Is switching to Roth IRA worth losing current tax break?
Dear Liz: Everyone talks about Roth IRAs and how beneficial they are. But I am self-employed, my husband contributes 16% toward his 401(k), our house is paid off, and we no longer have dependents to deduct on our 1040 tax return. My contribution to my traditional IRA is the only tax deduction we have left. Should I consider a Roth anyway? If so, why?
Answer: A Roth would give you a tax-free bucket of money to spend in retirement. That would give you more flexibility to manage your tax bill than if all your money were in 401(k)s and traditional IRAs, where your withdrawals typically are taxable. Also, there are no minimum distribution requirements for a Roth. If you don’t need the money, you can pass it on to your heirs. Other retirement funds require you to start taking money out after you turn 701/2. If you need to crack into your nest egg early, on the other hand, you’ll face no penalties or taxes when you withdraw amounts equal to your original contributions.
So is it worth giving up your IRA tax deduction now to get those benefits? If you have a ton of money saved, you want to leave a legacy for your kids and you’re likely to be in the same or a higher tax bracket in retirement, the answer may be yes. If you’re like most people, though, your tax bracket will drop once you retire. That means you’d be giving up a valuable tax break now for a tax benefit that may be worth less in the future.
You may not have to make a choice, however, between tax breaks now and tax breaks later if you have more than $5,500 (the current annual IRA limit) to contribute. Since you’re self-employed, you may be able to put up to $51,000 in a tax-deductible Simplified Employee Pension or SEP-IRA. At the same time, you could contribute up to $5,500 to a Roth (assuming your income as a married couple is within or below the phase-out range for 2013 of $178,000 to $188,000).
This would be a great issue to discuss with a tax pro.
Moving back in with Mom
Dear Liz: I just read your reply to the woman who was struggling to make ends meet with her part-time job. She was wondering whether she should sell her house and move in with her mother. I couldn’t get to my computer fast enough to ask you how on Earth you can recommend with a clear conscience that someone move back in with a parent because she can’t pay her bills.
Why should she be able to mooch off Mom and expect her to take her Social Security check to pick up the slack? I was in basically the same situation when I was 39, except that I had three kids and my ex passed away within a week of our divorce, so I got no child support. I still managed to find a full-time job, maybe not the job of my dreams, but it paid well and allowed me to keep the house and continue to raise the kids. I built up a good retirement, which I felt I had earned and was enjoying very much, until my adult son went through a bad divorce and “temporarily” moved himself back into my home.
I’ve tried to help him get back on his feet and moving again, but so far all that has happened is my credit cards are getting out of control, my home equity line of credit is maxed out, my property has been damaged, and my life is now miserable, as I share my once-lovely home with an ungrateful jerk, his girlfriend and three cats. I can’t figure out how to get him out, and I can see no end in sight. I’m not saying this woman would do the same, but it’s still not fair to expect her mom’s life to be disrupted, no matter how nice the lady is.
Answer: The other reader was considering going back to school to get training that would qualify her for a full-time job. Selling her home and moving in with her mother would allow her to keep her current part-time job while she went to school. There was no suggestion that Mom would pick up her bills — only that she would share her home for a finite period.
So the other reader’s situation probably isn’t like yours. But perhaps it’s easier to get mad at a stranger than to acknowledge that you helped create this mess and you’re the only one who can fix it.
Schedule a meeting with an attorney familiar with landlord-tenant laws in your state so you’ll understand the best way to evict your freeloader. Then do.
Perhaps your parents did a better job of setting boundaries with you than you did with your son, but it’s not too late to reclaim your retirement, your house and your life.
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