Thanks for the reply,
your recent articles "Is your 401k too big", I interpreted the chart from to mean if my account is $1.25million at age 70, my RMD would be taxed at 22%. (Using half the value because I am a single filer, not MFJ)
https://www.gocurrycracker.com/is-your-401k-too-big-part-2/In the part one of the series, you mentioned I could account for additional income (pension) by comparing it to the standard deduction and reducing the IRA by that much.
The math is deliciously simple in this regard, and we can just reference the Standard Deduction. Earn income equal to 1/4 of the Standard Deduction? ($500 per month.) Reduce the target IRA sizes by 1/4.
So a $10,000/year pension for a single deduction ($12,000, half of the MFJ). It is near 100%... if I were to reduce my account by that much, it would be nearly half in value. Going back above, so I would have to keep value below $625,000 in order to stay below the 22% tax bracket. I got $625,000 by using half of $1.25M (for single person).
I mentioned I would have $500,000 in IRA somewhere between age 50-60. In my mind, it is very likely that this value would grow to be at least $625,000 by age 70 which would put me into the 22% tax bracket. This is before I even account for taking social security at age 70. I would still have my other half in taxable account kicking out income too.
My views/thoughts was if I would be in the 22% tax bracket after age 70, does it matter if I did roth today at the 25% tax bracket. This was where I got the 5-10% tax savings that you said I did incorrectly. I forgot taxes were marginal.
Using your numbers from the post above
During the years when you pull $18k out pre-pension pre-SS you pay $600. During the years with pension pre-RMD you pay ~$2k.
If I FIRE at age 50, I would pay $600 for 10 years to age 60, then $2000 for 10 years until age 70. Then after age 70, I would be back at 22% marginal tax rate and be paying $4000/year until I die.
When I mentioned I would have fewer working years than retired years, I was thinking along the lines that if I went with a roth tsp. I would pay a total tax of $80,000 ($4,000/year for 20 years worked). If I went with a traditional account, I could save that $80,000 now, but from age 50 to age 70, I would pay $26,000. If after RMD, and paying $4000/year (22% marginal tax), it would take 13.5 years to pay off the remaining $54,000 of the total tax I saved. So my "break even" point would be age 83.5. So am I betting against the taxman that if I die before 83.5, a traditional TSP would be better? And if I live longer than 83.5, than a roth would be better?
I understand that by using the traditional TSP, I can "save" $4000 to invest, and I lose that opportunity cost by going with the roth TSP. But your article "Is your 401k too big" seems to suggest that I could "afford" the lost opportunity cost of those $4000 because my TSP would already be too big. Your part 3 (not out yet), but I would imagine you would say something like, what to do with the excess money? So why not let me put money into a roth TSP now and avoid this problem from the start?
Or to confuse me even more, I can put money into the TSP pre and post tax money, so 50%/50%, or any combination. The TSP matching of 5% is pre-tax (traditional tsp), and if I said it took 10 years for the portfolio to double in value (it's a good guess from other financial posts on interest rate returns I've seen). So after 20 years of matching, I would have around $200,000 in pre-tax money, in addition to however I put my money pre/post tax or combination.
I think you said not to let the tax tail shake my portfolio dog. I think I got lost in all the number crunching, because I was under the assumption that the pension/social security/rmd would be the car that runs over my dog, tax tail and all. So my thought process was to do a roth account now so the dog would be on the side of the road when the car comes by.
How much of the tax issues have I misunderstood? I want to get this sorted out in my head before I continue too far down the road. I got the "savings" rate part down from MMM. I can save 50% of my income, but I've been ignoring all the future tax planning issues thinking I can do that once I have enough money to worry about it. But then I changed my mind and decided it is better to start now with the tax planning.
if it matters, I have been maxing out a HSA and roth IRA, and putting money into a taxable account as well. It is mostly the TSP that is causing me problems. the roth IRA is post tax by nature, the HSA is pretax and taxable is post tax too, I didn't have to think about those. the investments are pretty much all the same, mirroring a total stock index