Background: I have about 25k from a 2014 bonus I want to invest for the future of my family and I. I am active-duty, so I have a TSP that I contribute to regularly. I'm already have emergency cash in savings.
My initial thought was to put about 8K into traditional IRAs for my wife and I for 2014. That will put us into a lower tax bracket for that year (from the bonus). I have a USAA financial advisor, however, who says don't worry too much about the tax bracket now, because you are only an E-6 and 32 years old (wife non working). He says I should dump as much as possible into Roth IRA's, so for my wife and I for 2014 and 2015 that comes to 22K right there. Is it even a good idea to put money into a Roth for 2014, considering that because of the bonus 2014 is an unusually high tax bracket year for me?
And I guess my big question: Is the financial advisor giving me good advice? And if Roth IRAs are so awesome, then why should I contribute to my traditional TSP at all if I haven't maxed out my Roth for a given year (remember active-duty military doesn't get a TSP employer match)?
I will assume the perspective of optimism that my financial advisor has, that I will be in a higher tax bracket at retirement than I am now.
There were probably a lot of rookie questions in there, but any and all advice is appreciated. Thanks in advance.
Sat Jan 03, 2015 8:08 pm
oldguy Senior Member
Cash: $ 715.40
Joined: 21 May 2006
The planner was right, the tax bracket stays the same - it is 15% with or without the $25,000 - the tax on the $25k is $3750.
In general, if you are low-income it is best to pay the tax up-front (while you are in a low bracket) - and get the money tax free when you retire. And if you are a high earner, it is best to take the tax break up-front and pay the tax when you retire (in a lower bracket).
In your case, I would pay the tax now and put the remaining $21,300 into His/Her Roths. And I would use a no-load company such as Fidelity or Vanguard and invest in the SP500 Index Fund. That historically has a longterm average return of 11%/yr. That would be about $400,000 tax free when you are age 60.
The power of compound interest is usually a surprise to people - Einstein once called it the greatest equation.