rollover to traditional or roth from annuity?

[tambo]

I apologize for my newbie-to-investing question, which I am sure you have answered before, but I appreciate the help. 

My husband has 2 retirement accounts (annuities) from former employers that we would like to put into an IRA and invest in an index fund.  One for $9200 and the other for $1000.  I was hoping to roll them over into a Roth IRA, but it looks like that contribution would be taxable this year.  Is it better to choose a traditional IRA instead? 

Also, I was hoping to roll both accts. over together and invest in an index fund with a $10,000 requirement.  Can I do that?  Vangaurd's online form doesn't give me options to add funds from more than one account, but I'm hoping that's still a viable option.   

[Bruno]

You need to ask your husbands former employer. Some plans do not permit rollovers.
Otherwise it shouldn't be a problem, but if you roll a pre-tax account into a Roth you need to pay income tax.
If rollovers are permitted you should be able to roll both into a single (roth) account.

[GlassStash]

I was hoping to roll them over into a Roth IRA, but it looks like that contribution would be taxable this year.  Is it better to choose a traditional IRA instead? 

A traditional IRA is better if you want to keep from paying taxes on the money now and defer paying taxes until withdraw. If you are comfortable paying the taxes now (and want the other benefits of a Roth), then rolling over to a Roth is better. It depends on your preference.

[tambo]

Thank you!  Yes, we have checked and can transfer into another retirement account without penalty.  Assuming all things are equal, it seems it would be better to pax the tax now, as it is more likely I will be paying more in tax later during retirement??

[Cheddar Stacker]

Thank you!  Yes, we have checked and can transfer into another retirement account without penalty.  Assuming all things are equal, it seems it would be better to pax the tax now, as it is more likely I will be paying more in tax later during retirement??

Most people will pay less tax in retirement. Are you asking us or telling us here - there are question marks. If you earn nice salaries now and live on less than you make, when you start drawing your retirement funds you will only take out what you need, correct? If that's the case, your taxable income will go down. Here's a very basic, rough example (and I'm just throwing out random numbers here, so don't bother checking the facts or asking why someone would need $70K to live on, it's just an example):

Current income          $100,000
Retirement Savings      -10,000  This will go away completely in retirement
SS & Medicare Tax        -  7,650  This will go away completely in retirement
Fed/State Tax              -15,000  This will go down because of the other two above that disappear
Net Living Expenses       67,350

So if you can live on $67,350 now, and you can continue to live on that in retirement (adjusted for inflation) then you would only need to draw about $80K from retirement funds giving you about $67K after taxes. This doesn't consider many other things like a paid off mortgage, less commuting costs, less everything else, so you might not even need the full "net living expenses" you currently have. Of course some expenses like health insurance can go up, so factor that into your model, but most people will spend less and pay less tax in retirement.

[GlassStash]

Thank you!  Yes, we have checked and can transfer into another retirement account without penalty.  Assuming all things are equal, it seems it would be better to pax the tax now, as it is more likely I will be paying more in tax later during retirement??

Most people will pay less tax in retirement. Are you asking us or telling us here - there are question marks. If you earn nice salaries now and live on less than you make, when you start drawing your retirement funds you will only take out what you need, correct? If that's the case, your taxable income will go down. Here's a very basic, rough example (and I'm just throwing out random numbers here, so don't bother checking the facts or asking why someone would need $70K to live on, it's just an example):

Current income          $100,000
Retirement Savings      -10,000  This will go away completely in retirement
SS & Medicare Tax        -  7,650  This will go away completely in retirement
Fed/State Tax              -15,000  This will go down because of the other two above that disappear
Net Living Expenses       67,350

So if you can live on $67,350 now, and you can continue to live on that in retirement (adjusted for inflation) then you would only need to draw about $80K from retirement funds giving you about $67K after taxes. This doesn't consider many other things like a paid off mortgage, less commuting costs, less everything else, so you might not even need the full "net living expenses" you currently have. Of course some expenses like health insurance can go up, so factor that into your model, but most people will spend less and pay less tax in retirement.

As Cheddar Stacker illustratively points out, it is highly likely that you will pay less in taxes when you retire. It would be helpful if we knew your current tax rate and your expected tax rate at retirement. The wife and I are currently in the 15% marginal tax bracket, so we prefer to max out our Roth IRAs instead of traditional IRAs. We find this space very valuable as we will not likely be in this bracket for much longer. Additionally, the ability to withdraw contributions in ER is attractive. There are, however, persuasive arguments about maxing traditional IRAs while possible (there are income limits) and then withdrawing from them through a 72(t) or Roth conversion ladder later on. "Better" is in the eye of the beholder.