Fun tax question/decision

[madcityacct]

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)

 

[MichaelB]

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.

 

[madcityacct]

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?

 

[SunsetSail]

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.

 

[MichaelB]

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.