Author Topic: set up IRA or ROTH account  (Read 332 times)

wotan

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set up IRA or ROTH account
« on: February 11, 2018, 07:18:38 AM »
we are both retired with no IRA or ROTH account. both of us are in our 60"s.
wife has small income taking care of father from long term insurance. she works for Griswold Services as an independent contractor making about $1,000/month.
we don't need the money to live on.
should we open an IRA or a ROTH account.
we have not filed our taxes for 2017, can we still open an account for 2017?
plan on investing the money in a brokerage account.

SeattleCPA

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Re: set up IRA or ROTH account
« Reply #1 on: February 11, 2018, 07:26:22 AM »
No one can (or should) answer your question unless you share your taxable income... this decision all boils down to the tax rate you'll pay today and the tax rate you'll pay if and when you withdraw the money.

But this blog post might be helpful: Are Roth-IRAs and Roth-401(k)s Really a Good Deal?

Also, the other thing to remember is that if your tax rate is and will be one of the first two brackets, that your marginal income tax rate on qualified dividends and long-term capital gains is probably zero. So you may not need put money into a Roth to make the income from the money tax free.

This post highlights the tax accounting: How to pay zero income taxes on $100,000 income
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

MDM

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Re: set up IRA or ROTH account
« Reply #2 on: February 11, 2018, 12:39:04 PM »
But this blog post might be helpful: Are Roth-IRAs and Roth-401(k)s Really a Good Deal?
It's unfortunate that, after a well written blog post, the first comment repeats the canard about saving at the marginal rate while paying only the effective rate on withdrawal.

Traditional accounts will be better for most early retirees, but not that much better.  One should always compare marginal rates for savings and withdrawals on the amounts in question to make the traditional vs. Roth choice.

MDM

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Re: set up IRA or ROTH account
« Reply #3 on: February 11, 2018, 12:45:45 PM »
...this decision all boils down to the tax rate you'll pay today and the tax rate you'll pay if and when you withdraw the money.
+1

OP, see also Traditional versus Roth, marginal tax rate, and Taxation of Social Security benefits.

When you combine ordinary income, capital gains, and SS benefits, the actual marginal rates can be unexpectedly large.  Fortunately those large rates often apply only over a small income range.

wotan

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Re: set up IRA or ROTH account
« Reply #4 on: February 16, 2018, 07:46:32 AM »
income around $50,000 ( SS and pension). plus the $12,000 form Griswold.

BTDretire

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Re: set up IRA or ROTH account
« Reply #5 on: February 17, 2018, 12:15:01 PM »
No one can (or should) answer your question unless you share your taxable income... this decision all boils down to the tax rate you'll pay today and the tax rate you'll pay if and when you withdraw the money.

But this blog post might be helpful: Are Roth-IRAs and Roth-401(k)s Really a Good Deal?

 I posted  elsewhere some calculations I did for money that is Roth converted vs not converted.
I calculated at 7% and 10% growth rates and 7 years and 3 years to grow.
 If the tax rate is the same at Conversion and withdrawal, the dollar value will be the same.
Surprisingly the same, paying taxes and then growing, or growing and then paying the taxes.
 You have an disadvantage if the tax rate is higher at withdrawal with non conversion.

 I'll go ahead and repost them here.

 I ran some more cases and I'm surprised at the results but maybe I shouldn't be.
 I'm using what I hope will be my numbers for 2018, ie. 12% tax bracket with a $35,000 Roth conversion.
$35k @12%tax leaves $30,800.
$30,800 @7% for 7 years = $49,458 Roth Tax free dollars.
$35,000 @7% for 7 years = $56,202 taxable. If unconverted.
$56,202 @12% tax leaves $49,458 after taxes. Exactly the same with or without conversion.
$56,202 @20% tax leaves $44,964 after taxes.
Let's try a 10% growth rate.
$35k @12% tax leaves $30,800.
$30,800 @10% for 7 years = $60,020 Roth Tax free dollars.
$35,000 @10% for 7 years = $68,205 taxable. If unconverted.
$68205 @12% tax leaves $60,020 after taxes. Exactly the same with or without conversion.
$68205 @20% tax leaves $54,564 after taxes.
 Growth rate makes no difference, Let's try the time frame, I'll drop from 7 years to 3 years.
$35k @12%tax leaves $30,800.
$30,800 @7% for 3 years = $37,731 Roth Tax free dollars.
$35,000 @7% for 3 years = $42,877 taxable. If unconverted.
$42,877 @12% tax leaves $37,732 after taxes. The same with or without conversion.
$42,877 @20% tax leaves $34,302 after taxes.
 And again at 10%
$35k @12% tax leaves $30,800.
$30,800 @10% for 3 years = $40,995 Roth Tax free dollars.
$35,000 @10% for 3 years = $46,585 taxable. If unconverted.
$46,585 @12% tax leaves $40,994 after taxes. Exactly the same with or without conversion.
$46,585 @20% tax leaves $37,266 after taxes.

  Summary: If you have the same tax bracket at withrawal as when doing the Roth Conversion, the end result is equal dollars, If you have a higher tax bracket at withdrawal, the Roth is a better.

 Since I expect to be in a higher tax bracket at withdrawal, I will do a Roth conversion.
I'll lose some deductions as the kids finish college.

 The next question, is it worth contributing to my SEP/IRA and doing a Roth conversion?
 Advantage, gets more money into tax defered accounts. The SEP/IRA deduction allows more to be put into the Roth Conversion.
 Disadvantage, you will have increased RMDs because of the contribution.
 You can continue Roth conversions after 70-1/2.
 If you have any disagreement, Please post them, I'm here to learn.

MDM

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Re: set up IRA or ROTH account
« Reply #6 on: February 17, 2018, 12:33:20 PM »
income around $50,000 ( SS and pension). plus the $12,000 form Griswold.
Your marginal saving rate due to a tIRA contribution, and thus whether you should do traditional or Roth, depends on your exact ages and how much of the $50K is SS and how much is pension.

If you are somewhat familiar with Excel, you could put your actual numbers into the case study spreadsheet and determine the marginal saving rate due to a tIRA contribution.