Author Topic: Roth, traditional IRA, or taxable?  (Read 4677 times)

Random

  • Stubble
  • **
  • Posts: 125
Roth, traditional IRA, or taxable?
« on: March 22, 2014, 05:54:01 PM »
I could use guidance on whether or not my wife and I should contribute to an IRA this year.

A bit of data: I am 55, she is 48.  She is leaving her job next month.  I will work for at least another year.  We both anticipate that we will have future income, just not in a normal job.  We have ample retirement and investment savings, with ~$500k in a taxable account and $1.25mm in tax advantaged (401k, Roths, traditional iras) accounts.  Our adjusted gross income is over $115k, which means that we can,t deduct an IRA contribution, so there is no tax benefit this year.

A Roth seems silly since we would pay tax now based on our current relatively high income, though I may be missing a key point or two on this.

What do you recommend we do?

Thanks in advance,
Random

MDM

  • Senior Mustachian
  • ********
  • Posts: 10105
Re: Roth, traditional IRA, or taxable?
« Reply #1 on: March 22, 2014, 06:20:08 PM »
Enjoy retirement - you have earned it.

If the choice is 401k (or other pre-tax investment) vs. Roth IRA, go 401k.

If the choice is invest your after-tax earnings in a taxable investment (e.g. index fund) vs. invest your after-tax earnings in a Roth IRA (e.g. index fund), go Roth IRA.

Random

  • Stubble
  • **
  • Posts: 125
Re: Roth, traditional IRA, or taxable?
« Reply #2 on: March 22, 2014, 06:27:20 PM »
Thanks MDM.  Our 401ks are maxed out, so it is a choice of putting after tax dollars in an index fund, a Roth, or a traditional.

What is your reasoning for going with Roth?  is it that future growth of the Roth is untaxed?

Thanks and forgive such noob questions.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10105
Re: Roth, traditional IRA, or taxable?
« Reply #3 on: March 22, 2014, 06:48:20 PM »
Thanks MDM.  Our 401ks are maxed out, so it is a choice of putting after tax dollars in an index fund, a Roth, or a traditional.

What is your reasoning for going with Roth?  is it that future growth of the Roth is untaxed?

Thanks and forgive such noob questions.
Yes, you have it exactly (bolded above).

You can invest in an index fund regardless of whether that investment is or is not in an IRA.  Google "index fund" and read some of the links.

Logic goes something like: it won't likely make a large percentage difference in your overall net worth, but it doesn't take much effort so why not do the Roth IRA?

bikebum

  • Pencil Stache
  • ****
  • Posts: 562
  • Location: Nor Cal
Re: Roth, traditional IRA, or taxable?
« Reply #4 on: March 22, 2014, 07:23:24 PM »
Thanks MDM.  Our 401ks are maxed out, so it is a choice of putting after tax dollars in an index fund, a Roth, or a traditional.

What is your reasoning for going with Roth?  is it that future growth of the Roth is untaxed?

Thanks and forgive such noob questions.
Yes, you have it exactly (bolded above).

You can invest in an index fund regardless of whether that investment is or is not in an IRA.  Google "index fund" and read some of the links.

Logic goes something like: it won't likely make a large percentage difference in your overall net worth, but it doesn't take much effort so why not do the Roth IRA?

That makes sense to me. I'm only posting because to me it is reassuring when other people agree with the advice.

Only down side I see to the Roth is 10% penalty if you withdraw gains before age 59.5, but you most likely won't be doing that given your solid situation.

Joel

  • Pencil Stache
  • ****
  • Posts: 799
  • Location: California
Re: Roth, traditional IRA, or taxable?
« Reply #5 on: March 22, 2014, 07:47:34 PM »
Roth IRA - take advantage of the tax-free growth.

Random

  • Stubble
  • **
  • Posts: 125
Re: Roth, traditional IRA, or taxable?
« Reply #6 on: March 22, 2014, 07:48:22 PM »
Thanks MDM and BikeBum.  It makes sense to me.  Away we go.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Roth, traditional IRA, or taxable?
« Reply #7 on: March 22, 2014, 07:49:38 PM »
It also doesn't count as income when it comes out while taxed capital gains (even at the 0% rate) do. Income will potentially increase your medicare copays and the amount of SS that is taxable.

Why wouldn't you do a ROTH over taxable? The 10% penalty is only on earnings. The op is  55. It will be hard to have a ton of earnings in 4.5 years:)

Thanks MDM.  Our 401ks are maxed out, so it is a choice of putting after tax dollars in an index fund, a Roth, or a traditional.

What is your reasoning for going with Roth?  is it that future growth of the Roth is untaxed?

Thanks and forgive such noob questions.

Random

  • Stubble
  • **
  • Posts: 125
Re: Roth, traditional IRA, or taxable?
« Reply #8 on: March 23, 2014, 09:35:50 AM »
Thanks for the additional nuance, Foobar.  And thanks for the quick input from all.  Time to max the Roth and finish my taxes.

The Happy Philosopher

  • Bristles
  • ***
  • Posts: 342
    • thehappyphilosopher
Re: Roth, traditional IRA, or taxable?
« Reply #9 on: March 23, 2014, 12:11:01 PM »
Also assets in a Roth offer more protection from creditors than taxable account (lawsuit, bankruptcy). Roth also are great estate planning tools although not everyone will need this.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 3398
  • Location: WDC
Re: Roth, traditional IRA, or taxable?
« Reply #10 on: March 24, 2014, 10:01:51 AM »
Does gross income exceed Roth limits?  I wouldn't suggest a backdoor Roth in your situation if you have a large amount in a traditional IRA. 

Random

  • Stubble
  • **
  • Posts: 125
Re: Roth, traditional IRA, or taxable?
« Reply #11 on: March 24, 2014, 12:02:27 PM »
Does gross income exceed Roth limits?  I wouldn't suggest a backdoor Roth in your situation if you have a large amount in a traditional IRA.

I'm not sure about the gross income question.  I will check.  My traditional is pretty small now as I migrated much of it to my Roth a few years back.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 3398
  • Location: WDC
Re: Roth, traditional IRA, or taxable?
« Reply #12 on: March 24, 2014, 01:57:01 PM »
In that case, when you did the conversion, did you get taxed on the value of ALL of the traditional IRAs, even the portion that wasn't converted?  I'm not an expert and am confused by much of it myself, but here's why I ask (article below is talking about back-door Roth conversions.  Not sure whether it applies or not: 
http://online.wsj.com/news/articles/SB10001424052702304104504579375432214126664

Quote from:  WSJ   http://online.wsj.com/news/articles/SB10001424052702304104504579375432214126664   
Convert that traditional IRA to a Roth, which is a move available to all.

There's one big caveat: This strategy works best for people who don't already have money in traditional IRAs. That's because in conversions, earnings and previously untaxed contributions in traditional IRAs are taxed—and that tax is figured based on all your traditional IRAs, even ones you aren't converting.

For an investor who doesn't already hold traditional IRAs, creating one and then quickly converting it into a Roth IRA will cost little or nothing in tax, because after a short holding period there's likely to be little or no appreciation in the account.

But if you already have money in traditional IRAs, particularly ones for which you took a deduction, you could face a far higher tax bill on the conversion.

"That is definitely a trap that people fall into," says Jeffrey Levine, a CPA with Ed Slott & Co. in Rockville Centre, N.Y.