Author Topic: Retirement Planning Case Study: Roth or Traditional IRA?  (Read 1386 times)

art642

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Retirement Planning Case Study: Roth or Traditional IRA?
« on: January 05, 2018, 10:20:01 AM »
Greetings, all, I'm looking for some advice. My wife and I are in our mid-30's and are saving for "retirement" sometime in the next 12 or so years. My target age is somewhere around 48–50. I'm wondering where we should be investing our money now so that we can live off of it if we want once we are financially independent. (Granted, we may continue to work if we still are in fulfilling jobs!)

Here's where we're currently at:

My wife's 403b: ≈$43,000
Vanguard Traditional IRAs: ≈$63,000
Vanguard Roth IRA: ≈$33,000
Vanguard Brokerage (taxable) account: ≈$7,000

Between us we will be contributing about $17,000 a year to our 403b's (like a 401k for non-profits) and $11,000 to our IRAs.

My main question is this: Should I be putting our annual IRA money ($11,000) into Roth or Traditional IRA's? I'm worried that once we hit 48 or 50 we won't be able to access the money in a traditional IRA or 403b without taking a penalty. I'm wondering if I might put $5,500 in a Roth and $5,500 in a Trad. IRA each year. That way, once we "retire," we could pull from the Roth tax- and penalty-free while doing a traditional to Roth IRA conversion.

What do you all think? What are your strategies? We have about 12 years left working and I feel like I need a good strategy from here on out to make sure we can draw on our money when we're ready.

Thanks, all!

Addition: Sorry: Just read the "how to write a case study" post. Here's a little bit more info if it helps in responding:

Life Situation: Married, 2 young kids
Gross Salary (combined): ≈$90,000
No rental income, etc. at this point
Current expenses are high because of childcare, but will go down over the next few years, so we might invest even more
Assets: We own a house with a mortgage (≈$129,000 owed; 3.125% interest rate)
Liabilities: Just the mortgage (≈$1,100/mo. payment)
« Last Edit: January 05, 2018, 10:26:28 AM by art642 »

Rocketman

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #1 on: January 06, 2018, 06:37:06 PM »
The overall goal is to reduce your LIFETIME taxes, so if you feel your current marginal tax rate is higher then defer the tax bill (regular IRA). If current year is lower - do Roth - if same - your decision.

I do like having some of both.

I don’t have all of the info, so I am guessing...
For your employer 401’s use Regular
Set-up a Rothira

Use the “investment order” thread

MDM

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #2 on: January 06, 2018, 07:36:01 PM »
The overall goal is to reduce your LIFETIME taxes, so if you feel your current marginal tax rate is higher then defer the tax bill (regular IRA). If current year is lower - do Roth - if same - your decision.
...
Use the “investment order” thread
+1.  Investment Order is the link.

@art642, at first glance 100% traditional seems likely to be best for you, given what numbers are in the OP.  Calculate your current marginal rate, then use the procedure in that link (or however you wish) to estimate your marginal rate when it comes time to withdraw. 

What do you get?

art642

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #3 on: January 08, 2018, 08:19:54 AM »
Thanks for the thoughts, so far, y'all. It looks like we're in the lowest tax bracket this year with the newly passed tax bill.

I think my lingering question is, if I'm converting from Traditional to Roth IRA with the Roth Conversion ladder, won't that add a significant amount of income the last five years of us working? So, assuming we continue to make about $90k/year:

Ages:
45 - make $90k, but also convert $30k+ from Trad. to Roth, which is taxed... this raises our income to $120,000.
46 - same thing
47 - same thing
48 - same thing
49 - same thing
50 - We can "retire" and withdraw money tax-free from the Roth at that point, I believe.

It seems to me like it would be nice to save 5 years worth of living expenses in a ROTH and begin our retirement at age 50 with that. That way we can then begin the Roth Conversion ladder at age 50 and have the following:

Age 50 - withdraw living expenses from Roth tax free; convert $30k or so from Trad. to Roth, pay taxes on it
51 - same thing
52 - same thing
53 - same thing
54 - same thing
55 - begin living off of the converted money in the Roth (while continuing the ladder process until 59.5)

I'm sorry this is making my brain feel foggy. Maybe it's not such a big deal. But I'd love your thoughts. Thanks for any wisdom you can share!

MDM

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #4 on: January 08, 2018, 08:36:09 AM »
Thanks for the thoughts, so far, y'all. It looks like we're in the lowest tax bracket this year with the newly passed tax bill.
With a gross income of $90K, and a standard deduction of $24K, it is unlikely that you have the additional $56K of pre-tax deductions needed to reach the 10% bracket.  Could you clarify?

Quote
I think my lingering question is, if I'm converting from Traditional to Roth IRA with the Roth Conversion ladder, won't that add a significant amount of income the last five years of us working?
...
It seems to me like it would be nice to save 5 years worth of living expenses in a ROTH and begin our retirement at age 50 with that.
Yes, it will.  The general idea is indeed to have enough, preferably in taxable, to get through the first five years after retirement without (significant) withdrawals from tax-advantaged accounts.  See How to withdraw funds from your IRA and 401k without penalty before age 59.5.

art642

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #5 on: January 08, 2018, 10:14:44 AM »
Thanks for the thoughts, so far, y'all. It looks like we're in the lowest tax bracket this year with the newly passed tax bill.
With a gross income of $90K, and a standard deduction of $24K, it is unlikely that you have the additional $56K of pre-tax deductions needed to reach the 10% bracket.  Could you clarify?

Quote
I think my lingering question is, if I'm converting from Traditional to Roth IRA with the Roth Conversion ladder, won't that add a significant amount of income the last five years of us working?
...
It seems to me like it would be nice to save 5 years worth of living expenses in a ROTH and begin our retirement at age 50 with that.
Yes, it will.  The general idea is indeed to have enough, preferably in taxable, to get through the first five years after retirement without (significant) withdrawals from tax-advantaged accounts.  See How to withdraw funds from your IRA and 401k without penalty before age 59.5.

Sorry, I think I was looking at the wrong thing for 2018 tax brackets. Looking at them again now. We are married, filing jointly, so I am almost certain we will be in the 12% bracket, if I'm looking at that right.

And: Your second response is very helpful. Thanks! I don't know if we'll get to the point where we have that much additional savings to invest in taxable brokerage accounts. My hunch is that we'll probably get to 48 or 50 yrs. old and have enough to be FI if we want to, but might keep on working on our own terms since we are both in professions that we find rewarding.

SomedayStache

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #6 on: January 14, 2018, 08:06:31 AM »
Following because our situation is very similar and I haven't made the time to sit down with the new tax rules and see what we should change.

My initial thoughts (and again haven't actually read the new tax laws) for my family is that I may switch some contributions to Roth.  We are currently getting 3 child tax credits and last year paid zero federal taxes on ~90k gross. 

MDM

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #7 on: January 14, 2018, 09:57:35 AM »
Following because our situation is very similar and I haven't made the time to sit down with the new tax rules and see what we should change.

My initial thoughts (and again haven't actually read the new tax laws) for my family is that I may switch some contributions to Roth.  We are currently getting 3 child tax credits and last year paid zero federal taxes on ~90k gross.
Depends on the marginal rate at which you would reduce tax owed or increase refund due you.  One might guess that on a single income (meaning only 1 401k-type contribution allowed), Roth will be better.  With 2 incomes totalling $90K, traditional might have a place.  Difference is whether the earned income tax credit is reachable.  But check the numbers for yourself.


SomedayStache

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Re: Retirement Planning Case Study: Roth or Traditional IRA?
« Reply #8 on: January 14, 2018, 11:11:34 AM »
Still single income.  Last year I added up 401k, HSA, and health insurance premiums and we weren't in the EIC range.