Author Topic: Always put money in regular IRA?  (Read 2719 times)

sr794

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Always put money in regular IRA?
« on: May 22, 2016, 09:41:56 AM »
What do you all think of this article? http://www.madfientist.com/traditional-ira-vs-roth-ira/ .

From what I understand, it essentially says that you should put money in your regular IRA instead of your Roth even if you are currently in a low tax bracket. This is because it's (mathematically) better to invest as much pre-tax money as possible even if you have to pay taxes on it at a later date, since the returns will more than make up for the increased taxes. Also, you can strategically minimize your taxes in those later years when you are making less money.

Psychstache

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Re: Always put money in regular IRA?
« Reply #1 on: May 22, 2016, 10:23:49 AM »
I think there are some interesting points, but individual situations still matter. For example, before considering Roth vs Traditional, I look at my situation and see that my wife and I have about 80k in tax differed space to fill up and will both have tax deferred pensions that will force us to accept a certain amount of taxable income, so we choose to use Roth iras for increased flexibility in the future.

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GizmoTX

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Re: Always put money in regular IRA?
« Reply #2 on: May 22, 2016, 10:49:55 AM »
You can't assume you will be automatically making less money in later years. Medicare charges higher premiums for those reporting higher income, & this is on top of the tax assessed when taking retirement account distributions. 

MDM

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Re: Always put money in regular IRA?
« Reply #3 on: May 22, 2016, 10:53:45 AM »
From what I understand, it essentially says that you should put money in your regular IRA instead of your Roth even if you are currently in a low tax bracket.
Close.  The article is not wrong, but it does make a significant assumption: that you will pay a lower tax rate when you withdraw, compared with what you are paying now.

If that assumption holds, then the consequent strategy "Always put money in regular IRA" works well.

If that assumption does not apply to your situation, then a different strategy is likely better for you.

thd7t

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Re: Always put money in regular IRA?
« Reply #4 on: May 22, 2016, 11:32:45 AM »
An obvious exception that can apply to mustacians is if (as I've seen people post) you can reduce your tax burden to zero. In that case, Roth all the way!

MDM

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Re: Always put money in regular IRA?
« Reply #5 on: May 22, 2016, 12:34:45 PM »
An obvious exception that can apply to mustacians is if (as I've seen people post) you can reduce your tax burden to zero. In that case, Roth all the way!

Unless contributing to a traditional account provides enough credits (e.g., earned income) to cause a high marginal savings rate .  A couple earning $60K/yr with 3 kids would probably find it worthwhile to contribute a significant amount to traditional accounts.

sr794

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Re: Always put money in regular IRA?
« Reply #6 on: May 22, 2016, 01:13:52 PM »
From what I understand, it essentially says that you should put money in your regular IRA instead of your Roth even if you are currently in a low tax bracket.
Close.  The article is not wrong, but it does make a significant assumption: that you will pay a lower tax rate when you withdraw, compared with what you are paying now.

If that assumption holds, then the consequent strategy "Always put money in regular IRA" works well.

If that assumption does not apply to your situation, then a different strategy is likely better for you.

Yeah, if you will pay a higher tax rate in retirement, it is not as clear and it could be hard to predict.

i.e. if you're in the 15% tax bracket now, you can invest more if you put your savings in a traditional IRA and then the "Extra" (from it being tax-free contribution) in a taxable account. Then, if you retire in the 20% tax bracket you owe capital gains on the taxable account and the traditional IRA. So, the question is, are the returns from the "extra" contributions greater than the additional tax you must pay? Probably not. So I guess the traditional advice on Roth vs IRA is still good (i.e. determine if you will be in a higher or lower tax bracket in retirement)

Telecaster

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Re: Always put money in regular IRA?
« Reply #7 on: May 22, 2016, 01:43:33 PM »

Yeah, if you will pay a higher tax rate in retirement, it is not as clear and it could be hard to predict.


I think uncertainty is an argument in favor of the traditional IRA.  You know your tax bracket right now, so take the deduction right now.

MDM

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Re: Always put money in regular IRA?
« Reply #8 on: May 22, 2016, 02:38:15 PM »
So I guess the traditional advice on Roth vs IRA is still good (i.e. determine if you will be in a higher or lower tax bracket in retirement)
Yes.

See https://www.bogleheads.org/wiki/Traditional_versus_Roth.

GrOW

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Re: Always put money in regular IRA?
« Reply #9 on: May 22, 2016, 03:23:55 PM »
How many people, years after year, really expect their marginal tax rate to be significant higher in retirement?  Honestly.

MDM

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Re: Always put money in regular IRA?
« Reply #10 on: May 22, 2016, 04:03:04 PM »
How many people, years after year, really expect their marginal tax rate to be significant higher in retirement?  Honestly.
Some do who shouldn't, some don't who should, and some get it right (either way).