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 59½ (minus contributions). Thanks very much.
-- Paul
Paradise
 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."
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