Rollover or iBonds?

[Safire]

We have a small rollover IRA that has $20K in it. We are saving up for a downpayment next year and we have around 100K in that fund. We are serious enough about buying a home of our own soon that we have scaled back on investing into the 401K, only putting enough to get employer match and not a dime more.

Husband and I are disagreeing about whether we should rollover IRA to a ROTH or if we should buy iBonds? The interest rate on IBonds that will be 9% until Oct, 2022.

I am strongly in favor of doing the rollover, rather than iBonds. I calculate the taxes to be around 7K based on our family income. Husband claims we're better off buying 7K worth of iBonds, esp since we're not contributing max to 401K but just enough to get the match. We've been arguing so I suggested rolling over 10K and investing $3500 in iBonds instead.

Franky, I am not able to explain why this rollover is so important to me. Maybe it's because aside from this & another 20K in our current 401K (which we plan to slowly rolling over the next few years), every other investment is in ROTHs.

What is our better option at this time? Should we rollover? Or just get those iBonds and continue saving for the house that we pray we could get soon?

Please advice.

 

[jazz4cash]

A point of clarification. The ibond rate is 9.6% for the 1st 6 months of ownership if you buy before the reset in Nov. After 6 months it will reset to the new rate.

 

[Alex The Great]

I would do a Roth conversion. I-Bonds are so popular now because of their high yield but it is temporary. Money in Roth IRA will grow tax free permanently.

 

[obsessed]

Will your tax rate be greater than 35% in retirement? If not, the time is probably not right for a Roth conversion.

 

[Montecfo]

Not a lot of info to go on. But I am not sure a Roth conversion makes sense at your tax rate. And it will cost you tax money better saved for home purchase.

And of course an IRA is an investment vehicle. You could buy virtually any investment in either type of IRA. So Roth conversion versus I-bonds is not the true choice. It sounds like you mean I-bonds versus using those funds to pay the tax man.

Your IRA strategy should be informed by your current and expected future tax rates. If something else is driving your decision, perhaps that should be reconsidered.

Best of luck on the home purchase.

Sent from my Pixel 3a using Early Retirement Forum mobile app

 

[Safire]

And of course an IRA is an investment vehicle. You could buy virtually any investment in either type of IRA. So Roth conversion versus I-bonds is not the true choice. It sounds like you mean I-bonds versus using those funds to pay the tax man.

Yes, sir. Thank you for putting into words what I was rambling on and on about. The decision is really iBonds or TaxMan over the Roth Conversion.

Our third option is to save that 7K that would become due when we rollover that 20K into a ROTH, and put it instead towards the home, which is an investment, too.

I worry as we are in our late 40s and don't have a home going into retirement in 15 years' time and with a significantly disabled child who will potentially need support all his life. I just worry about having to rent in retirement.

Could not bothering with either the ROTH conversion or buying iBonds be the best decision for us at this time?

 

[copyright1997reloaded]

1. What is your current marginal tax bracket?
2. What is your expected post-retirement tax bracket? (yes, just take a swag at this.)

You don't state it explicitly, but imply you are working. There may be a time in your future when one/both are not working, and your tax bracket would be lower and more favorable to Roth conversion.

If your goal is home ownership (i.e. getting that down payment as quickly as possible) and you are currently in a higher tax bracket, you might even want to change your Roth contributions (401k) to traditional (tax-deferred) to lessen the tax bit and thus have more for the down payment. I know this is blasphemy to your original post and in the long run means more Roth conversions, but perhaps still the right choice given your housing desires...and even also might mean doing neither the Roth conversion NOR the i-bonds but instead max out the drive to raise cash for the down payment.

As an aside (and not asked for), when folks ask me what they should invest in (knowing that I have lots of equities), my answer is always to FIRST have an emergency fund of six months of expenses (which would be one top of your down-payment requirement). This will also be needed after you purchase the house as you will find that STUFF HAPPENS (with a home) requiring $.

 

[Chuckanut]

Y

I worry as we are in our late 40s and don't have a home going into retirement in 15 years' time and with a significantly disabled child who will potentially need support all his life. I just worry about having to rent in retirement.

Home ownership is a lifestyle decision not just a financial one. If you think owning you own home will improve the lifestyle of yourselves and your child, then I would say focus in on that.

By the way, have you looked into ABLE accounts which allow you to put away tax advantage money for the care of a disabled child? Like a Roth income earned in the account it not taxed.

What is an ABLE account?

ABLE Accounts, which are tax-advantaged savings accounts for individuals with disabilities and their families, were created as a result of the passage of the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014 or better known as the ABLE Act. The beneficiary of the account is the account owner, and income earned by the accounts will not be taxed. Contributions to the account, which can be made by any person (the account beneficiary, family, friends Special Needs Trust or Pooled Trust), must be made using post-taxed dollars and will not be tax deductible for purposes of federal taxes; however, some states may allow for state income tax deductions for contributions made to an ABLE account.