Traditional IRA: Isnt it easy to be in a lower tax bracket when retiring?!
I’m in my 30’s and make 6 figures. I would like to start contributing to a an IRA. I’m looking at Traditional IRAs and the most common issue I find is will I be in a bigger tax bracket when I retire. Why would I be?? If I’m retiring I would stop working or have minimum income maybe a rental or 2. Say for an entire year I live off my rental property’s to show a record of low income, say $20000/yr wouldn’t that make a traditional ira worth it?
Permalink Submitted by Alan - IRA critic on Sat, 2015-09-12 00:12
Your tax bracket in retirement is determined by your taxable income. By the time you retire you can figure that at least 85% of your SS income will be taxable, any rental income, and income from interest and dividends or inherited assets. If you also accumulate enough in pre tax retirement plans such as 401k or IRA accounts, your RMDs starting at 70.5 will add to your income. And if tax rates rise as well, you could easily be in a higher bracket. But if you spend most of your income, retire early, have health problems or divorce problems, you probably will not be in a higher bracket. I would start with pre tax contributions, but once you begin accumulating a considerable balance, then you should start considering Roth contributions or conversions. You know what your marginal rate is now, but retirement rates are just a guess. The guess gets more accurate the older you are, so as things change your plan may need adjustment to reflect your income projections in retirement.
Permalink Submitted by Erik Esannason on Sat, 2015-09-12 00:58
Thanks. You said start with pretax contributions then consider roth but isn’t roth pretax? I also have 5yrs in a 401k with 3% company full match.
Permalink Submitted by Alan - IRA critic on Sat, 2015-09-12 01:29
No, Roth contributions are after tax. You do not get a deduction for them up front, but the benefit is that distributions are tax free if the Roth is held until it is qualified. These are preferred if you expect your tax rate in retirement to be higher than at the time of contributions. Pre tax 401k contributions or deductible TIRA contributions are made with untaxed income, but distributions are taxable. This is better if you expect your rate in retirement to be lower. If you don’t know or think your rate will be about the same, do some of each to hedge your bets.
Permalink Submitted by Erik Esannason on Sat, 2015-09-12 02:21
I may do that thanks for clearing that up!
Permalink Submitted by William Tuttle on Sat, 2015-09-12 04:08
You mentioned that you have contributions in a 401k. What you didn’t clarify is if you are making current 401k contributions. If you are an active participant in an employer retirement plan, there are income limitations on receiving a deduction for pre-tax IRA contributions. There are also income limitations on making a Roth IRA contribution.