Roth vs traditional for lower income maid

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SGM
Posts: 2743
Joined: Wed Mar 23, 2011 4:46 am

Roth vs traditional for lower income maid

Post by SGM » Fri Nov 09, 2018 12:31 pm

I was discussing retirement with our maid who is in her 60s. She and her husband have never heard of IRAs. They are fairly recent legal immigrants. They have no retirement accounts or 401ks. I discussed the advantages of traditional IRAs and Roth IRAs and referred them to Vanguard. The husband will make the investment decisions but only speaks Spanish. Someone they know does their taxes for them, but has never mentioned IRAs to them. I suspect most likely they would benefit more from a traditional IRA as it would be tax deductible and might allow them to put more into a tax advantaged space.

Any comments on traditional vs. Roth for a couple in their 60s with what i assume are not much savings? i would hope Vanguard would give them well thought out advice.

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth vs traditional for lower income maid

Post by KlangFool » Fri Nov 09, 2018 12:35 pm

SGM wrote:
Fri Nov 09, 2018 12:31 pm
I was discussing retirement with our maid who is in her 60s. She and her husband have never heard of IRAs. They are fairly recent legal immigrants. They have no retirement accounts or 401ks. I discussed the advantages of traditional IRAs and Roth IRAs and referred them to Vanguard. The husband will make the investment decisions but only speaks Spanish. Someone they know does their taxes for them, but has never mentioned IRAs to them. I suspect most likely they would benefit more from a traditional IRA as it would be tax deductible and might allow them to put more into a tax advantaged space.

Any comments on traditional vs. Roth for a couple in their 60s with what i assume are not much savings? i would hope Vanguard would give them well thought out advice.
SGM,

They need to research tax credits: Earned Income Tax Credit and Saver's Credit. At the low-income level, they may or may not qualify for those tax credits depending on whether they contribute to the Trad. IRA or Roth IRA.

KlangFool

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Phineas J. Whoopee
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Joined: Sun Dec 18, 2011 6:18 pm

Re: Roth vs traditional for lower income maid

Post by Phineas J. Whoopee » Fri Nov 09, 2018 12:50 pm

The lower one's current tax bracket the less advantage tax deferral has. Given that they're "lower income," Roth contributions might make a lot of sense. Of course there isn't enough information for a specific recommendation.
PJW

SGM
Posts: 2743
Joined: Wed Mar 23, 2011 4:46 am

Re: Roth vs traditional for lower income maid

Post by SGM » Sat Nov 10, 2018 9:44 am

Thanks for the replies. I don't know how much they work with their friend who does their taxes or how knowledgeable that person is. I don't want to get into their personal business. I do know that for 25 years they sent money back to Peru to help their family. Now the wife is considered evil because she stopped sending money back. Her sister who has lived here the same time owns 2 houses. This couple still rents. The wife has learned English, but the husband who works for himself as a carpenter finds it painful to learn English. We will see her again the day before Thanksgiving so I will mention looking at her taxes more closely.

b0B
Posts: 179
Joined: Fri Oct 19, 2018 11:39 am

Re: Roth vs traditional for lower income maid

Post by b0B » Sat Nov 10, 2018 10:08 am

KlangFool wrote:
Fri Nov 09, 2018 12:35 pm
They need to research tax credits: Earned Income Tax Credit and Saver's Credit. At the low-income level, they may or may not qualify for those tax credits depending on whether they contribute to the Trad. IRA or Roth IRA.
A corollary of this is that low income could mean high marginal tax rates. This is crucial to understand.

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth vs traditional for lower income maid

Post by KlangFool » Sat Nov 10, 2018 10:27 am

SGM wrote:
Sat Nov 10, 2018 9:44 am
Thanks for the replies. I don't know how much they work with their friend who does their taxes or how knowledgeable that person is. I don't want to get into their personal business. I do know that for 25 years they sent money back to Peru to help their family. Now the wife is considered evil because she stopped sending money back. Her sister who has lived here the same time owns 2 houses. This couple still rents. The wife has learned English, but the husband who works for himself as a carpenter finds it painful to learn English. We will see her again the day before Thanksgiving so I will mention looking at her taxes more closely.
SGM,

They should use the tax software to run through the numbers.

KlangFool

fulltilt
Posts: 181
Joined: Thu Dec 01, 2011 2:23 pm

Re: Roth vs traditional for lower income maid

Post by fulltilt » Sat Nov 10, 2018 10:32 am

b0B wrote:
Sat Nov 10, 2018 10:08 am
KlangFool wrote:
Fri Nov 09, 2018 12:35 pm
They need to research tax credits: Earned Income Tax Credit and Saver's Credit. At the low-income level, they may or may not qualify for those tax credits depending on whether they contribute to the Trad. IRA or Roth IRA.
A corollary of this is that low income could mean high marginal tax rates. This is crucial to understand.
Would you care to elaborate?

b0B
Posts: 179
Joined: Fri Oct 19, 2018 11:39 am

Re: Roth vs traditional for lower income maid

Post by b0B » Sat Nov 10, 2018 10:46 am

fulltilt wrote:
Sat Nov 10, 2018 10:32 am
b0B wrote:
Sat Nov 10, 2018 10:08 am
KlangFool wrote:
Fri Nov 09, 2018 12:35 pm
They need to research tax credits: Earned Income Tax Credit and Saver's Credit. At the low-income level, they may or may not qualify for those tax credits depending on whether they contribute to the Trad. IRA or Roth IRA.
A corollary of this is that low income could mean high marginal tax rates. This is crucial to understand.
Would you care to elaborate?
https://www.taxpolicycenter.org/briefin ... -taxpayers

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FiveK
Posts: 5722
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth vs traditional for lower income maid

Post by FiveK » Sat Nov 10, 2018 8:25 pm

SGM wrote:
Fri Nov 09, 2018 12:31 pm
They have no retirement accounts or 401ks.
...
Any comments on traditional vs. Roth for a couple in their 60s with what i assume are not much savings?
While I heartily concur with the use of tax software to see their actual marginal rates, given the situation above saving any amount on taxes now is likely best.

Whether to use commercial tax software and calculate the marginal rates by changing inputs and doing the subtraction and division by hand, or seeing the answers in chart form by using a spreadsheet such as the personal finance toolbox spreadsheet is a matter of taste.

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