Author Topic: Lower tax bracket this year only; should I do a ROTH?  (Read 1708 times)

ohsnap

  • Stubble
  • **
  • Posts: 249
Lower tax bracket this year only; should I do a ROTH?
« on: March 08, 2016, 09:12:49 AM »
For the first time in more than 10 years we'll be in the 15% federal bracket this year (2015 tax return).  State is about 6% marginal.  For 2016 we should be back up to 25%.

Should I re-characterize my $5500 contribution into a ROTH from the tax-deductible traditional IRA?  I'm even thinking of converting some of my traditional IRA existing balance into a ROTH (just up to the point where we'd hit the 25% marginal rate).  Most of my traditional IRA will be taxable on conversion because about 85% is from an employer rollover.

The plan would be for withdrawals starting in 5 years.  I imagine we'll be no higher than 15% tax bracket, but I have no idea about the state as we're not sure where we'll be in 5 years.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3406
  • Age: 36
Re: Lower tax bracket this year only; should I do a ROTH?
« Reply #1 on: March 08, 2016, 09:19:21 AM »
If you think you'll be paying more than 15 + 6% on withdrawal, then yes, go Roth.  If you think you'll be paying lower than that on withdrawal, then no, stick with traditional.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Lower tax bracket this year only; should I do a ROTH?
« Reply #2 on: March 08, 2016, 09:24:11 AM »
Don't forget to take into account the effect on the Saver's Credit.

ohsnap

  • Stubble
  • **
  • Posts: 249
Re: Lower tax bracket this year only; should I do a ROTH?
« Reply #3 on: March 08, 2016, 09:33:14 AM »
Don't forget to take into account the effect on the Saver's Credit.

We're not eligible for that (AGI too high), but thanks for mentioning it.  2015 is our daughter's last year as a dependent on our tax return.  We've been pressuring her to start aggressively saving for her retirement, and I didn't know about the Saver's Credit - she will be eligible, so that's another factor I can use next time I hammer her on this topic. :)

ohsnap

  • Stubble
  • **
  • Posts: 249
Re: Lower tax bracket this year only; should I do a ROTH?
« Reply #4 on: March 08, 2016, 09:40:02 AM »
If you think you'll be paying more than 15 + 6% on withdrawal, then yes, go Roth.  If you think you'll be paying lower than that on withdrawal, then no, stick with traditional.

Well, that's the $1M question...

Even if our tax bracket is the same/slightly lower in retirement, the fact that compounded earnings won't be taxed would still make a difference.  But would it be material enough to make it worth the hassle of the recharacterization of the already-made 2015 deposit, and the conversion of the previous balances? 


MDM

  • Walrus Stache
  • *******
  • Posts: 9412
Re: Lower tax bracket this year only; should I do a ROTH?
« Reply #5 on: March 08, 2016, 02:57:50 PM »
Well, that's the $1M question...

Even if our tax bracket is the same/slightly lower in retirement, the fact that compounded earnings won't be taxed would still make a difference.  But would it be material enough to make it worth the hassle of the recharacterization of the already-made 2015 deposit, and the conversion of the previous balances?
One year's worth won't make much difference one way or the other.

If your daughter will be at least a 1/2 time student for five months, she will be ineligible for the saver's credit.  If she won't be your dependent, but will still be covered under your family HDHP (and have no other coverage), she will be eligible to open her own HSA and fund it to the family maximum.

In any case, congratulations on her moving off your payroll. :)