Author Topic: IRA and 457, traditional or Roth?  (Read 2109 times)

Recliner

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IRA and 457, traditional or Roth?
« on: December 02, 2016, 02:17:28 PM »
I plan on working 18 more years until I retire from my government job. I'll have a pension that will pay $50k/year (tied to inflation so it'll be more in 18 years but the equivalent to $50k now)
My job gives a 50% match on our 457 plan up to the federal max of $18k and I can pick either traditional or Roth.
Household income is $110k and will slightly outpace inflation over the years but without any dramatic raises as I'm very happy with my position and will not be trying to get promoted.
Considering our current tax bracket and that my spending in retirement will be higher than my current income should I use the Roth option for my 457 and for my IRA? Or traditional for either?

$260k in taxable account
$133k in rollover IRAs
$133k in Roth IRAs
$140k in 457

We save $18k/year in my 457 and $11k in our Roths

VoteCthulu

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Re: IRA and 457, traditional or Roth?
« Reply #1 on: December 02, 2016, 02:29:34 PM »
With that much pension plus what you already have in deferred accounts (133+140) I would swap all of my contributions to roth that I could, and re-evaluate based on current tax laws every few years.

The benefits you can gain by deferring taxes at this point are minimal compared to the freedom from RMDs, unexpected needs bumping your tax bracket, etc. All of the current benefits could change, but then you can adjust your investment strategy.

seattlecyclone

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Re: IRA and 457, traditional or Roth?
« Reply #2 on: December 02, 2016, 02:32:33 PM »
Why do you plan to spend more than your current income in retirement? $110k is a lot! Reduce your aspirations just a tad and you won't need to spend 18 more years in your job.

MDM

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Re: IRA and 457, traditional or Roth?
« Reply #3 on: December 02, 2016, 02:48:28 PM »
Appears you are currently saving 25% (plus whatever state tax rate) on your traditional deductions.

If you switch to all Roth now, your marginal withdrawal rate - even at (~$110K/yr + tax) expenses - will be only 15% (plus whatever state rate).  Given that*, you should not switch to all Roth now.

At the very least, contribute enough to traditional to get below the 25% bracket.  If you continue to contribute the full $18K (or more - do you have a TSP/403b/other option in addition to the 457?), you could also do "tax gain harvesting" by taking capital gains from your taxable account and paying 0% federal (plus whatever state) if you stay within the 15% bracket for total taxable income.

Check again in 10 years or so to see what your expected marginal withdrawal rate is, and adjust if needed. :)

*You can play with the case study spreadsheet, www.i-orp.com, or other software to estimate this for yourself.

Recliner

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Re: IRA and 457, traditional or Roth?
« Reply #4 on: December 02, 2016, 02:50:33 PM »
The benefits you can gain by deferring taxes at this point are minimal compared to the freedom from RMDs, unexpected needs bumping your tax bracket, etc. All of the current benefits could change, but then you can adjust your investment strategy.

The benefits right now of doing traditional would be reducing my taxable income since I'm in the 25% tax bracket.  Does the fact that I'm likely to be in the 25% bracket in retirement also tip me to the Roth being best?

Recliner

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Re: IRA and 457, traditional or Roth?
« Reply #5 on: December 02, 2016, 03:03:25 PM »
Why do you plan to spend more than your current income in retirement? $110k is a lot! Reduce your aspirations just a tad and you won't need to spend 18 more years in your job.

I plan on traveling a lot and also offering to pay for my kids and their future families to come occasionally  too.  Plus, I love my job.  Maybe I'll retire in 15 (which is the earliest I could based on  my age) instead of 18 but I've got to work until I'm at least 52 for my pension

MDM

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Re: IRA and 457, traditional or Roth?
« Reply #6 on: December 02, 2016, 03:21:17 PM »
Does the fact that I'm likely to be in the 25% bracket in retirement also tip me to the Roth being best?
Ah, but is that a fact?  Take care to avoid self-defeating prophecies.  E.g., if you think you will be in a high bracket and contribute to Roth, you may end up in a lower bracket - and vice versa.

VoteCthulu

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Re: IRA and 457, traditional or Roth?
« Reply #7 on: December 02, 2016, 04:02:15 PM »
Appears you are currently saving 25% (plus whatever state tax rate) on your traditional deductions.

If you switch to all Roth now, your marginal withdrawal rate - even at (~$110K/yr + tax) expenses - will be only 15% (plus whatever state rate).  Given that*, you should not switch to all Roth now.

At the very least, contribute enough to traditional to get below the 25% bracket.  If you continue to contribute the full $18K (or more - do you have a TSP/403b/other option in addition to the 457?), you could also do "tax gain harvesting" by taking capital gains from your taxable account and paying 0% federal (plus whatever state) if you stay within the 15% bracket for total taxable income.

Check again in 10 years or so to see what your expected marginal withdrawal rate is, and adjust if needed. :)

*You can play with the case study spreadsheet, www.i-orp.com, or other software to estimate this for yourself.
The 50k pension plus 50% of social security plus RMD on deferred accounts plus the interest on their after tax money should push them up into the 25% bracket.

MDM

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Re: IRA and 457, traditional or Roth?
« Reply #8 on: December 02, 2016, 07:38:42 PM »
The 50k pension plus 50% of social security plus RMD on deferred accounts plus the interest on their after tax money should push them up into the 25% bracket.
There's a lot of time between age 52 and the need for either SS or RMD at age 70, during which they will not be in the 25% bracket - and maybe never will be, depending on Roth conversion amounts, etc., if they go all Roth now.

At least, that's what I got when I ran the numbers....