Roth to Traditional

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ZCULP
Posts: 12
Joined: Tue Mar 31, 2015 11:04 am

Roth to Traditional

Post by ZCULP » Wed Jul 15, 2015 2:51 am

Hello Everyone,

I currently just got my Roth IRA switched from Colorado Bankers to Vanguard's Target Retirement 2050. I have read from numerous financial sites, that while I'm working I should be utilizing tax-deferred accounts. I am currently 26 and active duty, but will be getting out in a year to become an electrician. I have about $5000 in the Roth now, and was wondering if I should take out 3000, to put into a Traditional IRA and invest that in the Total Stock Market Index Fund, then max it out first each year, then eventually buy into the International index fund as well as the Total Bond market fund. I was just looking for some advice as to whether or not that would be a good idea, also I am a little confused on how the Traditional IRA works. I know it is tax-deferred, but does that just mean you write off the $5,500 at the end of the year, or is there a way to deposit your money directly without the taxes being taken out?....Sorry if that is a stupid question.

Carl53
Posts: 1875
Joined: Sun Mar 07, 2010 8:26 pm

Re: Roth to Traditional

Post by Carl53 » Wed Jul 15, 2015 6:38 am

You might want to read the wiki post on traditional vs Roth IRAs:
https://www.bogleheads.org/wiki/Traditional_versus_Roth

Unless you have outside income or are married and your spouse has substantial income it is not likely that your marginal federal income tax bracket is >15%. IMHO, most bogleheads would go with the Roth instead of the Traditional in that low tax bracket. Both are tax advantaged, just differently. Roth's are particularly great when your income is low and expect income and tax brackets to be higher in later years.

2cents2
Posts: 404
Joined: Sun Mar 02, 2014 11:31 am

Re: Roth to Traditional

Post by 2cents2 » Wed Jul 15, 2015 7:35 am

Not to add to the confusion, but you mentioned you are on active duty and will be getting out of the service within an year. Currently, you have one of the lowest fee 401K type plans available to you. It is called the TSP. You can only fund it through payroll deductions (I believe you can sign up for it on MyPay--minimum 1% of basic pay). http://www.dfas.mil/militarymembers/tsp ... tspac.html
If you can make it up to at least $200.00 within the next year, you could use it later to roll over pretax funds into it even after you leave the service.

https://www.tsp.gov/PDF/formspubs/tspbk02.pdf
When you separate from service, you can leave your entire
account balance in the TSP if it is $200 or more and
continue to enjoy tax-deferred earnings and the plan’s
low administrative expenses.2 Once you separate, you
will no longer be able to make employee contributions.
However, you can transfer eligible money into your TSP
account from IRAs and eligible employer plans.

NightFall
Posts: 269
Joined: Wed Mar 12, 2014 4:38 pm

Re: Roth to Traditional

Post by NightFall » Wed Jul 15, 2015 8:05 am

ZCULP wrote:I have about $5000 in the Roth now, and was wondering if I should take out 3000, to put into a Traditional IRA and invest that in the Total Stock Market Index Fund
I may be reading this wrong, but I certainly wouldn't take out 3000 from your ROTH and place it in your IRA. Perhaps you're talking about recharacterizing a current year's contribution? If not, I don't see any way this is beneficial.
ZCULP wrote:does that just mean you write off the $5,500 at the end of the year, or is there a way to deposit your money directly without the taxes being taken out?....
Not exactly... it typically reduces your federal taxes, but your employer doesn't know you made an IRA contribution, so they will still withhold the same amount for federal taxes. When you do your taxes at the end of the year, a traditional IRA contribution will reduce your taxable income, which will reduce your federal taxes owed and may produce a refund. Although, as many will state, ROTHs are great now if you expect your income to rise in the future.

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whatusername?
Posts: 639
Joined: Wed Feb 18, 2015 6:08 pm

Re: Roth to Traditional

Post by whatusername? » Wed Jul 15, 2015 9:50 am

I agree with all of the above posters on their points. And take full advantage of that TSP! Many of us would like to have that option but we don't.

That said, if you can squirrel away additional retirement savings in an IRA, Roth contributions at 26 are a pretty good bet. If your current tax rate is low, Roth contributions are a hedge against tax increases when you are retired. Even if they are no longer offered at some point in the future (or totals get capped), I think your prior contributions will probably receive the expected tax treatment (i.e., tax-free qualified withdrawals) going forward.

mhalley
Posts: 7761
Joined: Tue Nov 20, 2007 6:02 am

Re: Roth to Traditional

Post by mhalley » Wed Jul 15, 2015 1:15 pm

Welcome to the forum. As my teachers in school always said, there are no stupid questions. The difference between the roth and traditional ira is when you pay taxes. If you put money in the roth, then you pay taxes on it now, and Never Again. No matter how much money the roth earns, you pay no money in taxes.
With the traditional ira, you get a tax deduction today on the money and don't pay taxes on it until you take money out in retirement. The hope is that your tax rate will be much lower in retirement.
The overwhelming majority of folks here recommend the roth ira. There are some other advantages also, such as no requred minimum distributions.
Many of your basic questions can be answered at the wiki.
http://www.bogleheads.org/wiki/Traditional_versus_Roth
There are no taxes for trading within iras, so you should proceed with your plan. Another option would be to buy the target date fund, then when you get up to 9k swItch to the three fund portfolio.
I would also encourage you to invest in the tsp. thank you for your service.
Mike
Check out http://www.bogleheads.org/wiki/Getting_started
And the yes you can ebook http://www.etf.com/docs/IfYouCan.pdf

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LAlearning
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Location: Los Angeles

Re: Roth to Traditional

Post by LAlearning » Wed Jul 15, 2015 1:59 pm

Neither -> TSP!
I know nothing!

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LadyGeek
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Re: Roth to Traditional

Post by LadyGeek » Wed Jul 15, 2015 3:25 pm

ZCULP, welcome! You had a duplicate thread with some replies. I merged everything into here and removed your duplicate post. This isn't a big deal, don't worry about it.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

retiredjg
Posts: 38942
Joined: Thu Jan 10, 2008 12:56 pm

Re: Roth to Traditional

Post by retiredjg » Wed Jul 15, 2015 4:11 pm

A lot of the Roth vs traditional argument depends on your tax bracket. If you are in a very low bracket, Roth is likely better. If you are in a high bracket, you should prefer to reduce your taxable income by using traditional IRA or Traditional TSP.

I suggest that you not change anything about what you already have - leave Roth as Roth. If you are in a higher bracket, start using traditional (TSP or IRA) in the future.

Do you know how to determine your tax bracket? Compare your taxable income, line 43 on Form 1040, to this chart.

http://www.moneychimp.com/features/tax_brackets.htm

I know there are times, such as during deployment to certain areas, that your income is not taxed. Roth IRA and Roth TSP are very good choices during those times.

cherijoh
Posts: 6379
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Roth to Traditional

Post by cherijoh » Thu Jul 16, 2015 5:55 am

ZCULP wrote:Hello Everyone,

I currently just got my Roth IRA switched from Colorado Bankers to Vanguard's Target Retirement 2050. I have read from numerous financial sites, that while I'm working I should be utilizing tax-deferred accounts. I am currently 26 and active duty, but will be getting out in a year to become an electrician. I have about $5000 in the Roth now, and was wondering if I should take out 3000, to put into a Traditional IRA and invest that in the Total Stock Market Index Fund, then max it out first each year, then eventually buy into the International index fund as well as the Total Bond market fund. I was just looking for some advice as to whether or not that would be a good idea, also I am a little confused on how the Traditional IRA works. I know it is tax-deferred, but does that just mean you write off the $5,500 at the end of the year, or is there a way to deposit your money directly without the taxes being taken out?....Sorry if that is a stupid question.
If the money is already in a Roth - leave it there! The traditional vs. Roth debate refers to getting the tax break now (traditional) vs. later (Roth). You get the tax break when you file your taxes since it reduces your taxable income by the amount you put into your account up to the annual limit.
However, traditional IRAs are only deductible if you don't have an employer plan or have low enough income. Usually people are deciding whether to invest more money in their traditional 401K (after getting the full employer match) or investing in a Roth IRA or a Roth 401K (If available from your employer). If you are young and in the 10% or 15% marginal tax bracket, you should do a Roth IRA IMO.

retiredjg
Posts: 38942
Joined: Thu Jan 10, 2008 12:56 pm

Re: Roth to Traditional

Post by retiredjg » Thu Jul 16, 2015 6:24 am

Here's some general information on finances for people in the military. Be sure to also click on the link at the end of the first sentence.

https://www.bogleheads.org/wiki/Military_finances

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