Every time that I mention that I am in a high income bracket and contribute to my ROTH, I have people go on and on about how that is a bad idea, even if it has nothing to do with the forum. For that reason, I am going to settle this once and for all in my mind. I am going to explain my reasoning, and let people have at the arguments that convinced me ROTH is Right for me.
Emergency Fund: Check
Asset Allocation: Irrelevant for this question
Combined family income: 140,000/yr (100k for my salary, 40k for wife)
Current 401k accounts, combined: $45k
Current liquid accounts, combined: $30k (this is liquid as a business emergency fund and therefore cannot be touched… or the car loan would be gone).
Auto Loan (pre-boglehead decision) 4.45% interest $6,900 paid off July 2014
Mortgage at 6.35% interest with a balance of $159,000 paid off in about 23 years – after talking with the credit union today, this may be refinanced despite being upside down to a 15 year mortgage at a lower rate.
Current Federal and State Tax rate: 35-38% depending on what my firm does this year. At odds with the number above? The firm made investments in previous years to allow it to grow (good business debt). The deduction was great then. Now, I cannot take a deduction again on the amount we paid the debt down, therefore, the IRS sees it as income (although it went to service debt and I do not have it). Think of it in the way of getting a computer on a credit card (Not what we did, but it simplifies it). If you buy the computer on credit card in 2012, you get the deduction at that time. The debt is a separate thing (a loan that also covers other expenses). Since you deducted the computer in 2012, you cannot also deduct it in 2013, when you pay the debt off. This creates ghost income. Because we paid almost all the debt last year, and will pay the rest this year, this should be the last year with this type of “ghost income.” My tax bracket will go down, but not a lot.
Business Income: I am 1/2 owner of a successful law firm with multiple attorneys. It will likely have a little extra profit this year. When I retire, this will be sold.
Life Insurance: I have $500,000 in term life insurance that my wife will get. It ends when I turn 46. I have $1,000,000 in life insurance paid for by the firm that ends when I turn (104? Something like that.) The proceeds will be invested to provide income at the point that she receives it.
Commercial Real Estate: I am 1/2 owner of a commercial property (the property for the business address). I receive nothing for this business now, but it will be paid off in 19 years. I will then receive income from the property. When I retire, this will potentially be sold. The current value of the property is $450,000, and it produces income of $7,000 a month. Again, I have a half interest in this property.
Residential Real Estate: While I do not own any now, I plan on buying some at the end of the year. I know that some people think of this as a hassle, but as an attorney, I know what it takes for an eviction process. I have handled these cases before. My goal is to own 10 - 20 properties by the time I retire. I have contacts that I believe will make this easier for me than for some (my grandfather and father both were primarily in this field).
Side business: Wife has a business that makes her $3k to $12k/year. Not overly relevant with the overall numbers, but I am trying to disclose everything.
Assuming that all goes to plan, I do not think I will be in a lower tax bracket when I retire. Rather, I anticipate being in a high tax bracket even when I no longer work. My wife is 9 years younger than I am, so she will continue to work after I retire. She is in at a company that should allow her to really grow. Even if the company goes under, I am confident in her ability to land a similar job (she just turned down such an offer from a recruiter). I may be wrong, but in planning, I want to look at what we anticipate will happen, so she would be making around 100k at that time (based in today’s dollars).
The question then becomes whether or not it is better to put money into a ROTH. I think of it as a hedge against increasing tax rates, as well as being able to stuff a little more into my retirement account, which is almost maxed out. I believe I can put 0.5% more into mine to max it out, but since you can only put into it in increments of 0.5%, I did not want to overfund it and kept the rate down. With anticipated increase in salary this year, I may not be able to make this correction. We will see at that time. For all intents and purposes, it is maxed out. My wife's has a little more room before it gets maxed out.
How is it stuffing more into the retirement? Well, by paying taxes now, the money at the end would be tax-free. Not paying taxes on it, it will be an actual value we receive, not an amount to be taxed. It is like making the dollars we set aside more valuable.
Edited to correct a grammatical error.
Last edited by Dulocracy
on Thu May 09, 2013 3:37 pm, edited 1 time in total.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.