Tax deferred savings during partial work year before ER?

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skibum
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Joined: Sat Feb 15, 2014 3:08 pm

Tax deferred savings during partial work year before ER?

Post by skibum »

I’m planning to retire in 2015 at 55 and convert tIRA to Roth up to the 15% bracket until 70. Our after tax savings may last thru the period with decent returns, but seem likely to fall a few years short resulting in tIRA spending. I understand it is not worthwhile to convert if taxes are paid from IRA withdrawals. I should have more info to figure that out when the time comes, comments welcome.

Circumstances suggest I work part of the year in 2015, with salary likely up to the 15% bracket. I have not explored the details or run turbotax yet. I expect the tax rate will be similar to the conversion period and a lifetime minimum. It seems advantageous in this situation to contribute the 401K match only, and skip any other tax deferred contributions, saving the income at min tax rate to fund current expenses and spending during conversion. I could double down by filling the deferred space AND converting Roth, but this burns thru after tax funds needed for ER spending with no apparent tax benefit. If ER timing drives taxes into the 25% bracket, then it would seem prudent to defer income in this regime.

I presume a few Bogleheads have crossed this bridge and have the usual expertise to share.

Thanks in advance,
Skibum
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White Coat Investor
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Re: Tax deferred savings during partial work year before ER?

Post by White Coat Investor »

My gut reaction is to do Roth in this year, but I haven't run the numbers for you. Not sure why you'd defer tax in a low tax year. If you can't afford to do some conversions, well, fine, but if you're planning on saving for retirement, might as well go Roth I say.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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kramer
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Re: Tax deferred savings during partial work year before ER?

Post by kramer »

Yes, in your situation, if you stay completely within the 15% tax bracket in 2015, probably better to only contribute to 401(k) up to matching.

I would make sure you really need to do that much conversion of IRA before age 70 (15 years of topping up to top of 15% bracket). Because you will still probably want some traditional IRA left after age 70 to optimize lifetime taxes (since you said your taxable account may be low or zero by that time. so as to not miss out on the 0% and 10% brackets after age 70). If you do have space between now and age 70, there is always 0% cap gains taxes within the 15% ordinary income bracket.

Also, this analysis assumes constant State income taxes.
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