patrick.net

Yes, you've hit on one of the big reasons the calculation isn't so simple.

Here's another one: You can structure how you receive the income from a traditional IRA so that you take less taxes. For example, you can limit what you take in a given year to lower your taxes for that year.

Some of my friends have hedged and put 50% in Traditional and 50% in Roth.

Somehow the rest of my post got clipped...but you hit on some of my other questions, too.

1. Is there wisdom in hedging and putting 1/2 in one and 1/2 in the other. Hedging against future tax uncertainty, for one...and also noting that some of the flexibility advantages (not being forced to take a distribution) have diminishing value. (It's great to not have to have a forced distribution for 1/2 of your money, but less valuable for the other half...most are going to want to take some distributions anyway)
2. Is there a motivation to invest your traditional IRA more conservatively than your Roth IRA (while still achieving your desired level of diversification)...since the traditional IRA will be taxed, and your Roth won't.
3. Can you "game" the system by taking 1/2 of your income from a traditional and 1/2 from a Roth..minimizing the tax penalty of a traditional, and maximizing the tax advantage of the Roth (since you will be taxed on 1/2 of your total distribution, which would fall in the lower tax brackets...all of your Roth distribution will have the advantage of avoiding the higher tax bracket rate)

etc., etc.

So, in deciding what types of investment vehicle to use, I have to consider all of this...And right now it seems like some mix is best.

One perceived advantage of the Roth is that you can contribute more value in a given calendar year since they have the same $ limits but different tax rules. I'm not sure how that all works out if you invested the difference in a non-sheltered account (and really had the discipline to leave it alone)...

For me I think I have more $$ to put in than I have room to work with, so I'm leaning towards contributing to all of my accounts (401k, IRA (x2), SEP 401K (spouse)) as Roth (to get the maximum value in the tax advantaged acct), but only if it makes sense...

SFace says

In a 401K, if I contribute 10K, I get 10K in working capital. In a roth IRA, i get to start off at 6K instead of 10K because 4K went to uncle sam and auntie sally.

Well, be careful there.

Let's say your marginal tax rate in both cases is 20%, just for simplicity.

If I put in $5K in my Traditional IRA. I get a present deduction and pay 20% less tax today. Then let's say my IRA gains 150% before I retire, and then I pay 20% tax. That means I will have $12,500 and then will pay 20%, netting $10K.

Let's say I instead put $4K in my Roth, which is based on $5K present income. Then my IRA gains 150%, so I have $10K.

I'm in the same net position. The difference is that I can actually put $5K in my Roth, so it's like having a Traditional IRA of $6250.

However, note that the Traditional IRA still lets you pay the 10% and 15% brackets on withdrawals, and you can structure the withdrawals too.

With very few exceptions people are way better off with Roth IRAs. Most financial consultants won't have the balls to say this, but it's true. Roth IRAs are almost always superior to traditional IRAs and when they are not, the difference is insignificant.

The few situations where the traditional IRA is better are ones that go like this. You are a few years from retirement; your income over the last few years of your career is going to drop; and you plan to hold the IRA for a short time. And in those situations the benefits of the traditional IRA are relatively small.

What makes the Roth IRA superior is that, although you contribute with after-tax dollars, the investment grows tax free.

While the traditional IRA saves you taxes on the money you put in, the Roth IRA saves you taxes on the entire growth of they money over decades. This is a lot more savings. A hell of a lot.

In fact, the Roth IRA is such a good vehicle for retirement savings, I'm in favor of completely getting rid of the traditional IRA and the 401K plan and all other such plans in exchange for letting everyone contribute up to $100k in year 2000 dollars per year in Roth IRAs regardless of their income. Such a super Roth IRA would render all other retirement investments obsolete. [For the 401K employer matching contributions, which are voluntary and rare, those would become matching Roth IRA contributions.]

I would also strongly recommend converting any traditional IRA you have into a Roth IRA unless you're only a few years away from retirement. I rolled over my traditional IRA into my Roth IRA years ago.

Traditional IRA vs. Roth IRA - Which is Better has a good summary of the differences between the two types of IRAs.

As a side note, for investing in IRAs, I'd recommend Vanguard. This mutual fund company is geared towards long-term investors and features the lowest costs in the industry. It was founded by John Boggles, the inventor of the index fund and a strong proponent of low-cost, indexed investing. Even if you like short-term investing and timing the markets, for retirement accounts, you really have to be a long-term investor to succeed.

corntrollio says

The difference is that I can actually put $5K in my Roth, so it's like having a Traditional IRA of $6250.

That's the "problem" I'm having. Partly because I have been very frugal lately, partly because I didn't contribute to my IRA last year (I had some risks to hedge against. They didn't come to pass, but it seemed prudent) which left me with excess $....So I have the funds to add to my accounts, the desire to do so (and make up for missing last year), so I am bumping into my contribution limits...so that extra value that I can put into the Roth matters...I just don't want to pay too much of a premium to access it.

Maybe I will try to do the analysis of traditional + non-sheltered compared to all Roth (both options funded with the same amount of pre-tax $).

In the end I guess it's just complicated, and there in most cases there is no "right" decision (too many unknowables, like future tax rates, etc)...that's why hedging feels right to me. I just want to make sure I'm not make a bad decision...

Dan8267 says

What makes the Roth IRA superior is that, although you contribute with after-tax dollars, the investment grows tax free.

While the traditional IRA saves you taxes on the money you put in, the Roth IRA saves you taxes on the entire growth of they money over decades. This is a lot more savings.

That is not how I understand it. My understanding is that both the traditional and Roth grow tax free. The traditional is taxed when you take a distribution, whereas the Roth is not. (And, of course, the traditional is not taxed when you make a contribution, but the Roth is). The growth in both cases is not taxed.

Wikipedia: http://en.wikipedia.org/wiki/Traditional_IRA

"With both types of IRA, transactions inside the account (including capital gains, dividends, and interest) incur no tax liability."

Yeah, I should clarify. When you take money out of a Roth IRA after reaching the required age, it's all tax free. But with the traditional IRA, you pay taxes on what you take out. The traditional IRA is "taxed deferred" and the Roth IRA is tax-free after the contributions.

I hope that's clearer.

swebb says

Wikipedia: http://en.wikipedia.org/wiki/Traditional_IRA

Also, seriously? Don't take financial advice from Wikipedia. When will people learn?

What's next? Medical advice from Wikipedia? I've read that eating Twinkies cures cancers and that high fructose corn syrup is actually good for you since it's made from corn, a vegetable.

Dan8267 says

Also, seriously? Don't take financial advice from Wikipedia. When will people learn?

What's next? Medical advice from Wikipedia?

Or real estate and investment advice from anonymous posters on forums? :)

I kid, I kid!

swebb says

"Again, if the taxpayer were in the same tax bracket before and after retirement, there would be no benefit or advantage to either IRA."

Note that your social security benefits become taxable once your income plus one half social security benefits exceeds $32,000 for married couples and $25,000 for other tax payers with up to 85% of your benefit taxable that total reaches $44,000 for married couples and $34,000 for other filers.

Traditional IRA (401k, etc.) distributions count as income under the formula; so sustaining a middle class lifestyle with such savings can effectively incur a 46.25% marginal rate among people in the 25% bracket.

Obviously the government is free to change the rules at any time and some diversification might be prudent as a hedge against that.

Dan8267 says

Also, seriously? Don't take financial advice from Wikipedia. When will people learn?

The Wikipedia reference was just a convenient place to point to. And, it happens to be right as far as I can tell. From re-reading your original post, and your "clarification" response, my conclusions is that you didn't really understand what you were talking about. Your defensive posture supports this, as well.

Dan8267 says

What makes the Roth IRA superior is that, although you contribute with after-tax dollars, the investment grows tax free.

While the traditional IRA saves you taxes on the money you put in, the Roth IRA saves you taxes on the entire growth of they money over decades. This is a lot more savings. A hell of a lot.

Sorry, that's not fully accurate. Please read the post directly above yours which explains that pre-tax is the same as post-tax if the tax rates are the same. http://patrick.net/?p=1103806#comment-772165

Think about it mathematically, if there is a 20% tax rate, you'd multiply by 0.8 to get the post-tax amount. If there is 150% growth, you would multiply by 2.5 to get the amount after investment growth. It doesn't matter if you multiply by 0.8 first or 2.5 first, you get the same answer either way.

Roth has other benefits, e.g. you can withdraw principal at any time without penalty (since you already paid tax on it). You can pull out money under certain other circumstances if you meet the exception. And as I mentioned above, you may be able to put more money into it.

However, post-tax and pre-tax don't matter if the rate is the same. If the rate will be different at present vs. at retirement, then pre-tax vs. post-tax does matter.

drew_eckhardt says

Traditional IRA (401k, etc.) distributions count as income under the formula; so sustaining a middle class lifestyle with such savings can effectively incur a 46.25% marginal rate among people in the 25% bracket.

Will you please show your math here? I'm inclined to go with SFAce's explanation on this. How did you get from 25% to 46.25%? Wouldn't the effective rate change depending on how much your Social Security to IRA income ratio is? First of all, the taxation here is phased in, if I remember correctly, and there's a bracket where up to 50% is taxable and a bracket where up to 85% is taxable. If you have other investment income, it could easily push you into one of these brackets already.

Here's a reference and it has a link to a calculator for the taxes (if applicable):

http://moneyover55.about.com/od/preretirementplanning/a/taxessocialsecurity1.htm

Controllio is right. In my case for example, the higher amount that I can put in a 401K type investment (403b actually), because it is before tax, at least offsets it being taxable when I withdraw. And arguably, with lower tax rates later, because my income is lower, not because tax rates will be lower,the Roth is actually a worse option for me.

But I would agree, that if you are comparing putting amount X in a Roth versus the same amount X in a 401K, or traditional IRA, then yes the Roth is better.

But then that comparison doesn't make sense, unless you are bumping up against your max, because the amount you have to earn, say to put 5000 in a Roth IRA is significantly more than you have to earn if you get to sock the 5000 away before taxes.

Controllio said the same thing in a different way above. In his example, the same amount of earnings is invested, but that is 20% less into the Roth, since it is after tax.

Note: even if you are at your max, you will have to earn significantly more, to put 5000 in a Roth than you will have to earn to put the same amount in a traditional IRA or 401K. Any legitimate comparison must take this in to account.

Dan8267 says

Also, seriously? Don't take financial advice from Wikipedia. When will people learn?

At least they quote their sources which is hyperlinked to government publications. Good source as a first start.

I think there's some element of STYLE and taste about Roth versus not.

I like the idea of the Roth, even during a year where I wasn't working much, I still funded my Roth. I like a lot being able to do stock trades in my E*Trade Roth IRA account and not worrying for a second about tax implications of the trade. It's liberating. Thusly my Roth has had results about double that of my individual trading account. In my individual I'm much more likely to look at the calendar and hold off thinking maybe I should hold X just a little longer for the lower capital gains tax, and I sometimes miss taking good money off the table.

Vicente says

I like a lot being able to do stock trades in my E*Trade Roth IRA account and not worrying for a second about tax implications of the trade

But if comparing a Roth IRA to a traditional IRA, wouldn't both accounts have the same privilege here? (I understand that money outside of either type of account would incur taxes)

marcus says

Note: even if you are at your max, you will have to earn significantly more, to put 5000 in a Roth than you will have to earn to put the same amount in a traditional IRA or 401K. Any legitimate comparison must take this in to account.

Well, again, assuming the tax rate is the same, if you are not putting more than $5K minus effective tax rate in your Roth, then you will be in the same position with Traditional IRA or Roth IRA. See my example above -- if you pay 20% effective taxes, it's the same to put $5K in a traditional and $4K in a Roth, and your end result will be the same if you also pay 20% on retirement.

By the way, the other thing to note is that you can be income-exempt from Roth eligibility and can be exempt from Traditional IRA eligibility.

The way around this if you are a higher earner is to use a non-deductible IRA and then convert it to Roth (you have already paid taxes on the non-deductible contribution, so it could be low impact). This started in 2010, and Congress could close the loophole at any time.

marcus said: Note: even if you are at your max, you will have to earn significantly more, to put 5000 in a Roth than you will have to earn to put the same amount in a traditional IRA or 401K. Any legitimate comparison must take this into account.
And really, that's the rub. Because most Americans don't think "Oh, I must also invest the tax savings from my tax deferred account". A maxed out Roth is probably the best solution for them. It's the same reason for buying a home and using it as a inflation hedged savings account. It works, because you have to do it.

swebb says

But if comparing a Roth IRA to a traditional IRA, wouldn't both accounts have the same privilege here?

Arrgh, yes you are right they do. I never noticed that.

corntrollio says

Sorry, that's not fully accurate. Please read the post directly above yours which explains that pre-tax is the same as post-tax if the tax rates are the same. http://patrick.net/?p=1103806#comment-772165

Your analysis in that post assumes that a person would contribute less in a Roth IRA because of the tax. This is not typically the case. People should, and most who use IRAs probably do, contribute the max to their IRA for that year. In your scenario, a person contributing the max to his Roth IRA would still come out ahead.

Furthermore, the difference is even greater if you take a realistic lifetime of growth, which would likely be much more than 150% in nominal terms.

Vicente says

I like the idea of the Roth, even during a year where I wasn't working much, I still funded my Roth.

You could contribute to a traditional IRA and later convert or roll over into a Roth IRA, but there are tax consequences of doing so. Personally, I don't think it's worth my time trying to get a few dollars less in taxes. After all, time is money, and IRAs are quite limited in how much you can contribute per year.

thomas.wong1986 says

At least they quote their sources which is hyperlinked to government publications. Good source as a first start.

In an article on something mundane as IRAs, you're probably safe using the references. However, I would warn against using Wikipedia as a starting point for references in general. If the article is misleading, then the set of references will be skewed to point you in the direction the authors want, which may be deliberately misleading.

I'd rather get my references directly from Google. Although not perfect by a long shot, at least Google is much harder to hijack for political or economic purposes.

Dan8267 says

Your analysis in that post assumes that a person would contribute less in a Roth IRA because of the tax. This is not typically the case.

Yes, I stated that's the assumption, and then I stated that if you actually contribute up to the Roth limit (assuming you aren't exempted out), you'll end up ahead based on that. Did you read the following sentence:

corntrollio says

I'm in the same net position. The difference is that I can actually put $5K in my Roth, so it's like having a Traditional IRA of $6250.

Dan8267 says

Furthermore, the difference is even greater if you take a realistic lifetime of growth, which would likely be much more than 150% in nominal terms.

It doesn't matter what the number is. Multiplying 0.8 * 18 million * X is the same as 18 million * 0.8 * X. But yes, if the first X is bigger than the second, sure.

Dan8267 says

I'd rather get my references directly from Google. Although not perfect by a long shot, at least Google is much harder to hijack for political or economic purposes.

The problem is that Google's formula tends to get hijacked by Wikipedia. It also gets easily hijacked by extremely low quality parked sites or sites which only mirror other sites' content (although I thought recent algorithm changes were supposed to eliminate that...).

The other thing I've noticed (which might be related) is that Google is very good for relatively common questions, but is less good on more complex questions or finding something very specific, and on those searches you start getting lots of irrelevant results. I feel like I used to be able to dig up better stuff back in the day than I can now on Google when doing these sorts of inquiries.

Something where you could search within the same sentence or same paragraph or within some number of words (as you could with something like Lexis -- e.g. http://www.lexisnexis.com/help/global/US/en_US/connect_frameset.asp ) and where you could refine your search within existing search results (I'm not sure if doing this manually yields the same results, at least Google's results counters seem inconsistent if this does work) would be useful for power users. Currently you get a lot of scattershot irrelevant stuff on Google under the current formulas.

EBGuy says

A maxed out Roth is probably the best solution for them. It's the same reason for buying a home and using it as a inflation hedged savings account. It works, because you have to do it.

For me with a 403b (basically the same as a 401 K) the max is 16K + plus the 5500 (catch up provision) for being over 50. That's 21,500. Since I don't save that much, even before tax, this makes more sense for me than a Roth.

In other words, I am saving more this way pretax, which obviously is 25% more than I would be putting in a Roth type account, with the same (saved) earnings. Still using Controllio's 20% bracket asssumption. And 100 is 25% more than 80 (25% of 80).

corntrollio says

Well, again, assuming the tax rate is the same, if you are not putting more than $5K minus effective tax rate in your Roth, then you will be in the same position with Traditional IRA or Roth IRA

Yes, I understand. Didn't I say in my post you were right ?

If I can save more this way, I will. I am under the assumption that my taxes will be lower. I know my income will be. I expect tax rates to be higher then, but not much on incomes like the one I will have.

Besides, I wouldn't be surprised if they even have special lower rates for seniors 10 + years from now, for seniors who don't have enough savings, and because the senior boomers will be such a big voting block. There is a problem with boomers not having enough put away. Some special tax consideration, especially on incomes under say 50K would be an easy bone to throw them.

Roth is better because you do not KNOW what will happen to tax rates when you are retired. They have to throw out the Roth completely to make it taxable, and there may be a big fight over this. Raising tax rates is much easier and this will affect the traditional IRA.
I have not converted my old IRA completely however, but all new money goes into a Roth IRA.
You can skip the whole issue and buy a "tax efficient" fund from Vanguard but that seems just boring somehow :) Then, you will be taxed at capital gains rates when you spend it down.

For the higher effective tax concern.

http://www.news-journalonline.com/opinion/editorials/2010/05/14/taxing-social-security-amounts-to-double-taxation.html

Here is a calculator: http://www.calcxml.com/do/inc08

The threshold is low and hasn't been adjusted for inflation so many people can't avoid this anyway, but bottom line is at certain income range, you will be paying tax for every dollar distributed from IRA and that same dollar will increase taxable social security benefit by one dollar, up to 85% of benefit. So IRA can increase ss benefit tax while ROTH wouldn't - you can verify with calculator.

clambo says

Roth is better because you do not KNOW what will happen to tax rates when you are retired. They have to throw out the Roth completely to make it taxable, and there may be a big fight over this. Raising tax rates is much easier and this will affect the traditional IRA.

I think you have this exactly reversed. Roth IRAs are the ones that are the relatively new creation that Congress could blow away at any time. Similar case for Roth 401(k)s.

I disagree. There is not that much money out there invested in Roth IRAs. So, they would have a giant political fight to throw out the Roth entirely but without the huge revenue they would like to achieve from taxing it. On the other hand, *some* Americans will always be working, and taxable capital gains will also be flowing, so I believe the politicians would go after taxing income and cap. gains first.
I could be wrong. I have a regular IRA, Roth, Sep IRA, an old variable annuity, index funds and some non index funds. It's a bit of a mess but it beats the alternative.

clambo says

There is not that much money out there invested in Roth IRAs. So, they would have a giant political fight to throw out the Roth entirely but without the huge revenue they would like to achieve from taxing it. On the other hand, *some* Americans will always be working, and taxable capital gains will also be flowing, so I believe the politicians would go after taxing income and cap. gains first.

If there's not that much money in it, why would there be a big political fight? If anything that suggests there'd be a bigger political fight for non-Roth.

In addition, they could get money from changing the treatment of Roth -- by going after cap gains tax on it.

Roth is a great way to suck you into the markets permanently since they'll ding you for taking the money out in some cases. Kind of a backward investing mentality when you think of it, but Wall Street has you, you know it, and they know it. Even with a deferred comp plan you take money out and get both penalties and taxes. Then, they attach an age bracket to the investments as well, stating you can't take the money until so and so age, without penalties, gotta laugh..

If the stock market went up every day like it did today, we would all be millionaires within a month.

everything says

Roth is a great way to suck you into the markets permanently since they'll ding you for taking the money out in some cases.

Not true. You could invest in a CD if you don't want to invest in the stock market, as you suggested in another thread.

You can take out principal untaxed from a Roth IRA because you already paid tax on it.

everything says

Even with a deferred comp plan you take money out and get both penalties and taxes. Then, they attach an age bracket to the investments as well, stating you can't take the money until so and so age, without penalties, gotta laugh.

Sure, and you knew that going in. If you didn't want tax deferral, why did you put it in there in the first place? If you instead pocketed the money, you would pay tax on it, and then you would pay capital gains tax on any investments you made with it upon sale, instead of having the advantage of deferral.

everything says

Roth is a great way to suck you into the markets permanently. . .

Secondly, what does this have to do with the OP question? Also, the same can be said for both Roth and Traditional IRA.

everything says

Even with a deferred comp plan you take money out and get both penalties and taxes. Then, they attach an age bracket to the investments [ROTH IRA?]as well, stating you can't take the money until so and so age, without penalties, gotta laugh..

Got a point here. I don't know the penalty rate, but it seem Traditional IRA early withdrawal the penalty may be applied to the principal and the earnings, while for ROTH the penalty should be applied only to the earnings. So if you think there is a chance you will need to pull out some money before retirement, ROTH should be better.

JimP says

Got a point here. I don't know the penalty rate, but it seem Traditional IRA early withdrawal the penalty may be applied to the principal and the earnings, while for ROTH the penalty should be applied only to the earnings. So if you think there is a chance you will need to pull out some money before retirement, ROTH should be better.

10% penalty for non-qualified reasons

It's a fair rule. without the penalty, there is nothing to stop income shifting and play around with tax brackets and rates.

Let's say I'm self employed and made 200K in one year so I contribute 45K in SEP IRA, saving about 20K in federal and state tax, then the next year, I decided to take the year off not make any $$ and withdraw 20K from the IRA instead, that IRA is not taxable anymore due to income. So I saved 20K in tax year 1 but pay nothing in year 2 even though in the end I contributed nothing to the IRA.

I'm betting if you're making 200K in a year running a business you've got better ways of hiding money. Even if you take 20K out and you have a 10% penalty, it is probably far less than the 35% tax bracket you were in the year before.

Now if you're making 20K/year and you all of a sudden have a vacation coming up and you're short.... Well this is a great place to get some money, especially if it's just like an ATM machine and since you're years away from retiring, you'll get it back in there... Oh wait, there is a penalty...

That scenario I have seen played out. The penalty being about the only thing stopping them. The penalty makes it more of a one way door for many people, which is what it should be.

I believe you're overthinking it swebb.

The only tax bracket that matters is your marginal tax bracket. To use your example, at the 25% tax rate with the 4K pretax contribution amount:

Roth: 3K goes in and 3K comes out (of principal, obviously)

Traditionial: 4K goes in and 3K comes out.

If tax brackets are the same then distributions are the same. Your investment decisisons should not be affected by your IRA type.

Don't forget to anticipate how tax rates will change between now and when you retire. Current tax rates are very low from a historical standpoint.

pkennedy says

I'm betting if you're making 200K in a year running a business you've got better ways of hiding money. Even if you take 20K out and you have a 10% penalty, it is probably far less than the 35% tax bracket you were in the year before.

Not in the 35% bracket unless you are in the AMT phaseout (28% + 25% phaseout = 35%). In fact, if you are married, $200K in profits running a business means you're not even in the 33% bracket (even beyond the fact that AGI is what determines bracket).

One of the reasons I don't think there will ever be a flat tax is because if there is, everyone holding a ROTH will be screwed.

swebb says

That's the "problem" I'm having. Partly because I have been very frugal lately, partly because I didn't contribute to my IRA last year (I had some risks to hedge against. They didn't come to pass, but it seemed prudent) which left me with excess $....

That was probably not a good move. Look at it this way, in your situation your maximum risk was 10% (the penalty for early withdrawal, assuming you took 100% of the money out for that year).

If your risk scenario came to be, more likely you take the hit for the exact amount you need and you still leave the rest in, so likely the hit would have been less than 10%. Mabye 5% or whatever. But now the remainder can go on to earn for you tax-deferred.

Jon137 says

One of the reasons I don't think there will ever be a flat tax is because if there is, everyone holding a ROTH will be screwed.

You mean if the flat tax is in the form of a consumption tax or VAT-style tax?

The flat tax could also be in the form of an income tax, in which case no harm no foul.

corntrollio says

You mean if the flat tax is in the form of a consumption tax or VAT-style tax?

The flat tax could also be in the form of an income tax, in which case no harm no foul.

I don't think there will ever be a flat income tax. We already have a flat tax (capital gains) and it provides a very good case study of why such taxes simply don't work. One size fits all taxes heavily favor the rich.

Seattle Investor says

I believe you're overthinking it swebb.

The only tax bracket that matters is your marginal tax bracket. To use your example, at the 25% tax rate with the 4K pretax contribution amount:

Roth: 3K goes in and 3K comes out (of principal, obviously)

Traditionial: 4K goes in and 3K comes out.

If tax brackets are the same then distributions are the same. Your investment decisisons should not be affected by your IRA type.

I still think it is more complicated than this. Assume all of my contributions into the Roth are at the 25% tax rate. So for the contribution side the "penalty" for using a Roth is 25% (that I could have deferred if I used a traditional IRA). When it comes time to take my distributions, also assume that my marginal tax rate is 25%. By the way taxes are assessed, I only pay 25% tax on the portion of my income that falls in the 25% tax bracket. Assuming todays tax brackets for "married, filing jointly", that would mean that my first $17,000 would be taxed at 10%, the portion between $17,000 and $69,000 would be taxed at 15%, and the portion above $69,000 would be taxed at 25%. In this way the taxes I pay at the time of distribution is significantly lower than the 25% marginal tax bracket.

As an example, if I made $100,000 I would pay:
0.1 * 17,000 + 0.15 * 52,000 + 0.25 * 31,000 = 17,250 (17.25%)

As someone else pointed out, Social Security income is taxable in some situations, and would have to be figured in to the above.

I think the simplification that most people make is to assume that if you are in the 25% tax bracket then *all* of your income is taxed at that rate, when in reality it is only the marginal income that gets taxed at that rate. That's my understanding, anyway -- and if correct it is an important consideration in making the Roth vs traditional decision. (I'm using both for various reasons)

s