Roth vs. Trad. IRA suggestion?

[sonjak]

Hi all,

I've been reading/lurking for a year or so and really enjoy all the stories, wisdom and discussions here.  Thank you to all of you who make this place so great! 
Mostly I find answers to any question I have either from current posts or from the archive so haven't needed to post.  But today I have a question.

I started a Roth IRA a couple years ago at Vanguard and the balance is currently approx. $7500.  I have the funds in a targeted retirement fund with fees at .18.  I have been contributing every paycheck this year and am on track to max it.  However, after reading the posts about pre-retirement vs. post-retirement income, I realize it makes more sense for me to contribute to my Traditional IRA since my income after retirement will be significantly less than it is now.

I would like to transfer my roth IRA funds into VTSAX with lower fees but I need a higher balance to be able to do that.  So my question is, does it make better financial sense to continue to contribute another year or so until I have enough to transfer the money into that fund or should I switch to contributing to Traditional now and forget about the difference in fees?  Or does it not matter?  Math is not my strong point so any advice would be greatly appreciated.

Sonja

[MDM]

I started a Roth IRA a couple years ago at Vanguard and the balance is currently approx. $7500. 
I would like to transfer my roth IRA funds into VTSAX with lower fees but I need a higher balance to be able to do that.  So my question is, does it make better financial sense to continue to contribute another year or so until I have enough to transfer the money into that fund or should I switch to contributing to Traditional now and forget about the difference in fees?

sonjak, welcome to the forum.

The difference in fees between VTSMX and VTSAX is 0.12%.  Even with $9,999 that is a difference of only $12/year.

If, for example, the difference between your current marginal rate and your retirement marginal rate is 10% (making the tIRA advantageous for you), for $9,999 that is $999.90.

In other words, the traditional vs. Roth is much more important than Vanguard's investor vs. admiral class.

[sonjak]

Thank you for your response.  I really appreciate it.  I contacted Vanguard today to initiate the transfer!

Sonja

[MDM]

You're welcome - hope it works out well for you!

[teen persuasion]

Just to clarify, are you switching to tIRA contributions  going forward, or looking to recharacterize this year's contributions from Roth to traditional?  You are not transferring previous year contributions from Roth to traditional, correct?

[sonjak]

Just to clarify, are you switching to tIRA contributions  going forward, or looking to recharacterize this year's contributions from Roth to traditional?  You are not transferring previous year contributions from Roth to traditional, correct?

Yes to both of the first questions, no to the last.  I hadn't thought of transferring contributions for this year until I read about that on another thread here on MMM and decided to ask Vanguard when I called.  They said yes they could do this year's. 

I also completed a form with Payroll yesterday requesting that future contributions be sent to Trad IRA instead of Roth.  So I think I'm on the right track.

Much as I love this stuff and am enthused about making progress in savings and retiring semi-early, I still feel like there's so much I don't know or hadn't considered.

[ImCheap]

Hi all,

However, after reading the posts about pre-retirement vs. post-retirement income, I realize it makes more sense for me to contribute to my Traditional IRA since my income after retirement will be significantly less than it is now.

Not so fast, its not really about income but more about tax brackets before and after retirement.

For most people in the 15% I think its good to have some rIRA (post tax), tIRA(pre tax) and Taxable for tax diversity, you mix will vary. Just look at how many changes and programs that have been started by the government in the past 30 years. 

I would leave what you have now and not move anything, just keep it simple. Start funding your Traditional if that is your plan.