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Obviously, if you're in an attractive marginal rate, it makes sense to take advantage of the Roth or convert regular IRA money to Roth.

I think the point was, today's marginal rates are probably going to be more attractive than future marginal rates.


Sure, almost certainly. And my point was that it might be REALLY attractive now vs in the future if you're in the range that nearly doubles the marginal rate of withdrawing more IRA money (due to driving Social Security to become 85% taxed) to pay the mortgage.
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Hi esxokm -

That’s a lot of questions in one post. Let me try to capture the highlights, but feel free to chime in if you need more information. In addition, I’m sure I’m covering the ‘80 for 20’ instead of getting into all the nitty gritty details.

This chart at the IRS has more details: https://www.irs.gov/retirement-plans/roth-comparison-chart , and there’s lots of other good and easily digestible info on the IRS site as well.

A key reason to tell your tax preparer when you contribute to your Roth IRA is that if you ever need to make withdrawals from the Roth IRA account before retirement age, your direct contributions to your Roth IRA are the first things you withdraw. Those contributions can be withdrawn without tax or penalty, but you have to have clear records of the contribution in case the IRS wants to charge you a tax and/or penalty on it.

Roth style accounts, both IRA and 401(k), take your contributions with after tax dollars and offer you tax free qualified withdrawals once you reach retirement age. The early withdrawal rules are a bit different between the two account types. In addition, Roth 401(k) plans are subject to RMDs at age 72, while Roth IRAs are not. It is generally possible to be able to contribute to both a Roth IRA and a Roth 401(k) in the same year, but you may run into income limits on the Roth IRA contribution.

As for a traditional and Roth 401k at work, yes, if your employer offers both options, you can contribute to one, the other, or both, but your total contribution you your 401(k) style plans are limited per person per year, not per account per year. The typical limit in 2020 is $19,500 if you’re under 50 or $26,000 If you’re 50+, but you may be subject to lower contribution limits based on the details of your employer’s plan, your total salary, and whether you’re considered a highly compensate employee. Traditional IRAs are tax deductible when you contribute but come out as ordinary income in retirement.

Regards,
-Chuck
Discovery/HR Home Fool
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I forget where I came across this, but, although contributions to a Roth are not deductible, is it true you get some sort of credit for them nevertheless? I remember a long time ago my accountant said always to let him know when I contribute, but I never understood why.

It's always a good idea to track how much has been contributed to a Roth IRA, because you are allowed to take contributions out tax and penalty free, even if you aren't 59 1/2 yet.

I'm wondering if there is some sort of benefit to the Roth for tax purposes. I think I read somewhere recently about some tax deduction for participating, but can't find it right now.

If you meet income limits, you can get the 'Retirement Saver's Credit' for contributing to either an IRA or an employer sponsored retirement plan https://www.irs.gov/retirement-plans/plan-participant-employ...

I also ask because I recently signed up for a new 401k and noticed for the first time I have access to Roth-401. I think, if I went through the process correctly, I can do both...401 and Roth-401. By doing both, do I get a double advantage?

Not really. You will just split the amount that you, as an employee, can contribute to the 401(k). In 2020, an employee can contribute a total of $19,500 to any and all 401(k)s. So if you have more than one employer during the year, it's up to you to track how much is contributed, and ask work with your employer(s) to return any excess to you.

As with all Roth vs. Traditional decisions, whether you contribute exclusively to one account type or the other, or split your contribution depends on your specific circumstances - what your current tax bracket is and what your expected future tax brackets will be.

AJ
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Thanks for the replies, both have given me the answers I seek and the context I need to know what will happen tax-wise and to guide my understanding. I appreciate it...
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I stumble on Susan Orman on PBS every once and a while, never staying long because my path in retirement has been set except for maybe rolling some of my 457b over into my Roth IRA.

But she said something that really hit home:

"There is probably no chance that taxes are going to be less in the future years because of all the pandemic money being handed out by the government. Someone is going to have to pay for it."

Ergo: Best to add to the Roth now instead of other 401's. This is a new twist to the old logic of having a Roth.
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"There is probably no chance that taxes are going to be less in the future years because of all the pandemic money being handed out by the government. Someone is going to have to pay for it."

Yes, I've been saying that for a while. At a minimum, under the TCJA, the tax brackets are scheduled to return to the prior brackets in 2026. It would require a new law to make the current brackets permanent. The pandemic spending on top of the already lower revenue because of the TCJA has been blowing the deficit up. It remains to be seen if Congress will have the appetite to make the current brackets permanent.

Best to add to the Roth now instead of other 401's.

Or do conversions to a Roth.

AJ
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"There is probably no chance that taxes are going to be less in the future years because of all the pandemic money being handed out by the government. Someone is going to have to pay for it."

Ergo: Best to add to the Roth now instead of other 401's. This is a new twist to the old logic of having a Roth.


A long time ago, it seemed like a good idea to have some money in different kinds of vehicles (regular IRA/401k, Roth IRA, outside investments) so as to have "more levers to push" when it came time to spending down my portfolio. Note that if your company's 401k (or 403b, etc.) has matching money, it will be "regular" 401k money (will be taxed on withdrawal) whether your contributions are pre- (regular) or post-tax (Roth). So, you'll be building up two "kinds" of accounts.

Obviously, if you're in an attractive marginal rate, it makes sense to take advantage of the Roth or convert regular IRA money to Roth.
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Obviously, if you're in an attractive marginal rate, it makes sense to take advantage of the Roth or convert regular IRA money to Roth.

I think the point was, today's marginal rates are probably going to be more attractive than future marginal rates. And given that the brackets now use chained CPI, they won't be increasing as quickly as many households' income, pushing those households to higher marginal rates.

AJ
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Obviously, if you're in an attractive marginal rate, it makes sense to take advantage of the Roth or convert regular IRA money to Roth.

I think the point was, today's marginal rates are probably going to be more attractive than future marginal rates.


Sure, almost certainly. And my point was that it might be REALLY attractive now vs in the future if you're in the range that nearly doubles the marginal rate of withdrawing more IRA money (due to driving Social Security to become 85% taxed) to pay the mortgage.
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