Roth IRA or Traditional IRA ?

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Topic Author
teelainen
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Roth IRA or Traditional IRA ?

Post by teelainen » Tue Mar 12, 2019 11:18 am

If an individual expects to make more money at 70.5 years of age (than his/her current income right now), should the individual contribute to a Roth IRA or Traditional IRA ?

At 70.5 years of age, the individual expects to be collecting dividends, interest income, and rental income that will likely add up to be higher than his/her current income right now.

Any tips, suggestions, or general feedback would be appreciated. Thanks.

Reddog2
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Re: Roth IRA or Traditional IRA ?

Post by Reddog2 » Tue Mar 12, 2019 11:27 am

I belive withdrawls from a Traditional IRA would only add to you income and increase your tax burden. I would say go with ROTH for sure and pay those taxes now.

bryanm
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Re: Roth IRA or Traditional IRA ?

Post by bryanm » Tue Mar 12, 2019 11:29 am

The wiki has a great page on this.

The very simple answer is that under your hypothetical you should do Roth. The slightly more complex answer is that you should focus on effective marginal tax rates, not income. So, if tax breaks or changes in the tax law mean a lower effective tax rate (even with higher income), traditional wins. Many people do both to hedge their bets (and because the Roth IRA provides additional tax-advantaged space that isn't available in all cases for pre-tax dollars.)

The even more complex answer is that you should question your assumptions. It's easy to assume you'll make more later, but things can change in life. Hedging can help with this. You also want to make sure you're not leaving money on the table by giving up an employer match, etc.
Last edited by bryanm on Wed Mar 13, 2019 10:48 am, edited 2 times in total.

bryanm
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Re: Roth IRA or Traditional IRA ?

Post by bryanm » Tue Mar 12, 2019 11:31 am

Also, given the high expected income in retirement, consider if there are years before 70.5 where you have low income and can convert traditional to Roth at a low or zero tax rate. An often-overlooked benefit of traditional contributions is to convert at any time to Roth. Sometimes the timing works really well.

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willthrill81
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Re: Roth IRA or Traditional IRA ?

Post by willthrill81 » Tue Mar 12, 2019 11:34 am

bryanm wrote:
Tue Mar 12, 2019 11:29 am
The wiki has a great page on this.

The very simple answer is that under your hypothetical you should do Roth. The slightly more complex answer is that you should focus on effective tax rates, not income. So, if tax breaks or changes in the tax law mean a lower effective tax rate (even with higher income), traditional wins. Many people do both to hedge their bets (and because the Roth IRA provides additional tax-advantaged space that isn't available in all cases for pre-tax dollars.)

The even more complex answer is that you should question your assumptions. It's easy to assume you'll make more later, but things can change in life. Hedging can help with this. You also want to make sure you're not leaving money on the table by giving up an employer match, etc.
+1

Roth accounts would almost certainly be better for the OP, but actually running the numbers is prudent.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
teelainen
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Re: Roth IRA or Traditional IRA ?

Post by teelainen » Tue Mar 12, 2019 11:02 pm

bryanm wrote:
Tue Mar 12, 2019 11:31 am
Also, given the high expected income in retirement, consider if there are years before 70.5 where you have low income and can convert traditional to Roth at a low or zero tax rate. An often-overlooked benefit of traditional contributions is to convert at any time to Roth. Sometimes the timing works really well.
bryanm, THANK YOU. Wow, that is a great overlooked benefit of the Traditional IRA.

JBTX
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Re: Roth IRA or Traditional IRA ?

Post by JBTX » Tue Mar 12, 2019 11:07 pm

bryanm wrote:
Tue Mar 12, 2019 11:29 am
The wiki has a great page on this.

The very simple answer is that under your hypothetical you should do Roth. The slightly more complex answer is that you should focus on effective tax rates, not income. So, if tax breaks or changes in the tax law mean a lower effective tax rate (even with higher income), traditional wins. Many people do both to hedge their bets (and because the Roth IRA provides additional tax-advantaged space that isn't available in all cases for pre-tax dollars.)

The even more complex answer is that you should question your assumptions. It's easy to assume you'll make more later, but things can change in life. Hedging can help with this. You also want to make sure you're not leaving money on the table by giving up an employer match, etc.
I'm assuming you mean marginal tax rates, not effective.

bryanm
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Re: Roth IRA or Traditional IRA ?

Post by bryanm » Wed Mar 13, 2019 10:47 am

JBTX wrote:
Tue Mar 12, 2019 11:07 pm
bryanm wrote:
Tue Mar 12, 2019 11:29 am
The wiki has a great page on this.

The very simple answer is that under your hypothetical you should do Roth. The slightly more complex answer is that you should focus on effective tax rates, not income. So, if tax breaks or changes in the tax law mean a lower effective tax rate (even with higher income), traditional wins. Many people do both to hedge their bets (and because the Roth IRA provides additional tax-advantaged space that isn't available in all cases for pre-tax dollars.)

The even more complex answer is that you should question your assumptions. It's easy to assume you'll make more later, but things can change in life. Hedging can help with this. You also want to make sure you're not leaving money on the table by giving up an employer match, etc.
I'm assuming you mean marginal tax rates, not effective.
Yes. Thanks.

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FiveK
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Re: Roth IRA or Traditional IRA ?

Post by FiveK » Wed Mar 13, 2019 11:03 am

teelainen wrote:
Tue Mar 12, 2019 11:18 am
At 70.5 years of age, the individual expects to be collecting dividends, interest income, and rental income that will likely add up to be higher than his/her current income right now.
If the dividend income will be significant, note that it may be taxed at lower rates than ordinary income (e.g., wages).

As others have noted, compare your current marginal tax saving rate for traditional contributions vs. your expected marginal tax rate on traditional withdrawals and go from there.

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smarcus3
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Re: Roth IRA or Traditional IRA ?

Post by smarcus3 » Wed Mar 13, 2019 7:45 pm

Do you have access to a 401k? If so your Tira may be non-deductible based on your income making the choice easy.
This is my personal opinion. I'm an engineer not a financial advisor.

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