Roth vs Traditional IRA

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winter5
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Roth vs Traditional IRA

Post by winter5 » Sat Sep 22, 2018 8:59 pm

Dear all,

I do not have a plan when I retire, and to balance the risk and benefit of Roth and traditional IRA, I am planning to have both starting from next year. What do you suggest?

I am thinking this because I may not get a high-paying job when I retire, and I may work less or may not work at all. So, in my assumption, my income will be likely lower than what I have now.

Thank you!

PFInterest
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Re: Roth vs Traditional IRA

Post by PFInterest » Sat Sep 22, 2018 9:15 pm

Do you have a workplace plan? What is your marginal rate?

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FiveK
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Re: Roth vs Traditional IRA

Post by FiveK » Sat Sep 22, 2018 9:18 pm

winter5 wrote:
Sat Sep 22, 2018 8:59 pm
So, in my assumption, my income will be likely lower than what I have now.
That implies a traditional account will work better for you. Do you have a reason to believe otherwise?

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Leif
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Re: Roth vs Traditional IRA

Post by Leif » Sat Sep 22, 2018 9:28 pm

winter5 wrote:
Sat Sep 22, 2018 8:59 pm
I am thinking this because I may not get a high-paying job when I retire, and I may work less or may not work at all. So, in my assumption, my income will be likely lower than what I have now.
You may have income in retirement that you don't have now. A pension perhaps, social security, interest and dividend income from your taxable accounts, RMDs at 70 from your IRA. You just may end up with more income later in retirement then pre-retirement.

I think tax diversification, by having both a traditional IRA and a Roth, is a smart move.

winter5
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Re: Roth vs Traditional IRA

Post by winter5 » Sat Sep 22, 2018 9:53 pm

Thank you all for your advise! I am in the military and have a retirement plan after 20 yrs of service. Also contributing to the TSP (Roth) and IRA (also Roth) in addition to taxable investment. My marginal tax rate is currently 25%.

Thank you again!

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FiveK
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Re: Roth vs Traditional IRA

Post by FiveK » Sat Sep 22, 2018 10:21 pm

winter5 wrote:
Sat Sep 22, 2018 9:53 pm
My marginal tax rate is currently 25%.
Is that federal+state+local? There is no federal 25% rate in 2018.

winter5
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Re: Roth vs Traditional IRA

Post by winter5 » Sat Sep 22, 2018 10:58 pm

Oh! sorry--I'm thinking the 2017 rate--it is 24% in 2018--I am paying only federal tax--my state has no tax. Thank you!

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FiveK
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Re: Roth vs Traditional IRA

Post by FiveK » Sun Sep 23, 2018 12:54 am

winter5 wrote:
Sat Sep 22, 2018 10:58 pm
Oh! sorry--I'm thinking the 2017 rate--it is 24% in 2018--I am paying only federal tax--my state has no tax. Thank you!
That makes the answer to the title question easy: you make too much to deduct a tIRA, so use a Roth IRA. See 2018 IRA Contribution and Deduction Limits If You ARE Covered by a Retirement Plan at Work.

Whether you should be using the traditional or Roth TSP depends on how much you have in traditional accounts now and the expected pension amount.

billfromct
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Re: Roth vs Traditional IRA

Post by billfromct » Sun Sep 23, 2018 2:00 am

The first thing is to build up tax diversity in your retirement account, as Leif mentioned. It appears that you are doing so.

You don't give your age, or marital status, so I'm assuming 30s & single.

Being in the 24% Federal tax bracket, I would recommend tax deductible in your TSP & a Roth IRA if eligible. I believe your modified adjusted gross income (MAGI) has to be below $120k to fully fund a Roth IRA in 2017; don't know if it changes for 2018.

I recommend to my kids (late 20s), that they should try to have their retirement accounts at about 25%-50% Roth money when they retire & to fully fund their Roth retirement accounts when in a lower tax bracket with many years to compound tax free & be taken out Federal & state tax free after age 59.5.

I will start SS & RMDs next year & am about 6% Roth & 94% taxable in my retirement accounts, because Roth IRAs started in 1998. I needed the tax deduction in my 401k when Roth 401k contributions became available in the mid 2000s. I would love to have my Roth retirement accounts at 25% now. My RMDs & SS will push me into a higher tax bracket next year as well as bump me up to higher Medicare costs due to my income.

If I were married, I probably wouldn't be in a higher tax bracket or pay the higher Medicare costs.

bill

Fishing50
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Re: Roth vs Traditional IRA

Post by Fishing50 » Sun Sep 23, 2018 2:39 am

It depends. As a senior officer about 3 yrs from retirement, we're 100% traditional TSP because we know our retired income tax bracket will be the same or lower. When we were unsure about our future plans, we chose a mix of Roth and traditional.

Good post on the topic: https://thefinancebuff.com/most-tsp-par ... h-tsp.html

For more detailed discussion, post your question in the format: viewtopic.php?f=1&t=6212
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

rkhusky
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Re: Roth vs Traditional IRA

Post by rkhusky » Sun Sep 23, 2018 5:39 am

Maxing the Traditional TSP ($18500) and using the tax savings to fund a Roth IRA ($5500) is usually a good choice. Then when you retire early, convert the Traditional TSP to Roth IRA at a lower tax rate.

winter5
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Re: Roth vs Traditional IRA

Post by winter5 » Sun Sep 23, 2018 3:46 pm

Thank you so much for all your advise. In regards to conversion, I don't think TSP currently allows traditional TSP to Roth conversion but the rule may change in the future.

Thank you again!

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