Author Topic: Worth Recharacterizing Roth IRA to Traditional IRA  (Read 1931 times)

jimmy88

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Worth Recharacterizing Roth IRA to Traditional IRA
« on: April 18, 2016, 08:36:14 PM »
Hello All, long time reader and lurker here,

I've been reading a lot recently about certain advantages a Traditional IRA can have over a Roth IRA - mostly points made in these articles:

http://www.madfientist.com/traditional-ira-vs-roth-ira/

http://www.gocurrycracker.com/roth-sucks/

I have come to the conclusion (and please correct me if I'm wrong) that as long as I'm above the 15% tax bracket it is better to use a Traditional IRA until I get older (I'm 27). Point being being that I would have more money to pour in taxable investment accounts right now since a Traditional IRA isn't taxed upfront.

I currently have a Roth IRA (20k), and a taxable investment account (40k).

My main questions is:  Is it worth recharacterizing my Roth IRA to a Traditional? Should I just open a new Traditional IRA and leave the Roth alone? I just saw the recharacterizing option today on Betterment. I'm very new to the early retirement community and still consider myself somewhat of an investing newbie. Thanks for any advice in advance y'all.

Best,
Jimmy

MDM

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Re: Worth Recharacterizing Roth IRA to Traditional IRA
« Reply #1 on: April 19, 2016, 12:11:16 AM »
I have come to the conclusion (and please correct me if I'm wrong) that as long as I'm above the 15% tax bracket it is better to use a Traditional IRA until I get older (I'm 27). Point being being that I would have more money to pour in taxable investment accounts right now since a Traditional IRA isn't taxed upfront.

My main questions is:  Is it worth recharacterizing my Roth IRA to a Traditional?
jimmy88, welcome to the forum.

See https://www.bogleheads.org/wiki/IRA_recharacterization for more details on recharacterization (including the option to do so for your 2015 contribution until October 2016).

The answer to the traditional vs. Roth question comes down to your marginal rate while contributing now vs. your marginal rate when you will withdraw.  It has nothing to do with "average" or "effective" rates at withdrawal.

So...what do you expect your marginal rate at withdrawal will be?  Some things to consider:
 - contribution and growth rates
 - pension or lack thereof
 - Social Security or lack thereof
 - likely filing status (e.g., single or MFJ or HOH)

Simplifying assumptions usually include
 - use "real" returns (i.e., ignore inflation)
 - tax laws (e.g., brackets) don't change

NoStacheOhio

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Re: Worth Recharacterizing Roth IRA to Traditional IRA
« Reply #2 on: April 19, 2016, 06:12:49 AM »
It's worth noting that you can only recharacterize your 2015 and 2016 contributions at the present time. Any contributions made prior to 2015 can't be recharacterized.

jimmy88

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Re: Worth Recharacterizing Roth IRA to Traditional IRA
« Reply #3 on: April 19, 2016, 10:16:32 PM »
Thanks for the feedback guys!

After more reading, and to prevent complicating things, I think I'm going to open a new Traditional IRA and just not touch my Roth until FI. I can then slowly convert my Traditional into the Roth for the tax advantages. Let me know if I'm missing something.

MDM

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Re: Worth Recharacterizing Roth IRA to Traditional IRA
« Reply #4 on: April 19, 2016, 11:02:33 PM »
Thanks for the feedback guys!

After more reading, and to prevent complicating things, I think I'm going to open a new Traditional IRA and just not touch my Roth until FI. I can then slowly convert my Traditional into the Roth for the tax advantages. Let me know if I'm missing something.
That is probably fine.  A year or two difference in Roth vs. traditional is not likely to have a great impact on your spendable retirement income.