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Started By
Message
Am I over thinking this...Roth v. Traditional IRA
Posted on 9/5/18 at 10:16 pm
Posted on 9/5/18 at 10:16 pm
First time poster on the MT board. A little background info...
34yrs old, happily married with two sons, have a mortgage and one car note (other two are paid for). Have a savings account (emergencies only) a CD and some property with some timber on it I plan on cutting it within the next year.
I have never had a job that offered retirement. My current job doesn't offer it either, but it is very stable, a lot of other perks too. So I'm late to the retirement game...
The object in work is to earn more money and grow each year. Therefore putting you in a higher tax bracket. You pay taxes on the money you earn/draw for each month.
I want to contribute the max every year. If I went the traditional way, all of that $5500 would be going straight to my investment. If I plan on retiring at 65, using my social security (not taxed) and lets say another $1200/mo from my IRA I would only be taxed on my $1200 each month ($14,400 income/yr).
If I went the Roth route, I'd be only truly contributing $5500 x .33 (current tax bracket 33%) which would only be $3685. If I continue to earn more money at the current job that tax bracket would increase, therefore even less going straight to my contributions.
Why would I want to pay taxes now at a higher bracket than have to pay the lower tax penalty when I retire? Especially if I am wanting to advance at work and make more money. Am I wrong for thinking this way?
34yrs old, happily married with two sons, have a mortgage and one car note (other two are paid for). Have a savings account (emergencies only) a CD and some property with some timber on it I plan on cutting it within the next year.
I have never had a job that offered retirement. My current job doesn't offer it either, but it is very stable, a lot of other perks too. So I'm late to the retirement game...
The object in work is to earn more money and grow each year. Therefore putting you in a higher tax bracket. You pay taxes on the money you earn/draw for each month.
I want to contribute the max every year. If I went the traditional way, all of that $5500 would be going straight to my investment. If I plan on retiring at 65, using my social security (not taxed) and lets say another $1200/mo from my IRA I would only be taxed on my $1200 each month ($14,400 income/yr).
If I went the Roth route, I'd be only truly contributing $5500 x .33 (current tax bracket 33%) which would only be $3685. If I continue to earn more money at the current job that tax bracket would increase, therefore even less going straight to my contributions.
Why would I want to pay taxes now at a higher bracket than have to pay the lower tax penalty when I retire? Especially if I am wanting to advance at work and make more money. Am I wrong for thinking this way?
This post was edited on 9/5/18 at 10:21 pm
7
Posted on 9/5/18 at 11:22 pm to ChandlerB03
Do you thnk taxes will be higher or lower in 31 years?
Also I wouldn’t count on SS being the same 31 years from now.
And I thought SS was taxed as income?
Look up info on Roth Conversions.
Also I wouldn’t count on SS being the same 31 years from now.
And I thought SS was taxed as income?
Look up info on Roth Conversions.
This post was edited on 9/5/18 at 11:24 pm
Posted on 9/6/18 at 6:23 am to ChandlerB03
Why not both? Max Roth then put extra savings into taxable account
Posted on 9/6/18 at 6:26 am to ChandlerB03
quote:
Why would I want to pay taxes now at a higher bracket than have to pay the lower tax penalty when I retire? Especially if I am wanting to advance at work and make more money. Am I wrong for thinking this way?
No, you're on the right track. But nobody truly knows what tax rates will look like in 30 yrs, so most people try to do both pre-tax and post-tax retirement investing to lower the risk. It's usually through 401k + Roth, but you can do the same with a tIRA, you just won't get any sort of match.
Posted on 9/6/18 at 6:28 am to ChandlerB03
Incorporate that timber enterprise into a sole member LLC and do a solo 401k, which has much higher contribution limits.
Posted on 9/6/18 at 6:31 am to HailToTheChiz
quote:
Why not both? Max Roth then put extra savings into taxable account
If you plan to contribute more than $11,000 (current Roth limits for you + wife) a year (and you should), then do this.
If only $11,000, and you want to diversify tax risk (and you don't have access to 401k or something similar), split between Roth and tIRA.
Posted on 9/6/18 at 7:02 am to ChandlerB03
Set up a business for your timber income. Then you can set up a solo 401k or SEP IRA and contribute up to 54k a year tax deductible.
If youre in the 33% tax bracket, dont you make too much to contribute to a roth?
As someone said, read into roth conversions. You can choose to pay taxes on IRA money and transfer it to a roth. Its very popular for my 60 to 70 old clients now that taxes are low. Also decreases your RMDs at 70 1/2
If youre in the 33% tax bracket, dont you make too much to contribute to a roth?
As someone said, read into roth conversions. You can choose to pay taxes on IRA money and transfer it to a roth. Its very popular for my 60 to 70 old clients now that taxes are low. Also decreases your RMDs at 70 1/2
Posted on 9/6/18 at 7:12 am to ChandlerB03
Sounds like you're not eligible for ROTH If you were in 33% tax bracket in 2017 ($233,350 to $416,700) you exceeded the ROTH max allowable income which was $196,000. This year the income threshold is $199,000.
You could do backdoor ROTH though.
As other posters suggested tax rates are likely to rise in the future. However, you're personal tax rate isn't likely to be as high as it is today. I'd probably the tax benefit now since you'll probably be in a much lower bracket in retirement compared to that current income.
With your income and no 401k or pension you should also be loading up taxable accounts. If you happen to be in a low tax bracket when you withdraw you could pay zero % long term capital gains. Since you won't have taxable income flowing from 401k withdrawal or pension taxable accounts might be advantageous in your situation.
You could do backdoor ROTH though.
As other posters suggested tax rates are likely to rise in the future. However, you're personal tax rate isn't likely to be as high as it is today. I'd probably the tax benefit now since you'll probably be in a much lower bracket in retirement compared to that current income.
With your income and no 401k or pension you should also be loading up taxable accounts. If you happen to be in a low tax bracket when you withdraw you could pay zero % long term capital gains. Since you won't have taxable income flowing from 401k withdrawal or pension taxable accounts might be advantageous in your situation.
Posted on 9/6/18 at 7:22 am to weagle99
Thanks for the info fellas.
Nope, no one knows what the tax rate will be in 31 years, but my taxable income will be less. I'm just assuming that SS will still be around, and obviously I wouldn't retire until I could get a full draw from it.
Smart idea with the timber corporation and offering a 401K.
I want to do both a pre-tax and post tax contribution, but didn't think you could do both an Tira and a Roth at the same time?
Nope, no one knows what the tax rate will be in 31 years, but my taxable income will be less. I'm just assuming that SS will still be around, and obviously I wouldn't retire until I could get a full draw from it.
Smart idea with the timber corporation and offering a 401K.
I want to do both a pre-tax and post tax contribution, but didn't think you could do both an Tira and a Roth at the same time?
Posted on 9/6/18 at 7:47 am to ChandlerB03
quote:
I want to do both a pre-tax and post tax contribution, but didn't think you could do both an Tira and a Roth at the same time?
You are right. I mistyped and should have been clearer.
My situation is similar to yours. I do not have retirement through my job. I opened Roth IRA for me, then Roth IRA for wife. Do max contributions to those. Then I have a taxable brokerage account that I use for mutual funds, etc
Posted on 9/6/18 at 8:21 am to HailToTheChiz
Either way be sure to max contributions for you and wife $11k.
Expecting a much lower bracket later and considering your current high bracket I'm not sure ROTH conversion is your best strategy unless it's do e later when you leave the high income job.
One note on your math, ROTH is not like investing $3685 instead of $5500. You'll have the full 5,500 invested. However, it will cost you about $8100 of income minus taxes to contribute that $5500. Sounds like a bad deal but remember that $5500 in ROTH will grow and never be taxed again while you'll eventually owe income tax on the full balance of the traditional IRA. Point is ROTH actually allows you to contribute more (in terms of pre tax dollars) and the eventual balance will be worth more since it will not be subject to income taxes upon withdrawals.
Expecting a much lower bracket later and considering your current high bracket I'm not sure ROTH conversion is your best strategy unless it's do e later when you leave the high income job.
One note on your math, ROTH is not like investing $3685 instead of $5500. You'll have the full 5,500 invested. However, it will cost you about $8100 of income minus taxes to contribute that $5500. Sounds like a bad deal but remember that $5500 in ROTH will grow and never be taxed again while you'll eventually owe income tax on the full balance of the traditional IRA. Point is ROTH actually allows you to contribute more (in terms of pre tax dollars) and the eventual balance will be worth more since it will not be subject to income taxes upon withdrawals.
Posted on 9/6/18 at 8:31 am to TorchtheFlyingTiger
I'm actually in the 25% bracket. One you take in account federal and state rate, I pay in about 33%. Should have clarified.
"However, you're personal tax rate isn't likely to be as high as it is today. I'd probably the tax benefit now since you'll probably be in a much lower bracket in retirement compared to that current income."
This is my thought also.
"However, you're personal tax rate isn't likely to be as high as it is today. I'd probably the tax benefit now since you'll probably be in a much lower bracket in retirement compared to that current income."
This is my thought also.
Posted on 9/6/18 at 10:17 am to ChandlerB03
I feel like everybody is overthinking this. You have 31 years till you are 65. If you put in $5500 this year in a roth and didn't touch that account again, it should be worth at least $65K. I don't care what bracket you are in, I would rather pay tax on $5500 than $65,000.
Posted on 9/6/18 at 4:40 pm to ChandlerB03
Also with a Roth you can leave it your heir(s) and they can use all the money tax free
This post was edited on 9/6/18 at 4:41 pm
Posted on 9/6/18 at 5:31 pm to leftovergumbo
quote:
everybody is overthinking this. You have 31 years till you are 65. If you put in $5500 this year in a roth and didn't touch that account again, it should be worth at least $65K. I don't care what bracket you are in, I would rather pay tax on $5500 than $65,000.
It's not that simple. $5500 in traditional saves him about $1800 in taxes which could be invested in a taxable account. On the other hand, to put $5500 into a ROTH actually costs about $8100 of pre tax income.
You havent accounted for the tax implications in the contribution year and growth if that difference is invested.
Other ROTH benefits, you can withdraw contributions penalty free if you retire before 59 1/2 and no RMDs.
This post was edited on 9/6/18 at 6:39 pm
Posted on 9/8/18 at 8:49 am to TorchtheFlyingTiger
I feel a Roth allows me to sell and cash out gains quickly since I’m not worried about short term capital gains taxes. I also tend to use my Roth for some of my riskier investments in the anticipation of untaxed gains.
Posted on 9/9/18 at 5:59 pm to ChandlerB03
One thing that's good about Roths, especially early in life when you don't have much yet, is that they are a great place for your emergency fund because you can withdraw at any time immediately up to the amount you contributed, while earnings grow tax-free.
Just make sure you invest the emergency fund part very conservatively (cash or cash equivalents) because you don't want your emergency money to be subject to major fluctuations just when you need it.
Of course, you can do this for awhile and when you're satisfied you have enough stashed away you can start contributing to a traditional IRA for retirement.
But a Roth is always > savings for emergency money.
Just make sure you invest the emergency fund part very conservatively (cash or cash equivalents) because you don't want your emergency money to be subject to major fluctuations just when you need it.
Of course, you can do this for awhile and when you're satisfied you have enough stashed away you can start contributing to a traditional IRA for retirement.
But a Roth is always > savings for emergency money.
Posted on 9/9/18 at 7:16 pm to foshizzle
I like the solo 401k idea on the timber business. Some solo 401ks offer the ability to do Roth and pretax within the same plan. winner.
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