Author Topic: Another Roth/Trad IRA question  (Read 220 times)

laughing_paddler

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Another Roth/Trad IRA question
« on: February 01, 2019, 09:15:01 AM »
Hi folks,

I'll get right to it. My wife and I have been contributing to Trad IRAs for the past few years for a couple of reasons that I thought were good (mainly, it was keeping us below 74k AGI), but now I'm wondering if this year I should recharacterize the 2018 Trad IRA contributions to ROTH.

Without the traditional IRA deduction, we'd have about $1000 taxed at the 22% rate, and the rest ($10,000) taxed at the 12% rate.

A friend of mine got me thinking about this because he's worried we'll save so much (i.e. won't decide to FIRE) that we'll be screwed over by RMDs later (we're only 37). I think my reasoning for the trad-IRA at this income level came from reading around here that there are ways to manage withdrawals later to stay in the 0% capital gains tax bracket or at worst, in the 15% bracket.

Am I way off? Should I stick with traditional for the near future until such time as it is no longer deductible? I am hopeful that income will rise that high in the next 3-5 years.

Does this calculation change if I am expecting a large-ish (upper 6 figures) inheritance in 20 years?

Thanks for any and all insight.

walkwalkwalk

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Re: Another Roth/Trad IRA question
« Reply #1 on: February 01, 2019, 10:37:06 AM »
I think you're confused about traditional ira distributions. They would be taxed as ordinary income, not capital gains rates. If your AGI is 74k, then your taxable income is 50k or less (standard deduction of 24k or more if you itemize). So I am unsure which part you're confused about, so I am unsure of your income.

dandarc

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Re: Another Roth/Trad IRA question
« Reply #2 on: February 01, 2019, 11:00:26 AM »
A friend of mine got me thinking about this because he's worried we'll save so much (i.e. won't decide to FIRE) that we'll be screwed over by RMDs later (we're only 37).
I worried about this a few years ago, but then I realized that to be "screwed over by RMDs", what that really means is that when I get to old age, I have too much money. So I file "could have played the long-term tax game better" under "good problems to have".

laughing_paddler

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Re: Another Roth/Trad IRA question
« Reply #3 on: February 01, 2019, 12:29:17 PM »
I think you're confused about traditional ira distributions. They would be taxed as ordinary income, not capital gains rates. If your AGI is 74k, then your taxable income is 50k or less (standard deduction of 24k or more if you itemize). So I am unsure which part you're confused about, so I am unsure of your income.

Ah, yes. You can see that: a) I haven't done much reading on the withdrawal stage (that bit about ordinary income certainly clarifies the tax rate comparison for the future), and b) I'm a bit fried from being up at 3:30 this morning!

Being so far below 74k for taxable income means the jump to the marginal 22% rate doesn't affect the decision this year. My question is still the same I suppose- for this year, do folks think I should do the recharacterization to Roth for our 2018 IRA contributions (due to the rate now being 12%, not likely to be lower)? Or are there still good reasons to avoid the tax today because we (mustachians) can avoid it later too?

terran

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Re: Another Roth/Trad IRA question
« Reply #4 on: February 01, 2019, 12:43:32 PM »
Unless you plan to have crazy high withdrawals in retirement you certainly want to contribute to traditional anything that would otherwise be in the 22% bracket.

You also want to have enough in tax deferred to fill up the standard deduction and the 10% bracket pretty much in perpetuity.

The 12% bracket is kind of a tossup. Really it doesn't matter either way as paying now and paying later is exactly equal when the rate is the same now and later. You might choose to pay the 12% now by contributing to Roth since the tax brackets are set to reset in 2025, so you'll be back in the 15% bracket. On the other hand, maybe new laws will keep the current brackets or lower them even further. Who knows.

Remember to account for state taxes too, especially if you pay them now and don't expect to pay them later.

I defer in the 12% bracket now cause it gets me the top savers tax credit, and because I expect to spend at least some of retirement as a resident of a no income tax state. Switching to Roth until I hit the 22% bracket seems like it would be a slightly worse idea for me, but I don't think it would be a huge difference.