Does Roth make sense in my situation?

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Does Roth make sense in my situation?

Postby Kircheis » Thu May 02, 2013 11:12 pm

Hi,

I will be in the 39.6% tax bracket this year. My workplace allows me to contribute to several different retirement accounts, including one that has a Roth option. I had been putting the maximum amount into the Roth (around $11k) for diversification purposes (since I figured it would be good to have an account that would be tax free at distribution and I was in a lower tax bracket before). However, I am thinking that it now would be better if I went back to the traditional option (pretax) for that account. What do you think?

Thank you in advance for the advice!
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Re: Does Roth make sense in my situation?

Postby jimmy » Thu May 02, 2013 11:56 pm

Hard to determine what exactly you should do with the information you provided but I can give you a few things to think about. A Roth definitely makes sense in a lower bracket but it's a much harder decision being in a top bracket. A lot depends on how much longer you'll be working and what tax bracket you will be in at retirement. If you end up in a lower bracket at retirement it's probably better to contribute pre-tax. I also agree with you that it's important to have an account that would be tax free since we really don't know where taxes will be in the future.. The simple answer and I assume you're referring to a 401k is split your contributions to a pre tax contribution and after tax (roth contribution) if your plan allows it. This way you can get the benefit of both plans..
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Re: Does Roth make sense in my situation?

Postby FinancialDave » Fri May 03, 2013 12:53 am

The Roth is a much harder sell in your tax bracket and since you already have some Roth, you at least have a start. If it was me I would probably still do about 20% to the Roth and 80% to the pre-tax.

As you have already figured out, the Roth will come in handy later in helping adjust your tax rate lower in retirement.

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Re: Does Roth make sense in my situation?

Postby interplanetjanet » Fri May 03, 2013 2:02 am

In that bracket, you are likely doing considerable savings outside of retirement accounts. If you think it is likely that you will retire "early", there is a very real possibility of drawing down your taxable accounts for living expenses while simultaneously doing Roth conversions in your 401k or IRA accounts (your income will be low here, so your tax rate will be low).

Though, if you are limited to $11k per year...how much of your total retirement savings is this? If it's a fairly small portion then it probably won't matter very much in the end.
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Re: Does Roth make sense in my situation?

Postby Kircheis » Fri May 03, 2013 8:55 am

To clarify some of the points, the account that I am talking about is actually a 457b that allows either traditional pretax or Roth (or a split between each). I have been contributing 100% of the allowed amount to the Roth since that option became available several years ago. The amount that gets put into that account is about 1/4 of the total "retirement" savings I do through work (so about 3/4 goes into a more traditional plan). I also save and put money into a taxable account, so in the end, the amount in the Roth is not a very large portion of my retirement savings.

In terms of work, I was planning to work another 30 years or so (since I am in my late 30's). I really love my job, so I really wasn't planning on retiring early (but I guess life plans can change).
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Re: Does Roth make sense in my situation?

Postby Iorek » Fri May 03, 2013 9:00 am

In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)
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Re: Does Roth make sense in my situation?

Postby JW Nearly Retired » Fri May 03, 2013 9:15 am

Iorek wrote:In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)

+1
Second this. Plus a Vanguard account Roth IRA is almost certain to give you investment options with way more low cost fund choices.
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Re: Does Roth make sense in my situation?

Postby Kircheis » Fri May 03, 2013 9:41 am

JW Nearly Retired wrote:
Iorek wrote:In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)

+1
Second this. Plus a Vanguard account Roth IRA is almost certain to give you investment options with way more low cost fund choices.
JW


Thank you very much for all of the advice. I have a Fidelity account through my work. I am able to use BrokerageLink with my Fidelity account, so I have been investing most of the money into the Spartan funds.
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Re: Does Roth make sense in my situation?

Postby learning_head » Fri May 03, 2013 10:43 am

Kircheis wrote:I am able to use BrokerageLink with my Fidelity account, so I have been investing most of the money into the Spartan funds.


Just curious, which Spartan funds do you use (I am guessing it's because they are cheaper than Vangaurd's equivalents at Fidelity?)

Regarding your original question, I will join those that say Traditional (not Roth) seems better in your high bracket and I would (and, in fact, do) use Roth IRA for diversification.
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Re: Does Roth make sense in my situation?

Postby inbox788 » Fri May 03, 2013 11:21 am

Kircheis wrote:I will be in the 39.6% tax bracket this year. My workplace allows me to contribute to several different retirement accounts, including one that has a Roth option. I had been putting the maximum amount into the Roth (around $11k) for diversification purposes (since I figured it would be good to have an account that would be tax free at distribution and I was in a lower tax bracket before). However, I am thinking that it now would be better if I went back to the traditional option (pretax) for that account. What do you think?


What state are you in? I am in a high tax state, so that was the deciding factor with staying with traditional. Who knows where I'll be retiring in the future, and avoiding the state tax likely outweighs future tax rate increases. If I'm in a lower tax bracket at retirement, prepaying higher taxes is a mistake. If I'm in a higher tax bracket, things are good, so can afford higher tax rate.

Back door conversion is a taxable event, so doesn't seem to apply to your situation when you have a direct Roth program, and even if it is something your considering, may make sense to wait for a lower tax rate year if possible.

One reason to do a Roth may be higher overall limits of sheltered income, post tax vs pretax, but that's assuming you have excess retirement investments in taxable accounts.
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Re: Does Roth make sense in my situation?

Postby Calm Man » Fri May 03, 2013 11:31 am

OP, I have an opinion. There is no proposed legislation involving what i am about to discuss so hopefully it will be acceptable. Your dilemma is fairly common and even faced by many of those of us at the forum who are in retirement or near retirement and deciding whether to convert to a ROTH for a lifetime and next generation of being free of taxes. I have read enough and we have all seen enough to know that Congress does change laws a lot. We just had tax regulations changed with a lot of "permanent" provisions and there is talk of changing it again. There is talk of limiting retirement account assets. We have no idea what will happen to taxation, either directly or indirectly with regard to ROTHs. It is possible that although not taxable withdrawals will count towards a modified type of income so that it wipes out exemptions and deductions. Or RMD requirements could begin and stretch IRAs including ROTHs eliminated, in which case an heir might have to clear it out in a few years. So my best bet is that if in doubt, steer clear of the ROTH if in a high tax bracket. Good luck.
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Re: Does Roth make sense in my situation?

Postby UALflyer » Fri May 03, 2013 12:10 pm

JW Nearly Retired wrote:
Iorek wrote:In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)

+1
Second this. Plus a Vanguard account Roth IRA is almost certain to give you investment options with way more low cost fund choices.
JW
There are lots and lots of excellent employer-sponsored retirement accounts that are both far cheaper than anything that Vanguard/Fidelity offer to their retail customers and also provide benefits that you can't get as a regular retail investor.
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Re: Does Roth make sense in my situation?

Postby JW Nearly Retired » Fri May 03, 2013 12:29 pm

Kircheis wrote:
JW Nearly Retired wrote:
Iorek wrote:In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)

+1
Second this. Plus a Vanguard account Roth IRA is almost certain to give you investment options with way more low cost fund choices.
JW


Thank you very much for all of the advice. I have a Fidelity account through my work. I am able to use BrokerageLink with my Fidelity account, so I have been investing most of the money into the Spartan funds.

I'm confused by your comment. You do know that over and above and separate from your work retirement accounts, you can open an individual retirement account (IRA or Roth IRA) with any fund company and make a $5500 yearly contribution? So can your spouse, if you have one, without having any earned income of their own. You just call up Vanguard or whoever and do it. If you exceed the income limits for making direct contributions to Roth IRAs, you can do it by the "backdoor" method. Put "backdoor roth" in the search box in the upper right of the page and check it out.
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Re: Does Roth make sense in my situation?

Postby JW Nearly Retired » Fri May 03, 2013 12:53 pm

UALflyer wrote:
JW Nearly Retired wrote:
Iorek wrote:In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)

+1
Second this. Plus a Vanguard account Roth IRA is almost certain to give you investment options with way more low cost fund choices.
JW
There are lots and lots of excellent employer-sponsored retirement accounts that are both far cheaper than anything that Vanguard/Fidelity offer to their retail customers and also provide benefits that you can't get as a regular retail investor.

Far cheaper than 0.06% ER? I haven't heard of any. Even if there are some, how can hundredths of a percent matter? I have an excellent Megacorp 401k but it isn't quite as good as VG retail. Are you referring to the benefit of better asset protection? OK, I agree with that but nobody is suggesting OP ditch his employer account, just add an IRA on top of it.

Can you explain further what benefits you are talking about?
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Re: Does Roth make sense in my situation?

Postby Kircheis » Fri May 03, 2013 1:07 pm

JW Nearly Retired wrote:
Kircheis wrote:
JW Nearly Retired wrote:
Iorek wrote:In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)

+1
Second this. Plus a Vanguard account Roth IRA is almost certain to give you investment options with way more low cost fund choices.
JW


Thank you very much for all of the advice. I have a Fidelity account through my work. I am able to use BrokerageLink with my Fidelity account, so I have been investing most of the money into the Spartan funds.


I'm confused by your comment. You do know that over and above and separate from your work retirement accounts, you can open an individual retirement account (IRA or Roth IRA) with any fund company and make a $5500 yearly contribution? So can your spouse, if you have one, without having any earned income of their own. You just call up Vanguard or whoever and do it. If you exceed the income limits for making direct contributions to Roth IRAs, you can do it by the "backdoor" method. Put "backdoor roth" in the search box in the upper right of the page and check it out.
JW


I just meant that I had access to low ER funds for my account at Fidelity (so I did not really feel the need to move to Vanguard). As for the traditional IRA, I thought that I would not be eligible for the tax deduction benefit of a traditional IRA due to having a retirement program at work. I will definitely look into it again.
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Re: Does Roth make sense in my situation?

Postby UALflyer » Fri May 03, 2013 1:22 pm

JW Nearly Retired wrote:Far cheaper than 0.06% ER? I haven't heard of any.
Vanguard's own Institutional Index Fund with Instituional Plus Shares (VIIIX) has a 0.02% ER.

You also have to remember that as you get into some of the more expensive categories, such as international, emerging markets, etc..., the differences will become rather pronounced.

Can you explain further what benefits you are talking about?
Excellent employer-sponsored retirement accounts can give you access to the types of funds and shares that you'd never be able to access as a regular retail investor. They can give you access to otherwise closed funds, waive all loads on excellent actively managed funds and give you access to institutional shares of those, such that your expense ratios will often be comparable to those of some of the index funds out there, etc...
Last edited by UALflyer on Mon May 13, 2013 12:22 pm, edited 1 time in total.
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Re: Does Roth make sense in my situation?

Postby UALflyer » Fri May 03, 2013 1:26 pm

Kircheis wrote:
JW Nearly Retired wrote:
Kircheis wrote:
JW Nearly Retired wrote:
Iorek wrote:In that tax bracket I would max out the pretax employer savings and then do a backdoor Roth IRA (note: chances are this would probably take no more money than what you are doing now-- it's just using the pre-tax savings to fund the Roth)

+1
Second this. Plus a Vanguard account Roth IRA is almost certain to give you investment options with way more low cost fund choices.
JW


Thank you very much for all of the advice. I have a Fidelity account through my work. I am able to use BrokerageLink with my Fidelity account, so I have been investing most of the money into the Spartan funds.


I'm confused by your comment. You do know that over and above and separate from your work retirement accounts, you can open an individual retirement account (IRA or Roth IRA) with any fund company and make a $5500 yearly contribution? So can your spouse, if you have one, without having any earned income of their own. You just call up Vanguard or whoever and do it. If you exceed the income limits for making direct contributions to Roth IRAs, you can do it by the "backdoor" method. Put "backdoor roth" in the search box in the upper right of the page and check it out.
JW


I just meant that I had access to low ER funds for my account at Fidelity (so I did not really feel the need to move to Vanguard). As for the traditional IRA, I thought that I would not be eligible for the tax deduction benefit of a traditional IRA due to having a retirement program at work. I will definitely look into it again.
You are not eligible to deduct your Traditional IRA contributions, as you are way over the income phase-out. You are also way over the Roth IRA income phase out but you do have the option of doing a backdoor Roth (contributing to a nondeductible Traditional account and then immediately converting it into a Roth).
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Re: Does Roth make sense in my situation?

Postby Kircheis » Mon May 06, 2013 12:20 pm

Thank you very much for the suggestions! I will definitely open a nondeductible IRA and then convert it to a Roth. With that, I will change back some of the contribution from the Roth to the traditional for the 403b.

In response to a previous question, I have been using a mixture of Spartan 500 Index Institutional (FXSIX), Spartan Extended Market Advantage (FSEVX), Spartan International Advantage (FSIVX), Spartan U.S. Bond Index Advantage (FSITX).
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Re: Does Roth make sense in my situation?

Postby UALflyer » Mon May 06, 2013 12:29 pm

Kircheis wrote:Thank you very much for the suggestions! I will definitely open a nondeductible IRA and then convert it to a Roth.
Just be sure to familiarize yourself with the exact procedure before you do it. For instance, you cannot have any other non-Roth IRA's, as the taxable portion of any conversion that you make is prorated over all your IRA's and you won't have the option to only convert your nondeductible portion.
Last edited by UALflyer on Mon May 06, 2013 1:45 pm, edited 1 time in total.
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Re: Does Roth make sense in my situation?

Postby FinancialDave » Mon May 06, 2013 1:42 pm

UALflyer wrote:
Kircheis wrote:Thank you very much for the suggestions! I will definitely open a nondeductible IRA and then convert it to a Roth.
Just be sure to familiarize yourself with the exact procedure before you do it. For instance, you cannot have any other non-Roth IRA's, as the taxable portion of any conversation that you make is prorated over all your IRA's and you won't have the option to only convert your nondeductible portion.


And you need to file IRS form 8606 to declare that nondeductible contribution.

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Re: Does Roth make sense in my situation?

Postby Kircheis » Mon May 06, 2013 3:18 pm

FinancialDave wrote:
UALflyer wrote:
Kircheis wrote:Thank you very much for the suggestions! I will definitely open a nondeductible IRA and then convert it to a Roth.
Just be sure to familiarize yourself with the exact procedure before you do it. For instance, you cannot have any other non-Roth IRA's, as the taxable portion of any conversation that you make is prorated over all your IRA's and you won't have the option to only convert your nondeductible portion.


And you need to file IRS form 8606 to declare that nondeductible contribution.

fd


That's good to know. Thank you. I will definitely do some research and talk to a rep at Fidelity before I open the IRA. I do not have any other IRA's, so the conversion should be okay.
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