If you expect to
be a in a higher tax bracket when you retire, having a Traditional IRA could mean a bigger tax bill.
If you think you'll
be in a higher tax bracket when you retire, especially if you're a younger worker and have yet to reach your peak earning years, then a Roth IRA is better than a traditional IRA from a tax standpoint.
But low postdoc salaries mean you will (hopefully)
be in a higher tax bracket when you retire than you are now.
If you're in a higher tax bracket when you put the money in than when you take it out, then it's better to use an RRSP.
If you expect to
be in a higher tax bracket when you redeem the bonds, it might benefit you to report the interest annually.
The lesson here is that if you're in a higher tax bracket when you withdraw your savings than when you contributed, RRSPs are the wrong vehicle.
I do not expect that I will
be in a higher tax bracket when I retire, but I want to hedge my bet!
Paying taxes now, as you do with a Roth IRA, protects you if you expect to
be in a higher tax bracket when you retire.
If you expect to
be a in a higher tax bracket when you retire, having a Traditional IRA could mean a bigger tax bill.
That could be valuable if you think you'll
be in a higher tax bracket when you retire.
Assuming your career goes well (which it will because you're a Top Performer), you'll
be in a higher tax bracket when you retire, meaning that you'd have to pay more taxes with a 401k.
If you expect to
be in a higher tax bracket when you're older, a Roth IRA makes sense.
Well, there's a lot of dorky debate in the personal - finance world, but the basic reasons are taxes and tax policy: Assuming your career goes well, you'll
be in a higher tax bracket when you retire, meaning that you'd have to pay more taxes with a 401 (k).
If you are ineligible to take the deduction for a traditional IRA contribution, or if you expect to
be in a higher tax bracket when you retire, then a Roth IRA is a good choice to consider.
You may
be in a higher tax bracket when you retire.
We are going to
be in a higher tax bracket when I retire because of both of our pensions (and SS, rental income)-- so it makes sense to get our money out now and use it to live and pay off rental properties for even more cash flow.
We make about $ 80k HHI, and we hope to
be in a higher tax bracket when we retire.
This works well for people who expect to
be in a higher tax bracket when they retire, because they'll have already paid taxes on that money when they contributed, not when they withdraw.
Not exact matches
Typically, if you
're young and
in a lower earnings
bracket than you expect to
be later
in life, a Roth may make sense — you'll forgo
tax deductions now, but later,
when you
're in a
higher bracket, you won't pay
taxes on distributions.
If you
're already
in the lowest
tax bracket you may not even want to contribute to an RRSP, he says, since a large retirement portfolio could push you into a
higher tax bracket when you retire and withdraw those funds.
An upwardly mobile person making $ 100K today at a young age (
in the 25 %
bracket) will most likely
be a
higher tax bracket when they retire assuming they max out their retirement savings vehicles.
If you believe your
tax rate
is lower now than it will
be when you start taking withdrawals, a conversion may look promising because you'll pay conversion
taxes while you
're in a lower
tax bracket and enjoy
tax - free Roth IRA withdrawals later (
when the
higher tax bracket won't matter).
«Deferring that income could
be advantageous because you
are most likely
in a
higher tax bracket while working than
when you retire,» said Labant.
However, it
's important to note that you will pay income
taxes on 401k withdrawals
when you reach retirement age, at which point you could
be in a
higher tax bracket.
When Reagan came to power, the top
tax rate
in the US
was 70 percent and the
high inflation of the 1970s ensured that many Americans quickly moved up the
tax brackets.
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If you believe you will
be in a
higher income, and thus
higher tax,
bracket when you retire, then a Roth IRA
is probably the better choice since any distributions then will not
be taxed.
This
is how the marriage penalty might get you:
when you combine incomes on a joint return, some of that income can push you into a
higher tax bracket than you would
be in if filing as single.
Tax brackets for married people
are not double those of singles, so
higher brackets kick
in sooner
when filing jointly.
«Capital gains can
be as
high as 20 % if you
're in the
highest tax bracket, and your overall liability can
be higher when you consider additional
taxes for
high earners,» says Klein.
She could put it into a TFSA, then reinvest that money back into her RRSP for a bigger refund
when she returns to work and
is in a
higher tax bracket.
You don't pay income
tax on the money
when you contribute it (during your working life
when your salary
is high and you
are in a
high percentage
tax «
bracket», i.e. Federal
tax is 25 - 33 % and state
tax is 0 - 12 %).
If you withdraw it
when you
are still working, you
are still
in a
high tax bracket due to your
higher earnings, and then, the big lump sum tends to push you into an even
higher tax bracket of 28 - 35 % / 0 - 12 % rate.
It
's obviously a lot more compelling to take a loss like this
when you
're in a
higher tax bracket, as the
tax savings become significantly
higher.
Even if you
're in a
high tax bracket, it
's important not to just focus on
taxes when you
're selecting funds.
There
are several more factors to consider that I didn't get into (like whether your sale would
be classified as a short - term or long - term capital loss, any wash - sale implications, any options premiums you collected, any dividend income you collected, your total capital losses / gains for the year, your eligibility and the amount you can contribute to a
tax - deferred account like a 401 (k), if you expect to
be in a lower or
higher tax bracket when it comes time to take distributions from your
tax - deferred account, etc.).
The other thing to do
is begin to even out the amount
in your RRSPs if there
's a big disparity — that way
when you begin withdrawing from your RRSPs at a standard 4 % withdrawal rate
in retirement, the
higher earner won't end up with an outsized RRSP and get bumped up into a
higher tax bracket, costing the couple lots of money
in taxes.
If you believe your
tax rate
is lower now than it will
be when you start taking withdrawals, a conversion may look promising because you'll pay conversion
taxes while you
're in a lower
tax bracket and enjoy
tax - free Roth IRA withdrawals later (
when the
higher tax bracket won't matter).
Rate shifting
is most important for people who
are in the 22 %
bracket or
higher while they
are working, but will
be in the 12 %
tax bracket when they retire.
When you're in a higher tax bracket, you pay more tax, but you also save more when you make a deduct
When you
're in a
higher tax bracket, you pay more
tax, but you also save more
when you make a deduct
when you make a deduction.
On the other hand, if you
're in line for a promotion and expect to
be in a
higher tax bracket next year, it would make more sense to realize the entire gain now, which would allow you to report it
in a year
when you'll pay less
tax.
Can you believe that contrary to what conventional wisdom tells us, many retirees
are in a
higher tax bracket compared to
when they
were working?
For some taxpayers, the immediate
tax deduction
is more important during
higher income earning years and less relevant during retirement
when they
are in a lower
tax bracket.
«Part of the premise of an RRSP,» Allen says, «
is that you should contribute to it
when you
're in a
higher tax bracket and pull funds out
when you
're in a lower
tax bracket.
So another idea
is to forgo the immediate deduction and claim it years later
when the money
is withdrawn to offset the
tax at that time, then you don't have to worry about
being in the
higher tax bracket (except for the income earned
in the meantime).
• Take advantage of the Roth variations of your 401 (k) and IRA, especially
in your early working years
when you may not
be in a
high tax bracket.
Here
's something else to consider:
when you retire, your withdrawals from your RRSP or RRIF could potentially place you
in a
higher tax bracket, resulting
in clawbacks of your government income - tested benefits and credits, such as the Guaranteed Income Supplement and Old - Age Security.
High tax bracket investors don't like it
when their profits
are bled off
in taxes.
The theory
is that you contribute to your RRSP
when you
are working and
in your
high tax earning years, and you take the money out
when you
are retired and
in a lower
tax bracket.
This way, the contribution can
be invested
tax sheltered but a bigger rebate can
be collected
in a year
when you
're in a
higher tax bracket.