Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
How to evaluate Roth IRA vs TIRA in this case?
Old 01-11-2012, 12:39 PM   #1
Full time employment: Posting here.
 
Join Date: Oct 2006
Posts: 524
How to evaluate Roth IRA vs TIRA in this case?

I am no where near as savvy as many of you here when it comes to investing so maybe this is a silly question. Both DW and I have income from w*rk. I have a 401K thru my employer but DW only w*rks PT with no benefits. For tax year 2011 she is allowed to make a tax deductable TIRA contribution $6,000 which would give me about $1,500 additional tax return this year. I am not eligible for a tax deductible TIRA so the last few years I have invested my $6,000 in a ROTH IRA (Vanguard Wellesley).

My question is, How do you evaluate whether or not it is better to invest DW's $6,000 into her TIRA vs. investing in a new Roth IRA and fore go the $1,500 tax savings now for possible tax advantages in the future? Either way the $6,000 would be invested in Vanguard Wellesley.

If it has a bearing, DW is soon to be 58, we would like to retire in about 3 years, and we would not need this money before she reaches SS retirement age 66.2 months, maybe even later than that.

what needs to be considered to make the best educated decision?

Tom
__________________

__________________
***********
My motto is.... "a dollar saved is better than a dollar earned. I don't pay tax on the dollar I saved."
Tom52 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 01-11-2012, 12:59 PM   #2
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
The most important important factor IMO is your current income tax rate vs. your projected tax rate when you withdraw the money in retirement. If you're at 25% federal tax bracket now but expect to be in the 15% bracket once retired, you're likely better off taking the deduction upfront. No sense in paying more taxes now only to save less taxes later.
__________________

__________________
panacea is offline   Reply With Quote
Old 01-11-2012, 01:13 PM   #3
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,077
Quote:
Originally Posted by panacea View Post
The most important important factor IMO is your current income tax rate vs. your projected tax rate when you withdraw the money in retirement. If you're at 25% federal tax bracket now but expect to be in the 15% bracket once retired, you're likely better off taking the deduction upfront. No sense in paying more taxes now only to save less taxes later.
+1

It's almost impossible to predict future tax rates, but for 2012 the 15% band goes up to $70,700 taxable gross (after deductions and credits) for married couples. It looks like the OP's marginal rate is 25% now so I would not do a ROTH. You can always do a ROTH conversion later if you want, should your income be in the 15% band.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 01-11-2012, 03:25 PM   #4
Thinks s/he gets paid by the post
Koolau's Avatar
 
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 3,240
Quote:
Originally Posted by Tom52 View Post

what needs to be considered to make the best educated decision?

Tom
Clearly, there are a lot of unknowns here. What will be the future tax rates (anybody here betting they will go down?) How much will your tIRAs and 401(k)s grow to by the time you have to pay RMDs? This is very difficult to estimate (heck, they could go down in value - think of all the taxes you will save) Will you move to a higher or lower taxation state after you retire? So, figuring what your future tax bill will be is problematic at best.

Alan's suggestion is probably the most conservative approach.

Just a couple of other wrinkles to consider: When will your income go back UP during retirement due to taking SS? Don't forget that SS can (probably will) affect your tax bracket - especially when added to your RMDs. So, when you take SS may depend upon when you do your Roth conversion(s). IOW, you probably should only do a conversion in the window between when you both retire and when you begin your SS.

Will you have enough after-tax money set aside if and when you make Roth conversions to pay the extra taxes then? Paying the taxes with after-tax money gives you a bump up in the value of your Roth over its tIRA equivalent.

Honestly, I love Roths so much that my inclination would be to do the Roth now unless you can pretty convincingly show that your tax RATE will go down in the future when you retire. Roths have flexibilities that tIRAs don't have. Yes, you can convert later, but that also starts the 5-year clock again on when you can withdraw proceeds (not the original investment).

I didn't mean to muddy the waters, but I hope I did give a few things to consider. Oh, and YMMV.
__________________
Ko'olau's Law -

Anything which can be used can be misused. Anything which can be misused will be.
Koolau is offline   Reply With Quote
Old 01-11-2012, 03:56 PM   #5
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,412
If you can afford the Roth but think your tax rate will be lower in the future, why not use the tax deferred IRA now and also invest an additional amount equal to the tax saved, in a taxable account. If your future tax rate ends up higher at least you will have part of the tax liability covered.
__________________
MichaelB is offline   Reply With Quote
Old 01-11-2012, 04:43 PM   #6
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by panacea View Post
The most important important factor IMO is your current income tax rate vs. your projected tax rate when you withdraw the money in retirement. If you're at 25% federal tax bracket now but expect to be in the 15% bracket once retired, you're likely better off taking the deduction upfront. No sense in paying more taxes now only to save less taxes later.
Agreed with this, and I'd add a little more. I would personally err on the side of marginal tax rates rising a bit in the future (I think it's a fairly safe bet they won't drop from the current levels). So if I thought I had 25% taxation today but in the 15% bracket for retirement, I'd probably choose the TIRA if I could since I don't think the 15% bracket will rise to 25% or more.

But if I thought I was in the same bracket now and in retirement, or if I thought the retirement bracket would be only slightly lower (such as 28% now versus 25% in retirement), I might be more inclined to go the Roth route.

In my planning (age 46) I personally assume tax brackets will be 3-5% higher in 15 years compared to now (based on nothing more than gut feeling). But I also assume we'll be in what is now the 15% bracket in retirement compared to 25% today, so the tax deduction today still makes more sense even if the 15% bracket rises to (say) 18-20% in the future.
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 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
Backdoor Roth IRA contributions still allowed in 2012, right? soupcxan FIRE and Money 35 02-12-2012 11:52 PM
Can I do a Roth IRA conversion if my AGI is over the Roth limit? starsfan18 FIRE and Money 20 01-03-2012 03:39 PM
Using tax loss harvesting to fund Roth IRA? sailor FIRE and Money 10 11-23-2011 09:31 PM
Roth IRA contribution limit for 2012? Mill Young Dreamers 3 10-21-2011 09:22 AM
Ally Bank now has TIRA & Roth IRA CD's veremchuka FIRE and Money 0 06-24-2011 05:51 PM

 

 
All times are GMT -6. The time now is 08:43 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.