjusting for the taxes up front effect with the Roth contribution made the take home pay hit less painful. The best part with Roth is your balance is YOUR balance. The tax code got us really comfortable with growing the tax liability with time.
With married couples having a $25,000 standard deduction plus going through the 10% and 12% federal rate first, you don't start paying 22% until your income is around $115,000. Your actual federal tax rate is just under 10% on that $115,000. You are making people believe they are paying the marginal rate, when in reality they are paying the effective rate.
Something else to keep in mind is Social Security taxation. Traditional funds will be calculated in to establish what your provisional income is and how much your social security benefit will be taxed. Roth funds are NOT included in as provisional income meaning less of a tax placed on your social security benefit.
I went 401k knowing I will be lower income when retired. I figure 10-12% most of the time. This was told to everyone when they put money in a 401k. It defers paying tax, then you pay tax when you take it out at a lower tax rate when retired. You can pay the tax at a lower rate when retired to convert some of 401k money to a ROTH. If you think you are going to be in a higher tax bracket retired you should consider ROTH.
With the traditional youre also adjusting your annual gross income lower for thr year giving you a tax break year to year. This needs to be factored in as well. Also the agency match always goes directly to the traditional. Thats why i am just sticking with the traditional letting it grow as big as possible.
Just realize your tax bill is growing as well. If you’re working for the government you’ll have a pension ss and your tsp. All of the will have tax implications. I would rather pay my tax with my paycheck now then with my investments later
One other thing to think about is if your married and one of you pass you will now be a single tax filer. This could have a huge impact on real dollars in taxes.
Bonus for those whom will retire outside of the U.S. Roth TSP often are covered in bilateral tax treaty as a government pension other than Social Security. In most cases, such government pension are taxable only by source country for U.S. Citizens. If you have a Roth TSP, it'll only be taxable in the U.S. and since U.S. treats it as tax free, it'll be tax free in both the U.S. and the country you are living in. For normal IRA, Roth IRA, 401(k), etc., which are not government pension, the primary taxing authority is with the resident country. Therefore, it is taxed first in the country in the country you live in, but also taxable in the U.S. as U.S. citizen. The problem is that all but 8 tax treaties with the U.S. do not directly or indirectly recognize Roth IRA as a tax free account thus in most cases, you are taxed on the earnings on a Roth in the host country. Fortunately for those whom didn't roll over their Roth TSP to a Roth IRA, because Roth TSP is a government pension, it usually remains tax free. The same idea applies to governmental 457(b) plan and governmental 401(a) and governmental 403(b) often offered by state and local government employees. They are usually only taxable in the U.S. for U.S. citizens residing abroad because it is covered by the same article as government pension. If you have a Roth 457(b) or Roth 403(b) plan and plan to retire overseas, it is usually more beneficial to keep it there instead of rolling it over to a Roth IRA for that reason.
This is great food for thought! However, everyone should keep in mind that tax laws change frequently and this may not be the best solution for everyone.
@@ChristyCapitalManagement These treaties don't change very easily. In fact, U.S. Model treaty of 2006 does treat Roth IRA to be tax free in the host country but only 8 countries directly or indirectly treat the Roth IRA as tax free in the host country and many already updated it since 2006 once or twice. It's not an easy negotiation. So in the mean time, it is prudent that if you already know you'll leave the U.S., most likely your Roth IRA will no longer be tax free after you leave the U.S. As unfair as it seem, even if you worked and accumulated for decades in the Roth IRA in the U.S. and you moved elsewhere, _all_ earnings including those which were earned before you expatriated is subject to taxation in your host country in all but those 8 countries with specific language in the tax treaty. If you knew this before you left the U.S. and are already at least age 59 1/2, things aren't as bad because you could pull everything out before you leave the U.S. But most people only find this out after they are in the other country and established residency there.
ONE very important consideration that MUST NOT be ignored BUT really conplicates this calculation is a notion that when you RETIRE you are in effect in a TOTALLY ALIEN TAX (and income-based variable fees for retirement benefits) ENVIRONMENT. Such things as IRMAA, RMD's, 0%/50%/85% taxability of SS income are not a consideration when you are younger BUT become a serious matter in retirement. If you had done 100% ROTH contributions throughout your life, such assets/income are NEVER used to calculate IRMAA, RMD's, 0%/50%/85% taxability of SS income. But if you wait til retirement and start pulling money out of your TAXABLE retirement accounts to meet your spending needs, this notion that it doesn't matter what you invest in whether Traditional or ROTH retirement accounts, the reality of our FEDERAL TAX CODE will HIT YOU IN THE FACE with HIGHER IRMAA, RMD's, and taxability of SS income for the REST OF YOUR RETIREMENT LIFE.
I understand your point. However, my opinion is that it’s really not an apple to apple discussion because practically speaking, most people don’t work these plans out the same way. In other words, most people say, I’m going to put $500 per month into my retirement. Whether it’s traditional or ROTH, doesn’t matter. If they happened to put that money into ROTH, they would have a much bigger pot of money at retirement that is all tax free.
Not a good example. Sorry. This is assuming that the investor is tapped and can only afford to put in 7,800 in the Roth everybody will max out a Roth or traditional to the best of their abilities so you need to do this comparison with 10,000 in each account as an investment not $7,800 versus 10,000
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Like other stated this video is based on you staying at the same income level at retirement. That accomplishment is rare thus most will be in a lower tax bracket. I will be in the 12% when i retire while now in the 22%
thus for every 1000 i take out i save 100 in taxes using TSP instead of roth
Excellent demo. When I’m doubt go to the numbers. I am starting to contribute to the Roth tsp so I have options when I retire.
Options are always good!
Very well presentation! The only curveball I see is RMD ( you did account for this by assuming same tax rate…)
Adjusting for the taxes up front effect with the Roth contribution made the take home pay hit less painful. The best part with Roth is your balance is YOUR balance. The tax code got us really comfortable with growing the tax liability with time.
You said it well!
Just like the conversion question, this is why the decision as to Roth or not is if one believes their taxes will be higher during retirement.
With married couples having a $25,000 standard deduction plus going through the 10% and 12% federal rate first, you don't start paying 22% until your income is around $115,000.
Your actual federal tax rate is just under 10% on that $115,000.
You are making people believe they are paying the marginal rate, when in reality they are paying the effective rate.
My wife and I draw out around 8k per month and I was shocked how low our effective federal tax rate was.
Glad to hear it!
Something else to keep in mind is Social Security taxation. Traditional funds will be calculated in to establish what your provisional income is and how much your social security benefit will be taxed. Roth funds are NOT included in as provisional income meaning less of a tax placed on your social security benefit.
I went 401k knowing I will be lower income when retired. I figure 10-12% most of the time. This was told to everyone when they put money in a 401k. It defers paying tax, then you pay tax when you take it out at a lower tax rate when retired. You can pay the tax at a lower rate when retired to convert some of 401k money to a ROTH.
If you think you are going to be in a higher tax bracket retired you should consider ROTH.
Very good comparison, only issue I’m planning on being down to 10 or 12 percent tax bracket in retirement.
Considering taxes is a big part of retirement planning. Sounds like you're ahead of the game.
With the traditional youre also adjusting your annual gross income lower for thr year giving you a tax break year to year. This needs to be factored in as well. Also the agency match always goes directly to the traditional. Thats why i am just sticking with the traditional letting it grow as big as possible.
Just realize your tax bill is growing as well. If you’re working for the government you’ll have a pension ss and your tsp. All of the will have tax implications. I would rather pay my tax with my paycheck now then with my investments later
One other thing to think about is if your married and one of you pass you will now be a single tax filer. This could have a huge impact on real dollars in taxes.
Bonus for those whom will retire outside of the U.S. Roth TSP often are covered in bilateral tax treaty as a government pension other than Social Security. In most cases, such government pension are taxable only by source country for U.S. Citizens. If you have a Roth TSP, it'll only be taxable in the U.S. and since U.S. treats it as tax free, it'll be tax free in both the U.S. and the country you are living in.
For normal IRA, Roth IRA, 401(k), etc., which are not government pension, the primary taxing authority is with the resident country. Therefore, it is taxed first in the country in the country you live in, but also taxable in the U.S. as U.S. citizen. The problem is that all but 8 tax treaties with the U.S. do not directly or indirectly recognize Roth IRA as a tax free account thus in most cases, you are taxed on the earnings on a Roth in the host country. Fortunately for those whom didn't roll over their Roth TSP to a Roth IRA, because Roth TSP is a government pension, it usually remains tax free.
The same idea applies to governmental 457(b) plan and governmental 401(a) and governmental 403(b) often offered by state and local government employees. They are usually only taxable in the U.S. for U.S. citizens residing abroad because it is covered by the same article as government pension. If you have a Roth 457(b) or Roth 403(b) plan and plan to retire overseas, it is usually more beneficial to keep it there instead of rolling it over to a Roth IRA for that reason.
This is great food for thought! However, everyone should keep in mind that tax laws change frequently and this may not be the best solution for everyone.
@@ChristyCapitalManagement These treaties don't change very easily. In fact, U.S. Model treaty of 2006 does treat Roth IRA to be tax free in the host country but only 8 countries directly or indirectly treat the Roth IRA as tax free in the host country and many already updated it since 2006 once or twice. It's not an easy negotiation. So in the mean time, it is prudent that if you already know you'll leave the U.S., most likely your Roth IRA will no longer be tax free after you leave the U.S. As unfair as it seem, even if you worked and accumulated for decades in the Roth IRA in the U.S. and you moved elsewhere, _all_ earnings including those which were earned before you expatriated is subject to taxation in your host country in all but those 8 countries with specific language in the tax treaty. If you knew this before you left the U.S. and are already at least age 59 1/2, things aren't as bad because you could pull everything out before you leave the U.S. But most people only find this out after they are in the other country and established residency there.
ONE very important consideration that MUST NOT be ignored BUT really conplicates this calculation is a notion that when you RETIRE you are in effect in a TOTALLY ALIEN
TAX (and income-based variable fees for retirement benefits) ENVIRONMENT.
Such things as IRMAA, RMD's, 0%/50%/85% taxability of SS income are not a consideration when you are younger BUT become a serious matter in retirement.
If you had done 100% ROTH contributions throughout your life, such assets/income are NEVER used to calculate IRMAA, RMD's, 0%/50%/85% taxability of SS income.
But if you wait til retirement and start pulling money out of your TAXABLE retirement accounts to meet your spending needs, this notion that it doesn't matter what you invest in whether Traditional or ROTH retirement accounts, the reality of our FEDERAL TAX CODE will HIT YOU IN THE FACE with HIGHER IRMAA, RMD's, and taxability of SS income for the REST OF YOUR RETIREMENT LIFE.
I understand your point. However, my opinion is that it’s really not an apple to apple discussion because practically speaking, most people don’t work these plans out the same way. In other words, most people say, I’m going to put $500 per month into my retirement. Whether it’s traditional or ROTH, doesn’t matter. If they happened to put that money into ROTH, they would have a much bigger pot of money at retirement that is all tax free.
Not a good example. Sorry. This is assuming that the investor is tapped and can only afford to put in 7,800 in the Roth everybody will max out a Roth or traditional to the best of their abilities so you need to do this comparison with 10,000 in each account as an investment not $7,800 versus 10,000
This is the same video you posted yesterday but why delete the original? Oh well
Just had to make a simple edit :)