Another question on retirement saving

**kork13** · 12-19-2012, 05:02 AM

What has your marginal tax rate been for the last few years? If it's normally 25% or lower, the Roth IRA is probably the best idea for you. If you're higher than that, it starts to depend on your expectations for the future -- a traditional IRA or the 401k might be a better option for you, depending on exactly how much you make and what taxes you're paying. But personally, I'm a big fan of the Roth, because it grows tax free, and when you withdraw it in retirement, there's absolutely zero taxes involved.

**Petunia 100** · 12-19-2012, 07:40 AM

Originally posted by Bob B. View Post

I've made a lot of progress on my CC debt repayment over the past two years. I'm at a position of increasing my retirement savings. I'd like to start with contributing an extra $50 per month. I expect my CC debt to be eliminated sometime around April to June 2013. At that point, I'll plan on upping my increase by a bit more. At the moment, I'm maxing out my employer match, and not a dollar more. Also, I'm 40.

Should I put the increased contribution in:

A) my employer sponsored program
B) an IRA
C) something else

What kind of fees are you paying in your employer plan? If they are high, then you are better off with an IRA.

And no, not option C. If you have room to contribute more in tax-advantaged plans, you do that before option C.

Originally posted by Bob B. View Post

If an IRA is the best option, should it be:

1) a traditional IRA
2) a Roth IRA

My federal income tax bill has been pretty low the past 10 years, because my wife quit working outside the home when our first child was born, and we now claim 4 child tax credits/exemptions. That period also coincides pretty closely with the Bush tax cuts. So, I expect my taxes may be going up? We'll see.

Because you are in a low tax bracket, and because you are already contributing some money to your employer plan, I think you should consider the Roth. Later on when your children are grown and you are paying more taxes, you may prefer the up-front tax deduction of the traditional.

Originally posted by Bob B. View Post

Can I make monthly contributions into an IRA account, then declare at tax time whether I would like the IRA to be a Roth or a Traditional? As you can see, I have no experience with IRAs.

No, you must specify which type of account you are opening at the time you open it. However, there is a time window during which you can re-characterize. In general, the window ends when your tax return is due.

**violet80907** · 12-20-2012, 04:07 PM

If an IRA is the best option, should it be:

1) a traditional IRA
2) a Roth IRA

A significant factor to this part of the decision regards what you think income taxes will likely be when you retire.

WIth the traditional IRA you pay no income tax on money deposited into the IRA, but when you use the money you pay taxes at the applicable rates.

With the Roth IRA, you pay your tax as you go, and pay no tax when it comes time to withdraw the money. So less money goes into the account, and the balance will grow more slowly than the same pre-tax contributions to the IRA.

Do you think your income tax rate will be higher or lower when you retire? It is possible that we (the U.S.) will address the cost of social programs with higher taxes, and pay very high rates in the future. It is also possible that will not happen.

This is a complex question, with no mathematically optimal answer. The "correct" answer is the one that, after your consideration, seems best for you.

**Bob B.** · 12-21-2012, 06:46 AM

Kork - We're way not in the 25% bracket. My family has one wage earner, and I earn in the mid 50's. With six tax exemptions and 4 child tax credits, we've been in the 10% bracket.

artwest - you are right. From a strictly financial point of view, paying off CC debt first is the best way to go. But, my CC debt is currently less than 10% of what it was 7 years ago. I would like to get this set up at around the first of the year, making nominal payments to get it started. Then bump things up when the CC debt is eliminated. When it's all said and done, it will make only a few bucks difference. Either way, I should have my CC debt paid off April or May.

Petunia - You make some very good points. Thank you.

Violet - Agreed.

I'll almost certainly go the Roth route. Then, once my tax exemptions start moving out, and going on their own - or I get a substantial salary increase - I'll move to a traditional.

**MonkeyMama** · 12-21-2012, 02:47 PM

ROTH IRA all the way.

Your income taxes are obviously -0- with the credits; you might be getting refundable tax credits back (which equates to a negative tax rate).

Definitely put money that you are not paying any income taxes with into ROTHs. We have always funded our ROTHs with tax-free income. Win-win!

**AccountantSalary** · 12-22-2012, 02:47 PM

Not to tell you what to do, but I was in your shoes about a year or so ago (low tax bracket and some credit card debt) and this is what I did

Paid off my credit card bill first. No investment paid more than the interest on my credit card debt, so there was no sense in make any investments until that was done.
Put my money in a Roth IRA. A tax avantaged plan wouldn't have been that helpful, since my taxes were low anyway. But I like the idea of having a windful during retirement that isn't taxed. (Of course, Congress could find a way to tax this anyway, but that's another story.)

**moneybags** · 12-23-2012, 05:41 AM

Originally posted by AccountantSalary View Post

[*]Put my money in a Roth IRA. A tax avantaged plan wouldn't have been that helpful, since my taxes were low anyway. But I like the idea of having a windful during retirement that isn't taxed. (Of course, Congress could find a way to tax this anyway, but that's another story.)[/LIST]

The government isn't big on double taxation. I wouldn't worry about being taxed on your Roth in the future.

Another question on retirement saving