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Traditional AND a Roth IRA?
Old 09-13-2018, 10:31 AM   #1
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Traditional AND a Roth IRA?

I currently have a traditional IRA that I contribute $6480 to each year. The balance is just under 100K at this point.

I am thinking about opening a Roth IRA at the start of the year and directing my $6480 contribution to the Roth each year. The traditional IRA would just sit there until we retire in five years with no further contributions. According to the tests I've run in the Flexible Retirement Planner our long term portfolio would improve with this one simple change.

The only real negative I see is that we wouldn't be able to deduct the Roth IRA contributions from our tax return. However, I used the OLT tax estimator to see what effect that would have and it looked like our tax bill would only increase about $1000. Not insignificant, but I think we could manage over the next five years.

I might convert some of the traditional to the Roth after we retire and our income level drops, but maybe not.

Are there any issues with owning both a Traditional AND a Roth IRA that I may have missed? Any other advantages to owning both?
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Old 09-13-2018, 10:57 AM   #2
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Owning both is better as it gives you flexibility in withdrawal choices.

You need to post more info to get a better answer. example having outside retirement brokerage funds with large buildup of capital gains would mean you would have a nice choice of selling the stocks, and buying them back, and paying zero dollars on the LT capital gain, as long as income is below certain amount.

Do you have any other retirement money like 401K ? or a nice big fat pension ?
Knowing this really determines your actions.

Your traditional IRA might be as high as $130,000 in 5 years, and perhaps $200,000 at age 70.5 when you have to take RMD's. This would mean an RMD withdrawal of just over $7,000.
Would that really raise your income to a higher tax level ? If not, then conversions are not needed.
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Old 09-13-2018, 10:58 AM   #3
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If your tax rate will be less than 1000/6480 in the future, the tIRA will leave you with more after-tax income then.
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Old 09-13-2018, 11:16 AM   #4
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Originally Posted by Sunset View Post
example having outside retirement brokerage funds with large buildup of capital gains would mean you would have a nice choice of selling the stocks, and buying them back, and paying zero dollars on the LT capital gain, as long as income is below certain amount.

Can you clarify?
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Old 09-13-2018, 12:03 PM   #5
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Owning both is better as it gives you flexibility in withdrawal choices. Do you have any other retirement money like 401K or a nice big fat pension? Knowing this really determines your actions.
We're planning to retire in five years with my wife's pension and my IRA. I'll be 60, she'll be 55.

I'll start my SS at 62 (yes I know the pro's and cons of waiting till FRA).

My wife will also start her SS at 62 (five years later when I'm 67).

My traditional IRA is with Vanguard and is invested entirely in a VBIAX balanced 60/40 index fund. If I start a Roth I would use the same VBIAX fund for it. The only difference would be contributing to the Roth instead of the traditional IRA.
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Old 09-13-2018, 12:18 PM   #6
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If your tax rate will be less than 1000/6480 in the future, the tIRA will leave you with more after-tax income then.
To keep things simple, let's say the tax rates don't increase in the future, and we'll be in the same tax bracket before and after retirement.

Now let's say I contribute 100K to my IRA and it gains 30K in interest over some unspecified period of time.

With the Roth IRA I would only be taxed on the 100K I contributed to the IRA right? With my traditional I would be taxed on the full 130K when I withdraw it (contributions and earnings).

Based on my crude example, it seems like I would be paying more in taxes with a traditional IRA than with a Roth IRA. Or am I missing something in my thinking?
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Old 09-13-2018, 12:23 PM   #7
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That's a common mistake. With the tIRA you don't pay taxes up front, and so you have that saved money available to pay the taxes when you later withdraw from the tIRA.
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Old 09-13-2018, 01:33 PM   #8
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... am I missing something in my thinking?
Yes. With a TIRA you are able to put more money in for a given net cost to your wallet. This "extra" is effectively Uncle Sam's but you will be earning the investment income on it. It's like an interest-free loan to you.



If your retirement savings is only $100K and you have to take SS at 62k because you cannot live on your wife's pension, you are very, very thin on assets. I would suggest saving like crazy and maxing both types of retirement accounts. Don't sweat the details. Just sweat running out of money in retirement.
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Old 09-13-2018, 01:35 PM   #9
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I look at it as opportunity cost really.



Pay the tax today via Roth and you have less money to buy less shares, but you pay no tax later...reducing the current tax rate.



Pay the tax later via TIRA and likely the balance is higher that roth since you bought more shares when you didn't need to pay tax, but you still need to pay tax when withdrawing, reducing the total return at the time of withdrawal.


Not having both reduces flexibility during points in time. Those points in time where your tax bracket will be lower will open up opportunities, while the tax bracket is higher it will reduce opportunities... if you have both Roth + TIRA you have more levers to pull at different times...then just one lever to pull essentially allowing for more tax control.


LTCG are taxed differently based on current tax bracket, sometimes as low as 0% creating an opportunity to reduce taxes in those years that you might be in a higher bracket. Just an extra lever to pull.
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Old 09-13-2018, 01:47 PM   #10
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If the tax rate stays the same then the math is very simple.

$100k into a tIRA at 15% tax rate is $85k that is yours and $15k that is the IRS's (to be paid on withdrawal).
Growth of 100% before withdrawal gives you $170k and the IRS $30k. The IRS still has 15% of the total.
Now withdraw your $200k, pay your 15% to the IRS ($30k) and you have $170k.
The whole time, contribution to withdrawal, the IRS owned 15% of your tIRA. Doesn't matter when you paid the taxes.

The numbers are very similar if you contribute $85k to a Roth while paying $15k of your original $100k to the IRS first.
The $85k doubles to $170k and you take it out tax free. Same amount you had with the tIRA.

But, given the contribution limits for tIRA and Roth IRA are generally the same, if $100k was maxing out your tIRA contribution you should have been able to put $100k into your Roth IRA as well. So if you had an extra $15k available (in or destined for a taxable account most likely) it could have been contributed to the Roth IRA. That $15k is then nontaxable in the Roth. A slightly better deal than having only $85k of your money in an IRA.

Owning both a tIRA and a Roth IRA can also be beneficial, depending on your tax rates.

Imagine you have no other income and only a Roth IRA. Everything is tax free and you pay no taxes at all.

Now imagine you have a tIRA and a Roth IRA. You can withdraw from the tIRA up to the point where you have to start paying taxes. That might be 10's of thousands of dollars, depending on deductions and tax rates, coming out of your IRA tax-free. And you didn't have to pay taxes on that money originally either. Even better than a Roth. Or maybe you can take out quite a bit at a lower tax rate than you had when you contributed it, because you have very little other taxable income in retirement.

Of course other income (SS, pension, taxable accounts) may interfere with that plan, but it's something to think about. I won't be Roth converting everything in our tIRAs just so I can withdraw from the tIRAs at the lower tax rates later.
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Old 09-13-2018, 01:51 PM   #11
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If your retirement savings is only $100K and you have to take SS at 62k because you cannot live on your wife's pension, you are very, very thin on assets.
Our expenses after retirement will only be 40K. Probably less, but I'm erring on the side of caution. And yes, that includes health care.

My wife's pension will pay about 27K per year, leaving 13K we have to make up elsewhere. The first couple of years that 13K will come completely from my IRA. I'll get about 5K when I start my SS at 62, dropping the portion from the IRA to about 8K per year. She'll get about 12K from SS when she turns 62, at which point we won't need the IRA anymore.

Waiting to take SS later would increase the benefits, but it would also mean we would draw from the IRA longer and drop it to uncomfortable levels. If our savings is better at the time than I'm estimating now, we might postpone SS a year or two. Otherwise, we'll take it at 62.

Multiple retirement calculators (Firecalc, FRP, etc.) put us at or near 100% success rates, using very cautious estimation figures.
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Old 09-13-2018, 03:51 PM   #12
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Owning both a tIRA and a Roth IRA can also be beneficial
I don't fully understand all of the math calculations, but it sounds like switching my IRA contributions to a Roth may not be worth the trouble. I want to keep things as simple as possible.

OK, let me consider another option. Let's say I leave my traditional IRA as-is and continue contributing $6480 per year. Could we open a second Roth IRA for my wife, and contribute to hers as well? The $6500 contribution limit is per-person right?

Obviously, that means we would have to scrape together more money for savings, but I think we could redirect some of the money that goes to our regular savings to a Roth IRA. It wouldn't amount to a huge amount over five years, but we could probably add another 30K to 40K to our portfolio by the time we retire. Could we then leave her Roth sitting there untouched until we need it in retirement (or pass it on to our daughter if we don't)?

If we contribute to a Roth for my wife, could we still deduct the $6480 I contribute to my traditional IRA on our tax return?

If I work part time after we retire, would I be able to contribute to her Roth IRA even though she is retired and no longer earning income? Or do contributions to her IRA have to come from her income?
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Old 09-13-2018, 04:41 PM   #13
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Contrib limits are per person, and each person of a married couple can contribute to that limit even if only one has earned income, enough to cover both contribs that is.
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Old 09-13-2018, 04:58 PM   #14
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Can you clarify?
Long term capital gains (LTCG) are tax free when total taxable income is in the 15% or less tax bracket.

So a married couple with $40K of taxable income (really about $60K income minus the standard deduction) could sell $37K worth of gains in stock (actual stock amount sold will be higher as original price called the basis is not income).
Then they buy back the same stock (no need to wait so could do it the next minute).
Later if they need to sell lots of stock, they can sell all these where they harvested the gains tax free, and since it reset the basis to the high value, the sales are nearly tax free.

Based on the 2018 IRS tax brackets, here's a breakdown of taxable income ranges for the zero long-term capital gains tax rate:
Single $0-$38,700
Married Filing Jointly $0-$77,400
Head of Household $0-$51,850
Married Filing Separately $0-$38,700
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Old 09-13-2018, 06:50 PM   #15
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Just to further clarify... due to an annoying legislative quirk, the limits for 0% LTCG are really $38,600 for single, $77,200 for MFJ. and $51,700 for head of household.

For 2017 and prior the 0% LTCG cutoff aligned with the top of tax brackets but for 2018 they do not and it is annoying.
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Old 09-13-2018, 07:04 PM   #16
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I use a mix of both Roth and tira to maximize my ACA subsidy. The flexibility to do so is very nice.
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