Author Topic: Traditional ira or roth?  (Read 3786 times)

mountaintown

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Traditional ira or roth?
« on: March 24, 2019, 10:04:24 PM »
In the past my wife and I have done the following to reduce our approximate $123k gross income down to AGI of about $70k.

TSP traditional, max out 18500
State deferred comp 18500
Traditional IRA his/her, 11000

flex accounts not relevant but including for clarity (2650+2650)
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The plan is to do the same maxing out of employer accounts this year and up to 19000 each as it is raised. This will qualify us for traditional IRA's again. Our effective tax rate for federal is about 5% by my calculations. It seems pretty small. Are we wasting opportunity by deducting as such again? Should we be putting at least one of the chunks of $6000 in Roth? As an example if we had done all Roth in 2018, we would have paid about $1400 more in federal taxes.

I estimate that in 2019, if I were to separate off a Roth we would pay about $700 more. If we did all Roth I think we would pay $1400 more. I have been hesitant to do so as I would pretty swayed by the madfientist and go curry cracker articles which highly favor traditional tax deduction and later conversions. I may be going back to school soon so I was seeing some opportunities for roth conversions at low tax rates. That being said if we are at a 5% effective rate now maybe it doesn't get much better.
 
Any help is appreciated. Note I didn't include state taxes for simplification reasons but the state runs roughly 60% of what the federal tax is.

Thanks for any help!

gocurrycracker

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Re: Traditional ira or roth?
« Reply #1 on: March 25, 2019, 12:04:20 AM »
Married filing jointly you are in the 22% tax bracket. That is a fairly clear benefit of Traditional.

Once you get AGI down to ~$100k you are in the 12% bracket. Will future IRA withdrawals be taxed less than that?

If yes, then more Traditional contributions are warranted. If no, then Roth (or brokerage.)

Something to consider:
ACA subsidy reductions are a tax of ~15%.
https://www.gocurrycracker.com/obamacare-optimization-vs-tax-minimization/
https://www.gocurrycracker.com/harvesting-massive-capital-gains/

prognastat

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Re: Traditional ira or roth?
« Reply #2 on: March 25, 2019, 08:39:34 AM »
And given that you are interested in FIRE I would assume you are saving a relatively sizeable portion of your income meaning you would need less in withdrawals than you are currently making in income and would mean a lower tax rate in retirement(barring large changes to the tax code of course).

mountaintown

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Re: Traditional ira or roth?
« Reply #3 on: March 25, 2019, 08:56:23 PM »
hmmmmm...what did you mean by the aca tax comment? Wouldn't that be a vote for roth?

As for whether we will have lower tax brackets...it's hard to say. I have aspirations for Fire and am actually contemplating going to school for 2-3 years for a masters program. Who knows how that will go but most likely in that case we would be in living on wife's income of 45k a year so obviously that would put us in a lower tax bracket and be advantageous. Just don't know for sure at this time.

Also...random question. Do you know if rollover IRA's can be converted in a roth conversion ladder? I have a commingled rollover IRA(401k funds and ira funds) and just wanted to make sure there wasn't some nuance there that doesn't allow me to convert.

gocurrycracker

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Re: Traditional ira or roth?
« Reply #4 on: March 26, 2019, 08:02:45 AM »
hmmmmm...what did you mean by the aca tax comment? Wouldn't that be a vote for roth?

Maybe, maybe not. If during your future studies you plan to do some Roth conversions, whilst your income is lower, and you will have health insurance through your wife's work. Or maybe your FIRE plan involves spending a few years outside the US. Or maybe you will enroll in a health sharing ministry. Then maybe the ACA is irrelevant for your purposes.

As for whether we will have lower tax brackets...it's hard to say.
Yes. You'll need to make an educated guess.

Also...random question. Do you know if rollover IRA's can be converted in a roth conversion ladder? I have a commingled rollover IRA(401k funds and ira funds) and just wanted to make sure there wasn't some nuance there that doesn't allow me to convert.
A rollover IRA is an IRA. So yes.