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10-22-2008, 08:06 AM
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#1
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Full time employment: Posting here.
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
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Roth or Traditional IRA
I retired last year and always just put the max into my 401k so I never had to choose between the two. My wife is still working this year and plans to keep her part time job at the local university. She teaches a night class there. So we will still have some earned income for a couple of years.
This year our adjusted income will be around 100K, probably will be the same the next couple of years. Then when we both are fully retired I expect it to drop to around 75K.
I'm 51 and my wife is 47. Does it make more sense to take the tax break now, with a traditional IRA, or put it in a Roth? Its not alot of money, but it's still money.
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10-22-2008, 08:24 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Charleston, SC
Posts: 13,566
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The conventional wisdom has always been that the Roth makes sense for younger investors (those under 40), and the traditional for older investors.
But with the advent of being able to stretch and inherit Roths, there might be some compelling reasons for estate purposes.
My gut says go with the Roth, since you will then have choices that your traditional IRA doesn't have regarding RMDs. I assume you rolled your 401k into a traditional IRA?
What is your withdrawal strategy from the various accounts? That might have some bearing on the situation as well.
__________________
“One day your life will flash before your eyes. Make sure it's worth watching.”
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10-22-2008, 08:47 AM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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My numbers say go with the traditional IRA and convert to a Roth later when you are in a lower tax bracket. This means you get to invest tax-free now and may possibly be able to do the conversion tax-free in the future.
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10-22-2008, 08:49 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2007
Posts: 14,328
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Another factor is the expense ratio of the available 401(k). If the expenses are high or the choices poor, that could shade your decision.
Don't forget that as long as your wife is working, you can also continue to contribute to a spousal IRA, if you want to sock away some additional money in a Roth.
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10-22-2008, 08:50 AM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2006
Posts: 12,483
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Quote:
Originally Posted by LOL!
My numbers say go with the traditional IRA and convert to a Roth later when you are in a lower tax bracket. This means you get to invest tax-free now and may possibly be able to do the conversion tax-free in the future.
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Their tax rate may not be lower in retirement......... I have yet to see someone harmed by opening and funding a Roth if they are eligible. I do think Congress may get rid of Roths at some point, but there will be a grandfather time frame so anyone that wants one can get it.........
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Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
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10-22-2008, 08:52 AM
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#6
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Full time employment: Posting here.
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
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My wife has a pension and we plan to live on that, plus cash and dividends from after tax accounts, untill I'm 60. Then we will probably start taking some out of my 401K. I have not rolled over my 401k into a traditional IRA at this time.
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10-22-2008, 08:52 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
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I would go with a Roth, only because looking at everything out there, it seems like tax rates have only one way to go longer-term, and it ain't down...
__________________
"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)
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10-22-2008, 08:57 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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With AGI going from 100K to 75K, it's very likely that they will pay a lower tax rate before they begin SS benefits. It's true that the pension can affect this. However, the 75K is above the line (i.e. AGI) and we didn't get any hints about their deductions and exemptions. For myself, with similar income to the OP, it makes sense to do the traditional IRA because of the tax savings with my early semi-retirement circumstances.
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10-22-2008, 09:06 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2006
Posts: 12,483
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Quote:
Originally Posted by LOL!
With AGI going from 100K to 75K, it's very likely that they will pay a lower tax rate before they begin SS benefits. It's true that the pension can affect this. However, the 75K is above the line (i.e. AGI) and we didn't get any hints about their deductions and exemptions. For myself, with similar income to the OP, it makes sense to do the traditional IRA because of the tax savings with my early semi-retirement circumstances.
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A Roth IRA is more advantageous with regards to the taxation of SS benefits........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
This Thread is USELESS without pics.........:)
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10-22-2008, 09:44 AM
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#10
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Full time employment: Posting here.
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
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But what if I took the IRA money and postponed my SS benefits for a year or so?
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10-22-2008, 12:40 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Exactly which is why I wrote
Quote:
it's very likely that they will pay a lower tax rate before they begin SS benefits
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They won't get SS benefits until several years into retirement (he is only 51 years old this year!). I didn't mention that I am also 51. I will probably not get benefits until I am 66 or older. I have 15+ years to convert my traditional IRA and 401(k) to Roth IRA.
Almost all the write-ups that advocate a Roth assume that you work until you start getting SS benefits, that you don't retire early, that you have a large pension that pays more than your current salary, that you can't live off your taxable investments, that you spend twice your current income in retirement, etc.
Anyways, just run your own numbers which isn't hard to do. In my early years of full retirement, I will be able to live off my money market funds and return of capital, so that I will have virtually no taxable income. Can you tell me that my taxes are gonna go up from my last year's 33% marginal income tax rate? With no taxable income needed for expenses, I can fill up the 0% tax bracket with conversions to Roth. I can also fill up the other low tax brackets with conversions. I can do this for several years. So I don't pay tax on the traditional IRA money now and I will pay virtually no tax on future conversions. This is so obvious, I don't see how you can argue for a Roth IRA now.
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10-22-2008, 02:44 PM
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#12
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Full time employment: Posting here.
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
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I went ahead and opened up a traditional IRA. I want my tax break now!! If the market doesnt start going up my income will definatly be lower than it is now, and arn't the politicians promissing tax breaks for us poor folks?
Thanks to everyone who gave me your opinion. Maybe I'll start a Roth next year.
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10-22-2008, 02:51 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Apr 2007
Location: west bloomfield MI
Posts: 2,223
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Quote:
Originally Posted by LOL!
My numbers say go with the traditional IRA and convert to a Roth later when you are in a lower tax bracket. This means you get to invest tax-free now and may possibly be able to do the conversion tax-free in the future.
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There are two ways to put money in a Roth. You can contribute and you can convert.
100k gross income does not tell us what your TAXABLE income is. After you take your deductions are you under $65100?
If yes- do roth
If no- probably do traditional then convert later (can you get a deduction on the traditional- this would influence decision).
Roth works best if you put money in at a low tax rate (like 15%) and take out at a higher tax rate (like 25%).
There are many other things to consider before making the decision, but the tax rates above, the tax deduction, and deductions available would be at the top of my list and can trump every other issue.
Use this site for reference and planning:
Reference Room
100k gross now
75k gross in retirement.
Note that married filing jointly has a standard deduction of 10900 for 2008 and that individual exemptions for you and your wife are 3500 each. That is $17900 of deductions.
100-17.9=82.1k- this is in 25% tax bracket (you would need 17k more of deductions to make this work well for Roth now)
75-17.9=57.1- this is in 15% tax bracket
This math suggests traditional is better (with or without deduction). This is also a greatly simplified calculation.
I agree with the post above that you should look into Roth conversions.
If you have 57.1 income need, you could withdraw another 8k for Roth conversion (and owe $1200 in taxes), then never pay taxes on that money again.
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Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
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10-22-2008, 03:21 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2008
Location: No fixed abode
Posts: 8,765
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__________________
"Good judgment comes from experience. Experience comes from bad judgement." - Anonymous (not Will Rogers or Sam Clemens)
DW and I - FIREd at 50 (7/06), living off assets
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10-22-2008, 04:17 PM
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#15
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Full time employment: Posting here.
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
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Quote:
Originally Posted by jIMOh
There are two ways to put money in a Roth. You can contribute and you can convert.
100k gross income does not tell us what your TAXABLE income is. After you take your deductions are you under $65100?
If yes- do roth
If no- probably do traditional then convert later (can you get a deduction on the traditional- this would influence decision).
Roth works best if you put money in at a low tax rate (like 15%) and take out at a higher tax rate (like 25%).
There are many other things to consider before making the decision, but the tax rates above, the tax deduction, and deductions available would be at the top of my list and can trump every other issue.
Use this site for reference and planning:
Reference Room
100k gross now
75k gross in retirement.
Note that married filing jointly has a standard deduction of 10900 for 2008 and that individual exemptions for you and your wife are 3500 each. That is $17900 of deductions.
100-17.9=82.1k- this is in 25% tax bracket (you would need 17k more of deductions to make this work well for Roth now)
75-17.9=57.1- this is in 15% tax bracket
This math suggests traditional is better (with or without deduction). This is also a greatly simplified calculation.
I agree with the post above that you should look into Roth conversions.
If you have 57.1 income need, you could withdraw another 8k for Roth conversion (and owe $1200 in taxes), then never pay taxes on that money again.
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Gross income this year will probably be 125K or so. The wifes pension and dividend income should come in around 75k gross, so we should definatly be in a somewhat lower bracket.
I'll look into a Roth conversion when the time comes. It wont be that difficult to do some adjusting of income from one year to the next.
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10-22-2008, 05:01 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 4,391
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One More Point
Just for fun, Lets say that you fund a traditional IRA every year to the max. Then when you retire you live off of that income only for a number of years until it is exhausted before using other assets.
Well in that case you deduct the traditional IRA at your MARGINAL (ie maximum) tax rate during the working years.
But when you pay income taxes upon liquidation of the IRA you will only pay taxes on that money at your retired AVERAGE tax rate. It goes without saying that your average tax rate is much less than your marginal rate. And if you live on a lower income in retirement than your working years, then the advantage would be even more towards the tradional IRA.
In my case should my retired income be the same as my working income, then my IRA tax rate in retirement will be just under half of what I got to deduct while working.
Do the numbers yourself with your own situation.
- Advantage traditional IRA
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10-22-2008, 09:04 PM
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#17
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Thinks s/he gets paid by the post
Join Date: Sep 2008
Posts: 2,171
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Quote:
Originally Posted by dm
I went ahead and opened up a traditional IRA. I want my tax break now!! If the market doesnt start going up my income will definatly be lower than it is now, and arn't the politicians promissing tax breaks for us poor folks?
Thanks to everyone who gave me your opinion. Maybe I'll start a Roth next year.
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Did you do the worksheet to see if your traditional IRA contributions will be fully deductible? You said your adjusted income was "around 100K" and that your wife is covered by a pension system. I think either of those could affect how much of a tax break you actually get.
(P.S. That's the draft version of the worksheet. I don't think the real McCoy will be available until next month or maybe even December.)
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10-23-2008, 05:47 AM
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#18
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Full time employment: Posting here.
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
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Quote:
Originally Posted by kyounge1956
Did you do the worksheet to see if your traditional IRA contributions will be fully deductible? You said your adjusted income was "around 100K" and that your wife is covered by a pension system. I think either of those could affect how much of a tax break you actually get.
(P.S. That's the draft version of the worksheet. I don't think the real McCoy will be available until next month or maybe even December.)
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I went by the tables at Vanguard. https://personal.vanguard.com/us/acc...MaxDeduct1.jsp
If I read them correctly, I am a non participating spouse and as long as our income is below $159,000 I can take the full deduction.
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10-23-2008, 08:27 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2006
Posts: 12,483
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__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
This Thread is USELESS without pics.........:)
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10-23-2008, 08:44 AM
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#20
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Full time employment: Posting here.
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
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Quote:
Yep, I remmember back in the late 70's, my fathers buisness was doing well, and he was turning down work. I asked him why he didnt just hire more people. His reply that after taxes the extra money just wasn't worth the extra headaches that expanding his buisness would bring.
He also retired early, 1990, he just didn't call it that at the time. He said he never regreted that decision either.
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