One reason why we started this blog was because we felt like our situation, namely as a military family, was vastly different from that of other financial bloggers and writers. And because of that difference, a lot of “tried and true” advice or “rules” don’t apply to us, or don’t make sense in our situation.
This difference became very clear to me when I started researching whether or not we should invest more heavily in a traditional retirement savings plan (via Davin’s TSP or a 403b through my work) or in Roth accounts (such as a Roth 403b, a Roth TSP, or a Roth IRA). In researching that difference I came across two blog posts from The Finance Buff, arguing for a traditional IRA over a Roth account:
Mr. Sit prefaces the first linked post by saying, “I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k).” I completely agree with all the reasoning in his article, but as I read it, I was struck that Davin and I fell into basically every category outlined for the exceptions; for the people who would actually benefit for a Roth over a traditional account. My argument here is that Davin and I do not fall into that category of “most people”, and if you are going to collect a pension or have other special circumstances, you may not fall into that majority as well. Let’s take a look at the reasons why a Roth is actually the best bet for Davin and me (and why they might be the best option for you as well).
We expect to move to a higher tax bracket in the future. Davin is currently a medical resident in the Air Force, and once he becomes an attending physician he will earn significantly more, thus bumping us both into a higher tax bracket. Furthermore, once he retires from the military and takes a job at a civilian hospital, his income will increase even further, possibly leading us to another tax bracket again. So for us, it makes sense to pay the taxes now than to pay them in the future in a higher tax bracket.
We will have pensions. Davin is planning on retiring from the military, in which case he will earn a pension. I will also receive a pension as a retired teacher one day. The problem with a traditional retirement plan for a pensioner is the Required Minimum Distributions (RMDs)- the amount that you are required to withdraw from your traditional IRA starting at age 70 ½. The combination of our pensions and RMDs would most likely cause us to go into a higher tax bracket, and we really don’t want to worry about that in our 70s.
Aside from his pension, Davin isn’t convinced he’ll be ready to retire in his early 70s. (Crazy, I know.) So if he’s still working, even just part time, then the combination of his salary, our pensions, and the RMDs will definitely move us to a higher tax bracket. So by paying the taxes now we are avoiding an increased tax bracket as septuagenarians. In fact, we could probably get by for a while on our pensions and his continued income. If we have a Roth, which does NOT require RMDs, then our accounts can continue to grow until we are ready to use it, not when the government tells us we have to withdraw it.
We plan on settling in a state with an income tax. We currently plan on retiring in California, which has a state income tax. If we were thinking about retiring to another state it might make sense to defer the taxes with a traditional IRA so the state wouldn’t touch the money at all. Alas, this will most likely not be the case for us.
Our employers DO NOT MATCH contributions. Since our employers provide a pension, they do not match contributions toward a 401k or similar. Therefore there isn’t an extra incentive to contribute to such an account.
We will eventually shift toward traditional retirement plans as there are some points where a shift to a traditional IRA makes sense for us:
- When we are in a high tax bracket, we will switch to traditional tax-sheltered accounts since there’s no point in “locking in” the lower tax bracket.
- If we decide to contribute more to our retirement, we would have to go through a traditional account. We have both already maxed our Roth IRAs, maxed out his Roth TSP, and maxed out my Roth 403b. Our only remaining option for contributing to a retirement account would be a 457 through my work and there is no Roth option available.
Are you part of the “majority” who would find the most benefit from a traditional IRA? Or are you like us, part of the small percentage of rule breakers that would benefit the most from a Roth? Do you have any special circumstances that push you toward a Roth-heavy retirement portfolio?