Author Topic: Does spouse age difference change IRA strategy?  (Read 3172 times)

rulesofacquisition

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Does spouse age difference change IRA strategy?
« on: August 28, 2015, 08:02:56 AM »
My spouse is 12 years younger than me. He currently makes about 41,000 and I will make 45,000 - 50,000 this year (commission, hard to tell), so I believe that puts us in the 15% tax bracket. I am considering putting money in an IRA account at Vanguard. Does a Roth make more sense since he may still have income after I retire? I considered splitting between a Roth and traditional but understand there may be 2 sets of fees for 2 accounts. Also, since I am 47 and started over from less than zero at 42, I have almost no savings (see case study - always moving forward) - does this make a Roth more favorable since I may need the money before 59 1/2? It's hard at this point to scrape up enough to do more than try to max my ira, so I'll have all my eggs in 1 basket for a couple more years.

nereo

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Re: Does spouse age difference change IRA strategy?
« Reply #1 on: August 28, 2015, 08:19:42 AM »
In a word: no.
Each year you should determine which makes most sense to you based on your current tax burden and your expected tax burden in retirement.  Don't forget that at any time you can convert funds from a tIRA to a ROTH by paying the appropriate taxes for that year (this is called a Roth Conversion Ladder).  This is a good strategy once you income is reduced upon retirement, but it requires that you have some money saved in order to pay the taxes during the conversion and to live off of during the conversion period.
If you are married filing jointly, any income over $74,901 is taxed at 25% (your marginal rate).  If you save money in a tIRA, your taxable burden will be reduced by 25 for each $1 you put in (until your AGI drops below $74,901 - which it might given standard deductions and other deductions/credits).  I

If you are with a low-cost provider like Vanguard, the fees will not be greater for having both a ROTH and a tIRA; both will get the same set of fees.  For example, if you have the Admiral SP500 funds (VFINX, I believe) you get charged 0.05% per year.  So you pay the same in fees whether you have $10k in a tIRA and $10k in a ROTH, or if you have $20k in just one.
Also, I wouldn't worry much about all of your 'eggs in one basket' if you choose a diversified fund for your IRA - one suggestion is to choose one of Vanguard's excellent equity/bond mixed funds - you will own hundreds of stocks and dozens of bonds at a ratio that is comfortable for you (e.g. 80/20 or 60/40).  It's hard to get much more diversified than that without a lot more effort.

Please post a case-study when you are ready.  I'm a bit concerned that you find it hard to "scrape up enough to do more than try to max my IRA" when you and your spouse are earning $86k-91k annually.  That's quite a bit of income to have a hard time coming up with $458/month for each of you.

forummm

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Re: Does spouse age difference change IRA strategy?
« Reply #2 on: August 28, 2015, 08:49:10 AM »
My spouse is 12 years younger than me. He currently makes about 41,000 and I will make 45,000 - 50,000 this year (commission, hard to tell), so I believe that puts us in the 15% tax bracket. I am considering putting money in an IRA account at Vanguard. Does a Roth make more sense since he may still have income after I retire? I considered splitting between a Roth and traditional but understand there may be 2 sets of fees for 2 accounts. Also, since I am 47 and started over from less than zero at 42, I have almost no savings (see case study - always moving forward) - does this make a Roth more favorable since I may need the money before 59 1/2? It's hard at this point to scrape up enough to do more than try to max my ira, so I'll have all my eggs in 1 basket for a couple more years.

If your spouse is making money after you retire, you could just live off the spouse's earnings and not tap your retirement accounts. So when you did tap retirement accounts, it would be after the spouse has retired and your tax bracket would be low. Also,
http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

MDM

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Re: Does spouse age difference change IRA strategy?
« Reply #3 on: August 28, 2015, 08:56:52 AM »
He currently makes about 41,000 and I will make 45,000 - 50,000 this year (commission, hard to tell), so I believe that puts us in the 15% tax bracket.
Correct.  After taking the standard deduction and exemptions your taxable income is <$74.9K so you are in the 15% federal bracket.

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Does a Roth make more sense since he may still have income after I retire?
If you do withdraw (as forummm notes, this is your choice) while one is still working for wages similar to what you have now, you will still be in the 15% bracket.  In that case, the simple math says "no difference between traditional and Roth" - but the greater flexibility of the Roth should tip the scales in that direction for you.
If you wait to withdraw until neither of you is working, and if you have no SS and no pension, then some of the withdrawals will come in the 0% and 10% brackets and traditional will have been better.  Any withdrawals that push your taxable income into the 15% bracket would be better (as discussed above) in Roth.
If you do have SS, depending on how much you withdraw your marginal rate can get >25% due to the way SS is taxed so this is not a simple question to answer....

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I considered splitting between a Roth and traditional but understand there may be 2 sets of fees for 2 accounts.
As nereo noted, in general with Vanguard this is not a concern.  You may get a slight break on fees by having all in one Admiral-class fund instead of 2 Investor-class funds, but the difference will be minimal.

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(see case study - always moving forward)
http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-always-moving-forward/

And one other note: given current tax law (i.e., no federal tax on LTCG and qualified dividends if you are in the 15% federal bracket), and assuming your investments don't ever grow enough to put you in the 25% ordinary bracket thus incurring 15% federal tax on LTCG and qualified dividends, and assuming no state/local income tax - you are better (at least, no worse) to put everything in taxable accounts.  But if you are paying state/local income tax (and they treat LTCG+QD as ordinary income) then Roth is still better.  See the '401k vs Taxable' tab in the case study spreadsheet if interested.

rulesofacquisition

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Re: Does spouse age difference change IRA strategy?
« Reply #4 on: August 28, 2015, 09:03:12 AM »
Nereo, thanks for the reply, my case study (always moving forward) is back on page 2 right now. This is the explanation for the lack of savings at this point from the case study -

"Background info: Lost everything in 2010 except truck and clothes in divorce. 2013 paid husband's student loans off. 2014 paid car off. 2015 paid off my attorney and medical, $5000 in first 4 months of the year. From May 1 to Aug 15th saved $5000 (used $3000 of that today to buy HVAC equipment after using wood for 2 years). No phone, no life ins, no disability ins, no gym memberships, no magazine subs."

So we're getting on track but both recovering from major financial issues.

I did read about the Roth conversion ladder.

Looking at this on a year to year basis makes sense, especially since our situation could change.

nereo

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Re: Does spouse age difference change IRA strategy?
« Reply #5 on: August 28, 2015, 09:04:43 AM »
Quote
Quote

    (see case study - always moving forward)

http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-always-moving-forward/

thanks for linking that MDM - I somehow missed/misunderstood that the OP had already posted a case study.

rulesofacquisition

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Re: Does spouse age difference change IRA strategy?
« Reply #6 on: August 28, 2015, 09:11:31 AM »
MDM, I was reading the "pre-tax post-tax or what?" thread earlier and wondered of an IRA even made sense. I do pay state tax, will check on the capital gains, no local tax. I will also check the spreadsheet (I use a Kindle to access the net at home and normally don't have time to do this at work, so have not fully delved into speadsheet and still need to accumulate better spending records to fill in missing info - working on it). Thanks for the input.

rulesofacquisition

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Re: Does spouse age difference change IRA strategy?
« Reply #7 on: August 28, 2015, 09:16:15 AM »
Forummm, thank for your reply, I did read that, this is a crash course for someone who didn't even know what a Roth ira was until a couple months ago. I'm learning quickly here, and trying to make up for a very late start in life.

- what the heck is a walrus stache?

nereo

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Re: Does spouse age difference change IRA strategy?
« Reply #8 on: August 28, 2015, 12:02:12 PM »
- what the heck is a walrus stache?
This forum has "levels" which depend entirely on the number of posts you have made.  Currently, "Walrus Stash" is the highest level, given only to members who have made 5000+ posts.  I believe only Dragoncar, Forummm and thegoblinchief have achieved this status. 
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