IRA Contribution Question and Age

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larmewar
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IRA Contribution Question and Age

Post by larmewar »

Is there an age or time till retirement past which it is generally considered preferrable to invest in a taxable account instead of making contributions to a traditional IRA or 401K? Same question for a Roth IRA? Additional background:

- 25% tax bracket now and will be in the same bracket when retired and collecting social security
- After I pass on, wife (5 yrs younger) will have 46.25% marginal tax rate due to Social Security taxation
- Plan on stopping work in 5-6 years
- Two-three years between stopping work and collecting social security,will convert TIRA to Roth up to 25% bracket
- Additional investments in question are equities in a balanced portfolio (50-55% equities)
- Funds are VG and TSP, so ERs are not a consideration

Lar
Johm221122
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Re: IRA Contribution Question and Age

Post by Johm221122 »

As long as I don't need money in current tax year i'd contribute

John
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Re: IRA Contribution Question and Age

Post by placeholder »

It would be very rare circumstances that would prefer taxable to Roth now tax deferred might depend on what the tax situation is in the year in particular but generally the time to retirement isn't a big factor.
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retiredjg
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Re: IRA Contribution Question and Age

Post by retiredjg »

Will there be a pension?
Topic Author
larmewar
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Re: IRA Contribution Question and Age

Post by larmewar »

In today's dollars, I'll have about $47K/yr from military retirement and a small civil service pension. So pensions are almost completely inflation adjusted. I already have more in Traditional IRAs and TSP than I'll be able to convert in 15% bracket.

Optimizing looks impossible. Take cap gains or convert TIRAs to Roth while waiting on Social Security? Or save CG for heirs and basis step-up? Max TSP and TIRA to take interest exemption for education on EE bonds? Additions to equity investments to tax deferred or in taxable? Or cash at 15% tax rate and crowds out IRA conversions. Convert all TIRAs and TSP to Roth in 25% bracket to minimize social security taxation of SS survivor benefits? Etc., etc. ... It seems like pushing Jello, push in one spot and everything else moves.

Lar
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BL
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Re: IRA Contribution Question and Age

Post by BL »

It is a nice problem to have!

There are income limits for deductible tIRA and Roth IRA. You are probably past the limit for tIRA, don't know about Roth. If eligible, just put it directly in the Roth. If not:
Do you both have non-Roth IRAs that would make it difficult to do the "Backdoor Roth" contributions? It would have to be pro-rated if you have any existing IRA. Remember this is "individual" so each applies separately to each.

I would max all 401ks, Roth IRAs, maybe I-bonds, before taxable. If you expect most of taxable will be left to heirs, then I don't see a point in "gain harvesting". Do keep an eye out for large losses, however, for tax-loss harvesting.

Even after RMDs started, we made the choice to keep transferring some IRA to Roth to the top of our tax bracket. This will be better for heirs, and for the survivor of the two of us who will be in a higher tax bracket.
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retiredjg
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Re: IRA Contribution Question and Age

Post by retiredjg »

tfb makes the argument that many federal employees should be using Roth TSP instead of traditional, because of the pension.

http://thefinancebuff.com/most-tsp-part ... h-tsp.html

I can't see any argument to put money into taxable space instead of Roth space (TSP, 401k, or IRA). In either case, the money is taxed, but in taxable, but earnings will be taxed.

Whether you should use traditional as opposed to Roth is not as clear - it may be a wash. Or as you said, like jello.
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jimb_fromATL
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Re: IRA Contribution Question and Age

Post by jimb_fromATL »

I'm with others in that I can't see any real advantage in contributing to a taxable account if you still have any space left to contribute to any tax deferred or tax-advantaged retirement accounts.
larmewar wrote:
- After I pass on, wife (5 yrs younger) will have 46.25% marginal tax rate due to Social Security taxation
That's not as awful as it may seem at first glance. Bear in mind that while it may seem like a jump to a higher marginal (top) tax bracket when you reach the limit where social security starts getting taxed, you and she will never be paying the actual marginal bracket rate on all of your/her income.

You still have the standard or itemized deduction and the personal exemption(s) before you pay any tax, then will pay tax at much lower percentages in the graduated lower tax brackets before you get to your top (25%) bracket. Even if she still has enough total income to exceed the phase-out for no tax on social security and has to effectively pay the top bracket of 25% on all of her social security income, it will still be on no more than 85% of it.

jimb
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BL
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Re: IRA Contribution Question and Age

Post by BL »

I would just assume paying 85% of SS for you and spouse and 85% of highest SS only for surviving spouse. Also assume 55% of your military pension (SBP) for spouse, and whatever you plan for civilian pension surviving spouse. So there is a decrease in income right there of the lower SS payment, 45% of military pension, and possibly some decrease in full civilian pension. Long term care costs or high charitable contributions could result in lower taxable income. Try some of these to see what bracket she will be in.

Putting more into Roth now with two pensions may make sense. Keep most of bonds in tax-deferred accounts (Roths if needed). Any in taxable should probably be tax-exempt.
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larmewar
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Re: IRA Contribution Question and Age

Post by larmewar »

Thanks for all the responses and ideas. In retirement, I won't be itemizing deductions and between medical and LTC insurance there isn't much potential for going over the standard deduction year after year. Roth now, or TIRA now/convert later is a wash with the same employed/retired tax rates and taxes coming from the TIRA. So I'll reprioritze to increase tax deferred contributions vs. paying off the mortgage. I dislike the Roth TSP, because the TSP takes distributions proportionately from regular and Roth TSP, and because there is no Roth conversion option. The latter will likely be fixed in the next few years, giving more flexibility with TSP.

On taxation of Survivor's benefits, although pensions go down the income brackets and thresholds go down for widowed filing status. If I can keep my wife out of the 85% SS phase in it saves about $2,500/yr in taxes vs a Roth conversion at 25% tax rate. Don't know how long my wife will outlive me, so there's no telling whether lower tax rate of heirs outwieghs taxes on SS survivors benefits.

Lar
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retiredjg
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Re: IRA Contribution Question and Age

Post by retiredjg »

In my experience as a single person with a federal pension, it does not take much "other income" to make 85% of SS taxable. And even if you can avoid that, probably 50% will be taxable. Not saying you should not try, but I'm not sure there is much you can do.


Have you seen the chart in the Wiki?
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BL
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Re: IRA Contribution Question and Age

Post by BL »

retiredjg wrote:In my experience as a single person with a federal pension, it does not take much "other income" to make 85% of SS taxable. And even if you can avoid that, probably 50% will be taxable. Not saying you should not try, but I'm not sure there is much you can do.


Have you seen the chart in the Wiki?
+1
http://www.bogleheads.org/wiki/Taxation ... y_benefits
and also check the SS site.

We pay 85% in 15% bracket with decent pension and relatively low SS as will the surviving spouse, I don't see any likelihood of bringing it down below 85% with a pension or SBP.
Last edited by BL on Sun Nov 23, 2014 2:24 pm, edited 1 time in total.
Spirit Rider
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Re: IRA Contribution Question and Age

Post by Spirit Rider »

I used to worry about the SS taxation, but the more I understand and project, I am going to get hit with it no matter what.

One thing to be aware of is that the income limits are not indexed to inflation. They are the same amounts that were applied the first year. If you consider that 1/2 of your social security benefit is used in the calculation. 1/2 my projected benefit at age 70 in inflation adjusted dollars will likely get me into the 85% bracket with little or no other income.
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grabiner
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Re: IRA Contribution Question and Age

Post by grabiner »

larmewar wrote:Is there an age or time till retirement past which it is generally considered preferrable to invest in a taxable account instead of making contributions to a traditional IRA or 401K? Same question for a Roth IRA?
A Roth IRA can't possibly be worse than a taxable account, as long as you meet the rules for withdrawals. A Roth IRA grows tax-free, which is always better than taxable, and you can invest it in anything.

It's unlikely that a deductible traditional IRA will be worse than a taxable account, and if it is (because you are in a low tax bracket now), you can use a Roth IRA instead, and convert your existing traditional IRA to a Roth.

A 401(k) can occasionally be worse than a taxable account, but not because of taxes; if you will be stuck in a high-cost 401(k) for a very long time, you may lose more to expenses in the 401(k) than you lose to taxes in a taxable investment. My rule of thumb is to consider taxable investing if the product of the extra costs and the number of years you will stay with the employer exceeds 30%; thus, if you are sure you will stay with your employer for 20 years and the expenses are 1.70% versus 0.20% for taxable investments, you might consider not contributing. (Teachers are sometimes in this situation, with tenure protecting their jobs but high-cost 403(b) plans.)

Additional background:

- 25% tax bracket now and will be in the same bracket when retired and collecting social security
- After I pass on, wife (5 yrs younger) will have 46.25% marginal tax rate due to Social Security taxation
Are you sure about this? The 46.25% region is rather small (and getting smaller every year because the formula isn't indexed to inflation); most retirees in the 25% tax bracket already pay tax on the maximum 85% of Social Security and have a 25% marginal tax rate. If your wife inherits your existing IRA or 401(k) balance, the RMDs will give her more income and likely push her out of the phase-out.
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Not Law
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Re: IRA Contribution Question and Age

Post by Not Law »

ANY earnings or gains in a traditional retirement account will be taxed as regular income. Taxable accounts receive a break on dividends and capital gains. Roths have no taxes. If you plan to invest in things that would benefit from the lower dividend/capital gains rates, it would be foolish to invest in a traditional retirement account. The problem for most folks is they do not have the discipline to save outside these retirement vehicles. Many who try end up liquidating when they switch jobs. I expect many here do not have this problem.
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retiredjg
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Re: IRA Contribution Question and Age

Post by retiredjg »

Not Law wrote:ANY earnings or gains in a traditional retirement account will be taxed as regular income. Taxable accounts receive a break on dividends and capital gains. Roths have no taxes. If you plan to invest in things that would benefit from the lower dividend/capital gains rates, it would be foolish to invest in a traditional retirement account. The problem for most folks is they do not have the discipline to save outside these retirement vehicles. Many who try end up liquidating when they switch jobs. I expect many here do not have this problem.
I think most folks here would disagree with the part I bolded. Deferring taxes by using a traditional retirement account is probably a good thing for most people.
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grabiner
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Re: IRA Contribution Question and Age

Post by grabiner »

Not Law wrote:ANY earnings or gains in a traditional retirement account will be taxed as regular income. Taxable accounts receive a break on dividends and capital gains. Roths have no taxes. If you plan to invest in things that would benefit from the lower dividend/capital gains rates, it would be foolish to invest in a traditional retirement account.
This is not correct for a deductible account because of the tax benefit on contributions. If you are in the 25% bracket, you invest $1000 in stock in a taxable account, and it grows to $2000 without paying dividends, you can spend $1850 if the only tax you pay is the 15% tax on the capital gain; more likely, because of taxes on dividends along the way, you will have about $1800. But if you have $1000 to invest and use a traditional IRA, you can contribute $1333 to the traditional IRA because you get $333 back from the tax deduction; if the stock value doubles to $2666 and you are still in a 25% bracket, you will get $2000 back after tax.

It is a mistake to invest in stock in a non-deductible IRA; in that situation, you could only invest $1000, and you would lose 25% of the gains to taxed to end up with $1750.
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BL
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Re: IRA Contribution Question and Age

Post by BL »

After I pass on, wife (5 yrs younger) will have 46.25% marginal tax rate due to Social Security taxation
I would not expect this as you will have the entire amount taxed at your bracket, whether that is 25% or higher. Once you have the entire 85% taxable, that is over. There could possibly be other phaseouts.
Topic Author
larmewar
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Re: IRA Contribution Question and Age

Post by larmewar »

I hadn't realized the thresholds aren't indexed for inflation. At 2-2.5% inflation, that wipes out about half the $2,500 or so in reduced income taxes. So I'll put on the shelf and take another look about the time I retire.

Thanks,
Lar
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