Author Topic: Advice on what type of IRA to choose.  (Read 2549 times)

thepokercab

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Advice on what type of IRA to choose.
« on: November 09, 2013, 01:30:00 PM »
Its been a crazy year!  I ran into MMM and this forum about 8 months ago and since then have dramatically changed my spending and savings habits.  For the first time, i'm contributing to retirement accounts and saving money!

One of the amazing things is what all of this savings is doing to my 2013 tax outlook! With that in mind though, i'm wondering what the best approach is regarding my newly funded Roth IRA.  I opened it up this year, and am on track to fully fund it. The Roth seems to be very popular and when I opened it i was sort of just starting out on my path to FIRE and the Roth seemed to be what all the cool kids were choosing. However after doing some research, and after reading this analysis from the Mad Fientist-

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

I'm wondering if I shouldn't consider recharacterizing it to a traditional IRA in order to further decrease my taxable income. 

Here is my current tax situation (i'm 29, married, with two kids):

Married Filing Jointly:

2013 Gross Income:  ~$91,000
Subtract deductions from HSA, SIMPLE IRA- $17,400
Subtract standard deduction- $12,200
Subtract student loan interest deduction ~$30
Subtract 4 Exemptions ~ (4 x $3,900) - $15,600

TOTAL Taxable Income:  $45,770

I think this math is right, but feel free to point out any errors. That is pretty low already, but it seems that I can fully deduct a traditional IRA, and further reduce my taxable income, getting some additional tax dollars back (that I can turn around and invest further)  Then, when i get closer to FIRE, open up a Roth and start slowly converting the money. 

I guess my question is, am I missing anything?  Are there other reasons why a Roth right now might be better in my circumstance? Why do other folks favor the Roth?  I have a emergency fund/house down payment fund and am also putting money into a taxable account, so i have a pool there in case I need to withdraw money for any reason.  I realize this is largely about personal preferences and there probably isn't a wrong answer but the Roth option seems to be really popular and widely recommended, so I wonder if I'm not foreseeing unintended consequences of recharacterizing.   I apologize if this topic has been brought up a ton already!     
« Last Edit: November 09, 2013, 01:32:53 PM by thepokercab »

avonlea

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Re: Advice on what type of IRA to choose.
« Reply #1 on: November 09, 2013, 01:52:07 PM »
I'm not as savvy as others on this forum when it comes to investing, but my husband and I chose to open Roth IRAs in case the 529s don't quite cover all the college expenses for our kids.  Most financial advisers suggest using a Roth over a traditional IRA if you might need extra funds for college.
« Last Edit: November 09, 2013, 03:49:00 PM by avonlea »

Mazzinator

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Pylortes

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Re: Advice on what type of IRA to choose.
« Reply #3 on: November 09, 2013, 01:57:33 PM »
One reason I personally believe to be an important factor in choosing a Roth over traditional IRA is the high probability of much higher tax rates in the future. Without turning the question into a political discussion most everyone on both sides acknowledges that fed spending is unsustainable without a lot higher revenue (taxes).  We've been running $1 trillion plus deficits every year. In my estimation there is a high probability that tax rates in the mid to long term future will be substantially higher, so the younger you are the more the playing field is tilted to the Roth.  If you are planning retirement in the next 5-10 years this may not be the case and a traditional IRA may be the better plan.

the fixer

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Re: Advice on what type of IRA to choose.
« Reply #4 on: November 09, 2013, 02:19:42 PM »
With a taxable income of only $45k for a married couple, your marginal tax rate isn't very high (at most 15% but I'm not looking at the rate tables). When you're FIRE'd, your income will be lower but it probably won't be taxed at a much lower rate than it is already, making the traditional IRA not much of a benefit. I vote for the Roth.