Author Topic: Using roth ira or not  (Read 6458 times)

mbk

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Using roth ira or not
« on: March 27, 2014, 11:55:39 PM »
I can contribute to IRA or roth IRA for me and my wife which is 11000. I am in 15% federal bracket and my marginal state tax bracket is 6%. For 2013, I already contributed $3500 to roth IRA (2k for spousal roth ira and 1500 on my name).

I will have a disposable $4k on April 1st. Now I am in dilemma whether to contribute that money to 2013 roth IRA or to 2013 regular IRA. I am not able to figure out which one is advantageous.

Another alternative is I can use that money to clear my debt and ratchet up my contributions to 403 and 457 in May. $5k of debt is 0% APR till Sept and remaining $4k is 1% APR till Jan. So clearing debt immediately doesn't look good to me.

Any help in figuring this out is appreciated. Thanks.
 
« Last Edit: March 28, 2014, 12:09:06 AM by mbk »

GoldenStache

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Re: Using roth ira or not
« Reply #1 on: March 28, 2014, 08:15:56 AM »
Do you think your future income is going to increase (raises in the future/ $m inheritance) or are you close to retirement or ER?

skunkfunk

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Re: Using roth ira or not
« Reply #2 on: March 28, 2014, 08:46:32 AM »
The answer is always Roth IRA. Unless you are old.

NinetyFour

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Re: Using roth ira or not
« Reply #3 on: March 28, 2014, 09:04:26 AM »
The answer is always Roth IRA. Unless you are old.

Please define "old".  Thanks.

skunkfunk

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Re: Using roth ira or not
« Reply #4 on: March 28, 2014, 09:12:00 AM »
The answer is always Roth IRA. Unless you are old.

Please define "old".  Thanks.

If you don't expect your Roth IRA to be around for a particular length of time (I haven't done the math in detail as I am definitely young enough to make it a no-brainer), you don't get much of a tax advantage by using it.

I don't know of any disadvantages if you are already maxing out your pre-tax accounts, though. I'm no expert, take it FWIW.

skyrefuge

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Re: Using roth ira or not
« Reply #5 on: March 28, 2014, 11:06:02 AM »
The answer is always Roth IRA. Unless you are old.

Sure, if the question is "Roth IRA or taxable", but that's not the question, so your answer is wrong. The question is "Roth IRA or traditional IRA (or debt payoff)?"

If you plan to retire early in Mustachian style, your taxable income in retirement will likely be much lower than it is when working, to the point where you might pay close to 0 taxes. So any taxes you can save now (by using traditional IRA) are likely more advantageous than taxes you would save in the future (by using a Roth IRA).

Being in the 15% bracket now makes it somewhat less of a slam-dunk decision (maybe you expect general tax rates to rise significantly in the future, or you plan to make a lot more money in the future and thus have a higher retirement income that you have now), but in general I would still start with the assumption that the Traditional IRA is better, and then do the math specific to your situation to prove otherwise.

skunkfunk

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Re: Using roth ira or not
« Reply #6 on: March 28, 2014, 02:06:49 PM »
The answer is always Roth IRA. Unless you are old.

Sure, if the question is "Roth IRA or taxable", but that's not the question, so your answer is wrong. The question is "Roth IRA or traditional IRA (or debt payoff)?"

If you plan to retire early in Mustachian style, your taxable income in retirement will likely be much lower than it is when working, to the point where you might pay close to 0 taxes. So any taxes you can save now (by using traditional IRA) are likely more advantageous than taxes you would save in the future (by using a Roth IRA).

Being in the 15% bracket now makes it somewhat less of a slam-dunk decision (maybe you expect general tax rates to rise significantly in the future, or you plan to make a lot more money in the future and thus have a higher retirement income that you have now), but in general I would still start with the assumption that the Traditional IRA is better, and then do the math specific to your situation to prove otherwise.

Again, not an expert. But when I did the math for my situation, I came out something like $300,000 dollars ahead with a Roth IRA, even accounting for the lower taxes at a later withdrawal date. Granted, I did this math before I drastically cut spending due to the MMM thing.

Hmm. Maybe I should do that math again?

Cheddar Stacker

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Re: Using roth ira or not
« Reply #7 on: March 28, 2014, 02:41:42 PM »
http://www.madfientist.com/traditional-ira-vs-roth-ira/ - This is a very nice summary of the benefits of each.

The answer is always Roth IRA. Unless you are old.

I would be careful with the word always, just sayin.

If you don't expect your Roth IRA to be around for a particular length of time ... you don't get much of a tax advantage by using it.

One of the biggest tax advantages most people don't think about related to Roth's is there are no RMD's. This is great because you don't have to force taxable income once you reach 70 like you do with a TIRA. It's also great because you literally never have to withdraw the money, so you can pass it on to any heirs within the Roth and likely not pay any tax. This means a Roth can be a very good thing even if you are old.


OP - if you can clear those debts before an interest rate spike through regular monthly savings that is likely your best bet, if not get rid of them if they have a big balloon interest rate. It's typically (not always) better to max out Traditional Ira's for the immediate tax savings, even in the 15% bracket if you plan to retire early, so that's what I'd do with any extra funds. If you don't max 2013 you lose the opportunity forever, however, if you expect to jump into the 25% bracket in 2014 maybe they would be better in that year if you can't max both years. You can slowly convert them to Roth's later and pay very little tax. See this thread if you haven't already:
AGI of $90K + with no tax

Good luck!

skyrefuge

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Re: Using roth ira or not
« Reply #8 on: March 28, 2014, 03:16:01 PM »
Hmm. Maybe I should do that math again?

Yes, I think so. There are ways you can come out ahead with a Roth, but not by that much! One frequent mistake in such calculations is forgetting to include the unsheltered-but-still-invested tax savings on the traditional IRA side.

mbk

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Re: Using roth ira or not
« Reply #9 on: March 28, 2014, 05:22:34 PM »
Thanks for the replies guys. To give more clear picture. I contribute $1700 per month to 403 and 457s. After taxes, retirement contributions and expenses, I will have any where between $2-2.5k every month for clearing debts and investments. With that money, I can comfortably clear my credit cards before the APR rises.

I am a postdoc and my VISA doesn't allow me to switch to a private company unless I jump through major hurdles (which I have no plans at this point). Regarding future income, I am not sure if I will go for a low paying academic career or a high paying industry job. Or I may go back to my home country.

Also my wife's working situation is spotty due to VISA regulations. So lots of variables and I am not sure what the future holds for me and hence the dilemma.
« Last Edit: March 28, 2014, 06:33:01 PM by mbk »

mbk

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Re: Using roth ira or not
« Reply #10 on: March 28, 2014, 05:31:48 PM »
Quote
OP - if you can clear those debts before an interest rate spike through regular monthly savings that is likely your best bet, if not get rid of them if they have a big balloon interest rate. It's typically (not always) better to max out Traditional Ira's for the immediate tax savings, even in the 15% bracket if you plan to retire early, so that's what I'd do with any extra funds. If you don't max 2013 you lose the opportunity forever, however, if you expect to jump into the 25% bracket in 2014 maybe they would be better in that year if you can't max both years. You can slowly convert them to Roth's later and pay very little tax. See this thread if you haven't already:
AGI of $90K + with no tax

Good luck!

I have the option to contribute $41k yearly to 403b, 457bs and 401a. For roth, the loss of 2013 contribution opportunity matters. In case of traditional IRA because of the $41k limit in workplace retirement account limits, loosing 2013 contribution opportunity doesn't matter that much.

Thanks,

SDREMNGR

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Re: Using roth ira or not
« Reply #11 on: March 28, 2014, 06:01:08 PM »
There are benefits to both the pre-tax retirement accounts (401k, Simple, SEP, 403b, etc.) and the post-tax (Roth IRA).  The nice thing about the Roth is that if your income tax rate is pretty low now, then it's a great time to get the money taxed and never taxed again.  If you plan on being rich and taking out at least $100k in income in your retirement years, then it'll get taxed at whatever the capital gains tax rate is at that time.  That is another good reason why you should max out your Roth IRA now if you are a young person.  No one knows what the social security and federal tax rates will do in the future, but my guess is that it will go up over the next 30-40 years.  They can't touch your Roth IRA money with taxes (well, I guess Congress can try, but voters aren't going to let that happen).  That is security I think.

As for the pre-tax accounts, you MAY end up with a lower tax bracket in the future and you may be able to take it out at a cheaper rate. 

BUT.... you should really be maxing out savings on both your pre-tax and Roth IRA at the same time.  That amount is around $17.5k - $21k or so per year per person, depending on what type of accounts you or your company has and how much money you make.  And if you aren't making or saving at least that much, I wouldn't worry so much about figuring out which account maxes out your returns, but how to make more money or save more money first.

mbk

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Re: Using roth ira or not
« Reply #12 on: March 28, 2014, 06:35:47 PM »
Quote
BUT.... you should really be maxing out savings on both your pre-tax and Roth IRA at the same time.  That amount is around $17.5k - $21k or so per year per person, depending on what type of accounts you or your company has and how much money you make.  And if you aren't making or saving at least that much, I wouldn't worry so much about figuring out which account maxes out your returns, but how to make more money or save more money first.
Sorry I didn't specify per month. I save $1.7k is per month. So it comes out to $20.5k per year.
I agree with your point.

Cheddar Stacker

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Re: Using roth ira or not
« Reply #13 on: March 28, 2014, 07:01:22 PM »
If you plan on being rich and taking out at least $100k in income in your retirement years, then it'll get taxed at whatever the capital gains tax rate is at that time.

When you draw your 401K/403B/IRA money out it's taxed at ordinary tax rates based on the tax tables. Capital Gains tax does not apply.

No one knows what the social security and federal tax rates will do in the future, but my guess is that it will go up over the next 30-40 years.
 
Social security is taxed when the money is earned. 401K deductions do not reduce SS tax, and when you draw the money out you won't pay this tax. You are likely right that tax rates will go up, but we really don't know for sure. I would rather reduce my tax now at a rate I know vs. pay now and hope the tax rate doesn't go down. You will have much more control over your tax bracket when you are not working making it easier to have the money taxed at a lower rate.

And if you aren't making or saving at least that much, I wouldn't worry so much about figuring out which account maxes out your returns, but how to make more money or save more money first.

I see your point here, but someone who is only able to save 10% (not specifically the OP, just whoever) stands to gain the most by doing the most optimal thing with their money. You are right, they should figure out a way to save more, but optimize your savings now matter how much they are.

beltim

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Re: Using roth ira or not
« Reply #14 on: March 30, 2014, 01:55:11 AM »
Thanks for the replies guys. To give more clear picture. I contribute $1700 per month to 403 and 457s. After taxes, retirement contributions and expenses, I will have any where between $2-2.5k every month for clearing debts and investments. With that money, I can comfortably clear my credit cards before the APR rises.

I am a postdoc and my VISA doesn't allow me to switch to a private company unless I jump through major hurdles (which I have no plans at this point). Regarding future income, I am not sure if I will go for a low paying academic career or a high paying industry job. Or I may go back to my home country.

Also my wife's working situation is spotty due to VISA regulations. So lots of variables and I am not sure what the future holds for me and hence the dilemma.

You may want to look into the tax ability of distributions from these plans if you wind up leaving the US.  If your home county would tax distributions regardless, you would be better off in a traditional IRA so you got a tax break now. Just something else to think about.

mbk

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Re: Using roth ira or not
« Reply #15 on: March 30, 2014, 01:20:03 PM »
Thanks for the replies guys. To give more clear picture. I contribute $1700 per month to 403 and 457s. After taxes, retirement contributions and expenses, I will have any where between $2-2.5k every month for clearing debts and investments. With that money, I can comfortably clear my credit cards before the APR rises.

I am a postdoc and my VISA doesn't allow me to switch to a private company unless I jump through major hurdles (which I have no plans at this point). Regarding future income, I am not sure if I will go for a low paying academic career or a high paying industry job. Or I may go back to my home country.

Also my wife's working situation is spotty due to VISA regulations. So lots of variables and I am not sure what the future holds for me and hence the dilemma.

You may want to look into the tax ability of distributions from these plans if you wind up leaving the US.  If your home county would tax distributions regardless, you would be better off in a traditional IRA so you got a tax break now. Just something else to think about.

Thanks for pointing out. That thing never crossed my mind. I will look into it.

bikebum

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Re: Using roth ira or not
« Reply #16 on: March 30, 2014, 03:56:09 PM »
http://www.madfientist.com/traditional-ira-vs-roth-ira/ - This is a very nice summary of the benefits of each.

This article is excellent. There are a lot of differences between the two. It's not as simple as "Do you think your income taxes will be more or less in the future?" That is a good way to look at it for a traditional work til 60 and retire person, but there are other things to look at for early retirees. An advantage for the roth IRA is you can withdraw your contributions (not earnings though) with no penalty at any time, which is not the case with the traditional IRA. Mad Fientist points out you can contribute to a traditional IRA while working, then transfer to a roth IRA to avoid all income taxes during early retirement, which works if you are living off of long-term capital gains from a taxable account when you transfer. The article explains it very well.

I wouldn't trust anything that says one is always better; it depends on the individual and what his or her future plans are.

kyleaaa

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Re: Using roth ira or not
« Reply #17 on: March 31, 2014, 07:05:10 AM »
Short answer: it depends on your personal circumstances so nobody here can really give you a decent answer.

Shorter answer: The answer is ALMOST always Roth IRA unless you're in the highest 2 tax brackets, and even then...

Cheddar Stacker

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Re: Using roth ira or not
« Reply #18 on: March 31, 2014, 10:23:20 AM »
Shorter answer: The answer is ALMOST always Roth IRA unless you're in the highest 2 tax brackets, and even then...

I disagree, but to each their own. For someone looking to RE I believe paying a 15% federal tax is too high.