8

I'm currently in the 25% tax bracket, with a salary of $71K; I max out my contributions to a Roth IRA and contribute to a Roth 401(k) past my employer's match. I'm also planning to attend grad school in three years, at which time I don't expect to have enough income to place me in the 25% bracket. Furthermore, some or all of my income may not be earned income, but rather stipends, fellowships, etc.

I'm considering contributing to a traditional IRA instead of a Roth, then rolling over the traditional into the Roth after I start grad school to take advantage of my lower tax bracket to save a little money. At the same time, I'll roll my Roth 401(k) and the pre-tax employer contributions into my Roth IRA as well and pay the appropriate taxes on pre-tax earnings and employer contributions/earnings. Based on other advice I've received, I'll also be staggering the rollover over my Roth 401(k).

The answers on this question state that expectations of higher future income and/or higher tax rates in the future are often reasons for young people to prefer Roth accounts to pre-tax accounts, but since the horizon for this rollover isn't too far afield and I don't expect my income to exceed the 25% bracket before I start grad school, I'm not sure those are reason enough for me to prefer a Roth IRA now.

Is my logic sound, or am I missing certain details? Assuming no positive shocks to my income, e.g. marriage, sudden pay raises, etc. is it reasonable for me to contribute to a traditional IRA instead of a Roth IRA for the next three years?

Community
  • 1
John Bensin
  • 15,048
  • 3
  • 72
  • 112

3 Answers3

3

I don't recommend Roth for those in the 25% bracket. If you are in the 25% bracket now, I'd suggest you go pretax and as you are planning to be in a lower bracket in a few years, use that bracket to convert. Depositing today at 25% to convert at 15% in a few years puts you that much ahead.

I understand the allure of a Roth heavy strategy. And the fuzzy crystal ball for what the tax code will look like doesn't help. That said, a retiree today who is a few years too young for Social Security will see an Exemption + STD deduction of $10,000, and a 15% bracket ending at $36,250, so $46,250 total with a total tax bill of $4991. A retiree should target $250K-$500K pretax to stay flexible and not miss these low brackets in the future.

JoeTaxpayer
  • 172,694
  • 34
  • 299
  • 561
3

Since we are talking about retirement accounts, I wouldn't worry too much about what your income will be in the next 10 years or so. I'd recommend basing your contributions primarily on what your likely income/tax bracket at or near retirement age will be compared to 25% today. I don't think that optimizing for the next three years will make a significant difference, given the uncertainty of the tax code as well as your income in the future.

However, it may make a difference to your planning whether you are going to grad school for an M.D. compared to an MSW, however, as to what your expected income/tax bracket will be.

John Bensin
  • 15,048
  • 3
  • 72
  • 112
JAGAnalyst
  • 4,455
  • 21
  • 24
2

From your updated information, it seems like you are not eligible to deduct a Traditional IRA contribution, at your income since you are covered by a 401(k) at work. Therefore, contributing to a Roth IRA is the only real option in terms of IRAs.

However, if you want to have some pre-tax contributions, you can change some or all of your Roth 401(k) to Traditional 401(k).

user102008
  • 17,734
  • 2
  • 30
  • 49