Author Topic: Have a Roth, should I start traditional?  (Read 4205 times)

catccc

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Have a Roth, should I start traditional?
« on: February 27, 2015, 02:01:51 PM »
DH and I both have Roth IRAs that we max out, and I have a 401K I max out.  (DH is a SAHP and doesn't have an employer sponsored retirement plan, we add to his Roth via spousal IRA contribution.)

Balances in Roths are roughly:
Me: 171K  (includes a number of old pre-tax 401Ks were rolled/recharacterized in a low income year)
DH: 76K

Other investments include:
Old pre-tax 401K Vanguard: 97K
Old after-tax 401K Vanguard: 2K
Current pre-tax 401K Fidelity: 24K
Taxable Vanguard: $132K
529s Vanguard: $44K

I read a lot here about how a traditional IRA makes better tax sense for some.  I'm not sure if I'm one of those people.  We are in the 15% tax bracket and expect to stay in the 15% tax bracket through early "retirement," during which I'm planning to work some type of fun job. 

Also, there is some kind of pro-rata rule to the taxation of IRAs when you have both Roth and Traditional, and I don't quite understand it, which causes me to want to avoid having two kinds of IRAs.

But if I expect my tax rate to stay the same, doesn't it make sense to go for the Roth, because I'm paying taxes on fewer dollars- just the contributions?  The way I see it, I pay 15% on the contributions with a Roth, and 15% on both the contributions and gains with a traditional.

Am I missing something here?  Am I wrong to have been contributing to a Roth?  Should I open an traditional?  What are the tax implications at withdrawal if I have both a Roth and Traditional IRA?
« Last Edit: February 27, 2015, 02:05:28 PM by catccc »

catccc

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Re: Have a Roth, should I start traditional?
« Reply #1 on: March 01, 2015, 12:34:24 PM »
anyone??

Frankies Girl

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Re: Have a Roth, should I start traditional?
« Reply #2 on: March 01, 2015, 01:05:07 PM »
I'm by no means an expert. ;)

I'm in the same situation - 15% taxable bracket while working and will be that or less in retirement. The husband and I both have Roths, and we fund those each year. I have a 401k, the husband has nothing available through work, but has an old rolled over traditional IRA from many years ago that has been sitting idle for quite some time (other than the few thousand in there chugging away). So I have been funding our Roths every year thinking it was the best solution.

I think for 2015, I'll fund the husband's rollover traditional (instead of his Roth) and that helps us out on the tax side next year, as there is a credit of sorts for funding a traditional IRA after tax (not the Roth), so we'll get more back (or have more room in our conversion buckets actually). I checked it out in TurboTax TaxCaster and it is quite nice to see I'll be able to throw an extra 10K into my roth as a conversion with no extra tax owed if we contribute to the husband's traditional IRA.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
« Last Edit: March 01, 2015, 01:07:47 PM by Frankies Girl »

waltworks

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Re: Have a Roth, should I start traditional?
« Reply #3 on: March 01, 2015, 01:05:39 PM »
If you are in the 15% bracket, and expect to remain in it in retirement, there is no reason to do a tIRA. Keep funding your Roths/taxable/etc.

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MDM

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Re: Have a Roth, should I start traditional?
« Reply #4 on: March 01, 2015, 01:15:52 PM »
If you can contribute the maximum amount, and expect the same effective tax rate applies to that amount both now and when withdrawing, Roth is better (or at least no worse) than traditional.

See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 and links therein for details.

catccc

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Re: Have a Roth, should I start traditional?
« Reply #5 on: March 02, 2015, 12:16:13 PM »
Thanks all.  I also found that the pro-rata rule does not apply to Roth, so no worries on that end.  I'll stay the course unless there are any big changes!

Gone Fishing

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Re: Have a Roth, should I start traditional?
« Reply #6 on: March 02, 2015, 12:38:31 PM »
Thanks all.  I also found that the pro-rata rule does not apply to Roth, so no worries on that end.  I'll stay the course unless there are any big changes!

If we are thinking about the same thing,  pro-rata rules apply when there are comingled deductible and non-deductible contributions in a traditional IRA (or multiple traditional IRAs) and probably mostly encountered by people trying to execute a back-door ROTH contribution.

Are you sure your post retirement withdrawals will be taxed at 15%?  Remember to compare your current bracket against what you expect your EFFECTIVE tax rate to be in retirement.  Which could be much lower than your bracket rate.  Posting your age, when you expect to retire, your total income and expected retirement spending would be helpful in answering your question. 

Read the links in my signature line below for more details and examples of how things should work out.   

Philociraptor

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Re: Have a Roth, should I start traditional?
« Reply #7 on: March 02, 2015, 12:41:42 PM »
Are you sure your post retirement withdrawals will be taxed at 15%?  Remember to compare your current bracket against what you expect your EFFECTIVE tax rate to be in retirement.  Which could be much lower than your bracket rate.

This. You may be in the 15% bracket, but you don't pay 15% in federal taxes, you pay less. However, traditional IRA contributions would be deductible at 15%. Mind the difference.

catccc

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Re: Have a Roth, should I start traditional?
« Reply #8 on: March 03, 2015, 02:27:02 PM »
Yeah, I understand that it is a tiered tax system, and the tIRA would come off the top.  15% is my max rate, but I expect to fill the 10% portion with part time wages and spouse's income, which might go up if I bow out of this working business.  So any "retirement" funds towards income would be at 15%.   

But it is entirely possible that we'd hit the 25% tax bracket depending on what DH decides to do.  Which brings up a follow up question, and probably one google will solve for me efficiently, but I will post here anyway... If I've contributed to a Roth, can I recharacterize my current year's contributions to a traditional?  I like to contribute as soon as i can at the start of the year, but things can change over the course of a year.

dandarc

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Re: Have a Roth, should I start traditional?
« Reply #9 on: March 03, 2015, 02:31:37 PM »
Yeah, I understand that it is a tiered tax system, and the tIRA would come off the top.  15% is my max rate, but I expect to fill the 10% portion with part time wages and spouse's income, which might go up if I bow out of this working business.  So any "retirement" funds towards income would be at 15%.   

But it is entirely possible that we'd hit the 25% tax bracket depending on what DH decides to do.  Which brings up a follow up question, and probably one google will solve for me efficiently, but I will post here anyway... If I've contributed to a Roth, can I recharacterize my current year's contributions to a traditional?  I like to contribute as soon as i can at the start of the year, but things can change over the course of a year.
Yes - you have until your tax filing deadline to do this (April 15th, or October 15th with an extension).

beltim

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Re: Have a Roth, should I start traditional?
« Reply #10 on: March 03, 2015, 02:47:56 PM »
Remember to compare your current bracket against what you expect your EFFECTIVE tax rate to be in retirement.  Which could be much lower than your bracket rate. 

No no no no no no no.  NO.  And again, NO!  Your advice is just wrong here.  This is the perfect situation to explain why your advice is wrong, too. 

The OP said she will work some type of fun job in retirement.  This could have a huge range, but there are a few possibilities:
1) The income from that job in retirement will not reach the 15% tax bracket. 
In this case, she would be better off putting some of her retirement savings in a traditional IRA, until her expected taxable income filled the 10% bracket (putting the rest of her income in the 15% or higher bracket).
2) The income from that job will completely fill the 10% bracket, but her family will stay in the 15% bracket.
In this case, there isn't a significant difference between a traditional and a Roth, although a Roth allows more savings in a tax-advantaged account.  But this is one case where your advice could lead people astray.  Someone in the 15% bracket now, who will be in the 15% bracket in retirement, is going to have an effective tax rate less than 15%.  But a Roth account is likely better (it is guaranteed to be no worse).
3) The combined income from retirement jobs and retirement income will push her family into the 25% bracket.
In this case, your advice is very, and factually wrong.  There is a range of many tens of thousands of dollars in annual income where the effective tax rate is 15% or below but the marginal tax rate is more than 15%.  In all of these cases if the OP followed your advice she would pay thousands of dollars in additional tax, because your trite rule is inaccurate.

beltim

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Re: Have a Roth, should I start traditional?
« Reply #11 on: March 03, 2015, 02:55:32 PM »
Yeah, I understand that it is a tiered tax system, and the tIRA would come off the top.  15% is my max rate, but I expect to fill the 10% portion with part time wages and spouse's income, which might go up if I bow out of this working business.  So any "retirement" funds towards income would be at 15%.   

But it is entirely possible that we'd hit the 25% tax bracket depending on what DH decides to do.  Which brings up a follow up question, and probably one google will solve for me efficiently, but I will post here anyway... If I've contributed to a Roth, can I recharacterize my current year's contributions to a traditional?  I like to contribute as soon as i can at the start of the year, but things can change over the course of a year.

Your understanding of the tax code exceeds that of several of the posters in this thread.  Given what you've said, there are only a few (possibly rare) reasons you might consider contributing to a traditional IRA:
1) You live in a high tax state now and expect to retire in a low tax state
2) Contributing to a traditional IRA would make you eligible for certain other tax benefits (e.g. Saver's credit)
3) You expect taxes for your income bracket to decline substantially between now and retirement.

If those aren't the case, then I think you're on the right path in contributing to a Roth instead of a traditional.  Given the possibility that you may be in the 25% bracket in retirement, I think it's a no-brainer to continue contributing to a Roth.  I don't know how far your are from a traditional retirement age, but consider also the effect that Social Security can have on your other taxable income.  You're likely going to be in a range where Social Security benefits are taxable, which could drive your tax bracket even higher.

TL;DR: Stay in a Roth.

catccc

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Re: Have a Roth, should I start traditional?
« Reply #12 on: March 04, 2015, 06:53:45 AM »
Your understanding of the tax code exceeds that of several of the posters in this thread.  Given what you've said, there are only a few (possibly rare) reasons you might consider contributing to a traditional IRA:
1) You live in a high tax state now and expect to retire in a low tax state
2) Contributing to a traditional IRA would make you eligible for certain other tax benefits (e.g. Saver's credit)
3) You expect taxes for your income bracket to decline substantially between now and retirement.

If those aren't the case, then I think you're on the right path in contributing to a Roth instead of a traditional.  Given the possibility that you may be in the 25% bracket in retirement, I think it's a no-brainer to continue contributing to a Roth.  I don't know how far your are from a traditional retirement age, but consider also the effect that Social Security can have on your other taxable income.  You're likely going to be in a range where Social Security benefits are taxable, which could drive your tax bracket even higher.

TL;DR: Stay in a Roth.

Thanks for your input, you broke it down very nicely!  The possibility of moving into the 25% tax bracket is a pre-retirement scenario, I wasn't clear on that...  I run tax projections regularly, so if it comes to a traditional being advantageous, I will be sure to look into a conversion if a Roth contribution has already been made.

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Re: Have a Roth, should I start traditional?
« Reply #13 on: March 04, 2015, 02:22:59 PM »
Remember to compare your current bracket against what you expect your EFFECTIVE tax rate (on your withdrawals) to be in retirement.  Which could be much lower than your bracket rate. 

No no no no no no no.  NO.  And again, NO!  Your advice is just wrong here.  This is the perfect situation to explain why your advice is wrong, too. 

The OP said she will work some type of fun job in retirement.  This could have a huge range, but there are a few possibilities:
1) The income from that job in retirement will not reach the 15% tax bracket. 
In this case, she would be better off putting some of her retirement savings in a traditional IRA, until her expected taxable income filled the 10% bracket (putting the rest of her income in the 15% or higher bracket).
2) The income from that job will completely fill the 10% bracket, but her family will stay in the 15% bracket.
In this case, there isn't a significant difference between a traditional and a Roth, although a Roth allows more savings in a tax-advantaged account.  But this is one case where your advice could lead people astray.  Someone in the 15% bracket now, who will be in the 15% bracket in retirement, is going to have an effective tax rate less than 15%.  But a Roth account is likely better (it is guaranteed to be no worse).
3) The combined income from retirement jobs and retirement income will push her family into the 25% bracket.
In this case, your advice is very, and factually wrong.  There is a range of many tens of thousands of dollars in annual income where the effective tax rate is 15% or below but the marginal tax rate is more than 15%.  In all of these cases if the OP followed your advice she would pay thousands of dollars in additional tax, because your trite rule is inaccurate.

There, fixed. 
« Last Edit: March 04, 2015, 03:07:30 PM by So Close »

beltim

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Re: Have a Roth, should I start traditional?
« Reply #14 on: March 04, 2015, 06:17:24 PM »
Remember to compare your current bracket against what you expect your EFFECTIVE tax rate (on your withdrawals) to be in retirement.  Which could be much lower than your bracket rate. 

No no no no no no no.  NO.  And again, NO!  Your advice is just wrong here.  This is the perfect situation to explain why your advice is wrong, too. 

The OP said she will work some type of fun job in retirement.  This could have a huge range, but there are a few possibilities:
1) The income from that job in retirement will not reach the 15% tax bracket. 
In this case, she would be better off putting some of her retirement savings in a traditional IRA, until her expected taxable income filled the 10% bracket (putting the rest of her income in the 15% or higher bracket).
2) The income from that job will completely fill the 10% bracket, but her family will stay in the 15% bracket.
In this case, there isn't a significant difference between a traditional and a Roth, although a Roth allows more savings in a tax-advantaged account.  But this is one case where your advice could lead people astray.  Someone in the 15% bracket now, who will be in the 15% bracket in retirement, is going to have an effective tax rate less than 15%.  But a Roth account is likely better (it is guaranteed to be no worse).
3) The combined income from retirement jobs and retirement income will push her family into the 25% bracket.
In this case, your advice is very, and factually wrong.  There is a range of many tens of thousands of dollars in annual income where the effective tax rate is 15% or below but the marginal tax rate is more than 15%.  In all of these cases if the OP followed your advice she would pay thousands of dollars in additional tax, because your trite rule is inaccurate.

There, fixed.

Better but still not completely right.  Consider your advice in the case of the OP, if the OP at some point between now and retirement, reaches the 25% tax bracket.