Author Topic: retirement.. roth or traditional  (Read 3073 times)

unix_kung_fu

  • Stubble
  • **
  • Posts: 101
retirement.. roth or traditional
« on: June 02, 2014, 10:01:01 AM »
I would like to think I can retire early, and also think I will be in a higher tax bracket later on, so I was thinking Roth IRA.

The problem is I have a horrible retirement plan at work, all the funds expense ratio are very high. I don't see myself switching jobs anytime soon nor do I see them changing the retirement plan. This leads to me to believe my best option would be to open a traditional IRA (I haven't started my own IRA yet) and every quarter roll it over to a traditional IRA.

Not sure if that is even possible or wise. Or would just paying the taxes and converting to Roth even make sense. And would this go against my annual $5.5k contribution limit?

nereo

  • Senior Mustachian
  • ********
  • Posts: 10056
  • Location: la belle province
    • Here's how you can support science today:
Re: retirement.. roth or traditional
« Reply #1 on: June 02, 2014, 10:12:59 AM »
Quote
also think I will be in a higher tax bracket later on, so I was thinking Roth IRA.
That's usually the best reason to go with a ROTH - if you plan on being in a higher tax bracket later on.

Quote
The problem is I have a horrible retirement plan at work, all the funds expense ratio are very high. I don't see myself switching jobs anytime soon nor do I see them changing the retirement plan. This leads to me to believe my best option would be to open a traditional IRA (I haven't started my own IRA yet) and every quarter roll it over to a traditional IRA
your work retirement plan shouldn't influence your decision to fund a t-IRA or roth-IRA (unless the answer depends on lowering your taxable income via a t-ira)
 Even with high fees you should contribute to your work retirement enough to get any company match.  It's the most certain return you will ever see.  Also, talk with your HR - often there is a low-cost index fund available from whatever brokerage your company deals with, but they only offer it if people express interest.  Pressure them.
Also, if you want to retire early you will very likely need to save more than $5.5k/year. 

Quote
Not sure if that is even possible or wise. Or would just paying the taxes and converting to Roth even make sense. And would this go against my annual $5.5k contribution limit?
no, converting from a t-IRA to a ROTH does not count against your $5.5k contributions.  You can do a rollover and still contribute $5.5k to either a t-ira or a roth.

unix_kung_fu

  • Stubble
  • **
  • Posts: 101
Re: retirement.. roth or traditional
« Reply #2 on: June 02, 2014, 10:25:27 AM »
Hi, thanks for the reply.

I will see if there is a low cost index fund available. Regardless I want to contribute the maximum amount allowed. I'll just eat the fees indefinitely, as I can't see how going through the trouble to roll over my employer retirement plan into a Roth (and paying taxes) would be worth the trouble.

LadyStache

  • Stubble
  • **
  • Posts: 231
Re: retirement.. roth or traditional
« Reply #3 on: June 02, 2014, 11:07:29 AM »
I'll just eat the fees indefinitely, as I can't see how going through the trouble to roll over my employer retirement plan into a Roth (and paying taxes) would be worth the trouble.

You don't have to do a rollover, you can keep the regular IRA and the Roth separate and make deposits into one or both (depending on your preferences). If your traditional IRA seems to be eating up your returns in fees yet you aren't willing to pay the taxes for a rollover, you should definitely consider leaving those funds where they are without adding to them significantly and opening up a Roth where you would stash most of your new contributions.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10056
  • Location: la belle province
    • Here's how you can support science today:
Re: retirement.. roth or traditional
« Reply #4 on: June 02, 2014, 11:10:42 AM »
no problem
Quote
I'll just eat the fees indefinitely, as I can't see how going through the trouble to roll over my employer retirement plan into a Roth (and paying taxes) would be worth the trouble.
The process isn't hard or particularly complicated.  I'm with Vanguard and to convert my previous t-IRA (held by another broker) and 403(b) into my roth-IRA took about 15 minutes of my time.  I called them and they generated all the paperwork, and I just signed it and mailed it in. At tax time they generate the required documents and I just know that will count against me on my 2015 paperwork.
Fidelity has similar services.

If you want to keep everything in your employer's fund that's fine (and I"m not sure you can roll it over until you stop working there) - but the process certainly isn't hard.

NumberCruncher

  • Pencil Stache
  • ****
  • Posts: 612
Re: retirement.. roth or traditional
« Reply #5 on: June 02, 2014, 12:06:40 PM »
I would like to think I can retire early, and also think I will be in a higher tax bracket later on, so I was thinking Roth IRA.

Well, the question is really whether you would be in a higher tax bracket when you plan on withdrawing funds.

It can get more complicated than just that, though. I highly recommend reading articles like this: http://www.madfientist.com/traditional-ira-vs-roth-ira/ to help you decide and look at your options.

Zamboni

  • Handlebar Stache
  • *****
  • Posts: 2217
Re: retirement.. roth or traditional
« Reply #6 on: June 02, 2014, 04:00:54 PM »
I agree it is complicated, but you already have tax-deferred savings through your employer's plan.  So, a Roth instead of a traditional IRA will give you tax diversification.  It also allows you the option to later set up a Roth pipeline if you want to retire early (just search that term if you want more info as there are plenty of other threads.)  Also, if you think your tax bracket will go up upon retirement, then a Roth is definitely the way to go.

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: retirement.. roth or traditional
« Reply #7 on: June 02, 2014, 09:30:06 PM »
Most of the benefits of converting a traditional IRA to a Roth through the "backdoor" method like you mentioned are lost if you have existing pre-tax assets. Look up "pro rata rule" to get more details on tax treatment when you convert.

How much higher do you think your tax bracket will be in retirement? A lot higher, or just a little (within 5% or so)?

If a lot, it may be worth converting ALL your assets to Roth and paying the taxes upfront.

If a little, I would contribute fully $17.5k to your 401k, $5.5k to a Roth, and then the remainder of your investments in a taxable account.

The benefit of having multiple account types is that it gives you options. For example, you could put your high-income (things like REITs and bonds) into your Roth, broadly invest in ETFs and whatever is available in your 401k, and then invest as you wish in your taxable account.