Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Fun tax question/decision
Old 01-25-2011, 03:52 PM   #1
Dryer sheet wannabe
 
Join Date: Sep 2010
Location: Madison
Posts: 13
Fun tax question/decision

Current tax situation using two maxed out Roth IRA's.

Fed Owed - 1,685
State Refund - 832

If I re-categorize 3,780 (max allowed) to one of the Traditional IRA - this is what happens.

Fed Owed - 1,115
State Refund - 1,083

Or I could re-categorize Two Traditional IRA's - each 3,780 (max allowed)

Fed Owed - 553
State Refund - 1,343

Any thoughts on how I should calculate the best course of action? Any other questions I didn't address?

Thanks

(I think this is the right category for this discussion)
__________________

__________________
madcityacct is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-25-2011, 04:19 PM   #2
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,492
Your marginal tax rate on the additional $3780 is 21.7%. How do you think that will compare to your marginal tax rate when you are taking distributions? Are you close to retirement and able to estimate income and tax rates? Can you easily afford the additional tax now?

My advice to my own kids is pay the tax and go for the ROTH when the marginal rate is 20% or less. This is pretty close.
__________________

__________________
MichaelB is offline   Reply With Quote
Old 01-25-2011, 04:31 PM   #3
Dryer sheet wannabe
 
Join Date: Sep 2010
Location: Madison
Posts: 13
Thanks MichaelB - that's the calculation I was coming up with too.

I don't believe I'll get the IRA deduction next year...would that influence your decision at all?
__________________
madcityacct is offline   Reply With Quote
Old 01-25-2011, 04:52 PM   #4
Recycles dryer sheets
 
Join Date: Jul 2010
Posts: 255
It doesn't look like the current tax year differences are that compelling either way so either option looks good.

I like to target a balance of $ in tax-deferred vs. tax-free so as to hedge my bets against tax law changes. I would contribute to whatever has a lesser balance. Going forward if you are covered under an employer plan you can increase the tax-deferred balance and you can supplement your tax-free balance with a backdoor Roth contribution regardless of income level. I'm assuming you are fairly young with a target RE date of 2030 - if you are near retirement then I would use a different analysis.
__________________
SunsetSail is offline   Reply With Quote
Old 01-26-2011, 09:40 AM   #5
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,492
Quote:
Originally Posted by madcityacct View Post
I don't believe I'll get the IRA deduction next year...would that influence your decision at all?
It might. Roth and deductible IRA are separate accounts. More paperwork. If it were a one time event I might reconsider. If I believed I might have other opportunities down the road for Roth or I would have the possibility to convert, I'd take the Roth now.

Paying tax is a PITA (speaking for me'self only), so if I had the cash, no debt, low savings returns, I'd rather pay tax now and get it over with. Also, no RMDs in the future.
__________________
MichaelB is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Fun in DC on Tax Day... donheff FIRE Related Public Policy 0 04-15-2010 12:21 PM
fun with tax return preparation... socca FIRE and Money 2 04-17-2009 08:39 AM
Another Tax Question F-One FIRE and Money 5 02-14-2009 03:13 PM
Tax Question: Please Help Letj Other topics 4 02-11-2009 09:33 AM
Tax question freddyw FIRE and Money 3 09-11-2008 07:21 AM

 

 
All times are GMT -6. The time now is 05:11 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.