Is Roth right for me?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
The Daughter
Posts: 87
Joined: Tue Jul 21, 2015 7:19 am

Is Roth right for me?

Post by The Daughter » Tue Aug 25, 2015 7:47 am

Greetings Bogleheads-

Here's the situation:
-- retiring somewhere between Nov. 30, 2015 and Jan. 31, 2016
-- maxed out my 403(b) contribution for the year
-- tax bracket = 25% (marginal 17.8%)
-- pension + SS will keep me in 25% bracket
-- possibility that my tax bracket will go up to 28% after retirement due to taxable inheritance distributions

Should I contribute to a Roth for this year?

If beefing up a Roth is a good idea, may I contribute the maximum to Roth in January 2016, or do I need to earn the contributed amount during 2016? If I may contribute the max to a Roth on January 1 (or Jan 4), I'll extend work into 2016. If not, fu-gedda-boud-it.

If I go ahead with adding to my currently paltry Roth ($4500), what is a good vehicle?

Or - should I convert my Roth to a traditional IRA? Is that even a choice?

Thank you in advance for your wisdom.

The Daughter

ieee488
Posts: 1989
Joined: Thu Dec 10, 2009 8:57 am

Re: Is Roth right for me?

Post by ieee488 » Tue Aug 25, 2015 8:07 am

Why $4500 for Roth?
The maximum for someone over 50 in 2015 is $6500.
Dell Optiplex 3020 (Win7 Pro), Dell Precision M6300 (Ubuntu Linux 12.04), Dell Precision M6300 (Win7 Pro), Dell Latitude D531 (Vista)

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

Re: Is Roth right for me?

Post by NightFall » Tue Aug 25, 2015 8:32 am

The Daughter wrote: -- tax bracket = 25% (marginal 17.8%)
-- pension + SS will keep me in 25% bracket
-- possibility that my tax bracket will go up to 28% after retirement due to taxable inheritance distributions

Should I contribute to a Roth for this year?
I think you mean your marginal tax is 25% and your total tax is 17.8%. Decisions are typically made with the marginal tax bracket in mind. I'll assume 25%. In general, Roth contributions should be preferred if you believe your marginal tax rate will be higher in the future. So if you believe you may hit 28% in retirement but are 25% right now, Roth makes sense for everything up to the 28% bracket. Note that there may be a 5 year period where you cannot access these funds. I seem to remember restrictions on new Roth accounts dependent on your age... if you're young enough.
The Daughter wrote: If beefing up a Roth is a good idea, may I contribute the maximum to Roth in January 2016, or do I need to earn the contributed amount during 2016? If I may contribute the max to a Roth on January 1 (or Jan 4), I'll extend work into 2016. If not, fu-gedda-boud-it.
IRAs can be contributed to up to the filing deadline for your 2015 taxes... typically April 15 of the year following the tax year in question. I don't see why you need to be employed in 2016 if the income is from 2015.
The Daughter wrote: If I go ahead with adding to my currently paltry Roth ($4500), what is a good vehicle?
I like the Mazda MX 5. I think you're asking about something else though. If you're asking about where you should put it, places like Vanguard will allow you to open a Roth IRA. If you're asking about what to invest it in, that's dependent on your other investments and asset allocation.
The Daughter wrote: Or - should I convert my Roth to a traditional IRA? Is that even a choice?
I do not think you can convert a Roth account to a traditional account. I see only disadvantages to doing so if it even was allowed. You can potentially re-characterize the contribution to a Roth IRA in the same tax year, but that doesn't make sense in your context.

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

Re: Is Roth right for me?

Post by NightFall » Tue Aug 25, 2015 8:40 am

I was just looking over your other posts. It appears you are 65 years old. I should clarify, the 5 year rule for Roths is about accessing the gains on any investments. You can always take out your contributions. The 5 year period starts in the year the Roth IRA account was created. It appears you already have a Roth IRA account. If it was 5 years or more ago, then ignore the 5 year rule thing I mentioned.

Note that one advantage of Roth IRAs is that they do not require RMDs at age 70 like most accounts do. Hence, you can leave the money in there as long as you want... potentially passing it onto your heirs as well.

Topic Author
The Daughter
Posts: 87
Joined: Tue Jul 21, 2015 7:19 am

Re: Is Roth right for me?

Post by The Daughter » Tue Aug 25, 2015 4:59 pm

ieee488 wrote:Why $4500 for Roth?
The maximum for someone over 50 in 2015 is $6500.
The current balance in my Roth ($4500) is from years and years ago...

alex_686
Posts: 5156
Joined: Mon Feb 09, 2015 2:39 pm

Re: Is Roth right for me?

Post by alex_686 » Tue Aug 25, 2015 5:07 pm

The primary factor will be which one has a lower tax drag. The only factor to consider for the tax drag is your tax rate. If your expected future tax rate is going to be higher, Roth. If lower, IRA.

Everything else is secondary.
Technically, you can save more with a Roth because you pay taxes outside of the contribution. However, this only matters if you are maxing out your contribution.

SGM
Posts: 3063
Joined: Wed Mar 23, 2011 4:46 am

Re: Is Roth right for me?

Post by SGM » Tue Aug 25, 2015 5:36 pm

You can contribute $6500 into a Roth in 2015 and up until April 15 2016. If you work in 2016 you can also contribute to a 2016 Roth up until April 15 2017. If you are going to be in the same or higher tax bracket in retirement it is generally a good idea to contribute to a Roth. Also generally you are better off withdrawing from taxable accounts, then tax deferred accounts, then Roth accounts in retirement.

You might want to consider conversions from your 403b to a Roth IRA. After age 70 you will have to take out RMDs required minimum distributions yearly. RMDs may increase your tax rate. I converted all IRAs to Roth IRAs prior to taking SS at age 70. Are you thinking of delaying SS to 70 to increase your payout. If married or divorced you could take a spousal benefit at age 66.

I used James Lange's Retire Secure 2009 edition to help with making some of these retirement investment decisions. He has a 2015 edition which is available for the cost of shipping only to BHs. See viewtopic.php?f=10&t=171935&newpost=2600650

billfromct
Posts: 1034
Joined: Tue Dec 03, 2013 9:05 am

Re: Is Roth right for me?

Post by billfromct » Tue Aug 25, 2015 5:36 pm

If you have a retirement plan available at work (403b), the ability to contribute to a tax deductible IRA starts to phase out when your modified adjusted gross income (MAGI) hits $61k if your are single. You didn't mention if you are single or married.

If you are in the 25% tax bracket I would guess your MAGI is over $61k.

A single person's ability to fund a Roth IRA starts to phase out when your MAGI hits $116k (or so) for a single person. Of course you can always contribute to a Roth IRA via the "backdoor Roth IRA" process if you don't have a traditional or rollover IRA.

bill

Post Reply