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Dr. Don Taylor, CFA, Bankrate.com advice columnist Downshifting in life alters Roth IRA choices

Dear Dr. Don,
I'm 49 years old, single, and have saved/invested $300,000. In the next five years or so, I'd like to move down South and take a job with less responsibility -- possibly as a teacher's aide. Therefore, my salary will be lower than it is today. My question is whether I should continue to fund my Roth IRA or invest the available money in my regular brokerage account. I ask this question because I'd like to include current interest/dividends as part of my overall salary -- when I move. Obviously, I can't touch the IRA money until I'm 59 (minus contributions). Thanks very much.
-- Paul Paradise

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Dear Paul,
Roth IRA contributions are made with after-tax dollars, so the tax issues surrounding distributions made before age 59½ relate to investment earnings and funds held in the Roth IRA for less than five years. IRS Publication 590, Individual Retirement Arrangements, provides additional guidance on IRAs, as does SmartMoney University's IRA Rules Super Page.

When a Roth IRA works
Roth IRAs typically work best when you expect to be in a lower tax bracket when contributing to the account than when you take distributions from the account. I don't see the advantage of a taxable account because both the Roth IRA and the brokerage account are funded with after-tax dollars, but the taxable account has to pay income and capital gains taxes on the investment earnings and the investment earnings in the Roth IRA can be tax-free in retirement. First make eligible contributions to the Roth IRA up to its funding limit and then look to the taxable account.

What I'm suggesting is that if you can make your budget work in your new career by only withdrawing contributions out of your Roth IRA prior to age 59½, then after that age you won't have to worry about penalty taxes or income taxes on the earnings. (Talk to a tax professional if this isn't clear.)

You haven't said how long you plan to work in this less-stressful career, or what retirement benefits you expect to have available to you besides your investment portfolio, so I can't comment on your eventual plans for retirement. But I'd suggest you keep working hard on that nest egg over the next five years and talk to a financial planner about whether you'll be able to afford the retirement you want when you plan to start taking distributions from your retirement account at age 54.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: March 5, 2007
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