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Contributing to Roth IRAs while one of couple is FIRE'd
Old 06-25-2005, 12:53 PM   #1
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Contributing to Roth IRAs while one of couple is FIRE'd

I'm not yet retired ... in my late forties.

If my spouse continues to work while I'm retired, we could contribute to Roth IRAs which we have not been eligible to do in the past because of my income.

Does it make sense to use portfolio income and long term capital gains from a taxable account with their tax advantages for living expenses if my spouse continues to work?* And use her earned income to contribute the max to her 401(k) to defer those taxes and also to contribute to Roth IRAs?

Her income alone after taxes would not cover our living expenses (let's assume $100K of those)

I'm thinking it does pay to keep maxing out retirement contributions.* The two scenarios would be something like either
(a) Live off $50K of her net income and draw down $50K from a portfolio, or
(b) Live off $28K of her net income, contribute $22K to 401(k) and Roth IRAs and draw down $72K from a portfolio.

It seems like robbing Peter to pay Paul, but would help shift assets to tax-advantaged accounts.* *Thanks for any insights!
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Re: Contributing to Roth IRAs while one of couple is FIRE'd
Old 06-25-2005, 04:30 PM   #2
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Re: Contributing to Roth IRAs while one of couple is FIRE'd

LOL,

I like the idea of maxing a ROTH and just do the company match
on a 401k. I believe that taxes will go up eventually and money
drawn from a IRA roll-over will be taxed at ordinary income rates.
This will also put you in a marginally higher tax rate by exposing
up to 85% of SS income to taxes. Withdrawal from a ROTH does
not count as taxable income (not yet anyway).

It is sad that you have to draw down your taxable account so
much. Personally, I like the flexibility of a taxable account and
the low current rates on divies and cap gains. Have you done
the math on drawing down your 401k via a 72t instead of your
taxable? I have a sneaking hunch that for some people this
might be a better strategy. If you chose to do this it would not
make much sense to put money into one 401k bucket and draw
it out of the other unless the company match makes a big difference.

Cheers,

Charlie
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Re: Contributing to Roth IRAs while one of couple is FIRE'd
Old 06-25-2005, 05:55 PM   #3
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Re: Contributing to Roth IRAs while one of couple is FIRE'd

Thanks for the comment charlie. I did not consider a 72t because we have kids that will go to college in a few years and I wanted to move assets into retirement accounts to perhaps help with the financial aid equation. We'll be about 59.5 or so when our second child starts college, so retirement funds could be tapped without penalty then.

I was curious enough to run scenarios (a) and (b) through TurboTax using our real numbers from 2004 for all the other stuff that goes on our tax forms. The real numbers include qualified dividends that are taxed.
In scenario (a) income tax would be about $5100 on about $105.1K AGI.
In scenario (b) income tax would be about $3700 on about $103.7K AGI.

So if I did things correctly, we would come out ahead saving income taxes on her earned income and paying the low capital gains taxes now instead. We would also get tax-free results from the Roth IRAs in the future. I guess a way to think about this is that we take a traditional IRA and convert annually some of it to a Roth IRA and pay long-term capital gains taxes on the conversion and not at our marginal income tax rate.

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Re: Contributing to Roth IRAs while one of couple is FIRE'd
Old 06-26-2005, 01:08 AM   #4
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Re: Contributing to Roth IRAs while one of couple is FIRE'd

Quote:
Originally Posted by LOL!
Does it make sense to use portfolio income and long term capital gains from a taxable account with their tax advantages for living expenses if my spouse continues to work?* And use her earned income to contribute the max to her 401(k) to defer those taxes and also to contribute to Roth IRAs?
That's what we're doing-- using taxable accounts for our expenses while maxing her 401(k) and both Roths.
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Re: Contributing to Roth IRAs while one of couple is FIRE'd
Old 06-26-2005, 03:04 PM   #5
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Re: Contributing to Roth IRAs while one of couple is FIRE'd

We *were* doing it that way, but I became pretty much disgusted with the fund offerings in my wifes 403b. Not that they werent bad to start with, but they've 'discontinued' half the funds I picked without replacing them with a similar offering.

This year we decided to take her income (all of it) for living costs, get rid of the bonds generating ordinary-income-taxable money, and turn the bulk of our investments to high dividend paying large cap value stocks. Given even our standard deduction and exemptions, we'll be paying in the ~5% bracket for our regular income and 5% on the equity dividends until 2007 when the tax on the equity dividends drops to zero. By largely living off my wifes income, we wont really touch the main taxable portfolio except for very large purchases, like a car.

Not as good as GOOD pretax plan, but I think its better than a bad one.
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