Hi JJPHD - there are a lot of factors that play into whether to do a Roth IRA conversion (current tax rate, future tax rate, cash flow needs, etc.). The fact that you can pay the immediate tax consequence with non-qualified funds is a major plus. Next, you should have a financial plan that encourages you not to use the Roth funds for several years (15+) - so that the impact of the immediate tax consequence can be offset by the tax-free growth inside the Roth IRA.
JJ, this isn't that straightforward because of your age. Given your health and family history. It may be worth converting some of it now if you plan to live for a long time (I know that sounds weird). If that is the case, then converting to a Roth may make sense. I like the thought process if you plan to use this money as "insurance" if you do live for a long time and your tradional retirement accounts get depleted because of required withdrawals. If you do make this conversion then it is strongly adviseable to use non-qualified money.
Here is a question from tiohenry
Tiohenry: Roth TSP is a good option to use if you are not eligible for Roth IRA. The max you can contribute to TSP and Roth TSP combined in 2013 is $23,000. If you want to contribute to Roth TSP you will have to contribute less to regular TSP. This will cause you to pay a little be more in taxes now. Do you project that you tax bracket will be higher in retirement?
Please clarify the 401k you are talking about at the end? Is this the same as your TSP or a different plan?
We also have a question from Akililu
Akilu, You could use a SEP as well as an IRA. I would recommend funding a Roth IRA first and then work on your SEP. Your SEP contributions are limited based on your income.
And here is another question from Dennis when you're ready
Thanks, planners. Here is our next question from ghrad.
Thanks, Chad. We have a follow up for you from PGH Scott, I believe, but for some reason it is not letting me post it. Here it is:
"Thanks for the answer on the variable annuity. I put approx. $14.5 into my 401-k (getting entire firm match) $4200 in my IRA and $3600 into my wife's IRA. I also invest $7200/year in taxable accounts for a diversity of investment vehicles. Should any of these dollars be directed toward the annutiy?"
PGH Scott- I think you are doing great! Unless you are a nervous investor (it does not sound like it) I would not put more in the annuity. I like maxing the 401k and keeping some money in taxable accts for the flexibilty. No need to pay for the insurance.
Allie, before doing an IRA conversion I would check with your CPA and Financial Advisor. Unless you are simply converting a single years contribution of $5k.
Dennis, Your advisory fees are way too high. You should not be paying 2%. For your IRA of 38k, transfer 50% of your current investment within your account to a low-fee total stock index fund, and also 40% to a total bond index fund and 10% in a cash money market mutual fund. These funds should have annual fees of less than 0.10% vs. 2.00%. That’s a big difference compared to what you are paying now. Your best bet is to stick with your employer’s matching retirement plan and more if you can to take advantage of all that free money!
Brian: Good thinking. That's why developing a financial plan for your specific needs and circumstances is so important. You want to customize it to you, not just follow a general rule of thumb.
But on the other hand...a secret about real-world retirement planning is that often retired people spend more than working people; they want to go out and have fun with all their leisure time. Planners often say that especially young retirees may spend 120%-130% of what they spend when they're working. Again, customizing is important.
And there are also the additional costs that come with retirement, such as increased medical insurance and out-of-pocket costs, and perhaps long term care. Then some retirees also want to help out family members, which can cut into assets.
So the best thing to do is to have a plan customized to your situation. Naturally, I recommend a CFP to help, even if it's just to give you a second opinion on the plan you've already outlined.
Delia and Phil, perhaps you can both weigh in on this question from John.
John: First, before you begin on an investment program, check this list:
* Isolate 3-6 months of expenses into an emergency fund in an insured account
* Check all insurance coverages, especially since you have a young child. Do you have sufficient life/health/disability coverages?
* Do you have the proper estate planning documents in place? That includes a will (which names guardians for the children), durable power of attorney for finance and an advanced health care directive? Some states also make use of revocable "living" trusts.
* And of course, have you paid off all high interest debt?
Delia, John provided us with a bit more information, but it was we didnt want to post publicly in this forum. He does have a good rainy day fund, adding about $500/month to it
Chad, here is one from Emily
Phil, we have a followup for you from Lisa from awhile back. Her original question was:
"New to this forum so apologies if it has already been asked - if I am ineligible for a Roth IRA, can you recommend a post-tax retirement savings vehicle?"
I have fully funded my 401K at work, but need to invest an additional $20,000 to meet my goal of saving 20% of yearly income. My work offers a 457 plan, but the choices are fairly limited. I don't qualify for Roth IRA. Can you offer some guidance about other investment vehicles, taking into consideration tax implications?
Hi JJPHD - there are a lot of factors that play into whether to do a Roth IRA conversion (current tax rate, future tax rate, cash flow needs, etc.). The fact that you can pay the immediate tax consequence with non-qualified funds is a major plus. Next, you should have a financial plan that encourages you not to use the Roth funds for several years (15+) - so that the impact of the immediate tax consequence can be offset by the tax-free growth inside the Roth IRA.
JJ, this isn't that straightforward because of your age. Given your health and family history. It may be worth converting some of it now if you plan to live for a long time (I know that sounds weird). If that is the case, then converting to a Roth may make sense. I like the thought process if you plan to use this money as "insurance" if you do live for a long time and your tradional retirement accounts get depleted because of required withdrawals. If you do make this conversion then it is strongly adviseable to use non-qualified money.
Tiohenry: Roth TSP is a good option to use if you are not eligible for Roth IRA. The max you can contribute to TSP and Roth TSP combined in 2013 is $23,000. If you want to contribute to Roth TSP you will have to contribute less to regular TSP. This will cause you to pay a little be more in taxes now. Do you project that you tax bracket will be higher in retirement?
Dennis, Your advisory fees are way too high. You should not be paying 2%. For your IRA of 38k, transfer 50% of your current investment within your account to a low-fee total stock index fund, and also 40% to a total bond index fund and 10% in a cash money market mutual fund. These funds should have annual fees of less than 0.10% vs. 2.00%. That’s a big difference compared to what you are paying now. Your best bet is to stick with your employer’s matching retirement plan and more if you can to take advantage of all that free money!
Brian: Good thinking. That's why developing a financial plan for your specific needs and circumstances is so important. You want to customize it to you, not just follow a general rule of thumb.
