View Full Version : Roth vs Traditional IRA
dan_white
Jun 13, 2012, 09:01 AM
My wife left her job, and we want to roll/move her pension into a IRA. I know that if we "roll" it over to a Traditional IRA, that there are no taxes on it, if we get a check and put it into a Roth IRA, than we will get a 20% federal tax on it. My question is, are we better off rolling it over into a Traditional IRA, or taking the 20% hit and put it into a Roth IRA. We are not sure which one would the most beneficial for us in the long run.
ebaines
Jun 13, 2012, 12:07 PM
The 20% they withhold in the distribution is just a down payment on taxes. The actual tax due depends on your tax bracket, which may be higher than you are accustomed to given this additional pension "income."
As for which option is best - it's a crap shoot. It all depends on whether you think you'll be in a higher tax bracket or a lower one when you withdraw the money. Factors to consider include:
(a) possibly being bumped into a higher bracket this year if you take the pension as a taxable distribution, which is an argument for doing the direct rollover to a traditional IRA as opposed to the Roth
(b) your income in retirement may be lower than today, again arguing for the IRA
(c) income tax rates may be higher in the future - look into your crystal ball and try to guess what may happen to the Bush-era tax cuts in the next few years. This argues for putting the money into a Roth account.
Another issue regarding the Roth option: if your wife is not yet 59-1/2 years of age the portion of the distribution that you don't roll to the Roth (the 20% they withhold) will be considered an early distribution, and she would have to pay 10% of that in penalty. That's right - she has to pay a penalty for paying taxes. Clearly an argument in favor of the traditional IRA.
Also - it's really not a good idea to use the pension money as a source of funds to pay the taxes on the rollover to the Roth IRA . You're better off using other after-tax funds to payteh tax bill. If you can't afford the tax bite using other funds I would suggest that you go with the direct rollover to a traditional IRA. Then later you can always covert the IRA to a Roth, perhaps just a bit each year, and pay the taxes as you go.