Nobody is asking the right questions. I'm worried about retirement and want to maximize my savings. I've tried various investments that didn't work out as I hoped, and now I'm unsure whether to invest in the stock market or index funds. Any recommendations would be appreciated.
The stock market is likely the best smart investment. However, if you are thinking of investing in the stock market and you are not well versed, its advisable to work with a financial advisor who is an expert to guide you through the process. this way you could make more profit with less risk
Agreed, I've always delegated my excesses to an advisor, since suffering major portfolio loss early 2020, amid covid outbreak. I'm now semi-retired and only work 7.5 hours a week, with barely 15% short of my $1m retirement goal after subsequent investments to date.
My CFA is Judith B. Richards, a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market. To be honest, I almost didn't buy the idea of letting someone handle growing my finance, but so glad I did.
Thank you so much for the suggestion! I really needed it. I looked her up on Google and explored her website; she has an impressive background in investments. I've sent her an email, and I hope to hear back from her soon!
To be a successful business owner and investor, you have to be emotionally neutral to winning and losing. Winning and losing are just part of the game. Risk comes from not knowing what you are doing.
From $37K to $45K that's the minimum range of profit return every week I thinks it's not a bad one for me, now I have enough to pay bills and take care of my family.
Sounds interesting. I was planning to invest some few £ in some coins, stack them up and leave them for a few years, but seeing this changed my mindset. Thank you very much
I will be forever grateful to you, you changed my whole life and I will continue to preach on your behalf for the whole world to hear that you saved me from huge financial debt with just a small Investment, thank you Jihan Wu you're such a life saver
As a beginner in this, it’s essential for you to have a mentor to keep you accountable. Jihan Wu is also my trade analyst, he has guided me to identify key market trends, pinpointed strategic entry points, and provided risk assessments, ensuring my trades decisions align with market dynamics for optimal returns.
Jihan Wu Services has really set the standard for others to follow, we love him here in Canada 🇨🇦 as he has been really helpful and changed lots of life's
Great video! I actually use marginal and effective tax rates and include the IRMAA in the calculation. Eventually someone has to pay for the pre-tax retirement accounts unless they are gifted away through QCD. Since we don't know our future tax brackets, nor do we know what tax brackets that beneficiaries might be in the future, it's anyone's guess. I am glad that we did Roth conversions but who knows if it was the best financial decision. Thanks very much. This was by far the best presentation I have seen on this subject.
THANK YOU for reiterating this. Never have understood why so many people focus on overall effective rates. I care more about what is happening with my next marginal dollar
the biggest benefit to converting to Roth for many is that after converting, the money compounds in a non-tax environment (leave it in traditional and your tax keeps increasing). Also the benefit of not having to mess with RMD's (or trying to evaluate how much RMD is in the future), limited IRMAA impact, being able to cover a big expense without it becoming a big tax event.
Eric, from the comments, it looks like a lot of people didn't fully grasp the big picture. Maybe you do a full real example using that last scenario. The person could do a 5k Roth conversion at 22% tax bracket. Then later you show how having that money available allows them to pay less total taxes/premiums. Might need to show it in actual total tax dollars paid vs. percentages? Good luck and thanks for continuing to put out good stuff.
After plotting out marginal cost (tax + IRMAA + NIIT) vs. Roth amount converted, something that I have a hard time quantifying is how much more one should be willing to pay up front in a Roth conversion, to avoid/lessen the possibility of Single Window's Penalty down the road, where sudden jumps over IRMAA cliffs and higher brackets are involved.
I agree. This is referred to as the Widow Tax Torpedo. Wish there was a tutorial in how to estimate future tax torpedo effects using a simple spreadsheet. I think the biggest challenge is determining all of the assumptions accurately (like year-by-year account growth rates, tax Bracket COLA adjustments, etc, etc). Without accurate forecasts, it just becomes a ‘garbage in - garbage out’ analysis and hard to make the correct choices, especially if forecasting far into the future.
I plan to create a no earned income window of time, between 60 and 63, and use this window to convert a large portion of tax deferred funds to Roth. After 63, it gets difficult to convert around Irmaa and retirement income.
After a cancer scare, we hedged and did a one time chunk and have laddered ever since. I saw how the CPA didn't offer any tax advice on a widow's final year of being able to file MFJ and have been overly concerned with the widow's penalty. Thankfully things are OK for us (in other words we didn't need to go so heavy in year one) but it could have paid off handsomely if things went south.
Eric, why does your Retirement Tax System graph (and many others in past videos) show the first IRMAA threshold at ~$58,000 when the 2024 IRMAA single person threshold is $103,000 of 2022 income?
@@polymath5119 I believe it is because the X-axis is not the total income you earn, but rather it is the incremental income you add to your base case scenarios.
We all understand trading our time for money. If you have to trade a day of you life for a dollar, so be it. But what if the next day you trade it was for only 50 cents? On Monday you get a dollar, on Tuesday 90 cents, on Wednesday 88 cents, on Thursday 78 cents, on Friday 76 cents, and the next Monday you only get 68 cents. Oh, and if you live in California, take an additional 1 cent to 13 cents off for them so that second Monday you are only getting 55cents while doing the same work that used to get you a dollar. And it keeps going down from there. I've never understood "effective tax rate" people. The critical number is how much tax on the next dollar of income. The government depends on people foolishly looking at effective tax rate so they stay motivated. Knowing that I was going to be paying the gov't 50% on the next dollar I earned meant I was not being compensated for the additional stress and aggravation that came with the promotion. Why put up with it? Instead I took a pay cut and reduced my hours to 32/week the last few years for the best return on my time. Considering anything other than marginal rates is simply combining disparate data - the 0% dollars, the 12% dollars, the 22% dollars, etc. are not equal, yet "effectively" would be thought of as the same. It's just bad thinking.
People are facing a tough retirement. and it's even harder for workers to save due to low-paying jobs, inflation, and high rents. Now, middle-class Americans find it tough to own a home too, leaving them without a place to retire in.
6:52 would graphing the effective tax rate on that graph be helpful in showing the effect of maxing out the bracket (including irmaa as a tax). I would expect to see it decrease to the right until it reached the next bracket or Irmaa threshold.
Thanks for sharing such valuable information! Could you help me with something unrelated: I have a SafePal wallet with USDT, and I have the seed phrase. (alarm fetch churn bridge exercise tape speak race clerk couch crater letter). How should I go about transferring them to Binance?
Sorry, but still I think effective tax rates is more crucial in retirement. For example, in your example where a retiree withdraws $3,000 more and ends up with a 58% marginal tax rate. But that %58 applies only to the $3,000. With everything considered (IRMAA, windows tax trap, etc.), still the retiree pays only about 16% of his total income. That’s much better than 24% marginal rate he would have had to pay during Roth conversion. Sure, it would be the best if the retiree plans in advance and plan not to withdraw $3,000 more
You are comparing the 16% effective rate of his overall income to the marginal 24% tax rate of a conversion of a much smaller amount of money done several years ago, that grew to $3000 over those years. That would not be an apples to apples comparison. Yes, from an effective tax rate view, the additional tax seems to be not that much more ($1700 additional over the original $15,000, or about 11% more tax) but it is significant especially when you consider that this bump was due to just $3000 more of income, or just a 2.5% increase in income. The main point is that, if you definitely need that additional $3000 in income, it is better to have the flexibility of having it available in Roth assets, to avoid the tax impact. Otherwise, say that this extra income is to make an urgent home repair, if you take it from pre-tax it’s like paying $4,745 for the repair rather than $3000.
Well, it's mainly about during retirement. You typically have more ways to control your marginal tax rate in retirement than when you are working. Although in a round-about way it also applies to before you retire because there are planning steps you can take then to prepare for the most tax flexibility when you do retire. But, this particular video isn't really about the latter, more the former.
@@bluesky2145 I don't think this video is just about Roth conversions. It is about anything that increases your ordinary income. That could be non-'required' pretax account withdrawals for living expenses, or a stock sale that would increase the amount of social security that is taxed, etc. Effective tax rate is interesting to know, but it isn't particularly actionable. If you do a Roth conversion where some of that money pushes otherwise untaxed capital gains income into the 15% CG bracket, or causes you to just cross into an IRMA penalty, or cause some more of your SS to be taxed, yes it may not be worth converting that incremental amount this year. You can do the amount that takes you to that threshold, but going over might not be worth it, because that incremental portion may effectively be taxed at 38% or 49% or something. If someone has millions of dollars they feel they need to convert, maybe there's not much that can be done about these cascading marginal effects. But I think the point is to understand they exist and work them to your benefit if you can. If you convert $100K and $5K of that caused you an IRMA penalty, did you really need to convert that $5K this year? I doubt it. This will be glossed over in effective rate but it will be more evident in a marginal rate analysis that you paid 40% or whatever on that additional $5K.
It is for both. Part of the point is to have Roth assets in retirement to give you flexibility to manage your taxes. You achieve in part by doing Roth contributions pre-retirement, but you can also make conversions pre-retirement depending on your tax bracket. Once retired, depending on your age of retirement and IRA balance, you may still have a window for conversions before Medicare/IRMAA and SS kicks in, assuming that conversions make sense for you based on future tax brackets, additional taxes, RMD amounts, and goals such as future spending or inheritances.
I watched this video a couple more times and it seems to be missing important points. It wants to compare effective tax rates and marginal tax rates but doesn't take into account the effects of not doing a Roth conversion and having all the effects of RMDs, higher social security taxes and IRMAA penalties. I learn a lot from this channel but it seems to me that this current video is just simply wrong.
I usually enjoy learning from this channel, but unfortunately I don't see any real proof provided in this video about why using marginal tax brackets in my retirement tax decision-making process is so much better than using my effective tax rate. It's kinda like the professor already knows the answer (and keeps repeating it), but it is left to the students in his class to derive the actual proof. And I think the IRMMA example provided is a poor one given that IRMMA are tax cliffs that are piled on top of our progressively-taxed income. I can make tax-related income decisions like a Roth Conversion knowing where those IRMMA cliffs are, regardless of whether I track effective tax rates or marginal tax brackets. And since I tend to concern myself with the total taxes paid, I see more value in understanding the impact to the effective tax rate (both federal & state combined) to give me insight to help make the best decision possible, versus whether knowing that something like an extra $5 of income is being taxed at some incredibly high marginal rate. Full transparency: I have always been an effective tax rate kind of guy - that is how I currently figure out my current withholdings - but I am new to the retirement scene so I would be willing to convert, if provided enough data to make a decision that is best for my particular situation.
If you change 1 variable while holding the rest constant, the marginal rate is the slope or proportional response to that change. They're not talking about $5. They're talking about $10's or $100's of thousands. Someone who perhaps over saved in non-Roth 401k/IRA, got lucky on their stick picks, and has a sizable qualified account such that they're worried about RMDs. They worry that after one spouse passes, the remaining spouse will change to the single filing status, significantly increasing their taxes (marginal and effective). A strategy is to perform several years of large Roth conversions at the right time to minimize overall taxation, do it before the spouse passes. Project what marginal bracket the remaining spouse would be in. You might fill up a bracket today at 22% or 24% so that they don't pay 32% later. The $10s of thousands of dollars saved overall on taxes can benefit the grandchild or charity of your choice.
You can pay 20% tax today or 10% tax next year, on the same amount of money. Which do you choose? Why would the average rate you paid on all previous money impact that decision? What average rate on past money would make paying 20% better than 10%? It’s a sunk cost. Also conveniently, paying a higher marginal rate will result in a higher effective rate, all else being equal.
I think he didn't spend enough time on the last example, which was the key point of the video. In that case, if you had money available in both Roth and Traditional accounts, taking out the last 3000 from the Roth would have saved a huge marginal tax hit. Way beyond a 22% or 24% tax rate. Planning for that specific scenario is really hard 20 years out, but planning for it during that year is quite doable with tax planning.
The irony of your video saying retirees should only worry about marginal tax brackets, and then your graphic at 3:50 proves that Roth conversions are beneficial by using effective tax rates.. :-) That graphic was based upon an effective tax rate of 15%, not the marginal 22/24% (depending on the tax year you used).
eh just check the tax bracket there is only 2% difference between 102K and 197K for a single taxpayer. I think you should focus on effective. You don't actually show which strategy is better. Marginal rates don't demonstrate what you are arguing for.
You are only focusing on federal income tax rates. You have to look beyond that which is the point. Did you check your Medicare premiums? What about Capital Gains? Or even more impactful if prior to 65, your Obamacare subsidy. The jump may be much higher than 2% if you do total tax planning.
That’s the point. You are paying 58% tax on just a 2% of additional income taken. So, you just needed $3000 more money, but you paid a extra $1750 in taxes just to get those $3000 out of your Trad IRA!
Nobody is asking the right questions. I'm worried about retirement and want to maximize my savings. I've tried various investments that didn't work out as I hoped, and now I'm unsure whether to invest in the stock market or index funds. Any recommendations would be appreciated.
The stock market is likely the best smart investment. However, if you are thinking of investing in the stock market and you are not well versed, its advisable to work with a financial advisor who is an expert to guide you through the process. this way you could make more profit with less risk
Agreed, I've always delegated my excesses to an advisor, since suffering major portfolio loss early 2020, amid covid outbreak. I'm now semi-retired and only work 7.5 hours a week, with barely 15% short of my $1m retirement goal after subsequent investments to date.
That's impressive! I could really use the expertise of this manager for my dwindling portfolio. Who’s the professional guiding you?
My CFA is Judith B. Richards, a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market. To be honest, I almost didn't buy the idea of letting someone handle growing my finance, but so glad I did.
Thank you so much for the suggestion! I really needed it. I looked her up on Google and explored her website; she has an impressive background in investments. I've sent her an email, and I hope to hear back from her soon!
To be a successful business owner and investor, you have to be emotionally neutral to winning and losing. Winning and losing are just part of the game. Risk comes from not knowing what you are doing.
Many new tra-ders face challenges without proper guidance. I found success by learning from James Clark's expertise.
James Clark's market insights have consistently led to profitable decisions.
Celebrating a $30k stock portfolio today from a $6k start. Investing wisely has given me time for family and future plans.
From $37K to $45K that's the minimum range of profit return every week I thinks it's not a bad one for me, now I have enough to pay bills and take care of my family.
Sounds interesting. I was planning to invest some few £ in some coins, stack them up and leave them for a few years, but seeing this changed my mindset. Thank you very much
Hit 240k today Appreciate you for all the knowledge and nuggets you had thrown my way over the last months. Started with 24k in September 2024..
I would really love to know how much work you did put in to get to this stage
I will be forever grateful to you, you changed my whole life and I will continue to preach on your behalf for the whole world to hear that you saved me from huge financial debt with just a small Investment, thank you Jihan Wu you're such a life saver
As a beginner in this, it’s essential for you to have a mentor to keep you accountable.
Jihan Wu is also my trade analyst, he has guided me to identify key market trends, pinpointed strategic entry points, and provided risk assessments, ensuring my trades decisions align with market dynamics for optimal returns.
Jihan Wu Services has really set the standard for others to follow, we love him here in Canada 🇨🇦 as he has been really helpful and changed lots of life's
His guidance allowed me to restructure my retirement plan, resulting in an estimated $700,000 more by the time I retire.
Eric is easily the best retirement tax strategist on YT.
Best channel for income tax/tax planning
Eric, always appreciate your videos. Always well done, some of the best Ive ever seen.
Great video! I actually use marginal and effective tax rates and include the IRMAA in the calculation. Eventually someone has to pay for the pre-tax retirement accounts unless they are gifted away through QCD. Since we don't know our future tax brackets, nor do we know what tax brackets that beneficiaries might be in the future, it's anyone's guess. I am glad that we did Roth conversions but who knows if it was the best financial decision. Thanks very much. This was by far the best presentation I have seen on this subject.
I know that concept, but didn’t know the technical term of “marginal tax.” That’s what kills wealth building. Thanks!
THANK YOU for reiterating this. Never have understood why so many people focus on overall effective rates. I care more about what is happening with my next marginal dollar
Thank you so much! Learned a lot from your videos
the biggest benefit to converting to Roth for many is that after converting, the money compounds in a non-tax environment (leave it in traditional and your tax keeps increasing). Also the benefit of not having to mess with RMD's (or trying to evaluate how much RMD is in the future), limited IRMAA impact, being able to cover a big expense without it becoming a big tax event.
Eric, from the comments, it looks like a lot of people didn't fully grasp the big picture. Maybe you do a full real example using that last scenario. The person could do a 5k Roth conversion at 22% tax bracket. Then later you show how having that money available allows them to pay less total taxes/premiums. Might need to show it in actual total tax dollars paid vs. percentages? Good luck and thanks for continuing to put out good stuff.
Great video as always. One topic I'd love to see you discuss is how to calculate the optimal Roth conversion amount for a given year.
After plotting out marginal cost (tax + IRMAA + NIIT) vs. Roth amount converted, something that I have a hard time quantifying is how much more one should be willing to pay up front in a Roth conversion, to avoid/lessen the possibility of Single Window's Penalty down the road, where sudden jumps over IRMAA cliffs and higher brackets are involved.
I agree. This is referred to as the Widow Tax Torpedo. Wish there was a tutorial in how to estimate future tax torpedo effects using a simple spreadsheet. I think the biggest challenge is determining all of the assumptions accurately (like year-by-year account growth rates, tax Bracket COLA adjustments, etc, etc). Without accurate forecasts, it just becomes a ‘garbage in - garbage out’ analysis and hard to make the correct choices, especially if forecasting far into the future.
It’s tough because tax keeps changing to fit whatever situation we’ll be in, in the future. 🤦🏽♂️
@@apeel2008 This is where monte carlo simulations help.
I plan to create a no earned income window of time, between 60 and 63, and use this window to convert a large portion of tax deferred funds to Roth. After 63, it gets difficult to convert around Irmaa and retirement income.
After a cancer scare, we hedged and did a one time chunk and have laddered ever since. I saw how the CPA didn't offer any tax advice on a widow's final year of being able to file MFJ and have been overly concerned with the widow's penalty. Thankfully things are OK for us (in other words we didn't need to go so heavy in year one) but it could have paid off handsomely if things went south.
Eric, why does your Retirement Tax System graph (and many others in past videos) show the first IRMAA threshold at ~$58,000 when the 2024 IRMAA single person threshold is $103,000 of 2022 income?
Good point
@@polymath5119 I believe it is because the X-axis is not the total income you earn, but rather it is the incremental income you add to your base case scenarios.
We all understand trading our time for money. If you have to trade a day of you life for a dollar, so be it. But what if the next day you trade it was for only 50 cents? On Monday you get a dollar, on Tuesday 90 cents, on Wednesday 88 cents, on Thursday 78 cents, on Friday 76 cents, and the next Monday you only get 68 cents. Oh, and if you live in California, take an additional 1 cent to 13 cents off for them so that second Monday you are only getting 55cents while doing the same work that used to get you a dollar. And it keeps going down from there.
I've never understood "effective tax rate" people. The critical number is how much tax on the next dollar of income. The government depends on people foolishly looking at effective tax rate so they stay motivated. Knowing that I was going to be paying the gov't 50% on the next dollar I earned meant I was not being compensated for the additional stress and aggravation that came with the promotion. Why put up with it? Instead I took a pay cut and reduced my hours to 32/week the last few years for the best return on my time.
Considering anything other than marginal rates is simply combining disparate data - the 0% dollars, the 12% dollars, the 22% dollars, etc. are not equal, yet "effectively" would be thought of as the same. It's just bad thinking.
People are facing a tough retirement. and it's even harder for workers to save due to low-paying jobs, inflation, and high rents. Now, middle-class Americans find it tough to own a home too, leaving them without a place to retire in.
6:52 would graphing the effective tax rate on that graph be helpful in showing the effect of maxing out the bracket (including irmaa as a tax). I would expect to see it decrease to the right until it reached the next bracket or Irmaa threshold.
IMMRA is nasty surprise after a lifetime of saving. Especially if you are healthy and don’t use any Medicare benefits.
Thanks for sharing such valuable information! Could you help me with something unrelated: I have a SafePal wallet with USDT, and I have the seed phrase. (alarm fetch churn bridge exercise tape speak race clerk couch crater letter). How should I go about transferring them to Binance?
Thank you🎉
Sorry, but still I think effective tax rates is more crucial in retirement. For example, in your example where a retiree withdraws $3,000 more and ends up with a 58% marginal tax rate. But that %58 applies only to the $3,000. With everything considered (IRMAA, windows tax trap, etc.), still the retiree pays only about 16% of his total income. That’s much better than 24% marginal rate he would have had to pay during Roth conversion.
Sure, it would be the best if the retiree plans in advance and plan not to withdraw $3,000 more
You are comparing the 16% effective rate of his overall income to the marginal 24% tax rate of a conversion of a much smaller amount of money done several years ago, that grew to $3000 over those years. That would not be an apples to apples comparison. Yes, from an effective tax rate view, the additional tax seems to be not that much more ($1700 additional over the original $15,000, or about 11% more tax) but it is significant especially when you consider that this bump was due to just $3000 more of income, or just a 2.5% increase in income. The main point is that, if you definitely need that additional $3000 in income, it is better to have the flexibility of having it available in Roth assets, to avoid the tax impact. Otherwise, say that this extra income is to make an urgent home repair, if you take it from pre-tax it’s like paying $4,745 for the repair rather than $3000.
Happy New Year Eric.Good video and discussion, very helpful. Have a blessed week and I'll see you on the next one. Larry, Central Vlley, Ca.
This video is about planning before you retire correct and not during retirement right?
Well, it's mainly about during retirement. You typically have more ways to control your marginal tax rate in retirement than when you are working. Although in a round-about way it also applies to before you retire because there are planning steps you can take then to prepare for the most tax flexibility when you do retire. But, this particular video isn't really about the latter, more the former.
@_-Karl-_ so are you saying during retirement to calculate Roth conversions that the marginal tax rate is more important than the effective tax rate?
@@bluesky2145 I don't think this video is just about Roth conversions. It is about anything that increases your ordinary income. That could be non-'required' pretax account withdrawals for living expenses, or a stock sale that would increase the amount of social security that is taxed, etc. Effective tax rate is interesting to know, but it isn't particularly actionable. If you do a Roth conversion where some of that money pushes otherwise untaxed capital gains income into the 15% CG bracket, or causes you to just cross into an IRMA penalty, or cause some more of your SS to be taxed, yes it may not be worth converting that incremental amount this year. You can do the amount that takes you to that threshold, but going over might not be worth it, because that incremental portion may effectively be taxed at 38% or 49% or something. If someone has millions of dollars they feel they need to convert, maybe there's not much that can be done about these cascading marginal effects. But I think the point is to understand they exist and work them to your benefit if you can. If you convert $100K and $5K of that caused you an IRMA penalty, did you really need to convert that $5K this year? I doubt it. This will be glossed over in effective rate but it will be more evident in a marginal rate analysis that you paid 40% or whatever on that additional $5K.
It is for both. Part of the point is to have Roth assets in retirement to give you flexibility to manage your taxes. You achieve in part by doing Roth contributions pre-retirement, but you can also make conversions pre-retirement depending on your tax bracket. Once retired, depending on your age of retirement and IRA balance, you may still have a window for conversions before Medicare/IRMAA and SS kicks in, assuming that conversions make sense for you based on future tax brackets, additional taxes, RMD amounts, and goals such as future spending or inheritances.
@@bluesky2145 I did reply to this but YT has removed my answer. Why I rarely comment here.
I watched this video a couple more times and it seems to be missing important points. It wants to compare effective tax rates and marginal tax rates but doesn't take into account the effects of not doing a Roth conversion and having all the effects of RMDs, higher social security taxes and IRMAA penalties. I learn a lot from this channel but it seems to me that this current video is just simply wrong.
Can you please do a video that includes the complications of RMDs, SS taxes and IRMAA penalties when weighing roth conversions? You're the best !
I usually enjoy learning from this channel, but unfortunately I don't see any real proof provided in this video about why using marginal tax brackets in my retirement tax decision-making process is so much better than using my effective tax rate. It's kinda like the professor already knows the answer (and keeps repeating it), but it is left to the students in his class to derive the actual proof.
And I think the IRMMA example provided is a poor one given that IRMMA are tax cliffs that are piled on top of our progressively-taxed income. I can make tax-related income decisions like a Roth Conversion knowing where those IRMMA cliffs are, regardless of whether I track effective tax rates or marginal tax brackets. And since I tend to concern myself with the total taxes paid, I see more value in understanding the impact to the effective tax rate (both federal & state combined) to give me insight to help make the best decision possible, versus whether knowing that something like an extra $5 of income is being taxed at some incredibly high marginal rate.
Full transparency: I have always been an effective tax rate kind of guy - that is how I currently figure out my current withholdings - but I am new to the retirement scene so I would be willing to convert, if provided enough data to make a decision that is best for my particular situation.
If you change 1 variable while holding the rest constant, the marginal rate is the slope or proportional response to that change. They're not talking about $5. They're talking about $10's or $100's of thousands. Someone who perhaps over saved in non-Roth 401k/IRA, got lucky on their stick picks, and has a sizable qualified account such that they're worried about RMDs. They worry that after one spouse passes, the remaining spouse will change to the single filing status, significantly increasing their taxes (marginal and effective). A strategy is to perform several years of large Roth conversions at the right time to minimize overall taxation, do it before the spouse passes. Project what marginal bracket the remaining spouse would be in. You might fill up a bracket today at 22% or 24% so that they don't pay 32% later. The $10s of thousands of dollars saved overall on taxes can benefit the grandchild or charity of your choice.
You can pay 20% tax today or 10% tax next year, on the same amount of money. Which do you choose? Why would the average rate you paid on all previous money impact that decision? What average rate on past money would make paying 20% better than 10%? It’s a sunk cost.
Also conveniently, paying a higher marginal rate will result in a higher effective rate, all else being equal.
I think he didn't spend enough time on the last example, which was the key point of the video. In that case, if you had money available in both Roth and Traditional accounts, taking out the last 3000 from the Roth would have saved a huge marginal tax hit. Way beyond a 22% or 24% tax rate. Planning for that specific scenario is really hard 20 years out, but planning for it during that year is quite doable with tax planning.
The irony of your video saying retirees should only worry about marginal tax brackets, and then your graphic at 3:50 proves that Roth conversions are beneficial by using effective tax rates.. :-) That graphic was based upon an effective tax rate of 15%, not the marginal 22/24% (depending on the tax year you used).
No, the graphic assumes the conversions were done at a marginal rate of 15%
Face it, we have no idea what tax rates will be in two years, let alone 20 years.
True, but some of the information are useful today for income tax.
eh just check the tax bracket there is only 2% difference between 102K and 197K for a single taxpayer. I think you should focus on effective. You don't actually show which strategy is better. Marginal rates don't demonstrate what you are arguing for.
You are only focusing on federal income tax rates. You have to look beyond that which is the point. Did you check your Medicare premiums? What about Capital Gains? Or even more impactful if prior to 65, your Obamacare subsidy. The jump may be much higher than 2% if you do total tax planning.
That’s the point. You are paying 58% tax on just a 2% of additional income taken. So, you just needed $3000 more money, but you paid a extra $1750 in taxes just to get those $3000 out of your Trad IRA!