Roth IRA vs. Traditional IRA

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Topic Author
necroman
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Roth IRA vs. Traditional IRA

Post by necroman »

Hey gang, I need help with a decision to fund a Roth IRA or a traditional IRA.

Here's my situation:

I am a teacher in Arizona who contributes to the Arizona State Retirement System. This will give me a pension of about 60% of my salary upon retirement for the rest of my life. I contribute 12.4% of my paycheck, pre-tax, to the pension system. The state of AZ matches my contribution.

I make about $80,000-$85,000 a year teaching at a local community college, depending on if I teach some extra classes or not. I am just entering the 24% tax bracket, and I don't think I would ever make enough to move up to a higher bracket, unless I go into administration or something.

I am current 39 years old, and I imagine I'll continue working until at 67, and maybe 70 years old. I have about 30 years left to work.

I figure my pension and Social Security should fund the majority of my retirement.

At the beginning of my teaching career, I also opened up a Roth IRA account as a supplement. I didn't want to open a 403b because my small school district at the time had poor options with a focus on expensive annuities. I also figured a Roth would make more sense because I expected (or hoped) that I would save enough to have more in retirement each year than I would being a poor teacher in Arizona.

But then I got a much higher paying teaching job at a community college, and now my retirement situation is different. I also started reading the Bogleheads Guide to Retirement, and one chapter broke down how we should look at taxes in retirement, and different strategies for withdrawals from different accounts to be as tax efficient as possible.

My question is whether I should continue funding my Roth IRA (and open a Roth 403b, because the community college district has much better options, including TIAA Cref and Fidelity), or if I should switch to a traditional IRA and traditional 403b.

If my pension and Social Security cover most of my retirement, I shouldn't have to pull too much from my IRA account. That makes the Roth IRA more appealing, because I wouldn't have RMD's. I also already get a pretty decent tax break each year because my pension contributions are pre-tax. I guess a traditional IRA and 403b would give me more of a tax break, but I'm not sure about the trade off.

Anyways, thank you for your help. I'm just trying to reason through which is the best strategy--a Roth IRA and 403b, or a traditional IRA and 403b. Any suggestions are greatly appreciated.

Edit: I should clarify that my wife and I are currently married filing separately for student loan repayment purposes, but will file married jointly when her loans are forgiven, hopefully next year. She makes about the same as me, maybe $85,000-$90,000; and she has a pretax 403b through her university.
Last edited by necroman on Thu May 13, 2021 9:41 pm, edited 1 time in total.
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retired@50
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Re: Roth IRA vs. Traditional IRA

Post by retired@50 »

necroman wrote: Thu May 13, 2021 12:17 pm I make about $80,000-$85,000 a year teaching at a local community college, depending on if I teach some extra classes or not. I am just entering the 24% tax bracket, and I don't think I would ever make enough to move up to a higher bracket, unless I go into administration or something.
Are you sure about the Federal tax bracket?

As I read the table, with the standard deduction, you'd be in the 22% bracket.
Source: https://www.nerdwallet.com/article/taxe ... x-brackets

I think a common mistake is that people read the table and compare their gross income, instead of taxable income. Maybe double check your tax return (2020 Form 1040, line 15) for the taxable income amount.

Regards,
Last edited by retired@50 on Thu May 13, 2021 12:33 pm, edited 2 times in total.
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FiveK
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Re: Roth IRA vs. Traditional IRA

Post by FiveK »

This choice boils down to "your marginal tax saving rate now" vs. "your expectation for your marginal tax rate on withdrawals later".

See Traditional versus Roth - Bogleheads. After reading that - what do you think?
tibbitts
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Re: Roth IRA vs. Traditional IRA

Post by tibbitts »

It's impossible to know for sure what will turn out best, but generally with at least a moderate income and where you'll have pension plus social security retirement income, it will probably turn out to be a good idea to have a mix of deferred (your pension apparently) and Roth.
jimkinny
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Re: Roth IRA vs. Traditional IRA

Post by jimkinny »

I think you will find the answer to your question here
https://www.bogleheads.org/wiki/Traditional_versus_Roth
nolesrule
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Re: Roth IRA vs. Traditional IRA

Post by nolesrule »

Can you make deductible contributions to a traditional IRA?

https://www.irs.gov/retirement-plans/20 ... an-at-work
LittleMaggieMae
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Re: Roth IRA vs. Traditional IRA

Post by LittleMaggieMae »

retired@50 wrote: Thu May 13, 2021 12:29 pm
necroman wrote: Thu May 13, 2021 12:17 pm I make about $80,000-$85,000 a year teaching at a local community college, depending on if I teach some extra classes or not. I am just entering the 24% tax bracket, and I don't think I would ever make enough to move up to a higher bracket, unless I go into administration or something.
Are you sure about the Federal tax bracket?

As I read the table, with the standard deduction, you'd be in the 22% bracket.
Source: https://www.nerdwallet.com/article/taxe ... x-brackets

I think a common mistake is that people read the table and compare their gross income, instead of taxable income. Maybe double check your tax return (2020 Form 1040, line 15) for the taxable income amount.
And if you are contributing 12.4% of your Gross -- that's 85,000 * .124 = $10,540.
85,000 - 10,540 = 74460
74460- 12,550 (2021 standard deduction, I think) = $61,910 You are in the middle-ish of the current 22% bracket for Singles

That said. It's not a bad time to contribute to a Roth. Depending on how the tax brackets change - you could be in the 22% -ish bracket for some years.

As for your question - my pension will provide about 45% of salary (gross income) I aggressively saved in pre-tax accounts (I didn't pay attention to the pension. I spent most of my working career in that 50K to 80K taxable income level. I would definitely put some money every year into your Roth.

I would also think about "early retirement" - and perhaps start building your taxable funds now. The assumption is a slow and steady stream of money going to your Roth and taxable while still contributing to your pretax account. It's kind of hedging your bets.

(Yes, you can use pretax and roth money before you are 59.5 --- but it's kind of nice to have a couple of years of expenses available should you decide to "retire" early - in order to not have to tap your tax advantaged accounts at a "young" age... especially if your pension won't kick in for a few years.
boogiehead
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Re: Roth IRA vs. Traditional IRA

Post by boogiehead »

Do you plan on retiring early? If so, having a traditional IRA could come in handy for roth conversion purposes (assuming you'll be in lower tax bracket when you FIRE).
KlangFool
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Re: Roth IRA vs. Traditional IRA

Post by KlangFool »

OP,

When will your pension be vested?

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LittleMaggieMae
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Re: Roth IRA vs. Traditional IRA

Post by LittleMaggieMae »

Are you assuming you will need to work until 65 or 70 or do you KNOW you will (because you just recently started saving for retirement and just recently started a job with a pension (that requires you to work 25 or 30 years to get the biggest payout)?

I know lots of teachers who are opting for "early retirement" because between holding off on taking the pension and SS, their "alphabet number" pre tax and post plans that they contributed to for 15 or 20 years - will tide them over to their pension and SS.
Topic Author
necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Little Maggie Mae,

I chose 67 years old because of Social Security. I then rounded up to 70 because I hope to still enjoy my job, and teaching offers some perks like summer vacations to travel if I wanted to. At this point, I'm not really sure what my magic number in terms of retirement should be. I'm just trying to save as much as possible.

What do you mean by "alphabet number"?
Last edited by necroman on Thu May 13, 2021 1:51 pm, edited 1 time in total.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
Topic Author
necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Klang Fool,

I am 100% vested in the pension system. In AZ, the pension works off a point system where you add your age to the number of years you've been teaching. Once you reach 80 points, you're guaranteed full pension benefits. If you wait longer, like to Social Security age, you can increase your pension amount, using a multiplier system.

The pension doesn't offer COLA's, though. It's a set amount for the rest of your life.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
Topic Author
necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Retired @ 50 and Little Maggie Mae,

Yeah, you're probably right. I think I was just using my salary amount, and not my actual taxable income. I'm probably in the 22% bracket. Thank you for clarifying that for me.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
lakpr
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Re: Roth IRA vs. Traditional IRA

Post by lakpr »

Per Little Maggie Mae's calculations, you are now smack in the middle of the 22% tax bracket for a Single.

Per your original post, you can look forward to 60% * $85k = $51k in guaranteed pension benefits for life.

$51k in gross income for a Single is just $2k shy of the $53k limit for the top of 12% bracket for a Single now. If you will accumulate any significant taxable assets in the intervening 30 years, it is not hard to imagine that you will earn additional $2k through CDs or dividends on stocks.

In other words, now as well as in retirement, you are and will be firmly in the 22% tax bracket. So whether you contribute to a Roth IRA or a Traditional IRA, you will end up paying the same marginal tax rate.

But, as the law stands now, the 22% tax bracket will disappear in 2026. It will become 25% tax bracket then. Absent any other information, and speculating on future tax rates is prohibited in these forums -- it calls for making a Roth IRA contribution now. Lock in the 22% marginal tax rate now, and withdraw it in retirement when the marginal tax rates are 25% for someone in your income range.
Katietsu
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Re: Roth IRA vs. Traditional IRA

Post by Katietsu »

I think that your situation has no clear winner. You are speculating about the next thirty years of your life and the next thirty years of the tax code. How many times has the tax code changed in the last 5 years let alone 30? And think back to being 9 years old when your parents probably had no cell phone and you had to watch whatever was live on TV.

But since you must make a decision, I would put my first dollars in a Roth IRA. This gives you tax diversification since you have a vested pension. And the Roth can be used as an emergency fund if you are ever in dire straits.

After that, I think it is a coin flip as to whether the next tranche of retirement savings goes to a traditional or a Roth 403b while you are in the 22% tax bracket and, I think, in a state with a middle of the road taxation.
Topic Author
necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Hey Gang,

Reading through these replies makes me realize that I didn't consider the entire picture. First, would it be safe to say that the pension is retirement plan, even though it's not a 401k or 403b? I know that sounds silly, but whenever I have done my taxes on Turbo Tax and filled out the section on IRA contributions, I can't recall it prompting me on referring to any pension contributions when determining what kind of deductions I might get with my IRA contributions. Maybe I didn't make enough at that time.

And if, per IRS rules, I no longer qualify for an IRA deduction because of my MAGI, or my wife's and my MAGI (we file separately right now for student loan repayment purposes), does that make contributing to a traditional 403b or Roth 403b more enticing?
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
lakpr
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Re: Roth IRA vs. Traditional IRA

Post by lakpr »

necroman wrote: Thu May 13, 2021 2:17 pm Hey Gang,

Reading through these replies makes me realize that I didn't consider the entire picture. First, would it be safe to say that the pension is retirement plan, even though it's not a 401k or 403b? I know that sounds silly, but whenever I have done my taxes on Turbo Tax and filled out the section on IRA contributions, I can't recall it prompting me on referring to any pension contributions when determining what kind of deductions I might get with my IRA contributions. Maybe I didn't make enough at that time.

And if, per IRS rules, I no longer qualify for an IRA deduction because of my MAGI, or my wife's and my MAGI (we file separately right now for student loan repayment purposes), does that make contributing to a traditional 403b or Roth 403b more enticing?
That changes everything. If you are Married Filing Single, then you are NOT eligible to make contributions to Roth IRA; for MFS, the gross income limit to make Roth IRA contributions directly is $10k. Yes, measly $10,000 per year.

You will have to make the backdoor Roth (contribute to a Traditional IRA on a non-deductible basis first, then convert to Roth). But this assumes that you do not have any Traditional IRA (not even Rollover IRAs) anywhere, at any custodian. If that's true, you can go ahead and adopt the Backdoor Roth approach.

Yes, you are deemed "covered by a retirement plan at work", by virtue of making pension contributions. Even if such 'contributions' are involuntary. So if you did make any previous contributions to Traditional IRA in the past years, those contributions were also non-deductible.

Since you said you have excellent choices at work, especially Fidelity and TIAA-CREF, I suggest you look into making the Roth 403b contributions. Much higher limits, and no phase outs ...
Topic Author
necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Lakpr,

In a nutshell, I was contributing to a Roth IRA for years, but then switched to contributing to a nondeductible traditional IRA when I married my wife, so that we could file separately to keep student loan payments manageable. But she's nearing ten years working at a non-profit university, and should qualify for loan forgiveness, after which I plan on backdoor transferring the money I put in the traditional IRA these last five years in my Roth IRA, and then resuming my Roth IRA contributions.

That's the plan at least. But then, I also have some better 403b options now, which I plan on exploring. My goal was to max out my IRA contributions each year (for now, a traditional, but in the future, my Roth IRA) and then start throwing in $50 or $100 a paycheck into a 403b.

But I don't know if it should be a traditional 403b for tax reasons, or a Roth 403b.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
LittleMaggieMae
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Re: Roth IRA vs. Traditional IRA

Post by LittleMaggieMae »

necroman wrote: Thu May 13, 2021 1:43 pm Little Maggie Mae,

I chose 67 years old because of Social Security. I then rounded up to 70 because I hope to still enjoy my job, and teaching offers some perks like summer vacations to travel if I wanted to. At this point, I'm not really sure what my magic number in terms of retirement should be. I'm just trying to save as much as possible.

What do you mean by "alphabet number"?
Opps! I thought I had changed that... I meant a Number and letter type account - a 401K or 403b or any of the other types of pre tax accounts that employers offer (based on the type of employer).
SerenityBlue
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Re: Roth IRA vs. Traditional IRA

Post by SerenityBlue »

necroman wrote: Thu May 13, 2021 2:34 pm Lakpr,

In a nutshell, I was contributing to a Roth IRA for years, but then switched to contributing to a nondeductible traditional IRA when I married my wife, so that we could file separately to keep student loan payments manageable. But she's nearing ten years working at a non-profit university, and should qualify for loan forgiveness, after which I plan on backdoor transferring the money I put in the traditional IRA these last five years in my Roth IRA, and then resuming my Roth IRA contributions.

That's the plan at least. But then, I also have some better 403b options now, which I plan on exploring. My goal was to max out my IRA contributions each year (for now, a traditional, but in the future, my Roth IRA) and then start throwing in $50 or $100 a paycheck into a 403b.

But I don't know if it should be a traditional 403b for tax reasons, or a Roth 403b.
If you already have any type of traditional IRAs, backdoor Roth is going to complicate it.
https://www.bogleheads.org/wiki/Backdoor_Roth#Cautions

As someone else mentioned, you're going to have to start filing jointly to be eligible for direct Roth IRA contributions assuming your combined MAGI allows for it because filing separately basically negates the ability to contribute directly to Roth IRA. Or you can start working on cleaning-up your current traditional IRA accounts so you can start taking advantage of backdoor Roth.

As to your broader question, I can only speak from what I've decided to do and that is diversity my investments while spreading my tax liability so we have a healthy amount of post and pre-tax retirement funds so we can then develop a tax strategy near time of retirement. So currently contribute 25% pre-tax (t401k), 50% post-tax (r457b/IRA) and 25% brokerage because my portfolio is currently pre-tax heavy and I'm trying to balance it out with this current contribution breakdown. This may change in the future but that's what I've decided to do for now.
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LilyFleur
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Re: Roth IRA vs. Traditional IRA

Post by LilyFleur »

In your planning, remember that your social security may be reduced because of your government pension.

https://www.ssa.gov/pubs/EN-05-10007.pdf

Also, it seems like you are single. Having some money in a Roth would be a nice option if you have your pension and social security using up the lower tax brackets.

There are lots of calculations you can study to see if a Roth is a good idea for you. There are also many factors we simply cannot know in the future.

One of the best bits of advice I have received on this forum is: have a diversity in types of retirement accounts. Based on that advice, I began Roth conversions.

I would recommend a Roth at Schwab or Fidelity or Vanguard. There will certainly be many more options for low-cost investments at those places--with easy flexibility to transfer funds to a brokerage or checking account, and you've already got your pension with the school district.
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FiveK
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Re: Roth IRA vs. Traditional IRA

Post by FiveK »

necroman wrote: Thu May 13, 2021 2:34 pm But she's nearing ten years working at a non-profit university, and should qualify for loan forgiveness, after which I plan on backdoor transferring the money I put in the traditional IRA these last five years in my Roth IRA, and then resuming my Roth IRA contributions.
...
But I don't know if it should be a traditional 403b for tax reasons, or a Roth 403b.
You should compare your MFS marginal rate now to your expected MFJ marginal rate when withdrawing.
lakpr
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Re: Roth IRA vs. Traditional IRA

Post by lakpr »

necroman wrote: Thu May 13, 2021 2:34 pm Lakpr,

In a nutshell, I was contributing to a Roth IRA for years, but then switched to contributing to a nondeductible traditional IRA when I married my wife, so that we could file separately to keep student loan payments manageable. But she's nearing ten years working at a non-profit university, and should qualify for loan forgiveness, after which I plan on backdoor transferring the money I put in the traditional IRA these last five years in my Roth IRA, and then resuming my Roth IRA contributions.

That's the plan at least. But then, I also have some better 403b options now, which I plan on exploring. My goal was to max out my IRA contributions each year (for now, a traditional, but in the future, my Roth IRA) and then start throwing in $50 or $100 a paycheck into a 403b.

But I don't know if it should be a traditional 403b for tax reasons, or a Roth 403b.
Others have already responded, so let me add my response as well. So I assume you have made non-deductible contributions but did NOT do any Roth conversions all these years? Have you also been filign Form 8606 with the IRS to keep track of the basis in that (or those, if multiple) non-deductible IRA?

Since you do have better 403b options now, I suggest you start contributing to the 403b. Please check with your employer, Fidelity does allow rollover of other pretax assets (which is the growth on those non-deductible IRAs) into the 403b plan. You need to make sure that you leave at least the amount of contributions you made over the years, back in the Traditional IRA. So if you made $40k in total contributions over the last 5 to 6 years for example, and the account is worth around $75k (obviously varies due to market conditions), then you need to first move $40k into a money market account (so it is NOT subject to market vagaries), and move the rest of the money (whatever be the value on the day the cut over happens) to your 403b. Once that is accomplished, you can convert the $40k left behind to Roth IRA, and reinvest again into the funds you want.

The money that's rolled into the 403b, and the employer match if any, will remain as Traditional until your retirement or withdrawal post age 59.5

If you are going to be Married Filing Jointly in the near future, as @FiveK said, compare your current MFS marginal tax rate (which is 22%) to your future MFJ marginal tax rate (which COULD BE 15%, but more likely 25% given that you have a pension. will your wife has a pension too? you mentioned she is seeking loan forgiveness, meaning she is workign in non-profit sector, which may have pensions). It might still be beneficial for you to do Roth 403b for now.
Topic Author
necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Lakpr,

Yes, that is correct. In the years that I have been married filing separately and contributing to the nondeductible IRA, I didn't make any backdoor Roth conversions. I thought it sounded too complicated to do a conversion AND continue to make contributions in the same year. I just thought I would wait until my wife's loan forgiveness kicked in, and then I would start backdoor conversions to Roth in chunks over several years. But what you say makes it sound like this could be a somewhat complicated thing to do. So, to clarify, what I probably want to do is move over all my contributions that I have made over the years in the nondeductible IRA into a money market fund. I assume that money market fund would be in the IRA account, right? That's probably a stupid question. But using your example, I would move $40k into a money market account, which totals my contributions for that time period. I would then rollover the remainder (which is money I have made off of it) into a traditional 403b plan (if my employer approves it)? Then I would go back to that $40k and move that into the Roth IRA?

A potentially dumb question--why can't I move everything (my contributions and any possible gains I made) into the Roth IRA? I imagine I'll have to pay taxes on the move anyway. Or is the way you're describing it the most efficient way to do it, tax-wise?

For the record, I only have two IRA accounts--one Roth and one traditional. And this nondeductible IRA isn't very big. It has about $21,000 and change in it. Being a teacher in AZ, I was only able to add maybe $100 a month to start, and then slowly upped contributions as we became more financially stable, ultimately culminating in $150 per paycheck once I got the teaching job at the college. It was only this year that I could actually start to max out the IRA.
Last edited by necroman on Thu May 13, 2021 4:21 pm, edited 2 times in total.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
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necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

FiveK,

That's a good suggestion--thank you.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
lakpr
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Re: Roth IRA vs. Traditional IRA

Post by lakpr »

necroman wrote: Thu May 13, 2021 4:17 pm Lakpr,

Yes, that is correct. In the years that I have been married filing separately and contributing to the nondeductible IRA, I didn't make any backdoor Roth conversions. I thought it sounded too complicated to do a conversion AND continue to make contributions in the same year. I just thought I would wait until my wife's loan forgiveness kicked in, and then I would start backdoor conversions to Roth in chunks over several years. But what you say makes it sound like this could be a somewhat complicated thing to do. So, to clarify, what I probably want to do is move over all my contributions that I have made over the years in the nondeductible IRA into a money market fund. I assume that money market fund would be in the IRA account, right? That's probably a stupid question. But using your example, I would move $40k into a money market account, which totals my contributions for that time period. I would then rollover the remainder (which is money I have made off of it) into a traditional 403b plan (if my employer approves it)? Then I would go back to that $40k and move that into the Roth IRA?
Yes this understanding is correct.
necroman wrote: Thu May 13, 2021 4:17 pm A potentially dumb question--why can't I move everything (my contributions and any possible gains I made) into the Roth IRA? I imagine I'll have to pay taxes on the move anyway. Or is the way you're describing it the most efficient way to do it, tax-wise?

For the record, I only have two IRA accounts--one Roth and one traditional. And this nondeductible IRA isn't very big. It has about $21,000 and change in it. Being a teacher in AZ, I was only able to add maybe $100 a month to start, and then slowly upped contributions as we became more financially stable, ultimately culminating in $150 per paycheck once I got the teaching job at the college. It was only this year that I could actually start to max out the IRA.
By law, the 401k plans and 403b plans *CANNOT* accept non-deductible contributions, that's the limitation. The growth on non-deductible contributions is pre-tax, so that can be rolled into the 401k/403b plans.

Sure, if you want to convert everything in the non-deductible IRA to Roth. If you do it all at once, it could push you into a higher tax bracket. If you do it over the years, you have the problem of the money left behind growing again between first chunk and second chunk and third chunk etc ... it is easier to have all that growth be inside Roth or inside the 401k/403b. This way you will be done in a single year.

In your particular case, $21k is not a big chunk of money, I agree. Once you start filing MFJ, additional Roth conversion of $21k may NOT put you over into a new tax bracket. You may still be in the 22% bracket, so whether you drag it out over years or do it all at once it's the same tax hit. That's not a bad plan either.
sman09
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Re: Roth IRA vs. Traditional IRA

Post by sman09 »

boogiehead wrote: Thu May 13, 2021 1:19 pm Do you plan on retiring early? If so, having a traditional IRA could come in handy for roth conversion purposes (assuming you'll be in lower tax bracket when you FIRE).
Could you elaborate on this please?

I'm in a similar situation as OP and wanted some clarification.

I vaguely recall reading from posts here that if your income allows you to contribute to Roth IRA that should be prioritized.

Thankyou.
SerenityBlue
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Re: Roth IRA vs. Traditional IRA

Post by SerenityBlue »

sman09 wrote: Thu May 13, 2021 4:38 pm
boogiehead wrote: Thu May 13, 2021 1:19 pm Do you plan on retiring early? If so, having a traditional IRA could come in handy for roth conversion purposes (assuming you'll be in lower tax bracket when you FIRE).
Could you elaborate on this please?

I'm in a similar situation as OP and wanted some clarification.

I vaguely recall reading from posts here that if your income allows you to contribute to Roth IRA that should be prioritized.

Thankyou.
He may be referring to performing a Roth IRA conversion ladder as long as you have other post-tax funds to live off of and taking advantage of being a lower tax bracket based on the amount you convert between the tIRA to rIRA.

https://www.madfientist.com/wp-content/ ... ladder.png
sman09
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Re: Roth IRA vs. Traditional IRA

Post by sman09 »

This is great - thanks for posting the picture.

So, if one is thinking of not retiring early would contributing to Roth IRA be just fine even if Traditional IRA is a possibility - this would be the first time that we would be funding our IRA

(just as a side note: to include such visualizations in one's post, do you have to first upload a picture elsewhere and embed the link in the post to the source's web address?)
SerenityBlue
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Re: Roth IRA vs. Traditional IRA

Post by SerenityBlue »

sman09 wrote: Thu May 13, 2021 4:57 pm This is great - thanks for posting the picture.

So, if one is thinking of not retiring early would contributing to Roth IRA be just fine even if Traditional IRA is a possibility - this would be the first time that we would be funding our IRA

(just as a side note: to include such visualizations in one's post, do you have to first upload a picture elsewhere and embed the link in the post to the source's web address?)
I think that's what this entire thread and other Roth vs Traditional IRA threads are about. It all boils down to your current tax bracket and if you want to lock-in that rate versus what you think your future tax bracket will be (take a chance with traditional IRA), and how far off from retirement you are. Ultimately what makes Roth vehicles attractive is the earnings being tax-free and their growth compounding over time tax-free. Hence it boils down to mostly about what tax strategy you want to adopt and which side of the fence you want to be on. Others have also suggested taking a 50-50 contribution approach between pre/post-tax accounts and hedging your bets.

You can embed the image within your post without uploading it and using the image tags. I chose not to cause the image was big in size.
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FiveK
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Re: Roth IRA vs. Traditional IRA

Post by FiveK »

sman09 wrote: Thu May 13, 2021 4:57 pm (just as a side note: to include such visualizations in one's post, do you have to first upload a picture elsewhere and embed the link in the post to the source's web address?)
See Posting images in the Bogleheads forum - Bogleheads.
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necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Lakpr,

Thank you for your patience and clarification. My wife doesn't have a pension with her university. She has a 403b with a match, pre-tax. Maybe I should look at it this way: my pension is pre-tax and my wife's 403b is pre-tax. Maybe having a Roth IRA and Roth 403b helps balance out the possibilities of what to do with the money in retirement. Do you think that's a fair perspective?

Also, on the off-chance, are you aware of any online calendars that might help me predict what a one-time, $21,000 Roth conversion would do to my tax liability that year? Anything where I could plug in numbers and just see how much it will cost me, so I can plan ahead?

Thank you again for all your help.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
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FiveK
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Re: Roth IRA vs. Traditional IRA

Post by FiveK »

necroman wrote: Thu May 13, 2021 5:13 pm ...help me predict what a one-time, $21,000 Roth conversion would do to my tax liability that year? Anything where I could plug in numbers and just see how much it will cost me, so I can plan ahead?
Perhaps the best/easiest thing to do, if you use tax software, is to add $21K to your current return to get the cost.
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necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

FiveK,

You mean, if I just added $21,000 in income? On Line 11 (adjusted gross income) or Line 15 (taxable income) of my 1040?
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
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FiveK
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Re: Roth IRA vs. Traditional IRA

Post by FiveK »

necroman wrote: Thu May 13, 2021 5:45 pm FiveK,

You mean, if I just added $21,000 in income? On Line 11 (adjusted gross income) or Line 15 (taxable income) of my 1040?
Unless you have income-dependent deductions, changing line 11 (e.g., by entering a 1099-R Roth conversion or even "other non-self-employment income") should also change line 15 by an identical amount.
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Re: Roth IRA vs. Traditional IRA

Post by Katietsu »

FiveK wrote: Thu May 13, 2021 5:38 pm
necroman wrote: Thu May 13, 2021 5:13 pm ...help me predict what a one-time, $21,000 Roth conversion would do to my tax liability that year? Anything where I could plug in numbers and just see how much it will cost me, so I can plan ahead?
Perhaps the best/easiest thing to do, if you use tax software, is to add $21K to your current return to get the cost.
I do not think this is right. I think the OP said the total in the traditional IRA is $21,000. But the basis or non deductible contributions would be subtracted from that to get the additional taxable income.

For instance: Current value $21k.
Non deductible contributions over the years: $10k.
Taxable income upon converting the full amount: $11k.
Extra federal tax: $11k x 22%=$2420
State tax : I am not familiar with how your state tax handles this. It seems like it might be a few hundred dollars in state tax as well.

You would want to pay the $2420 from outside money. In other words, you would not want taxes withheld. Having taxes withheld is the same as withdrawing which would lead to more taxes and early withdrawal penalties.

Before contributing to any additional retirement plan, I would decide how I was going to get this cleared up.

Note that you might want to edit your original post. The fact that you are married filing separate but will soon be filing joint is relevant to some of the responses. How much is your wife’s salary?
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Re: Roth IRA vs. Traditional IRA

Post by Jon Luskin »

necroman wrote: Thu May 13, 2021 12:17 pm Hey gang, I need help with a decision to fund a Roth IRA or a traditional IRA.
Paula Pant had Ed Slott recently on her podcast. He's a pretty strong advocate for the Roth.

Check it out: https://affordanything.com/307-the-tax- ... -ed-slott/

I hope that helps! :D
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Roth IRA vs. Traditional IRA

Post by willthrill81 »

Pension + SS benefits = Roth IRA contributions right now

As others have noted, traditional IRA contributions might be better if the OP was retiring early, but since that will not likely be the case, Roth contributions are a slam dunk right now.

The biggest reason for this is due to the taxation of SS benefits. The heat map below shows how easy it is for a married filing jointly couple to have a 22.2% or higher marginal tax rate once SS benefits begin, and it's even easier for single filers to reach a high marginal tax rate. The thresholds are potentially far below what would be necessary to reach the 22% bracket without SS benefits.

Image
https://www.bogleheads.org/wiki/Taxatio ... y_benefits
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FiveK
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Re: Roth IRA vs. Traditional IRA

Post by FiveK »

Katietsu wrote: Thu May 13, 2021 6:28 pm But the basis or non deductible contributions would be subtracted from that to get the additional taxable income.
That's correct.
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necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Katietsu, my wife makes about $85,000-$90,000 in salary. She has a pretax 403b. Thank you for your knowledge. I really appreciate it.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Thank you, JonL.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
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Re: Roth IRA vs. Traditional IRA

Post by calwatch »

Arizona is one of the states where most public employees contribute to social security. So the hidden social security tax bracket comes into play as shown in the chart above. It also means that the WEP/GPO (the offsets for those who work in states where public employees don't contribute to social security) doesn't apply.
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necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Calwatch,

Could elaborate further on that? What do you mean by hidden social security bracket?
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Re: Roth IRA vs. Traditional IRA

Post by whereskyle »

necroman wrote: Thu May 13, 2021 12:17 pm Hey gang, I need help with a decision to fund a Roth IRA or a traditional IRA.

Here's my situation:

I am a teacher in Arizona who contributes to the Arizona State Retirement System. This will give me a pension of about 60% of my salary upon retirement for the rest of my life. I contribute 12.4% of my paycheck, pre-tax, to the pension system. The state of AZ matches my contribution.

I make about $80,000-$85,000 a year teaching at a local community college, depending on if I teach some extra classes or not. I am just entering the 24% tax bracket, and I don't think I would ever make enough to move up to a higher bracket, unless I go into administration or something.

I am current 39 years old, and I imagine I'll continue working until at 67, and maybe 70 years old. I have about 30 years left to work.

I figure my pension and Social Security should fund the majority of my retirement.

At the beginning of my teaching career, I also opened up a Roth IRA account as a supplement. I didn't want to open a 403b because my small school district at the time had poor options with a focus on expensive annuities. I also figured a Roth would make more sense because I expected (or hoped) that I would save enough to have more in retirement each year than I would being a poor teacher in Arizona.

But then I got a much higher paying teaching job at a community college, and now my retirement situation is different. I also started reading the Bogleheads Guide to Retirement, and one chapter broke down how we should look at taxes in retirement, and different strategies for withdrawals from different accounts to be as tax efficient as possible.

My question is whether I should continue funding my Roth IRA (and open a Roth 403b, because the community college district has much better options, including TIAA Cref and Fidelity), or if I should switch to a traditional IRA and traditional 403b.

If my pension and Social Security cover most of my retirement, I shouldn't have to pull too much from my IRA account. That makes the Roth IRA more appealing, because I wouldn't have RMD's. I also already get a pretty decent tax break each year because my pension contributions are pre-tax. I guess a traditional IRA and 403b would give me more of a tax break, but I'm not sure about the trade off.

Anyways, thank you for your help. I'm just trying to reason through which is the best strategy--a Roth IRA and 403b, or a traditional IRA and 403b. Any suggestions are greatly appreciated.

Edit: I should clarify that my wife and I are currently married filing separately for student loan repayment purposes, but will file married jointly when her loans are forgiven, hopefully next year. She makes about the same as me, maybe $85,000-$90,000; and she has a pretax 403b through her university.
You'll want to have SOME tax free income in retirement, right? Why not split your contributions half and half? It's an easy decision to make and you can't go wrong because no matter what you'll be at least half right.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: Roth IRA vs. Traditional IRA

Post by lakpr »

necroman wrote: Fri May 14, 2021 7:33 am Calwatch,

Could elaborate further on that? What do you mean by hidden social security bracket?
@necroman, if you look at the heat map that @willthrill81 posted, you will notice that there is a 22.2% tax bracket at lower social security income + higher other income, or at higher social security income + lower other income [ the yellow patch lying below the green and red patches ] There is also the 40% tax bracket [ the entirely red patch ] ...

That's quite a steep jump from those who are otherwise going to be in either 0% or 12% bracket (look at the surrounding brackets); and similarly those who would otherwise be in the 22% or 24% bracket. That is what is he meant by hidden social security tax bracket.

This comes from the way Social Security benefits are taxed: 0% or 50% or 85% of the social security income is included in taxable income, *depending on your other income*. The effective marginal tax rates, as I mentioned above, jump quite steeply from 12% to 22.2%; and from 22% to 40.7%. This is caught almost always after the fact when doing the tax returns. Being aware of it ahead of time could let you judiciously tap your traditional IRA or Roth IRA, when you are drawing Social Security, to keep yourself in the "green" or at most "yellow" zone.

Keep your "other income" which includes traditional IRA withdrawals and pension income, below $58k per year to be in that green/yellow zone. Sometimes it is impossible, since the pension alone blows you through the $58k threshold. If that's the case, it also makes sense for you to increase your "other income" through traditional IRA withdrawals or conversions all the way to the top of the "other income" chart shown above, up to $100k per year to come back to the more-earthbound 22% tax bracket.
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Re: Roth IRA vs. Traditional IRA

Post by abuss368 »

necroman wrote: Thu May 13, 2021 12:17 pm Hey gang, I need help with a decision to fund a Roth IRA or a traditional IRA.

Here's my situation:

I am a teacher in Arizona who contributes to the Arizona State Retirement System. This will give me a pension of about 60% of my salary upon retirement for the rest of my life. I contribute 12.4% of my paycheck, pre-tax, to the pension system. The state of AZ matches my contribution.

I make about $80,000-$85,000 a year teaching at a local community college, depending on if I teach some extra classes or not. I am just entering the 24% tax bracket, and I don't think I would ever make enough to move up to a higher bracket, unless I go into administration or something.

I am current 39 years old, and I imagine I'll continue working until at 67, and maybe 70 years old. I have about 30 years left to work.

I figure my pension and Social Security should fund the majority of my retirement.

At the beginning of my teaching career, I also opened up a Roth IRA account as a supplement. I didn't want to open a 403b because my small school district at the time had poor options with a focus on expensive annuities. I also figured a Roth would make more sense because I expected (or hoped) that I would save enough to have more in retirement each year than I would being a poor teacher in Arizona.

But then I got a much higher paying teaching job at a community college, and now my retirement situation is different. I also started reading the Bogleheads Guide to Retirement, and one chapter broke down how we should look at taxes in retirement, and different strategies for withdrawals from different accounts to be as tax efficient as possible.

My question is whether I should continue funding my Roth IRA (and open a Roth 403b, because the community college district has much better options, including TIAA Cref and Fidelity), or if I should switch to a traditional IRA and traditional 403b.

If my pension and Social Security cover most of my retirement, I shouldn't have to pull too much from my IRA account. That makes the Roth IRA more appealing, because I wouldn't have RMD's. I also already get a pretty decent tax break each year because my pension contributions are pre-tax. I guess a traditional IRA and 403b would give me more of a tax break, but I'm not sure about the trade off.

Anyways, thank you for your help. I'm just trying to reason through which is the best strategy--a Roth IRA and 403b, or a traditional IRA and 403b. Any suggestions are greatly appreciated.

Edit: I should clarify that my wife and I are currently married filing separately for student loan repayment purposes, but will file married jointly when her loans are forgiven, hopefully next year. She makes about the same as me, maybe $85,000-$90,000; and she has a pretax 403b through her university.
Roth all the way. Another benefit is Medicare premiums will be taxed less.

Tony
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necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Lakpr,

This is starting to make my brain hurt.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
lakpr
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Re: Roth IRA vs. Traditional IRA

Post by lakpr »

necroman wrote: Sat May 15, 2021 8:49 am Lakpr,

This is starting to make my brain hurt.
I very much share the feeling and sympathize, but nothing we can do about tax laws. Just be aware of it and plan accordingly...
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Re: Roth IRA vs. Traditional IRA

Post by Sahara »

necroman wrote: Thu May 13, 2021 5:13 pm Lakpr,

Thank you for your patience and clarification. My wife doesn't have a pension with her university. She has a 403b with a match, pre-tax. Maybe I should look at it this way: my pension is pre-tax and my wife's 403b is pre-tax. Maybe having a Roth IRA and Roth 403b helps balance out the possibilities of what to do with the money in retirement. Do you think that's a fair perspective?

Also, on the off-chance, are you aware of any online calendars that might help me predict what a one-time, $21,000 Roth conversion would do to my tax liability that year? Anything where I could plug in numbers and just see how much it will cost me, so I can plan ahead?

Thank you again for all your help.
https://www.mortgagecalculator.org/calc ... ulator.php
https://www.taxformcalculator.com/state ... -york.html

These two calculators might help model the taxes if you convert now or spread it over a year or two. The second allows modeling of state taxes.

As a retired teacher, I’m in the situation where my tax bracket will be the same throughout my lifecycle. I’m satisfied having 1/3 Roth and 2/3 traditional.

I don’t see a need for you to convert the traditional if you’ll be able to contribute directly to Roth or Roth 403b in the near future. I would simply keep an eye on the tax deferred balances moving forward and contribute 50/50. Flexibility is key and you have a couple moving pieces. You could leave education earlier than you imagine, and a lower income year would allow room to convert if you seem to be approaching a higher tax bracket, or issues with the higher Medicare premiums etc.
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necroman
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Re: Roth IRA vs. Traditional IRA

Post by necroman »

Sahara,

That's an excellent perspective. Thank you.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
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