Retirement Tax Rates

[getrichslow]

Seems like sprinkled throughout threads I see people talking about considering your tax rates now and when you retire. It seems like most are assuming future rates similar to rates today. I thought it would be interesting to see what people are using in their planning.

What do you anticipate Fed brackets will be in 5, 10, 20 and 30 years? How are you factoring that into your planning?

[sweeps]

For what it's worth I don't think tax rates will be that much different than they are today.

I think a much bigger factor is what your withdrawal rate will be at retirement. Someone withdrawing $50,000/year obviously has a much different situation than someone who can withdraw $200,000/year. The latter would benefit greatly by having some tax-free (Roth) withdrawals.

[disneysteve]

I think it is unknowable but I'd be willing to bet that rates will go up. We are enjoying record low rates currently and they aren't sustainable. That's why Roths and other tax-free accounts are such a good idea.

[Aleta]

Yes, it is unknowable at this time but I don't think that the retired (especially those who aren't well-off) would like paying a very high rate. Seems like the politicians tread very softly when they talk about taxes on the elderly because the retired can still vote. Plus, the lawmakers will be there one day themselves and I'll grant you that they won't want to pay high taxes.

[Like2Plan]

You never know what wacky tax law congress will come up with next. I am still smarting from the changes to the Kiddie Tax law that congress has made over the past couple of years. (The latest one raising the kiddie tax up to age 24)

My prediction for future tax planning: whatever it is it will not benefit those who have planned for their retirement.....

(The other prediction is whatever they come up with, we won't like it. )

[LivingAlmostLarge]

For all we know they could decide Roth IRAs are too rich to not start taxing and in 30 years start taxing the withdrawals.

[Snave]

You are right about the Roth's and "for all we know they could tax these," but I think the reason they have gone to these and even added them to 401K plans is that they want the tax money now as oppossed to years from now.

[jIM_Ohio]

I am in 25% bracket now, and close to reaching 28% bracket within next few years.

What those percentages are when I retire in 20-40 years is not a planning concern.

The planning concern is to get as much money in Roth accounts now as possible. In addition the planning concern is also to have some tax defferred monies, and some taxable monies too. That way I can tak e advantage of low tax rates where possible.

Knowing things like the following helps with planning:

Capital gains taxes will NOT change your tax bracket. So this allows 401k withdraws to be taxes at lowest rates.

Capital gains tax rates change more often than tax bracket rates (gov't changes the caps more often than they change the % taxed).

Having 5-7 years of cash in taxable accounts allows for mid term tax planning with fluctuating rates.

[sweeps]

For all we know they could decide Roth IRAs are too rich to not start taxing and in 30 years start taxing the withdrawals.

Very possible. At a minimum, the government could say "We won't tax your Roth withdrawals per se, but we will add it to your taxable income, so the rest of your earnings will be taxed at a higher rate."

Flipping this around another way. It is possible that sometime in the next 30 years, Congress could decide to not tax (or at least not tax at the top rate) withdrawals from your 401k. This could happen as part of a stimulus package, a bailout or a sweetheart deal for seniors. This could turn out to be a huge win for 401k savers.

[Aleta]

I had an advisor say that when the government gives you taxes off on your income, you had better take it before they change their mind. They are giving you free money in today's dollars.

[jIM_Ohio]

It is always a good idea to delay taxes as long as possible.

It is always a good idea to pay taxes when tax rates are lowest.

A smart person will see those two statements contradict each other in some cases. In those cases, do a little of both.

[LivingAlmostLarge]

You don't know what the future holds. So why bother? If given a choice, I max out both a Roth IRA and 401k. I'll continute until not eligible. But otherwise it doesn't matter. We can only make the best decision with the given information. And for now we know that Roth IRAs are not taxed and 401k are taxed. But both are great for retirement.

[tripods68]

A good measuring stick for determining future outlook of federal tax rate to rise, remain, or even fall at existing level is whoever gets into the White House.

I personally think that when Social Security becomes exhausted you will hear big sucking sound on the other end, heading straight to bankruptcy. It's like a ticking "time bomb" just waiting. This is inevitable unless we fix it now or else. Don't mean to preach

[Broken Arrow]

I am of a similar opinion.

I don't know what will happen, so I work with what I do know right now.

Right now, I know my employer's 401k match program is very generous. Far out-stripping anything else I can invest in, I do what I can to max that out.

Right now, I am also in a low income tax bracket. I realize that laws may (or may not) change some day, but for now, a Roth IRA remains the most flexible and tax-efficient secondary investment option for me. So that's what I am contributing in after my 401k is maxed out.

If and when things change, then I'll change my strategy accordingly.