Author Topic: Roth or Taxable going forward?  (Read 1688 times)

SHARP_00

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Roth or Taxable going forward?
« on: October 20, 2017, 07:04:55 AM »
Apologies if this has been answered before, feel free to reply with a link to an earlier thread if so!

Here's my situation:

Gross Income: ~115k, varies a bit with bonus
Max 401k, company matches 8%
Max HSA
Started funding vanguard taxable account this year, just hit threshold for admiral shares this month.

Looking ahead, I'm trying to decide whether its worth it to fund a Roth IRA before putting more into taxable. I'm currently under the limit, and will be getting married next year to a partner who makes significantly less, so we should be under the MFJ limit for at least a few more years. Heres how I'm thinking:

Taxable
-Contributions are already taxed
-Unrealized gains are not taxed
-Qualified dividends are taxed, but at a lower rate than income
-long term realized gains taxed at lower rate than income

Roth
-Contributions are already taxed
-Dividends are tax deferred, untaxed if withdrawn after 59.5
-gains are tax deferred, untaxed if withdrawn after 59.5

In either case the contributions can be withdrawn at any time with no tax (although with taxable you cannot neatly separate contributions from gains, so any withdrawal will have tax implications). So the difference is in the earnings. If I expect to not need the earnings before 59.5, Roth clearly wins. But if I expect my later years to be fully funded through 401k and HSA dollars, it seems like I'm better off paying LTCG tax on my taxable earnings than income tax + penalty on Roth earnings.

Does this sound right?

alexpkeaton

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Re: Roth or Taxable going forward?
« Reply #1 on: October 20, 2017, 07:24:03 AM »
If I expect to not need the earnings before 59.5, Roth clearly wins.

Right, so what's the answer to this question? There you go.

Quote
But if I expect my later years to be fully funded through 401k and HSA dollars, it seems like I'm better off paying LTCG tax on my taxable earnings than income tax + penalty on Roth earnings.

This really depends on the answer above. If you'll need the access to the money in excess of your contributions before age 59.5, then maybe go with a taxable account. (Though, even then, paying the penalty could be worth it in some cases.) If you can just live off the contributions for 5 years while your Roth pipeline kicks in, then the Roth is better.

Of course, better yet, do both. :)

 

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