Author Topic: Roth at 15% or pay into Trad to get down to 10%?  (Read 2323 times)

Gin1984

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Roth at 15% or pay into Trad to get down to 10%?
« on: March 29, 2014, 08:54:52 AM »
I figured out this week that if I deposit $6000 in a traditional IRA we would be down to 10%.  However, we pay pretty little tax as is, even at 15% marginal.  I have graduate school, my husband is just graduating from it (so last year of the credit for him, and my costs will go down next year) we already deposit $5000 in a daycare FSA plus we have the childcare and child tax credits.  I pay 3% pretax into a pension.
However, depositing in a traditional would mean less federal and state taxes and I would still have some money to put in a Roth (to capture the 10%) and because of the change in marginal rate, I can chose to pay down my debt quicker or increase my retirement.  At this point I have the pension and just 15% towards the Roth.  We have some student loan debt that comes due in six months from when my DH graduates and then 3 years for me.  I already expect to have DH's paid off, but I am not sure if I'll have enough for me.

Joel

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Re: Roth at 15% or pay into Trad to get down to 10%?
« Reply #1 on: March 29, 2014, 10:08:16 AM »
Do you expect your marginal tax rate to increase to 25% in the future? My general rule of thumb is traditional at 25% and above. Roth at anything below.

Gin1984

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Re: Roth at 15% or pay into Trad to get down to 10%?
« Reply #2 on: March 29, 2014, 10:21:12 AM »
Do you expect your marginal tax rate to increase to 25% in the future? My general rule of thumb is traditional at 25% and above. Roth at anything below.
I do expect it to get up to 25% but not for quite some time.  Your rule is the one I have always heard, but I'd love to capture the 10% bracket. 
We are at $51000 gross but come July my husband is moving to a new position which will increase our income to $60000 gross.  We have a rental and that taxable varies but we mostly we take a loss or pay about $100 in taxable income.  At some point we will sell and have to pay the deprecation back.  I expect to get up to $75,000-85000 in three years, but that will still be in the 15% bracket.   That does not even account for the access to 401k at the high rates. 

Joel

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Re: Roth at 15% or pay into Trad to get down to 10%?
« Reply #3 on: March 29, 2014, 10:40:27 AM »
I would put the money into the Roth personally.

If you are set on the traditional IRA, only contribute the exact amount that is in the marginal 15% rate, and then use Roth contributions for the excess.

You do understand what is meant by marginal tax rate, right? The way you describe the 10% tax rate makes me unsure if you do.

Gin1984

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Re: Roth at 15% or pay into Trad to get down to 10%?
« Reply #4 on: March 29, 2014, 11:23:49 AM »
I would put the money into the Roth personally.

If you are set on the traditional IRA, only contribute the exact amount that is in the marginal 15% rate, and then use Roth contributions for the excess.

You do understand what is meant by marginal tax rate, right? The way you describe the 10% tax rate makes me unsure if you do.
Yes, I am aware what the marginal rate is.  That bolded was my plan.  Use the traditional to get down to 10% and shovel the rest into the Roth to capture the 10% rate.

Gin1984

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Re: Roth at 15% or pay into Trad to get down to 10%?
« Reply #5 on: March 29, 2014, 11:25:49 AM »
How many children do you have? Do you have have other preax deductions (insurance, etc.)? If you deposit more into the tIRA, you may be eligible for the very generous Saver's Tax Credit.
I have one daughter but being a full time graduate student I am ineligible for the saver's credit. I have health insurance which is about $10/two weeks for myself and $40/ 2 weeks for my husband but once he changes jobs, they both go on mine and it goes up to $62/2 weeks.  Then, of course the daycare FSA and pension I mentioned above.