Author Topic: For the nth time: Roth or Tradition IRA  (Read 4813 times)

charis

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For the nth time: Roth or Tradition IRA
« on: October 08, 2014, 10:23:27 AM »
My husband and I have contributed $3400 to the two Roth IRAs that we opened this year.  But the more I think/read about, I am not sure if a traditional IRA isn't the way to go.  I am a newbie at this and I don't know all the nuances of IRAs.

Married, obviously, with two children.  We are currently within the 15% tax bracket.  Even with an anticipated salary increase and addition of my husband's salary within the next year, if we max our 401Ks, we should be able to stay in 15% bracket for a while.

Should we stick with the Roth for the time being?  Until we hit the 25% tax bracket, then switch to traditional?  I don't know how to predict how we will be taxed in retirement.  I have a hard time wrapping me head around this.

To complicate matters, I will be receiving a lump sum vacation payout (just under $7k probably) in a few weeks when I switch jobs. I was planning to just stick it in the Roth IRAs.  This would sit better with me if I could deduct the contributions.  Am I missing anything? 

« Last Edit: October 08, 2014, 11:37:55 AM by jezebel »

seattlecyclone

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Re: For the nth time: Roth or Tradition IRA
« Reply #1 on: October 08, 2014, 10:27:25 AM »
I think you should definitely do enough traditional 401(k)/IRA contributions to keep yourself below the 25% tax bracket. If you're in the 0% or even the 10% bracket, the Roth IRA makes a lot of sense. The 15% bracket is sort of borderline. You might do better with traditional contributions if you plan to be in the 0-10% bracket in retirement, but Roth contributions won't kill you.

Will the lump sum payout push you up into the 25% bracket for the year? You may want to do some traditional contributions in that case.

charis

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Re: For the nth time: Roth or Tradition IRA
« Reply #2 on: October 08, 2014, 10:38:05 AM »
Thanks for your response.  According to my calculations (basically a guess using my current weekly net), we should make in under the 25% bracket even with the payout.

Cheddar Stacker

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Re: For the nth time: Roth or Tradition IRA
« Reply #3 on: October 08, 2014, 10:45:06 AM »
If you're unsure where your AGI will be, maybe consider preparing your tax return before making the contribution. You have until 4/15 every year to make your contributions for the preceding year.

I agree with seattlecyclone though, either way is fine in the 15% bracket. It sounds like you live on a low amount of expenses based on the numbers, which would lead me to believe you can pull off less than 15% tax rate once you FIRE. If that's the case, I'd lean more toward traditional IRA to lock in the tax savings.

charis

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Re: For the nth time: Roth or Tradition IRA
« Reply #4 on: October 08, 2014, 11:37:12 AM »
Good point, I should hold off until I get a better picture of our 2014 AGI after the job switch and the pay out. 

rayt168

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Re: For the nth time: Roth or Tradition IRA
« Reply #5 on: October 09, 2014, 07:02:56 AM »
Another thing that you may wish to consider is the contribution savings credit.  I just learned of this a couple of months ago and don't know whether or not if it applies to Roth or traditional.  However, the summary only mentions traditional.   

http://www.irs.gov/uac/Get-Credit-for-Your-Retirement-Savings-Contributions

Gone Fishing

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Re: For the nth time: Roth or Tradition IRA
« Reply #6 on: October 09, 2014, 08:29:29 AM »
I am assuming the answer is yes if you are on this forum, but are you planning on retiring early?  If so, you may be able to almost completely avoid income taxes on your savings.

Read this: http://www.madfientist.com/traditional-ira-vs-roth-ira/

Then read this for an example of the strategy perfectly executed: http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

Cheddar Stacker

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Re: For the nth time: Roth or Tradition IRA
« Reply #7 on: October 09, 2014, 09:16:28 AM »
If you're unsure where your AGI will be, maybe consider preparing your tax return before making the contribution. You have until 4/15 every year to make your contributions for the preceding year.

The bad thing about this is they will lose the gains for the whole year.  Normally it is best to invest the money as soon as possible.  Instead of waiting for the year to go by, I front load the IRA I think I will use.  In my case, I max out my Roth IRA as soon as I can, then if it turns out I am better off with a traditional IRA, I recharacterize the contributions by 4/15 of the next year.  I've recharacterized twice so far.  It was very easy to do -- took maybe 15-20 minutes on the phone with Vanguard.  The last time I recharacterized I shifted $1,000 from Roth to traditional (remaining $4,500 stayed Roth) and it saved me about $600 in taxes, mainly due to the retirement savings credit.

jezebel, make sure you factor in state income taxes as well.  I don't know what your long term plans are, but if you are in a state with income taxes and plan to retire to a state with no income taxes, a traditional IRA will save you that much more.

+1, particularly the last bit.

All good points knaak. I tried to keep it basic since jezebel stated "newbie" status on IRAs, but you've certainly got it all figured out. Nice work.

geek101

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Re: For the nth time: Roth or Tradition IRA
« Reply #8 on: October 09, 2014, 11:08:43 AM »
Another thing that you may wish to consider is the contribution savings credit.  I just learned of this a couple of months ago and don't know whether or not if it applies to Roth or traditional.  However, the summary only mentions traditional.   

http://www.irs.gov/uac/Get-Credit-for-Your-Retirement-Savings-Contributions

The Savings credit applies to Roth or tIRA contributions as seen on the actual form

http://www.irs.gov/pub/irs-pdf/f8880.pdf

Definitely apply for it if your income is low enough, for $2000 worth of contributions it's a free $200!

charis

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Re: For the nth time: Roth or Tradition IRA
« Reply #9 on: October 10, 2014, 07:38:48 AM »
The bad thing about this is they will lose the gains for the whole year.  Normally it is best to invest the money as soon as possible.  Instead of waiting for the year to go by, I front load the IRA I think I will use.  In my case, I max out my Roth IRA as soon as I can, then if it turns out I am better off with a traditional IRA, I recharacterize the contributions by 4/15 of the next year.  I've recharacterized twice so far.  It was very easy to do -- took maybe 15-20 minutes on the phone with Vanguard.  The last time I recharacterized I shifted $1,000 from Roth to traditional (remaining $4,500 stayed Roth) and it saved me about $600 in taxes, mainly due to the retirement savings credit.

I had no idea that I could do this.  Great idea! 

Based on last year's numbers, we probably won't be eligible for the savings credit, but I will keep it in mind.  At this point, I am doing what I can to keep us in the 15% tax bracket.

kpd905

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Re: For the nth time: Roth or Tradition IRA
« Reply #10 on: October 10, 2014, 10:29:21 AM »

Then read this for an example of the strategy perfectly executed: http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

This article really makes me want to start a taxable account for those capital gains and dividends.  I just don't know when it would be optimal tax-wise to start one.  I'll be getting married next year, and when my student loans are paid off, would like to max out two 401ks and two IRAs, maybe an HSA too.  I'm not sure I'd had any left over after that for a taxable account.

Has anyone else been in the situation where you forego a tax-advantaged investment in order to build the taxable account?  I guess if one of the 401ks had bad options the decision would be a little easier.

Cheddar Stacker

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Re: For the nth time: Roth or Tradition IRA
« Reply #11 on: October 10, 2014, 10:39:11 AM »

Then read this for an example of the strategy perfectly executed: http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

This article really makes me want to start a taxable account for those capital gains and dividends.  I just don't know when it would be optimal tax-wise to start one.  I'll be getting married next year, and when my student loans are paid off, would like to max out two 401ks and two IRAs, maybe an HSA too.  I'm not sure I'd had any left over after that for a taxable account.

Has anyone else been in the situation where you forego a tax-advantaged investment in order to build the taxable account?  I guess if one of the 401ks had bad options the decision would be a little easier.

I don't do IRA's. Income is too high for Traditional to be deductible. I prefer immediate tax deferral. We can do Roths, but I want access to all the funds and want to have "dry powder" for real estate investing so I keep everything after the 401k's in a taxable brokerage account.

If you get down to the 15% tax bracket then it can certainly make sense to stop deferrals and start a taxable brokerage account. Or if you just have other goals like real estate investing. It really all boils down to how much you make, how much of that you are able to save, and what your goals are.