Recently I have been thinking about how the advantages of these 2 items compare I thought I would do a deeper analysis of whether it is better to put money into a tIRA or RothIRA when in the 15% tax bracket.
My assumptions will be based on Married Couples that both have the ability to max out a 401k.
The 15% tax bracket for 2014 is at $73,800
The Saver's Tax credit starts at $60,000 which maxed out for 2 people provides: $400
at $39,000: provides an $800 credit
and at $36,000: provides a $2000 credit
The 15% tax on $13,800 (The difference between $73,800 and $60,000) is $2070. This means that You are paying an initial $2070 to put that into Roth Investment Accounts.
So assuming that you can put money into tax advantaged accounts and reach an AGI of $60,000 compare these outcomes:
1. Put money into ROTH IRA or 401k when inside the 15% tax bracket.
Roth accounts:$13,800
Taxable Accounts: 0
2. Put money into tax deferred accounts:
Non-Roth accounts:$13,800
Taxable Account:$2,470
The value of accounts for a single year after 20 years (assume avg. return of 8%):
1.
Roth Account: $64,321
Taxable: $0
2.
Non-Roth Accounts: $64,321
Taxable Account: $11,513
Now option 1 is now tax-free and has a true value of $64,321
If we assume that the money in option 2 is still taxed at 15% (though truly likely smaller in retirement):
Non-Roth Account value after tax: $54,673
Taxable Account: $11,513
Total: $66,186
Value of your account if you can make it to the $800 credit:
Non-Roth Account: $54,673
Taxable Account: $13,377
Total: $68,050
Value of your account if you can make it to the $2000 credit:
Non-Roth Account: $54,673
Taxable Account: $18,970
Total: $73,643
And this is only the difference 1 year makes (up to almost $10,000).
Hopefully someone else can verify me on this. My knowledge of tax law is limited, but I'd like to find out what other people think the pros and cons of this are.