Author Topic: To Roth or Not To Roth, that is the question for 2014!  (Read 5096 times)

handsnhearts

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To Roth or Not To Roth, that is the question for 2014!
« on: April 12, 2015, 09:28:31 AM »
i am trying to figure out if it makes sense to roth for last year while I can. I have no retirement savings. DH is eligible for 401k with no match. However was not aware that he could have done it last year. Will likely fully fund this year. He has a Roth IRA but did not fund last year. He also had an IRA that rolled over from an old 401k last year that wasn't funded either.
We will have a bigger income this year, around 150k gross. 2014 was about 92k, gross. I am applying for jobs now and will be employed sometime between June and September. My current job is doesn't offer any benefits at all.
I do have student loans. I will paste them over from my journal when I get to a computer. But all loans are on deferment ( most are not a a ruling interest and the ones that are will be paid prior to capitalization). We are moving in 1 month and I will be unemployed for at least 1 month likely. We have a $40,000 emergency fund. We would take the Roth money out of that. We currently spend about $8000 a month with room to improve. But that is a 5 month emergency fund. DH is keeping his job, so no interruption in his income. About $3300 gross. I bring home $7400 minimum gross, with at least $3000 as self employment.

So, To Roth or Not To Roth? And should DH put the contribution in the trad IRA?  Yes, right?!?
I was just thinking about the Roth but as I was writing this post I remembered about the rollover account. We are both 38 and not going to FIRE sooner than 10 years at best, probably longer.

MDM

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #1 on: April 12, 2015, 10:26:10 AM »
i am trying to figure out if it makes sense to roth for last year while I can.
We will have a bigger income this year, around 150k gross. 2014 was about 92k, gross.
So, To Roth or Not To Roth? And should DH put the contribution in the trad IRA?  Yes, right?!?
If this year's higher income is likely the start of a trend, then putting $11K ($5.5K each) into Roths for 2014, given your apparent 15% tax bracket, makes sense.

handsnhearts

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #2 on: April 12, 2015, 11:07:04 AM »
MDM, yes this is definitely the start of a larger income trend as I am just starting my physician career after years of residency and training.  But for DH, does it make more sense to reduce our taxable income this year(trad IRA) or to take the post tax savings (roth) instead?


MDM

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #3 on: April 12, 2015, 11:48:49 AM »
MDM, yes this is definitely the start of a larger income trend as I am just starting my physician career after years of residency and training.  But for DH, does it make more sense to reduce our taxable income this year(trad IRA) or to take the post tax savings (roth) instead?
Assuming you are and will file as MFJ, DH's money is yours and vice versa.  Better to pay the 15% now and not pay the 25%, 28%, etc. later.

handsnhearts

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #4 on: April 12, 2015, 12:23:38 PM »
Assuming you are and will file as MFJ, DH's money is yours and vice versa.  Better to pay the 15% now and not pay the 25%, 28%, etc. later.

Good assumption.  Yes MFJ and his is mine, mine is his...  But my question is if we end up FIRE, esp ER, is it better to pay tax now or to pay tax later with less income more likely?  I know this is the constant conundrum... and I don't know if our income will be below 15% even if we ER...
My only option in Roth (I think) because I don't have a trad IRA account.  He already has a trad IRA account open, so he can still contribute to that or the Roth for 2014, right?  In which case, which is better?

seattlecyclone

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #5 on: April 12, 2015, 12:24:59 PM »
MDM, yes this is definitely the start of a larger income trend as I am just starting my physician career after years of residency and training.  But for DH, does it make more sense to reduce our taxable income this year(trad IRA) or to take the post tax savings (roth) instead?
Assuming you are and will file as MFJ, DH's money is yours and vice versa.  Better to pay the 15% now and not pay the 25%, 28%, etc. later.

Sure, it's better to pay some now than more later. But will you actually be in a position where you would have to pay more during retirement? That's the question.

As a physician, your income is likely going to be high enough that you won't have the option of saving in a pre-tax IRA for much longer. You'll likely find Roth IRA contributions (or possibly backdoor Roth contributions) to be a good option at that time, when your only alternative is a taxable account. The consequence of this is that you'll likely have a decent percentage of your net worth in Roth accounts when you retire regardless of what you decide this year.

This leads to an interesting problem: the more of your money that you have in Roth accounts in retirement, the smaller your taxable income will be during retirement (since Roth withdrawals don't count as income). This will then make your tax bracket lower than it would be if you were entirely invested in pre-tax retirement accounts. As we all know, the lower your expected tax bracket in retirement, the more the math tends to favor pre-tax retirement contributions.

Under current tax law, a married retired couple doesn't start paying 25% on the marginal dollar until they've already taken out $95.5k from their pre-tax retirement accounts, in addition to whatever they might take out of their Roth accounts. As a physician you shouldn't have much trouble saving enough to get into that bracket while still retiring at a relatively early age, if that's what you want to do. Do you want to do that, or do you intend to retire even earlier on a more modest amount of savings? I can't answer that question for you, but whatever you decide should inform your decision here.

handsnhearts

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #6 on: April 12, 2015, 02:15:31 PM »
95.5k to live on sounds astronomical. Which the makes it utterly ridiculous that that is basically the amount we have lived on this year. So much more Mustachian work to do!

But in retirement, early or semi, I would hope to not be paying ridiculous rent and daycare, and student loans etc. although maybe some college expenses. But my goal is to retire early, maybe 10-15 years from now. I guess the question always remains, do i think my bracket will be lower the or now?  So hard to guess, but probably low last year(2014) higher this year and the next bunch of years, and then FIRE. 2015 we will be in the 25% bracket most likely.

Also, I am only working part time, and plan to continue this. So I don't think we will reach the income limits for Roth contributions anytime soon if ever. Maybe when DD is off to college if we don't have enough saved by then. But I hope to be retired/semi- retired by then. As I guess I am now if I look at it right. I'm just not FI yet.

Rubic

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #7 on: April 12, 2015, 04:13:56 PM »
My current bias is to defer paying taxes today whenever possible. Even if there is a probably of paying a higher tax rate at a later date, that's a high quality problem to have.

The returns on your deferred tax savings may compensate your higher tax rate anyway, and paying taxes prematurely may penalize you if your long-term plans don't work out.

MDM

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #8 on: April 12, 2015, 04:23:40 PM »
The returns on your deferred tax savings may compensate your higher tax rate anyway

Actually,  it doesn't work that way.  Many defensible reasons to choose either traditional or Roth, but multiplication is commutative so P * (1 - t) * (1 + i)^n = P * (1 + i)^n * (1 - t).  I.e., for equal tax rates "it doesn't matter."

See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 if you want to go into gorier details, including the fact that for maximum contributions with equal tax rates, Roth is actually better.  Of course one also needs to parse "equal tax rates" carefully because that doesn't necessarily mean "equal marginal tax rates."

Rubic

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #9 on: April 13, 2015, 06:28:13 AM »
MDM:  Thanks for the correction.

Zamboni

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #10 on: April 13, 2015, 06:36:26 AM »
With a Roth, you also don't pay taxes on the growth.  If you plan to retire or semi-retire before 67, setting up a Roth now will have been a very smart move.

At 38, with nothing in retirement, my opinion is that you need to maximum every retirement savings plan that is an option for you. 

You are probably not going to need the $40K reserve immediately, and you still have access to any amount of it that you put in a Roth.  So put it in a Roth (max for last year plus this year is $11K.)  Still your money, but now you don't have to pay taxes on any interest that compounds as it sits there.

lhamo

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #11 on: April 13, 2015, 06:57:35 AM »
I would put money in the Roth.  It can serve as an emergency fund, for one thing (can withdraw your contributions at any time), and also be tapped for things like first home purchase.  And you can use it as a cashflow management tool if you do FIRE.

DH and I have been limited in what we could contribute to our Roths due to limited US earned income over the last 15 years.  But we have put what we could in most years.  As a result, we now have about $73k in contributions to our personal Roths that we can tap if needed.  And I also have a significant amount in a Roth 403b that I should be able to convert to a Roth IRA once I leave my job.  Makes for a nice cash cushion as we figure out next steps and fund my upcoming year (or more) off. 

handsnhearts

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #12 on: April 13, 2015, 07:58:57 AM »
Thank you everyone for your insight.

After doing some research, I realized that I had an incorrect assumption. I thought a trad IRA had to be opened by 12/31/14 to contribute. That isn't true. One can open a Roth or trad up to tax day.

So this really comes down to the question

Trad IRA - does this ever make sense to contribute to? 

Pros: growth is tax free as long as you don't touch it until 59.5.
Can take out for exceptions.
Will reduce MAGI And thereby possibly marginal bracket.

Cons: can't touch until 59.5 without heavy penalties of 10% plus marginal rate, except exceptions

Roth IRA
Pros: earnings are tax free if not taken out before 59.5 except exceptions
Contributions can be taken out at any time, but only have 60 days to replace or can't replace.

Cons:  does not reduce MAGI and has no chance of lowering tax bracket.

Did I miss anything important?

So I know my tax bracket this year is less than next year. And I know it will go up in the next years. And I don't know but I guess it will go down or stay the same in FIRE. I think this is why I am thinking  traditional.
Oh, but DH isn't sure we want to put it in at all as he wants financial cushion for moving and my employment gap. (1-3 months)  So this makes me want to Roth instead.


Jeremy E.

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #13 on: April 13, 2015, 02:12:34 PM »
I found this post to be very helpful when I was making this decision, I hope it can help you too.
http://www.madfientist.com/traditional-ira-vs-roth-ira/

handsnhearts

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #14 on: April 14, 2015, 04:26:59 PM »
Thanks for the link. I have read that one before and it re-read it several times today. I'm not sure if it applies to my situation. I'm not sure I will truly RE, may stay in a semi-retired PT state like now. Or become mor self-employed, earn salary plus business profits.

I talk with our CPA today and she calculated it both ways, trad vs Roth. Trad would take an extra $2490 off the taxes, would not change bracket of 15%. Roth would deduct an extra $400.

So I think out bracket will go up next year and for the foreseeable future as long as I am working. Unless DH quits to work on rental properties and other opportunities, which could happen at some point but not for a few years minimum.

If we stay in the same income category until 65, then Roth makes a lot more sense. If not, trad makes more sense and this opportunity will be gone after tomorrow.

I've thought about this so much, but I still don't know what the right answer is.  I asked about splitting the contribution to try an maximize the deduction, but it seems too complicated.

Any last minute thoughts on losing out on the trad IRA opportunity?

Valhalla

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #15 on: April 14, 2015, 04:32:53 PM »
Don't think there is a wrong choice, but as someone who cannot directly contribute to a Roth IRA, I want what I can't have, which is to do the Roth.

MDM

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #16 on: April 14, 2015, 04:46:48 PM »
Trad would take an extra $2490 off the taxes, would not change bracket of 15%. Roth would deduct an extra $400.

Pretty much all the "traditional vs. Roth" suggestions assume "all else being equal."  From the quote above I'm guessing you are close to a Saver's Credit break point, likely the $36K one.  If so, all else is certainly not equal and, despite being in the low marginal bracket of 15%, a traditional IRA could very well make more financial sense.

handsnhearts

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Re: To Roth or Not To Roth, that is the question for 2014!
« Reply #17 on: April 14, 2015, 11:31:16 PM »
MDM. You are definitely right about the savers credit. I called to double check. We ended up splitting our contributions. I did trad and DH did Roth. I think we win either way, and it is totally good. We get some of the benefits of each. Or we lose out, but I'm a glass is half full kind a gal. :)

 I opened a vanguard account, so I'm stoked about that. They suggested I put it in the retirement 2040 account but I am considering the index account. Thoughts?