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traditional vs. Roth IRA?
Old 02-10-2008, 11:33 AM   #1
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traditional vs. Roth IRA?

Hey all,

Trying to decide on whether we should choose a traditional vs. a Roth for my IRA. DH will do a Roth (not eligible for traditional). We will be eligible to take the full deduction (unless we get a major windfall) for a traditional IRA for myself.

Everything I read said if you expect to be in a lower tax bracket at time of retirement, then go for the traditional IRA now (i.e. take the tax deduction now while in a higher bracket). We expect to live on much less than what we bring home now, so I would presume we will be in a lower bracket, and the traditional is right for us.

However, DH says that the tax brackets could very well change in 2010 and even though we will be living on much less when FIRED we still could be in a higher tax bracket than now. I'm really confused:confused:

Feedback?
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Old 02-10-2008, 11:43 AM   #2
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I dunno. I'm all about reducing my taxable income right now, so I max out my deductions to my 401(k), and am doing a ROTH as well. I feel like you should get the max deferred first and then look to ROTH, but I'm no financial guru! If I was, I'd have a whole lot mo' money!
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Old 02-10-2008, 01:09 PM   #3
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Try this calculator: Roth vs Traditional IRA Calculator

If you are near retirement and expecting tax-rate to decrease, a traditional IRA is better than a ROTH IRA.
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Old 02-10-2008, 01:14 PM   #4
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Quote:
Originally Posted by Spanky View Post
Try this calculator: Roth vs Traditional IRA Calculator

If you are near retirement and expecting tax-rate to decrease, a traditional IRA is better than a ROTH IRA.

Thanks Spanky, but this calculator is for deciding whether you want to convert your traditional to Roth ("This calculator is designed to assist you in determining the benefits, if any, of rolling your traditional IRA funds into a Roth IRA.")

We are looking at putting new money in - traditional vs Roth.

We are hoping to retire maybe 2013/2014.
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Old 02-10-2008, 01:32 PM   #5
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try this one (it's written in Java and may take a while to load):
Roth vs. Traditional IRA
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Old 02-10-2008, 01:46 PM   #6
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Quote:
Originally Posted by simple girl View Post
Hey all,
Trying to decide on whether we should choose a traditional vs. a Roth for my IRA. DH will do a Roth (not eligible for traditional). We will be eligible to take the full deduction (unless we get a major windfall) for a traditional IRA for myself.
If your DH is ineligible to deduct contributions to a traditional IRA due to his being covered by a pension plan at work, then that ineligibility might also extend to you. Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf) deals with all aspects of IRAs and it is full of "if you or your spouse is covered by a pension plan" language.
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Old 02-10-2008, 01:48 PM   #7
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My thinking is that if I can get a reduction in taxes now, that is an advantage. At some point in the future I will either withdraw the money and hope I am in a lower tax bracket then, or I will convert the money into a Roth and pay taxes for the conversion at my then tax rate. While I agree that tax rates will likely rise in the future (not guaranteed, but seems a likely trend) in order to be ahead on the deal I need only to have some years with a lower tax rate in the future - not only when I use the money. My personal plan to retire early likely means I have some years living on savings before taking RMDs from IRAs or other income, so I likely have some years with low income for tax purposes, so I plan to take advantage of those low rate years and that means taking the deduction now is more valuable to me. Your situation may differ.
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Old 02-10-2008, 02:22 PM   #8
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Here's something that I never saw mentioned, and none of those calculators address: If you will have a period during which you can live off taxed assets, you can convert your IRAs to Roths and pay very little tax. I converted $10K in 2007 and didn't pay a penny of tax (due to education tax credits).
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Old 02-10-2008, 03:04 PM   #9
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if your in a higher bracket now then you think you will be later definatley take the right off. 95% of america will be in a lower bracket with no pay check coming in later on then with a check now
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Old 02-10-2008, 04:38 PM   #10
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I would think the Roth would be best in most cases. The investment earnings in a traditional IRA would be taxed as normal income at withdrawal, while the Roth would have no taxes. Unless this is a short-term deal (and it sounds like it may be) I would favor the Roth. It is also nice to get into the Roth while you can if you are in danger of exceeding the income limits in the future.

You might also consider using both the traditional and Roth accounts to provide some "tax diversity". It sounds like you expect to have a lower tax rate in retirement with some certainty, so this may not be a big factor for you.

If you can, use a spreadsheet or online calculator to try out some scenarios for each alternative.

Dan
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Old 02-10-2008, 04:41 PM   #11
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[quote=Animorph;613988]I would think the Roth would be best in most cases. The investment earnings in a traditional IRA would be taxed as normal income at withdrawal, while the Roth would have no taxes. Unless this is a short-term deal (and it sounds like it may be) I would favor the Roth. It is also nice to get into the Roth while you can if you are in danger of exceeding the income limits in the future.

You might also consider using both the traditional and Roth accounts to provide some "tax diversity". It sounds like you expect to have a lower tax rate in retirement with some certainty, so this may not be a big factor for you.

If you can, use a spreadsheet or online calculator to try out some scenarios for each alternative.


quote]


may not make sense for a roth if your giving up a 30-40% deduction now so you can save 15% later on.
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Old 02-10-2008, 04:42 PM   #12
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Quote:
Originally Posted by Spanky View Post
try this one (it's written in Java and may take a while to load):
Roth vs. Traditional IRA
That's a really cool calculator and easy to use. Shows it is to our benefit to do a traditional for me, especially if we FIRE. Even if we didn't retire until I was 65, I'd still be slightly ahead with the traditional. Thanks!

Quote:
Originally Posted by gindie View Post
If your DH is ineligible to deduct contributions to a traditional IRA due to his being covered by a pension plan at work, then that ineligibility might also extend to you. Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf) deals with all aspects of IRAs and it is full of "if you or your spouse is covered by a pension plan" language.
I reviewed this. Since our AGI is less than the amount they note, we are entitled to the full deduction. I appreciate the heads-up. Could get close in future years.

Quote:
Originally Posted by TromboneAl View Post
Here's something that I never saw mentioned, and none of those calculators address: If you will have a period during which you can live off taxed assets, you can convert your IRAs to Roths and pay very little tax. I converted $10K in 2007 and didn't pay a penny of tax (due to education tax credits).
Wow, that's really cool! So you lived off your taxable accounts, converted your IRA to a Roth, and had enough deductions to pay zero tax. Now that's something to aspire to!

Thanks to everyone. I'm going to bookmark this next year so I don't have to rethink it again, like I've been doing for the past couple years...
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Old 02-10-2008, 04:42 PM   #13
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Quote:
Originally Posted by TromboneAl View Post
Here's something that I never saw mentioned, and none of those calculators address: If you will have a period during which you can live off taxed assets, you can convert your IRAs to Roths and pay very little tax. I converted $10K in 2007 and didn't pay a penny of tax (due to education tax credits).
I like your way better - my way(Katrina) is not recommended - a tax loss is still a tax loss.

heh heh heh - I Google up the ORP Planner and lie to it - to get various scenios on spending Roth vs trad IRA. Sneaky rascals still have me living to 91 now - I haven't figured how to trick it back to my old trusty 84.6.
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Old 02-10-2008, 05:02 PM   #14
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heh heh heh - I Google up the ORP Planner and lie to it - to get various scenios on spending Roth vs trad IRA. Sneaky rascals still have me living to 91 now - I haven't figured how to trick it back to my old trusty 84.6.
Take up smoking and/or bungie jumping?
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Old 02-10-2008, 07:52 PM   #15
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The other wrinkle for me - now filing single - I get hosed on my early SS - 85% taxible this year. Depending on your filing status a Roth can help you there - till Congress wises up and closes the loop hole.

heh heh heh - . You know I don't mind the IRS that much when I spend more trad. IRA/party hearty cause I'm not getting any younger - but they never bring a side dish or wine/anything to drink - just take the taxes and run. Party poopers!
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Old 02-11-2008, 08:48 AM   #16
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Another loophole I found in setting up a Roth IRA is that you must keep it five years before withdrawing money or else you are going to pay taxes. So, set up a small Roth and leave the rest of your money in your regular IRA for five years, you can then move the money over avoiding that five year hold rule and not have to worry about emergency withdrawals being taxed.
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Old 02-11-2008, 09:01 AM   #17
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Another loophole I found in setting up a Roth IRA is that you must keep it five years before withdrawing money or else you are going to pay taxes.
My understanding is any earnings you have on the funds in the Roth are subject to penalties and tax if withdrawn prior to 5 years (or under age 59.5). I thought you could withdraw up to the amount you contributed into your Roth tax free at any time since you've already paid tax on that money before contributing it to your Roth.

At least I think that's what these guys say...Timeline for Using Your IRA

EDIT: Looks like the Fairmark site says you must pay a 10% distribution penalty on the entire amount if you withdraw before 5 years if under 59.5.
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Old 02-11-2008, 10:21 AM   #18
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OK, consider this, you've got a 401k you've rolled over into an IRA, so ALL the money is taxable. Now you put $1000 into a Roth, then in five years roll the rest. You've now created the situation where you could have withdrawn your money from your regular IRA in case of an emergency, and now you can put the rest of your cash into your Roth and it is immediately available.
I think what you're trying to convey is a situation where you've been contributing to a regular IRA and part is non taxable because it was after tax dollars.
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Old 02-11-2008, 05:10 PM   #19
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as far as my outlook on roths they may not be good for most of us. like i said very few of us will actually be in a higher bracket when the paychecks stop and right now a retired couple at full retirement age can pull almost 35,000 from retirement money and pay 1500.00 bucks in taxes.
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Old 02-12-2008, 01:21 AM   #20
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If you have a sizeable 401k/IRA, you should guesstimate what the portfolio will look like at 70 1/2 when you have to take mandatory minimum distributions. If that amount is big, then you may want to roll some (or all) of it to a Roth. Couple that with your current tax rate and the expected tax rate at 70 1/2 and you should be able to make an intelligent financial decision.
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