Author Topic: Seeking advice & opinions about IRA contributions & rollovers...  (Read 3517 times)

MoonShadow

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I would like to get some opinions and options regarding my particular situation.  As I have mentioned on this forum before, I have not paid any income taxes in several years, mostly because I have a set of rather unusual deductions & credits.  One set of those credits of particular importance is a set of one time adoption credits, for adopting a set of "medically fragile" siblings that were wards of the state.  This adoption credit is large and non-refundable, but it is available for rollovers, which is what we have been doing for years.  My tax accountant has informed me that this set of credits will be spent in the 2016 tax year, so the return that I file next April will be the final one that I can depend upon.  That said, I also have a rather large set of annual deductions besides, that put my "regular taxable income"  (Is this my MAGI?) around $55K.   That puts me solid into the 15% bracket with zero chance of getting into the 10% bracket, but also with about $20K of headspace before I'm into the 25% bracket.  I also find it unlikely that my wife & I will stay in the 10% after 60 years of age, because my pension alone will put us right on that line if it were today.  What I'm considering is a rollover from a Traditional IRA into my Roth of about $15K in 2016, and perhaps another $15K in 2017.  I know that opinions vary on whether contributions to a Traditional IRA or a Roth IRA are better, but what I want to know is, if you had a strong belief that your tax bracket would remain the same after age 60 (call it regular retirement age) would you prefer to stuff the after-tax Roth, or the tax-deductable Traditional?

seattlecyclone

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Re: Seeking advice & opinions about IRA contributions & rollovers...
« Reply #1 on: April 12, 2016, 01:58:01 PM »
If you honestly expect your tax bracket to be the same, the two options are roughly equivalent. The Roth has a slight tiebreaker in that the nominal contribution limit is the same for traditional and Roth, but you get to keep the full Roth amount when you withdraw so you can consider a maxed-out Roth to be worth more than a maxed-out traditional.

Keep in mind that the more savings you have in a Roth account, the less your typical taxable income will be during your retired years (since Roth withdrawals don't count as income), which makes it less likely that your tax bracket will in fact be the same as it is now. But the 15% bracket is pretty big, and if you expect a pension to get you basically to the bottom of that bracket, it seems reasonable enough to assume that you'll be in that bracket regardless of your traditional/Roth split during retirement.

Another thing to consider is that Roth IRAs currently don't have required minimum distributions. This can be good for estate planning if you expect to have some money left over to leave to your kids.

Given the totality of your situation, I think that performing Roth conversions up to the top of the 15% bracket is a reasonable plan.

zolotiyeruki

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Re: Seeking advice & opinions about IRA contributions & rollovers...
« Reply #2 on: April 12, 2016, 09:56:48 PM »
Agreed with the above.  For what it's worth, MAGI is not the same as "regular taxable income".  MAGI is (roughly speaking) your AGI plus tax-exempt interest.  Taxable income is your AGI minus all your deductions.

MDM

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Re: Seeking advice & opinions about IRA contributions & rollovers...
« Reply #3 on: April 13, 2016, 05:50:38 AM »
Marginal rates can differ greatly from tax brackets while you are working and contributing to retirement accounts, especially with credits involved.

Marginal rates can also differ from tax brackets after you stop working and are withdrawing from retirement accounts, especially with social security involved.

Short answers to your "tax bracket would remain the same" question (assuming "bracket" = "marginal rate"):
1) if I were sure the contribution and withdrawal brackets would be the same, it would be Roth for the "no RMD" reason seattlecyclone mentioned.
2) otherwise, it would be traditional due to the lesser impact of using traditional when Roth would have been better, and the greater impact of using Roth when traditional would have been better.

Might be worthwhile for you to take a closer look at your actual marginal rates and then decide. See http://forum.mrmoneymustache.com/taxes/optimizing-taxes-maximizing-benefits-for-parttime-working/msg953768/#msg953768 for an example picture.

Unfortunately "taxable income" is used to describe many things - would need to know which line on your 2015 Form 1040 has the $55K to comment better.

MoonShadow

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Re: Seeking advice & opinions about IRA contributions & rollovers...
« Reply #4 on: April 13, 2016, 03:23:12 PM »

Unfortunately "taxable income" is used to describe many things - would need to know which line on your 2015 Form 1040 has the $55K to comment better.

RFI granted. Page #2, line #43  $53,666

MDM

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Re: Seeking advice & opinions about IRA contributions & rollovers...
« Reply #5 on: April 13, 2016, 04:03:48 PM »
Unfortunately "taxable income" is used to describe many things - would need to know which line on your 2015 Form 1040 has the $55K to comment better.
RFI granted. Page #2, line #43  $53,666

Ah - the "Form 1040" taxable income.  Your AGI is line 37 or 38 (same value), so it will be higher than your taxable income by the amount of deductions and exemptions you have.

Your MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a/ch01.html#en_US_2015_publink100025076
Your MAGI calculation for Roth IRA purposes is https://www.irs.gov/publications/p590a/ch02.html#en_US_2015_publink1000230988

Mother Fussbudget

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Re: Seeking advice & opinions about IRA contributions & rollovers...
« Reply #6 on: April 13, 2016, 05:12:27 PM »
I hear you... pay income taxes on a larger amount, or pay 15% capital gains taxes via a taxable account...  I wish I knew of a better way to model that scenario.

I started a Roth IRA conversion ladder 2 years ago, realizing I would be on the 'long sabbatical' by age 57-58, and converted a full year's budget.  It caused a tax hit(!), and I paid it, so the following year, I only converted the amount I could contribute to my T-IRA ($6,500).  I plan to do that for the next 4 years, and by FI, I should have at least two years of expenses ready from the Roth. 

AFTER 59-1/2, I'll start converting the IRA to the ROTH at a greater pace thru age 70.
Goal:  convert all IRA $$ into ROTH $$ so I can avoid RMD's at age 70.

Since my company doesn't support after-tax-401K contributions, I'll have most of my FIRE stash in taxable accounts anyway.
The thing I'm worried about:  I don't think the capital gains tax rate will stay at 15% - I'm sure it will go up.

MDM

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Re: Seeking advice & opinions about IRA contributions & rollovers...
« Reply #7 on: April 13, 2016, 05:48:29 PM »
I hear you... pay income taxes on a larger amount, or pay 15% capital gains taxes via a taxable account...  I wish I knew of a better way to model that scenario.
www.i-orp.com is a very good tool you could use.

There are some simpler calculations on the '401k vs Taxable' and 'Misc. calcs' tabs in the case study spreadsheet.