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Roth IRAs and your retirement income

Earlier this month, I posted Are you ready for a Roth conversion? It looked at the elimination of the income limit on converting a traditional IRA to a Roth account. Some of the comments that item generated were from my fellow personal finance blogger and Twitter pal JoeTaxpayer. I invited him to elaborate, and he graciously agreed to write this guest post.

JoeTaxpayer has updated this post.
You'll find it at How your future retirement tax bracket affects today's Roth IRA decisions.


Today, I'd like to offer a look at what it would take to be in a higher tax bracket at retirement.

Since no one can say what the tax rates will be in two years let alone 10 or 20, let's look at the numbers for a couple retiring in 2010.

Note there is a withdrawal rate of 4 percent that is commonly used as a safe number to avoid spending down your funds too quickly. Further, I assume no itemized deductions, just the standard deduction, to keep this analysis as simple as possible.

In 2010 dollars (and tax brackets) a couple would have a standard deduction of $11,400 plus exemptions totaling $7,300. The first $18,700/year is tax-free. A 4 percent withdrawal means one needs $467,500 in pretax savings to generate that $18,700.

 The next $16,750 is currently taxed at 10 percent. Another $418,750 to generate that; $886,000 to just fill the 10 percent  bracket.

 The next $51,250 is taxed at 15 percent. You need an additional $1,281,250 to be able to withdraw this much.

Let's summarize this, and take a moment to think about these numbers. $86,700 is the total income you can have in 2010 and have that last taxable dollar taxed at 15 percent. If you are taking all of that from pretax accounts, you need $2,167,500 to maintain that withdrawal rate.

I find that a chart is the better way to present so many numbers to clarify this discussion and bring the point home.

Amount you
can withdraw
at each rate
Gross Dollars needed to generate this withdrawal Cumulative dollars needed
to 'top off' this     tax bracket
Filing Joint
Zero Bracket $18,700 $467,500 $467,500
10% $16,750 $418,750 $886,250
15% $51,250 $1,281,250 $2,167,500
25% $69,300 $1,732,500 $3,900,000
Zero Bracket $9,350 $233,750 $233,750
10% $8,375 $209,375 $443,125
15% $25,625 $640,625 $1,083,750
25% $48,400 $1,210,000 $2,293,750

All of the numbers presented in the text are now shown above. I've added the 25 percent  marginal rate as well as the numbers for a single filer. I use the term "zero bracket" to describe the effect of the standard deduction along with the exemption amount, it should not be treated as an official tax term.

Well-informed readers will note that I've ignored the fact that Some Social Security benefits may be taxable. As this occurs at $25,000 for single and $32,000 joint, it lends itself to a completely different dialog, beyond the scope of this article. Suffice it to say that as one gets closer to retiring, this issue does need to be addressed.

This discussion is focused on just how much income (and therefore wealth) it takes to even retire at the top of the 15 percent tax bracket. It would be a shame to convert money and perhaps pay a marginal rate of 25 percent only to find yourself retiring at a lower rate, as most of us will.

On the other hand, if when you do your taxes for 2009, you realize you are currently in the 15 percent  marginal bracket, it can certainly make sense to convert enough each year to "fill the bracket," so your last dollar taxed is at 15 percent, but any higher amounts would have been at 25 percent.

Likewise, the same strategy can be used in any year your income drops for whatever reason, a period of unemployment, a spouse taking time off to raise a child, etc.

Remember, the Roth conversion is not an "all or none" decision. For most converts, it's an annual partial conversion that will maximize their wealth and minimize their tax burden.

JoeTaxpayer is the founder of the eponymous, Financial commentary for the average Joe, where he has been blogging on various financial topics for over three years. You also can follow him on Twitter at @JoeTaxpayerBlog.


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One of the reasons why most employed citizens retire early is because they expect to receive social security benefits long after they have retired.


Current tax rates favor the Roth. A couple is taxed at between zero and 15% up to $86,700 total income, and that's without itemizing. That's about twice the annual income of the average household in the US.

That point needs to be emphasized because it indicates that taxes are at extremely low rates, especially given the state of national finances. There's no way to know for certain what tax rates will be in the future, but it's an odds on bet they'll be quite a bit higher than they are now.

The last thing we need to do is defer income that would be taxed today at no more than 15% in exchange for higher, maybe much higher rates in the future. At least with the Roth, the contributions themselves can be withdrawn free from taxes and were contributed from income taxed at no more than 15%. With a traditional retirement plan, the whole plan balance will be subject to higher future rates.


Joe, I love the information you put forth! It make take me a bit to crank the cogs in order to understand this all. And then when I do understand it I want to freak out because I realize I am under par in my retirement account. In my mid 30s, I understand I am to have roughly $130K saved up. But I am only at $18K. The good thing, I realize where and almost what I need to do to fix the issue - and it equate to a lot of hard work to get up to par.

My husband and I had a great discussion with this post.


Yes. In fact, one of the times conversion can make sense is when you have little to no income, or when you are retired and use it to 'top off' your current bracket as described in the article.


Can you convert funds from an IRA or 401(k) to a Roth IRA if you are retired and do not have any "earned income" during the tax year?

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