optimal tIRA to Roth ratio of dollars

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optimal tIRA to Roth ratio of dollars

Postby red5 » Wed Jan 30, 2013 3:30 pm

I was reading a thread about traditional vs roth investing concerning lower income families. I've always contributed to a Roth IRA except for a bit in an old TSP (deferred). I'm at the bottom of the 10% bracket and figured a Roth is best. Contributing to a traditional IRA nudges my refund a bit higher but not by an extraordinary amount [I play with turbotax and that is how I came to that].

But then I had a thought. I looked in the Wiki but did not find the information. My goal is to retire in 35 years and have $60,000 in income every year in today's dollars. My assumption is I will receive $12,000 in social security benefits. Thus I will need $48,000 from my retirement accounts.

Would it be advantageous to be able to draw enough from a traditional IRA without triggering any taxes and then the rest from my Roth IRA? This way I could make some traditional contributions and get a bit of money in a refund and lower my taxable income. As an example, in 2012 dollars wouldn't I be able to take $19,500 from a traditional IRA and not pay taxes (11,900 standard deduction, 3,800 x 2 = 7600 in exemptions for a husband and wife) thus making my taxable income equal $0.00.

Then the rest of my 60,000 after SS and Traditional IRA would equal 60,000 - 12,000 - 19,500 = 28,500.

In this way I could plan on never paying taxes in traditional IRA monies. This would lead me to believe that optimally my ratio of TIRA to Roth monies should be

19500:28500 = 1:1.46

Of course lots of things can change in 35 years and the standard deduction and expemptions may rise at rates that would make them different in 2012 dollars when I do retire.

am I missing anything? I'm quite a novice, especially when it comes to taxes!

edit: The point is not to pinpoint an exact ratio of traditional to roth dollars. It would be merely to find a very rough and ballpark way of dividing up any tax deferred to taxed retirement dollars. Also, this ignores other factors such as moving into higher tax brackets which is expected at some point.
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Re: optimal tIRA to Roth ratio of dollars

Postby jdilla1107 » Wed Jan 30, 2013 7:27 pm

You definitely have the right idea. If a person ends up with only Roth Iras in retirement, they almost certainly have a sub optimal outcome. You want to be drawing something that is taxable to fill up those low brackets in retirement.

I would be sure to account for the probability of your income increasing in the future and traditional IRAs being more valuable to you in the future. (ie: staying with roths for now) In other words, you probably can achieve your ratio by doing 100% roths and then 100% traditional IRAS later when your income rises.

I think that your exact ratio calculation is overly precise because tax brackets and tax law can change. But you have the right line of thought.
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Re: optimal tIRA to Roth ratio of dollars

Postby bertilak » Wed Jan 30, 2013 10:00 pm

red5 wrote:Would it be advantageous to be able to draw enough from a traditional IRA without triggering any taxes and then the rest from my Roth IRA?

You may not have that option. There is something called the Required Minimum Distribution (RMD) that kicks in at about age 70.5. In my case this will be more than I need to take and will push me up a tax bracket. I have about 4 years to convert as much as I can of my tIRA to ROTH so as to minimize my future RMDs. I have a bit of headroom in my current bracket so I convert that much each year.
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Re: optimal tIRA to Roth ratio of dollars

Postby tainted-meat » Wed Jan 30, 2013 10:06 pm

At the 10% tax bracket Roth is a great option. With that said, one thing I do like about pre-tax dollars is the options it gives you with regards to conversions. If you end up with a lot of money in tIRAs or pre-tax 401ks, you can just retire earlier and start conversions earlier.
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Re: optimal tIRA to Roth ratio of dollars

Postby red5 » Thu Jan 31, 2013 7:21 am

jdilla:
Thank you for your thoughts. I am definitely going to continue making Roth contributions for the time being with perhaps a tiny traditional contribution here and there. The exact ratio is overly precise and I'm sure it would change over time as I near retirement. I'd use it more like a guideline.

bertilak:
I did play around with an RMD calculator a bit. I typed in my desired portfolio amount (traditional dollars) and it spit out an RMD that was lower than the standard deduction plus personal exemptions in 2012 dollars. Of course a lot can change in 35 years. I'm glad you brought that up because at first I hadn't thought of RMDs.

TAINTED-MEAT: Great point. That would be a nice issue to deal with in my 50s.
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Re: optimal tIRA to Roth ratio of dollars

Postby bdpb » Thu Jan 31, 2013 10:11 am

red5 wrote:I'm at the bottom of the 10% bracket ...

My goal is to retire in 35 years and have $60,000 in income every year in today's dollars. My assumption is I will receive $12,000 in social security benefits. Thus I will need $48,000 from my retirement accounts.


It seems like you are planning on spending quite a bit more during retirement than you are spending now (based on income guess from your tax bracket). Most people spend less in retirement than during their working years. To reach this goal it seems you will have to save a very significant portion of your current income.
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Re: optimal tIRA to Roth ratio of dollars

Postby papito23 » Thu Jan 31, 2013 10:26 am

A lot could change in 35 years. Lock in whatever benefits you now (keeping in mind low-income benefits like Retirement Savings Credit and EITC) as long as it puts you "in the ballpark" decades hence.
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Re: optimal tIRA to Roth ratio of dollars

Postby red5 » Thu Jan 31, 2013 11:12 am

bdpb wrote:
It seems like you are planning on spending quite a bit more during retirement than you are spending now (based on income guess from your tax bracket). Most people spend less in retirement than during their working years. To reach this goal it seems you will have to save a very significant portion of your current income.


Yes, you are right, I do plan on spending quite a bit more during retirement. And yes, it does require saving a significant portion of current income. But it is what it is. In a couple years we'll be a two parent working family. Now one of us stays home with the kiddos.

and yes, Papito, "ballpark" is good enough for me.
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Re: optimal tIRA to Roth ratio of dollars

Postby Prokofiev » Thu Jan 31, 2013 11:38 am

Red,

Better to think about $ amounts than ratios for a TIRA. Your RMDs start around 4% at 70.5, so figure $4k taxable per $100k in TIRA. In addition, I would put in $50-$100k of medical/nursing/home care that you will probably be able to get out of a TIRA at 0% somewhere along the line. So for most folks, $150-300k is the minimum TIRA to shoot for, even if you only receive a 10% tax break.

But with 35+ years to retirement, things will/should change along the way. I hope you don't plan on being in the 10% bracket for another 35 years. You need to increase your income. As such, you will benefit more by doing a TIRA in the future when you can get 25-28% of immediate tax benefit and continue with the Roth-only for the time being.

Good Luck, -P
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Re: optimal tIRA to Roth ratio of dollars

Postby MGBGTV8 » Thu Jan 31, 2013 1:58 pm

Maybe the right way to think about this is to build up a Roth IRA to supplement withdrawals for big, or unplanned expenses, such as replacing a car or house upgrades when the withdrawal would put you above the next tax bracket. I think that you may consider more weight toward the traditional IRA, but we ARE planning many years in the future, with many opportunities for political risk to bite us!
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Re: optimal tIRA to Roth ratio of dollars

Postby crowd79 » Thu Jan 31, 2013 2:32 pm

A tIRA is a bigger benefit to those in lower income bracket as an initial contribution. For example, you made $22k last year (AGI). Contribute $5k to a tIRA and get below the $17,250 threshold for a $1,000 tax credit from uncle sam. With a Roth, you cant get AGI lower. Take the deduction with a tIRA contribution this year and repay the deduction taxes on Roth conversion the following year, but you still keep the potential $1k Savers Credit....
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Re: optimal tIRA to Roth ratio of dollars

Postby red5 » Thu Jan 31, 2013 2:36 pm

Prokofiev wrote:Red,

Better to think about $ amounts than ratios for a TIRA. Your RMDs start around 4% at 70.5, so figure $4k taxable per $100k in TIRA. In addition, I would put in $50-$100k of medical/nursing/home care that you will probably be able to get out of a TIRA at 0% somewhere along the line. So for most folks, $150-300k is the minimum TIRA to shoot for, even if you only receive a 10% tax break.

But with 35+ years to retirement, things will/should change along the way. I hope you don't plan on being in the 10% bracket for another 35 years. You need to increase your income. As such, you will benefit more by doing a TIRA in the future when you can get 25-28% of immediate tax benefit and continue with the Roth-only for the time being.

Good Luck, -P


That is another good point and an idea that had briefly passed through my mind in the last couple days. I thought of it like this though: very roughly speaking I *may* have about 15,000 to 20,000 worth of deduction / expemptions in 2013 dollars that I could use the tIRA for. This (say 17,500) multiplied by 25 equals $437,500. Add in the 50-100k of medical expenses, which I hadn't thought of, and a good value of my tIRA could be (again, very roughly) $500,000 in 2013 dollars.

MGBGTV8 wrote: but we ARE planning many years in the future, with many opportunities for political risk to bite us!


Yes I am very very aware. Mostly, I just like to play with numbers and this exercise helps satisfy that. This at least gives me some kind of idea that there is a way to optimally use a tIRA while keeping taxes at or very near $0.00. Of course if life changes and I jump up tax brackets this will all change.
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Re: optimal tIRA to Roth ratio of dollars

Postby MN Finance » Thu Jan 31, 2013 4:02 pm

I would still concentrate on the Roth, under the possibly faulty assumption, that paying tax at 10% is as good as it will be. As mentioned, you can always do conversions later, if still allowed, to realize income
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