PlanoPrivateer's IRA strategy

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My IRA strategy includes using both Traditional and Roth’s. My wife and I have 401ks through work and Traditional IRAs that we started with before Roth’s ever existed. Our combined 401k and traditional IRAs far exceed our Roth’s because we’ve been contributing to the Traditional and 401ks for so long. Now we max out our Roth’s each year and put the rest of what we can manage into our 401ks which is always more than the company's match.

When we retire the idea is to take whatever we need out of the traditional IRAs each year up until we hit a marginal tax bracket increase. Then take the rest out of our Roth’s. Suppose I need $50,000 for a particular year in retirement. Let’s says the marginal tax rate increases from 25% to 30% on anything over $40,000. We would take $40,000 out of the Traditional and $10,000 out of the Roth. Thus we would have our total of $50,000 but only pay tax on $40,000. If our Roth’s grow a lot before we retire we may be able to drop down to an even lower marginal tax rate for the Traditional and take more out of our Roth’s. It all depends on where the marginal tax breaks fall at the time and how much of our total retirement is in the Roth’s vs. the Traditional.

As we get older we need to lower the percentage of our retirement money in stock mutual funds and increase the percentage in bonds, stable value and / or money markets. Historically, (yes I know past results are no guarantee of future returns) stock mutual funds have outperformed bond mutual funds over the long run. For that reason I am keeping my Roth’s in 100% stock mutual funds (no tax upon withdrawal) and increasing the bond funds inside the Traditional. I need the diversity but I might as well pay taxes on the bonds which in theory should have their value increase less than the stocks.

Bottom line – use both Traditional and Roth’s so you will have more flexibility in retirement. About now is the time that someone will post and say that Roth’s may become taxable or subject to some total withdrawal cap in the future. My answer to that is you can only play by the rules in effect now but keep an eye out for future changes.

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