Traditional or Roth IRA

[NJAbroad]

Hello,

For the past 2 years I have been contributing to a Roth IRA without giving it a second thought.  After reading through the forums I think a traditional IRA is more suitable for my situation.  I just ran a  Taxcaster report and my refund estimate jumped about $1000 with a traditional.  Below are my numbers:

Pre-Tax Income = $52404
Federal Taxes = $3769.56
Family is My wife, my 5 yr old son and myself.
I claim married with 3 exemptions.

Should I be contributing to a Roth or a Traditional?

[eyePod]

This is a hard one. Saving is the most important part.

I have money in an IRA from a 401k rollover.

I have money in a roth IRA also. We haven't been able to fund those fully since we're paying off our mortgage to get under PMI right now.

I'm more of a middle ground kind of guy. I like to hedge my bets. Have money in both taxable and non-taxable accounts. It's hard to know what's going to happen with taxes in the future, so I like to round it out with both.

[dandarc]

It depends.  Some people draw the line at the 15% bracket - in the 15% or lower, go Roth, 25% or higher, go traditional.  Appears you are in the 15% bracket.

If you see your spending going higher (outpacing inflation) over the years, then likely Roth will work out better in the long term.  If you are really committed to keeping expenses down, your withdrawal phase might involve paying 0 taxes (http://www.gocurrycracker.com/never-pay-taxes-again/), then traditional looks pretty good.

If you expect your income to rise a great deal, you might go traditional now, as later you might not be able to deduct the contributions.

If you already have a ton of traditional money, you might go Roth as you've already "filled up" a lot of the lower tax-brackets when you withdraw with existing funds.

So a lot to consider.  The good news is, even if you "pick wrong" (which you won't know for sure for many years), you're still way ahead of most just by having the money invested.

[NJAbroad]

It depends.  Some people draw the line at the 15% bracket - in the 15% or lower, go Roth, 25% or higher, go traditional.  Appears you are in the 15% bracket.

If you see your spending going higher (outpacing inflation) over the years, then likely Roth will work out better in the long term.  If you are really committed to keeping expenses down, your withdrawal phase might involve paying 0 taxes (http://www.gocurrycracker.com/never-pay-taxes-again/), then traditional looks pretty good.

If you expect your income to rise a great deal, you might go traditional now, as later you might not be able to deduct the contributions.

If you already have a ton of traditional money, you might go Roth as you've already "filled up" a lot of the lower tax-brackets when you withdraw with existing funds.

So a lot to consider.  The good news is, even if you "pick wrong" (which you won't know for sure for many years), you're still way ahead of most just by having the money invested.

My future income is more than likely going to increase.  I will "retire" from the military between 2017-2019 with a small pension of about $24K-$28K/year.  My current career field (network engineer) pays between $70K-$110K for the experience and education I have.  I projected my future earnings to be:

Pre-Tax Pension $28K
Job Income $80K
Total = $108K est.

I've run Taxcaster for that level as well and I'd be in the 25% range. 

[forummm]

It sounds like Roth is a good choice for you given that you will have a good sized pension later.

[Gone Fishing]

Are you funding an IRA for your spouse as well?


Be sure to read Nord's Military Guide

http://the-military-guide.com/

[NJAbroad]

Are you funding an IRA for your spouse as well?


Be sure to read Nord's Military Guide

http://the-military-guide.com/

That is a good question.  I was not aware that I could do that until recently.  I have a few bills that I need to pay off that are priority but I am going to start funding one for her.  I budgeted $915/month to IRA's for 2016 and beyond.   

[NJAbroad]

It sounds like Roth is a good choice for you given that you will have a good sized pension later.

Thanks.  That's what I was thinking but the Taxcaster estimate has me thinking I am leaving money on the table with a Roth IRA.

[forummm]

It sounds like Roth is a good choice for you given that you will have a good sized pension later.

Thanks.  That's what I was thinking but the Taxcaster estimate has me thinking I am leaving money on the table with a Roth IRA.

You pay the tax now at a low income tax bracket, instead of having to pay the tax later at a higher income tax bracket. Whatever you put into a Roth you can pull out for free. And the interest is also not taxed if you leave it in until age 59.5. With a TIRA both your contributions and interest are taxed when you pull them out. TIRA can make sense for people--especially higher earners who won't have a pension later. But it sounds like that's not your situation.

[frugaliknowit]

Agree with what others have said plus the Roth is a "known" (you know what your tax is because you are paying it).  The taxes on a traditional IRA are an "unknown" (anyone's guess what your tax rate will be when you withdraw...currently tax rates are historically low.  Are you willing to bet they will not go up?).

[Nords]

Are you funding an IRA for your spouse as well?

Be sure to read Nord's Military Guide

http://the-military-guide.com/

That is a good question.  I was not aware that I could do that until recently.  I have a few bills that I need to pay off that are priority but I am going to start funding one for her.  I budgeted $915/month to IRA's for 2016 and beyond.   

Almost everyone in the military below the rank of E-7/O-4 will pay lower taxes now by contributing to a Roth TSP and Roth IRA(s).  The difference is not only in your income tax bracket but also in your tax deductions and tax credits.  And as you've already noted, if you add a bridge career to your military pension then you won't have much room left to convert a traditional tax-deferred retirement account to a Roth before Social Security and RMDs.

Try to maximize your contributions to your Roth TSP (and both Roth IRAs) and then save even more in taxable accounts. 

The key to financial independence is tracking your spending so that you can stop wasting your money.  You'll spend on the things that you're willing to work for, and you'll save/invest the rest.  The pay raises, special pays, allowances, and promotions will also make a big difference if you resist lifestyle expansion and save 80%-90% of those.

[NJAbroad]

Are you funding an IRA for your spouse as well?

Be sure to read Nord's Military Guide

http://the-military-guide.com/

That is a good question.  I was not aware that I could do that until recently.  I have a few bills that I need to pay off that are priority but I am going to start funding one for her.  I budgeted $915/month to IRA's for 2016 and beyond.   

Almost everyone in the military below the rank of E-7/O-4 will pay lower taxes now by contributing to a Roth TSP and Roth IRA(s).  The difference is not only in your income tax bracket but also in your tax deductions and tax credits.  And as you've already noted, if you add a bridge career to your military pension then you won't have much room left to convert a traditional tax-deferred retirement account to a Roth before Social Security and RMDs.

Try to maximize your contributions to your Roth TSP (and both Roth IRAs) and then save even more in taxable accounts. 

The key to financial independence is tracking your spending so that you can stop wasting your money.  You'll spend on the things that you're willing to work for, and you'll save/invest the rest.  The pay raises, special pays, allowances, and promotions will also make a big difference if you resist lifestyle expansion and save 80%-90% of those.

Hello Noord,

I haven't contributed to a traditional or even a roth TSP over my career.  I am really far behind as far as that is concerned.  My excuse over the years was that there was no match for uniformed personnel but it was also because my spending was too high.  Now with about 2-4 years left of service, I think it's too late to start.  I'd rather contribute to IRA's.  With our current budget I can max my wife's and my IRA  ($11000/year) but I would be hard pressed to find another 1400/month to max a TSP as well.

[Nords]

Almost everyone in the military below the rank of E-7/O-4 will pay lower taxes now by contributing to a Roth TSP and Roth IRA(s).  The difference is not only in your income tax bracket but also in your tax deductions and tax credits.  And as you've already noted, if you add a bridge career to your military pension then you won't have much room left to convert a traditional tax-deferred retirement account to a Roth before Social Security and RMDs.

Try to maximize your contributions to your Roth TSP (and both Roth IRAs) and then save even more in taxable accounts. 

The key to financial independence is tracking your spending so that you can stop wasting your money.  You'll spend on the things that you're willing to work for, and you'll save/invest the rest.  The pay raises, special pays, allowances, and promotions will also make a big difference if you resist lifestyle expansion and save 80%-90% of those.

Hello Noord,

I haven't contributed to a traditional or even a roth TSP over my career.  I am really far behind as far as that is concerned.  My excuse over the years was that there was no match for uniformed personnel but it was also because my spending was too high.  Now with about 2-4 years left of service, I think it's too late to start.  I'd rather contribute to IRA's.  With our current budget I can max my wife's and my IRA  ($11000/year) but I would be hard pressed to find another 1400/month to max a TSP as well.

I'm confused by the reasoning of "too late to start" when you could contribute $11K to your Roth TSP (instead of to your two Roth IRAs).  "Late" is still an opportunity to buy shares of the world's largest passive index funds with the world's lowest expense ratios.  When you retire from the military you'll have 2-4 years of contributions, which would be at least $22K-$44K and possibly more due to annual pay raises and biennial longevity pay raises.

But yes, if you're not going to contribute to the TSP then you should at least maximize your contributions to your IRAs. 

[Kiwipino]

Almost everyone in the military below the rank of E-7/O-4 will pay lower taxes now by contributing to a Roth TSP and Roth IRA(s).  The difference is not only in your income tax bracket but also in your tax deductions and tax credits.  And as you've already noted, if you add a bridge career to your military pension then you won't have much room left to convert a traditional tax-deferred retirement account to a Roth before Social Security and RMDs.

Try to maximize your contributions to your Roth TSP (and both Roth IRAs) and then save even more in taxable accounts. 

The key to financial independence is tracking your spending so that you can stop wasting your money.  You'll spend on the things that you're willing to work for, and you'll save/invest the rest.  The pay raises, special pays, allowances, and promotions will also make a big difference if you resist lifestyle expansion and save 80%-90% of those.

Hello Noord,

I haven't contributed to a traditional or even a roth TSP over my career.  I am really far behind as far as that is concerned.  My excuse over the years was that there was no match for uniformed personnel but it was also because my spending was too high.  Now with about 2-4 years left of service, I think it's too late to start.  I'd rather contribute to IRA's.  With our current budget I can max my wife's and my IRA  ($11000/year) but I would be hard pressed to find another 1400/month to max a TSP as well.

I'm confused by the reasoning of "too late to start" when you could contribute $11K to your Roth TSP (instead of to your two Roth IRAs).  "Late" is still an opportunity to buy shares of the world's largest passive index funds with the world's lowest expense ratios.  When you retire from the military you'll have 2-4 years of contributions, which would be at least $22K-$44K and possibly more due to annual pay raises and biennial longevity pay raises.

But yes, if you're not going to contribute to the TSP then you should at least maximize your contributions to your IRAs.

Nords is spot on about TSP expense ratios.  2014 average expense ratio of TSP funds (G, F, I, C, S, and lifecycle/target retirement funds) was a ridiculously low 0.029%.  Please, please, please take advantage of TSP!