IRA question specific to those with pensions

[TDub]

Hi, all,

Maybe I'm reading too much, because now I'm confused about what to do.
Matt Becker at MomandDadMoney wrote this argument here that I think makes a very solid case for why the tIRA should not be overlooked and is the best option for many people. He states, however, that if one expects other income in retirement, a ROTH likely makes the most sense.

For those of you expecting or currently drawing on pensions, what did you do during your wealth accumulation years? Did you forgo the ROTH in favor of the tIRA?

Currently, DW and I max out our ROTHs each year and intend to do so until we exceed the income limits. (We do the same with our traditional TSPs).

Thanks!

 

[Sunset]

I think it's best to have both. Gives you flexibility to account for income tax changes over decades.

I'll admit I stopped reading the article when he said you should "compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE"

To me, that is wrong, as it will always provide proof IRA is the best choice, since effective tax rate in future is NEARLY always lower than marginal rates of 15%, unless you are getting over $250K per yr in retirement.

 

[steelyman]

I don’t think Roth plans existed in any form until the late 90s, so the only option was traditional. However, the contribution limits were pretty low.

They finally offered a Roth option in my employer-sponsored plan in 2008 and I went all in on that. It was more a catch-up strategy to have funds in both types.

 

[VanWinkle]

I like the ability to have both the TIRA and the RIRA to draw from in retirement. But, I also am an advocate of having a taxable account as well to help control taxes in retirement. I think having all 3 types of accounts is the best solution for me. I wish I had more Roth, but am slowly increasing it with conversions at 0 tax rate. After SS at 66, I will accelerate the Roth amounts and remain in the 12% brkt.

 

[Animorph]

More income in retirement, like a pension or SS, just drives up the tax rate on RMD's from a tIRA. Run an estimate of your taxes when you hit 71 and all of that income is maxed out.

I have only taxable brokerage account "income" until I turn 70. After that, with 2x SS and a small pension, I might have a little 12% tax bracket left for RMD's, but mostly it would have been in the old 20% bracket. So I Roth convert my tIRA's until then, reducing RMD's and the amount of tIRA withdrawn at my highest tax rates.

Before retiring I was able to do a little "backdoor" Roth conversion, but generally my taxes were higher than now and with care even after I'm 70. So 401k/tIRA deductions were more valuable. It all depends on your life long tax situation.

The flip side of this is if you have no income at all, you can take a significant withdrawal from your tIRA at 0% or 10% taxes. You definitely want to do that. That's why I'll save a little tIRA instead of converting it all. Some of it will be withdrawn before age 70, and a little dribble after that, filling in my lower tax brackets. You don't want to end up with a 0% tax bracket and only Roth withdrawals available!

 

[steelyman]

The flip side of this is if you have no income at all, you can take a significant withdrawal from your tIRA at 0% or 10% taxes. You definitely want to do that. That's why I'll save a little tIRA instead of converting it all. Some of it will be withdrawn before age 70, and a little dribble after that, filling in my lower tax brackets. You don't want to end up with a 0% tax bracket and only Roth withdrawals available!

Good post, but the last part (quoted) seems important in light of pension income. If you’ve got it, you may not get the 0% bracket.

 

[jazz4cash]

It’s extremely useful to have as many categories as possible: taxable, tax deferred, Roth and pension if available.

 

[Independent]

I think it's best to have both. Gives you flexibility to account for income tax changes over decades.

I'll admit I stopped reading the article when he said you should "compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE"

To me, that is wrong, as it will always provide proof IRA is the best choice, since effective tax rate in future is NEARLY always lower than marginal rates of 15%, unless you are getting over $250K per yr in retirement.

I have always agreed with the bold. But, I didn't stop reading.

In the example, he assumes that 100% of their retirement income comes from IRA withdrawals. No pension, SS, or income from taxable investments. So part of the tIRA withdrawal can be matched to the 0% bracket.

I always assumed I would have other income, so the marginal vs. marginal was the right comparison for me. I can see that will be different for some people.

If I were starting today, I'd try to have both. I call that "tax diversification". I don't know what future tax rules will be.

 

[TDub]

In your opinion, would you consider a pension + a tax deferred account (TSP), a Roth, and a taxable account enough “tax diversification”?

We’ll absolutely switch to TIRA contributions once we’re phased out of Roth eligibility, but in the meantime perhaps it’s overkill to add a TIRA for the sake of diversification ?

 

[Dtail]

I like the ability to have both the TIRA and the RIRA to draw from in retirement. But, I also am an advocate of having a taxable account as well to help control taxes in retirement. I think having all 3 types of accounts is the best solution for me. I wish I had more Roth, but am slowly increasing it with conversions at 0 tax rate. After SS at 66, I will accelerate the Roth amounts and remain in the 12% brkt.

+1
Couldn't qualify for Roth, but having some in all 3 types does give the most flexibility when retired.

 

[VanWinkle]

In your opinion, would you consider a pension + a tax deferred account (TSP), a Roth, and a taxable account enough “tax diversification”?

We’ll absolutely switch to TIRA contributions once we’re phased out of Roth eligibility, but in the meantime perhaps it’s overkill to add a TIRA for the sake of diversification ?

I think you have it covered!!

VW

 

[pb4uski]

I think it's best to have both. Gives you flexibility to account for income tax changes over decades.

I'll admit I stopped reading the article when he said you should "compare your MARGINAL tax rate TODAY with your EFFECTIVE tax rate in the FUTURE"

To me, that is wrong, as it will always provide proof IRA is the best choice, since effective tax rate in future is NEARLY always lower than marginal rates of 15%, unless you are getting over $250K per yr in retirement.

Well, he was on the right track but just worded it wrong... if your marginal tax rate today is higher than your expected marginal tax rate when you are retired, then the tIRA is the way to go.

The majority of our retirement savings were tax-deferred and it has worked out well.. the income I deferred at a 28% or higher marginal tax rate will ultimately be taxed at 22% or less.

 

[Jerry1]

It’s extremely useful to have as many categories as possible: taxable, tax deferred, Roth and pension if available.

^^This^^

For me, I made too much to contribute to a ROTH or I would have put more money in that. I also did not save enough (you can never have enough) in my taxable accounts. It would be nice, especially from a tax management point of view, to have the flexibility that after tax dollars give you to manage your taxes in retirement.

 

[TDub]

Awesome. Thanks for the input, all.

 

[RunningBum]

It’s extremely useful to have as many categories as possible: taxable, tax deferred, Roth and pension if available.

I don't agree with that as a goal. Not at all.

The Roth is the ideal place to have your money. It's tax free to withdraw from, and growth is tax free. The only drawback is the limitations to pull from it before 59.5, so having some in taxable is good for that window. Otherwise if I could have 100% in Roth now, I would.

The counter to that is, when you are working, it's probably best to defer as much income as possible, which makes a 401K or tIRA the better choice at that point in your life.

The balance is in minimizing your taxes throughout your lifetime, which turns into an individual strategy. So the ideal situation may turn out to have all those categories, but that's a method, not a goal.

For myself, I maxed out my deferred while working because of my tax bracket, and also because a Roth wasn't available to me. Now retired, I am trying to totally convert my tIRA to a Roth before I start drawing my small pension and SS, but I won't do it at a rate higher than I'll be paying once I start on those. There is no usefulness at all in leaving some in tax deferred if I can get it all converted before 65 or 70.

Others' situations may be different, but "tax diversification" is not a goal; instead, "tax minimization" over your lifetime should be.

Regarding pension, that should be considered as part of your compensation when deciding which job to take. I wouldn't take a job with a pension just so I could have that category of income, but it would be part of a benefit package I'd take into account.

 

[Bir48die]

Well, I am in approximately 75% tax deferred. A bit of that is an inherited IRA. A main reason I was able to RE was having deferred comp available. I look at this all as a blessing. If I'm so worried about the tax effect at 70.5 then I'm in pretty good shape. Not in a position where my retirement income is low enough to do consistent Roth conversions.

It just so timed out that when I drain the last of my deferred comp money I start having to take my RMD's. If I'm lucky or unlucky I'll be taking my SS at the same time. We'll see.

 

[deserat]

I don't agree with that as a goal. Not at all.

The Roth is the ideal place to have your money. It's tax free to withdraw from, and growth is tax free. The only drawback is the limitations to pull from it before 59.5, so having some in taxable is good for that window. Otherwise if I could have 100% in Roth now, I would.

The counter to that is, when you are working, it's probably best to defer as much income as possible, which makes a 401K or tIRA the better choice at that point in your life.

The balance is in minimizing your taxes throughout your lifetime, which turns into an individual strategy. So the ideal situation may turn out to have all those categories, but that's a method, not a goal.

For myself, I maxed out my deferred while working because of my tax bracket, and also because a Roth wasn't available to me. Now retired, I am trying to totally convert my tIRA to a Roth before I start drawing my small pension and SS, but I won't do it at a rate higher than I'll be paying once I start on those. There is no usefulness at all in leaving some in tax deferred if I can get it all converted before 65 or 70.

Others' situations may be different, but "tax diversification" is not a goal; instead, "tax minimization" over your lifetime should be.

Regarding pension, that should be considered as part of your compensation when deciding which job to take. I wouldn't take a job with a pension just so I could have that category of income, but it would be part of a benefit package I'd take into account.

^^^ This for me - but my pension won't be small, so while I am in a lull before my pension, I am converting my IRAs to the ROTH betting that we won't have a national VAT anytime soon.

I shudder at the idea of having to take large taxable amounts out of my IRA at 70.5.....if I can control the tax rate on the conversion to a level that I'm willing to accommodate then I will do that. It will be higher than 12%, but I'm calculating due to my pension(s), SS, etc, I might be in a higher tax bracket than that once the streams of income start flowing. I'm willing to bite some of the bullet now so I don't have to worry about it later.

To the OP, having diversified funds is a good idea. It allows you to be able to manage some of the money movement easier, for example, if you have enough funds in a taxable bucket, you can use those to pay the taxes on any conversions and not have it come out of the conversion amount. If you are here and frugal, you will probably be able to do that.

I saved in both tax-deferred and after tax vehicles....ROTHs came around later in my life, so I did not use those until later. I missed out on the ROTH TSP which would have made my TSP conversions easier, but that's the way the cookie crumbles for me.....

 

[TDub]

^^^ This for me - but my pension won't be small, so while I am in a lull before my pension, I am converting my IRAs to the ROTH betting that we won't have a national VAT anytime soon.



I shudder at the idea of having to take large taxable amounts out of my IRA at 70.5.....if I can control the tax rate on the conversion to a level that I'm willing to accommodate then I will do that. It will be higher than 12%, but I'm calculating due to my pension(s), SS, etc, I might be in a higher tax bracket than that once the streams of income start flowing. I'm willing to bite some of the bullet now so I don't have to worry about it later.



To the OP, having diversified funds is a good idea. It allows you to be able to manage some of the money movement easier, for example, if you have enough funds in a taxable bucket, you can use those to pay the taxes on any conversions and not have it come out of the conversion amount. If you are here and frugal, you will probably be able to do that.



I saved in both tax-deferred and after tax vehicles....ROTHs came around later in my life, so I did not use those until later. I missed out on the ROTH TSP which would have made my TSP conversions easier, but that's the way the cookie crumbles for me.....

Very helpful, thanks! I love the idea of using funds in a taxable bucket to pay taxes on conversions.

 

[kaneohe]

I don't agree with that as a goal. Not at all.

The Roth is the ideal place to have your money. It's tax free to withdraw from, and growth is tax free. The only drawback is the limitations to pull from it before 59.5, so having some in taxable is good for that window. Otherwise if I could have 100% in Roth now, I would.

.......................................................

You can withdraw your contributions at any time w/o tax or penalty.

 

[Musica40]

DW wife is a domestic goddess and does not work. I am still employed and draw Air Force retired pension, VA disability. My company matches up to 5% of my salary with a 12% match of their own in my 401K. After evaluating our situation, I came to the conclusion that we needed to invest in Roth's as opposed to a regular IRA as I was maxing out the 401k with $26K per year. My biggest fear is that we are too top heavy on taxable accounts (i.e.. 401k and regular IRA) and we will feel the pain when we start to draw from those accounts. In addition, my military pension is also taxable and then we have to worry about social security. Many would say these are good problems to have and that is why I max out the 401k and contribute $14K per year to ROTH's for the wife and I in the event we do need to pull a big chunk due to an unexpected emergency. Every situation is different. So my advice woyuld be Roth's.

 

[RetireBy90]

We used TIRAs when starting out in 70’s as I don’t think a Roth came along till 97. We draw 3 small pensions, one SS and some income from rental. I’m converting to top of 22% today to have a known tax rate today. Several situations make me want to avoid large RMDs.

Starting out I would suggest using Roth and perhaps using a tax deferred once your income reaches higher levels. The big problem is that in your 20s and 30s you have no idea if your work will provide a pension; what tax rates will be; will you live in a state with income taxes; will you be subject to married or single rates; and many other things that can affect your tax rate when doing withdraws. I don’t know about others, but I never expected to be in the financial situation we find ourselves to day.

 

[RetireeRobert]

I have both traditional and Roth IRA's. The Roth's didn't come along until after I had years worth of Traditional IRA contributions, but once they did, I started in on them as allowed.

Having both gives flexibility for withdrawals during retirement and somewhat lets you control your retirement taxation situation.

 

[VanWinkle]

I have both traditional and Roth IRA's. The Roth's didn't come along until after I had years worth of Traditional IRA contributions, but once they did, I started in on them as allowed.

Having both gives flexibility for withdrawals during retirement and somewhat lets you control your retirement taxation situation.

+1 Great point RetireeRobert!! Add in a taxable account prior to retirement and with 3 flows(TIRA, ROTH, Taxable) you have maximum control of your tax situation. This is often overlooked by Retirees and Financial Advisors.

 

[gayl]

I didn't have a choice during most of my working years. Contributed to a 457 then once working PT after FIRE did the Roth & rolled the 457 to an IRA. Fortunately I don't have to worry about ACA as my pension includes health insurance. Also I don't have to take it out until 72 so I won't get hit with that tax cliff until then. I don't plan on every moving it from my Roth.

Maybe I could have done a BACK DOOR ROTH but the 457 was just easier (and I chose the self directed option at Schwab)

 

[mickeyd]

For those of you expecting or currently drawing on pensions, what did you do during your wealth accumulation years? Did you forgo the ROTH in favor of the tIRA?

Thank goodness many of us have all three investment income resources (tira, roth, pensions). LBYM has been our guide.