Spousal Roth or Traditional IRA - 2017 & 2018

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Thu Mar 22, 2018 9:54 am

Need to decide whether spouse’s IRA contributions for 2017 and 2018 should go to Roth or Traditional. Her contribution to Traditional IRA would be fully deductible.

Numbers below are before any Traditional IRA contributions. I am ignoring state taxes because both Roth and Traditional IRAs are treated the same in my state (no deduction for contributing to either, no tax for withdrawal from either).

Ages: Both under 40
Spouse is homemaker, I was not eligible for 401k in 2017, but am eligible in 2018

2017
AGI: $132,000
Taxable income: $77,500
Marginal tax bracket: 30% (25% + 5% partial loss of child tax credit; 20% marginal tax bracket at $75,900)
Retirement contributions: $6750 HSA, $5500 Roth IRA for me, will add $5500 spousal IRA (Roth or Traditional)

2018
AGI: $133,000
Taxable income: $109,000
Marginal tax bracket: 22%
Retirement contributions: $18,500 Traditional 401(k) + $5,000 employer match, $6,900 HSA, $5,500 Roth IRA for me, will add $5500 spousal IRA (Roth or Traditional)

Current investments:
88% Roth
12% Traditional

Future investments:
Max HSA
Max 401(k)
Max Roth IRA for me
Max Roth or Traditional IRA for spouse

Planning to work for another 30 years. I expect my future income will roughly track inflation going forward. No pension.

What should we do with my spouse’s IRA for 2017 and 2018?

1. Roth IRA all the way
2. Traditional IRA only while in 30%+ marginal tax bracket, then Roth IRA
3. Traditional IRA only while in 22%+ marginal tax bracket, then Roth IRA
4. Traditional IRA while in 20%+ marginal tax bracket
5. Something else (please explain)
Don't assume I know what I'm talking about.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Thu Mar 22, 2018 5:12 pm

Bump for the evening crowd
Don't assume I know what I'm talking about.

Olemiss540
Posts: 468
Joined: Fri Aug 18, 2017 8:46 pm

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by Olemiss540 » Thu Mar 22, 2018 6:32 pm

I am in almost the same boat.

I took the deduction and contributed to a deductible IRA for my spouse.

I believe the amount of money in the market trumps tax treatment status, atleast until you are in the 7 figure club with your tax deferred investments.

Put 11k in a deductible IRA and put the 3k of tax savings into a taxable investing account or 529. If you are just going to spend the tax savings and not direct them towards investing, then go Roth.

I want to build the net worth as quickly as possible because I feel it gives me the most options at the end of the day.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Thu Mar 22, 2018 8:39 pm

Thanks, OleMiss
Don't assume I know what I'm talking about.

User avatar
FiveK
Posts: 4369
Joined: Sun Mar 16, 2014 2:43 pm

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by FiveK » Thu Mar 22, 2018 10:35 pm

G-Money wrote:
Thu Mar 22, 2018 9:54 am
2017
AGI: $132,000
Taxable income: $77,500

2018
AGI: $133,000
Taxable income: $109,000
The 2018 numbers are understandable: $24K standard deduction.

Are the 2017 numbers correct? $54,500 is a lot of itemized deductions and personal exemptions. Plausible if you have a bunch of kids, large mortgage, high state and property taxes, etc., so just checking....

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 5:30 am

FiveK wrote:
Thu Mar 22, 2018 10:35 pm
Are the 2017 numbers correct? $54,500 is a lot of itemized deductions and personal exemptions. Plausible if you have a bunch of kids
Bingo. Also bunched deductions in 2017 after the tax reform passed. The 2017 numbers were pulled from my draft 1040.
Don't assume I know what I'm talking about.

rkhusky
Posts: 5058
Joined: Thu Aug 18, 2011 8:09 pm

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by rkhusky » Fri Mar 23, 2018 6:57 am

If wife doesn't already have Traditional account, use Roth for 2017 and 2018. If she has an existing Traditional account, Traditional for 2017 and Roth for 2018.

ivk5
Posts: 238
Joined: Thu Sep 22, 2016 9:05 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by ivk5 » Fri Mar 23, 2018 6:58 am

See wiki on traditional vs Roth if you haven't already. This is mainly tax arbitrage and depends on your predictions for your future tax situation. Personally I'd do traditional at the 30% marginal rate and probably Roth at 20/22%, but your situation may be different. (Roth at 20/22% could still be a loser if you retire early and have plenty of years for subsequent Roth conversions at lower rate.)

Curious- what state are you in that does not allow deduction for tIRA contribution? Risk is that if you are living in another state in retirement that does tax tIRA withdrawals, you'll have some amount of double-taxation.
rkhusky wrote:
Fri Mar 23, 2018 6:57 am
If wife doesn't already have Traditional account, use Roth for 2017 and 2018. If she has an existing Traditional account, Traditional for 2017 and Roth for 2018.
I don't see a rationale for looking at own account and spouse's differently, unless you are looking to preserve future backdoor Roth option for one spouse in case future MAGI exceeds deductible tIRA limit. I think this was rkhusky's point above.

coupleofcents
Posts: 142
Joined: Wed May 24, 2017 7:55 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by coupleofcents » Fri Mar 23, 2018 8:04 am

I would take do Roth for both 2017 and 2018. Given you are planning to work for 30 years and you max your 401k, you're pretax account will eventually catch up and surpass your Roth accounts. Roth will give you more flexibility for a traditional retirement age (no RMDs).

I personally have been doing traditional for my stay at home wife since I like tax savings now vs later, and we plan to retire in our 50s and use a Roth conversion ladder to access the traditional accounts early without penalty. But when the tax law changed our marginal bracket to only 12% this year, I contributed to Roth for both of us for 2018 and going forward. I'm still maxing my 401K. We are both 33 years old.

User avatar
ruralavalon
Posts: 12756
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by ruralavalon » Fri Mar 23, 2018 8:28 am

I suggest traditional deductible IRA contributions.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ivk5
Posts: 238
Joined: Thu Sep 22, 2016 9:05 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by ivk5 » Fri Mar 23, 2018 8:31 am

ivk5 wrote:
Fri Mar 23, 2018 6:58 am
See wiki on traditional vs Roth if you haven't already. This is mainly tax arbitrage and depends on your predictions for your future tax situation. Personally I'd do traditional at the 30% marginal rate and probably Roth at 20/22%, but your situation may be different. (Roth at 20/22% could still be a loser if you retire early and have plenty of years for subsequent Roth conversions at lower rate.)
Here's link to wiki: Traditional versus Roth

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 8:35 am

rkhusky wrote:
Fri Mar 23, 2018 6:57 am
If wife doesn't already have Traditional account, use Roth for 2017 and 2018. If she has an existing Traditional account, Traditional for 2017 and Roth for 2018.
Spouse does not yet have Traditional. Is your rationale to just keep things simple?
Don't assume I know what I'm talking about.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 8:53 am

ivk5 wrote:
Fri Mar 23, 2018 6:58 am
See wiki on traditional vs Roth if you haven't already. This is mainly tax arbitrage and depends on your predictions for your future tax situation. Personally I'd do traditional at the 30% marginal rate and probably Roth at 20/22%, but your situation may be different. (Roth at 20/22% could still be a loser if you retire early and have plenty of years for subsequent Roth conversions at lower rate.)
Thanks. I’ve read the wiki on this point. The prevailing wisdom on the board had been to do traditional at 25% and Ross at 15%. Which doesn’t give a lot of guidance on what to do when one’s marginal tax bracket is 20%.

Since my spouse does not have a traditional IRA yet, I am also considering doing traditional IRA for 2017 for the portion within the 30% marginal tax bracket, then immediately converting it to Roth, for a tax savings of 8%. For the small portion of our income that’s in the 30% bracket, not sure if it’s worth the effort.
ivk5 wrote:
Fri Mar 23, 2018 6:58 am
Curious- what state are you in that does not allow deduction for tIRA contribution? Risk is that if you are living in another state in retirement that does tax tIRA withdrawals, you'll have some amount of double-taxation.
PA: http://www.revenue.pa.gov/FormsandPubli ... ev-636.pdf

Good point. I hadn’t considered that risk. Another risk is if/when one spouse predeceases the other; then the surviving spouse would face the prospect of years filing as single instead of MFJ with RMDs. I suppose both risks point in favor of Roth.
Don't assume I know what I'm talking about.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 9:00 am

coupleofcents wrote:
Fri Mar 23, 2018 8:04 am
I would take do Roth for both 2017 and 2018. Given you are planning to work for 30 years and you max your 401k, you're pretax account will eventually catch up and surpass your Roth accounts. Roth will give you more flexibility for a traditional retirement age (no RMDs).
Thanks. I’ve run some very rough numbers, and agree that our pretax accounts has a decent chance of matching or surpassing Roth. It figures to be close either way.

I think the flexibility argument can go both ways. If I do Traditional, I always have the option of converting to Roth. Once it’s in Roth, it’s stuck there. Of course, as you point out, ultimately having more in Roth creates more flexibility in the distribution side.
Don't assume I know what I'm talking about.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 9:01 am

ruralavalon wrote:
Fri Mar 23, 2018 8:28 am
I suggest traditional deductible IRA contributions.
Thanks. May I ask why?
Don't assume I know what I'm talking about.

rkhusky
Posts: 5058
Joined: Thu Aug 18, 2011 8:09 pm

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by rkhusky » Fri Mar 23, 2018 9:03 am

G-Money wrote:
Fri Mar 23, 2018 8:35 am
rkhusky wrote:
Fri Mar 23, 2018 6:57 am
If wife doesn't already have Traditional account, use Roth for 2017 and 2018. If she has an existing Traditional account, Traditional for 2017 and Roth for 2018.
Spouse does not yet have Traditional. Is your rationale to just keep things simple?
Yes. It's a bit of a coin flip on whether to go Roth IRA for years 2018+ in the 22% bracket, but I would lean that way for tax diversification. You're putting $23K+ into Traditional with your 401k and, with her IRA being a Roth, would then be putting $11K in Roth, which seems to me to be a good balance. So, unless you can make a solid case that you will definitely be in the 12% bracket in retirement, including SS taxation, I would go with Roth. Additionally, in the year you turn 50, you can start putting an extra $6K into your 401k, which would further increase your Traditional holdings.

If you decide to go Traditional in her IRA for years 2018+, I would go Traditional for 2017.

edit: The above assumes your current balances are rather small. If you already have $1M in Roth, it might change things.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 9:28 am

rkhusky wrote:
Fri Mar 23, 2018 9:03 am
G-Money wrote:
Fri Mar 23, 2018 8:35 am
rkhusky wrote:
Fri Mar 23, 2018 6:57 am
If wife doesn't already have Traditional account, use Roth for 2017 and 2018. If she has an existing Traditional account, Traditional for 2017 and Roth for 2018.
Spouse does not yet have Traditional. Is your rationale to just keep things simple?
Yes. It's a bit of a coin flip on whether to go Roth IRA for years 2018+ in the 22% bracket, but I would lean that way for tax diversification. You're putting $23K+ into Traditional with your 401k and, with her IRA being a Roth, would then be putting $11K in Roth, which seems to me to be a good balance. So, unless you can make a solid case that you will definitely be in the 12% bracket in retirement, including SS taxation, I would go with Roth. Additionally, in the year you turn 50, you can start putting an extra $6K into your 401k, which would further increase your Traditional holdings.

If you decide to go Traditional in her IRA for years 2018+, I would go Traditional for 2017.
Appreciate the follow-up. Hard to project future tax rates. Back of the envelope calculation suggests we’d be on the cusp of 12%/22% in retirement (assuming no changes) while both are living, then on cusp of 22%/24% when one spouse dies.
Don't assume I know what I'm talking about.

User avatar
ruralavalon
Posts: 12756
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by ruralavalon » Fri Mar 23, 2018 9:47 am

G-Money wrote:
Fri Mar 23, 2018 9:01 am
ruralavalon wrote:
Fri Mar 23, 2018 8:28 am
I suggest traditional deductible IRA contributions.
Thanks. May I ask why?
1) Traditional contributions will ordinarily be better for most people, because of the of the effect of progressive nature of the tax code at the time of withdrawal. Please Google the TFB blog post "The Case Against Roth 401k".

2) Also your 2017 and 2018 marginal tax rates argue for traditional. Please see the wiki article "Traditional versus Roth".

3) My CPA/tax attorney generally advised -- take your tax break now, rather than later.

I must add that I am not a tax expert, I don't even do my own tax returns.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 10:17 am

ruralavalon wrote:
Fri Mar 23, 2018 9:47 am
G-Money wrote:
Fri Mar 23, 2018 9:01 am
ruralavalon wrote:
Fri Mar 23, 2018 8:28 am
I suggest traditional deductible IRA contributions.
Thanks. May I ask why?
1) Traditional contributions will ordinarily be better for most people, because of the of the effect of progressive nature of the tax code at the time of withdrawal. Please Google the TFB blog post "The Case Against Roth 401k".

2) Also your 2017 and 2018 marginal tax rates argue for traditional. Please see the wiki article "Traditional versus Roth".

3) My CPA/tax attorney generally advised -- take your tax break now, rather than later.

I must add that I am not a tax expert, I don't even do my own tax returns.
I remember reading TFB’s post years ago, and just re-read it. I agree with it to a point. For me, I’m pretty sure SS and RMDs from my Traditional 401(k) will fill up all or most of the 0% and 12% buckets. Traditional IRA does nothing for us with respect to stat income tax. So his arguments, as they apply to my situation, are preserving more of the child tax credit (for 2017), and keeping the option open to converting to Roth in the future.

I guess the difficulty is in forecasting future tax rates. I didn’t bother thinking about it when we were squarely in the 15% bracket; we just used Roth wherever possible. The 20% - 22% range feels a bit like no man’s land, with no clearly right answer.
Don't assume I know what I'm talking about.

User avatar
FiveK
Posts: 4369
Joined: Sun Mar 16, 2014 2:43 pm

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by FiveK » Fri Mar 23, 2018 12:43 pm

G-Money wrote:
Fri Mar 23, 2018 5:30 am
FiveK wrote:
Thu Mar 22, 2018 10:35 pm
Are the 2017 numbers correct? $54,500 is a lot of itemized deductions and personal exemptions. Plausible if you have a bunch of kids
Bingo. Also bunched deductions in 2017 after the tax reform passed. The 2017 numbers were pulled from my draft 1040.
For 2017, assuming
- gross income of $140K,
- $6750 HSA and $1250 pre-tax medical insurance premium to reach $132K AGI,
- 3 kids and enough mortgage interest, state and property tax, and charitable contributions to reach $77,500 taxable,
the first $1600 of tIRA contributions will save 30%. Anything beyond that will save 20%.

For 2018, assuming
- gross income of $159.6K,
- $6850 HSA, $1250 pre-tax medical insurance premium, and $18.5K 401k to reach $133K AGI,
- 3 kids and standard deduction to reach $109K taxable,
any amount of deductible tIRA contributions will save 22%.

See the personal finance toolbox spreadsheet if you'd like to use more accurate numbers.

Probably using traditional to get the 30% saving would be good.

The 20% and 22% saving rates are less clear. The relatively low amount of current traditional savings might tip the scales toward using traditional.

It would take ~$1 million traditional balance to reach the 12% bracket based on 4%/yr withdrawal as the only income, and ~$2.5 million to reach the 22% bracket. See cells Calculations!T2:U29 (in particular, U16 and U17) in the linked spreadsheet. Other income sources will decrease those balances needed.

What do you expect your traditional balance to be at retirement?

User avatar
ruralavalon
Posts: 12756
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by ruralavalon » Fri Mar 23, 2018 12:51 pm

G-Money wrote:
Fri Mar 23, 2018 10:17 am
ruralavalon wrote:
Fri Mar 23, 2018 9:47 am
G-Money wrote:
Fri Mar 23, 2018 9:01 am
ruralavalon wrote:
Fri Mar 23, 2018 8:28 am
I suggest traditional deductible IRA contributions.
Thanks. May I ask why?
1) Traditional contributions will ordinarily be better for most people, because of the of the effect of progressive nature of the tax code at the time of withdrawal. Please Google the TFB blog post "The Case Against Roth 401k".

2) Also your 2017 and 2018 marginal tax rates argue for traditional. Please see the wiki article "Traditional versus Roth".

3) My CPA/tax attorney generally advised -- take your tax break now, rather than later.

I must add that I am not a tax expert, I don't even do my own tax returns.
IRS away, we don't even know what the tax brackets,will be then. remember reading TFB’s post years ago, and just re-read it. I agree with it to a point. For me, I’m pretty sure SS and RMDs from my Traditional 401(k) will fill up all or most of the 0% and 12% buckets. Traditional IRA does nothing for us with respect to stat income tax. So his arguments, as they apply to my situation, are preserving more of the child tax credit (for 2017), and keeping the option open to converting to Roth in the future.

I guess the difficulty is in forecasting future tax rates. I didn’t bother thinking about it when we were squarely in the 15% bracket; we just used Roth wherever possible. The 20% - 22% range feels a bit like no man’s land, with no clearly right answer.
I wholeheartedly agree that there is no clear right answer. It seems impossible to forecast an individual's or couple's tax rate 30+ years away, we don't even know what the tax brackets might be then.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 1:58 pm

FiveK wrote:
Fri Mar 23, 2018 12:43 pm
G-Money wrote:
Fri Mar 23, 2018 5:30 am
FiveK wrote:
Thu Mar 22, 2018 10:35 pm
Are the 2017 numbers correct? $54,500 is a lot of itemized deductions and personal exemptions. Plausible if you have a bunch of kids
Bingo. Also bunched deductions in 2017 after the tax reform passed. The 2017 numbers were pulled from my draft 1040.
It would take ~$1 million traditional balance to reach the 12% bracket based on 4%/yr withdrawal as the only income, and ~$2.5 million to reach the 22% bracket. See cells Calculations!T2:U29 (in particular, U16 and U17) in the linked spreadsheet. Other income sources will decrease those balances needed.

What do you expect your traditional balance to be at retirement?
I generally agree with your calculations. But I also am assuming that 85% of SS will be taxable, which would substantially lower the traditional balances needed to push into the 22% bracket.
Don't assume I know what I'm talking about.

User avatar
FiveK
Posts: 4369
Joined: Sun Mar 16, 2014 2:43 pm

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by FiveK » Fri Mar 23, 2018 2:15 pm

G-Money wrote:
Fri Mar 23, 2018 1:58 pm
FiveK wrote:
Fri Mar 23, 2018 12:43 pm
What do you expect your traditional balance to be at retirement?
I generally agree with your calculations. But I also am assuming that 85% of SS will be taxable, which would substantially lower the traditional balances needed to push into the 22% bracket.
Yes it would, once SS starts. The effect depends somewhat on the time available for Roth conversions before starting SS.

See also Taxation of Social Security benefits - Bogleheads for some plausible marginal rates. There are some high rates over some amounts of non-SS income, but also some relatively low rates, especially for MFJ filers.

Of course, having a 20-22% marginal rate now, if the retirement marginal rate is somewhere between 15% and 25%, the consequences of the traditional vs. Roth choice won't be huge. The benefit from you investing a good chunk of money in either form now, however, should be huge - good luck!

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: Spousal Roth or Traditional IRA - 2017 & 2018

Post by G-Money » Fri Mar 23, 2018 2:44 pm

Thank you. You’re right, that in the 20-22% range, the consequences of making the “wrong” choice won’t be severe.

At this point, I’m inclined to contribute to Traditional for the portion of 2017’s income in the 30% bracket, then immediately convert that portion to Roth in the 22% bracket. Seeing that the responses in this thread came out almost exactly 50/50 in favor of Roth/Traditional, I think it’s safe to say there’s no clearly correct answer. I’ll save a nice dinner’s worth in taxes, while maintaining fewer accounts going forward.

Thanks again to everyone for your help.
Don't assume I know what I'm talking about.

Post Reply