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So we have this:

  • Contributions to traditional IRA: Pre-tax
  • Distributions from traditional IRA: Taxed at the time of distribution
  • Contributions to Roth IRA: Post-tax
  • Growth and distributions (qualifying) from Roth IRA: Tax-free

Suppose I'm young (25), single and earning 100k now, but I know that in the not-too-distant future (5-10 years out), I will be in a low U.S. income bracket — possibly either grad school, earning 24k/year or working abroad with foreign taxable income that's under the IRS allowance. Would it make sense for me to contribute to traditional IRA (even though I'm eligible for Roth) and make rollover distributions to a Roth IRA in the future when I'm in a low income bracket?

My reasoning is that if I contribute to Roth now, I pay (say) 25% tax on 5.5k, but if I contribute to traditional and do a rollover when the income is low, I can lower my current taxable income and pay only, say, 15% or whatever is the rate at the 24k + 5.5k bracket. Plus, I might even be in a state w/ no income taxes (currently in CA).

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Your scenario is perfect for converting from traditional to Roth IRA. You should max out your 401k, if possible, because that will further reduce your current tax liability and allow you to maximize the benefit of the rollover in your low income years.

Currently 15% is a good tax bracket to target, so contribute to the IRA/401k until you get to the bottom of the 25% bracket now (or as close as you can, given the limits). Then when you are in your low income years, roll enough to max out the 15%.

  • If the OP has a 401(k) plan, then he cannot make tax-deductible Traditional IRA contributions since his AGI likely exceeds $71K. – Dilip Sarwate Feb 7 '17 at 16:48
  • @DilipSarwate: "If the OP has a 401(k) plan" Specifically, if the OP (or his employer) contributes to his 401(k) during the year. – user102008 Feb 7 '17 at 17:46
  • @user102008 My comment was intended to point out that the suggestion to maximize contributions to a 401(k) plan means that the OP is covered by a workplace retirement plan, and that negates any tax-deductible contributions to a Traditional IRA. since the OP says that his AGI is on the order of $100k. Assuming that the AGI is less than $116K, the OP has the choice of making a non-deductible contribution to a Traditional IRA (to be followed by a rollover conversion to Roth IRA right now, or in later years) or making a (non-tax-deductible) Roth IRA contribution right away. – Dilip Sarwate Feb 7 '17 at 19:29
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Are you covered by a workplace retirement plan? If so, you cannot deduct Traditional IRA contributions if your modified Adjusted Gross Income (MAGI) exceeds $71K (see IRS Publication 590a). In this case, it might make sense to make a Roth IRA contribution now, instead of a nondeductible Traditional IRA contribution now and conversion later. But note that ff your MAGI exceeds $116K, your eligibility to make a Roth IRA contrbution is reduced (and disappears entirely once MAGI exceeds $131K). For people in this situation, a nondeductible Traditional IRA contribution might be the way to go.

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    "For people in this situation, a nondeductible Traditional IRA contribution might be the way to go." Followed by an immediate conversion to Roth (assuming he has no existing pre-tax money in IRAs). – user102008 Feb 7 '17 at 17:44

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