Layout:
Home > To Roth or not to Roth - that is the question

To Roth or not to Roth - that is the question

April 14th, 2013 at 04:37 am

I STILL haven’t finished my taxes. I’ve done all the info entering into turbo t@x, I just can’t decide if I should contribute to my existing traditional IRA, or open a new Roth IRA. I’ve recently begun thinking about possibly retiring early. I have no idea if I will be able to save enough money to do so or what age I would aim for. But, if I do, most of my money would be in retirement accounts (403b and traditional IRA) which I wouldn’t be able to touch without penalty until I’m 59.5 years old. I’m wondering if I should open a Roth IRA, an account where I could withdraw my contributions (but not earnings) at any time without penalty. I recently learned that I could retire from my current place of employment at 55 (I would meet the requirements if I stay another seven years) and could then draw on my 403b without penalty. If I leave this job before 55, I couldn’t touch the money without penalty until I turned 59.5.

If I open a new Roth IRA now, I would only be able to accumulate 58K plus any earnings over the next ten years. So, if retired early and started to draw on the contributions, that money really wouldn’t grow much. And, there wouldn’t be much in there – probably not even two years of living expenses. But, it would be tax free.

The hardest decision is in the moment because if I contribute $5000 to my traditional IRA for 2012, I would receive about $1218 in refunds. If I open and contribute to a Roth, I would only receive about $290 in refunds, a difference of $928. It’s hard to think of letting that money go now in order to have some tax free money available in the future. I’m thinking that I should have started a Roth IRA YEARS ago, but I really didn’t think it through back then. I’m also not sure if I should convert my traditional IRA to a Roth at some point.

Ugh, I don’t know what to do and I need to decide very soon! Smile I've been swallowed whole by work the last few weeks and I haven't had time to really think it through.

4 Responses to “To Roth or not to Roth - that is the question”

  1. Wino Says:
    1365937246

    I went the Roth route. I don't like the restrictions on Traditional IRA's, and I think my tax bracket at retirement will be similar to my tax bracket now. I think it is much like timing the market. Just do one of them (tomorrow's the last day to decide for 2012), and live with the results.

  2. MonkeyMama Says:
    1365948265

    I think you are in the "flip a coin" area, which makes the decision difficult. (I went back and read some of your old posts to get a feel for your overall financial situation).

    If you needed that $928 to pay debts or for basic living, so be it, but it seems you are in a low tax bracket and are saving a large percentage of income. I would probably put it into a ROTH. We have made a commitment to always fund our ROTHs while "lower-income" but it is a difficult one. But since we have been able to amass almost six figures in our ROTHs over the past decade, it is a decision I am *very happy with* looking backwards. I am pondering dropping the ROTH contributions as our taxes rise. I think a 25% tax savings will be the crossover for me. (Since there are two of us and the IRA contributions keep increasing - not sure I can or should pass up a $2,750 tax break when our "realized" tax rate hits 25%). That would bump up our savings rate by 4% (4% of income), if we saved the tax savings, which is nothing to sneeze at. But I am hanging tight when our tax savings is only 20%-ish and all our other financial goals are being achieved with the ROTH contributions.

    In the interim, I am okay with saving less in the ROTHs (& having smaller tax breaks so less to save outside of ROTH) because I know I won't need to save near as much for retirement. The ROTHs won't be taxed again, which lowers the amount we will need to withdraw in retirement.

    One thing to keep in mind - you can always convert regular IRAs to ROTHs (at 0% or just at a lower tax rate than you are paying now) when you retire or if you are ever unemployed or have a low-income year. The caveat with this strategy is that tax laws always change, and this might not always be so. But, for now, this is an option, and is one reason why I find it hard to pass up immediate tax breaks.

  3. scfr Says:
    1365957410

    If you truly are on the fence and there is no clear perceived advantage to one over the other, why not go 50% to traditional and 50% to Roth?

  4. snafu Says:
    1365958652

    I'd go with the tax refund benefit this year and review priorities, advantages/disadvantages each year. If your situation changes you can make changes, if tax laws changes - that also opens the door for review. A modest amount of aggressive holding in five year time span can create substantial growth/value. Retirement years can be tricky. First you only withdraw sums needed for expenses...not the whole pot so growth continues. Second, bucket lists change and after fulfilling several goals you might long for some sort of work. Third, choices so very much health related.

Leave a Reply

(Note: If you were logged in, we could automatically fill in these fields for you.)
*
Will not be published.
   

* Please spell out the number 4.  [ Why? ]

vB Code: You can use these tags: [b] [i] [u] [url] [email]