To Roth or Not to Roth

For many, the goal is to retire debt free. No mortgage. No HELOC. No kids in college. However, these are all tax deductions that lower taxable income and, as a result, taxes.

Also, after retirement, why fund a 401(k) or IRA? And, most likely, retirees are empty-nesters, so no $1,000/child tax credits. There go two more tax saving strategies most workers get.

So, medical expenses becomes the main tax deduction for the retired. And this is one tax deduction I, personally, would like to avoid!

What does thia mean? A plan to fund retirement with taxable investments--Traditional 401(k), Traditional IRA and Social Security--may mean more taxable income at retirement than when employed.

I believe this argues for the ability to manipulate taxable income in retirement by withdrawing income from a tax-free Roth account (i.e. so emergency spending doesn't push a retiree into a higher tax bracket).

If you can afford to pay the taxes next year (in April 2010), then use the recent market lows today to convert some of your undervalued Traditional IRA into a Roth IRA (assuming you don't exceed the income level to do a conversion).

You'll also be saving on taxes. That $1 in income you put in your Traditional IRA is worth just 50 cents today. So you'll be paying taxes on just 50% of the income you earned over the last few years. And when the market bounces back, all that growth will be in your tax-free Roth account, not in your taxable during retiremnt Traditional IRA account.

A year ago, my wife and I were 90% Traditional IRA and 401(k). We used the declining market at the end of last year and again just recently to convert some of our Traditional IRA funds. Today, we're 50% Traditional IRA/401(k) and 50% Roth IRA/401(k).

Our retirement funds are now both asset diversified and tax diversified.

Mark of OR 1:32PM February 24, 2009