Traditional IRA?

[Spanky]

Since we are not qualified for Roth IRA contribution, is it still worthwhile contributing to a traditional IRA? The only benefit is tax-deferred accumulation but subject to penality if withdrawal before age 59.5. We could invest it into a tax-managed fund instead.

Any opinion?

 

[BUM]

Nope,

GD-ER is right. Uncle Sam says pay me now or pay me later. Its up to the individual to GUESS when the payout would be more favorable. Pay taxes today or pay taxes later.

Its a quizzical debate. One might save big by deferring taxes out 10 or 20 years. However those taxes might be more affordable now. Don't just fund your TradIRA for its own sake. OTOH that doesnt mean dont save for ER! Put $$$ aside in your regular account.

BUM

 

[unclemick]

Mark Twain had something wry to say about: 'When Congress is in Session'.

Having started investing in 1966 - things have changed quite a bit over the years: I can remember paying off SS in June of the year, cap gain rate changes, new ideas like IRA's and this silly Roth thing, etc., etc.

My view - don't overly depend on predicating 10 - 20 years out what Congress will do. However, accept a certain level of uncertainty and invest to get the most $ working for you the longest time possible in your situaton.

I maxed every tax deferred vehicle availible to me before investing after tax $.

Now eleven years into ER (age 61) doing a little partial Roth conversion - just in case I fail to croak precisely at 84.3 (my IRS life expectancy in1992). So I'm violating my own suggestion slightly. But the bulk trad. IRA is still growing tax deferred toward RMD at 70 1/2 - which has also changed recently.

Bottom line - do what your situation will allow you to get the most $ working for you the longest time possible.

And pray for Congress - they need all the help they can get.

 

[lazyday]

For someone close to retirement, it _might_ make sense. Later, during the retirement years that income is low, do partial conversions from IRA to Roth, until max out the 0%, 10%, 15% or 25% bracket. (I like to max out the 15% bracket today. I aim for maxing the 10% with NQ divs and conversions to Roth, and the rest with LT capgains and qualified dividends, for 5%. Before the 5% rate, I did bigger conversions.)

If making nondeductable contributions to the IRA, beware that when converting to Roth, you can't convert those $ first--there is a formula, only letting you take part of the tax-paid $ for each conversion, even if your nondeductable IRA is a separate IRA.

In spite of the downsides, so far I'm happy I made nondeductable IRA contributions, but I stopped working soon enough to take advantage with still-low income tax rates, and have a low enough "income" to do the conversions each year.

I might be an exception, and if tax laws change enough before enough of my IRA is converted, I may be worse off for my nondeductable contributions too.

 

[Nords]

I never did see the advantage of putting nondeductible contributions in an IRA/401... Anyone know of any?

Heck, yeah-- first there's those employer's matching 401(k) contributions.

Also take a look at your tax bracket in retirement. Those 15% dividend & cap gains are great but only if you're not getting taxed to death in other areas like pension income or RMDs.

Most of our IRA contributions have been non-deductible, including some 1990s investments that turned out huge cap gains. Glad we didn't have to pay taxes on those back then. And we would have taken humongous cap gains if they'd been in individual stocks because we wouldn't have stayed there after early 2000.

Today, with me ER'd and spouse working on it, we're in a conversion "sweet spot" with a 10-15% tax bracket. We've been converting up to the top of the 15% bracket and paying no more than we would on the equivalent dividends or CGs. The taxes are paid with funds outside the IRA so the net effect is a boosted contribution to the Roth IRA. (The Roth IRA is starting at the same size as the conventional IRA, but now all of the Roth dollars & gains are tax-free.)

If spouse's pension works out the way that she thinks it will, we'd be pushing the 15% bracket. Dividends & cap gains would hopefully be taxed at no more than they are today, but can we realistically hope that the lowest tax rates of the last century won't revert to some scarier "mean"? So I'd rather pay the taxes at today's lower rates than to have to swallow RMDs on top of pension income in ~30 years.

 

[Jarhead*]

Mark Twain had something wry to say about: 'When Congress is in Session'.

Having started investing in 1966 - things have changed quite a bit over the years: I can remember paying off SS in June of the year, cap gain rate changes, new ideas like IRA's and this silly Roth thing, etc., etc.

My view - don't overly depend on predicating 10 - 20 years out what Congress will do. However, accept a certain level of uncertainty and invest to get the most $ working for you the longest time possible in your situaton.

I maxed every tax deferred vehicle availible to me before investing after tax $.

Now eleven years into ER (age 61) doing a little partial Roth conversion - just in case I fail to croak precisely at 84.3 (my IRS life expectancy in1992). So I'm violating my own suggestion slightly. But the bulk trad. IRA is still growing tax deferred toward RMD at 70 1/2 - which has also changed recently.

Bottom line - do what your situation will allow you to get the most $ working for you the longest time possible.

And pray for Congress - they need all the help they can get.

Unclemick: As I'm sure you know, the RMD at 70 and a half, was changed about a year and a half ago from about 16 to 26.
When it was 16, I was "entertaining" the idea of converting partially to Roth. But when it got down to it, I just couldn't force myself to pay taxes ahead of time.
The "real old phart" might be upset with the "old phart",
for not doing this, but hell with him, green fees, and tournament fees are expensive
Using 26 year payout shouldn't be too bad. (If taxes become a real problem, it will partially be because Ira has done better than I thought it would. (I make no predictions on tax rates). I also make no predictions on how long I will be active enough to enjoy my vices. (One day at a time at this juncture).
Have fun in New Orleans. (My wife and I attended two business conferences there in the 70"s and 80"s, and having left the kids at home, had a "great time", and most of it was legal.

 

[ESRBob]

Maybe I just drank the Kool-Aid on Roths, but I have always lusted to get as much as possible into Roths in order to have them be outside the tax system for my lifetime and my kids' if I can pass it on to them.

Since you can only get money into an IRA or Roth if you have earned income then your working years aret the time to do it. Now it's too late for me in ER.

Non-Roth IRAs (Sep or regular op 401k) are like holding tanks. You can get the money converted into a Roth sometime in the future. Since the future for anyone contemplating ER means that time is not too far away, this is not all just far-off theory. You will have a time soon, in ER, where you can make the conversions at 10% and 15% tax brackets. I've been doing it bit by bit for some years now.

It's sort of like backgammon -- moving the pieces down the board, when the rolls make it safe.

So deductible or not, I'd say get the $ into an IRA, and move it to Roth later when you can.

One final thought: get one of those calculators and notice how big your IRA is likely to be by age 80, and what your RMDs are likely to be. You'll be in the max tax bracket for sure, with those kinds of deductions. Because of all the compounding inside the IRA this is going to be huge. Get it into the Roth in your 40s or 50s and all the growth and compounding in the subsequent years is all taxfree.

Here is a calculator about the size of RMDs that might open your eyes as to how big they could get:
http://www.hughchou.org/calc/mdib.cgi

Jarhead, I am not sure if it uses the 16 or 26 method -- would you be able to tell if you looked at it? It was updated in 2002-- maybe RMDs are not so bad now?

 

[unclemick]

I like Hugh Chou's simple calulators - been using them since before I discovered this forum - in my early webtv days.

 

[Jarhead*]

Here is a calculator about the size of RMDs that might open your eyes as to how big they could get:
http://www.hughchou.org/calc/mdib.cgi

Jarhead, I am not sure if it uses the 16 or 26 method -- would you be able to tell if you looked at it?  It was updated in 2002-- maybe RMDs are not so bad now?

ESRBob: Actually, the RMD is now 27 1/2 at age 70.
(According to the above Calc.). All custodians, apparantly use above conforming RMD for all accounts.
Using the new figures, it is a lot less punitive than it was previously.
Very good news for most of us. (I was concerned when it was l6).
I would much rather let IRA run, and make any shortfall from other funds outside of IRA.

 

[Mr._johngalt]

Hello Jarhead and all. Like Jarhead I am still
"letting the IRA run" and living off other funds.
This is opposite of what I had planned when I ERed.
However, way back then I still thought taxes would be
an issue in ER. Surprise! They are not, and I even have
some different ways to take the income I require.

Three major events will torque the present set-up
if I make it that far:

SS for me 2006
SS for spouse 2011
Spouse employment status unknown

Meantime, the IRA keeps "running".

JG

 

[rapoole]

ESR Bob

Thanks much for the RMD calculator! It was an eye opener. I'm going to get much more serious about Rothing when I get the opportunity.

rapoole

 

[ESRBob]

OK- Found another reason to make nondeductible contributions into a trad IRA/40x... - FAFSA --- IRA $$ don't count against you for financial aid for you or your dependents.</rant>

GD-ER-

That looks like another good reason to try to get kids a Roth, too. (another post going on that elsewhere).

Re the Financial Aid People-- I would be very interested in hearing news from the coal face on what qualifies or disqualifies kids these days, as specifically relates to ER parents, or kids assets.

If the IRA doesn't count, do other retirement assets count?

I had been hearing that only income was what mattered, and thought that would make us look pretty attractive, or at least not eliminate us from the game. Not always true?

Anything you could pass on would be helpful, or maybe we should start another thread?

 

[ESRBob]

ESRBob: Actually, the RMD is now 27 1/2 at age 70.
(According to the above Calc.).

Jarhead, Now I know what you mean by 16, 26 or 27 1/2 -- it is the divisor for the first year,and then it looks like the divisor falls by .8 or .9 for the next ten years or so.

What shocked me with that calculator was the size of the RMDs down the road. I know you have a few years on us, when I put in the following "reasonable" I think stats for an ER couple, I showed up with quarter-million dollar-per-year withdrawals in our 90s - just when we really need those sports cars and fantasy balloon trips around the world..

Inputs: 46 years old, 200k current IRA balance, growing 8% a year. (I know this may be optimistic, and it may not suit everybody, but still -- 200k+ RMDs in old age didn't sound too useful.

I'm sticking with my Roth Medicine approach: Harvest the 10% and 15% brackets during your early ER years, pay the tax with other taxable funds and maybe even pass the Roth on to your heirs...