Author Topic: When to switch to Traditional IRA?  (Read 1510 times)

mrmoneycleanshaven

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When to switch to Traditional IRA?
« on: May 23, 2015, 10:28:00 AM »
I'm in the military and plan on doing at least 20 years. This would give me a pension of $65,000 in today's dollars, which puts my marginal tax rate in retirement at 15%.

Early retirement is off the table, I like my job, and not to sound full of myself, but I think given the shortage of doctors I think it would be selfish of me to retire early given how much society   

I live comfortably on $48,000 post tax now, and don't see any upward creep occurring that would continue into retirement.

I currently put 20% of my take home into a ROTH 401(k) plan (the TSP), and my effective tax rate is just 4% (marginal of 15%). I'll be bumped into an effective tax rate of 11% soon (marginal of 25%), and an effective tax rate of 15% shortly there after with a marginal tax rate of 28%.

When I get the bump that takes me into the 25% tax bracket, would that be a good time to shift to the Traditional 401(k) as my marginal tax rate in retirement (in todays dollars) will be only 15%? I'll have to have my IRA as a ROTH due to income levels, but thought it would be prudent to have some of my retirement savings in tax deferred status as it seems like I'll have a lower tax rate in retirement (plus I am not sure I'll be tapping retirement at all given my pension.

Thanks.
CleanShaven


forummm

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Re: When to switch to Traditional IRA?
« Reply #1 on: May 23, 2015, 10:48:46 AM »
I think putting it in traditional gives you a lot of options for the future. And is likely the best strategy for when your income increases as well.

Clean Shaven

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Re: When to switch to Traditional IRA?
« Reply #2 on: May 23, 2015, 10:53:05 AM »
Hey, get your own user name...

MDM

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Re: When to switch to Traditional IRA?
« Reply #3 on: May 24, 2015, 03:26:18 PM »
... my effective tax rate is just 4% (marginal of 15%). I'll be bumped into an effective tax rate of 11% soon (marginal of 25%), and an effective tax rate of 15% shortly there after with a marginal tax rate of 28%.

When I get the bump that takes me into the 25% tax bracket, would that be a good time to shift to the Traditional 401(k) as my marginal tax rate in retirement (in todays dollars) will be only 15%? I'll have to have my IRA as a ROTH due to income levels, but thought it would be prudent to have some of my retirement savings in tax deferred status as it seems like I'll have a lower tax rate in retirement (plus I am not sure I'll be tapping retirement at all given my pension.

Ignore the "effective" - for the purpose of deciding Roth vs. Traditional marginal is all that matters.

If your marginal rate in retirement (including Required Minimum Distributions) will be lower than your marginal rate now, Traditional is better.