Author Topic: Where should I continue to save? Traditional or Roth  (Read 3614 times)

WorkToNotWork

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Where should I continue to save? Traditional or Roth
« on: February 10, 2014, 11:22:36 PM »
The question of Traditional Vs Roth IRA is always being debated, and on regular timelines I realize that if I'm young and not in my highest earning years then Roth is generally favorable. But I'm looking for advise for my situation which is different than lots of other people because I already have a large chunk saved in a Roth.

I'm not super young anymore and I only plan to work until I'm 45 at most, the goal is to have financial independence by 40, but that's the "goal" the more realistic number is probably 42 then tack on a few years so I can have some lifestyle inflation when I'm done. I'm currently 31 years old, and I'll be making around 85-90k this year.

So far, my whole life I have contributed to a Roth IRA and the balance of that account is about 140k. I do have a 401k which I still contribute to, but after doing my taxes this year I'm wondering if I should put more money into tax deferred accounts by switching to a traditional IRA this year instead of my Roth. 5.5k isn't a ton of tax deferred money but I'm starting to think that I'm now entering my higher money making years lowering my taxes is probably a good strategy. Also since I already have 140k in a Roth if I do nothing with that account until I'm 60, it should be worth somewhere in the area of 1 million by the time I can actually touch it without penalties (at a 7% return rate).

After doing my taxes (and actually owing money this time!) I was thinking of taking more steps to lower my taxes. Last year I started saving more money outside of my retirement accounts in preparation for early retirement (one of my goals is to purchase a new home, a smaller home where I don't have roommates).

Here are some random concerns and thoughts I have had:

I've heard that having money in various types of taxable and non taxable accounts gives you more flexibility in retirement, I'm thinking of beefing up the tax deferred side of things since I actually have more money in my Roth than in my tax deferred accounts at the moment. Does this even matter that much? I'm not retired so I have no idea how much of an advantage this might be to have tax deferred savings and taxed savings. Also I believe I've already saved a large chunk of money in my Roth which is probably the harder type of account to get a larger balance on because you have to pay taxes on all money going in.

I'm starting to make more money now than I plan to have passively in retirement. So wouldn't lowering my taxes now be a good idea? I also know that this depends on how I think tax rates will be in the future and while I think tax rates will be a little higher, I don't think it will be any drastic change.

Basically I'm not sure where I should keep contributing. No matter what I will continue to contribute to my 401k since I have a company match, but outside of that I'm not sure where I should be stashing my money.

Any ideas on which is a better place? Why should I contribute to one or the other?

Thanks!!

Frankies Girl

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Re: Where should I continue to save? Traditional or Roth
« Reply #1 on: February 11, 2014, 12:14:35 AM »
If it was me in your shoes, then yes, I'd be pushing the 401k to the max (as long as you've got halfway decent funds to choose from), and seeing if a traditional IRA was possible as well. It might not get you down to a lower taxable income bracket, but you'd at least be paying less overall since your taxable income would go down. There are several ways to move the money over without paying penalties or tax if you're at or under the 15% tax bracket in retirement (no matter what age you actually retire) as well, but with what you've already got in your Roth, it would seem that a Roth pipeline might be a good fit.

So, short answer, max your 401k and Roth, and if it's possible, get a traditional IRA going as well.




foobar

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Re: Where should I continue to save? Traditional or Roth
« Reply #2 on: February 11, 2014, 06:42:58 AM »
Deductible all the way. You will probably deduct some money in the 25% bracket (depends on married and how big the 401(k) but when you take it out you are much more likely to be in the 0%(i.e. deduction offset) or 10% bracket.  ROTHs are great tax wise for people making 100k+ in retirement. If your making more like 40k, you aren't paying taxes to begin with. The RMD avoidance is another plus to the roth but you have plenty of time to convert your 401(k) to a roth when your in a lower tax bracket.

You do need some taxable savings but in general if you can get the money out of your 401(k) penalty free by doing a bit of work (see roth roll overs, 72(t), loans).


Max out the 401(k)
Max out the IRA

stick the rest in a taxable account.

The question of Traditional Vs Roth IRA is always being debated, and on regular timelines I realize that if I'm young and not in my highest earning years then Roth is generally favorable. But I'm looking for advise for my situation which is different than lots of other people because I already have a large chunk saved in a Roth.

I'm not super young anymore and I only plan to work until I'm 45 at most, the goal is to have financial independence by 40, but that's the "goal" the more realistic number is probably 42 then tack on a few years so I can have some lifestyle inflation when I'm done. I'm currently 31 years old, and I'll be making around 85-90k this year.

So far, my whole life I have contributed to a Roth IRA and the balance of that account is about 140k. I do have a 401k which I still contribute to, but after doing my taxes this year I'm wondering if I should put more money into tax deferred accounts by switching to a traditional IRA this year instead of my Roth. 5.5k isn't a ton of tax deferred money but I'm starting to think that I'm now entering my higher money making years lowering my taxes is probably a good strategy. Also since I already have 140k in a Roth if I do nothing with that account until I'm 60, it should be worth somewhere in the area of 1 million by the time I can actually touch it without penalties (at a 7% return rate).

After doing my taxes (and actually owing money this time!) I was thinking of taking more steps to lower my taxes. Last year I started saving more money outside of my retirement accounts in preparation for early retirement (one of my goals is to purchase a new home, a smaller home where I don't have roommates).

Here are some random concerns and thoughts I have had:

I've heard that having money in various types of taxable and non taxable accounts gives you more flexibility in retirement, I'm thinking of beefing up the tax deferred side of things since I actually have more money in my Roth than in my tax deferred accounts at the moment. Does this even matter that much? I'm not retired so I have no idea how much of an advantage this might be to have tax deferred savings and taxed savings. Also I believe I've already saved a large chunk of money in my Roth which is probably the harder type of account to get a larger balance on because you have to pay taxes on all money going in.

I'm starting to make more money now than I plan to have passively in retirement. So wouldn't lowering my taxes now be a good idea? I also know that this depends on how I think tax rates will be in the future and while I think tax rates will be a little higher, I don't think it will be any drastic change.

Basically I'm not sure where I should keep contributing. No matter what I will continue to contribute to my 401k since I have a company match, but outside of that I'm not sure where I should be stashing my money.

Any ideas on which is a better place? Why should I contribute to one or the other?

Thanks!!

WorkToNotWork

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Re: Where should I continue to save? Traditional or Roth
« Reply #3 on: February 11, 2014, 11:58:15 PM »
That's basically the advise that I was thinking I would get, I just wanted some other outside opinions. Thanks all!

Wads

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Re: Where should I continue to save? Traditional or Roth
« Reply #4 on: February 12, 2014, 03:57:47 AM »
I always thought if you had a company 401k you are not allowed to contribute to a traditional  IRA with a income over 69k? Am i missing something?



http://www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work



Cromacster

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Re: Where should I continue to save? Traditional or Roth
« Reply #5 on: February 12, 2014, 07:49:01 AM »
I always thought if you had a company 401k you are not allowed to contribute to a traditional  IRA with a income over 69k? Am i missing something?



http://www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

It depends on his MAGI.  So if he is single, taking standard deductions, making 90k, and maxing out his 401K, his MAGI is 62350, so he would be eligible for a tradition IRA deduction as well.

To the OP:
There are always going to be many opinions out there.  I personally like the idea of having as much as possible in the Roth and not touching it until you absolutely have to.  You can withdraw the principle penalty/tax free any time, but its earnings are tax free, so best to keep the pot full as you can.  But, if you have the ability to reduce your tax bill, while still fully funding your Roth, definitely take advantage where you can.