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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?

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    I'm not sure what your exact income is, but are you aware that, since you are covered by a 401(k), that your ability to deduct a Traditional IRA phases out at a pretty low income? (For single in 2013, it phases out between $59,000 and $69,000. That's right in the middle of the 25% bracket for single.) – user102008 Sep 10 '13 at 5:49
  • @user102008 Thank you, I wasn't aware of that. It looks like I'm just a little too high to take advantage of the deduction, I think. I updated my question with my salary (71K), so that changes the calculus a bit. – John Bensin Sep 10 '13 at 12:06
  • Good question. I wasn't sure what bracket I'd be in at retirement -- some models have my retirement cash availability higher than my current salary, if I want to draw it down rather than living only on the income --so I've been splitting the difference. Which is probably the wrong answer. – keshlam Jan 1 '16 at 13:06
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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.

  • Thanks for the information; I'm thinking I should make some of my contributions to a traditional IRA, not all of them, in case I don't go to grad school. If I contribute everything to a traditional IRA and then for some reason don't go to grad school, I may be stuck converting to a Roth IRA in the 25% bracket, and paying 25% on all of the earnings doesn't appeal to me. – John Bensin Sep 9 '13 at 13:56
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    It's a matter of balance and many variable to look at. If you have high growth in the Traditional IRA, the cost to convert can be high, and Roth might have been right all along. If you are certain to go to grad school or have low income years for whatever reason, the 25/10% brackets can be used to your advantage. Even if you plan to go heavily Roth, there's value in having enough pre-tax IRA to fill the lower brackets after you retire. Editing my answer above to expand on this. – JTP - Apologise to Monica Sep 9 '13 at 15:02
  • I wasn't aware of the phaseout for deducting a traditional IRA, but it looks like my salary is just above the cutoff. Not to keep prodding you for details, but does that change your advice? – John Bensin Sep 10 '13 at 12:08
  • It's fine, John. Yes, if the IRA isn't deductible, by all means, go with Roth. – JTP - Apologise to Monica Sep 10 '13 at 22:17
  • Good to know. If I was below the cutoff, I would probably go with a traditional IRA for the stated reasons. I guess if I experienced a life change that increased my income and had some degree of warning, I could always roll the traditional IRA over beforehand to minimize the taxes I pay on the earnings. – John Bensin Sep 10 '13 at 22:29
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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.

  • I expect I'll be in the 25% bracket when I retire. The reason I asked, though, is because if I know I'm going to be in a lower tax bracket in a couple of years, it seemed logical that I should take advantage of that by paying taxes on some money then instead of now. – John Bensin Sep 10 '13 at 19:59
  • It's a valid point and worth looking into, its just unlikely to result in a significant change in the overall value of your portfolio at retirement age. Your tax bracket at retirement has a much larger effect, although you've now covered this in your comment. – JAGAnalyst Sep 10 '13 at 21:13
  • True. I calculated that I would save at most $1,650 over three years, which is nice, but that doesn't take into account the phaseout of the deduction, so if anything I would guarantee myself paying extra because with a Roth, I'll never be taxed on the earnings. – John Bensin Sep 10 '13 at 22:31
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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).

  • I don't think my workplace offers a traditional 401(k) option (except for employer contributions, which are pre-tax automatically). Does the law require 401(k) plans to offer a pre-tax option? – John Bensin Sep 12 '13 at 2:36

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