We have no IRA. Are we missing out?

[EaMone]

Hello all. I am a long time reader of the blog and forums. I have a question about the path I have chosen for our FI journey.

Quick run of the numbers:
We currently make a bit over $70k jointly, putting us in the 15% tax bracket.
We have $60k invested in a brokerage account and $7k invested in my employer's tax deferred compensation 457 plan.

As you can see, there is no IRA. My reasoning for not funding an IRA is that we plan on being FI at ages 35 and 31 and therefore would benefit from having immediate access to our retirement funds rather than having to wait until 59 1/2. The 457 plan provides the same tax deferring benefits of a traditional IRA but the funds are disbursed once I leave my job.

Is my reasoning flawed? Should we be taking advantage of an IRA? And if so, would Roth or Traditional serve us better? 

I would appreciate any advice and opinions on our situation.

[Joet]

In my opinion, in a word, yes.

72(t) and Roth conversions from your 401/403/SEP plans in ER when in the ~0-10% tax bracket(s) make a lot of sense to me.

However you are in the 15% tax bracket, so you aren't giving up a ton. Well a bit more perhaps depending on the state tax situation I suppose.

15% vs 10% or 0% isn't the biggest thing in the world to worry about I suppose. Not a huge delta there.

But one thing to throw out there is that long term cap gains rate may return more to the historical norm, making your taxable investments less attractive at some point. But really, who knows. Some of your money invariably [IMO] needs to be available post 59.5 or thereabouts so unless you plan on dieing [knock on wood] before then, it's probably perfectly sensible to have SOMETHING in tax deferred space.

[EaMone]

Thanks for the reply!

As far as the state tax situation, we are in Florida so no issue there.

Also, I did not mention that I will be receiving a pension in my late 50s which would give me some extra income later on in life as I definitely do no plan on dying just yet :)

I suppose either changes to capital gains tax rates or us being bumped up to a higher tax rate would both be good reasons for utilizing a traditional IRA. But for now, I just don't see the benefit. Unless, of course, someone can point out what were losing out on.

[matchewed]

Flexibility. You're looking at Joet's response and saying well that's not now so who cares? The point of Joet's response is that you cannot predict the future. You don't know what the tax laws will be down the road. Given that it is just as important to have diversified investment vehicles as it is to have diversified investments. And frankly they are the same concept, as in they are risk management strategies.

[tylerherman]

The market rises and falls out of our control, but with our investments the two things we can control are:
1) the fees we pay
2) the taxes we pay

Letting your money grow tax free is pretty much a no brainer, regardless of when you decide to take advantage of it.

[GreenGuava]

My reasoning for not funding an IRA is that we plan on being FI at ages 35 and 31 and therefore would benefit from having immediate access to our retirement funds rather than having to wait until 59 1/2. The 457 plan provides the same tax deferring benefits of a traditional IRA but the funds are disbursed once I leave my job.

Is my reasoning flawed? Should we be taking advantage of an IRA? And if so, would Roth or Traditional serve us better? 

I would appreciate any advice and opinions on our situation.

You mention elsewhere a pension in your late 50s.  No old 401(k)s that could become an IRA?

My suggestion:  get a Roth IRA;  go to Vanguard and just get a target date fund for the years post-60.  And then ignore it, other than contributing some to it annually.  Don't even count it towards your FI.  Think of it as additional insurance for your older age;  on top of that, because it's a Roth IRA, you can dip into the contributions if you need to, but otherwise it will grow tax-free.

Even for retiring at an age in which you can't pull from a tax-advantaged account as easily as you can post 59.5, I still think it's great if you intend to live that long.

[EaMone]

Thanks again for the responses. I appreciate the information.

I will definitely take an IRA into consideration for diversification and the tax benefits you both mentioned.

Is the general consensus here that a Roth is superior to Traditional due to the long term tax-free growth? I ask because my wife will hopefully be graduating to start a career in the health industry within the next 2 years which will bump us up to the 25% marginal tax bracket. Of course I cant predict what tax brackets will be when we are ready to retire but I think its safe to say that our retirement income wont see us in the 25% bracket.

That being said, would a Traditional IRA be the better choice as we can assume we will pay higher taxes now rather than in retirement?

And in response to GreenGuava; no we do not have any old 401ks which we could convert.

[GreenGuava]

Roth is generally used for diversification;  there's also a fairly low limit after which you can't contribute to a traditional IRA and get the deduction.

[pom]

One point that I want to make is that if you withdraw your SWR, lets say 4%, it does not have to be uniformly accross your investments. 

Assuming a 50/50 split, you can withdraw 8% from your brokerage and 0% from the IRA. You can plan it to make sure that you are at around age 59 1/2 by the time the brokerage is depleted and you start withdrawing from your now substantial IRA.