WCI #359: Tax Deferred vs. Roth Contributions: A Deep Dive
Mar 21, 2024
auto_awesome
In this podcast, they delve into the complexities of Roth IRAs, Backdoor Roth, Mega backdoor Roth, and Roth conversions. They discuss the importance of determining pre or post tax contributions considering tax rates. The conversation progresses from a basic to advanced level, exploring tips and tricks for making financial decisions. Guest expert Chris Daven shares insights on personal finance, while highlighting the benefits of retirement accounts and maximizing after-tax income in retirement.
Consider converting pre-tax money to Roth for flexibility in tax payments.
Roth accounts eliminate required minimum distributions, beneficial for high RMD individuals.
Forecast future tax rates by analyzing income sources and using financial formulas for projections.
Deep dives
Factors Influencing Roth vs. Tax-Deferred Contributions
Contributing to Roth or tax-deferred accounts depends on various factors. Pre-tax money can be converted to Roth, providing flexibility for opportune times to pay taxes. Roth accounts have no required minimum distributions (RMDs), offering a benefit for those with anticipated high RMDs. Estate planning, early retirement plans, maximum contribution effects, and super-saver scenarios influence the choice between Roth and pre-tax contributions.
The Income-Related Monthly Adjustment Amount (IRMA) imposes additional Medicare premiums based on income levels. IRMA triggers progressive premiums tied to modified adjusted gross income, impacting retirees aged 65 and older. Predicting future marginal tax rates involves factoring in the 5% average tax cost of IRMA as taxable income rises. Tactical planning can address short-term impacts, while long-range predictions integrate marginal tax rates and anticipated post-retirement sources of income.
Predicting Future Marginal Tax Rate Methodology
Forecasting future marginal tax rates involves creating a mock tax return to estimate post-retirement income and taxable portions. An analysis of income sources like real estate earnings, pension income, pre-tax withdrawals, and Social Security benefits aids in determining future tax obligations. Calculations using financial functions like the future value (FV) formula help project pre-tax account balances and withdrawal rates. Anticipating social security taxation and its implications on taxable income assists in establishing future marginal tax rates.
Estimating Future Tax Rate and Roth Contributions
Estimating your future tax rate involves considering factors like investment returns, deductions, and tax brackets. By breaking down complex tax problems into manageable pieces, you can calculate a reasonable estimate of your future tax rate. The decision between pre-tax and Roth contributions can be guided by a rule of thumb, where contributions are based on peak earnings years and tax brackets.
Common Misconceptions and Optimizing Contribution Strategies
There are misconceptions regarding comparing current and future tax rates, deferring taxes, and optimal asset ratios for retirement accounts. Understanding the marginal tax rate curve and considering split contributions can optimize tax advantages. While mistakes in retirement account decisions may not have a significant impact, taking a systematic approach and prioritizing savings goals can lead to informed choices.
Today Chris Davin, engineer and self taught master of all things Roth, joins Dr. Dahle on the podcast. For anyone who has ever wanted to get all the way into the Roth weeds, this episode is for you. We talk about Roth IRAs, the Backdoor Roth, the Mega backdoor Roth, Roth conversions, and what all of those things mean. We discuss how to determine if you should be doing pre or post tax contributions and why, and how your taxes and tax rate should be considered when deciding what kind of contribution to make. We start with a 101 level discussion before moving to a 201 level discussion and then diving into the graduate level tips and tricks.
If you’re looking to Boost Returns, Lower Taxes & Build Wealth, join the WCI monthly Real Estate Opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities. Expect educational emails that introduce you to syndicators, fund companies, online courses, and online real estate platforms. Go to https://www.whitecoatinvestor.com/reopportunities to sign up today. You can do this and The White Coat Investor can help.
The White Coat Investor has been helping doctors with their money since 2011. Our free financial planning resource covers a variety of topics from doctor mortgage loans and refinancing medical school loans to physician disability insurance and malpractice insurance. Learn about loan refinancing or consolidation, explore new investment strategies, and discover loan programs specifically aimed at helping doctors. If you're a high-income professional and ready to get a "fair shake" on Wall Street, The White Coat Investor is for you!
