TIRA Vs. Roth (12% tax bracket) - 2020

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Topic Author
sthadani
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Joined: Wed Oct 24, 2018 10:11 am

TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Wed Feb 05, 2020 10:55 am

In reviewing my 2020 paystubs and making some assumptions I was able to calculate my tax burden for 2020. Currently I contribute to a Roth IRA (myself & DW) but wondering if I should switch to TIRA since this might qualify me for the Saver's Credit. Here are some details:

Current situation:
MFJ
Total income - 111,500 (approx.)
401(k) - 19,500
Ins (deductible) - 5,202
FSA - 5,000
HSA - 4,700
AGI (W-2) - 77,098
Other income - 1,000
AGI - 78,098
Std. Ded - (24,800)
Taxable - 53,298
Tax due - 6,000

Hypothetical situation:
MFJ
Total income - 111,500 (approx.)
401(k) - 19,500
Ins (deductible) - 5,202
FSA - 5,000
HSA - 4,700 + 1,100+
TIRA - 12,000
AGI (W-2) - 63,998
Other income - 1,000
AGI - 64,998
Std. Ded - (24,800)
Taxable - 40,198
Tax due - 4,428 … reduced by 12% x (12,000 +1,100)
Saver's Credit - (400)
Tax Due - $4,028

Would the additional $400 saver's credit warrant switching to TIRA even in a lower tax bracket?

The 1,440 in tax savings can be redirected to the HSA which means no change in take-homepay.

Any feedback would be greatly appreciated.

EHEngineer
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by EHEngineer » Wed Feb 05, 2020 1:10 pm

Great analysis of your taxes.

I think you have made an error in comparing your "take home" money after all savings and investments are made. Let me propose two metrics to analyze each scenario. You can see below in the "hypothetical situation" you said "... no change in take home pay" but I calculated "spendable money" to be higher by $872.

1) Spendable money =
Total income + other income - 401(k) - Ins - FSA - HSA - TIRA - tax due (after credits are applied)

2) After tax value of investments
Since the 401k, Ins and FSA are not changed in this analysis, I neglect them for simplicity.
I assume you will be in the 12% marginal tax bracket at the time you withdrawl money put in pre-tax accounts. (addt'l analysis below)
After tax value of investments =
HSA + Roth + After Tax investments + (100%-12%)*(TIRA)

current situation:
spendable money = $60,098
After tax value of investments = $16,700
Total = $76,798

Hypothetical Situation
Spendable money = $60970
After tax value of investments = $16360
Total = $77,330

Hypothetical situation holding spendable money constant by making taxable investments
Spendable money = $60098
After tax value of investments = $17,232
Total = $77,330


New proposed situation ($7000 in HSA, $10,800 in TIRA and $872 in Roth, because HSA has greater tax advantages than TIRA or Roth)
Spendable money = $60098
After tax value of investments = $17376
Total = $77,474

When I do a sensitivity analysis of the future tax rate (previously assumed to be 12%) for the "New proposed situation", I conclude that a future tax rate of 18.3% is break even. Future tax rates above 18.3% make the roth contribution more attractive (including the effect of the saver's credit). Future tax rates below 18.3% make the TIRA contributions more attractive (including the effect of the saver's credit).

good luck.

Edit to add: If your HSA contributions are done through paycheck withholdings HSA contributions will also avoid FICA taxes which will add to "spendable money". I did not account for that positive effect. If payroll withholdings are used, it will reduce your SS wage history and possibly impact on your future social security income. Depending on several factors, this could have zero effect or some small effect. If you want to avoid any change to SS wage history, make the HSA contribution with post-tax money, and take the deduction on your 2020 tax filing. This will cause you to pay FICA taxes and so not affect your SS wage history.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

Topic Author
sthadani
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Wed Feb 05, 2020 3:01 pm

Thanks for the detailed feedback! I will prioritize the HSA contribution for 2020. I too was assuming to be in the same tax bracket for my golden years so it seemed logical to take the tax break now.

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FiveK
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by FiveK » Wed Feb 05, 2020 6:02 pm

sthadani wrote:
Wed Feb 05, 2020 3:01 pm
I too was assuming to be in the same tax bracket for my golden years so it seemed logical to take the tax break now.
When contributing the maximum as you are, "tie goes to the Roth" for equal contribution and withdrawal marginal rates. See the first of two More complicated situations.

For you to get that $400 of saver's credit it takes $31,500 of traditional contributions (plus the HSA). $400/$31,500 is only 1.3%, making the marginal rate on that $31,500 only 13.3%. You might be better off to put all the IRA and 401k money into Roth.

See Estimating future marginal tax rate for one way to compare 13.3% vs. what you might pay in retirement.

JBTX
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by JBTX » Wed Feb 05, 2020 6:37 pm

I'm not sure how you can do both an HSA and full FSA unless it is dependent care.

Ron Ronnerson
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by Ron Ronnerson » Wed Feb 05, 2020 7:04 pm

JBTX wrote:
Wed Feb 05, 2020 6:37 pm
I'm not sure how you can do both an HSA and full FSA unless it is dependent care.
The amount listed for the FSA is $5k, which is the maximum for a dependent care FSA. I think the health FSA limit is $2750 or thereabouts. So, I'd assume this is for a dependent care FSA. I do wonder if there are child tax credits available that the OP may have not included in their calculation.

Topic Author
sthadani
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Wed Feb 05, 2020 8:34 pm

You are correct. The 5,000 is for daycare for my son. I didn't include that since the Child Tax Credit doesn't change in either situation. I would be getting the $2000 credit in both scenarios.

Ron Ronnerson
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by Ron Ronnerson » Wed Feb 05, 2020 9:16 pm

sthadani wrote:
Wed Feb 05, 2020 8:34 pm
You are correct. The 5,000 is for daycare for my son. I didn't include that since the Child Tax Credit doesn't change in either situation. I would be getting the $2000 credit in both scenarios.
Okay, I see how you approached it. The Child Tax Credit will affect the tax due, though. You said the tax due is $6,000 under the current situation. However, once you apply the child tax credit, your tax liability drops by $2k per child. I'm assuming you have one child based on your most recent post. It wasn't previously clear how many children you had and that does make a difference. For example, if you had three kids under age 17, you'd get $6k in child tax credits and your tax liability would be $0. In that situation, even if you qualified for the Saver's Credit, it wouldn't be of benefit to you as it is a non-refundable credit.

Ron Ronnerson
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by Ron Ronnerson » Wed Feb 05, 2020 9:23 pm

Also, personally, I would stick with Roth IRA accounts in your case. I don't think the benefit of the Saver's Credit is great enough to make the switch worthwhile.

MrBeaver
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by MrBeaver » Wed Feb 05, 2020 9:49 pm

Is there any long term capital gains income?

I'm in a similar bracket situation, and for the last 2-3 years we have been straddling the top of the 0% LTCG bracket by using a combination of Roth and Traditional contributions to avoid the hidden 27% marginal rate (when additional LTCG dollars are taxed at 15% while also pushing wage income into a higher bracket). Old article with old tax bracket information, but the theory still holds:
https://www.kitces.com/blog/long-term-c ... in-0-rate/

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sthadani
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Thu Feb 06, 2020 8:44 am

Ron Ronnerson wrote:
Wed Feb 05, 2020 9:16 pm
sthadani wrote:
Wed Feb 05, 2020 8:34 pm
You are correct. The 5,000 is for daycare for my son. I didn't include that since the Child Tax Credit doesn't change in either situation. I would be getting the $2000 credit in both scenarios.
Okay, I see how you approached it. The Child Tax Credit will affect the tax due, though. You said the tax due is $6,000 under the current situation. However, once you apply the child tax credit, your tax liability drops by $2k per child. I'm assuming you have one child based on your most recent post. It wasn't previously clear how many children you had and that does make a difference. For example, if you had three kids under age 17, you'd get $6k in child tax credits and your tax liability would be $0. In that situation, even if you qualified for the Saver's Credit, it wouldn't be of benefit to you as it is a non-refundable credit.
I guess for clarity I should have added that in. Just 1 kid for 2020 (as far as I know, it's still early in the year lol). Yes with the current situation my tax burden would be $4,000 ($6,000 - $2,000 child tax credit). In the hypothetical, it would be $2,098 ($4,098 - $2,000 child tax credit). The difference in the tax burden still remains the same ($1,902).

Topic Author
sthadani
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Thu Feb 06, 2020 8:46 am

MrBeaver wrote:
Wed Feb 05, 2020 9:49 pm
Is there any long term capital gains income?

I'm in a similar bracket situation, and for the last 2-3 years we have been straddling the top of the 0% LTCG bracket by using a combination of Roth and Traditional contributions to avoid the hidden 27% marginal rate (when additional LTCG dollars are taxed at 15% while also pushing wage income into a higher bracket). Old article with old tax bracket information, but the theory still holds:
https://www.kitces.com/blog/long-term-c ... in-0-rate/
Unfortunately, no LTCG for me. All my investments are either in 401(k) or IRAs. The "other income" I mentioned was from 2019 state refund & interest income from savings.

Topic Author
sthadani
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Thu Feb 06, 2020 8:48 am

Ron Ronnerson wrote:
Wed Feb 05, 2020 9:23 pm
Also, personally, I would stick with Roth IRA accounts in your case. I don't think the benefit of the Saver's Credit is great enough to make the switch worthwhile.
You don't think the extra $1,902 is worth the switch to TIRA?

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FiveK
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by FiveK » Thu Feb 06, 2020 5:32 pm

sthadani wrote:
Thu Feb 06, 2020 8:48 am
Ron Ronnerson wrote:
Wed Feb 05, 2020 9:23 pm
Also, personally, I would stick with Roth IRA accounts in your case. I don't think the benefit of the Saver's Credit is great enough to make the switch worthwhile.
You don't think the extra $1,902 is worth the switch to TIRA?
What do you expect for the difference in spendable income between traditional and Roth after you have taken withdrawals in retirement?

See the Simplest situation for a starting point.

Ron Ronnerson
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by Ron Ronnerson » Fri Feb 07, 2020 1:52 am

sthadani wrote:
Thu Feb 06, 2020 8:48 am
Ron Ronnerson wrote:
Wed Feb 05, 2020 9:23 pm
Also, personally, I would stick with Roth IRA accounts in your case. I don't think the benefit of the Saver's Credit is great enough to make the switch worthwhile.
You don't think the extra $1,902 is worth the switch to TIRA?

You’re in a low tax bracket during a period where tax brackets have been temporarily lowered below previous levels (until 2025). We don’t know what things will look like in the future but it is not hard to imagine that you could find yourself in a higher than 12% marginal rate. You are already putting the max in a traditional IRA and some diversification in terms of type of accounts is generally a good idea. The Saver’s Credit is only $400. I don’t think it’s worth giving up the benefits of being able to fully fund a couple of Roth IRA accounts while in the 12% bracket for this relatively small amount. If it were a bigger credit, it could be a different story.

Ron Ronnerson
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by Ron Ronnerson » Fri Feb 07, 2020 9:49 am

Ron Ronnerson wrote:
Fri Feb 07, 2020 1:52 am
sthadani wrote:
Thu Feb 06, 2020 8:48 am
Ron Ronnerson wrote:
Wed Feb 05, 2020 9:23 pm
Also, personally, I would stick with Roth IRA accounts in your case. I don't think the benefit of the Saver's Credit is great enough to make the switch worthwhile.
You don't think the extra $1,902 is worth the switch to TIRA?

You’re in a low tax bracket during a period where tax brackets have been temporarily lowered below previous levels (until 2025). We don’t know what things will look like in the future but it is not hard to imagine that you could find yourself in a higher than 12% marginal rate. You are already putting the max in a traditional 401k* and some diversification in terms of type of accounts is generally a good idea. The Saver’s Credit is only $400. I don’t think it’s worth giving up the benefits of being able to fully fund a couple of Roth IRA accounts while in the 12% bracket for this relatively small amount. If it were a bigger credit, it could be a different story.
*edit - I had originally typed traditional IRA instead of traditional 401k by mistake. It was late at night.

Topic Author
sthadani
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Fri Feb 07, 2020 10:50 am

Ron Ronnerson wrote:
Fri Feb 07, 2020 9:49 am
Ron Ronnerson wrote:
Fri Feb 07, 2020 1:52 am
sthadani wrote:
Thu Feb 06, 2020 8:48 am
Ron Ronnerson wrote:
Wed Feb 05, 2020 9:23 pm
Also, personally, I would stick with Roth IRA accounts in your case. I don't think the benefit of the Saver's Credit is great enough to make the switch worthwhile.
You don't think the extra $1,902 is worth the switch to TIRA?

You’re in a low tax bracket during a period where tax brackets have been temporarily lowered below previous levels (until 2025). We don’t know what things will look like in the future but it is not hard to imagine that you could find yourself in a higher than 12% marginal rate. You are already putting the max in a traditional 401k* and some diversification in terms of type of accounts is generally a good idea. The Saver’s Credit is only $400. I don’t think it’s worth giving up the benefits of being able to fully fund a couple of Roth IRA accounts while in the 12% bracket for this relatively small amount. If it were a bigger credit, it could be a different story.
*edit - I had originally typed traditional IRA instead of traditional 401k by mistake. It was late at night.
Thanks for the feedback, historically I have always had a good balance in terms of contributions to Traditional 401(k) & Roth IRA (myself & DW). I guess that's still the path to continue on.

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sthadani
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Re: TIRA Vs. Roth (12% tax bracket) - 2020

Post by sthadani » Fri Feb 07, 2020 10:53 am

FiveK wrote:
Thu Feb 06, 2020 5:32 pm
sthadani wrote:
Thu Feb 06, 2020 8:48 am
Ron Ronnerson wrote:
Wed Feb 05, 2020 9:23 pm
Also, personally, I would stick with Roth IRA accounts in your case. I don't think the benefit of the Saver's Credit is great enough to make the switch worthwhile.
You don't think the extra $1,902 is worth the switch to TIRA?
What do you expect for the difference in spendable income between traditional and Roth after you have taken withdrawals in retirement?

See the Simplest situation for a starting point.
Isn't that always the big question? I plan on not having a mortgage payment in retirement but instead having more fun money and the cost of health insurance prior to 65. I guess if we assume expenses will be higher in retirement I should favor the Roth savings now and stay on the same course.

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